Volume 7, Number 1, 2002
Federal Reserve Bank of Dallas
Adam
Smith—Capitalism’s Prophet
 |
|
No series on the great
figures in the history of economics would be
complete without Adam Smith, known generally
as the father of modern economics. Smith’s
influence on the development of economic theory
and the evolution of modern, market-based societies
cannot be overstated. As with all great thinkers,
his reputation has had peaks and valleys. Some
economists would deny that he was either a
great thinker or an influential philosopher.
But whether or not his critics will admit it,
these controversies reflect Smith’s stature
in the realm of economic thought.
In this Economic
Insights, we look at the man, his life
and some of his thoughts, with an eye toward
offering Smith’s persuasive, engaging arguments
and observations to a new generation. His
magnificent Wealth of Nations repays readers
today as it always has. His masterpiece should
never become, as so many great works do,
just another classic that no one bothers
to read because they think they already know
what it says. A credit to Smith’s genius
is that this has not yet happened to his
works and probably never will. That alone
sets him apart from the majority of thinkers
and writers, whether economists or not.
| — |
Bob McTeer
President and Chief Executive Officer
Federal Reserve Bank of Dallas |
|
|
|
Adam Smith—Capitalism’s Prophet
Adam Smith was born in Kirkcaldy, Scotland, near Edinburgh,
in 1723.[1] His father died before Smith was born, but his
will provided money for tutors and guardians, so Smith became
well educated. At age 14 he enrolled at Glasgow University.
After three years, he traveled to England to attend Balliol
College, Oxford, for the next six years, returning to Kirkcaldy
in 1746.
Smith earned money lecturing
and soon gained a reputation that enabled him to live quite
comfortably. He was invited
in 1751 to join the faculty of Glasgow University as professor
of logic. The following year, he moved to the chair in moral
philosophy, lecturing until 1763 on natural theology, ethics,
jurisprudence and, finally, political economy. Smith’s notes
on theology are lost to history, but his notes on jurisprudence
were published as Lectures on Jurisprudence in 1896,
more than a century after his death. In 1759 his lectures
on ethics became The Theory of Moral Sentiments,
a work that greatly enhanced his reputation. Of course, his
lectures on political economy are available to us in the
form of his masterpiece, An Inquiry into the Nature and
Causes of the Wealth of Nations, first published in
1776.
Smith was able to leave his teaching position after the
success of his 1759 book and his well-paid appointment as
tutor to the Duke of Buccleuch. Traveling with his pupil
in France and surrounding areas, Smith met a number of important
thinkers and writers and came to enjoy his tutorial work,
always making observational notes during his travels. The
notes would later be used to provide empirical support for
his theoretical arguments in Wealth of Nations.
While visiting Paris, Smith met Francois Quesnay and A. R.
J. Turgot, the leading theorists of the Physiocrat school
of political economy, which was then at the height of its
influence.
Returning to London in 1766, Smith worked on revisions to
his Theory of Moral Sentiments until the next year.
He then returned to Kirkcaldy, where he began work on Wealth
of Nations, completed nine years later. It was an immediate
success and went through five editions by 1789. Two years
after Wealth of Nations was published, Smith actively
sought and won an appointment as commissioner of customs
for Scotland. Strangely, Smith spent the last 12 years of
his life (1778–90) attempting to enforce the very type
of protectionist regulations against which he had argued
so impressively in Wealth of Nations.[2]
Since the publication of Wealth of Nations,
Smith’s
theories and ultimate purpose have been the subject of controversy.
Not everyone thinks of him as a great economic philosopher.[3]
But no one can deny the impressive influence Smith had on
the policies of his time and even, in the case of Marxism,
on the theoretical positions of his most vocal opponents.
As Wesley Mitchell put it, Smith sought to convince people
that "the wealth of a nation would be promoted with
vastly greater effectiveness by the ‘obvious and simple system
of natural liberty’ than by national planning of the mercantilist
sort."[4] And like John Maynard Keynes, Smith offered
more in his Wealth of Nations than economic theory;
he proffered policy solutions to what he saw as continuing
economic problems. He claimed, as did Keynes, that his solutions
would improve macroeconomic performance and national prosperity.
But whatever his motivations,
Smith’s life demonstrates
the incredible power of one individual’s efforts to profoundly
change things. An obscure professor writing works that few
could—or did—read, he nonetheless successfully impressed
his economic model upon a future world that he would not
live to see.[5] For in his own time, mercantilism dominated
public policy discussions, and the state and its planners
directed all economic activities. Smith’s theoretical emphasis
on individual people as rational utility maximizers whose
aggregate efforts brought forth greater overall economic
prosperity was an extremely radical proposition in its day
and even in the places where Smith propounded his analysis.
