Adam Smith: The Father of Economics
“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.”
A proverb from one of the world’s most famous economists, Adam Smith in one of his renowned works ‘The Wealth of Nations’, it lays the foundation of modern-day capitalism.
Why do you think Coca Cola has those amazing commercials and succeeds in having a profitable business model of over a century? Or, why do Dominos Pizza keep on giving you those amazing deal?
It’s all because it makes business sense for them, and keeps building customer engagement. You can well have a business today, but if you don’t plan out your organizational goals well, you wouldn’t succeed.
Adam Smith’s political theories were interesting, and here is a cool video that explains it.
Let’s find out more about how Smith explained the concept of Gross Domestic Product (GDP) even before people knew what it was and how he became ‘the Father of Economics’.
ABOUT ADAM SMITH’S LIFE
Not much is known about the early life of Adam Smith but his date of baptism, 5th June 1723 and the fact that he attended the Balliol College at Oxford University after attending University of Glasgow.
There are reports that the economic and moral philosopher in his childhood, at the age of 4, was abducted by a group of gypsies and was missing for a while but was rescued by the scouts from a gypsy woman who escaped at the time.
After returning from Oxford, he began giving public lectures at the University of Edinburgh where he was accompanied by his Scottish philosopher and good friend David Hume.
Based on these lectures Smith was honored to be a part of his Alma Mater, the University of Glasgow’s teaching committee in the year 1751.
Tutoring and philosophical achievements of his career led to him publishing his first book which was based on the fact that human morals depend on the sympathy among individuals for the members of their society.
In 1763 Smith was offered the position to tutor the Duke of Buccleuch, Henry Scott which he accepted. For the next several years, Adam Smith traveled to the remotest corners of Europe while educating and tutoring the young Duke as requested by his stepfather, Charles Townshend.
On this remarkable journey, Smith encountered many renowned thinkers and philosophers like Voltaire in Geneva, Anne-Robert-Jacques Turgot, and Jean-Jacques Rousseau in vivid parts of Europe, with every encounter his pool of knowledge and fascination for the capitalism and how it can reform any nation’s wealth through free markets began to take shape.
We all know about his most well-known piece of writing ‘The Wealth of Nations’ but not many people are aware of the initial philosophical publication by the Father of Economics called, ‘The Theory of Moral Sentiments’.
THE THEORY OF MORAL SENTIMENTS
This piece of writing by Adam Smith was published in 1759 and its implementations are visible to date. The book goes on to extensively discuss the concept of charity and its effect on human ethics.
The Theory of Moral Sentiments states that our actions as human beings result from psychological conditions, specifically compassion.
He argues in the book that humans look for self-interest but help others automatically as they sympathize, and feel is right.
When we see others suffer, we feel for them, although not as strongly but humans are sympathetic to the members of their society.
We tend to be selfish but do not wish to harm other humans in the process of fulfilling our self-interests, that is human empathy.
Whatever we do must be done after considering the after effects of our actions, which is the normal human rationale.
Our conscience lets us make decisions and perceive our actions as any other observer might, consequently leading us to take the correct and more humane decision.
Smith, as he mentions in The Theory of Moral Sentiments, believes in a benevolent and omniscient God, and compares the universe God has created to a watch with all the humans as individual components of the watch that function cohesively to not interfere with any other component making the mechanism run smoothly.
The most fundamental nature instilled in humans by the Creator Himself is their morals which lead them to live harmoniously in this world without disrupting the lives of others with their actions.
While going through the book you’ll find various quotes by Adam Smith, though simple the depth and explanation of every quote are beautiful, let’s take a look at some of the interesting adages mentioned in The Theory of Moral Sentiments and find out what they convey in general terms.
“Never complain of that of which it is at all times in your power to rid yourself.”
This line simply means that whining for something that can easily be altered is not wise.
Work towards it if it is wrong only then will the problem disappear, if you keep complaining but do nothing about it then you’ll always be complaining without achieving anything.
Smith explains the point by using the Stoics as an instance and concludes it by saying that we must act as the Superintending power, that is God, has made obligatory for the humans to conduct themselves.
“How selfish so ever 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.”
Humans work on the base of self-interest, doing what benefits them the most is in their nature.
Yet some principles make a man interested in the wellbeing of others as well; the principle he is talking about is the human morals.
We, as humans, help others out of our own free will and cannot see the people around us suffer, it is against human conscience, and we naturally feel bad if we see others in pain which is why we are morally forced to help them.
