Wealth

Part 13 - Adam Smith

In the first modern work of economics, Adam Smith (1723 - 1790) introduced his theories about the "invisible hand" of economic liberalism, free markets, competition and specialisation of labour. His ideas, of how rational self-interest and competition could eliminate poverty and lead to economic prosperity, had considerable influence on the Industrial Revolution that turned Britain into the 'workshop of the world' in the 19th century.

Adam Smith described the economic system of the market economy (capitalism) in two books, The Theory of Moral Sentiments (in 1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). The second book made his name as "The Father of Economics." Centuries later both books are as relevant as ever.

Today however, politicians and much of the voting public, ignore Smith's writing. His warnings, for example, about the conceit of central planning go unheeded. 'The statesman who should attempt to direct private people in what manner they ought to employ their capitals,' Smith wrote in The Wealth of Nations, 'would assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.'

Adam Smith described the, 'man of the system' who 'is apt to be very wise in his own conceit' and 'enamoured with the supposed beauty of his own plan of ideal government.' Such a person 'seems to imagine that he can arrange' peoples lives with as much ease as arranging pieces on a chessboard.

On trade, Smith warned of the danger of government control and defended free trade. In order to make profits businesses have to produce things people want to buy. In a free market people wanting to serve their own interests must promote the public interest. Today, many politicians, who pay no price for their mistakes, demonstrate their incompetence by directing our financial affairs. The results of this is more waste, a less productive economy and a lower standard of living.

After an education at the University of Glasgow and at Balliol College, Oxford, Smith travelling throughout Europe where he impressed the philosophers Immanuel Kant and Voltaire and was greatly influenced by François Quesnay and Jacques Turgot (known as French Physiocrats) who were promoting a relaxation of trade barriers and laissez-faire (literally leave to do) economic policies.

Smith also spent considerable time in Britain with influential thinkers including, David Hume, James Watt (who revolutionized industry with improved steam engines), philosopher and statesman Edmund Burke, Prime Minister Frederick (Lord) North, Prime Minister William Pitt the Younger, geologist James Hutton and chemist Joseph Black.

Adam Smith and David Hume, observing that some people were miserably poor while others were wealthier, wondered which moral, cultural, political and economic institutions contributed to human prosperity and allowing people to rise out of poverty. 

 Smith noticed that while a businessman was concerned only with his profit he nevertheless benefited society by providing goods or services at reasonable prices. '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.'

'As every individual . . . generally, neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security; and intends only his own gain. So, he 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'.

Smith, was impressed by François Quesnay's ideas that unproductive labour did not contribute to growth and added that productivity could be further improved by increasing the division of labour. This would lead to reduced prices, thus 'increasing the standard of living—"general plenty" and "universal opulence"—for all'. 

Smith argued that while competition in the free market benefited society by keeping prices low, nevertheless, he warned of "conspiracy against the public or in some other contrivance to raise prices".

Smith was strongly opposed to government giving special protections or privileges to businesses and repeatedly warned that business owners tended to form cabals or monopolies to fix higher prices. Also, business-dominated political systems would allow businesses to conspire against consumers. Therefore, any proposed law or regulation of commerce should never be adopted without 'carefully examination, with the most scrupulous and suspicious attention'.

Smith understood that, for any society to survive and prosper, peace and justice were essential. Governments should protect citizens from invasion and not permitted them to harm others, either directly or by refusing to honour a debt. 

 He also argued that it was the duty of government to erect and maintain, 'certain publick works and certain publick institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense . . . though it may frequently do much more than repay it to a great society.'

Adam Smith noted that free markets were self organising systems, like language, and required no designer. Ecosystems, including all life on Earth, were also spontaneous self organizing systems; an observation that greatly influenced Charles Darwin.