The Man who Founded the Science of Economics, The Life of Adam Smith
A shy professor of Moral Philosophy was the unlikely figure who formulated a whole new way of thinking about wealth.
Adam Smith was born in 1723 in Kirkcaldy, a small town on the east coast of Scotland. Most of the members of Smith’s family (including his father, who died the year Smith was born) were involved in the business of customs and excise, making sure that import and export duties were paid on goods. This was a subject Smith would write much about in his greatest work, The Wealth of Nations.
Adam Smith’s Education and Career
At the age of fourteen Adam Smith enrolled at Glasgow University. He went on to study at Balliol College in Oxford University for another six years, before returning to Glasgow to teach. His professorship was in Logic at first, but he soon he moved to Moral Philosophy, the position he held for the rest of his time at Glasgow University.
While at the university he became good friends with David Hume, another great Scottish philosopher of the day. Scotland had lost its own parliament earlier in the century, so the great thinkers and influential men of the day instead met in clubs where new ideas were discussed with friends. Among Smith’s friends were other figures from the Scottish Enlightenment such as Joseph Black the chemist and James Hutton the geologist.
In 1763 Smith left his post at the university to accompany the young Duke of Buccleuch around Europe as his tutor. It was very fashionable for young nobles to undertake a “grand tour” of Europe at this time, and the Duke’s stepfather was prepared to pay for the best possible tutor. The trip was valuable for Smith because he was able to meet many of the great French Enlightenment thinkers, such as Voltaire, d’Holbach, and the economic philosophers Quesnay and Turgot, who were part of a school called the Physiocrats.
Adam Smith’s Philosophical Works
Smith started work on his greatest work, An Inquiry into the Nature and Causes of the Wealth of Nations during this trip, and finished it over a number of years after his return to Britain. He was already well known for his earlier work Theory of Moral Sentiments, which had gained him a great deal of admiration. It was this book which had made the Duke of Buccleuch’s stepfather so keen to hire Smith as his stepson’s tutor. On its publication in 1776, Wealth of Nations was an immediate success, and five editions were produced within Smith’s own lifetime. Smith intended to complete his philosophical series with a work on jurisprudence, which he never finished, but lectures he had given on the subject were published after his death.
Smith never married. After the success of Wealth of Nations he was appointed customs commissioner for the capital city, Edinburgh, which was a great honour and allowed him a comfortable retirement, although it was rather ironic considering that his greatest work had criticised import and export restrictions. He died in 1790 at the age of 68.
Adam Smith’s Wealth of Nations – The Book which Began the Science of Economics
In 1776 a book which was to shake up the way the world thought about money was written by a shy Scottish professor of Moral Philosophy.
Before the publication of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations there had been no major works written on economics, and economic policy was usually influenced by the powerful merchant class. A system called Mercantilism, or the Commercial System, was in place. It was characterised by the use of lots of restrictions and incentives to push trade in the “right” directions to enrich the country. Smith demonstrated that most of these measures were counter-productive, and his views contributed to the introduction of the Classical System, which dominated European trade for well over a century.
Adam Smith had plenty of experience of Mercantilism. His father, guardian and cousin all worked in customs. In The Wealth of Nations Smith listed all the ways in which trade was encouraged or hindered, such as: restraints upon the import of goods which could be produced in the home country, restrictions on imports from certain foreign countries, bounties (a sum paid to encourage the export of certain goods), and monopolies (when one country or company had sole right to trade with a particular colony).
Adam Smith argued that this system did not enrich the country. He showed that the policy of encouraging exports and discouraging imports so that there was more physical money in the country did not mean that the country was richer. It just meant that the value of money was reduced, and that food and clothing, which have real worth, became more expensive. He explained that encouraging exports meant that the poor were taxed twice on the things they bought. The first, direct tax, was paid to the government so that it could pay merchants the bounty. The second, indirect tax was the higher price of goods due to less being available because too much was exported.
The Classical System
What Smith proposed was a system of “perfect liberty”. Trade should be free to do what was most profitable, not pushed into unnatural channels where it had to be subsidised by the government. As an Enlightenment thinker he believed in the good of the greatest number, not just the good of the rich. He believed that free trade would benefit the poor by not keeping prices artificially high.
Wealth of Nations also argues for the division of labour. Smith showed how in a factory, different people performing different tasks meant that the product could be produced much quicker and more cheaply than if each person performed every task.
Growing the World Economy
Smith’s controversial idea was that this principle could be applied internationally. Goods which could be produced in other countries more cheaply should be imported, because that was better for both countries. His famous example was that wine could be produced in Scotland by using greenhouses, but it would cost thirty times more to make it than in France. It made much more sense to import it, and this principle applied to everything.
By examples like this Adam Smith showed that it was possible for trade to benefit both countries, causing mutual growth. Previously it had been believed that there was a fixed amount of wealth in the world, so trade always benefited one country at the expense of the other – hence the heavy restrictions on the “wrong” kind of trade. Smith showed that this wasn’t true – the economy as a whole could grow. As people in all countries became richer their appetite for imported luxury goods would get bigger, creating even more wealth. In laying down the principle that it is possible for the whole world economy to grow, Adam Smith produced the basis of modern economics.