Adam Smith

Adam Smith was a Scottish moral philosopher and a central figure of the Scottish Enlightenment (The Enlightenment), best known as the founder of modern economics. His first book, The Theory of Moral Sentiments (1759), explained morality as growing from sympathy — our capacity to imagine ourselves in others’ situations — and from the judgment of an imagined impartial spectator. His second, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), argued that the wealth of a nation consists not in gold and silver but in the productive labour of its people; that productivity grows through the division of labour and the extent of the market; that in a system of “natural liberty”, individuals pursuing their own interest are led “as if by an invisible hand” to promote the public good; and that mercantilist restrictions, monopolies and colonial trade systems impoverish nations. Read ever since as the bible of free markets, Smith was also a sharp critic of merchants, a defender of the labouring poor, and a moralist who believed commerce must rest on justice and sympathy.

Life

Smith was born in Kirkcaldy, a small port on the Firth of Forth, and baptised on 5 June 1723 in the old-style calendar — 16 June in the modern calendar; his exact birth date is unknown. His father, a customs official, had died months before; Smith was devoted to his mother, Margaret Douglas, all his life and never married. At fourteen he entered the University of Glasgow, where he studied moral philosophy with Francis Hutcheson, the “never-to-be-forgotten” teacher who taught him the moral sense and the principle of “the greatest happiness for the greatest numbers”. He spent six unhappy years at Balliol College, Oxford (1740–46), where he found the professors had “given up altogether even the pretence of teaching”, and read widely on his own — including, it is said, Hume’s Treatise, which was confiscated.

Back in Scotland he gave public lectures in Edinburgh on rhetoric and jurisprudence, and in 1751 became professor of logic, then of moral philosophy at Glasgow (1752–64), where his lectures covered natural theology, ethics, jurisprudence and political economy. He became the closest friend of David Hume. The Theory of Moral Sentiments (1759) made him famous. In 1764 he resigned his chair to become travelling tutor to the young Duke of Buccleuch, spending nearly three years in France and Geneva; he met Voltaire and, in Paris, the Physiocrats François Quesnay and Turgot, whose economic theory — that land is the source of wealth and that trade should be free — he admired and criticised. In Toulouse, bored, he began a book “in order to pass away the time”.

The pension from Buccleuch freed him to spend ten years, mostly at Kirkcaldy, writing The Wealth of Nations, published on 9 March 1776, the year of the American Declaration of Independence and of Hume’s death. In 1778 he was appointed Commissioner of Customs for Scotland and moved to Edinburgh, where he lived with his mother and cousin, entertained friends at Panmure House, and revised his books. Shortly before his death on 17 July 1790, he had his friends burn sixteen volumes of unpublished manuscripts. He is buried in the Canongate Kirkyard.

The Theory of Moral Sentiments

The book opens: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” The foundation is sympathy — not pity alone, but “fellow-feeling with any passion whatever”. We cannot directly feel what others feel; but by imagination we place ourselves in their situation and form some idea of their sensations, as when “we see a stroke aimed and just ready to fall upon the leg or arm of another person, we naturally shrink and draw back our own leg or our own arm”.

We approve of others’ feelings and actions when, imagining ourselves in their place, we find that we would feel the same — when our sympathetic feelings “correspond” with theirs. We judge our own conduct by imagining how it would appear to others, and so arrive at the idea of an impartial spectator, “the man within the breast, the great judge and arbiter of our conduct”, whose verdict is conscience. Smith offers a famous example: if a man in Europe heard that the great empire of China was swallowed up by an earthquake, he would express sorrow, reflect on the precariousness of life, and then go to sleep untroubled; yet if he were to lose his little finger tomorrow, he would not sleep tonight. Would he then sacrifice a hundred million Chinese to save his finger? “Human nature startles with horror at the thought.” What restrains us is “not the soft power of humanity” but “reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter”.

Smith discusses the virtues of propriety, prudence, justice and benevolence; argues that justice, the duty not to harm, is “the main pillar that upholds the whole edifice” of society, while benevolence is “the ornament which embellishes”; and observes how admiration for the rich and great “is the great and most universal cause of the corruption of our moral sentiments”. The first “invisible hand” appears here: the rich, consuming little more than the poor, “are led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made, had the earth been divided into equal portions among all its inhabitants”.

The Wealth of Nations

The Wealth of Nations is in five books.

The division of labour. It begins with a pin factory. One worker, untrained, “could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty”. But divided into some eighteen operations — “one man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head” — ten workers could make 48,000 pins a day. The division of labour increases dexterity, saves time, and encourages invention of machines. It arises from “a certain propensity in human nature… to truck, barter, and exchange one thing for another”; “nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog”. And it is limited by the extent of the market.

Self-interest. In exchange, we appeal not to others’ kindness but to their interest: “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.”

Value and prices. Smith distinguished value in use from value in exchange (water is useful but cheap, diamonds useless but dear), held that labour is “the real measure of the exchangeable value of all commodities”, and analysed prices into wages, profit and rent. Market prices gravitate toward a “natural price” through competition.

The invisible hand. In Book IV, discussing why merchants prefer to invest at home rather than abroad, Smith writes: every individual “intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, 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… By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”

Against mercantilism. Most of Book IV attacks the “mercantile system”, which held that a nation’s wealth is its stock of gold and silver, and so sought a favourable balance of trade through tariffs, bounties, monopolies and colonial restrictions. Smith argued that such policies benefited merchants and manufacturers at the expense of consumers: “Consumption is the sole end and purpose of all production.” He was scathing about merchants: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” He condemned the East India Company and the colonial system, and urged Britain to let the American colonies go if they would not pay for their defence.

The role of government. Under “the obvious and simple system of natural liberty”, the sovereign has three duties: defence; the administration of justice; and “erecting and maintaining certain public works and certain public institutions” — roads, bridges, canals, and education — which no individual would profitably provide. Smith warned that the division of labour, carried to excess, could make a worker “as stupid and ignorant as it is possible for a human creature to become”, and urged publicly funded parish schools to prevent it. He favoured taxes proportioned to ability to pay.

Legacy

The Wealth of Nations founded classical political economy, continued by Malthus, Ricardo and Mill, and was attacked and built upon by Marx, who took up Smith’s labour theory of value and his observations on the degrading effects of the division of labour. In the twentieth century Smith was claimed by advocates of free markets as their founder; recent scholars emphasise the “Adam Smith problem” — how the sympathy of the Moral Sentiments fits with the self-interest of the Wealth of Nations — and argue that for Smith markets work only within a framework of justice, law and moral sentiment.

In conversation

• The pin factory — the power of the division of labour.
• The butcher, the brewer and the baker — self-interest in exchange.
• The man within the breast — the impartial spectator.