We help others; it can be said, out of our own self-interest for the pleasure we get when people around us are happy.
“We are but one of the multitudes, in no respect better than any other in it.”
The truth of life, we are in fact a small fragment of the universe, billions of other aspects make it complete.
An individual is not better than any other on this planet; we are all equals and must not consider ourselves superior to the rest.
We are all a part of the same world and have roles to fulfill; God has created all of his mankind without any differentiation.
Like these, The Theory of Moral Sentiments has many such verses which are more or less based on the fact that no human is different, and we all have basic morals which make us help others at desperate times as we are self-interested in the satisfaction of the people around us.
With this book, Adam Smith takes David Hume’s philosophical imagination even further, suggesting an even more sophisticated approach towards compassion.
Throughout the treatise, he mentions that self-interest is only the initial aim, the main goal, however, is to lead a morally virtuous life.
In his lifetime, Adam Smith coined different theories, from ‘The Theory of Moral Sentiments’ to ‘An Enquiry into the Nature and Causes of the Wealth of Nations’, all of his theories were well-defined and are to-date considered in high regard by philosophers and economist’s alike.
Renowned thinkers globally took inspiration from Smith’s works and a reflection can be seen in their own works, like Karl Marx’s theory for capitalism, although the conclusions that they reach are widely different how they reach those results is quite similar.
Not only Karl Marx, but different economists and thinkers like David Ricardo, Milton Friedman, and John Maynard Keynes have based their theories on Smith’s clustered and, unto now, renowned work ‘The Wealth of Nations’ which he wrote in 1776.
Let’s find out more about this detailed dissertation from which concepts are still used to-date by the modern-day economists and why it is considered to be an economist’s bible.
Here is a graph that explains Smith’s theories.
‘AN ENQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS’
Written by the Scottish economist and moral philosopher, Adam Smith, commonly referred to as ‘The Wealth of Nations’ was published in 1776 and was well-received at that time by the highly educated circles and scholars.
Although, it failed to become the epitome of capitalism, which was budding greatly during the industrial revolution.
Originally written in six volumes, The Wealth of Nations is now combined into two books containing three volumes each into a single book which totals to more than 1,100 pages of the 18th Century economics in detail.
If you look at it, the book has been around for more than 2 centuries and is still considered as the go-to documentation for modern economics.
Smith laid the foundation of most of the current economic concepts centuries before modern economics was even discovered.
Most of the theories mentioned in this treatise are actively used worldwide posthumously giving Adam Smith the recognition he deserved in the 17th century.
The depth and vastness of this book cannot be summarized thoroughly without the knowledge of three basic concepts explained in the book,
1. Division of Labor
Smith uses the example of manufacturing pins to demonstrate the Division of Labor.
He explains how processes can be broken down into simple steps allowing an individual to develop a speciality.
He says that a single person cannot finish all the processes alone and that division of labor is necessary to increase the productivity of the company taking us to the second concept that is, ‘Productivity’.
He gives readers three key and interlinked reasons as to why greater productivity is the consequence of a better division of labor.
- He says that with the division of labor, an individual specializes in an area and thus increasing the dexterity of that individual which leads to the second reason which is related to the time taken.
- When all the workers specialize in their task there won’t be any wastage of time and costs to transfer the process from one person to another; it will be carried harmoniously.
- The third or the final reason is that one person focusing on a single task is likely to come up with different and quicker ways to complete that task in lesser time than many individuals switching through the same task.
3. Free Markets
With this concept, Adam Smith stated that the economic power lied in the hands of people and whether they want to buy a product or not.
Also called the ‘Laissez-Faire’ policy nowadays, this concept introduced by Adam Smith proclaimed that the interference of the government in economic matters must be minimum and when translated from French means to ‘let do’ the people what they economically see fit for themselves.
Adam Smith started the debate of when you let a market to be alone, will that be good or depraved which is still going on.
He says that the wages paid to the workers are essential as if every employee is paid equally, no matter the difficulty level of their job then it would create conflict among the workers to get the easiest job and still get paid the same amount.
This can be solved by offering different wages to the different divisions based on the effort of their operation, meaning that a worker with the most difficult job gets paid more and vice versa.
According to Smith, these three concepts are basic to drive the nations to become wealthier.
These series of books introduced many other concepts that later became central to the modern economical thoughts and understanding the prosperity of a country.
Here is a video that talks about it all.
