Economist of Choice

Adam Smith: the Father of Economics

Adam Smith was born in 1723, in a small village in Kirkcaldy, Scotland, where his widowed mother raised him.  In 1751, Smith was appointed professor of logic at Glasgow university, transferring in 1752 to the chair of moral philosophy.  In 1776, Smith's "An Inquiry into the Nature and Causes of the Wealth of Nations" was published, which examined in detail the consequences of economic freedom.  This outlined the role of self-interest, the division of labour, the function of markets, and the international implications of a laissez-faire economy.  Smith never married, and he died in Edinburgh, Scotland on July 19, 1790. 

The following passage is taken from Adam Smith's 1776 book called: 

"An Inquiry into the Nature and Causes of the Wealth of Nations".

"...every individual necessarily labours to render the annual revenue of the society as great as he can.  He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it.  By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.  Nor is it always the worse for the society that it was no part of it.  By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

Smith's reputation is defined by his explanation of how rational self-interest in a free-market economy leads to economic well-being.  The price of anything, guided by the "invisible hand", is determined by the mechanisms Smith describes: the law of supply (which he says creates a direct relationship between the price of a product and the amount sellers are willing to sell) and the law of demand (which he says creates an inverse relationship between the price of a product and the amount consumers are willing to by).  This explains all sorts of modern phenomena, from scientific progress to environmental degradation to the establishment of movie theaters like CINEPLEX ODEON.  The exchange of goods and services is mutually beneficial.  

Smith was an advocate of individualism, yet his first major work concentrates on ethics and charity.  He saw the main cause of prosperity as increasing division of labour.  Using the famous example of pins, Smith said that ten workers could produce 48,000 pins per day if each of eighteen specialized tasks was assigned to particular workers.  Average productivity would be 4,800 pins per worker per day.  But without the division of labour, a worker would be lucky to produce even one pin per day. 

He said each individual strives to become wealthy "intending only his own gain" but to this end they must exchange what they own or produce with others who sufficiently value what they have to offer.  Therefore, by division of labour and a free market, public interest is advanced.  Otherwise re-distribution would result.

Smith used this insight to explain why wage rates differed.  He argued that rates would be higher for trades that were more difficult to learn , because people would not be willing to learn them if they were not compensated by a higher wage.  This also included people who engaged in dirty or unsafe occupations.  His thoughts gave rise to the modern notion of human capital.  Basically, differences in work were compensated by differences in pay.  Modern economists call Smith’s insight the theory of compensating wage differentials.

Smith believed that government also had an important role to play in society, like enforcing contracts, and granting patents and copyrights to encourage inventions and new ideas.  He also thought that the government should provide public works, such as roads and bridges, but he wanted the users of such public works to pay in proportion to their use.

Smith's writings look into the science of economics and a policy guide for realizing the wealth of nations.  He believed that economic development was best fostered in an environment of free competition that operated in accordance with universal "natural laws."    

 Smith is often regarded as the father of modern economics, and his writings have been enormously influential today.

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Works Cited

http://www.adamsmith.org/adam-smith/

http://www.econlib.org/library/Enc/bios/Smith.html