: Adam Smith
RUSSIAN ECONOMIC ACADEMY NAMED AFTER
G V PLEKHANOV
INTERNATIONAL BUSINESS STUDIES
ADAM SMITH
Student: Anton Skobelev
Group: 855
Moscow 1997
After two centuries, Adam Smith remains a towering figure in the history of
economic thought. Known primarily for a single work, An Inquiry into the
nature an causes of the Wealth of Nations (1776), the first comprehensive
system of political economy, Smith is more properly regarded as a social
philosopher whose economic writings constitute only the capstone to an
overarching view of political and social evolution. If his masterwork is viewed
in relation to his earlier lectures on moral philosophy and government, as well
as to allusions in The Theory of Moral Sentiments (1759) to a work he
hoped to write on “the general principles of law and government, and of the
different revolutions they have undergone in the different ages and periods of
society”, then The Wealth of Nations may be seen not merely as a
treatise on economics but as a partial exposition of a much larger scheme of
historical evolution.
Early Life
Unfortunately, much is known about Smith’s thought than about his life.
Though the exact date of his birth is unknown, he was baptised on June 5,
1723, in Kikcaldy, a small (population 1,500) but thriving fishing village
near Edinburgh, the son by second marriage of Adam Smith, comptroller of
customs at Kikcaldy, and Margaret Douglas, daughter of a substantial
landowner. Of Smith’s childhood nothing is known other than that he received
his elementary schooling in Kirkcaldy and that at the age of four years he
was said to have been carried off by gypsies. Pursuits was mounted, and young
Adam was abandoned by his captors. “He would have made, I fear, a poor
gypsy”, commented his principal biographer.
At the age of 14, in 1737, Smith entered the university of Glasgow, already
remarkable as a centre of what was to become known as the Scottish
Enlightenment. There, he was deeply influenced by Francis Hutcheson, a famous
professor of moral philosophy from whose economic and philosophical views he
was later to diverge but whose magnetic character seems to have been a main
shaping force in Smith’s development. Graduating in 1740, Smith won a
scholarship (the Snell Exhibition) and travelled on horseback to Oxford,
where he stayed at Balliol College. Compared to the stimulating atmosphere of
Glasgow, Oxford was an educational desert. His years there were spent largely
in self-education, from which Smith obtained a firm grasp of both classical
and contemporary philosophy.
Returning to his home after an absence of six years, Smith cast about for
suitable employment. The connections of his mother’s family, together with
the support of the jurist and philosopher Lord Henry Kames, resulted in an
opportunity to give a series of public lectures in Edinburgh - a form of
education then much in vogue in the prevailing spirit of “ improvement”.
The lectures, which ranged over a wide variety of subjects from rhetoric
history and economics, made a deep impression on some of Smith’s notable
contemporaries. They also had a marked influence on Smith’s own career, for
in 1751, at the age of 27, he was appointed professor of logic at Glasgow,
from which post he transferred in 1752 to the more remunerative professorship
of moral philosophy, a subject that embraced the related fields of natural
theology, ethics, jurisprudence, and political economy.
Glasgow
Smith then entered upon a period of extraordinary creativity, combined with a
social and intellectual life that he afterward described as “ by far the
happiest, and most honourable period of my life”. During the week he lectured
daily from 7:30 to 8:30 am and again thrice weekly from 11 am to noon, to
classes of up to 90 students, aged 14 and 16. (Although his lectures were
presented in English, following the precedent of Hutcheson, rather than in
Latin, the level of sophistication for so young an audience today strikes one
as extraordinarily demanding.) Afternoons were occupied with university
affairs in which Smith played an active role, being elected dean of faculty
in 1758; his evenings were spent in the stimulating company of Glasgow
society.
