Profile
Adam Smith — (1723-1790)
Economist and Philosopher
With The Wealth of Nations Adam Smith installed himself as the fountainhead of contemporary economic thought. Currents of Adam Smith ran through David Ricardo and Karl Marx in the nineteenth century, and through Keynes and Friedman in the twentieth.
Adam Smith was born in a small village in Kirkcaldy, Scotland. There his widowed mother raised him until he entered the University of Glasgow at age fourteen, as was the usual practice, on scholarship. He later attended Balliol College at Oxford, graduating with an extensive knowledge of European literature and an enduring contempt for English schools.
He left academia in 1764 to tutor the young duke of Buccleuch. For over two years they lived and traveled throughout France and into Switzerland, an experience that brought Smith into contact with contemporaries Voltaire, Jean-Jacques Rousseau, François Quesnay, and Anne-Robert-Jacques Turgot. With the life pension he had earned in the service of the duke, Smith retired to his birthplace of Kirkcaldy to write The Wealth of Nations. It was published in 1776, the same year the American Declaration of Independence was signed and in which his close friend David Hume died. In 1778 he was appointed commissioner of customs. This job put him in the uncomfortable position of having to curb smuggling, which, in The Wealth of Nations, he had upheld as a legitimate activity in the face of "unnatural" legislation.
Today Smith's reputation rests on his explanation of how rational self-interest in a free-market economy leads to economic well-being. It may surprise those who would discount Smith as an advocate of ruthless individualism that his first major work concentrated on ethics and charity. In fact, while chair at the University of Glasgow, Smith's lecture subjects, in order of preference, were natural theology, ethics, jurisprudence, and economics, according to John Millar, Smith's pupil at the time. In The Theory of Moral Sentiments, Smith wrote: "How selfish soever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others and render their happiness necessary to him though he derives nothing from it except the pleasure of seeing it."
The five-book series of The Wealth of Nations sought to reveal the nature and cause of a nation's prosperity. The main cause of prosperity, argued Smith, was increasing division of labor. Smith gave the famous example of pins. He asserted that ten workers could produce 48,000 pins per day if each of eighteen specialized tasks was assigned to particular workers. Average productivity: 4,800 pins per worker per day. But absent the division of labor, a worker would be lucky to produce even one pin per day.
Smith’s insight on equality of returns was used to explain why wage rates differed. Wage rates would be higher, he argued, for trades that were more difficult to learn, because people would not be willing to learn them if they were not compensated by a higher wage. His thought gave rise to the modern notion of human capital. Similarly, wage rates would also be higher for those who engaged in dirty or unsafe occupations, such as coal mining and butchering, and for those, like the hangman, who performed odious jobs. In short, differences in work were compensated by differences in pay. Modern economists call Smith's insight the theory of compensating wage differentials.
Adam Smith has sometimes been caricatured as someone who saw no role for government in economic life. In fact, he believed that government had an important role to play. Like most modern believers in free markets, Smith believed that the government should enforce contracts and grant patents and copyrights to encourage inventions and new ideas. He also thought that the government should provide public works, such as roads and bridges, that, he assumed, would not be worthwhile for individuals to provide. Interestingly, though, he wanted the users of such public works to pay in proportion to their use. One definite difference between Smith and most modern believers in free markets is that Smith favored retaliatory tariffs.
Smith's writings were both an inquiry into the science of economics and a policy guide for realizing the wealth of nations. Smith believed that economic development was best fostered in an environment of free competition that operated in accordance with universal "natural laws." Because Smith's was the most systematic and comprehensive study of economics up until that time, his economic thinking became the basis for classical economics. And because more of his ideas have lasted than those of any other economist, Adam Smith truly is the alpha and the omega of economic science.
Source: The Library of Economics and Liberty
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