ADAM SMITH

Father of economics
Scottish Moral Philosopher & Economist
(Baptized June 5, 1723 Kirkcaldy, Scotland. – died July 17, 1790,
Edinburgh)
 Introduction
Social and Moral Philosopher and a Political Economist

Major Works:
 The Theory of Moral Sentiments (1759)
 An inquiry into the nature and causes of wealth of
nations (1776)
Foundation Stone of Political and Social Evolution

Lectures on : Philosophy, Government, Law & Economics

Professor at Oxford University and University of

Glasgow
 Famous
Adam Smith was famous for his two
books namely
1 ) The Theory of Moral Sentiments
published in 1759 based on the social
relationship and explain the sources of
mankind and ability of moral Judgments.
2) The Wealth of Nations published in
1776 regarded as Smith most famous
work.
 Early Life
Elementary Schooling in Kirkcaldy

At the age of 4 he was carried off by gypsies

At the age of 14 Entered University of Glasgow

Influenced by Francis Hutcheson (Scot-Irish philosopher

and major exponent of the theory of the existence of a
moral sense through which man can achieve right action)

Got a Scholarship (i.e Snell Exhibition) of Oxford

University
 Early Life
Started delivering public lectures in Edinburg after
returning from Oxford

Subjects: Rhetoric, History, Economics etc.

Appointed as a professor of Logic at Glasgow when he

was 27

In 1752 he was transferred to “moral philosophy” (a

combination of natural theology, ethics, jurisprudence and
political economy)
Glasgow
Happiest and honourable period of Smith’s life

Lectures and University Affairs

Appointed as a Dean in 1758

Evenings were spent in Society of Glasgow

Company with Aristocrats, Scientists, Government

Officials & other intellectuals:
Joseph Black Pioneer of Chemistry
James Watt Famous for Steam Engine
Robert Foulis Publisher
The Theory of Moral Sentiments
(TMC)
Didactic, Exhortative, Analytic in Nature*

It lays the psychological foundations for later work

Describes the principles of “human nature”

It was taken as a universal & unchanging datum from which

social institutions & behaviour could be deduced

Long debates about the conflicts between the TMC & later
works of Adam Smith
* Didactic: Intended to teach with moral instructions,
Exhortative: Motivational, Analytic: Using logical reasoning
The TMC Cont. . . .

Question in TMC that attracted attention of

Philosophers:

“The “source” of the “ability” to form

“moral judgments”; including the
judgments on one’s “own behavior”, in
the face of the seemingly “overriding
passions” for “self-preservation & self-
interest””
The TMC Cont. . . .
Smith’s Answer: “The presence of
an “Inner man” who plays the role
of “impartial spectator”, “approving
or condemning” “our own & others’
actions” with a voice “impossible to
disregard.”
 Adam Smith

Author of An Inquiry into the

Nature and Causes of the
Wealth of Nations
 The Wealth of Nations
In his book he emphasis on
1) Free Trade : it is the Principle of
liberalism. Its mean straightforward flow
of products and minimum help of
Government.
2) limited Government influence between
business and individuals.
An Inquiry into the Nature and Causes of
the Wealth of Nations.

• Four Stages of Society:

1. Hunters
2. Nomadic Agriculture
3. Feudal Farming
4. Commercial
Interdependence
• Laissez-faire Capitalism
Wealth of Nations cont….
The Philosophy of Smith in Book is:

Focused on “human nature”

Driven by the “desire for self-

betterment”

Guided by “Faculties of Reason”

 Adam Smith
•Private property -
Individuals have the
right to own physical
objects (and
sometimes people!) as
private property to the
exclusion of others
 Adam Smith

• Invisible Hand –
Assumptions:
–Our preferences are
consistent
–We act based on self-
interest
–Individual Good adds up to
Social Good
 THE INVISIBLE HAND

Supply and demand always u s e s prices and

profits to signal to producers that society
required. T h u s producers, in search o f profits,
p r o d u c e what society requires - in t h e correct
quantity and at a competitive price.

Too little o f a g o o d pr oduc ed for society - high

demand for low supply leads to high profit from
high prices s o attracts more effort into
production and vice versa until at ‘equilibrium’
Invisible Hand (Explanation)
• Capital flows from less profitable to more profitable
businesses or areas or occupations
• Competitive mechanism continuously forces the
prices to stay at the natural levels despite short-run
aberrations
• Wages, Rents and Profits (Factors of cost of
Production) are also subject to the same self
interest and competition
• Smith provided a rationale for these natural prices
and also revealed an orderliness in the distribution
of income (i.e. wages for workers, rents for
landlords and profits for manufacturers)
Invisible Hand (Self-interest)

