1.

0 Adam Smith Biography

Adam Smith is a Scottish economist who was a pioneer in the field of

political economy and is one of the modern economics thinkers. Due to his
extensive work in economics and for being the most influential thinkers in modern
economics, Smith was awarded the title of 'Father of Modern Economics'. He
is mostly known for his book on 'The Wealth of Nations' which has become the
book of Capitalism.
He was born in a small village called in Kikcaldy, Scotland. His father, a
customs officer in Kirkcaldy, died before he was born. Loss of his father brought
Smith very close to his mother Margaret Douglas, who was the daughter of the
landed Robert Douglas of Strathedry. Although he was still young, his speaking
and writing skills were instantly recognised by his mother early on and she was
looking forward to ensure he was given the best education possible. He went to
the best schools of Scotland Burgh School of Kirkcaldy where he learnt writing,

mathematics and history.Based on his biography, it was mentioned that his

mother became the most influential person in his life.
He studied at Glasgow and Oxford Universities. He returned to Kircaldy in
1746 and two years later he was asked to give a series of public lectures in
Edinburgh, which established his reputation. Smith was a hugely influential
Scottish political economist and philosopher, best known for his book 'The Wealth
of Nations'.
For his academic capabilities, in 1751, Smith was appointed professor of
logic at Glasgow University and a year later professor of moral philosophy. This
made him part of a brilliant intellectual circle that included David Hume, John
Home, Lord Hailes and William Robertson. In 1764, Smith left Glasgow to travel
on the Continent as a tutor to Henry, the future Duke of Buccleuch. While
travelling, Smith met a number of leading European intellectuals including
Voltaire, Rousseau and Quesnay.
In 1776, Smith moved to London. He published a volume which he intended
to be the first part of a complete theory of society, covering theology, ethics,
politics and law. This volume, 'Inquiry into the Nature and Causes of the Wealth
of Nations', was the first major work of political economy. Smith argued forcefully
against the regulation of commerce and trade, and wrote that if people were set
free to better themselves, it would produce economic prosperity for all.
In 1778, Smith was appointed commissioner of customs in Edinburgh. In
1783, he became a founding member of the Royal Society of Edinburgh. He died
in the city on 17 July 1790.

Famous As

Economist and Philosopher

Nationality

Scottish, Welsh

Born On

16 June 1723 AD

Zodiac Sign

Gemini

Born In

Kirkcaldy, Scotland

Died On

17 July 1790 AD

Place Of Death

Edinburgh

Father

Adam Smith

Mother

Margaret Douglas

Married

No

Education

Kirkcaldy High School (1729 1737),

Balliol College, University of Glasgow,
University of Edinburgh, University of
Oxford

Founder/Co-Founder

Royal Society of Edinburgh

Major Works

The Theory of Moral Sentiments

(1759) How mutual sympathy was the
basis of moral sentiments.

The Wealth of Nations (1776)

Awards & Achievements

Adam Smith was conferred with the title

of Father of Modern Economics

His book, popularly known as the The

Wealth of Nations was named among
the 100 Best Scottish Books of all
time. The book came to be known as
the first modern work of economics.

Contributions

2.0 Adam Smiths Theories and Thoughts

In this paper, they are 3 Adam Smiths theories and thoughts that will be
discussed. Firstly, Adam Smith Theory of Invisible Hand , followed by Adam
Smith Theory of Paradox of Value and thirdly, Adam Smith Theory of Divison of
Labour.

