Adam Smith

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"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."


"As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual value of society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."
(from The Wealth of Nations)

Adam Smith (baptised June 5, 1723 O.S. / June 16 N.S. – July 17, 1790) was a Scottish moral philosopher who made a major contributor to the modern perception of free market economics. One of the key figures of the intellectual movement known as the Scottish Enlightenment, he is best known as the author of The Theory of Moral Sentiments (1759), and of An Inquiry into the Nature and Causes of the Wealth of Nations (1776). The latter was a systematic study of the historical development of industry and commerce in Europe, as well as a sustained attack on the doctrines of mercantilism. Smith's work helped to found the modern academic discipline of free market economics and provided one of the best-known intellectual rationales for free trade, and capitalism.

Smith was best known for his "laissez-faire" economic theory that denounced guilds in 18th century Europe. He believed in the right to influence your own economic progress freely, without the puppet strings of guilds and/or the state. His theory caught on in proto-Industrialization Europe, and changed much of Europe into a free trade domain, allowing the emergence of the entrepreneur. He is also known as "The Father of Economics".

Education

At the age of 15, Smith entered the University of Glasgow, where he studied moral philosophy under "the never-to-be-forgotten" (as Smith called him) Francis Hutcheson. Here, Smith developed his passion for liberty, reason, and free speech. In 1740 he entered Balliol College, Oxford, but as William Robert Scott said, "the Oxford of his time gave little if any help towards what was to be his lifework," and he left the university in 1746. In The Wealth of Nations, Smith comments on the low quality of instruction and the meagre intellectual activity at English universities when compared to their Scottish counterparts. He attributed this to the rich endowments of the colleges at Oxford and Cambridge, which made the income of professors independent of their ability to attract students, and to the fact that distinguished men of letters could make an even more comfortable living as ministers of the Church of England.

Career in Edinburgh and Glasgow

In 1748 Smith began delivering public lectures in Edinburgh under the patronage of Lord Kames. Some of these dealt with rhetoric and belles-lettres, but later he took up the subject of "the progress of opulence," and it was then that he first expounded the economic philosophy of "the obvious and simple system of natural liberty" which he later proclaimed in his Wealth of Nations. In about 1750 he met the philosopher David Hume, who was his senior by over a decade. The alignments of opinion that can be found within the details of their writings on history, politics, philosophy, economics, and religion indicate that they shared a closer intellectual alliance and friendship than with the others who played important roles during the emergence of the Scottish Enlightenment. Smith frequented the Poker Club of Edinburgh.

In 1751 he was appointed Chair of Logic at the University of Glasgow, transferring in 1752 to the Chair of Moral Philosophy, once occupied by Francis Hutcheson. His lectures covered ethics, rhetoric, jurisprudence, political economy, and "police and revenue". In 1759 he published The Theory of Moral Sentiments, embodying some of his lectures. This work, which established Smith's reputation, was concerned with how human communication depends on sympathy between agent and spectator (that is, the individual and other members of society).

Smith's analysis of language evolution was somewhat superficial, as shown only 14 years later by a more rigorous examination of primitive language evolution by Lord Monboddo in his Of the Origin and Progress of Language. Smith's capacity for fluent, persuasive, if rather rhetorical argument, is much in evidence. He bases his explanation not, as Hutcheson had done, on a moral sense; nor, as Hume did, on utility; but on sympathy.

Smith now turned to jurisprudence and economics in his lectures and less to his theories of morals. An impression can be obtained as to the development of his ideas on political economy from the notes of his lectures taken down by a student in about 1763 which were later edited by Edwin Cannan, and from what Scott, its discoverer and publisher, describes as "An Early Draft of Part of The Wealth of Nations", which he dates about 1763. Cannan's work appeared as Lectures on Justice, Police, Revenue and Arms. A fuller version was published as Lectures on Jurisprudence in 1776.

