Adam Smith

Born June 5, 1723

Kirkcaldy, Scotland

Died July 17, 1790

Edinburgh, Scotland

Scottish economist, philosopher

"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 necessities but of their advantages."

Adam Smith is often regarded as providing the theoretical justification for the Industrial Revolution, a period of fast-paced economic change that began in Great Britain in the middle of the eighteenth century. His masterpiece, An Inquiry Into the Nature and Causes of the Wealth of Nations (familiarly known by its abbreviated title The Wealth of Nations, 1776), was published just as the Industrial Revolution was gaining momentum in England. In it Smith argued that economic competition, rather than government regulation, was the best way to assure the greatest good for the greatest number of people. Despite this belief, Smith recognized an important role for government in making sure that business owners did not conspire to limit competition for their selfish interests.

What is the best way to assure maximum happiness for the greatest number of people? Aside from the realm of personal relationships between individuals, this question often involves the subject of economics, the systematic study of how people create wealth and how societies distribute it.

Smith was one of the first philosophers to consider this subject comprehensively, and his theories still have many advocates in the twenty-first century. He is sometimes considered the intellectual godfather of capitalism, the system that leaves ownership of factories and other types of property in private hands.

Smith's writings played an important part in gaining widespread acceptance of the capitalist economic system that came into being in Britain and the United States, namely regulated free-enterprise. Much of the economic and political history of both the United States and Britain since the late eighteenth century could be described as an ongoing series of experiments to achieve the ideal balance between individual economic freedom and social restraints (or government controls) that Smith thought offered the best chance for the greatest happiness for the greatest number of people.

Childhood and early years

Adam Smith was born in Kirkcaldy, Scotland in 1723. His father was a government official at Kirkcaldy, and he died two months before Adam was born. Adam grew up as an adoring, and adored, only son. He was not especially healthy as an infant, and in later years his mother, Margaret Douglas, was criticized for spoiling her child. Adam remained devoted to his mother for his entire life.

The most dramatic incident recorded in Adam's childhood occurred when he was about three years old. He and his mother were visiting Adam's uncle in Strathenry, Scotland, and Adam was left playing outside in the courtyard. A small group of homeless people came across the child and kidnapped him. His uncle heard the footsteps and quickly gave chase, rescuing his young nephew.

As a young boy, Adam was not physically strong enough for vigorous play. Instead, he became an avid reader. He was remembered as having a warm, friendly, and generous personality, and he had many friends.

At age fourteen, Smith became a student at the small but influential University of Glasgow for three years. In 1740, at age seventeen, he traveled to England and enrolled in Balliol College of Oxford University, where he was a student for nearly seven years. Attending college in Smith's era was quite
a different experience from what it is today. Attendance at classes was voluntary and lecturers were often paid by students, much as if going to a film or play. Smith earned his bachelor of arts degree from Oxford and returned to his hometown of Kirkcaldy, where he resumed living with his mother. He earned money by giving lectures on English literature until he decided to move to Edinburgh, Scotland.

In 1751, at age twenty-seven, Smith became a professor of logic at the University of Glasgow and later became a professor of moral philosophy. Eight years later, he published the first of his two principal works: The Theory of Moral Sentiments. The book laid out Smith's ideas on morality, which he thought were based on the idea of sympathy (that is, human beings can easily imagine being in someone else's position), and ideas of right and wrong essentially stem from the notion of sympathy for another person, he reasoned.

In 1764 Smith was offered an opportunity to travel across Europe as a tutor to two young Scottish aristocrats, sons of the duke of Buccleuch. Their itinerary included visits to Paris, Toulouse, and Geneva during a period of intense intellectual activity in Europe that eventually led up to the French Revolution in 1789. On the trip, Smith met some French physiocrats, economists who believed that agriculture was the only true source of a nation's added wealth. It was an economic idea that gained popularity in France at just the time that the Industrial Revolution was about to take off in England, helping to explain why industrialization was initially more widely accepted in England than in France.

Smith returned to Scotland in 1766. He moved back in with his mother and a cousin, and spent the next ten years producing his major work: a book on economics titled An Inquiry Into the Nature and Causes of the Wealth of Nations.

The Wealth of Nations

Smith's nine-hundred-page book presents both an analysis of economics and a series of policy recommendations. Using historical and contemporary examples, he explains the principles of economics and, in particular, why some nations are wealthy and others are not.

In considering Adam Smith, it is essential to bear in mind that he published his book in the midst of the era of mercantilism, an economic theory that advocated government control over foreign trade. This theory had been dominant in England, France, and Holland since about 1500. In brief, it held that the best way for a country to increase its overall wealth was to increase export of manufactured goods, for example, in exchange for gold or silver, which was needed to pay for armies and the costs of government.

Ideally, according to the mercantilist system, governments would use armies to protect foreign trade in which manufactured goods were sold abroad for gold or silver. The government was chiefly in control of foreign trade, with the objective of selling more abroad than was purchased, and also of encouraging manufacturing over, say, agriculture or mining. Thus, government policy was aimed at regulating the economy to make sure manufacturing was favored, and that foreign trade resulted in a balance favorable to the home country.

When the British government applied this philosophy to its North American colonies, it eventually alienated the colonists. For example, the government in London insisted that the colonies trade exclusively with England, even if better deals could be had by the colonists in trading with such countries as France or Holland. Over the years, this insistence on uneven trade and exclusive dealing with England increasingly angered American colonists and helped bring on the American Revolution (1775–83).