Among his circle of acquaintances were not only remembers of the aristocracy,
many connected with the government, but also a range of intellectual and
scientific figures that included Joseph Black, a pioneer in the field of
chemistry, James Watt, later of steam-engine fame, Robert Foulis, a
distinguished printer and publisher and subsequent founder of the first British
Academy of Design, and not least, the philosopher David Hume, a lifelong friend
whom Smith had met in Edinburgh. Smith was also introduced during these years
to the company of the great merchants who were carrying on the colonial trade
that had opened to Scotland following its union with England in 1707. One of
them, Andrew Cochrane, had been a provost of Glasgow and had founded the famous
Political Economy Club. From Cochrane and his fellow merchants Smith
undoubtedly acquired the detailed information concerning trade and business
that was to give such a sense of the real world to The Wealth of Nations
.
The Theory of Moral Sentiments
In 1759 Smith Published his first work, The Theory of Moral Sentiments.
Didactic, exhortative, and analytic by turns, The Theory lays the
psychological foundation on which The Wealth of Nations was later to be
built. In it Smith described the principles of “human nature “, which, together
with Hume and the other leading philosophers of his time, he took as a
universal and unchanging datum from which social institutions, as well as
social behaviour, could be deduced.
One question in particular interested Smith in The Theory of Moral
Sentiments. This was a problem that had attracted Smith’s teacher Hutcheson
and a number of Scottish philosophers before him. The question was the source
of the ability to form moral judgements, including judgements on one’s own
behaviour, in the face of the seemingly overriding passions for
self-preservation and self-interest. Smith’s answer, at considerable length, is
the presence within each of us of an “inner man” who plays the role of the
“impartial spectator”, approving or condemning our own and others’ actions with
a voice impossible to disregard. (The theory may sound less naive if the
question is reformulated to ask how instinctual drives are socialized through
the superego.)
The thesis of the impartial spectator, however, conceals a more important aspect
of the book. Smith saw humans as created by their ability to reason and - no
less important - by their capacity for sympathy. This duality serves both to
pit individuals against one another and to provide them with the rational and
moral faculties to create institutions by which the internecine struggle can
be mitigated and even turned to the common good. He wrote in his Moral
Sentiments the famous observation that he was to repeat later in The
Wealth of Nations: that self-seeking men are often “led by an invisible
hand... without knowing it , without intending it, to advance the interest of
the society.”
It should be noted that scholars have long debated whether Moral Sentiments
complemented or was in conflict with The Wealth of Nations, which
followed it. At one level there is a seeming clash between the theme of social
morality contained in the first and largely amoral explanation of the manner
in which individuals are socialized to become the market-oriented and
class-bound actors that set the economic system into motion.
Travels on the Continent
The Theory quickly brought Smith wide esteem and in particular attracted
the attention of Charles Townshend, himself something of an amateur economist,
a considerable wit, and somewhat less of a statesman, whose fate it was to be
the chancellor of the exchequer responsible for the measures of taxation that
ultimately provoked the American Revolution. Townshend had recently married and
was searching for a tutor for his stepson and ward, the young Duke of
Buccleuch. Influenced by the strong recommendations of Hume and his own
admiration for The Theory of Moral Sentiments, he Approached Smith to
take the Charge.
The terms of employment were lucrative (an annual salary of £300 plus
travelling expenses and a pension of £300 a year after), considerably
more than Smith had earned as a professor. Accordingly, Smith resigned his
Glasgow post in 1763 and set off for France the next year as the tutor of the
young duke. They stayed mainly in Toulouse, where Smith began working on a book
(eventually to be The Wealth of Nations) as an antidote to the
excruciating boredom of the provinces. After 18 months of ennui he was rewarded
with a two-month sojourn in Geneva, where he met Voltaire, for whom he had the
profoundest respect, thence to Paris where Hume, then secretary to the British
embassy, introduced Smith to the great literary salons of the French
Enlightenment. There he met a group of social reformers and theorists headed by
Francois Quesnay, who are known in history as the physiocrats. There is some
controversy as to the precise degree of influence the physiocrats exerted on
Smith, but it is known that he thought sufficiently well of Quesnay to have
considered dedicating The Wealth of Nations to him, had not the French
economist died before publication.
