Adam Smith Research Paper
Adam Smith (baptized June 5, 1723 O.S. / June 16 N.S. July 17, 1790) was a Scottish moral philosopher and a pioneering political economist. One of the key figures of the intellectual movement known as the Scottish Enlightenment, he is known primarily as the author of two treatises: The Theory of Moral Sentiments (1759), and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). The latter was one of the earliest attempts to systematically study the historical development of industry and commerce in Europe, as well as a sustained attack on the doctrines of mercantilism. Smith's work helped to create the modern academic discipline of economics and provided one of the best-known intellectual rationales for free trade, capitalism,
…show more content…
and libertarianism.
Contents
[hide]
* 1 Biography o 1.1 Education o 1.2 Career in Edinburgh and Glasgow o 1.3 Tour of France o 1.4 Later years o 1.5 Personal character and views * 2 Works * 3 'The "Adam Smith-Problem" * 4 Influence * 5 Major works * 6 References * 7 See also * 8 Bibliography * 9 External links
[edit] Biography
Smith was a son of the controller of the customs at Kirkcaldy, Fife, Scotland. The exact date of Smith's birth is unknown, but he was baptized at Kirkcaldy on June 5, 1723, his father having died some six months previously. At around the age of 4, he was kidnapped by a band of Gypsies, but he was quickly rescued by his uncle and returned to his mother. Smith's biographer, John Rae, commented wryly that he feared Smith would have made "a poor Gypsy."[citation needed] There is no record of Smith having had any siblings.
[edit] Education
At the age of fifteen, Smith entered the University of Glasgow, where he studied moral philosophy under "the never-to-be-forgotten" (as Smith called him) Francis Hutcheson. Here Smith developed his strong passion for liberty, reason, and free speech. In 1740 he was awarded the Snell Exhibition and entered Balliol College, Oxford, but as William Robert Scott has said, "the Oxford of his time gave little if any help towards what was to be his lifework," and he left the university in 1746. In Book V of The Wealth of Nations, Smith comments on the low quality of instruction and the meager intellectual activity at English universities when compared to their Scottish counterparts. He attributed this both to the rich endowments of the colleges at Oxford and Cambridge, which made the income of professors independent of their ability to attract students, and to the fact that distinguished men of letters could make an even more comfortable living as ministers of the Church of England.
Adam Smith
Adam Smith
[edit] Career in Edinburgh and Glasgow
In 1748 Smith began delivering public lectures in Edinburgh under the patronage of Lord Kames. Some of these dealt with rhetoric and belles-lettres, but later he took up the subject of "the progress of opulence," and it was then, in his middle or late 20s, that he first expounded the economic philosophy of "the obvious and simple system of natural liberty" which he was later to proclaim to the world in his Wealth of Nations. In about 1750 he met the philosopher David Hume, who was his senior by over a decade. The alignments of opinion that can be found within the details of their respective writings covering history, politics, philosophy, economics, and religion indicate that they both shared a closer intellectual alliance and friendship than with the others who were to play important roles during the emergence of what has come to be known as the Scottish Enlightenment[1]; he frequented The Poker Club of Edinburgh.
In 1751 Smith was appointed chair of logic at the University of Glasgow, transferring in 1752 to the Chair of Moral Philosophy, once occupied by his famous teacher, Francis Hutcheson. His lectures covered the fields of ethics, rhetoric, jurisprudence, political economy, and "police and revenue". In 1759 he published his The Theory of Moral Sentiments, embodying some of his Glasgow lectures. This work, which established Smith's reputation in his day, was concerned with how human communication depends on sympathy between agent and spectator (that is, the individual and other members of society). His analysis of language evolution was somewhat superficial, as shown only 14 years later by a more rigorous examination of primitive language evolution by Lord Monboddo in his Of the Origin and Progress of Language[2]. Smith's capacity for fluent, persuasive, if rather rhetorical argument, is much in evidence. He bases his explanation, not as the third Lord Shaftesbury and Hutcheson had done, on a special "moral sense", nor (as Hume did) on utility, but on sympathy.
