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: Adam Smith

: Adam Smith

RUSSIAN ECONOMIC ACADEMY NAMED AFTER

G V PLEKHANOV

INTERNATIONAL BUSINESS STUDIES

ADAM SMITH

Student: Anton Skobelev

Group: 855

Moscow 1997

After two centuries, Adam Smith remains a towering figure in the history of

economic thought. Known primarily for a single work, An Inquiry into the

nature an causes of the Wealth of Nations (1776), the first comprehensive

system of political economy, Smith is more properly regarded as a social

philosopher whose economic writings constitute only the capstone to an

overarching view of political and social evolution. If his masterwork is viewed

in relation to his earlier lectures on moral philosophy and government, as well

as to allusions in The Theory of Moral Sentiments (1759) to a work he

hoped to write on the general principles of law and government, and of the

different revolutions they have undergone in the different ages and periods of

society, then The Wealth of Nations may be seen not merely as a

treatise on economics but as a partial exposition of a much larger scheme of

historical evolution.

Early Life

Unfortunately, much is known about Smiths thought than about his life.

Though the exact date of his birth is unknown, he was baptised on June 5,

1723, in Kikcaldy, a small (population 1,500) but thriving fishing village

near Edinburgh, the son by second marriage of Adam Smith, comptroller of

customs at Kikcaldy, and Margaret Douglas, daughter of a substantial

landowner. Of Smiths childhood nothing is known other than that he received

his elementary schooling in Kirkcaldy and that at the age of four years he

was said to have been carried off by gypsies. Pursuits was mounted, and young

Adam was abandoned by his captors. He would have made, I fear, a poor

gypsy, commented his principal biographer.

At the age of 14, in 1737, Smith entered the university of Glasgow, already

remarkable as a centre of what was to become known as the Scottish

Enlightenment. There, he was deeply influenced by Francis Hutcheson, a famous

professor of moral philosophy from whose economic and philosophical views he

was later to diverge but whose magnetic character seems to have been a main

shaping force in Smiths development. Graduating in 1740, Smith won a

scholarship (the Snell Exhibition) and travelled on horseback to Oxford,

where he stayed at Balliol College. Compared to the stimulating atmosphere of

Glasgow, Oxford was an educational desert. His years there were spent largely

in self-education, from which Smith obtained a firm grasp of both classical

and contemporary philosophy.

Returning to his home after an absence of six years, Smith cast about for

suitable employment. The connections of his mothers family, together with

the support of the jurist and philosopher Lord Henry Kames, resulted in an

opportunity to give a series of public lectures in Edinburgh - a form of

education then much in vogue in the prevailing spirit of improvement.

The lectures, which ranged over a wide variety of subjects from rhetoric

history and economics, made a deep impression on some of Smiths notable

contemporaries. They also had a marked influence on Smiths own career, for

in 1751, at the age of 27, he was appointed professor of logic at Glasgow,

from which post he transferred in 1752 to the more remunerative professorship

of moral philosophy, a subject that embraced the related fields of natural

theology, ethics, jurisprudence, and political economy.

Glasgow

Smith then entered upon a period of extraordinary creativity, combined with a

social and intellectual life that he afterward described as by far the

happiest, and most honourable period of my life. During the week he lectured

daily from 7:30 to 8:30 am and again thrice weekly from 11 am to noon, to

classes of up to 90 students, aged 14 and 16. (Although his lectures were

presented in English, following the precedent of Hutcheson, rather than in

Latin, the level of sophistication for so young an audience today strikes one

as extraordinarily demanding.) Afternoons were occupied with university

affairs in which Smith played an active role, being elected dean of faculty

in 1758; his evenings were spent in the stimulating company of Glasgow

society.