2.1 Adam Smith Theory of Invisible Hand

According to Adam Smith, Invisible Hand is a self-regulating system where
individual enjoy freedom of fulfilling self-interest which eventually channel
benefits to broader society at all. He believes that free market could set up
equilibrium point for demand and supply automatically even less or without
regulation in the market. Adam Smith was critical on government intervention,
driven by fear risk of distortion in the market that leads to inefficiency.. Though,
the only favorable role the government should play based on his view, is by
providing defense, justice and public goods as he realizes that private enterprise
would discourage due to free rider problem.
Instead, let the market alone, allowing people to make transaction freely would
bring competition between traders. Since every traders aim for profit
maximization, they exploit each others greed. For example, if one seller charges
too much, others would respond it by undercut his price, thus customer will
switch to the cheaper option. To ensure they sustain in the business, competition
motivates them to searching the most efficient method on producing goods.
Given availability of variety of substitutes, consumers benefit it through lower
price and better products offering.
There is a famous quote It is not from the benevolence of the butcher, the
brewer, or the baker, that we can expect our dinner, but from their regard to their
own interest. They provide dinner to us neither they really care that we are
hungry nor of kindness but because they intend to accumulate wealth, so that
they can feed himself and family and enjoy better quality of life. Profit, in fact, is
the main driver in their business operation and the fact that this supplies us with
dinner matter little to them. Goal of pursuing individual self-interest inadvertently
make up decent outcome in form of an improved well-being condition of society.
Free market provides special reward to people for efficiency. Fair price is the
result from reflection of productivity level by factor of production. The labors
supply his/her skill and knowledge should gain natural wage as return of

involvement in production process. Land owner who supply land to make product
should gain natural rent and natural profit is return of investment in capital likes
equipment, machinery and tools. However, the gap between market price and
rate of return could exist in case of scarcity. The event creates chances for them
to raise the price and gain profit. However, since there are low barriers to entry, it
opens door to other firms and competition eventually drive the price drop to the
natural level. In the long run, market and natural rates will achieve equilibrium.
Adam Smith expressed vocal voice against formation of monopoly and cartel
collusion which could shrink competition, therefore concept of fair piece could not
realized. He argues that competitive market is characterized by a large number of
sellers compared with existence of merely one or two firms. This is because
monopoly or cartel can exploit its advantage of having economics of scale by
limiting volume of output and charge high price. Low degree of barriers to entry
and effective competition, thus, are two main features that drive price lower.
2.2 Adam Smith Theory of The Paradox of Value
Before this idea is introduced by Adam Smith, another economic scholar, Anne
Robert Jacques noted that despite its necessity, water is not seen as a precious
thing in a well-watered country (The Economics Book, p.63). Then, Smith came
with this theory to explain on why economy tend to value highly important
necessity such as water with low price compared with rarely used diamond with
high value. He distinguish two types of value exists in things around us; value of
exchange and value in use. He argues that practical thing we often use on daily
basis tend to have low or little value in ecxchange. In contrast, goods that have
greatest value tend to have little use. Concept of scarcity and marginal utility are
used to explain further this phenomenon. Scarcity is defined as avalaibility of
particular goods, services and knowledge. Meanwhile, marginal utility is level of
satsifaction gained from the last unit of the commodity consumed. People usually
are willing to pay with high price for goods that high marginal utility. Water have
little marginal utility as it is abundant while diamonds are scare and difficult to
find. Diamonds are worth more than water because each one is extremely

valuable no matter how many you have, whereas water become less valuable
per unit, as quantities increase (The Economics Book, p.63). Only if there is case
of water scarcity, for example, one person lost in desert and dying of thirst,
marginal utility of water is higher from another cup of water would be much higher
than the additional satisfaction of owning a diamond.

2.3 Adam Smith Theory of Division of labour

It can be defined as specialization of labor in which labors are assigned into
specific jobs rather than carry out full production process alone. Adam Smith
recognized gap between production of goods by a single person and when many
people are emphasized within limited scope of jobs. The concept works by
narrow down whole task of producing an item into several smaller components,
limit to one or group of person for every task.
In his masterpiece, Wealth of Nation, he used tradition pin making process
as a classic example. If a person have to carry out every step sequentially, he
probably unable to produce a pin per day. But when workers specialize in their
own task, they could produce thousands pin per day. Under this approach,
workers only have to concentrate on specific task they are instructed to do.
Repetition on same role on daily basis increases speed and skill. It saves a lot of
time and money as it eliminates the need for workers to switch task among them
during working day. Also, it allows worker to pay attention on every detail of
production process, so enhance quality of product.
However, despite efficiency this regime offers to organization, Smith admits
that it has several issues; doing the same job everyday could cause boredom
and spark dissatisfaction feeling among workers. Labors creativity is constrained
as their scope is limited according to standard and procedure the management
has set off.