Smith now began to give more attention to jurisprudence and economics in his lecture and less to his theories of morals. An impression can be obtained as to the development of his ideas on political economy from the notes of his lectures taken down by a student in about 1763 which were later edited by Edwin Cannan[3], and from what Scott, its discoverer and publisher, describes as "An Early Draft of Part of The Wealth of Nations", which he dates about 1763. Cannan's work appeared as Lectures on Justice, Police, Revenue and Arms. A fuller version was published as Lectures on Jurisprudence in the Glasgow Edition of 1976.
[edit] Tour of France
In 1762 the academic senate of the University of Glasgow conferred on Smith the title of doctor of laws (LL.D.).
At the end of 1763, he obtained a lucrative offer from Charles Townshend (who had been introduced to Smith by David Hume), to tutor his stepson, the young Duke of Buccleuch. Smith subsequently resigned from his professorship and from 1764-66 traveled with his pupil, mostly in France, where he came to know intellectual leaders such as Turgot, Jean D'Alembert, André Morellet, Helvétius and, in particular, Francois Quesnay, the head of the Physiocratic school whose work he respected greatly. On returning home to Kirkcaldy Smith was elected fellow of the Royal Society of London and he devoted much of the next ten years to his magnum opus, The Wealth of Nations, which appeared in 1776. The book was very well-received and made its author …show more content…
famous.
[edit] Later years
In 1778 Smith was appointed to a post as commissioner of customs in Scotland and went to live with his mother in Edinburgh. In 1783 he became one of the founding members of the Royal Society of Edinburgh and from 1787 to 1789 he occupied the honorary position of Lord Rector of the University of Glasgow. He died in Edinburgh on July 17, 1790, after a painful illness and was buried in the Canongate Kirkyard.
Wikisource has original text related to this article:
Times Obituary of Adam Smith
Smith's literary executors were two old friends from the Scottish academic world; the physicist and chemist Joseph Black, and the pioneering geologist James Hutton. Smith left behind many notes and some unpublished material, but gave instructions to destroy anything that was not fit for publication. He mentioned an early unpublished History of Astronomy as probably suitable, and it duly appeared in 1795, along with other material, as Essays on Philosophical Subjects.
[edit] Personal character and views
Very little is known about Smith beyond what can be deduced from his published works. All of his personal papers were destroyed after his death. He never married and seems to have maintained a close relationship with his mother, with whom he lived after his return from France and who predeceased him by only six years. Contemporary accounts describe Smith as an eccentric but benevolent intellectual, comically absent minded, with peculiar habits of speech and gait and a smile of "inexpressible benignity."[4] His patience and tact are said to have been valuable to his work as a university administrator at Glasgow. After his death it was discovered that much of his income had been devoted to secret acts of charity.
There has been considerable scholarly debate about the nature of Adam Smith's religious views. Smith's father had a strong interest in Christianity[5] and belonged to the moderate wing of the Church of Scotland (the national church of Scotland since 1690). Smith may have gone to England with the intention of a career in the Church of England: this is controversial and depends on the status of the Snell Exhibition. At Oxford, Smith rejected Christianity and it is generally believed that he returned to Scotland as a Deist.[6]
Economist Ronald Coase, however, has challenged the view that Smith was a Deist, stating that, whilst Smith may have referred to the "Great Architect of the Universe", other scholars have "very much exaggerated the extent to which Adam Smith was committed to a belief in a personal God". He based this on analysis of a remark in The Wealth of Nations where Smith writes that the curiosity of mankind about the "great phenomena of nature" such as "the generation, the life, growth and dissolution of plants and animals" has led men to "enquire into their causes". Coase notes Smith's observation that: "Superstition first attempted to satisfy this curiosity, by referring all those wonderful appearances to the immediate agency of the gods. Philosophy afterwards endeavoured to account for them, from more familiar causes, or from such as mankind were better acquainted with than the agency of the gods." Coase argues that this is "hardly a remark which would have been made by a strong, or even a mild, deist."[7] According to Coase, Smith's attitude towards religion was problably close to that of his friend and mentor, the atheist David Hume.
[edit] Works
Shortly before his death Smith had nearly all his manuscripts destroyed. In his last years he seemed to have been planning two major treatises, one on the theory and history of law and one on the sciences and arts. The posthumously published Essays on Philosophical Subjects (1795) probably contain parts of what would have been the latter treatise.