Among his circle of acquaintances were not only remembers of the aristocracy,

many connected with the government, but also a range of intellectual and

scientific figures that included Joseph Black, a pioneer in the field of

chemistry, James Watt, later of steam-engine fame, Robert Foulis, a

distinguished printer and publisher and subsequent founder of the first British

Academy of Design, and not least, the philosopher David Hume, a lifelong friend

whom Smith had met in Edinburgh. Smith was also introduced during these years

to the company of the great merchants who were carrying on the colonial trade

that had opened to Scotland following its union with England in 1707. One of

them, Andrew Cochrane, had been a provost of Glasgow and had founded the famous

Political Economy Club. From Cochrane and his fellow merchants Smith

undoubtedly acquired the detailed information concerning trade and business

that was to give such a sense of the real world to The Wealth of Nations

.

The Theory of Moral Sentiments

In 1759 Smith Published his first work, The Theory of Moral Sentiments.

Didactic, exhortative, and analytic by turns, The Theory lays the

psychological foundation on which The Wealth of Nations was later to be

built. In it Smith described the principles of human nature , which, together

with Hume and the other leading philosophers of his time, he took as a

universal and unchanging datum from which social institutions, as well as

social behaviour, could be deduced.

One question in particular interested Smith in The Theory of Moral

Sentiments. This was a problem that had attracted Smiths teacher Hutcheson

and a number of Scottish philosophers before him. The question was the source

of the ability to form moral judgements, including judgements on ones own

behaviour, in the face of the seemingly overriding passions for

self-preservation and self-interest. Smiths answer, at considerable length, is

the presence within each of us of an inner man who plays the role of the

impartial spectator, approving or condemning our own and others actions with

a voice impossible to disregard. (The theory may sound less naive if the

question is reformulated to ask how instinctual drives are socialized through

the superego.)

The thesis of the impartial spectator, however, conceals a more important aspect

of the book. Smith saw humans as created by their ability to reason and - no

less important - by their capacity for sympathy. This duality serves both to

pit individuals against one another and to provide them with the rational and

moral faculties to create institutions by which the internecine struggle can

be mitigated and even turned to the common good. He wrote in his Moral

Sentiments the famous observation that he was to repeat later in The

Wealth of Nations: that self-seeking men are often led by an invisible

hand... without knowing it , without intending it, to advance the interest of

the society.

It should be noted that scholars have long debated whether Moral Sentiments

complemented or was in conflict with The Wealth of Nations, which

followed it. At one level there is a seeming clash between the theme of social

morality contained in the first and largely amoral explanation of the manner

in which individuals are socialized to become the market-oriented and

class-bound actors that set the economic system into motion.

Travels on the Continent

The Theory quickly brought Smith wide esteem and in particular attracted

the attention of Charles Townshend, himself something of an amateur economist,

a considerable wit, and somewhat less of a statesman, whose fate it was to be

the chancellor of the exchequer responsible for the measures of taxation that

ultimately provoked the American Revolution. Townshend had recently married and

was searching for a tutor for his stepson and ward, the young Duke of

Buccleuch. Influenced by the strong recommendations of Hume and his own

admiration for The Theory of Moral Sentiments, he Approached Smith to

take the Charge.

The terms of employment were lucrative (an annual salary of £300 plus

travelling expenses and a pension of £300 a year after), considerably

more than Smith had earned as a professor. Accordingly, Smith resigned his

Glasgow post in 1763 and set off for France the next year as the tutor of the

young duke. They stayed mainly in Toulouse, where Smith began working on a book

(eventually to be The Wealth of Nations) as an antidote to the

excruciating boredom of the provinces. After 18 months of ennui he was rewarded

with a two-month sojourn in Geneva, where he met Voltaire, for whom he had the

profoundest respect, thence to Paris where Hume, then secretary to the British

embassy, introduced Smith to the great literary salons of the French

Enlightenment. There he met a group of social reformers and theorists headed by

Francois Quesnay, who are known in history as the physiocrats. There is some

controversy as to the precise degree of influence the physiocrats exerted on

Smith, but it is known that he thought sufficiently well of Quesnay to have

considered dedicating The Wealth of Nations to him, had not the French

economist died before publication.