The stay in Paris was cut short by a shocking event. The younger brother of the
Duke of Buccleuch , who had joined them in Toulouse, took ill and perished
despite Smith’s frantic ministration. Smith and his charge immediately returned
to London. Smith worked in London until the spring of 1767 with Lord Townshend,
a period during which he was elected a fellow of the Royal Society and
broadened still further his intellectual circle to include Edmund Burke, Samuel
Johnson, Edward Gibbon, and perhaps Benjamin Franklin. Late that year he
returned to Kirkcaldy, where the next six years were spent dictating and
reworking The Wealth of Nations, followed by another stay of three
years in London, where the work was finally completed and published in 1776.
The Wealth of Nations
Despite its renown as the first great work in political economy. The Wealth
of Nations is in fact a continuation of the philosophical theme begun in
The Theory of Moral Sentiments. The ultimate problem to which Smith
addresses himself is how the inner struggle between the passions and the
“impartial spectator’ - explicated in Moral Sentiments in terms of the
single individual - works its effects in the larger arena of history itself,
both in the long-run evolution of society and in terms of the immediate
characteristics of the stage of history typical of Smith’s own day.
The answer to this problem enters in Book 5, in which Smith outlines he four
main stages of organization through which society is impelled, unless blocked
by deficiencies of resources, wars, or bad policies of government: the
original “rude’ state of hunters, a second stage of nomadic agriculture, a
third stage of feudal or manorial “farming”, and a fourth and final stage of
commercial interdependence.
It should be noted that each of these stages is accompanied by institutions
suited to its needs. For example, in the age of the huntsman, “there is scar
any established magistrate or any regular administration of justice. “ With
the advent of flocks there emerges a more complex form of social
organization, comprising not only “formidable” armies but the central
institution of private property with its indispensable buttress of law and
order as well. It is the very essence of Smith’s thought that he recognized
this institution, whose social usefulness he never doubted, as an instrument
for the protection of privilege, rather than one to be justified in terms of
natural law: “Civil government,” he wrote, “so far as it is instituted for
the security of property, is in reality instituted for the defence of the
rich against the poor, or of those who have some property against those who
have none at all.” Finally, Smith describes the evolution through feudalism
into a stage of society requiring new institutions such as market-determined
rather than guild-determined wages and free rather than government-
constrained enterprise. This later became known as laissez-faire capitalism;
Smith called it the system of perfect liberty.
There is an obvious resemblance between this succession of changes in the
material basis of production, each bringing its requisite alterations in the
superstructure of laws and civil institutions, and the Marxian conception of
history. Though the resemblance is indeed remarkable, there is also a crucial
difference: in the Marxian scheme the engine of evolution is ultimately the
struggle between contending classes, whereas in Smith’s philosophical history
the primal moving agency is “human nature “driven by the desire for self-
betterment and guided (or misguided) by the faculties of reason.
Society and “the invisible hand”
The theory of historical evolution, although it is perhaps the binding
conception of The Wealth of Nations, is subordinated within the work
itself to a detailed description of how the “invisible hand” actually operates
within the commercial, or final, stage of society. This becomes the focus of
Books I and II. In which Smith undertakes to elucidate two questions. The first
is how a system of perfect liberty, operating under the drives and constraints
of human nature and intelligently designed institutions , will give rise to an
orderly society. The question, which had already been considerably elucidated
by earlier writers, required both an explanation of the underlying orderliness
in the pricing of individual commodities and an explanation of the “laws” that
regulated the division of the entire “wealth” of the nation (which Smith saw as
its annual production of goods and services) among the three great claimant
classes - labourers, landlords, and manufacturers.
This orderliness, as would be expected, was produced by the interaction of the
two aspects of human nature, its response to its passions and its
susceptibility to reason and sympathy. But whereas The Theory of Moral
Sentiments had relied mainly on the presence of the “inner man” to provide
the necessary restraints to private action, in The Wealth of Nations
one finds an institutional mechanism that acts to reconcile the disruptive
possibilities inherent in a blind obedience to the passions alone. This
protective mechanism is competition, an arrangement by which the passionate
desire for bettering one’s condition - a “desire that comes with United States
from the womb, and never leaves United States until we go into the grave “ - is
turned into a socially beneficial agency by pitting one person’s drive for
self-betterment against another’s.