One of the greatest contributions of Adam Smith

was the invisible hand theory which he used to
demonstrate how self-interest guides the most
efficient use of resources in a nation’s economy,
with public welfare coming as a byproduct .
According to Adam Smith, self-interest should not
be denied. In the ‘Wealth of Nations’, he asserts
that self-interest in the market is to encourage
the growth of society through the division of labor
and the maximization of wealth. For him, self-
interest is enough to motivate the exchange of
goods.
 Self-Interest and the Society

• Individuals are largely, but not completely, motivated

by self-interest. But because humans have within
themselves a capacity for sympathy, they generally do
not pillage at will. Nonetheless, humanity’s
sympathetic capacities are limited, and are socially
more useful in restraining wicked actions than in
compelling virtuous ones

• For this reason, Smith notes that society is more

likely to condemn a malicious character than it is to
castigate merely a non-praiseworthy one
 Self-Interest and the Society

• Because individuals constantly seek to better their

condition, they will continually direct resources to
higher and better uses, if they are allowed to do so.
This will result not only in their personal advantage,
but in the advantage of others

• A free market enables individuals’ significant self-

interest to exercise itself within the limits established
by a government that restrains people from performing
positively bad actions
 Self-Interest and the Society

• Smith famously states: “Man has almost constant

occasion for the help of his brethren, and it is vain for
him to expect it from their benevolence only. He will
be more likely to prevail if he can interest their self-
love in his favor, and show them that it is for their own
advantage to do for him what he requires of them... 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”
 Self-Interest and the Society

• Smith’s famous analogy for the thesis that people, if

left alone, will produce not only their own greatest
good, but the good of all, is “the invisible hand”
(Example of the butcher and baker)

• In The Wealth of Nations, Smith states that – in a

free economic system – an individual is “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”
 Adam Smith

•Laissez-faire - The
government should not
interfere with economic
matters
 Adam Smith on Government

• In his day, the major goal of social philosophers

was to reduce the extent of government and
custom in all areas
• Government at that time produced much
inefficiency and waste though poor taxation
practices, misdirection of resources, and over-
regulation
of the economy and society generally
• Political liberty and economic laissez faire are
thus related
 Adam Smith on Government

• Smith, like most Marxian analysts, holds that the

economic structure of society will precede its political one
• He states, “Commerce and manufactures gradually
introduced order and good government
• It is when individuals have something worth preserving
that they will institute a political system that will protect it
• The appropriate role for government is to provide a
stable social framework within which “the uniform,
constant, and uninterrupted effort of every man to
better his condition” can be realized
 Adam Smith

•Division of Labor
- Economic output is
maximized when production tasks
are divided amongst various
workers with specialized skills
4) Division of Labor
The division of labor mean the division
of work refers to the division of a large
task. It mean the specialization of
cooperation Individuals who perform
specific tasks and roles.
Division of Labor and the Wealth of
Nations
• The great advantage of free domestic and foreign markets is that
they expand individuals’ abilities to specialize, and it is through
SPECIALIZATION that the wealth of persons and nations really
increases
• Among Smith’s most important concepts, following his emphasis
on the importance of free markets, is that as a productive enterprise
becomes more complex, it generally can produce far more output
(Example: the pinmaker)
• The DIVISION OF LABOR is a fundamental component of
economic growth to Smith, and it is this division which – more than
any other single factor – allows the wealth of nations and persons to
develop
• In a primitive state of society, an individual’s productive capabilities
are extremely limited – to what a person can only directly produce
 Labor as the Source of Value

• Following Locke, Smith sees labor as the ultimate source

for all value: “Labor... is the real measure of the
exchangeable value of all commodities.” (Except in the
case of goods that are naturally scarce like diamonds)

• Smith considers that wages of labor to vary based on five

components: 1) the agreeableness of the employment, 2)
the difficulty in learning it, 3) the constancy of the
employment, 4) the amount of trust required by it, and 5)
the probability of success in it
Division of Labor and the Wealth of
Nations
• The division of labor requires, further, a free market in order to be
most effective. Where there is a closed market (either at home or
abroad), or monopolies or guilds control productive practices,
inefficiencies can result, and often do
• Individuals’ self-love will lead them to use the system for their
personal advantage to the detriment of all, if the system allows them
to
• A free market in labor and capital always directs resources to be
used exclusively by those who manage them optimally and provides
the rewards necessary to encourage innovation and technical
advance. Inefficient practices and producers will lose work. If this
means that some producers go out of business or some workers
must shift occupations, “the interest of the producer ought to be
attended to only so far as it may be necessary for promoting that of
the consumer”
Human Nature & Philosophy of Smith

 Wealth of Nations would grow if individuals

grow laissez-faire
 System of “Natural Liberty” not mercantilism
or monopolies
 Merchants & Manufacturers are neither are;
nor ought to be the rulers of mankind
 Intellectual degradation resulting in
commercial division of labour
 Adam Smith on Human Nature