The stay in Paris was cut short by a shocking event. The younger brother of the

Duke of Buccleuch , who had joined them in Toulouse, took ill and perished

despite Smiths frantic ministration. Smith and his charge immediately returned

to London. Smith worked in London until the spring of 1767 with Lord Townshend,

a period during which he was elected a fellow of the Royal Society and

broadened still further his intellectual circle to include Edmund Burke, Samuel

Johnson, Edward Gibbon, and perhaps Benjamin Franklin. Late that year he

returned to Kirkcaldy, where the next six years were spent dictating and

reworking The Wealth of Nations, followed by another stay of three

years in London, where the work was finally completed and published in 1776.

The Wealth of Nations

Despite its renown as the first great work in political economy. The Wealth

of Nations is in fact a continuation of the philosophical theme begun in

The Theory of Moral Sentiments. The ultimate problem to which Smith

addresses himself is how the inner struggle between the passions and the

impartial spectator - explicated in Moral Sentiments in terms of the

single individual - works its effects in the larger arena of history itself,

both in the long-run evolution of society and in terms of the immediate

characteristics of the stage of history typical of Smiths own day.

The answer to this problem enters in Book 5, in which Smith outlines he four

main stages of organization through which society is impelled, unless blocked

by deficiencies of resources, wars, or bad policies of government: the

original rude state of hunters, a second stage of nomadic agriculture, a

third stage of feudal or manorial farming, and a fourth and final stage of

commercial interdependence.

It should be noted that each of these stages is accompanied by institutions

suited to its needs. For example, in the age of the huntsman, there is scar

any established magistrate or any regular administration of justice. With

the advent of flocks there emerges a more complex form of social

organization, comprising not only formidable armies but the central

institution of private property with its indispensable buttress of law and

order as well. It is the very essence of Smiths thought that he recognized

this institution, whose social usefulness he never doubted, as an instrument

for the protection of privilege, rather than one to be justified in terms of

natural law: Civil government, he wrote, so far as it is instituted for

the security of property, is in reality instituted for the defence of the

rich against the poor, or of those who have some property against those who

have none at all. Finally, Smith describes the evolution through feudalism

into a stage of society requiring new institutions such as market-determined

rather than guild-determined wages and free rather than government-

constrained enterprise. This later became known as laissez-faire capitalism;

Smith called it the system of perfect liberty.

There is an obvious resemblance between this succession of changes in the

material basis of production, each bringing its requisite alterations in the

superstructure of laws and civil institutions, and the Marxian conception of

history. Though the resemblance is indeed remarkable, there is also a crucial

difference: in the Marxian scheme the engine of evolution is ultimately the

struggle between contending classes, whereas in Smiths philosophical history

the primal moving agency is human nature driven by the desire for self-

betterment and guided (or misguided) by the faculties of reason.

Society and the invisible hand

The theory of historical evolution, although it is perhaps the binding

conception of The Wealth of Nations, is subordinated within the work

itself to a detailed description of how the invisible hand actually operates

within the commercial, or final, stage of society. This becomes the focus of

Books I and II. In which Smith undertakes to elucidate two questions. The first

is how a system of perfect liberty, operating under the drives and constraints

of human nature and intelligently designed institutions , will give rise to an

orderly society. The question, which had already been considerably elucidated

by earlier writers, required both an explanation of the underlying orderliness

in the pricing of individual commodities and an explanation of the laws that

regulated the division of the entire wealth of the nation (which Smith saw as

its annual production of goods and services) among the three great claimant

classes - labourers, landlords, and manufacturers.

This orderliness, as would be expected, was produced by the interaction of the

two aspects of human nature, its response to its passions and its

susceptibility to reason and sympathy. But whereas The Theory of Moral

Sentiments had relied mainly on the presence of the inner man to provide

the necessary restraints to private action, in The Wealth of Nations

one finds an institutional mechanism that acts to reconcile the disruptive

possibilities inherent in a blind obedience to the passions alone. This

protective mechanism is competition, an arrangement by which the passionate

desire for bettering ones condition - a desire that comes with United States

from the womb, and never leaves United States until we go into the grave - is

turned into a socially beneficial agency by pitting one persons drive for

self-betterment against anothers.

