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Figure 1. Portrait of Adam Smith.


Early Life and Education

Adam Smith, born in 1723 in Kirkcaldy, County Fife, Scotland is widely viewed as the father of economics. He was raised in Kirkcaldy by his widowed mother until going off to the University of Glasgow on a scholarship at the age of fourteen (econlib). By the time he was seventeen, Smith was attending Oxford, to which he had also been awarded a scholarship as a student of moral philosophy (Heilbroner, 1999). While attending Oxford, Smith did most of his learning on his own, reading the books he deemed appropriate. He later criticized Oxford as an educational institution in his Wealth of Nations by writing about “the wastefulness of the student’s life at Oxford” (Heilbroner, 1999, p. 51). After graduating from Oxford, Smith went on to give lectures at Edinburgh, where he met and became friends with David Hume.

Smith later held positions as the Chair of Logic, Chair of Moral Philosophy, and eventually dean at the University of Glasgow, which was the center of the Scottish Enlightenment. He went on to become a tutor, which allowed him to travel throughout Europe. He ended up in France, where he met and talked with Francois Quesnay, the father of Physiocracy, whom Smith came to admire although their ideas about the economy did not always line up. (Heilbroner, 1999).


Adam Smith and the Mercantilists


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Figure 2. Representation of Mercantilist Ideas.


The major similarity that Adam Smith had with the mercantilists is the desire for “explaining the nature and causes of the wealth of nations” (Landreth, 78). The mercantilists explanations of this however, are quite different from those of Adam Smith. While the mercantilists believed that the wealth of a nation was determined by its accumulation of gold and bullion and its ability to maintain a favorable balance of trade (trade surplus), Adam Smith believed that the wealth of a nation depended on the productivity of labor and the proportion of labor that was productively employed. He also held the assumption that economies would automatically achieve full employment of their resources (Landreth, 2002).

Adam Smith accepted the mercantilist idea that man was rational, calculating, and driven by economic self-interest, and because of this, he believed that an invisible hand would guide the free market to equilibrium (investopedia). Smith’s belief that “a natural process at work in the economy can resolve conflicts more effectively than any arrangements devised by human beings” (Landreth, 2002, p. 81) differed greatly from the beliefs of the mercantilists, and is the basis for his support of laissez faire economic policies.


Adam Smith and the Physiocrats

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Figure 3. Portrait of Francois Quesnay.
While in France, Adam Smith became friends with the father of physiocracy, Francois Quesnay. The two men shared some of the same economic ideas but differed greatly on others. Both strongly believed in laissez faire (literally “let do”, used to refer to government intervention in the economy) economic policy, but for different reasons. The physiocrats believed in laissez faire because of their concern with the export of French grain for the good of France. Adam Smith believed in laissez faire because he observed, throughout the history of England and Scotland and during his own life, that government intervention in the economy did not always produce better social outcomes than competitive free markets. One similarity in the ideas of the phsyiocrats and Adam Smith is that they were based on real-life context. Quesnay’s ideas were based on what he observed would best serve France, and Smith’s ideas were based on what he observed would best serve England.

Some of the main differences in the ideas of Francois Quesnay and Adam Smith are Quesnay’s focus on production rather than consumption, and each man’s conception of where economic growth and prosperity came from. Adam Smith saw consumption as the main driver of economic activity because without consumption (demand), there is no need for production of certain goods and services. Smith saw the importance of demand in determining what is produced in an economy. Adam Smith also believed that labor, not land, was the source of value. He believed that economic growth would occur through the division of labor and capital accumulation, and that wealth came from the flow of goods and services in an economy.


The Wealth of Nations

Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, commonly known as The Wealth of Nations was publised in 1776. It marked the beginning of a new school of economic thought, known as the classical school, which influenced the future of economics to come. Adam Smith saw economics differently from the mercantilists and the physiocrats before him. He was able to bring together all of the previous ideas of economics into one piece of work. While others ignored certain aspects of the economy in their analysis, Smith saw the interconnectedness of different parts of the economy and explained his ideas in The Wealth of Nations. According to Robert L. Heilbroner (1999), “The Wealth of Nations is not a wholly original book, but it is unquestionably a masterpiece” (p. 51). This statement refers to the fact that all of Smith's ideas were not original, for instance, he shares some beliefs with the mercantilists and the physiocrats, but the way in which he put all of these ideas together in one work was something completely original.

