One cannot speak of economics without mentioning Adam Smith, considered by many to be the father of modern economics. Surprisingly, Adam Smith was not an economist by trade, but a philosopher. Smith himself, in fact, considered his life’s greatest work to be a treatise on the nature and motive of human morality, entitled The Theory of Moral Sentiments. Over two hundred years later, however, Smith is most remembered and revered for creating the economic framework for modern capitalism. The work in which he outlined his economic ideas, The Wealth of Nations, has enjoyed almost biblical status in the world of economics since it was published.
Adam Smith was born in Kirkcaldy, Scotland around 1723. The exact date of his birth is unknown. His father died before he was born, leaving Smith in the sole care of his mother. These circumstances, though, appear to have had no detrimental impact on his success. As a child and as a young man, Smith attended some of the best schools in Scotland. Smith also enjoyed a close relationship with his mother, who scholars believe encouraged his academic ambitions.
At a young age, Smith studied history, mathematics and Latin. When he entered the University of Glasgow on scholarship at age 14, Smith adopted a passion for moral philosophy. He was so successful in his studies that he earned a scholarship to Balliol College at Oxford University in England. Smith, however, found Oxford’s teaching and academics substantially inferior to Glasgow’s. He quit before he completed his studies there, though not before noting the economic reason behind the difference in instruction: Oxford’s professors were paid regardless of the students they attracted, and many of them were more focused on advancing their careers in the Church of England than they were on teaching or mentoring students.
After his dismal experience at Oxford, Smith returned home to Scotland in 1749 and began giving public lectures sponsored by the Philosophical Society of Edinburgh. It was in one of these lectures that Smith first spoke of “natural liberty” in economics, the basis for capitalism. Considering mercantilism was the economic system in practice at the time, “natural liberty” was a radical notion. Smith wasn’t much of a public speaker, either, being both eccentric and absent-minded. Nevertheless, Smith’s lectures enjoyed a very positive reception.
Smith’s success on the lecture circuit led to a professorship at Glasgow University in 1751 and membership in the Philosophical Society of Edinburgh in 1752. In 1753, Smith became head of Moral Philosophy at Glasgow and kept the position for 13 years, teaching and lecturing. During this period, he published The Theory of Moral Sentiments based on his lectures; the work greatly increased his reputation and drew a large following of students. Afterwards, he devoted more of his lectures to economics, specifically pointing out mercantilism’s shortcomings and promoting labor as a source of both personal and national wealth. His success and contributions to philosophy earned him the title of Doctor of Laws (LL.D.), conferred by Glasgow University in 1762.
In 1763, Smith left his position at Glasgow University to tutor the Duke of Buccleuch, a job that doubled his salary and granted a life’s pension. The job took him to France and allowed him to meet some of the greatest minds of his generation, including the philosopher Voltaire, U.S. founding father Benjamin Franklin and François Quesnay, head of the Physiocratic school of economics. Smith found friends among the physiocrats, who, like him, opposed mercantilism. Although physiocratic theory itself was a far cry from capitalism, its notion of “laissez-faire,” or “hands-off,” economics greatly impressed Smith. He would later introduce the concept to the world in The Wealth of Nations.
Smith began penning An Inquiry into the Nature and Causes of the Wealth of Nations after returning to Scotland in 1766. It was the first modern work of economics and the blueprint for capitalism, written in a relatively plain, accessible style. Published as a series of five books, The Wealth of Nations, an abbreviated title of the work, covered the following subjects: labor, stock, opulence, the mercantile system and sovereign revenue. In short, Smith sought to provide a thorough prescription for a new, highly efficient, wealth-generating system of economics. He left virtually no stone unturned on the topic, taking 10 years to complete the roughly 1,000-page treatise. It was published in 1776, the same year America declared its independence from England, and received instant acclaim. Thus, economic science was born.
In his remaining life, Smith published other works and received other honors. The publication of The Wealth of Nations, however, marked his most significant final achievement. The best years of his life were behind him. He spent the next several years working as the commissioner of customs in Scotland, combating smuggling activities. He died from illness in 1790, having never married or fathered children.
Few other writers, however, can claim a legacy as illustrious as Smith’s. Nearly all other economic theories proposed since 1776 contain some of Smith’s original ideas, including monetarism, Keynesian macroeconomics and even Marxism. Modern economists still discuss and debate Smith’s work, and his image can be found on European statues and banknotes. No other economist in history has achieved such status.
