Smith, Adam (1723–90)
A Scotsman brought up by his mother at Kirkcaldy, he became a student under Francis Hutcheson at Glasgow University at the age of fourteen and won a scholarship to Oxford, where he spent six years until 1746. He lectured at Edinburgh University from 1748 to 1751. From 1751 until 1763 he was at Glasgow, first in the Chair of Logic and a year later the Chair of Moral Philosophy, which he took over from Hutcheson. From 1764 to 1766 he toured France as the tutor to the Duke of Buccleugh. His major work on economics, An Inquiry into the Nature and Causes of the Wealth of Nations, appeared in 1776. This work of Adam Smith’s became the foundation upon which was constructed the whole subsequent tradition of English classical economics, which can be traced from D. Ricardo through A. Marshall to A.L. Pigou. Smith was primarily concerned with the factors which led to increased wealth in a community, and he rejected the physiocrats‘ view of the pre-eminent position of agriculture, recognizing the parallel contribution of manufacturing industry. He began his analysis by means of a sketch of a primitive society of hunters. If it cost twice the labour to kill a beaver as it does a deer, one beaver would exchange for two deer. Labour was the fundamental measure of value, though actual prices of commodities were determined by supply and demand on the market. There were two elements in the problem of increasing wealth: (a) the skill of the labour force and (b) the proportion of productive to unproductive labour. (According to Smith, the service industries did not contribute to real wealth.) The key to (a) was the division of labour. To illustrate his point, he quoted the example of the manufacture of pins. If one man were set the task of carrying out all the operations of pin manufacture – drawing the wire, cutting, head-fitting and sharpening – his output would be minimal. If, however, each man specialized on a single operation only, output would be increased a hundredfold. The size of the output need only be limited by the size of its market. The key to (b) was the accumulation of capital. Not only did this enable plant and machinery to be created to assist labour, but it also enabled labour to be employed. Capital for the latter was the wages fund. The workers must be fed and clothed during the period ofproduction in advance of the income earned from their own efforts. Smith believed that the economic system was harmonious and required the minimum of government interference. Although each individual was motivated by self-interest, they each acted for the good of the whole, guided by a ‘hidden hand’ made possible by the free play of competition. Free competition was the essential ingredient of the efficient economy. However, from his Wealth of Nations it is clear that not only did his scholarship range widely over the fields of history and contemporary business, but that, at the same time, he was a very practical man. He was quite aware, for instance, of the forces which were at work to limit competition: ‘People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public, or on some contrivance to raise prices’ (Book One, Chapter X, Part 2). In his discussions of public finance, he laid down four principles of taxation: (a) equality (taxes proportionate to ability to pay), (b) certainty, (c) convenience and (d) economy.
Reference: The Penguin Dictionary of Economics, 3rd edt.