To encounter this problem, Smith urged government to provide education to

workers. Through education, workers can enhance their skill and knowledge,
thus their life would not be trapped in the same level. It is important to ensure
workers are employed in role they prefer to work for and relevant with their best
skill they have. According to him, labor is considered productive only if they fulfil
these required standards; 1) it must involve in production of tangible goods and
have ability to create surplus which can be reinvested into production (Yousuf
Dhamee, 1995)
2.3.1 Criticism
b) Argument
1) Karl Marx
Karl Marx argued regarding Adam Smith theory of divison of labour. Karl Marx
is a well-known German philosopher. He lived during the progressive industrial
revolution period that took place across Europe. Karl Marx has been observing
different type of classes that exist as result of free market system operation.
Those two classes are capitalists and proletarian. Capitalists are the owner of
factor of production; capital, labour and land and use it to operate business and
investment purpose to gain profit. Meanwhile, proletarian is the group of people
who have nothing but sell their labour to earn wage in for survival.
In social structures hierarchy outlined by Marx, capitalists consists few people
who belong to the top of hierarchy while majority of people fall into category of
proletarian which placed at the bottom of hierarchy. He criticizes suppressing
force of capitalism system that exploit proletarian disadvantage. Due to absence
of means of production but labor, they are forced to sacrifice their whole life to
work intensely for survival while capitalists keep accumulating wealth without
addressing this inhumane condition endured by proletarian. He believes that
class conflict between capitalist and proletarian would take place eventually.

During Industrial Revolution, capitalist used division of labor as a method to

enhance productivity. Karl Marx acknowledges the power of this idea, but he
claimed that it was necessary evil. He coined the term of alienation. The
division of labour is responsible, for a whole number of alienating separations
between mental and physical labour, between town and country, between
workers and capitalists, between rulers and ruled (Dr Peter Critchley, 2001).
As people keep doing the same thing repetitively in alienated production, the
labors feel isolated in their own world and powerless to change this situation.
Rigid work structure makes workers treated like a machine, thus end up workers
with low skill and loss enthusiasm in a stagnant way. Alienation blocks interaction
between individual and community and degrade human growth. Limitation on
fixed task has been a great barrier for individual development process. Thus, for
Marx, fragmented social classes resulting from virtual slavery in form of division
of labor serves as a destruction tool of human race unity.
2) Ha Joon Chang
Adam Smith recognizes the power of self-interest by saying that it is not from the
benevolence of the butcher, the brewer, or the baker, that we can expect our
dinner, but from their regard to their own interest. Based on Smiths vision, even
though selfish trait is viewed as bad moral behavior, but when people act to
pursuit their own self-interest, it can actually benefit to society without people
realize it. A South Koreans economist who also a lecturer in Cambridge
University criticize this idea by insisting that self-interest is not the only human
motivation in economic routine but also driven by other moral principle includes
honesty, respect, loyalty, sympathy, sense of accountability, love, patriotism and
so on. Indeed, if the world were full of the self-seeking individuals found in
economic textbooks, it would grind to a halt because we would be spending most
of our time cheating, trying to catch the cheaters, and punishing the caught (Ha
Joon Chang, 2010). The fact is that in any organizational management approach,
there is no suggestion that the organization should keep questioning its
employees commitment; instead they put trust in them, provide necessary

