The birthday of a great man just passed virtually unnoticed
— even in his homeland — though he shaped the modern world perhaps as much as
anybody. That man was Adam Smith, the world’s first economist.
Smith was baptized on June 5, 1723, in Kirkcaldy, Scotland.
It’s not known for certain, but presumed that he was either born on that very
day, or a day or two before. Whichever date it was, he entered a world that his
reason and eloquence would later transform.
For 300 years before Smith, Western Europe was dominated by
an economic system known as "mercantilism." Though it provided for modest
improvements in life and liberty over the feudalism that came before, it was a
system rooted in error that stifled enterprise and treated individuals as pawns
of the state.
Mercantilist thinkers believed that the world’s wealth was
a fixed pie, giving rise to endless conflict between nations. After all, if you
think there’s only so much and you want more of it, you’ve got to take it from
Mercantilists were economic nationalists. Foreign goods,
they thought, were sufficiently harmful to the domestic economy so that
government policy should be marshaled to promote exports and restrict imports.
Instead of imported goods, they wanted exports to be paid for by foreigners in
gold and silver. To the mercantilist, the precious metals were the very
definition of wealth, especially to the extent that they piled up in the coffers
of the monarch.
Because they had little sympathy for self-interest, the
profit motive and the operation of prices, mercantilists wanted governments to
bestow monopoly privileges upon a favored few. In Britain, the king even granted
a protected monopoly over the production of playing cards to a particular,
Economics in the late 18th century was not yet a focused
subject of its own, but rather a poorly organized compartment of what was known
as "moral philosophy." Smith’s first of two books, The Theory of Moral
Sentiments, was published in 1759 when he held the chair of moral philosophy
at Glasgow University. He was the first moral philosopher to recognize that the
business of enterprise — and all the motives and actions in the marketplace that
give rise to it — was deserving of careful, full-time study as a modern
discipline of social science. The culmination of his thoughts in this regard
came in 1776. As American colonists were declaring their independence from
Britain, Smith was publishing his own shot heard round the world, An Inquiry
into the Nature and Causes of the Wealth of Nations, better known ever since
as simply The Wealth of Nations.
Smith’s choice of the longer title is revealing in itself.
Note that he didn’t set out to explore the nature and causes of the poverty
of nations. Poverty, in his mind, was what happened when nothing happens, when
people are idle by choice or force, or when production is prevented or
destroyed. He wanted to know what brings the things we call material wealth into
being, and why. It was a searching examination that would make him a withering
critic of the mercantilist order.
Wealth was not gold and silver in Smith’s view. Precious
metals, though reliable as media of exchange and for their own industrial uses,
were no more than claims against the real thing. All of the gold and silver in
the world would leave one starving and freezing if they couldn’t be exchanged
for food and clothing. Wealth to the world’s first economist was plainly this:
goods and services. Whatever increased the supply and quality of goods
and services, lowered their price or enhanced their value made for greater
wealth and higher standards of living. The "pie" of national wealth isn’t fixed;
you can bake a bigger one by producing more.
Baking that bigger pie, Smith showed, results from
investments in capital and the division of labor. His famous example of the
specialized tasks in a pin factory demonstrated how the division of labor works
to produce far more than if each of us acted in isolation to produce everything
himself. It was a principle that Smith showed works for nations precisely
because it works for the individuals who make them up. He was consequently an
economic internationalist, one who believes in the widest possible
cooperation between peoples irrespective of political boundaries. He was, in
short, a consummate free trader at a time when trade was hampered by an endless
roster of counterproductive tariffs, quotas and prohibitions.
Smith wasn’t hung up on the old mercantilist fallacy that
more goods should be exported than imported. He exploded this
"balance of trade" fallacy by arguing that since goods and services
constituted a nation’s wealth, it made no sense for government to make sure that
more left the country than came in.
Self-interest, frowned upon for ages as acquisitive,
anti-social behavior, was celebrated by Smith as an indispensable spur to
economic progress. "It is not from the benevolence of the butcher, the brewer,
or the baker, that we can expect our dinner," he wrote, "but from their regard
to their own interest." Moreover, self-interest was an unsurpassed incentive: "The
natural effort of every individual to better his own condition ... is so
powerful, that it is alone, and without any assistance, not only capable of
carrying on the society to wealth and prosperity, but of surmounting a hundred
impertinent obstructions with which the folly of human laws too often encumbers
In a free economy, he reasoned, no one can put a crown on
his head and command that others provide him with goods. To satisfy his own
desires, he must produce what others want at a price they can afford. Prices
send signals to producers so that they will know what to make more of and what
to provide less of. It wasn’t necessary for the king to assign tasks and bestow
monopolies to see that things get done. Prices and profit would act as an
"invisible hand" with far more efficiency than any monarch or parliament. And
competition would see to it that quality is improved and prices are kept low.
Smith’s view of competition was undoubtedly shaped by the
way he saw the universities of his day, loaded with coddled, tenured professors
whose pay had little to do with their service to their pupils or the public at
large. While a student at Oxford in the 1740s, he observed the lassitude of his
professors who "had given up altogether even the pretense of teaching."
If it seems that Smith put much more faith in people and
markets than in kings and edicts, it’s because that’s precisely right. With
characteristic eloquence, he declared that ". . .[I]n
the great chess-board of human society, every single piece has a principle of
motion of its own, altogether different from that which the legislature might
choose to impress upon it."
Smith displayed an understanding of government that
eclipses that of many citizens today when he wrote, "It
is the highest impertinence and presumption, therefore, in kings and ministers,
to pretend to watch over the economy of private people, and to restrain their
expense . . . . They are themselves always, and without any exception, the
greatest spendthrifts in the society. Let them look well after their own
expense, and they may safely trust private people with theirs. If their own
extravagance does not ruin the state, that of their subjects never will."
ideas of Adam Smith exerted enormous influence before he died in 1790 and
especially in the 19th century. America’s Founders were greatly affected by his
insights. The Wealth of Nations became required reading among men and
women of ideas the world over. A tribute to him more than any other individual,
the world in 1900 was much freer and more prosperous than anyone imagined in
1776. The march of free trade and globalization in our own time is further
testimony to the enduring legacy of Adam Smith.
A think tank in Britain bears his name and seeks to make that legacy better
Ideas really do matter. They can
change the world. Adam Smith proved that in spades, and we are all immeasurably
better off because of the ideas he shattered and the ones he set in motion.
Lawrence W. Reed is president of
the Mackinac Center for Public Policy, a research and educational institute
headquartered in Midland, Mich. Permission to reprint in whole or in part is
hereby granted, provided that the author and the Center are properly cited.