Adam Smith “the Father of Modern Economics”
Specifically, Adam Smith is:
- The founder of classic liberal economics (his Wealth of Nations describes self-interest, competition, supply and demand, and the relationship of labor in capital in a free market; what today we call capitalism).
- A Hero of the Scottish Enlightenment in the Age of Reason (a true liberal and an empiricist like Locke).
- An “empirical” moral philosopher notable for his “invisible hand” theory regarding a morality driven free-market (a concept from his empirical theory of morals found in his Theory of Moral Sentiments).
There is no one way to interpret the Scottish philosopher Adam Smith, but we do our best to give a clear overview of his views on morality and economics to explain why he is considered “the father of modern economics” (or more specifically the father of modern capitalism and classical liberal economics).
Adam Smith’s major works are:
- The Theory of Moral Sentiments (1759) – (Read 1759 version online) (Revised 1790 Version Read Online) (Summary) (Buy Now)
- An Inquiry into the Nature and Causes of The Wealth of Nations (1776) – (Read Online) (Summary) (Buy Now)
Adam Smith’s major themes are:
- His economic philosophy where he lays the foundation of the mechanics of capitalism: How a nation can become wealthy and ensure their wealth through production, commerce, specialization, and trade in a (mostly) free-market. He ties together everything from Plato to his nine years of travel and research, into a comprehensive political and economic system that still works as the foundation of modern economics today. Despite his philosophy working as a foundation modern economics (giving root to the branches we call neoclassical and laissez faire), his work isn’t flawless (thus it should be read from an academic and historical perceptive, not taken as gospel in terms of specifics). TIP: One thing to note, when thinking of Smith as laissez faire, is that he is critical of corruption of industry and government and was writing in a time when liberal states were breaking away from state-controlled mercantile governments for the first time. Here i’ll note, if one wants to understand Smith the Philosopher) it really helps to understand Smith in context of his times and Moral Philosophy.
- His moral philosophy, where he speaks on Moral sentiment: The idea that self-interest drives charity because people are naturally empathetic and sympathetic. (Learn more about Adam Smith’s moral philosophy here).
- The invisible hand, where he combines the two concepts: The idea, that in a well-regulated and just society (with certain things are accounted for like greed and monopolies by “masters”, and war-time spending by politicians), a trust in the people to participate in commerce and politics freely, rather than a reliance on the aristocracy to control the people and money supply, bears great fruit. The invisible hand guides the wealth of nations via self-interest in a capitalist economy. A visible hand (such as the hand of a King) is not needed.
Why Is The Wealth of Nations So Important? Adam Smith and Classical Economics (2010).
FACT: Wealth of Nations was published in 1776. If that doesn’t hit you over the head like a sack of potatoes, you should read Smith and take another look at America. Hamilton wasn’t Smith’s biggest fan, but Smith knew Franklin (who helped him edit his book), and Smith had a rather big impact on America, liberalism, enlightenment, the world, and pretty much everything since his time.
FACT: In 2007 the Bank of England placed Adam Smith’s picture is on the back of the £20 banknote.
“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.” – Adam Smith
Why Was Adam Smith Important?
Similar to Sir Isaac Newton’s Principia Mathematica for physics, Antoine Lavoisier’s Traité Élémentaire de Chimie for chemistry, and Charles Darwin’s On the Origin of Species for biology, Adam Smith’s The Wealth of Nations (1776) completely changed how Western society viewed economics.
Smith’s Natural Laws of Economics: Self-interest, Competition, Supply, Demand, Capital, Labor, and the Wealth of Nations
Smith was the first to write a comprehensive set of rules for free-market economics, giving us theories like his natural laws of economics (which are, very loosely):
- Self-interest drives supply and demand and competition (people want to work, hire, trade, and consume).
- Competition in the marketplace of things drives labor, production, and prices.
- Supply and Demand help set prices (where high supply and high demand is best). See the relationship of supply and demand, it is of course more complex than that.
TIP: With a theory like that, we can see how when Locke says “labor creates value” and Smith says “self-interest drives human markets” (again, speaking loosely) they were onto something very central to not only fiscal economy, but political economy, social economy and all other natural markets.
Why We Still Care About Adam Smith
Above we get a sense of why Smith’s works are still studied today, that is, because he was correct in his denoting of the foundation of economics (and human behavior).
In words, not only his economic ideas, but his ideas based on morality and social psychology, have stood the test of time.
BOTTOMLINE: Smith laid the groundwork for free-market consumer capitalism. His work forms the basis of classic economics and by extension modern western economics. With that in mind, he based many of his ideas on his Theory of Moral Sentiments and that is worth noting. With this in mind many (including Smith himself) viewed The Theory of Moral Sentiments, not The Wealth of Nations, to be his most important work. This gives us a hint at his true identity as a humanist first, and Capitalist second (something his biggest fans often ignore).