Let’s discuss some more theories from The Wealth of Nations which are still widely popular and implemented in modern economics.
THEORY OF THE ‘INVISIBLE HAND’
In the Wealth of Nations, Smith introduces the concept of an ‘invisible hand’ by using the following quote.
“He is in this, and in many other cases, led by an invisible hand to promote an end, which was no part of his intention.”
The theory works best in a free market scenario, where every individual works for their self-interest without the interference of any higher power.
If we look at it the entire economy comes down to two people; a buyer and a seller, and it would function meticulously if sellers have the interests of their buyers in mind.
Here is what happens according to Smith.
When the government interferes with the market and the sellers, it gives rise to competition, although, in a free market, the sellers look at the market as an opportunity, an opportunity to trade for self-interest.
Smith used the example of a baker to explain this phenomenon, he said that if a baker offers scones and the demand increases, then other bakers will start to make scones.
Looking at which the farmers automatically start producing more wheat that the bakers will need to make scones for their customers, the demand and supply will result in the cost being slashed at different bakers, getting you scones at the least possible price.
This way, everyone works in their self-interest and without the government interfering in the market’s functioning, the economy is balanced, and everyone lives happily.
He uses the term ‘Man of System’ to depict the idea where a person who thinks that something is ideal, tries to plan everything from top to bottom, but that is only what he thinks is correct, but it may not necessarily be the case.
A man of system tries to move around people and make them perform tasks as though they are chessmen and he is the player.
Smith says that this manipulation can be dangerous for two possible reasons, the first being the ‘Man of System’ assuming that he knows what is best for everyone and the second reason being the treatment of human beings as chess pieces, which they are certainly not.
There will come a time when everyone will revolt against the ‘Man of System’, and the economy will be disrupted.
The idea behind a free market was to trade something that the seller has for something that the buyer offers, working in both of their interests, leading to economic equilibrium as the sellers and buyers are working as peers and not competing with one another, leading to minimizing costs and better opportunities for everybody.
This is what Smith means by being led by an ‘invisible hand’ which can satisfy large companies as well as small bakers.
Along with the major economic revelations about economics through his work, ‘The Wealth of Nations’ Smith also coined what we now know popularly, as the Gross Domestic Product or GDP.
It wasn’t obviously called as GDP by him although he referred to it as economic liberalism.
So, let’s learn more about the term Adam Smith introduced in the 17th Century, which is widely used now as the base for trading opportunities worldwide, the GDP.
Knowing what economic liberalism, in the words of Adam Smith, is important to compare it to the modern economic concept of Gross Domestic Product and see how similar they are.
Economic Liberalism is not a concept as much as it is a system that indicates the way for the economic development of any country through a free market without government intervention.
FIGHT AGAINST MERCANTILISM
Smith constantly criticized the hoarding of gold by any individual and claimed that simply accumulating gold in the country is not beneficial to it and must not be considered as the ‘National Wealth’.
On the other hand, he firmly believed that the produce of a country and the labor of that country in totality defined the wealth of nations.
Smith was way ahead of his time and what he meant by the produce of land and labor is what economists now refer to as the Gross Domestic Product (GDP) which is a country’s entire production.
He argued that with mercantilism, the productivity failed to maximize, which was after all the motive in all cases, to improve productivity and increase the nation’s prosperity but mercantilism created monopolies and it limited the productivity greatly which led to the costs go through the ceiling.
As Smith has mentioned throughout the Wealth of Nations, a division of labor is essential to improve the productivity of a country and not the gold inflow, mercantilism only reduced the overall trade among countries and specialization rate (the division of labor).
For this, he introduced the concept of free markets which promoted the mutual benefits of traders and not rivalry among them.
Now that we know about the father of economics and his celebrated pieces of work during his life, there is something peculiar about his demise too, let’s find out what.
LIFE AFTER DEATH
Adam Smith in his final days gave instructions to destroy materials not adequate for publication and left notes to publish some of his finished works which he thought were fit for a publication like ‘History of Astronomy’ which was published in 1795 with some others.
Smith, on his deathbed, expressed that he was disappointed he could not achieve more in his lifetime.
Little did he know that his work, the Wealth of Nations would be considered as the bible for capitalism worldwide in the 21st century, decades after his passing, getting him the title of the Father of Modern Capitalism.
Until her death in 1784, Smith was close to his mother, Margaret Douglas who passed away just a few years before himself and a few handpicked friends and acquaintances such as Joseph Black and James Hutton to name a few.
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