SMITH, ADAM

Although Adam Smith (1723–1790) was not the originator of many of the ideas that became modern economics, his synthesizing treatise, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), was so influential that he is generally considered the founder of the discipline. He effectively elaborated the concept of unplanned, spontaneous order, a feature of his economics that later played a part in other sciences such as evolutionary biology and cybernetics. Smith treated economic behavior as part of an entire ethical system, which he set out in his other major work, The Theory of Moral Sentiments (1759). Born in Kirkcaldy, Scotland, and baptized on June 5, he attended Glasgow and Oxford Universities and then returned to Glasgow as professor of moral philosophy. He died in Edinburgh on July 17.

Self Interest and Public Benefit

For Smith and contemporary practitioners, economics is in large measure the study of the outcome for society of individuals acting in their own interest without a view to public benefit. Smith thought the outcome was generally good. Unregulated, self-interested behavior could produce greater material wealth for society than could a system of policies designed by authorities to achieve wealth. Economists, historians, philosophers, and ethicists have debated his argument from his day to the present.

In support of his notion that beneficial order, not destructive chaos, can result from persons acting in their own interest, Smith repeatedly shows how desirable features of society are the unintended outcome of actions taken for other reasons. For example the division of labor, to which he attributed national wealth, was not the effect of human wisdom that intended the resulting material well being. Smith argues that humans, unlike animals that fawn to obtain favors, learn to divide tasks and specialize in producing goods and services that they can exchange for what they want. The division of labor, therefore, was the effect of the tendency of humans to barter in order to get what they want from others. It produces wealth because it saves time, develops specialized skills, and prompts workers to invent technologies to ease their tasks.

Being aware of the productive advantages of specialization, authorities may presume that they can plan the division of labor. Smith traces the steps involved in producing a simple item and makes it clear that a planner would be incapable of assessing people's desires, devising tasks to satisfy them, and assigning the tasks to various workers. Even if people made their desires known in any one place, no person or group could imagine the skills and resources required to provide for any one desire. The division of labor functions most effectively if individuals learn from market prices the best way to employ their own time and abilities to satisfy the desires of others, thereby offering productive resources of which a planner would be unaware. When entrepreneurs seek the most profitable employment of their capital and workers go where wages are highest, the result, which neither intended, is that they unintentionally supply the desires of others in the cheapest way. Individuals do not have to have benevolent motives to produce social benefits.

Smith, who did not romanticize business, thought that employers always try to conspire to keep wages down and that sellers in the same trade always conspire to raise prices. Accordingly he admonished governments never to take actions that would make it easier for members of the same trade to cooperate. Self-interest leads to public benefit, but only if competition prevails.

Unregulated markets, when competitive, harness self-interested behavior to produce public benefit. Smith understood, however, that the authorities did not deliberately institute a market system to achieve this end. On the contrary, history taught him that the system emerged when landlords used the produce of their agricultural estates to buy luxuries rather than to maintain hundreds of tenants, soldiers, and servants. When they were no longer bound to their landlords, these individuals became freer to exchange their services for market-determined wages.

Smith's understanding of how the pursuit of individual interest produces the wealth of all led him to advocate the system of natural liberty in which the government's role, while indispensable, is confined to providing national defense, law and order, and goods that are unprofitable for private persons to produce, even though their benefits exceed their costs. Attempts by government to fix prices, encourage particular technologies, or subsidize certain industries for the benefit of society would be useless if not pernicious.

The Moral Basis of Markets

Smith devotes much of The Wealth of Nations to working out the implications of individuals being able to pursue their own interests, but he was aware that his system of natural liberty had a moral foundation. Markets not only had to be free from improper government interference and monopoly; legal and moral rules also had to protect them from injustice—murder, theft, and broken promises. In The Theory of Moral Sentiments (1759), Smith contended that orderly society was possible because the Author of Nature endowed humans with resentment of injustice and a desire to see it punished. For Smith society is possible because people passionately desire to punish injustice, not because they reason that their group will suffer if crimes against its members go unpunished. In his treatment of the social support for justice, as in his explanation of the emergence and functioning of markets, Smith emphasizes unintended outcomes. Individuals do not seek a wealthy society; they pursue their own interest and national wealth results. Similarly individuals do not strongly desire orderly society; their resentment of malice provides the basis for order.

It is easy enough to see that humans would resent malice toward themselves, but what of hurtful actions toward others? Humans are self-interested, but, as Smith claims in the opening line of The Theory of Moral Sentiments, they also care about the fortunes of others. By imagining what they themselves would feel in a similar situation, humans sympathize with the resentment of sufferers of injustice.