The invisible hand

Smith's book was largely a rejection of mercantilism. He favored instead a theory that is sometimes shortened to "the invisible hand." Smith contended that the way to achieve the ideal economic result for everyone was to let competition run its course; if every individual is left free to pursue his or her own vision of what is best, the overall total result for everyone will turn out to be good. Smith reasoned, for example, that under a system of free trading, each individual would do what he or she did best, such as making shoes or furniture. Thus, those who were good at making shoes would thrive in the shoemaking industry, while those who were especially talented at making furniture would concentrate their expertise in that industry.

Smith urged adoption of a few basic policies by governments eager to achieve the best economic result. Foremost was free trade, the elimination of restrictions on the purchase and sale of goods between countries. Similarly, if merchants are given legal monopolies on exporting or importing certain goods, this will result in artificially inflated prices and disturb the most efficient distribution of resources. Instead, let those who can produce a product most inexpensively have an opportunity to do so and pass along this advantage to everyone in the society.

Smith explained his notion that free trade encourages individuals to seek fulfilling occupations. "As it is the power of exchanging that gives occasion to the division of labor, so the extent of this division must always be limited by the extent … of the market," he wrote in The Wealth of Nations. That is, a bigger market will result in a greater, and more efficient, division of labor.

Sometimes Smith's idea of freedom of trade is oversimplified and presented as the notion of laissez-faire (pronounced lay-zay-FAIR; a French expression meaning "free to do," suggesting that people should be free to do as they choose). In fact, Smith never advocated laissez-faire. He realized that business people are likely to get together and make secret arrangements (such as agreeing to charge the same price for items in short supply, or buying other companies in order to eliminate competition) that will benefit themselves at the public's expense.

In Smith's words: "People of the same trade seldom meet together, even for merriment and diversion, [without] the conversation [ending] in a conspiracy against the public, or in some contrivance to raise prices."

When they can, business owners will join in societies designed to promote their special interests, often at the expense of the overall interests of their societies, Smith thought. He wrote in The Wealth of Nations:

The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

Smith saw three main functions for government: defending the nation from attack; providing a system of law to protect the rights of property, punish fraud, enforce contracts, and prevent violence; and providing public services, such as building roads, that no one in private business was likely to produce.

Smith also believed that economic competition and government regulation would work together to protect the public from the tendency by businesspeople to conspire against the public interest. At the same time, he recognized that there might be some instances in which a country's best interests were served by the government granting a merchant a special set of rights in order to encourage setting up trade with a particular country or in a particular commodity (something needed for defense purposes, for instance) that might not normally be profitable.

Smith accepted that under capitalism, wealthy businesspeople would tend to grow steadily richer. But he thought workers also would come to be better off over time.

An unfinished script

Although Smith was explicit in believing that businesspeople would tend to conspire against the public good, he did not make it clear exactly how governments should be organized to prevent this. Based on his own experience with government mercantile policies, he clearly understood how merchants would try to persuade governments to adopt policies that were in their narrow interests—and against the broader interests of the society.

Nevertheless, Smith provided many generations of economists and politicians arguments in favor of letting business grow without interference from government. The Industrial Revolution resulted in business enterprises much larger and more influential than any previously seen, and consequently social power in the hands of business owners that was much greater than the powers previously exercised by merchants or landowners. When this power was questioned, generations of businesspeople could point to the writings of Adam Smith as an argument for keeping government out of the business of business.

Near the time of his death, Smith was working on a third work, but illness made it impossible for him to complete the book. Not long before he died, he asked that his papers be burned. "What remains," he wrote in The Theory of Moral Sentiments, "the theory of jurisprudence, which I have long projected, I have hitherto been hindered from executing.... My very advanced age leaves me ... very little expectation of ever being able to execute this great work to my own satisfaction."

The Wealth of Nations was a critical and popular success during Smith's lifetime. Within a few years of its publication, many of Smith's recommendations became law, even as England advanced quickly as the leader in the Industrial Revolution.

In 1790, at the age of sixty-seven, Adam Smith died in Edinburgh, Scotland.

For More Information

Books

Macfarlane, Alan. The Riddle of the Modern World: Of Liberty, Wealth andEquality. New York: St. Martin's Press, 2000.

Ross, Ian Simpson. The Life of Adam Smith. Oxford, England: Clarendon Press, 1995.

Rothschild, Emma. Economic Sentiments: Adam Smith, Condorcet, and the Enlightenment. Cambridge, MA: Harvard University Press, 2001.

Smith, Adam. The Essential Adam Smith. New York: W. W. Norton, 1987.

Smith, Adam. An Inquiry Into the Nature and Causes of the Wealth of Nations. New York: Modern Library, 1994.

Smith, Adam. The Theory of Moral Sentiments. Oxford, England: Clarendon Press, 1976.

Periodicals

Gordon, John Steele. "Land of the Free Trade." American Heritage, July–August 1993, p. 50.

Kaufman, Henry. "If Adam Smith Were Alive Today: Capitalism Is the Only Way to Go." Vital Speeches, October 15, 2001, p. 12.

Web Sites

"Adam Smith 1723–1790." History of Economic Thought.http://cepa.newschool.edu/het/profiles/smith.htm (accessed on February 15, 2003).

"Adam Smith (1723–90)." The Library of Economics and Liberty.http://www.econlib.org/library/Enc/bios/Smith.html (accessed on February 15, 2003).

Yardeni, Edward and David A. Moss. "The Triumph of Adam Smith." TheLibrary of Economics and Liberty.http://www.adamsmith.org.uk/smith/triumph-of-smith.pdf (accessed on February 15, 2003).