Tour of France

In 1762 the University of Glasgow conferred on Smith the title of 'Doctor of Laws' (LL.D.). At the end of 1763, he obtained a lucrative offer from Charles Townshend (who had been introduced to Smith by David Hume), to tutor his stepson, the young Duke of Buccleuch. Smith resigned his professorship and from 1764-66 traveled with his pupil, mostly in France, where he came to know intellectual leaders such as Turgot, Jean D'Alembert, André Morellet, Helvétius and, in particular, Francois Quesnay, the head of the Physiocratic school whose work he respected greatly. On returning home to Kirkcaldy. Smith was elected fellow of the Royal Society of London and he devoted much of the next ten years to his magnum opus, The Wealth of Nations, which appeared in 1776.

Later years

In 1778 Smith was appointed to a post as commissioner of customs in Scotland and went to live with his mother in Edinburgh. In 1783 he became a founding member of the Royal Society of Edinburgh, and from 1787 to 1789 he occupied the honorary position of Lord Rector of the University of Glasgow. He died in Edinburgh on July 17, 1790, after a painful illness and was buried in the Canongate Kirkyard.

His literary executors were two old friends: the physicist and chemist Joseph Black, and the geologist James Hutton. Smith left behind many notes, but gave instructions to destroy anything that was not fit for publication. He mentioned an early unpublished History of Astronomy as probably suitable, and it duly appeared in 1795, along with other material, as Essays on Philosophical Subjects.

Personal character and views

"Take the case of no less distinguished a person than Adam Smith, author of the Wealth of Nations, who went about the streets talking and laughing to himself in such a manner as to make the market women think he was deranged; and he told of one himself who ejaculated, as he passed, "Hech, sirs, and he is weel pat on, too!" expressing surprise that a decided lunatic, who from his dress appeared to be a gentleman, should be permitted to walk abroad unattended. Professors still have their crotchets like other people; but we can scarcely conceive a professor of our day coming out like Adam Smith, and making fishwives to pass such observations on his demeanour." (from Dean Ramsay's Reminiscences of Scottish Life and Character[1]

Adam Smith never married, and seems to have maintained a close relationship with his mother, with whom he lived after his return from France and who predeceased him by only six years. Contemporary accounts describe Smith as an eccentric but benevolent intellectual, comically absent minded, with peculiar habits of speech and gait and a smile of "inexpressible benignity." His patience and tact are said to have been valuable to his work as a university administrator at Glasgow. After his death it was discovered that much of his income had been devoted to secret acts of charity.

There has been debate about the nature of Adam Smith's religious views. Smith's father had a strong interest in Christianity and belonged to the moderate wing of the Church of Scotland (the national church of Scotland since 1690). Smith may have gone to England with the intention of a career in the Church of England, but at Oxford, Smith rejected Christianity and it is generally believed that he returned to Scotland as a Deist.

The economist Ronald Coase challenged the view that Smith was a Deist, stating that, whilst Smith may have referred to the "Great Architect of the Universe", other scholars have "very much exaggerated the extent to which Adam Smith was committed to a belief in a personal God". He based this on analysis of a remark in The Wealth of Nations where Smith writes that the curiosity of mankind about the "great phenomena of nature" such as "the generation, the life, growth and dissolution of plants and animals" has led men to "enquire into their causes". Coase notes Smith's observation that: "Superstition first attempted to satisfy this curiosity, by referring all those wonderful appearances to the immediate agency of the gods." However, this belief would not conflict with deism, a belief system which holds as sceptical the idea of a personal God.

The historian of economic thought, Jean-Claude Perrot [2] gives a religious interpretation to Adam's Smith "invisible hand" that should be the will of a "hidden God" that would guide men action toward the good. Perrot points out the influence of Jansenist ideas on Smith through the analysis of private libraries where Smith works were associated with Jansenist writings.

Works

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary." (from The Wealth of Nations

Shortly before his death, Smith had nearly all his manuscripts destroyed. In his last years he seemed to have been planning two major treatises, one on the theory and history of law and one on the sciences and arts. The posthumously published Essays on Philosophical Subjects (1795) probably contain parts of what would have been the latter treatise.