Smith used the first sentence of The Wealth of Nations to make clear that his ideas about economics were not the same as those of the mercantilists and the phsyiocrats. As cited in Landreth (2002, p. 86) from The Wealth of Nations, “The annual labor of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consists always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.”

Some of the key ideas covered in The Wealth of Nations are that laissez faire economic policies produce the best social outcomes, that the income of a nation is dependent upon the productivity of its labor, that full employment of labor in an economy will occur automatically, specialization as a way to increase productivity, the idea of absolute advantage, consumption as the main purpose of economic activity, and value theory. In fact, The Wealth of Nations is “a huge panorama” (Heilbroner, 1999, p. 51) as it covers an abundance of topics, including Smith’s dissatisfaction with his time at Oxford.


Laissez Faire Economics

It is extremely important for people quoting The Wealth of Nationsand the ideas of Adam Smith to understand his true feelings on economic policy. Smith advocated for laissez faire because, according to his observations of the English economy, the natural workings in the free competitive market produced better social outcomes than government involvement and intervention. This applied specifically to trade. Smith viewed tariffs as an obstruction to trade unless the tariffs were in place to protect infant industries. Adam Smith did believe that the government should provide goods and services that were beneficial to society, like roads, bridges, national defense, and education, that were not profitable for the free market to provide. Smith recognized that certain goods and services would not be provided if there was not enough of a monetary incentive (profit), and he thought that the government ought to provide those things. (Landreth, 2002).

It is important to remember that in his writings, Adam Smith made certain assumptions such as: man is rational, calculating, and motivated by self-interest, and that competitive markets exist. Without these assumptions, many of Smith’s ideas become irrelevant and inapplicable to economic policy. Smith based his ideas on his contextual analysis of the economy, which is what made him so different from other classical economists like David Ricardo, who based his ideas on theorizing the economy.

Adam Smith’s advocacy for laissez faire economic policy should not be misquoted and misunderstood, as it often is by free-market capitalists. The true ideas of Adam Smith should be appreciated for their influence on the economics that followed, and not used as a shield by people who do not understand the full complexity of his work.

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Cartoon of Invisible Hand.
“Adam Smith did not mean what he is often made to say” – Jonathan Schlefer on Smith’s idea of the invisible hand (Schlefer, n.d.)




Figure Sources

Figure 1. Portrait of Adam Smith. Source: https://libwebspace.library.cmu.edu:4430/posner/sp09/subcontents/AdamSmith.html

Figure 2. Representation of Mercantilist Ideas. Source: https://globalimperialism.wikispaces.com/Mercantilism

Figure 3. Portrait of Francois Quesnay. Source: http://www.wisdomsupreme.com/dictionary/francois-quesnay.php

Figure 4. Cartoon of Invisible Hand. Source: http://www.theatlantic.com/past/docs/i



Works Cited

Adam Smith. (n.d.). Adam Smith: The Concise Encyclopedia of Economics | Library of Economics and Liberty. Library of Economics and Liberty. Retrieved November 30, 2011, from http://www.econlib.org/library/Enc/bios/

Heilbroner, R. L. (1999). The Wonderful World of Adam Smith. The worldly philosophers: the lives, times, and ideas of the great economic thinkers (Rev. 7th ed., pp. 42-74). New York: Simon & Schuster.

Invisible Hand Definition. (n.d.). Investopedia.com - Your Source For Investing Education. Retrieved December 1, 2011, from http://www.investopedia.com/terms/i/in

Landreth, H., & Colander, D. C. (2002). History of economic thought(4th ed.). Boston: Houghton Mifflin.

Schlefer, J. (n.d.). Today's Most Mischievous Misquotation - 98.03. The Atlantic — News and analysis on politics, business, culture, technology, national, international, and life. TheAtlantic.com. Retrieved December 1, 2011, from http://www.theatlantic.com/past/docs/i