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Adam Smith (1723-1790)

Adam Smith (1723-1790) was a philosopher and economist, who came to be known as the “father of modern economics” through his main piece of work ‘An Inquiry into the Nature and Causes of the Wealth of Nations’.

Table of Contents

Life

Smith was born in Kirkcaldy, Scotland. His father, also named Adam Smith, was a lawyer and civil servant who married Margaret Douglas in 1720 and died two months after Smith was born.

Smith first developed an interest in ideas of liberty and freedom while studying moral philosophy at the University of Glasgow and the University of Oxford; his experience at Oxford leading to a personal distaste for British education. Through a series of public lectures at the University of Edinburgh in 1748, he met lifelong friends David Hume who appointed Smith professor of Logic at Glasgow University in 1751. The next year he took the Chair of Moral Philosophy and published some of his lectures in ‘The Theory of Moral Sentiments’.

In 1764 he left academia in Britain to tutor a duke in Switzerland which brought him into contact with renowned European academics, such as Voltaire and Rousseau. The income he received from tutoring allowed him retire, giving him time to write his most famous piece, the ‘Wealth of Nations’ before re-entering employment as the commissioner for commerce in 1778. In this role Smith found himself enforcing the law against smuggling, something which conflicted with Smith’s personal philosophy.

Smith died in 1790, lamenting that he had not achieved more in his life.

Key ideas

According to Smith, man is self-interested and self-commanding, and seeks to further his own ambitions. But through these intentions, unknowingly to the individual, he also benefits society as he must produce something others value in the marketplace. This is despite their actions having no benevolent intentions. Smith called this “the invisible hand of the marketand is the foundation of a laissez-faire economy unimpeded by government intervention.

Smith proposed that a nation’s wealth should be judged not by its store of bullion, as was the case under the mercantile system at the time of his writing. A nation’s wealth should be judged by the total of its production and commerce, and to increase production and commerce a nation must specialise.

He explored theories of the division of labour and the improvements it brings to the skill of the individual, its ability to save time and the impact this had on productivity and with it prosperity. A nation’s wealth is therefore the result of extensive division of labour.

Another key idea of Smith’s is his canons of taxation. These are four principles that should be considered before setting up a tax:

  • Economic – a tax should be simple and cheap to collect so that the revenue is maximised compared to the cost of collection
  • Equity – a tax should be fair; based on the ability to pay (vertical equity) and people of the same income pay the same amount of tax (horizontal equity)
  • Certainty – taxpayers should understand how the system works, what to pay and when
  • Convenience – payment and timing of tax should be suited to the taxpayer

Legacy

Smith’s legacy is impressive for both its longevity and its impact. All subsequent writings on economics have been influenced in some way by Smith from a range of economists from David Ricardo, Milton Friedman, John Maynard Keynes and even Karl Marx!

Smith’s idea of specialised division of labour and its impact on production, alongside his opposition to mercantilism, allowed others to develop more detailed analysis on free trade such as Ricardo’s comparative advantage theory.

While noted that Smith didn’t invent many of the ideas that he wrote about, he was the first person to compile and publish them in a structured format. As a result, he is responsible for popularizing many of the ideas that underpin the school of thought that became known as classical economics. This said, there is debate over Smith’s reputation as a symbol of laissez-faire. Smith’s ideas have formed the basis of economics and are remembered even to this day – you only have to turn over a £20 note to see his lasting importance.

The wide consensus on his importance to the foundation of economics has earned Smith the title of ‘father of modern economics’ and for this reason alone Smith is arguably the most important economist in the history of the discipline.

Milton Friedman (1912-2006)