Modern economics was by no means born in the mind of a single individual, but probably no one is more deserving of the title “founder” than Adam Smith. Smith was a Scottish philosopher of international fame even before he published An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. This enduring work attracted widespread attention and helped to establish economics as a field of study apart from moral philosophy.
A lifelong bachelor possessing notable personal idiosyncrasies, Smith once described himself to a friend as “a beau in nothing but my books” Shortly before his death Smith, a prolific writer, supervised the burning of his unpublished manuscripts, which ran to sixteen large volumes. However, his major published works, Theory of Moral Sentiments (1759) and the Wealth of Nations are literary classics.
Smith's Wealth of Nations was encyclopedic, masterfully covering and extending the then current knowledge of economics. His book served as the starting point for practically every major economic treatise until 1850. The Wealth of Nations provided (a) an impressive collection of economic data gleaned from Smith's wide reading of history and his keen insights into human affairs; (b) an ambitious attempt to explain in detail the nature of economic processes in an individualistic, or “market,” society; and (c) a radical critique of existing society and government.
Smith argued strongly for national policies of nonintervention in economic matters. A major point of his argument is that economic freedom is an efficient way to organize an economy. He made the model of the marketplace the centerpiece of his economic inquiry. Decisions freely made by buyers and sellers are coordinated in the marketplace by what Smith called the invisible hand of competition. Competition harnesses the driving force of self-interest and harmonizes it with the public interest, yielding increases in national wealth.
The really fresh idea in Smith's argument is that the public interest is served best not by those who intend (or pretend) to promote it through governmental regulation but rather by those who actively seek their own gain without regard for the public interest. Economic competition compels self-interested merchants to serve consumers' interests better if they are to increase their sales and gain advantage over rival sellers. Monopoly, on the other hand, is destructive of the public interest because it restricts output and forces prices up. In Smith's day, the existing monopolies were created and sustained by government; hence, Smith called for minimal economic roles for government.
Quotes from Smith
“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.” [Wealth of Nations]
“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.” [Wealth of Nations]
and, from the Theory of Moral Sentiments:
“Let us suppose that the great empire of China, with all its myriads of
inhabitants, was suddenly swallowed up by an earthquake, and let us consider
how a man of humanity in Europe, who had no sort of connexion
with that part of the world, would be affected upon receiving intelligence of
this dreadful calamity. He would, I imagine, first of all, express very
strongly his sorrow for the misfortune of that unhappy people, he would make
many melancholy reflections upon the precariousness of human life, and the
vanity of all the labours of man, which could thus
be annihilated in a moment. He would too, perhaps, if he was
a man of speculation, enter into many reasonings
concerning the effects which this disaster might produce upon the commerce of
“And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquility, as if no such accident had happened.
“The most frivolous disaster which could befal himself would occasion a more real disturbance. If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own.
“To prevent, therefore, this paltry misfortune to himself, would a man of humanity be willing to sacrifice the lives of a hundred millions of his brethren, provided he had never seen them? Human nature startles with horror at the thought, and the world, in its greatest depravity and corruption, never produced such a villain as could be capable of entertaining it. But what makes this difference? When our passive feelings are almost always so sordid and so selfish, how comes it that our active principles should often be so generous and so noble? When we are always so much more deeply affected by whatever concerns ourselves, than by whatever concerns other men; what is it which prompts the generous, upon all occasions, and the mean upon many, to sacrifice their own interests to the greater interests of others?
“It is not the soft power of humanity, it is not that feeble spark of benevolence which Nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self-love. It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration.
“It is from him only that we learn the real littleness of ourselves, and of whatever relates to ourselves, and the natural misrepresentations of self-love can be corrected only by the eye of this impartial spectator. It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the smallest injury to another, in order to obtain the greatest benefit to ourselves.
“It is not the love of our neighbour, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own characters.”
The Invisible Hand
“...But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; 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. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it...” [Wealth of Nations]
The Wealth of Nations: Product and Income
“The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.
“According therefore as this produce, or what is purchased with it, bears a greater or smaller proportion to the number of those who are to consume it, the nation will be better or worse supplied with all the necessaries and conveniences for which it has occasion.
“But this proportion must in every nation be regulated by two different circumstances; first, by the skill, dexterity, and judgment with which its labour is generally applied; and, secondly, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed. Whatever be the soil, climate, or extent of territory of any particular nation, the abundance or scantiness of its annual supply must, in that particular situation, depend upon those two circumstances.
“The abundance or scantiness of this supply, too, seems to depend more upon the former of those two circumstances than upon the latter...”
[Wealth of Nations]
Division of Labor
“The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour...” [Wealth of Nations]
Author: Ralph Byrns
Economics instructors and students are hereby granted provisional permission to use these materials for educational purposes only. Commercial use of any of these materials is forbidden. Withdrawal of this permission may be announced at this site without notice, and these materials may not be used thereafter without written permission.