The Wealth of Nations was influential since it did so much to create the field of economics and develop it into an autonomous systematic discipline. In the Western world, it is arguably the most influential book on the subject ever published. When the book, which has become a classic manifesto against mercantilism (the theory that large reserves of bullion are essential for economic success), appeared in 1776, there was a strong sentiment for free trade in both Britain and America. This new feeling had been born out of the economic hardships and poverty caused by the American War of Independence. However, at the time of publication, not everybody was immediately convinced of the advantages of free trade: the British public and Parliament still clung to mercantilism for many years to come.

The Wealth of Nations also rejects the importance of land; instead, Smith believed labour was paramount, and that a division of labour would effect a great increase in production. One example he used was the making of pins: one worker could probably make only twenty pins per day, but if ten people divided up the eighteen steps required to make a pin, they could make 48,000 pins in a day. Nations was so successful that it led to the abandonment of earlier economic schools, and later economists, such as Thomas Malthus and David Ricardo, focused on refining Smith's theory into what is now known as classical economics. Malthus expanded Smith's ruminations on overpopulation, while Ricardo believed in the "iron law of wages" — that overpopulation would prevent wages from topping the subsistence level. Smith postulated an increase of wages with an increase in production, a view considered more accurate today.

A main point of The Wealth of Nations is that the free market, while appearing chaotic and unrestrained, is guided to produce the right amount and variety of goods by a so-called "invisible hand" (an image that Smith had previously employed in Theory of Moral Sentiments, but which has its original use in his essay, "The History of Astronomy"). If a product shortage occurs, for instance, its price rises, creating a profit margin that creates an incentive for others to enter production, eventually curing the shortage. If too many producers enter the market, the increased competition among manufacturers and increased supply would lower the price of the product to its production cost, the "natural price". Even as profits are zeroed out at the "natural price," there would be incentives to produce goods and services, as all costs of production, including compensation for the owner's labour, are also built into the price of the goods. If prices dip below a zero profit, producers would drop out of the market; if they were above a zero profit, producers would enter the market. Smith believed that while human motives are often selfishness and greed, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and argued against the formation of monopolies.

Smith attacked the antiquated government restrictions which he thought hindered industrial expansion. He attacked most forms of government interference in the economic process, including tariffs, arguing that this creates inefficiency and high prices in the long run. This theory, now referred to as "laissez-faire" ("let them do"), influenced government legislation in later years, especially in the 19th century. (However this was not opposition to government. Smith advocated a Government that was active in sectors other than the economy: he advocated public education of poor adults; institutional systems that were not profitable for private industries; a judiciary; and a standing army.)

A critical but rarely-quoted passage in The Wealth of Nations is:

"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation."

Herbert Stein, in a frequently-quoted article entitled "Adam Smith did not wear an Adam Smith necktie," wrote that the people who wear the Adam Smith tie do it "to make a statement of their devotion to the idea of free markets and limited government. However, what stands out in Wealth of Nations, is that their patron saint was not pure or doctrinaire about this idea. He viewed government intervention in the market with great skepticism. He regarded his exposition of the virtues of the free market as his main contribution to policy, and the purpose for which his economic analysis was developed."

"Yet he was prepared to accept or propose qualifications to that policy in the specific cases where he judged that their net effect would be beneficial and would not undermine the basically free character of the system," wrote Stein. "He did not wear the Adam Smith necktie." In Stein's reading, The Wealth of Nations could justify the Food and Drug Administration, The Consumer Product Safety Commission, mandatory employer health benefits, environmentalism, and "discriminatory taxation to deter improper or luxurious behavior."

