Adam Smith (1723 - 1790)

Although others wrote about economic issues and principles before him, Adam Smith is regarded by most people as the father of economics.

This honor stems neither from the originality of his ideas nor from the techniques of economic analysis that he pioneered. Rather, Smith is regarded as the father of economics due to his vision of capitalism as an economic system that makes everyone better off. Smith was the first person to see the benefits stemming from greater competition and to argue for policies that promote greater competition. This required both reduced government involvement in the economy, and also government actions to counter monopolistic tendencies and practices.

Smith was born in 1723 in Kirkcaldy, a small town near Edinburgh, Scotland. His father, a lawyer and controller of customer duties, died shortly before he was born, so Smith was raised by his mother and by guardians appointed in his father’s will.

Although he was a sickly child, Smith had a great passion for books and was an avid reader. At age fourteen, he was sent by his parents to the University of Glasgow, where he studied moral philosophy, mathematics, and political economy. In 1740, he won a scholarship to Oxford University and studied at Balliol College for the next six years.

In 1751 Smith was hired to fill the Chair of Logic at the University of Glasgow. A year later he took over the Chair of Moral Philosophy. His lectures on ethics were well attended and formed the basis of his first literary success – The Theory of Moral Sentiments (Smith 1759).

The Theory of Moral Sentiments tried to explain how people acquired the moral feelings that enabled them to distinguish right from wrong. It found the answer in the ability people had to put themselves in the position of an impartial spectator. This allowed people to judge actions not only from the viewpoint of their own selfish interests, but also from the perspective of an objective observer. Like the conscience, this ability led people to act in ways that were morally right.

When Charles Townshend read The Theory of Moral Sentiments he decided that he could do no better than to put his stepson, the Duke of Buccleuch, under the tutelage of Smith. So Townshend hired Smith, and Smith resigned from his professorship at Glasgow to accompany the young Duke to France. This new job gave Smith lots of free time to read and reflect, and by traveling to France, Smith was able to meet the leading Physiocrats, including Francёois Quesnay. In early 1764, Smith began writing a book ‘‘to pass away the time’’, as he noted in a letter to his friend David Hume.

After traveling around France for three years, Smith returned to Kirkcaldy and then spent the next decade finishing his book. The Wealth of Nations was published in 1776, and it brought Smith both fame and fortune.

In contrast to The Theory of Moral Sentiments, The Wealth of Nations assumed that people act according to their own self-interest. Yet, The Wealth of Nations argues that individual acts of selfishness contribute to the public good.

The Wealth of Nations set out to analyze what caused the national standard of living to rise, and to show how self-interest and competition contributed to economic growth. It also examined how governments affect economic performance. These studies of the principles of economics also led to an attack on the economic theories and policies of the mercantilists.

While generally regarded as the patron saint of laissez-faire economics and an opponent of government, Smith did not really oppose all government intervention into economic affairs. In fact, he recognized four important functions for government.

The first is in preventing monopoly or guaranteeing a competitive environment. Second, Smith recognized that only governments could provide for the defense of the entire nation against outside threats. Third, government had to provide for internal order and defense; that is, it had to protect each member of society from every other member of society. Government was thus responsible for setting up a police force and a judicial system.

Smith began by distinguishing the market price of a good from the natural price of a good. The market price was the price that people paid in their everyday economic transactions. Market prices were determined by the fixed quantity of goods brought to market as well as by the demand for those goods. In contrast, the natural price of a good was an equilibrium price, or the price towards which market prices moved or gravitated. Smith thought that an automatic mechanism would bring the natural price and the market price into equality. If market price exceeded natural price for some good, then landowners and employers would shift their land and capital to produce more of this good. This would tend to reduce market price and move the market price closer to the natural price. On the other hand, if market price were below the natural price, landowners and employers would seek some other good to produce, or some other use for their land or capital. This would reduce the supply of this good, increase its market price, and move the market price towards its natural price.

Smith argued against mercantilist restraints on trade, and wanted the British government to control monopolies and observe care in the manner by which it taxed its citizens.

Smith’s vision was an optimistic one, involving competitive capitalism increasing living standards and making everyone better off. In the time since The Wealth of Nations was published, this vision has largely come to pass. But it was not a quick transformation. Nor was it an easy one. What Smith did not live long enough to see the set of serious and deep problems that would accompany economic growth – unemployment, pollution, the poverty of British workers, and the deterioration of industrial cities in Britain. These were the problems that Smith’s successors were forced to grapple with.