Adam Smith

Kirkcaldy (Scotland), 1723 - 1790

Adam Smith (Baptised June 5, 1723 – July 17, 1790) was a Scottish political economist and moral philosopher. His Inquiry into the Nature and Causes of the Wealth of Nations was one of the earliest attempts to study the historical development of industry and commerce in Europe. That work helped to create the modern academic discipline of economics and provided one of the best-known intellectual rationales for free trade and capitalism.

The Wealth of Nations was influential since it did so much to create the field of economics and develop it into an autonomous systematic discipline. In the Western world, it is arguably the most influential book on the subject ever published. When the book, which has become a classic manifesto against mercantilism (the theory that large reserves of bullion are essential for economic success), appeared in 1776, there was a strong sentiment for free trade in both Britain and America. This new feeling had been born out of the economic hardships and poverty caused by the war. However, at the time of publication, not everybody was immediately convinced of the advantages of free trade: the British public and Parliament still clung to mercantilism for many years to come.

The Wealth of Nations also rejects the Physiocratic school's emphasis on the importance of land; instead, Smith believed labour was tantamount, and that a division of labour would effect a great increase in production. Nations was so successful, in fact, that it led to the abandonment of earlier economic schools, and later economists, such as Thomas Malthus and David Ricardo, focused on refining Smith's theory into what is now known as classical economics. (Modern economics evolved from this.) Malthus expanded Smith's ruminations on overpopulation, while Ricardo believed in the “iron law of wages” — that overpopulation would prevent wages from topping the subsistence level. Smith postulated an increase of wages with an increase in production, a view considered more accurate today.

One of the main points of The Wealth of Nations is that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called “invisible hand.” If a product shortage occurs, for instance, its price rises, creating incentive for its production, and eventually curing the shortage. The increased competition among manufacturers and increased supply would also lower the price of the product to its production cost, the “natural price.” Smith believed that while human motives are often selfish and greedy, the competition in the free market would tend to benefit society as a whole anyway. Nevertheless, he was wary of businessmen and argued against the formation of monopolies.