The Wealth of Nations was influential since it did so much to create the field of economics and develop it into an autonomous systematic discipline. In the Western world, it is arguably the most influential book on the subject ever published. When the book, which has become a classic manifesto against mercantilism (the theory that large reserves of bullion are essential for economic success), appeared in 1776, there was a strong sentiment for free trade in both Britain and America. This new feeling had been born out of the economic hardships and poverty caused by the American War of Independence. However, at the time of publication, not everybody was immediately convinced of the advantages of free trade: the British public and Parliament still clung to mercantilism for many years to come.
The Wealth of Nations also rejects the Physiocratic school's emphasis on the importance of land; instead, Smith believed labour was paramount, and that a division of labour would effect a great increase in production. One example he used was the making of pins. One worker could probably make only one pin per day. But if ten people divided up the eighteen steps required to make a pin, they could make a combined amount of 48,000 pins in one day. Nations was so successful, in fact, that it led to the abandonment of earlier economic schools, and later economists, such as Thomas Malthus and David Ricardo, focused on refining Smith's theory into what is now known as classical economics. Both Modern economics and, separately, Marxian economics owe significantly to classical economics. Malthus expanded Smith's ruminations on overpopulation, while Ricardo believed in the "iron law of wages" that overpopulation would prevent wages from topping the subsistence level. Smith postulated an increase of wages with an increase in production, a view considered more accurate today.
One of the main points of The Wealth of Nations is that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand" (an image that Smith had previously employed in Theory of Moral Sentiments, but which has its original use in his essay, "The History of Astronomy").
If a product shortage occurs, for instance, its price rises, creating a profit margin that creates an incentive for others to enter production, eventually curing the shortage. If too many producers enter the market, the increased competition among manufacturers and increased supply would lower the price of the product to its production cost, the "natural price". Even as profits are zeroed out at the "natural price," there would be incentives to produce goods and services, as all costs of production, including compensation for the owner's labour, are also built into the price of the goods. If prices dip below a zero profit, producers would drop out of the market; if they were above a zero profit, producers would enter the market. Smith believed that while human motives are often selfish and greedy, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and argued against the formation of
monopolies.
Smith vigorously attacked the antiquated government restrictions which he thought were hindering industrial expansion. In fact, he attacked most forms of government interference in the economic process, including tariffs, arguing that this creates inefficiency and high prices in the long run. This theory, now referred to as "laissez-faire", which means "let them do", influenced government legislation in later years, especially during the 19th century. (However this was not opposition to government. Smith advocated a Government that was active in sectors other than the economy: he advocated public education of poor adults; institutional systems that were not profitable for private industries; a judiciary; and a standing army.)
Two of the most famous and often-quoted passages in The Wealth of Nations are:
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 own necessities but of their advantages.
As every individual, therefore, endeavours 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 labours to render the annual value of 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 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. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of 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.
[edit] 'The "Adam Smith-Problem"
The Liberalism series, part of the Politics series
Development
History of liberal thought
Contributions to liberal theory
Schools
Classical liberalism
Conservative liberalism
Cultural liberalism
Economic liberalism
Neoliberalism
Ordoliberalism
Paleoliberalism
Social liberalism
National variants
In the United States
In Canada
In Australia
In the United Kingdom
In Austria
Ideas
Individual rights
Individualism
Laissez-faire
Capitalism
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Liberal neutrality
Negative & positive liberty
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Liberal parties worldwide
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This box: view talk edit
In the Wealth of Nations Smith claims that self-interest alone (in a proper institutional setting) can lead to socially beneficial results. But in his Theory of Moral Sentiments Smith argues that sympathy is required to achieve socially beneficial results. On the surface it appears that a contradiction exists. Economist August Oncken referred to this in German as das 'Adam Smith-Problem'.[8] Austrian economist Joseph Schumpeter also emphasized this apparent contradiction in his commentary on Smith's work.
Adam Smith himself cannot have seen any contradiction, since he produced a revised edition of Moral Sentiments after the publication of Wealth of Nations. Both sets of ideas are to be found in his Lectures on Jurisprudence. In recent years most students of Adam Smith's work have argued that no contradiction exists. In the Theory of Moral Sentiments, Smith develops a theory of psychology in which individuals in society find it in their self-interest to develop sympathy as they seek approval of what he calls the "impartial spectator." The self-interest he speaks of is not a narrow selfishness but something that involves sympathy.