It is in the unintended outcome of this competitive struggle for self-

betterment that the invisible hand regulating the economy shows itself, for

Smith explains how mutual vying forces the prices of commodities down to

their natural levels, which correspond to their costs of production.

Moreover, by inducing labour and capital to move from less to more profitable

occupations or areas, the competitive mechanism constantly restores prices to

these natural levels despite short-run aberrations. Finally, by explaining

that wages and rents and profits (the constituent parts of the costs of

production) are themselves subject to this natural prices but also revealed

an underlying orderliness in the distribution of income itself among workers,

whose recompense was their wages; landlords, whose income was their rents;

and manufacturers, whose reward was their profit.

Economic growth

Smiths analysis of the market as a self- correcting mechanism was

impressive. But his purpose was more ambitious than to demonstrate the self-

adjusting properties of the system. Rather, it was to show that, under the

impetus of the acquisitive drive, the annual flow of national wealth could be

seen steadily to grow.

Smiths explanation of economic growth , although not neatly assembled in one

part of The Wealth of Nations, is quite clear. The score of it lies in

his emphasis on the division of labour (itself an outgrowth of the natural

propensity to trade) as the source of societys capacity to increase its

productivity. The Wealth of Nations opens with a famous passage

describing a pin factory in which 10 persons, by specialising in various tasks,

turn out 48,000 pins a day, compared with the few, perhaps only 1 , that each

could have produced alone. But this all-important division of labour does not

take place unaided. It can occur only after the prior accumulation of capital

(or stock, as Smith calls it ), which is used to pay the additional workers and

to buy tools and machines.

The drive for accumulation, however, brings problems. The manufacturer who

accumulates stock needs more labourers ( since labour-saving technology has

no place in Smiths scheme), and in attempting to hire them he bids up their

wages above their natural price. Consequently his profits begin to fall,

and the process of accumulation is in danger of ceasing. But now there enters

an ingenious mechanism for continuing the advance. In bidding up the price of

labour, the manufacturer inadvertently sets into motion a process that

increases the supply of labour, for the demand for men, like that for any

other commodity, necessarily regulates the production of men. Specifically,

Smith had in mind the effect of higher wages in lessening child mortality.

Under the influence of a larger labour supply, the wage rise is moderated and

profits are maintained; the new supply of labourers offers a continuing

opportunity for the manufacturer to introduce a further division of labour

and thereby add to the systems growth.

Here then was a machine for growth - a machine that operated with all the

reliability of the Newtonian system with which Smith was quite familiar. Unlike

the Newtonian system, however, Smiths growth machine did not depend for its

operation on the laws of nature alone. Human nature drove it, and human nature

was a complex rather than a simple force. Thus, the wealth of nations would

grow only if individuals, through their governments, did not inhibit this

growth by catering to the pleas for special privilege that would prevent the

competitive system from exerting its begin effect. Consequently, much of

The Wealth of Nations, especially Book IV, is a polemic against the

restrictive measures of the mercantile system that favoured monopolies at

home and abroad. Smiths system of natural liberty, he is careful to point

out, accords with the best interests of all but will not be put into practice

if government is entrusted to, or heeds, the mean rapacity, who neither are ,

nor ought to be, the rulers of mankind.

The Wealth of Nations is therefore far from the ideological tract it is

often supposed to be. Although Smith preached laissez-faire (with important

exceptions), his argument was directed as much against monopoly as government;

and although he extolled the social results of the acquisitive process, he

almost invariably treated the manners and manoeuvres of businessmen with

contempt. Nor did he see the commercial system itself as wholly admirable. He

wrote with decrement about the intellectual degradation of the worker in a

society in which the division of labour has proceeded very far; for by

comparison with the alert intelligence of the husbandman, the specialised

worker generally becomes as stupid and ignorant as it is possible for a human

being to become.