POLITICAL THEORY – Adam Smith.
FACT: The story goes that Smith spent 8 (or 9) years traveling and meeting with politicians, merchants, and business people asking questions, watching them, and taking notes when preparing for The Wealth of Nations. Like Descartes (who employed similar methods), Adam Smith wasn’t just a forefather of economics; he was a forefather of social science in general. He didn’t just learn from the classics; he learned from experience and human interaction. The ideas in his books come from discussions with many of the great thinkers of his time including America’s founding fathers.
An Overview of Adam Smith’s Moral and Economic Philosophy – An Overview of the Theory of Moral Sentiments and the Wealth of Nations
Smith’s The Theory of Moral Sentiments focuses on types of morality born out of self-interest.
His much less philosophical and more practical An Inquiry into the Nature and Causes of The Wealth of Nations doubles as a 101 level guide to economics.
What Topics Does the Wealth of Nation Cover?
In it, he explains the following topics: the origin and purpose of money, supply and demand, the division of labor and wages, monopolies, what today we would call union busting, markets and commodities, prices and quantity, stock, debt, taxes, hoarding, nationalism, politics, profits, land ownership and rental, and more in terms of both psychology and mechanics. Most of these topics get their own section within The Wealth of Nations, and we won’t cover each part, so skim the book or watch the comprehensive overview video below, as it supplements the information we present.
Of the Plan of Work (Wealth of Nations Explained). Here is a whole series explaining the wealth of nations in plain speak.
The Wealth of Nations specifically tries to show that when all people contribute freely to the economy, it results in the wealth of nations or wealth in capital and wealth in happiness. This is preferable to the state simply dividing up money between special interests it deems important. In simple terms it is a capitalist manifesto, see Smith’s introduction for an overview by him .
Neither book is summed up completely here, but the following summary of both books can give you a general overview:
Smith believed that economies arose out of a few factors including man’s natural desire to barter (and thus specialization occurs, so man has something to barter with). He also believed that individual self-interest had unintended social benefits, naming many psychological factors that could drive rich capitalists, workers, and consumers toward the common good. To Smith self-interest includes, but isn’t limited to, economic self-interest, altruistic intentions, ego, pride, deriving pleasure from helping others (moral sentiment), and favoring one’s own nation over others.
Ultimately, Smith believed that a just society will benefit from individuals of all classes acting out of self interest if they are given freedom to pursue excellence, happiness, and individual prosperity. If they are happy, educated, and discerning, it will result in economic prosperity and social benefit for all (the wealth of nations).
Some act out of moral sentiment, taking pleasure in the happiness of others as if it was their own. Some just want awards and to feel as though they have a purpose, or as Aristotle called it telos (true for workers and masters). Others simply follow base desires, investing in their nation to avoid investing in other nations (and thus weakening their own power), or selling crops only to turn their crops into capital before they rot (as there is only so much room in one’s belly). They sell the crops for what the market will bare and so come economic influences (the detailed functions of which you can read about for yourself in The Wealth of Nations).
Regardless of individual intentions, to Smith, it seems that the net effect of individual actions was social benefit closely resembling how things would be shared if mother nature distributed goods and services herself. Thus, Smith claims, in a well-structured society, self-interest and freedom naturally lead to the wealth of nations. Or rather, as if by divine providence, an invisible hand seems to guide a nation toward prosperity and common good through individual self-interest and moral sentiment.
Essentially, Smith argues broadly for free-market capitalism, but he also warns of pitfalls. You can read more on “the invisible hand” here.
WARNING: Smith is often quoted out of context to disastrous results. Smith was critical of the merchant class and “masters”, as can be gleaned by reading his works in order (including the 1790 revision of Moral Sentiment and even in The Wealth of Nations itself). He saw the capitalism of his day and saw how it could lead to wealth for all people of a nation over time if an economic philosophy like his was followed and improved upon. The goal wasn’t putting money in the pockets of the rich, the goal was lifting up nations and people by understanding not just what drove wealth, but what drove happiness.
The Invisible Hand.
TIP: Consider the person who considers amassing a fortune for fortunes sake a reward, and how this throws a wrench in the cog. If the invisible hand is individual and group action is driven by moral sentiment, and “awards” work to drive this, then we can see the dangers of a person seeing the accumulation of wealth as the highest reward. The robber barons ended up giving back to society through charity in their later years (they had already given through industry and direct and indirect social change), but what of the baron who isn’t driven to happiness by higher values?