The Wealth of Nations
Smith was the first person to design an economic system that works in harmony with human nature. Smith proposed that man, acting in his own self-interest to acquire goods or generate wealth, unwittingly benefits all of society by producing things that others in society value. The butcher who desires to buy bread provides meat at a low cost to consumers so he can earn money to purchase bread; consumers benefit from the availability of meat, and the butcher benefits from his profits. If the butcher becomes wealthy through his labor, he can then hire subordinates to help him in his work, thereby lifting others out of poverty through employment. The butcher, of course, does not set out to do anyone a favor; the good results from merely looking out for himself.
Smith theorized that with producers and consumers looking after their own best interests, markets would naturally become self-regulating. In The Theory of Moral Sentiments, Smith referred to the phenomenon as an “invisible hand” that guided economic activities toward a rational outcome. It is from this supposition that neoclassical economists derive the theory of the “economic man,” or the ever-logical consumer. Laissez-faire was introduced to discourage government intervention in rational economic trade.
From Smith’s work also came the concept of “human capital,” though Smith himself never used the term. He argued that a nation’s wealth came not from trade manipulation or empire-building, but from its labor—specifically, division of labor. To Smith, expecting one laborer to manufacture an entire pin, the example he used, was exceedingly inefficient. Instead, each laborer should be assigned a different part of the pin to construct, with the product being assembled at the end. Specializing in one task would increase worker speed and efficiency, leading to increased productivity and lower prices. Smith’s division of labor inspired the creation of assembly lines in the early 20th century.
However, Smith recognized that laborers would not all receive the same wages for their work. Some workers would be naturally more skilled than others. Some would work at more complex tasks requiring higher levels of training and expertise. Still others would be employed to carry out dangerous or undesirable tasks, such as coal mining or garbage removal. Smith believed that in an economy where workers could freely choose how to employ their labor, high wages would be required to draw laborers into the market’s dirtiest occupations.
Despite his support of laissez-faire, Smith did outline acceptable roles for governments in capitalistic economies. He recognized that governments were often more efficient at providing certain amenities, such as roads, bridges and canals, than private individuals were. Government was also needed to enforce patent and copyright laws, prevent monopolies, set taxes and tariffs, provide national defense and promote public welfare.
Surprisingly, Smith’s ideas regarding “free-market” competition and trade have been grossly misrepresented in modern times. People who know of laissez-faire assume that Smith opposed any and all restrictions on economic activity and promoted business interests above all others. In fact, nothing could be further from the truth.
Smith understood that pure, unrestricted capitalism would eventually result in social inequality, monopoly power and labor exploitation. Thus, he saw government as a necessary evil to prevent market power from collecting in the hands of a few. As skeptical as Smith was of government intervention, he was even more leery of corporate dominance. In Book I, Chapter 10 of The Wealth of Nations, he wrote:
“Corporation laws enable the inhabitants of towns to raise their prices, without fearing to be under-sold by the free competition of their own countrymen. Those other regulations secure them equally against that of foreigners. The enhancement of price occasioned by both is every-where finally paid by the land-lords, farmers, and labourers of the country, who have seldom opposed the establishment of such monopolies […] and the clamour and sophistry of merchants and manufacturers easily persuade them that the private interest of a part […] is the general interest of the whole.”
Smith was also the first person to suggest a progressive tax system. He believed that “the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion” (Book V, Ch. 2). Taxes to Smith weren’t just necessary, they were a symbol of liberty: a way of guaranteeing protection of private property, of which the rich possessed the most. He greatly criticized the revenue-raising policies of governments that disproportionately taxed and oppressed the poor. Furthermore, Smith advocated living wages for laborers that reflected their skills and productivity, as well as government investment in public education and infrastructure. Today’s free-market economists often fail to acknowledge this side of Smith’s writings.
Nevertheless, evidence of Smith’s influence on economic thought can be seen everywhere. His ideas have shaped economic thought for over 200 years, though the term “economics” was not even coined in his day. He is not just the father of economics or of capitalism, but also of progressive taxation, school voucher programs, fair wages, limited government and the ideas that have spawned a dozen economic theories and schools of thought. Yet the great irony remains that this legacy came not from a self-proclaimed economist or a government policymaker, but from a moral philosopher whose greatest passion in life was lecturing on human nature.