Some readers of The Wealth of Nations have assumed that when Smith speaks of "self-interest" he is referring to selfishness. Although in some contexts, such as buying and selling, sympathy generally need not be considered, Smith makes it clear that he regards selfishness as inappropriate, if not immoral, and that the self-interested actor has sympathy for others. In The Theory of Moral Sentiments Smith argues that the self-interest of any actor includes the interest of the rest of society, since the socially-defined notions of appropriate and inappropriate actions necessarily affect the interests of the invidividual as a member of society.
In any case, Adam Smith apparently believed that moral sentiments and self-interest would always add up to the same thing. One possible line of reasoning he might have employed in reaching this conclusion is as follows: the invisible hand cannot operate if there is no society, for precluding a societal construct precludes division of labor, and thus, the efficiency which comes with its manifestation. Now for society to exist, justice is a necessary condition (as pointed out in Smith's Theory of Moral Sentiments). For justice to exist in any social setting, individuals must harbor the passions of gratitude and resentment governed by a sense of 'merit' and 'demerit' (again from Smith's Theory of Moral Sentiments). And finally, as Smith himself would have so vehemently argued, the sense of 'merit' and 'demerit' is almost exclusively engendered by human sympathy. In conclusion, the invisible hand of the market is, at some level, contingent upon the ability of humans to sympathize: Smith's self-interest is indeed in consonance with the notion of sympathy.
[edit] Influence
The Wealth of Nations, one of the earliest attempts to study the rise of industry and commercial development in Europe, was a precursor to the modern academic discipline of economics. It provided one of the best-known intellectual rationales for free trade and capitalism, greatly influencing the writings of later economists.
There has been some controversy over the extent of Smith's originality in The Wealth of Nations. Some argue that the work added only modestly to the already established ideas of thinkers such as Anders Chydenius (The National Gain 1765), David Hume and the Baron de Montesquieu. Indeed, many of the theories Smith set out simply described historical trends away from mercantilism and towards free trade that had been developing for many decades and had already had significant influence on governmental policy. Nevertheless, Smith's work organized their ideas comprehensively, and so remains one of the most influential and important books in the field today.
Smith was ranked #30 in Michael H. Hart's list of the most influential figures in history.
A portrait of Smith can be seen on a Bank of Scotland fifty pound sterling note.
Smith's portrait will appear on the new twenty pound sterling note, soon to be issued by the Bank of England, and he will thus become the first Scotsman to feature on a Bank of England note.[9]
[edit] Major works
and libertarianism.
Contents
[hide]
* 1 Biography o 1.1 Education o 1.2 Career in Edinburgh and Glasgow o 1.3 Tour of France o 1.4 Later years o 1.5 Personal character and views * 2 Works * 3 'The "Adam Smith-Problem" * 4 Influence * 5 Major works * 6 References * 7 See also * 8 Bibliography * 9 External links
[edit] Biography
Smith was a son of the controller of the customs at Kirkcaldy, Fife, Scotland. The exact date of Smith's birth is unknown, but he was baptized at Kirkcaldy on June 5, 1723, his father having died some six months previously. At around the age of 4, he was kidnapped by a band of Gypsies, but he was quickly rescued by his uncle and returned to his mother. Smith's biographer, John Rae, commented wryly that he feared Smith would have made "a poor Gypsy."[citation needed] There is no record of Smith having had any siblings.
[edit] Education
At the age of fifteen, Smith entered the University of Glasgow, where he studied moral philosophy under "the never-to-be-forgotten" (as Smith called him) Francis Hutcheson. Here Smith developed his strong passion for liberty, reason, and free speech. In 1740 he was awarded the Snell Exhibition and entered Balliol College, Oxford, but as William Robert Scott has said, "the Oxford of his time gave little if any help towards what was to be his lifework," and he left the university in 1746. In Book V of The Wealth of Nations, Smith comments on the low quality of instruction and the meager intellectual activity at English universities when compared to their Scottish counterparts. He attributed this both to the rich endowments of the colleges at Oxford and Cambridge, which made the income of professors independent of their ability to attract students, and to the fact that distinguished men of letters could make an even more comfortable living as ministers of the Church of England.