guidance, and encourage sense of belonging among workers. This inspires

workers to contribute more than what they are instructed to and build loyalty for
the sake of the organization. During Industrial Revolution that occurred in 19th
century across Europe, capitalists prefer aggressive tactic by forcing their
workers to toil for long working hours which they believe it can maximize their
output. However, the expected outcome did not emerge. Yet, the loss of freedom
and self-esteem came with negative respond of workers by which they become
more passive, less work enthusiasm, and absence of cooperation with employer;
the capitalists. Due to this event, various school of management thought started
to acknowledge importance of good communication between employers and
workers in order to extract the best out of workers. Japanese production system
is the best management model in this field. In the Japanese system, workers are
given a considerable degree of control over the production line (Ha Joon Chang,
2010). They also are given opportunity to make recommendation on how to
improve companys performance and offer space for creativity personal
development. This model is a Japanese success story of organizational
management in boosting production efficiency and maintaining its high standard
of its output. This reality encounters Smiths idea by revealing that even moral
driven human characters can actually benefit to firm and society.
3) Joseph Stiglitz
Adam Smiths supporters believe that market need to liberalized to ensure its
efficiency and lead to prosperity of society. From their perspectives, government
intervention is an unnecessary mechanism that distorts the efficient use of
resources and its distribution. In this modern era, free marketer urge the needs
for deregulation and have created various innovative financial products that lower
risk taking and open opportunity for society to gain profit from investment and
business. They believe that market can work at its own best and have ability to
autocorrect its blunder. High degree of government involvement in the market
can serve as a hindrance of profit maximization, thus discourage people to
innovate and invest. As result, market growth tends to slow.

This Nobel Prize Winner in Economics Science argue that Invisible Hand often
seem invisible is that is often not there. He opposed the myth of free marketer.
His argument is that the government should not be eliminated totally from the
market, but instead, there must be balance between the role of market and role
of government. He uses China economy growth model to explain this
relationship. He observes China as a copy of American form of capitalism. Like
United States, problems that China faces today as the result from excessive
freedom of market and little government role. China has high income inequality
as corruption among public and private institution has been not unusual thing.
This situation is just same as United States experienced. The fact is that Chinese
economy is heavily depends on export industry and private consumption.
Uncontrolled opening of industrial factories without clear law on environmental
preservation has cause severe pollution problem in China which is not just affect
its people standard of living but worsening global warming problem due to high
carbon emission. Environmental pollution is recognized as a form of market
failure; negative externalities in which harmful effect suffered by third party when
external cost from production process is passed onto society. Since the cost is
not compensated by the responsible party, market fails to work well. Declining in
environmental quality and living standard means a clear sign for the government
to play its role to overcome this problem. It must place health care as the top
priority. China must avoid using the same American health care system because
of its inefficiency. Since medical service in United States also mostly privatized
and subject to profit motive, it becomes unaffordable for many people. The latest
development sees that the Chinese government has started to expand its public
health care service which emphasize in rural area. This is a big step taken by the
government, indicates its awareness that not all sectors should be left to the
market especially involving human necessities such as health care.
In addition, Joseph Stiglitz also observes that individualism started to offset
sense of morality. In his view, todays society becomes too materialistic, mainly
driven by rising in purchasing power among consumers. In turn, excessive

consumption leads to wastage and abuse of economic resources. Speedy

economic growth is a good thing, but could create other problems in future if the
growth is not in line with environmental and social sustainability. Individualistic
trait has caused people to reach their goal no matter what even at the expense of
other people. Taking advantage of other people is seen as a short cut way for
personal gain. Almost every day has brought stories of bad behaviour by those in
the financial sector Ponzi schemes, insider trading, predatory lending, and a
host of credit card schemes to extract as much from the hapless user as possible
(Joseph Stiglitz, 2010). Financial crisis that happen global worldwide in 2008 has
brought free marketer down to earth to rethink and reconsider the role of morality
in the market. In fact, all financial players were self-seeking agents to be blame
for the cause of financial crisis. It is apparent that pursuit of self-interest did not
lead to societal well-being as expected by Adam Smith.