Smith does not limit the role of sympathy to ensuring that members of society will punish perpetrators of injustice. He uses the term sympathy to mean the human capacity to experience, to some degree, all the passions of others. When people share the passions that prompt others to act in ways they themselves would act in similar circumstances, they consider the acts of others just and proper. Similarly people approve of their own conduct if they feel that an impartial spectator would sympathize with the passions that influenced it. The impartial spectator acts as a constraint on self-interest. It approves of such self-regarding virtues as prudence, industry, and temperance, but recoils at malevolence or sordid selfishness.

Thus although Smith recognized the power of self-interestedness, he understood and celebrated other motives as well. According to his figure of speech, if the pillar of justice prevails, a society of the merely self-interested can exist, but without the ornaments of friendship, generosity, gratitude, and charity, people live a less happy, agreeable, and comfortable life. In his words, "to restrain our selfish, and to indulge our benevolent, affections, constitutes the perfection of human nature" (Smith 1969, p. 71).

Relevance to Current Policy

Smith's system of natural liberty does not provide guides for policies for the contemporary problems of poverty, environmental degradation, or for the alleviation of the stultifying effects of specialization. In these areas, later developments in specialized fields of economics have surpassed Smith's approach. At the same time, his understanding of human behavior and the sources of national wealth is still pertinent. The human tendency to regard first self-interest and that of family and friends has a basis in nature and is not entirely the consequence of education or culture. Therefore persons who make laws and policies must acknowledge it. It is fruitless to hope that authorities can persuade humans to provide for each other's needs out of benevolence. Self-interested individuals, however, will serve each other as they pursue their own interests, if competition exists and there are rules that punish violators of personal and property rights. Moreover authorities, as compared with the public, are no less self-interested and no more able to judge which industries or technologies will provide the greatest future social benefits. One lesson from Smith, then, is that governments should forgo planning and concentrate on promoting wealth and happiness by having legal systems that protect property rights and by encouraging ethical standards that honor following the rules of justice.

Another lesson is that markets do not become free because of the vision of some well-meaning and enlightened group. In the case of England, Smith observed that the market system resulted when landlords lost power. This historical observation is in keeping with his understanding of the limited effect of beneficial intent.

The twentieth-century failure of planned economies relative to those with freer markets lends support to Smith's free-market policies for the growth of national wealth. Even so, international agencies and national governments should be careful about promoting free markets by financially supporting authorities that promise to create them. Smith's historical perspective suggests that markets become freer when power changes hands, not when powerful leaders purport to make them free.

WILLIAM O. SHROPSHIRE

SEE ALSO Capitalism;Cybernetics;Enlightenment Social Theory;Libertarianism;Market Theory;Political Economy.

BIBLIOGRAPHY

Hayek, Friedrich. (1988). The Fatal Conceit. Chicago: University of Chicago Press. Includes an exposition of Smith's contribution to the concept of spontaneous order and references to his influence on Darwin and cybernetics.

Heilbroner, Robert. (1986). The Essential Adam Smith. New York: W. W. Norton, Inc. Excerpts from most of Smith's works, an excellent introduction to each of them, and a brief biography.

Marx, Karl. (1963). "Economic and Philosophical Manuscripts." In Karl Marx: Early Writings, ed. and trans. Tom B. Bottomore. New York: McGraw-Hill Book Company. Marx's view of the damage done to humanity by Smith's market-dominated society.

McCloskey, Deirdre. (1998). "Bourgeois Virtue and the History of P and S." Journal of Economic History 58: 297–317. An explanation of Smith's system of ethics as a combination of the prudent and social virtues.

Niebuhr, Reinhold. (1953). "The Christian Faith and the Economic Life of Liberal Society." In Goals of Economic Life, ed. A. Dudley Ward. New York: Harper Brothers. The perspective of a Christian theologian who came to a more moderate view of market society after being a socialist critic in his earlier years.

Samuels, Warren. (1977). "The Political Economy of Adam Smith." Ethics 87:189–207. An interpretation of Smith as a synthesizer of natural theology, ethics, jurisprudence, and expediency.

Schumpeter, Joseph. (1954). History of Economic Analysis. New York: Oxford University Press. A monumental history of economic thought that assesses Smith's importance and traces the background of many of his ideas, including the concept of spontaneous order.

Smith, Adam. (1969 [1759]). The Theory of Moral Sentiments. Indianapolis, IN: Liberty Classics Fund, Inc. Liberty Classics edition with introduction by Edwin G. West.

Smith, Adam. (1981 [1776]). An Inquiry into the Nature and Causes of the Wealth of Nations, eds. Russell Campbell and Andrew Skinner. Indianapolis, IN: Liberty Fund, Inc. Introduction by R. Campbell and A. Skinner.

West, Edwin. (1976). Adam Smith: The Man and His Works. Indianapolis, IN: Liberty Press. An accessible and sympathetic biography.