The "Adam Smith-Problem"

In the Wealth of Nations Smith claims that self-interest alone (in a proper institutional setting) can lead to socially beneficial results. But in his Theory of Moral Sentiments he argues that 'sympathy' is required to achieve socially beneficial results. On the surface it appears that a contradiction exists. Economist August Oncken referred to this in German as das 'Adam Smith-Problem'.The Austrian economist Joseph Schumpeter also emphasized this apparent contradiction in his commentary on Smith's work.

Adam Smith himself cannot have seen any contradiction, since he produced a revised edition of Moral Sentiments after the publication of Wealth of Nations. Both sets of ideas are to be found in his Lectures on Jurisprudence. In recent years, most students of Adam Smith's work have argued that no contradiction exists. In the Theory of Moral Sentiments, Smith develops a theory of psychology in which individuals in society find it in their self-interest to develop sympathy as they seek approval of what he calls the "impartial spectator." The self-interest he speaks of is not a narrow selfishness but something that involves sympathy.

Some have assumed that when Smith speaks of "self-interest" he is referring to selfishness. Although in some contexts, such as buying and selling, sympathy generally need not be considered, Smith makes it clear that he regards selfishness as inappropriate, if not immoral, and that the self-interested actor has sympathy for others. In The Theory of Moral Sentiments he argues that the self-interest of any actor includes the interest of the rest of society, since the socially-defined notions of appropriate and inappropriate actions necessarily affect the interests of the individual as a member of society. Context is also useful, as Adam Smith was against the idea of corporations, or "joint stock companies."

In any case, Smith apparently believed that moral sentiments and self-interest would always add up to the same thing. One possible line of reasoning he might have employed in reaching this conclusion is as follows: the invisible hand cannot operate if there is no society, for precluding a societal construct precludes division of labor, and thus, the efficiency which comes with its manifestation. Now for society to exist, justice is a necessary condition (as pointed out in the Theory of Moral Sentiments). For justice to exist in any social setting, individuals must harbor the passions of gratitude and resentment governed by a sense of 'merit' and 'demerit'. And finally, as Smith would have so vehemently argued, the sense of 'merit' and 'demerit' is almost exclusively engendered by human sympathy. Thus, the invisible hand of the market depends on the ability of humans to sympathize: Smith's self-interest is thus consonant with the notion of sympathy as used by fellow Enlightenment thinkers William Cullen and David Hume.

Influence

The Wealth of Nationswas a precursor to the modern discipline of economics. It provided one of the best-known intellectual rationales for free trade and capitalism.

There has been some controversy over the originality of The Wealth of Nations; some argue that the work added only modestly to the ideas of thinkers such as Anders Chydenius (The National Gain, 1765), David Hume and the Baron de Montesquieu. Indeed, many of the theories Smith set out described historical trends away from mercantilism and towards free trade that had been developing for many decades and had already had a significant influence on governmental policy. Nevertheless, Smith's work organized their ideas comprehensively, and so remains one of the most important books in the field today.

Smith spent the last twelve years of his life in Edinburgh, working as The Commissioner of Customs from 1778. He is known to have several affairs, he never married or had any children. He died in Edinburgh on July 17th 1790.

Smith was ranked #30 in Michael H. Hart's list of the most influential figures in history. From 13 March 2007 onwards Smith's portrait appeared in the UK on new £20 notes. He is the first Scotsman to feature on a currency issued by the Bank of England. [3]

On June 25th 2006, when Warren Buffet announced that he would donate his wealth to The Bill and Melinda Gates Foundation, he was presented with a copy of Adam Smith's Wealth of Nations by Bill Gates.

A statue of Adam Smith, sculpted and cast in bronze by Alexander Stoddart, faces down the high street of Edinburgh's Royal Mile. The statue was unveiled on 4th July 2008. [4]

References

  1. Dean Ramsay's Reminiscences of Scottish Life and Character (Project Gutenberg)
  2. Jean-Clause Perrot (1992) Une histoire intellectuelle de l’économie politique (XVIIe-XVIIIe siècle), Paris, Éditions de l’EHESS, 496 p
  3. A picture of the note is available on the Bank of England website.
  4. Statue