It is in the unintended outcome of this competitive struggle for self-
betterment that the invisible hand regulating the economy shows itself, for
Smith explains how mutual vying forces the prices of commodities down to
their natural levels, which correspond to their costs of production.
Moreover, by inducing labour and capital to move from less to more profitable
occupations or areas, the competitive mechanism constantly restores prices to
these “natural” levels despite short-run aberrations. Finally, by explaining
that wages and rents and profits (the constituent parts of the costs of
production) are themselves subject to this natural prices but also revealed
an underlying orderliness in the distribution of income itself among workers,
whose recompense was their wages; landlords, whose income was their rents;
and manufacturers, whose reward was their profit.
Economic growth
Smith’s analysis of the market as a self- correcting mechanism was
impressive. But his purpose was more ambitious than to demonstrate the self-
adjusting properties of the system. Rather, it was to show that, under the
impetus of the acquisitive drive, the annual flow of national wealth could be
seen steadily to grow.
Smith’s explanation of economic growth , although not neatly assembled in one
part of The Wealth of Nations, is quite clear. The score of it lies in
his emphasis on the division of labour (itself an outgrowth of the “natural”
propensity to trade) as the source of society’s capacity to increase its
productivity. The Wealth of Nations opens with a famous passage
describing a pin factory in which 10 persons, by specialising in various tasks,
turn out 48,000 pins a day, compared with the few, perhaps only 1 , that each
could have produced alone. But this all-important division of labour does not
take place unaided. It can occur only after the prior accumulation of capital
(or stock, as Smith calls it ), which is used to pay the additional workers and
to buy tools and machines.
The drive for accumulation, however, brings problems. The manufacturer who
accumulates stock needs more labourers ( since labour-saving technology has
no place in Smith’s scheme), and in attempting to hire them he bids up their
wages above their “natural” price. Consequently his profits begin to fall,
and the process of accumulation is in danger of ceasing. But now there enters
an ingenious mechanism for continuing the advance. In bidding up the price of
labour, the manufacturer inadvertently sets into motion a process that
increases the supply of labour, for “the demand for men, like that for any
other commodity, necessarily regulates the production of men.” Specifically,
Smith had in mind the effect of higher wages in lessening child mortality.
Under the influence of a larger labour supply, the wage rise is moderated and
profits are maintained; the new supply of labourers offers a continuing
opportunity for the manufacturer to introduce a further division of labour
and thereby add to the system’s growth.
Here then was a “machine” for growth - a machine that operated with all the
reliability of the Newtonian system with which Smith was quite familiar. Unlike
the Newtonian system, however, Smith’s growth machine did not depend for its
operation on the laws of nature alone. Human nature drove it, and human nature
was a complex rather than a simple force. Thus, the wealth of nations would
grow only if individuals, through their governments, did not inhibit this
growth by catering to the pleas for special privilege that would prevent the
competitive system from exerting its begin effect. Consequently, much of
The Wealth of Nations, especially Book IV, is a polemic against the
restrictive measures of the “mercantile system” that favoured monopolies at
home and abroad. Smith’s system of “natural liberty”, he is careful to point
out, accords with the best interests of all but will not be put into practice
if government is entrusted to, or heeds, the “mean rapacity, who neither are ,
nor ought to be, the rulers of mankind.”
The Wealth of Nations is therefore far from the ideological tract it is
often supposed to be. Although Smith preached laissez-faire (with important
exceptions), his argument was directed as much against monopoly as government;
and although he extolled the social results of the acquisitive process, he
almost invariably treated the manners and manoeuvres of businessmen with
contempt. Nor did he see the commercial system itself as wholly admirable. He
wrote with decrement about the intellectual degradation of the worker in a
society in which the division of labour has proceeded very far; for by
comparison with the alert intelligence of the husbandman, the specialised
worker “generally becomes as stupid and ignorant as it is possible for a human
being to become”.
