ADAM SMITH

Author of the first systematic study of capitalism, eighteenth-century Scottish economist Adam Smith is generally known as the "Father of Economics." Smith's most famous theory - that an "invisible hand" guides the free market economy - argues that individuals who pursue their own self-interests actually produce economic results beneficial to society as a whole. Smith's general thesis that free markets are the most efficient allocators of scarce resources remains at the heart of mainstream economics today.

Adam Smith was born on June 5, 1723, in Kirkcaldy, Scotland, a tiny fishing village near Edinburgh. His father, a lawyer and government official, died two months before his birth. In school Smith immersed himself in mathematics and the classics. His scholarly ability was such that he was accepted at age 14 into Scotland's Glasgow College. At 17 he graduated with a Master of Arts degree and a scholarship to Oxford University.

Oxford and Beyond

At Oxford Smith was miserable. The University seemed to him to suffer from a lack of intellectual spirit: Professors often skipped lectures, tutors shirked their responsibilities, and university officials offered students little guidance. Still worse, Scottish students suffered blatant discrimination. Smith's fellow students and even faculty members laughed at his accent and called him names.
As a result he grew depressed and his health suffered at Oxford. He complained of "inveterate scurvy" and developed a nervous tic - an involuntary "shaking of the head." In addition, he suffered from blackouts. Such neurological disturbances plagued him throughout his adult life.

Despite his difficulties at Oxford, Smith remained there for 6 years, most of the time studying on his own in the University's grand library. In 1746 Smith left Oxford, returning first to Kirkcaldy and, failing to find a regular job, moving to Edinburgh 2 years later. There he gave a successful series of public lectures on such topics as philosophy, jurisprudence, and political economy. His lectures attracted the attention of several of Edinburgh's leading intellectuals; their sponsorship allowed him to continue lecturing for several years.

Philosophy and Teaching

In 1751, Glasgow College officials offered him the newly created post of professor of Logic. Smith accepted and within a year was promoted to the Chair of Moral Philosophy. He became well respected as a philosopher, and his lectures were popular among students. His first book, the Theory of Moral Sentiments, published in 1759, made him well known among other intellectuals.

One statesman who was particularly impressed by the book was Charles Townshend. He sought Smith as a teacher for his teenage stepson, the duke of Buccleuch. In 1763 Smith left Glasgow to accept the position and spent the next 3 years in Toulouse, France, with the young duke. To alleviate his boredom, Smith used his spare time to make a thorough investigation of economics, and began to commit some of his ideas on the subject to paper.

The Wealth of Nations

Smith returned to Scotland in 1766, endowed by the duke with a generous pension for life. At home in Kirkcaldy, he continued to develop the economic ideas he had begun to explore during his time abroad. Ten years later, he completed and published his most famous book on the subject; a tour de force entitled An Inquiry into the Nature and Causes of the Wealth of Nations.

In the Wealth of Nations Adam Smith emerges as the free market economist we recognize today. Here he expressed his belief that private enterprise, operating in an unmediated competitive manner, is the most efficient and equitable economic system. Moreover, he argued that individuals in such a system who pursue their own self-interests will, as if guided by an invisible hand, produce results beneficial to all of society. Smith sharply criticized the existing British government's interventions into domestic, colonial, and international economic matters, maintaining that such acts upset the natural equilibrium of a free market economy. Today we refer to this notion as "laissez-faire" economics.

The Wealth of Nations was enormously successful; five editions were published during Smith's lifetime, winning him international acclaim as an economist. His influential ideas spread quickly among the many disciples who developed them into what we now regard ad the classical tradition of economics. Smith passed his remaining years industriously in Scotland. In the last years of his life, in spite of the fact that he was severely ill, he undertook a thorough revision of his Theory of Moral Sentiments for the sixth edition. As death drew near, he had his unfinished manuscripts burned without explanation. A week later, on July 17, 1790, he died, leaving the legacy of his theories, which gave birth to modern economics.

