Adam Smith, a name synonymous with classical economics and free-market capitalism. But who was this influential figure? Let's delve into the life, theories, and enduring impact of this 18th-century philosopher and economist.
Adam Smith is considered the father of modern economics
He argued against mercantilism and was a major proponent of laissez-faire economic policies.
- His ideas-the importance of free markets, assembly-line production methods, and gross domestic product-formed the basis for theories of classical economics.
Legacy
Adam Smith’s writings influence economics today as he believed wealth is created via labor, and self-interest spurs people to use their resources to earn money.
- Smith’s theories that economies thrive when competition, capitalism, and a free market are alive and well in the 21st century.
Early Life
Smith was born June 5, 1723 in Kirkcaldy, Scotland.
- He attended the University of Glasgow at the age of 13, then attended Balliol College at Oxford University, where he studied European literature and philosophy.
- He returned home and delivered a series of well-received lectures at Glasgow University, which appointed him first as the chair of logic, and then chair of moral philosophy, before moving to France as a tutor to Charles Townshend, the stepson of the future Chancellor of the Exchequer.
Wealth and Production of Goods
The ideas promoted by The Wealth of Nations generated international attention and were a motivating factor in the evolution from land-based wealth to wealth created by assembly-line production methods made possible by the division of labor
- Smith used the example of the labor required to make a pin to illustrate the effectiveness of this method
- If one person were to undertake the 18 steps required to complete the tasks, they could only make a handful of pins per week, but if the same amount of work was done by 10 individuals, production would jump to thousands of pins a week
Notable Accomplishments and The Wealth of Nations
During his years spent teaching and working at Glasgow, Smith worked on getting some of his lectures published
- His book The Theory of Moral Sentiments was eventually published in 1759
- Smith published his most important work, An Inquiry into the Nature and Causes of the Wealth of nations, in 1776
- In his book, Smith popularized many of the ideas that form the basis for classical economics
- Other economists built on Smith’s work to solidify classical economic theory through the Great Depression
Gross Domestic Product (GDP)
Smith argued that countries should be evaluated based on their levels of production and commerce
- This concept was the basis for creating the GDP metric for measuring a nation’s prosperity
- When Smith’s book was published, many countries were hesitant to trade with other countries
- A free exchange should be created because both countries are better off from the exchange
Honors and Awards
In 2007, the Bank of England placed Smith’s image on the £20 note.
Philosophy of Free Markets
Emphasis on minimizing the role of government intervention and taxation
- “Invisible hand” guides supply and demand in an economy
- Every person inadvertently helps create the best outcome for all
- A hypothetical butcher, brewer, and baker in this economy hope to make money by selling products that people want to buy
- If they are effective in meeting the needs of their customers, they will enjoy financial rewards
The Invisible Hand Theory
According to Smith, an institutional framework is necessary to steer humans toward productive pursuits that are beneficial to society
- This framework consists of institutions like a justice system designed to protect and promote free and fair competition
- However, there must be competition undergirding this framework, and competition is the “desire that comes with us from the womb, and never leaves us, until we go into the grave.”