In all of this, it is notable that Smith was writing in an age of preindustrial

capitalism. He seems to have had no real presentiment of the gathering

Industrial Revolution, harbingers of which were visible in the great ironworks

only a few miles from Edinburgh. He had nothing to say about large-scale

industrial enterprise, and the few remarks in The Wealth of Nations

concerning the future of joint-stock companies (corporations) are disparaging.

Finally, one should bear in mind, that, if growth is the great theme of The

Wealth of Nations, it is not unending growth. Here and there in the

treatise are glimpsed at a secularly declining rate of profit; and Smith

mentions as well the prospects that when the system eventually accumulates its

full complement of riches - all the pin factories, so to speak, whose output

could be absorbed - economic decline would begin, ending in an impoverished

stagnation.

The Wealth of Nations was received with admiration by Smiths wide circle

of friends and admires, although it was by no means an immediate popular

success. The work finished, Smith went into semiretirement. The year following

its publication he was appointed commissioner both of customs and of salt

duties for Scotland, posts that brought him £600 a year. He thereupon

informed his former charge that he no longer required his pension, to which

Buccleuch replied that his sense of honour would never allow him to stop paying

it. Smith was therefore quite well off in the final years of his life, which

were spent mainly in Edinburgh with occasional trips to London or Glasgow

(which appointed him a rector of the university). The years passed quietly,

with several revisions of both major books but with no further publications. On

July 17, 1790, at the age of 67, full of honours and recognition, Smith died;

he was buried in the churchyard at Canongate with a simple monument stating

that Adam Smith, author of The Wealth of Nations, was buried there.

Beyond the few facts of his life, which can be embroidered only in detail,

exasperatingly little is known about the man. Smith never married, and almost

nothing is known of his personal side. Moreover, it was the custom of his

time to destroy rather than to preserve the private files if illustrious men,

with the unhappy result that much of Smiths unfinished work, as well as his

personal papers, was destroyed (some as late as 1942). Only one portrait of

Smith survives, a profile medallion by Tassie; it gives a glimpse of the

older man with his somewhat heavy-lidded eyes, aquiline nose, and a hint of

protrusive lower lip. I am a beau in nothing but my books, Smith once told

a friend to whom he was showing his library of some 3,000 volumes.

From various accounts, he was also a man of many peculiarities, which

included a stumbling manner of speech ( until he had warmed to his subject),

a gait described as vermicular/ and above all an extraordinary and even

comic absence of mind. On the other hand, contemporaries wrote of a smile of

inexpressive benignity, and of his political tact and dispatch in managing

the sometimes acerbic business of the Glasgow faculty.

Certainly he enjoyed a high measure of contemporary fame; even in his early

days at Glasgow his reputation attracted students from nations as distant as

Russia, and his later years were crowned not only with expression of

admiration from many European thinkers but by a growing recognition among

British governing circles that his work provided a rationale of inestimable

importance for practical economic policy.

Over the years, Smiths lustre as a social philosopher has escaped much of the

weathering that has affected the reputations of other first-rate political

economists. Although he was writing for his generation, the breadth of his

knowledge/ the cutting edge of his generalization, the boldness of his vision,

have never ceased to attract the admiration of all social scientists, and in

particular economists. Couched in the spacious, cadenced prose of his period,

rich in imagery and crowded with life, The Wealth of Nations projects a

sanguine but never sentimental image of society. Never so finely analytic as

David Ricardo nor so stern and profound as Karl Marx, Smith is the very epitome

of the Enlightenment: hopeful but realistic, speculative but practical, always

respectful of the classical past but ultimately dedicated to the great

discovery of his age - progress.

BIBLIOGRAPHY:

John Rae. Life of Adam Smith 1985

William Scott. Adam Smith as Student and Professor 1987

Andrew S. Skinner. Essays on Adam Smith 1988


2010