“With the greater part of rich people, the chief enjoyment of riches consists in the parade of riches.” – Adam Smith
A Summary of Smith’s Warnings and His Criticism of Free-Markets
The above concepts can be read as unwavering support of free-markets, but this is a shallow reading.
Smith was wary of “the elite” and warned of their “conspiracy against the public or in some other contrivance to raise prices.” Smith warned of monopolies, warned of tax havens, described the short-fallings of the invisible hand indirectly, talked about wartime and public debt, balancing credit and debt, taxation, factions. He illustrated a system run by capital that only works when self-interest happens to favor the people, so we need conditions like the rich favoring their own nation.
Smith understood that we can’t expect freedom and good behavior at the same time, people of lower order thinking must be extended the same freedom as the more ethical. But he realized that nationalism and home bias would help ensure the wealth of nations in a free society, and this would lead to a balanced economy and distribution system.
Smith pretty clearly warned of what we can call “away bias” (bias against the state, like when Americans use tax shelters and don’t invest back in America and instead want to move to John Gault island). This could create new nations, weaken a nation, or it could create a shadow economy which at best results in the wealth of the world, but at worst drags down the nation and creates a worldwide oligarchy. Along with the unintended social benefits, comes the unintended social consequences. So, in a modern lens, these aspects should be considered closely.
Adam Smith, Theory of Moral Sentiments.
TIP: A criticism of Smith’s moral philosophy is that moral sentiments result in charity. Charity manifests as overfunding X, but underfunding Y. An argument can be made for a strong role of government in favoring the less attractive Y, without dis-incentivizing the funding of X.
Adam Smith vs. Karl Marx – The Industrial Revolution Philosophers. Karl Marx (who comes later) is the other important economic philosopher of the industrial revolution. There are two general types of liberalism social liberalism and classical liberalism, Marx represents an extreme view today, but the underlying concept Marx-lite of regulated markets and state intervention IS the other part of the foundation of modern economics.
Smith in Modern Times – As if By Divine Providence, A New World Order (For the People, not the Elite Class)
The Wealth of Nations is considered the first major modern work of economics and essentially defined what became modern western capitalism (including Laissez-faire ideology and neoliberalism). That text specifically is still widely studied today, although the over-arching message of Smith is often over-simplified to justify Reagan era trickle down economics and other lack-luster policies (typically described as Neoliberalism or Anarcho-Libertarianism or Anarcho-Capitalism depending on the extent of Government involvement and specifics of ideology).
A close reading of Smith, especially in The Theory of Moral Sentiments, shows his take is more nuanced and critical of “masters” (employers, people with economic, social, and political capital). In retrospect Alan Greenspan (who defined Reagan era economics) regretted employing “overly-free-market-based approach” pushed by America’s far-right Libertarians arising from the Goldwater-Nixon-Reagan era.
Luckily, unlike Principia Mathematica a laymen can read and understand Smith with a little time and effort. Smith isn’t implying that bankers should take over the world and hoard money offshore so it can’t be taxed in the interest of the Plebs; he advocates the exact opposite of that, understanding that the worst of human instinct can be leveraged for the common good.
In sum, Smith’s work describes the idea that morality and self-interest found in the human condition manifest as a social benefit. “As if by divine providence” there seems to be an “invisible hand” that pushes individual self-interest toward collective social interest in a well-structured society.
When the rich have too much and don’t want to invest in other nations more than their own, then they can use capitalism to distribute resources in exchange for capital and thereby increase the wealth of their nation, unless they ship the resources to a tax haven in Panama.
Noam Chomsky on Adam Smith & Invisible Hand – americanfeud.org. How to understand the Invisible hand according to Chomsky.
TIP: People often forget about or ignore Smith’s Theory of Moral Sentiments and read the Wealth of Nations as a call for anarcho-libertarianism or unrestrained neoliberalism. Smith’s work may double as a guidebook to economics, but the overarching message is one of tempering the desire for freedom with the desire for moral virtue (arete). As if by divine providence, self-interest drives man toward social interest, but this only manifests under the right conditions (as warned about when Smith compares England to other nations including the Colonies AKA America in the Wealth of Nations section in Of the Wages of Labour and elsewhere). If one leaves out the “just society” and “moral virtue” aspects, or if one adds in factors like shipping all the money to a tax haven in Panama, or one abandons the core of Smith and is left with a much less elegant system.
TIP: The unintended social benefits of group dynamics are one thing; another thing is the actual coordination of groups under monopolies. Smith warned of factions and monopolies, and often Smith spoke subtly. He also updated his views and worked throughout his life. There is no one way to read Smith knowing what we know now in the 2010’s, so make sure to seek the insight of many scholars and commenters.