Even more radical was Smith’s belief that a society composed
of individuals acting in pursuit of their own interests would
result in a stable, free and more prosperous society than
one regimented and planned by the state. Smith took Isaac
Newton’s vision of a universe running by itself according
to natural laws and applied it to society as a whole and
to economic activity in particular. In the recorded history
of humanity, no contention has generated more controversy
than this simple idea based on faith in the wonders people
can achieve when allowed to trade and live in freedom. In
fact, the majority of what we today call politics is some
proposed, practical application of state power that is tempered
by this ongoing debate between Smith’s generally laissez-
faire approach and the approach of planning proponents
who claim they can create superior outcomes through coercion.
For Smith, economic growth is
good and is achieved by the ever-widening application of
the division of labor, which
is organized within markets and driven by rational self-interest.
Those nations that allow market forces to generate such growth
will become wealthier, in Smith’s view, than those that follow
the mercantile model of managed trade.[6] In his writings
on policy issues in Wealth of Nations, Smith lays
out the proper role for state activity. He maintains that
there are three areas for legitimate governmental activity
in society: defense against external and internal security
threats, the formation of laws that prevent individuals from
oppressing one another and the provision of public goods
that the market would not supply.
There is, of course, room for disagreement about the scope
of state activities within that third governmental task.
To Smith, it meant certain high-risk, large efforts such
as canal building. In our day, almost every good and service
has found advocates who wish it to be made public and, hence,
into a long-term taxpayer liability. Although Smith would
disagree with the vast expansion of public undertakings,
it is unlikely that he would be surprised at the drift of
policy since his death.
Regardless of our own predilections to agree or disagree
with Smith, his influence on all of us today is probably
greater than it was on his contemporaries or those who lived
immediately after Wealth of Nations was published.
He is regarded as not merely the father of modern political
economy or just a starting point for a history of thought
class but a system builder who sought to integrate ethics,
morality, political economy and jurisprudence into a coherent
whole. We will endlessly debate the extent to which he succeeded
in this task—that, in itself, is testimony to his continuing
influence and importance. We have, to a large extent, abandoned
his system of natural liberty by expanding state interventions
into our daily affairs, but his metaphor of the invisible
hand remains not just immortal but never improved upon as
a description of the market’s ongoing process.
In George Stigler’s judgment, Smith’s greatest achievement
was to "put into the center of economics the systematic
analysis of the behavior of individuals pursuing their self-interest
under conditions of competition. This theory was the crown
jewel of [Wealth of Nations], and it became, and
remains to this day, the foundation of the theory of the
allocation of resources. The proposition that resources seek
their most profitable uses, so that in equilibrium the rates
of return to a resource in various uses will be equal, is
still the most important substantive proposition in all economics."[7]
Smith was a true scholar, a masterful observer and chronicler
of real events, a persuasive and insightful author and, not
least important, a beloved, dedicated and extremely effective
pedagogue. To paraphrase Sir Thomas More: Not a bad life,
that.
Smith died in July 1790 after
more than a decade of opulent, agreeable living supported
by his tutor’s pension, his royalties
and his salary from the government of Scotland. He died with
these words to his companions: "I love your company,
gentlemen, but I believe I must leave you to go to another
world."[8] Just before he died, he implored close acquaintances
to burn all his unpublished works, which came to 16 volumes.
Unfortunately, his friends did as he requested, leaving us
but a fraction of his output. But what a fraction! Smith
is buried in Edinburgh, Scotland, in a large if not especially
well-visited or well-maintained grave.
| — |
Robert L. Formaini
Senior Economist |
|
| Notes
- Ross (1995, 1). The exact date of Smith’s
birth is not known, but he was baptized on
June 5, 1723.
- Upon securing the customs appointment, Smith
burned his clothes because they were not in
compliance with England’s complex trade restrictions
and suggested to friends that they do likewise.
See Skousen (2001, 30).
- For an example of outright hostility, see
Rothbard (1995).
- Mitchell (1967, 48).
- Blaug (1997, 33–34) reprints an amusing
paragraph by Glenn Morrow to the effect that
no one has ever read Wealth of Nations cover
to cover. As for changing the world, in Smith’s
case, Keynes’ famous description of "academic
scribblers" was never more on target.
See Keynes (1964, 383).
- Robbins (1998, 128–29).
- Stigler (1982, 147–48).
- Skousen (2001, 31).