• His assumptions about human nature are

uncomplicated and representative of the British capitalist-
utilitarian era
• He believed that human beings are at root individualistic
• The reference point is that of the sympathetic, impartial
spectator
• According to him, human beings are autonomous,
independent entities who may interact either more or less
successfully
• Human life has no set, predetermined, or inescapable
goal or purpose
 Adam Smith on Human Nature

• Humans will interact most successfully if they live

in a society of economic freedom: individualistic
philosophies tend to emphasize what people can
do as individuals, not what they can do as groups

• Smith prefer more economic questions like

whether a person may trade, establish an
enterprise, or enter an occupation
 Adam Smith

•Freedom of Trade

– Businesses and
governments should be
allowed to trade freely
(meaning without tariffs)
around the world
 Adam Smith

Liberalism and modern economics

 Related concepts to Adam Smith
• Laissez-faire
• Free market economy
• Capitalism
• Economics
• Self-interest
• Individualism
• Classical economics
• Microeconomics – theory of firms
• Public goods – “lighthouse”
• Industrial revolution
Economic Growth & Smith
 Division of Labor Output Efficiency
 Examples of a Pin Factory
 Accumulation of Capital/Stock for wages, costs,
machine & tools
 Division of Labor makes individuals stupid
 Division of labor, Labor Supply, Wages & Mortality
Rates are closely related
 Against Monopolies, Mercantilists and
Accumulation of Wealth
 THE MARKET
Society can d e p e n d on unregulated capitalist markets
rather than tradition or authoritarianism

Self interest (guided by profit) motivates p e o p l e to

perform tasks required by society (what p e o p l e are
willing to pay for)

Competition regulates gr eed i.e. over chargers lose to

t h o s e that charge cheaper, even for wages

T h u s pursuit o f self interest leads to communal

prosperity
D e p e n d s on f r e e d o m to pursue self interest and
compete
 GROWTH
Division o f labour (splitting up a task) allows workers to
specialize in niches (leading to productivity, innovation
etc.)

Growth c o m e s from t h e above

Wealth = fr e e d o m + trade + division o f labour

Freedom - pursuit o f self interest

Trade - allows competition and global cooperation

for division o f labour; against mercantilism
MARKET IS PROSPERITY

Market will work for societal g o o d if left alone

(‘laissez faire’ from French Physiocrats)

Guided by laws o f ‘invisible hand’ rather than iron

fist

Capitalism today is unlike his ideal model -

with less competition from monopolies,
large unions etc.

L e s s f r e e d o m and trade leads to less

prosperity
MORE LAWS OF PROGRESS
Law o f accumulation - profits will b e s p e n t for
expansion until higher demands for wages
makes profit margins thin and disappear

Law o f population - labour is s ubjec t to

demand; as wages rise, more p e o p l e will
enter t h e workforce (e.g. through birth rates)
and vice versa

Increased population increases worker supply

s o lower wages and higher profit - laws counter
balance for harmony
 LEGACY

Formalized e c on o mi c thinking - p res e nte d b o t h

sides whilst giving evaluative factors, th e n
argued for his opinion on t h e b e s t means for
prosperity

Optimism in dynamic progression o f society

Long discussions and digressions on

prominent e c o n o m i c t h e m e s o f his day
 TOP QUOTES
It is not from t h e benevolence o f t h e butcher,
t h e brewer, or t h e baker that we e x p e c t our
dinner, but from their regard to their own
interest.

N o society can surely b e flourishing and happy,

o f which t h e far greater part o f t h e m e m b e r s
are p o o r and miserable. To feel m u c h for o th e r s
(is) human nature.

All money is a matter o f belief.

On t h e road from t h e City o f Skepticism, I

• Youtube Video: Turning Points in History-
Industrial Revolution
• Industrial Revolution Overview
• [Link]
/videos?view=0
 Industrial Revolution
• Historical Context: Industrial Revolution (1760-1840) in
Britain
• Industrial revolution is perhaps the most important
part that has shaped the modern age
• Discovery of the new world and antiquity helped create
a more secular European civilization
• The Protestant Reformation emphasized Individualism
and that individuals should be free to play more of a
role in controlling their earthly, as well as their eternal,
destiny
• In politics, change was represented by the English,
American, and French revolutions
 Mercantilism
• Mercantilism – the economic outlook during the
discovery of the New World
• Under this system, the hoarding of gold and silver was
the primary economic goal, colonies were extremely
valuable, the import of finished goods (which had to be
paid for in gold and silver) was undesirable, and the
export of finished goods (for which gold and silver
would be received) was highly desirable (balance of
trade).
• The government had a “big hand” on the political
economic activities of the times
• To facilitate these policies, nations adopted tariffs and
bounties (subsidies to exports)
 Economic freedom
• Through the advent of the industrial revolution and Protestantism,
a greater appreciation for the individual (instead of the Church and
the State) and this life (instead of the afterlife) had been attained
• Slavery (at least of the Europeans) became illegal and economic
advances had to be facilitated through technical advances. There
was no industrial revolution in the ancient times because of the
existence of slavery, which allowed the higher classes to have an
affluent life-style without technical innovation
• In a very real sense, machines are modern slaves – and machines
(unlike slaves) can be made available to everyone, not just the rich
• Wealth and its creation has, since then, been looked upon as great
social and personal goals
 Adam Smith

