Every individual endeavors to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led [as if] by an invisible hand to promote an end which was not part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.
Adam Smith, Wealth of Nations (1776)
Modern economics is by no means the product of a single mind, but no one has a better claim to the title of "Father of Economics" than Adam Smith (1723--1790), a Scottish philosopher who was renowned even before he published An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. The international attention given to this work helped establish economics as a field of study apart from moral philosophy.
The eccentric Smith was a lifelong bachelor who described himself as "a beau in nothing but my books." He burned sixteen lengthy manuscripts shortly before he died, but his published remains are literary classics. Smith's Wealth of Nations spanned the spectrum of the then current knowledge of economics and was a starting point for virtually every major economic treatise until 1850.
This work provided: (a) an impressive array of economic data gleaned from his wide reading of history and keen insights into human affairs; (b) an ambitious attempt to detail economic processes in an individualistic society; and (c) a radical critique of existing government policies. Smith advocated replacing government activities with laissez-faire policies in most economic matters.
Laissez-faire theory greatly differed from mercantilism, the conventional wisdom of Smith's era. Among other policies, mercantilism supported (a) imperialism in an era when European monarchs competed to colonize the rest of the world, (b) grants of monopoly by government to private firms, and (c) import restrictions, because it was erroneously thought that countries gained power by exporting goods in exchange for gold. Smith exposed the fallacy of protectionist trade policies by pointing out that the real "wealth of a nation" consists of productive capacity and the goods available for its people–not shiny metal.
Smith strongly dissented from the interventionist policies prevalent in the eighteenth century and called for a minimal economic role for government. A major point of his argument is that economic freedom is an efficient way to organize an economy–people would never trade with each other unless both sides expect to gain. The model of the marketplace was the centerpiece of Smith's inquiry. The decisions of buyers and sellers are coordinated in the marketplace by what he called the invisible hand of self-interest, which harmonizes the forces of competition with the public interest to generate real national wealth.
The freshest idea in Smith's argument is that the public interest is not served best by those who intend (or pretend) to promote it through government, but rather by those who actively seek their own gain in disregard of the public interest. The quest for higher incomes and profits redirects resources into more efficient configurations, facilitates technological advances, and accommodates changing patterns of demand. Self-interested merchants engaged in competition can gain advantages over rivals and increase their sales only by better serving consumers. Monopoly, on the other hand, harms the public interest by restricting outputs to force prices up. Smith thought that virtually all monopoly power would succumb to competitive forces if not for governmental protection of monopolies.