Sources and Suggested
Reading
Blaug, Mark (1997), Economic Theory in Retrospect,
5th ed. (Cambridge: Cambridge University Press).
Herman, Arthur (2001), How
the Scots Invented the Modern World: The
True Story of How Western
Europe’s Poorest Nation Created Our World and
Everything in It (New York: Crown Publishing
Group).
Keynes, John Maynard (1964), The General
Theory of Employment, Interest and Money (New
York: Harcourt, Brace and World), orig. pub.
1936.
Mitchell, Wesley C. (1967), Types of Economic
Theory, vols. 1 and 2 (New York: Augustus
Kelley).
Robbins, Lionel (1998), A History of Economic
Thought: The LSE Lectures, ed. Steven
Medema and Warren Samuels (Princeton, N.J.:
Princeton University Press).
Ross, Ian Simpson (1995), The Life of Adam
Smith (Oxford: Clarendon Press).
Rothbard, Murray (1995), Classical Economics:
An Austrian Perspective on the History of Economic
Thought, vols. 1 and 2 (Hants, UK: Edward
Elgar).
Skinner, Andrew S.
(1987), "Adam Smith," in The
New Palgrave: A Dictionary of Economics,
vol. 4, ed. John Eatwell, Murray Milgate and
Peter Newman (New York: Stockton Press), 357–74.
Skousen, Mark (2001), The Making of Modern
Economics: The Lives and Ideas of the Great
Thinkers (Armonk, N.Y.: M. E. Sharpe).
Smith, Adam (1981), An Inquiry Into the
Nature and Causes of the Wealth of Nations,
2 vols. (Indianapolis, Ind.: Liberty Classics,
reprint from Oxford University Press, 1976),
orig. pub. 1776.
——— (1982), Lectures on Jurisprudence (Indianapolis,
Ind.: Liberty Classics, reprint from Oxford University
Press, 1978), orig. pub. 1896.
——— (1976), The Theory of Moral Sentiments (Oxford:
Clarendon Press) orig. pub. 1759.
Stigler, George (1982), The Economist as
Preacher and Other Essays (Chicago: University
of Chicago Press).
West, E. G. (1976), Adam Smith: The Man
and His Works (Indianapolis, Ind.: Liberty
Press/Liberty Classics). |
|
|
The
Most Famous Rhetorical Metaphor in Economics
As every individual,
therefore, endeavors as much as he can both
to employ his capital in
the support of domestic industry, and so to direct
that industry that its produce may be of the
greatest value; every individual necessarily
labors to render the annual revenue of the society
as great as he can. He generally, indeed, neither
intends to promote the public interest, nor knows
how much he is promoting it. By preferring the
support of domestic [as opposed] to that of foreign
industry, he intends only his own security; and
by directing that industry in such a manner as
its produce may be of the greatest value, he
intends only his own gain, and he is in this,
as in many other cases, led by an invisible hand
to promote an end which was no part of his intention….By
pursuing his own interest he frequently promotes
that of the society more effectually than when
he really intends to promote it. I have never
known much good done by those who affected to
trade for the public good. It is an affectation,
indeed, not very common among merchants, and
very few words need be employed in dissuading
them from it.
—Wealth of Nations,
Vol. 1, 456. |
|
Making Visible
the Miracle of the Invisible Hand
The woolen coat, for example,
which covers the day-laborer, as coarse and rough
as it may appear,
is the produce of the joint labor of a great
multitude of workmen. The shepherd, the sorter
of wool, the wool-comber or carder, the dyer,
the scribbler, the spinner, the weaver, the fuller,
the dresser, with many others, must all join
their different arts in order to complete even
this homely production. How many merchants and
carriers, besides, must have been employed in
transporting the materials from some of those
workmen to others who often live in a very distant
part of the country! How much commerce and navigation
in particular, how many ship-builders, sailors,
sailmakers, rope-makers, must have been employed
in order to bring together the different drugs
made use of by the dyer, which often come from
the remotest corners of the world! What a variety
of labor too is necessary in order to produce
the tools of the meanest of those workmen!…The
miner, the builder of the furnace for smelting
the ore, the feller of the timber, the burner
of the charcoal to be made use of in the smelting
house, the brick-maker, the brick-layer, the
workmen who attend the furnace, the mill-wright,
the forger, the smith, must all of them join
their different arts in order to produce them.