• Considered to be the apostle of capitalism

• He systematized, summed up and explained the political

economic order that was emerging during the industrial
revolution

• The essential element in Smith’s philosophy is his

concentration on the importance of a FREE MARKET in
ensuring the HIGHEST QUALITY of goods at the LOWEST
PRICES
Free Markets and the Wealth of
Nations
• Free markets allow all individuals in an economy to
improve their conditions: this collective improvement
by individuals equals national improvement – the
wealth of nations
• In its emphasis on the wealth of a nation being
nothing other than the wealth of the members who
make up the nation, Smith’s philosophy is
individualistic. It furthers political theories that
emphasize the individual, and proclaims the worth of
each individual. Although in a very different way,
Smith, like Marx, finds men and women’s purpose in
work
 Production through free trade

• Anything that restricts individuals’ abilities to

conduct transactions of all sorts is a hindrance to
production. If apprenticeship laws and customs
restrict the number of producers in an economic
endeavor, then this is a restriction on the market.
Similarly, if trade between nations is curtailed, then
specialization will not occur to the extent that it
otherwise would, resulting in inefficiency
 Production through free trade

• Smith’s great target of opposition was mercantilism.

This precapitalist phase of economic development
saw rivalry between nations – fostered by discovery
and colonization of the New World – as inerradicable.
Rivalry was both on a territorial and commercial
basis. Each nation considered its own interest, in a
balance of trade condition, to be possession of as
much gold and silver as possible
• Smith’s appraisal of mercantilism was that “the
interest of the consumer is almost continually
sacrificed to that of the producers”
 Production through free trade
• Smith was emphatically opposed to any restraints on
foreign trade that were the result of mercantilism. He
considered this to result in both a nation – and its competitor
– being worse off
• Wherever the market is restricted, there is not the same
possibility for specialization, and this is what allows maximum
economic production (Example: Two-nation economy of cars
and food)
• Smith sees a natural harmony of interests that results when
freedom is society’s governing principle. This implies, broadly
speaking, a pacific policy in foreign relations, as well as
domestic policies of economic non-inteference and political
liberty
 Production through free trade
• Smith opposed restrictions on trade (like tariffs) within
nations and between them. He was, however, no defender of
what would later be called “big business.” Along these lines,
he wrote, “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”
• His solution to monopolies fostered by government was
freer exchange through diminished government
• In general, people will benefit more from a general principle
of non-interference by government than from a principle that
allows interference, because there is no telling what the
interference will be or whom it will benefit
 Adam Smith on Justice

• Like Hume, Smith grounds justice in property:

“Commerce and manufactures can seldom flourish long

in any state which does not enjoy a regular
administration of justice, in which people do not feel
themselves secure in the possession of their property, in
which the faith of contracts is not supported by law, and
in which the authority of the state is not supposed to be
regularly employed in enforcing the payment of debts
 Government’s Role

• Smith was not completely opposed to government,

though he saw a limited role for it.

• The three functions that he allowed government are:

1) national defense; 2) administration of an impartial
system of justice; and 3) facilitation of certain public
works and institutions that are beneficial to society
(particularly in furthering commerce), but whose
nature does not lend themselves to being performed
by individuals
 Government’s Role

• Concerning the non-defense and non-judicial

functions of the government, Smith saw these as
essentially two:

1) Public works such as bridges, roads, and canals

that are (or were) too expensive for individuals to
construct

2) Some support for education for education would

ward off some of the negative side effects of
modernization
 Government’s Role

• On taxation, Smith propounds four principles:

1. Taxation should be proportionate to income;

2. Its amount should be certain for the payer(and not
arbitrary);
3. Its payment should be at a time when it is
convenient for the payer; and
4. It should be of a nature that is uncostly to
administrate
Final Years of Life

 Wealth of Nations received recognition

 Appointed as a commissioner of Customs
Duty for Scotland
 Well off in the final years of life
 Spent time in Edinburg with occasional visits
to Glasgow & London
 Died at the age of 67
 Buried in church yard Cannon Gate with a
monument “Adam Smith Author of Wealth of
Nations”
THE END