Adam Smith

Adam Smith (1723-1790) was the first of the classical economists to be a professor. He was a professor not of economics, however, but of moral philosophy.

Schumpeter (1966) pointed out, however, that moral philosophy was a precursor to the social sciences. It was the branch of philosophy that dealt with the science of the mind and society, as distinguished from natural philosophy, which gave birth to the physical sciences and mathematics. Smith's early work focused on moral and ethical issues, and he took up the subject of political economy relatively late in his career. That he did so should come as no surprise; as noted earlier, economic theory was an important issue for British philosophers of that time. (Smith was Scottish.) Smith was also a friend of Hume, Quesnay, and Voltaire, all of whom were engaged with the topic.*

Many people view Adam Smith as an apologist for capitalism, but most economic historians view him as a true scholar concerned about analyzing the prospects for the newly emerging system. He did not believe in accumulation for the sake of accumulation, but as a benefit to society as a whole; as a moral philosopher he was not a crude advocate for self-interest, although his work has been used by others for this purpose (Heilbroner, 1999; Niehans, 1990). Blaug (2002) notes

* Classical political economy involved a relatively small group of scholars who knew each other well. In addition to these relationships of Smith's, John Malthus, James Mill, and David Ricardo, whom we shall discuss shortly, were good friends. Hume and Rousseau were friends of Thomas Malthus' father. Ricardo gave John Stuart Mill (James Mill's son) his first lessons in political economy while he was still a teenager. In later periods, other economists would have economist fathers, including two responsible for important and pathbreaking work in the field: Léon Walras and John Maynard Keynes.

his frequent acerbic comments — that landowners love "to reap where they never sowed" or that entrepreneurs seek "to widen the market and to narrow the competition" — as evidence of his skepticism about the motives of men. There is no doubt that Smith was quite optimistic about the benefits of commerce, however. He lived in a harmonious Newtonian and Cartesian universe and, assimilating the ideas of Locke, imagined an economic system that operated by natural law (Letwin, 1964; Canterbery, 1976; Spiegel, 1991).

These ideas are incorporated into Adam Smith's seminal book, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), which is one of the most profoundly influential books of all time. Some make note of the fact that many of the ideas in the book can be found in the work of precursors to Smith, but Smith is credited for presenting these ideas in a clear, comprehensive, and scholarly manner — unlike anyone before him. He brought all of the threads of political economy together in a masterful synthesis, setting the tone for much of the work that was to follow.*

For example, although the importance of the division of labor in society was known, Smith fully worked out the importance of a factory system based on specialization, demonstrating the great productivity gains that can result. The motive force for this system, however, was competition in combination with self-interest (Heilbroner, 1999). While not justifying self-interest, he, like many of his time, felt that self-interest was the nature of man. He argued that a competitive system could marshal the self-interested behavior of men and push them towards activities that would benefit society as a whole. Someone engaged in trade, who overcharged customers or — because of some advantage — reaped a large profit, would soon find this profit or advantage eroded by competition. Thus an invisible hand moved the system toward one where there

* Sir James Steuart (1712-1780) actually published a synthesis, Principles of Political Economy, in 1767, almost a decade before Smith. But it was poorly written and lacking in cohesion, resulting in limited success (Spiegel, 1991).

would be a large quantity of goods at the lowest price. Society would benefit from the self-interested behavior of others.

Smith, at a more "macro" level, discussed the accumulation of capital that results from the increasing wealth in society. This accumulation benefits society insofar as it is invested in the production of goods. So the self-interested accumulation of wealth can also benefit society. Serving as a check on the accumulation of wealth, however, is population growth. Increasing wealth results in higher wages, which — by making the lives of the working class more comfortable — encourages population growth. This encourages competition among workers, resulting in decreased wages and a fall in the population. Then the cycle of accumulation begins again. Thus, both his micro-level discussion of competition and the production of goods and his macro-level discussion of accumulation and population growth suggest a self-regulating system that can always right itself if it goes too far in any given direction (Heilbroner, 1999). This depiction fit within Smith's concern to emulate a kind of Newtonian vision of the economic world.

Smith also discussed a labor theory of value, rejecting the point of view of the Physiocrats. But Smith saw the labor theory of value as only relevant in a barter economy and largely relied on a cost of production theory of value. Only later, with Ricardo, does one find a full statement of a labor theory of value. What he did take from the Physiocrats — other than their natural law conceptions of the economy — is their belief in laissez-faire, a term he adopts in his own work. The self-regulating system of capitalism can only work effectively if it is not interfered with by government. The mercantilist ethic of heavy government involvement in the economy had to go.

It should also be noted that Smith was not insensitive to the situation of the working class. He strongly believed in the provision of public education as an antidote to the often mind-numbing factory work that was available to them. But ultimately he felt that the clockwork economy that he depicted would bring them greater benefits than the mercantile system — based on special privileges for the wealthy and well-connected. Canterbury (1976) has also noted that the extreme poverty of the urban slums, as witnessed by Marx, were not as common in Adam Smith's world, as he lived prior to the Industrial Revolution and the consequent social disruptions that it caused. So his optimism was a reflection of more optimistic times.

Although The Wealth of Nations went on to be a highly successful and influential book, it was another 25 years before a well-organized school of thought developed — centered around David Ricardo and his amendments to Smith's work. Prior to David Ricardo, however, Thomas Malthus made a significant contribution to the emerging classical school.

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