Excerpts from Adam Smith's Wealth of Nations

People of the same trade rarely meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

On International Relations

In ancient times the opulent and civilized nations found it difficult to defend themselves against the poor and barbarous nations. In modern times the poor and barbarous find it difficult to defend themselves against the opulent and civilized.

On Government Administration

The abuses which sometimes creep into the administration of a local and provencial revenue, however enormous they may appear, are in reality almost always trifling compared with the administration of the revenue of a great empire. They are, besides, much more easily corrected.

On Work and Leisure

Great labour, either of mind or body, continued for several days together requires to be relieved by some indulgence, sometimes of ease only, but sometimes too of dissipation and diversion. If it is not complied with, the consequences are often dangerous, and sometimes fatal.

On Happiness*

What can be added to the happiness of a man who is in health, who is out of debt, and has a clear conscience?

On Sympathy*

To seem not to be affected with the joy of our companions is but want of politeness. But not to wear a serious countenance when they tell us their afflictions, is real and gross inhumanity.

On Colleges and Universities

The discipline of colleges and universities is contrived, not for the benefit of the students, but for the ease of the master.

On Humaneness*

No society can surely be flourishing and happy, of which the far greater part of its members are poor and miserable.

The world neither ever saw, nor ever will see, a perfectly fair lottery, because the undertaker could make nothing by it. In the state lotteries the tickets are really not worth the price, yet the soberest people scarce look upon it as a folly to pay a small sum for the chance of gaining ten or twenty thousand pounds. In a lottery in which no prize exceeded twenty pounds there would not be the same demand for tickets.

On Free Trade

By restraining, either by high duties, or by absolute prohibitions, the importation of such goods from foreign countries as can be produced at home, the monopoly of the home market is more or less secured to the domestic industry employed in producing them.

To expect that the freedom of trade should ever be entirely restored, is as absurd as to expect that an oceana or utopia should ever be established. Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it.

On Government Officials

It is the highest impertinence and presumption of kings and ministers to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will. There is no art that one government sooner learns from another than that of draining money from the pockets of the people.

On Supply and Demand

When the quantity brought to market is just sufficient to supply the effectual demand and no more, the market price naturally comes to be either exactly, or as nearly as can be judged, the same as the natural price. The whole quantity upon hand can be disposed of for this price, and can not be disposed of for more. The competition of the different dealers obliges them all to accept this price, but does not oblige them to accept less.

The uninterrupted effort of every man to better his condition is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government and of the greatest errors of administration.

On Authoritarianism

Fear is in almost all cases a wretched instrument of government, and ought in particular never to be employed against any order or men who have the smallest pretensions to independency. To attempt to terrify them serves only to irritate their bad humour, and to confirm them in opposition which more gentle usage might easily induce them to lay aside.

On Public versus Private Education

Those parts of education for which there are no public institutions are generally the best taught. When a young man goes to a fencing or a dancing school, he does not indeed always learn to fence or to dance very well; but he seldom fails to learn how to fence or to dance.

On the "Invisible Hand"

As every individual endeavors both to employ his capital in the support of domestic industry and to direct that industry so that its produce may be of the greatest value, every individual renders the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. 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 that society was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

On Principal/Agent Relationships

The directors of joint-stock companies, [corporations] being the manager rather of other peoples money rather than their own, cannot well be expected to watch over it with the same anxious vigilance with which the owners of a private partnership frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honor, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

The statesman who should attempt to direct private people in what manner they should employ their capitals would load himself with a most unnecessary attention. He would assume an authority, which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

On Exchange

Man is an animal which makes bargains. The propensity to truck, barter, and exchange one thing for another is common to all men, and to be found in no other race of animals. Give me that which I want, and you shall have this which you want, is the meaning of every offer. It is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. 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.

On Human Equality

The difference of natural talents in different men is, in reality, much less than we are aware of. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom and education.

On Specialization

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs different artificers.

All quotations are from The Wealth of Nations (1776), except those with an asterisk (*). They are from a philosophical treatise by Smith, The Theory of Moral Sentiments (1759). Some quotations have been edited slightly to enhance readability by today's standards.

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