Were we to examine, in the same manner, all the
different parts of his dress and household furniture,
the coarse linen shirt which he wears next to
his skin, the shoes which cover his feet, the
bed which he lies on, and all the different parts
which compose it, the kitchen grate at which
he prepares his victuals, the coals which he
makes use of for that purpose, dug from the bowels
of the earth, and brought to him perhaps by a
long sea and a long land carriage, all the other
utensils of his kitchen, all the furniture of
his table, the knives and forks, the earthen
or pewter plates upon which he serves up and
divides his victuals, the different hands employed
in preparing his bread and his beer, the glass
window which lets in the heat and the light,
and keeps out the wind and the rain, with all
the knowledge and art requisite for preparing
that beautiful and happy invention, without which
these northern parts of the world could scarce
have afforded a very comfortable habitation,
together with the tools of all the different
workmen employed in producing those different
conveniences; if we examine, I say, all these
things, and consider what a variety of labor
is employed about each of them, we shall be sensible
that without the assistance and cooperation of
many thousands, the very meanest person in a
civilized country could not be provided, even
according to, what we very falsely imagine, the
easy and simple manner in which he is commonly
accommodated.
—Wealth of Nations,
Vol. 1, 22–23. |
|
The Origin of
the Division of Labor
This division of
work is not however the effect of any human
policy, but is the necessary consequence
of a natural disposition altogether peculiar
to men, viz the disposition to truck, barter,
and exchange; and as this disposition is peculiar
to man, so is the consequence of it, the division
of work betwixt different persons acting in
concert….Man continually standing in need of
the assistance of others, must fall upon some
means to procure their help. This he does not
merely by coaxing and courting; he does not
expect it unless he can turn it to your advantage
or make it appear to be so. Mere love is not
sufficient for it, till he applies in some
way to your self-love. A bargain does this
in the easiest manner. When you apply to a
brewer or butcher for beer or for beef, you
do not explain to him how much you stand in
need of these, but how much it would be to
your ["his" was meant] interest to
allow you to have them for a certain price.
You do not address his humanity, but his selflove….
This disposition to truck, barter, and exchange
does not only give occasion to the diversity
of employment, but also makes it useful.
—Lectures on Jurisprudence,
347–48. |
|
Use of Taxation Power Can Generate Poverty
When, by different taxes
upon the necessaries and conveniencies of life,
the owners and employers
of capital stock find, that whatever revenue
they derive from it, will not, in a particular
country, purchase the same quantity of those
necessaries and conveniencies, which an equal
revenue would in almost any other; they will
be disposed to remove to some other. And when,
in order to raise those taxes, all or the greater
part of merchants and manufacturers; that is,
all or the greater part of the employers of
great capitals, come to be continually exposed
to the mortifying and vexatious visits of the
tax-gatherers; this disposition to remove will
soon be changed into an actual removal. The
industry of the country will necessarily fall
with the removal of the capital which supported
it, and the ruin of trade and manufactures
will follow the declension of agriculture.
To transfer from the owners of those two great
sources of revenue, land and capital stock,…to
another set of persons (the creditors of the
public, who have no such particular interest)
the greater part of the revenue arising from
either, must, in the long run, occasion both
the neglect of land, and the waste or removal
of capital stock….But a creditor of the public,
considered merely as such, has no interest
in the good condition of any particular portion
of land, or in the good management of any particular
portion of capital stock. As a creditor of
the public he has no knowledge of any such
particular portion. He has no inspection of
it. He can have no care about it. Its ruin
may in some cases be unknown to him, and cannot
directly affect him.
—Wealth of Nations, Vol.
2, 927–28. |
|
Why People Have Such a Weakness for the ‘Spirit of System’
This spirit of system commonly takes the direction
of that more gentle public spirit; always animates
it, and often inflames it, even to the madness
of fanaticism....The great body of the party
are commonly intoxicated with the imaginary
beauty of this ideal system, of which they
have no experience, but which has been represented
to them in all the most dazzling colours in
which the eloquence of their leaders could
paint it. Those leaders themselves, though
they originally may have meant nothing but
their own aggrandisement, become, many of them
in time, the dupes of their own sophistry,
and are as eager for this great reformation
as the weakest and foolishest of their followers.
Even though the leaders should have preserved
their own heads, as, indeed, they commonly
do, free from this fanaticism, yet they dare
not always disappoint the expectation of their
followers, but are often obliged, though contrary
to their principle and their conscience, to
act as if they were under the common delusion.
—The Theory of Moral
Sentiments, 232–33. |
|
| About Economic
Insights
Economic Insights
is a publication of the Federal Reserve Bank of
Dallas. The views expressed are those of the authors
and should not be attributed to the Federal Reserve
System.
Please address all correspondence
to
Economic Insights
Public Affairs Department
Federal Reserve Bank of Dallas
P.O. Box 655906
Dallas, TX 75265-5906 |
|
|
