Adam Smith: Who He Was, Early Life, Accomplishments and Legacy

Adam Smith was an 18th-century Scottish economist, philosopher, and author who is considered the father of modern economics. Smith argued against mercantilism and was a major proponent of laissez-faire economic policies. In his first book, The Theory of Moral Sentiments, Smith proposed the idea of an invisible hand—the tendency of free markets to regulate themselves using competition, supply and demand, and self-interest.

Smith is also known for creating the concept of gross domestic product (GDP) and for his theory of compensating wage differentials. According to this theory, dangerous or undesirable jobs tend to pay higher wages to attract workers to these positions. Smith's most notable contribution to the field of economics was his 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nations.

Early Life

The recorded history of Smith's life begins at his baptism on June 5, 1723, in Kirkcaldy, Scotland; his exact birthdate is undocumented, but he was raised by his mother, Margaret Douglas, after the death of his father, Adam Smith. He attended the University of Glasgow at the age of 13 and attended Balliol College at Oxford University, where he studied European literature. He returned home and delivered a series of well-received lectures at Glasgow University, which appointed him first as the chair of logic in 1751 and then chair of moral philosophy in 1752.

After returning to Scotland, Smith held a series of public lectures at the University of Edinburgh. The success of his lecture series helped him earn a professorship at Glasgow University in 1751. He eventually earned the position of Chair of Moral Philosophy. 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 moved to France in 1763 to accept a more remunerative position as a personal tutor to the stepson of Charles Townshend, an amateur economist and the future Chancellor of the Exchequer. During his time in France, Smith counted as his contemporaries Benjamin Franklin and the philosophers David Hume and Voltaire.

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 (shortened to The Wealth of Nations), in 1776 after returning from France and retiring to his birthplace of Kirkcaldy, Scotland.

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, the dominant school of economic thought through the Great Depression. Smith's ideas are evident in the work of David Ricardo and Karl Marx in the 19th century and John Maynard Keynes and Milton Friedman in the twentieth century.

Smith's work discusses the evolution of human society from a hunter stage without property rights or fixed residences to nomadic agriculture with shifting residences. The next stage is a feudal society where laws and property rights are established to protect privileged classes. Finally, modern society is characterized by laissez-faire or free markets, where new institutions are established to conduct market transactions. Smith's work addresses the idea of the "economic man," defined as someone who pursues their self-interested goals and interests, which impacts their behavior in economics.

The Philosophy of Free Markets

The philosophy of free markets emphasizes minimizing the role of government intervention and taxation in the free markets. Although Smith advocated for a limited government, he did see the government as responsible for the education and defense sectors of a country.

From Smith comes the idea of the "invisible hand" that guides the forces of supply and demand in an economy. According to this theory, by looking out for themselves, 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. While they are engaging in enterprise to earn money, they also provide products that people want. Smith argued that this kind of system creates wealth for the butcher, brewer, and baker and creates wealth for the entire nation.

The Invisible Hand Theory

According to Smith's beliefs and theory, a wealthy nation is one that is populated with citizens working productively to better themselves and address their financial needs. In this kind of economy, according to Smith, a man would invest his wealth in the enterprise most likely to help him earn the highest return for a given risk level. The invisible-hand theory is often presented in terms of a natural phenomenon that guides free markets and capitalism in the direction of efficiency, through supply and demand and competition for scarce resources, rather than as something that results in the well-being of individuals.

For 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."

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. However, if the 18 tasks were completed in assembly-line fashion by 10 individuals, production would jump to thousands of pins per week. Smith argued that the division of labor and resulting specialization produces prosperity.

Gross Domestic Product (GDP)

The ideas in The Wealth of Nations provided the genesis for the concept of gross domestic product (GDP) and transformed the importing and exporting business. Before the publication of The Wealth of Nations, countries declared their wealth based on the value of their gold and silver deposits.

However, Smith was highly critical of mercantilism; he 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 The Wealth of Nations was published, many countries were hesitant to trade with other countries. Smith argued that a free exchange should be created because both countries are better off from the exchange.

As a result of this shift in attitudes toward trading, there was an increase in imports and exports. Smith also argued for legislation that would make trading as easy as possible.

Legacy

Smith's most prominent ideas—the "invisible hand" and division of labor—are now foundational economic theories. His theories on economics continue to live on in the 21st century in modern economic theory.

Smith was a proponent of the belief that the labor of the poor is a key measure of how an economy performs, but Smith was known for being concerned with inequality itself. Karl Marx, a political economist and social philosopher like Smith, was greatly inspired by The Wealth of Nations and built greatly upon Smith's works. However, while Smith wrote that capitalism was an ideal state for economic growth, Marx believed that capitalism led to greed and inequality among citizens, and would ultimately lead itself to collapse.

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 with competition, capitalism, and a free market are alive and well in the 21st century.

Honors and Awards

In 2007, the Bank of England placed Smith's image on the £20 note. He was a fellow of the Royal Society of Arts, and several buildings in Scotland are named after him. An award in his name, the Adam Smith Award, is the highest honor bestowed by The Association of Private Enterprise Education. The University of Glasgow has a chair, library, research center, and building in his name.

The Bottom Line

Adam Smith died on July 17, 1790, at age 68, in Edinburgh, Scotland, and was buried in Canongate Kirkyard. The ideas he popularized live on in the classical school of economics and in institutions like the Adam Smith Institute, Britain's leading free-market neoliberal think tank.