Adam Smith
Adam Smith
[edit] Career in Edinburgh and Glasgow
In 1748 Smith began delivering public lectures in Edinburgh under the patronage of Lord Kames. Some of these dealt with rhetoric and belles-lettres, but later he took up the subject of "the progress of opulence," and it was then, in his middle or late 20s, that he first expounded the economic philosophy of "the obvious and simple system of natural liberty" which he was later to proclaim to the world in his Wealth of Nations. In about 1750 he met the philosopher David Hume, who was his senior by over a decade. The alignments of opinion that can be found within the details of their respective writings covering history, politics, philosophy, economics, and religion indicate that they both shared a closer intellectual alliance and friendship than with the others who were to play important roles during the emergence of what has come to be known as the Scottish Enlightenment[1]; he frequented The Poker Club of Edinburgh.
In 1751 Smith was appointed chair of logic at the University of Glasgow, transferring in 1752 to the Chair of Moral Philosophy, once occupied by his famous teacher, Francis Hutcheson. His lectures covered the fields of ethics, rhetoric, jurisprudence, political economy, and "police and revenue". In 1759 he published his The Theory of Moral Sentiments, embodying some of his Glasgow lectures. This work, which established Smith's reputation in his day, was concerned with how human communication depends on sympathy between agent and spectator (that is, the individual and other members of society). His analysis of language evolution was somewhat superficial, as shown only 14 years later by a more rigorous examination of primitive language evolution by Lord Monboddo in his Of the Origin and Progress of Language[2]. Smith's capacity for fluent, persuasive, if rather rhetorical argument, is much in evidence. He bases his explanation, not as the third Lord Shaftesbury and Hutcheson had done, on a special "moral sense", nor (as Hume did) on utility, but on sympathy.
Smith now began to give more attention to jurisprudence and economics in his lecture and less to his theories of morals. An impression can be obtained as to the development of his ideas on political economy from the notes of his lectures taken down by a student in about 1763 which were later edited by Edwin Cannan[3], and from what Scott, its discoverer and publisher, describes as "An Early Draft of Part of The Wealth of Nations", which he dates about 1763. Cannan's work appeared as Lectures on Justice, Police, Revenue and Arms. A fuller version was published as Lectures on Jurisprudence in the Glasgow Edition of 1976.
[edit] Tour of France
In 1762 the academic senate of the University of Glasgow conferred on Smith the title of doctor of laws (LL.D.).
At the end of 1763, he obtained a lucrative offer from Charles Townshend (who had been introduced to Smith by David Hume), to tutor his stepson, the young Duke of Buccleuch. Smith subsequently resigned from his professorship and from 1764-66 traveled with his pupil, mostly in France, where he came to know intellectual leaders such as Turgot, Jean D'Alembert, André Morellet, Helvétius and, in particular, Francois Quesnay, the head of the Physiocratic school whose work he respected greatly. On returning home to Kirkcaldy Smith was elected fellow of the Royal Society of London and he devoted much of the next ten years to his magnum opus, The Wealth of Nations, which appeared in 1776. The book was very well-received and made its author …show more content…
famous.
[edit] Later years
In 1778 Smith was appointed to a post as commissioner of customs in Scotland and went to live with his mother in Edinburgh. In 1783 he became one of the founding members of the Royal Society of Edinburgh and from 1787 to 1789 he occupied the honorary position of Lord Rector of the University of Glasgow. He died in Edinburgh on July 17, 1790, after a painful illness and was buried in the Canongate Kirkyard.
Wikisource has original text related to this article:
Times Obituary of Adam Smith
Smith's literary executors were two old friends from the Scottish academic world; the physicist and chemist Joseph Black, and the pioneering geologist James Hutton. Smith left behind many notes and some unpublished material, but gave instructions to destroy anything that was not fit for publication. He mentioned an early unpublished History of Astronomy as probably suitable, and it duly appeared in 1795, along with other material, as Essays on Philosophical Subjects.
[edit] Personal character and views
Very little is known about Smith beyond what can be deduced from his published works. All of his personal papers were destroyed after his death. He never married and seems to have maintained a close relationship with his mother, with whom he lived after his return from France and who predeceased him by only six years. Contemporary accounts describe Smith as an eccentric but benevolent intellectual, comically absent minded, with peculiar habits of speech and gait and a smile of "inexpressible benignity."[4] His patience and tact are said to have been valuable to his work as a university administrator at Glasgow. After his death it was discovered that much of his income had been devoted to secret acts of charity.