In all of this, it is notable that Smith was writing in an age of preindustrial
capitalism. He seems to have had no real presentiment of the gathering
Industrial Revolution, harbingers of which were visible in the great ironworks
only a few miles from Edinburgh. He had nothing to say about large-scale
industrial enterprise, and the few remarks in The Wealth of Nations
concerning the future of joint-stock companies (corporations) are disparaging.
Finally, one should bear in mind, that, if growth is the great theme of The
Wealth of Nations, it is not unending growth. Here and there in the
treatise are glimpsed at a secularly declining rate of profit; and Smith
mentions as well the prospects that when the system eventually accumulates its
“full complement of riches” - all the pin factories, so to speak, whose output
could be absorbed - economic decline would begin, ending in an impoverished
stagnation.
The Wealth of Nations was received with admiration by Smith’s wide circle
of friends and admires, although it was by no means an immediate popular
success. The work finished, Smith went into semiretirement. The year following
its publication he was appointed commissioner both of customs and of salt
duties for Scotland, posts that brought him £600 a year. He thereupon
informed his former charge that he no longer required his pension, to which
Buccleuch replied that his sense of honour would never allow him to stop paying
it. Smith was therefore quite well off in the final years of his life, which
were spent mainly in Edinburgh with occasional trips to London or Glasgow
(which appointed him a rector of the university). The years passed quietly,
with several revisions of both major books but with no further publications. On
July 17, 1790, at the age of 67, full of honours and recognition, Smith died;
he was buried in the churchyard at Canongate with a simple monument stating
that Adam Smith, author of The Wealth of Nations, was buried there.
Beyond the few facts of his life, which can be embroidered only in detail,
exasperatingly little is known about the man. Smith never married, and almost
nothing is known of his personal side. Moreover, it was the custom of his
time to destroy rather than to preserve the private files if illustrious men,
with the unhappy result that much of Smith’s unfinished work, as well as his
personal papers, was destroyed (some as late as 1942). Only one portrait of
Smith survives, a profile medallion by Tassie; it gives a glimpse of the
older man with his somewhat heavy-lidded eyes, aquiline nose, and a hint of
protrusive lower lip. “I am a beau in nothing but my books, ”Smith once told
a friend to whom he was showing his library of some 3,000 volumes.
From various accounts, he was also a man of many peculiarities, which
included a stumbling manner of speech ( until he had warmed to his subject),
a gait described as “vermicular”/ and above all an extraordinary and even
comic absence of mind. On the other hand, contemporaries wrote of a smile of
“inexpressive benignity,” and of his political tact and dispatch in managing
the sometimes acerbic business of the Glasgow faculty.
Certainly he enjoyed a high measure of contemporary fame; even in his early
days at Glasgow his reputation attracted students from nations as distant as
Russia, and his later years were crowned not only with expression of
admiration from many European thinkers but by a growing recognition among
British governing circles that his work provided a rationale of inestimable
importance for practical economic policy.
Over the years, Smith’s lustre as a social philosopher has escaped much of the
weathering that has affected the reputations of other first-rate political
economists. Although he was writing for his generation, the breadth of his
knowledge/ the cutting edge of his generalization, the boldness of his vision,
have never ceased to attract the admiration of all social scientists, and in
particular economists. Couched in the spacious, cadenced prose of his period,
rich in imagery and crowded with life, The Wealth of Nations projects a
sanguine but never sentimental image of society. Never so finely analytic as
David Ricardo nor so stern and profound as Karl Marx, Smith is the very epitome
of the Enlightenment: hopeful but realistic, speculative but practical, always
respectful of the classical past but ultimately dedicated to the great
discovery of his age - progress.
BIBLIOGRAPHY:
John Rae. “Life of Adam Smith” 1985
William Scott. “Adam Smith as Student and Professor” 1987
Andrew S. Skinner. “Essays on Adam Smith” 1988
