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 Ј300 plus

travelling expenses and a pension of Ј300 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 Ј600 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