There has been considerable scholarly debate about the nature of Adam Smith's religious views. Smith's father had a strong interest in Christianity[5] and belonged to the moderate wing of the Church of Scotland (the national church of Scotland since 1690). Smith may have gone to England with the intention of a career in the Church of England: this is controversial and depends on the status of the Snell Exhibition. At Oxford, Smith rejected Christianity and it is generally believed that he returned to Scotland as a Deist.[6]
Economist Ronald Coase, however, has challenged the view that Smith was a Deist, stating that, whilst Smith may have referred to the "Great Architect of the Universe", other scholars have "very much exaggerated the extent to which Adam Smith was committed to a belief in a personal God". He based this on analysis of a remark in The Wealth of Nations where Smith writes that the curiosity of mankind about the "great phenomena of nature" such as "the generation, the life, growth and dissolution of plants and animals" has led men to "enquire into their causes". Coase notes Smith's observation that: "Superstition first attempted to satisfy this curiosity, by referring all those wonderful appearances to the immediate agency of the gods. Philosophy afterwards endeavoured to account for them, from more familiar causes, or from such as mankind were better acquainted with than the agency of the gods." Coase argues that this is "hardly a remark which would have been made by a strong, or even a mild, deist."[7] According to Coase, Smith's attitude towards religion was problably close to that of his friend and mentor, the atheist David Hume.
[edit] Works
Shortly before his death Smith had nearly all his manuscripts destroyed. In his last years he seemed to have been planning two major treatises, one on the theory and history of law and one on the sciences and arts. The posthumously published Essays on Philosophical Subjects (1795) probably contain parts of what would have been the latter treatise.
The Wealth of Nations was influential since it did so much to create the field of economics and develop it into an autonomous systematic discipline. In the Western world, it is arguably the most influential book on the subject ever published. When the book, which has become a classic manifesto against mercantilism (the theory that large reserves of bullion are essential for economic success), appeared in 1776, there was a strong sentiment for free trade in both Britain and America. This new feeling had been born out of the economic hardships and poverty caused by the American War of Independence. However, at the time of publication, not everybody was immediately convinced of the advantages of free trade: the British public and Parliament still clung to mercantilism for many years to come.
The Wealth of Nations also rejects the Physiocratic school's emphasis on the importance of land; instead, Smith believed labour was paramount, and that a division of labour would effect a great increase in production. One example he used was the making of pins. One worker could probably make only one pin per day. But if ten people divided up the eighteen steps required to make a pin, they could make a combined amount of 48,000 pins in one day. Nations was so successful, in fact, that it led to the abandonment of earlier economic schools, and later economists, such as Thomas Malthus and David Ricardo, focused on refining Smith's theory into what is now known as classical economics. Both Modern economics and, separately, Marxian economics owe significantly to classical economics. Malthus expanded Smith's ruminations on overpopulation, while Ricardo believed in the "iron law of wages" that overpopulation would prevent wages from topping the subsistence level. Smith postulated an increase of wages with an increase in production, a view considered more accurate today.
One of the main points of The Wealth of Nations is that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand" (an image that Smith had previously employed in Theory of Moral Sentiments, but which has its original use in his essay, "The History of Astronomy").
If a product shortage occurs, for instance, its price rises, creating a profit margin that creates an incentive for others to enter production, eventually curing the shortage. If too many producers enter the market, the increased competition among manufacturers and increased supply would lower the price of the product to its production cost, the "natural price". Even as profits are zeroed out at the "natural price," there would be incentives to produce goods and services, as all costs of production, including compensation for the owner's labour, are also built into the price of the goods. If prices dip below a zero profit, producers would drop out of the market; if they were above a zero profit, producers would enter the market. Smith believed that while human motives are often selfish and greedy, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and argued against the formation of
monopolies.
Smith vigorously attacked the antiquated government restrictions which he thought were hindering industrial expansion. In fact, he attacked most forms of government interference in the economic process, including tariffs, arguing that this creates inefficiency and high prices in the long run. This theory, now referred to as "laissez-faire", which means "let them do", influenced government legislation in later years, especially during the 19th century. (However this was not opposition to government. Smith advocated a Government that was active in sectors other than the economy: he advocated public education of poor adults; institutional systems that were not profitable for private industries; a judiciary; and a standing army.)
Two of the most famous and often-quoted passages in The Wealth of Nations are:
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 own necessities but of their advantages.
