Adam Smith

Adam Smith never taught a course in economics. In fact, Smith never took a course in economics and is considered as the father of actual economics. His great contribution was proposing that nations wealth could be reached based on individuals choices. There is an invisible hand that is acting to get everything OK (by the way, the invisible hand is mentioned no more than three times in the whole Wealth of Nations). Even more, he tell us what increases the wealth of nations: division of labor and free trade.

What I find really majestic of Smith is that everything he proposes comes with limits or advices. He is not mandatory but an advisor. For example, regard division of labor:

The man whose whole life is spent in performing a few simple operations, of which the effect too are perhaps, always the same… has no occasion to exert his understanding, or to exercises his invention in finding out expedientes to removing difficulties….He, naturally, therefore loses the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become”.He even tell us how to deal with this: public education.

He advises us about abnormal high profits too. Those could persist when small groups of merchants join in pacts to keep prices high. Moreover, proposes exceptions to free trade; Infant industries should have temporary benefits to the early years of development. So yes, government could play a role in markets. Not a fatal heresy.

Nevertheless Smith was very clear about government role:

  1. Provide national defense.
  2. Manage justice through a court system.
  3. Maintain public institutions and resources such roads, canals, bridges, educational systems, and the dignity of the sovereign.

Smith argued that government interference in economy is general harmful and the public interest is best served by competition among private buyers. He recognized that businessmen love to use politics in order to help themselves.

Adam Smith did not invent the market; nor did he invent economics, but taught economics and market to the world for around 75 years, and even more.

Understanding morals as the way how people should act to keep society working, Smith started being a moralist. He searched for the origin of moral approval or disapproval in his first big book: The Theory of Moral Sentiments.

The Presbytery prosecuted him for spreading the following ”false and dangerous” doctrines:

  1. The standard of moral good is promotion of happiness to others.
  2. It is impossible to know good and evil without knowing God.

Against the question How can man who is interested chiefly in himself make moral judgements that satisfy other people? He answered: When people confront moral choices, they imagine an ”impartial spectator” who carefully considers and advises them. Instead of simply following their self-interest, they take the imaginary observer’s advice. So, people decide on the basis of sympathy, not selfishness. It seams that is not just selfishness that rule human life, but maybe a noble side. We are assuming that noble side does not come from selfishness.

Instead of measure wealth on the basis of coin and precious metals, Smith believed that real wealth should be gauged by the standard of living of households. So wealth must be measured from the viewpoint of a nation’s consumers. This surely comes from his french friends, the Physiocrats that argued:

  1. Wealth arose from production, not from gold and silver as mercantilist thought.
  2. Only the agricultural enterprise produced wealth.

In his An Inquiry into the Nature and Causes of the Wealth of Nations Smith focuses in one goal: to uncover causal laws that explain how to achieve wealth. Why? because he was bothered and started to write a book to pass the time in Europe, mainly France. So, he was very good describing his life in those days.

It is a completely change from moral. He saw men as they were, not as they should be. Is that a real difference? or is just that behavior as become too complicated to connect with basic rules?

Some of the remarkable hypothesis were:

  • ”desire of bettering our condition, a desire which though generally calm and dispassionate, comes with us from the womb, and never leaves us till we go to the grave”.
  • ”there is scarce perhaps a single instant in which his situation, as to be without any which of alteration or improvement of any kind”.
  • ”a certain propensity in human nature… to truck, barge, and exchange one thing for another… it is common to all men” .

Smith suggested that society should exploit these natural drivers: Government should not repress self-interested people, for self-interest is a rich natural resource. People would be fools and nations would be impoverished if they depended on charity and altruism.

Man almost constantly need help from others, but it is hoping in vain to expect their benevolence only. He will be more likely to prevail if he can shew them that it is for their own advantage. So here it comes the famous phrase ”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”.

Smith never suggest that people motivated only by-self interest; he simply states that self-interest motivates more powerfully and consistently than kindness, altruism, or martyrdom. Put succinctly: Society cannot rest its future on the noblest motives, but must use the stronger motives in the best possible way.

Can a community survive without a central planning authority do decide who produces and what produced?. Yes he argued. Not only will it survive, but the community will thrive more than any community with central planning. 

In The Wealth of Nations, Smith saw labor as the chief engine of economic growth, accelerating when:

1. Labor supply increased
2. labor subdivided
3. labor quality rose through new machines.

As long as new ideas for profitable investment and inventions continued to spring from imaginations and free exchange was permitted, economic growth would go forward. That means, the general public could enjoy a higher standard of living. Which is very similar to findings by Nobel Prize-winning economist, Paul Samuelson: «inventions keep recurring…profit rates and real wage rates average out above their subsistence level” .

So that was Smith: Wealth as function of land, labor, and capital. Free will and trade.

As weird as it may sound, I feel close to Adam Smith. That is because he started to write The Wealth of Nations just because he found himself getting bored in Europe, just as I did when I started to read about economics. In words of the old Smith, ”I Have begun to write a book in order to pass away the time”.

Moreover he started being a moralist, ended being an economist. Is there a real difference?.