As every individual, therefore, endeavours 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 labours to render the annual value of 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 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. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of 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.
[edit] 'The "Adam Smith-Problem"
The Liberalism series, part of the Politics series
Development
History of liberal thought
Contributions to liberal theory
Schools
Classical liberalism
Conservative liberalism
Cultural liberalism
Economic liberalism
Neoliberalism
Ordoliberalism
Paleoliberalism
Social liberalism
National variants
In the United States
In Canada
In Australia
In the United Kingdom
In Austria
Ideas
Individual rights
Individualism
Laissez-faire
Capitalism
Liberal democracy
Liberal neutrality
Negative & positive liberty
Free market
Mixed economy
Open society
Organizations
Liberal parties worldwide
Liberal International · Iflry
ELDR/ALDE · Lymec
CALD · ALN · Relial. CLH
Politics Portal
This box: view talk edit
In the Wealth of Nations Smith claims that self-interest alone (in a proper institutional setting) can lead to socially beneficial results. But in his Theory of Moral Sentiments Smith argues that sympathy is required to achieve socially beneficial results. On the surface it appears that a contradiction exists. Economist August Oncken referred to this in German as das 'Adam Smith-Problem'.[8] Austrian economist Joseph Schumpeter also emphasized this apparent contradiction in his commentary on Smith's work.
Adam Smith himself cannot have seen any contradiction, since he produced a revised edition of Moral Sentiments after the publication of Wealth of Nations. Both sets of ideas are to be found in his Lectures on Jurisprudence. In recent years most students of Adam Smith's work have argued that no contradiction exists. In the Theory of Moral Sentiments, Smith develops a theory of psychology in which individuals in society find it in their self-interest to develop sympathy as they seek approval of what he calls the "impartial spectator." The self-interest he speaks of is not a narrow selfishness but something that involves sympathy.
Some readers of The Wealth of Nations have assumed that when Smith speaks of "self-interest" he is referring to selfishness. Although in some contexts, such as buying and selling, sympathy generally need not be considered, Smith makes it clear that he regards selfishness as inappropriate, if not immoral, and that the self-interested actor has sympathy for others. In The Theory of Moral Sentiments Smith argues that the self-interest of any actor includes the interest of the rest of society, since the socially-defined notions of appropriate and inappropriate actions necessarily affect the interests of the invidividual as a member of society.
In any case, Adam Smith apparently believed that moral sentiments and self-interest would always add up to the same thing. One possible line of reasoning he might have employed in reaching this conclusion is as follows: the invisible hand cannot operate if there is no society, for precluding a societal construct precludes division of labor, and thus, the efficiency which comes with its manifestation. Now for society to exist, justice is a necessary condition (as pointed out in Smith's Theory of Moral Sentiments). For justice to exist in any social setting, individuals must harbor the passions of gratitude and resentment governed by a sense of 'merit' and 'demerit' (again from Smith's Theory of Moral Sentiments). And finally, as Smith himself would have so vehemently argued, the sense of 'merit' and 'demerit' is almost exclusively engendered by human sympathy. In conclusion, the invisible hand of the market is, at some level, contingent upon the ability of humans to sympathize: Smith's self-interest is indeed in consonance with the notion of sympathy.
[edit] Influence
The Wealth of Nations, one of the earliest attempts to study the rise of industry and commercial development in Europe, was a precursor to the modern academic discipline of economics. It provided one of the best-known intellectual rationales for free trade and capitalism, greatly influencing the writings of later economists.
There has been some controversy over the extent of Smith's originality in The Wealth of Nations. Some argue that the work added only modestly to the already established ideas of thinkers such as Anders Chydenius (The National Gain 1765), David Hume and the Baron de Montesquieu. Indeed, many of the theories Smith set out simply described historical trends away from mercantilism and towards free trade that had been developing for many decades and had already had significant influence on governmental policy. Nevertheless, Smith's work organized their ideas comprehensively, and so remains one of the most influential and important books in the field today.
Smith was ranked #30 in Michael H. Hart's list of the most influential figures in history.
A portrait of Smith can be seen on a Bank of Scotland fifty pound sterling note.
Smith's portrait will appear on the new twenty pound sterling note, soon to be issued by the Bank of England, and he will thus become the first Scotsman to feature on a Bank of England note.[9]
[edit] Major works