Economic Thought: Adam Smith “Wealth of Nations”

“It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest” Adam Smith

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Economic progress is a recent phenomenon.

Life in 1600 was remarkably like 600 with peasants and rulers.

The economy was the same century after century until the Industrial Revolution.

In the mid-1700s, the manufacturing and transportation industries experienced technological innovations.

The changes would forever affect the dynamic between workers and owners.

Up until that point, history saw slow technological progress.

However, technological innovations became the new normal.

Instead of working in agriculture, people moved to cities for manufacturing jobs.

People stopped working on farms and did service jobs in cities.

The beginnings of globalization started with railroads and telegraphs.

The average person had access to long distance travel and communications.

ECONOMIC HISTORY

Economics is a 250-year-old profession.

For 250 years, economists have been creating, debating, and testing economic theories.

Understanding history is the best guide to understanding economics.

One must study an enormous amount of economic history.

But, the purpose of this article is to break it down into a small chunk to learn.

We think economic events are unique.

They are not unique.

There are close parallels between different economic events.

For example, the 2008 Great Recession is like the 1893 Panic.

Present day globalization has commonality with the globalization in the late nineteenth century.

History repeats itself, but we do not learn.

ADAM SMITH

Adam Smith is a prominent economist who grew up in Scotland.

He influenced David Ricardo, Karl Marx, John Maynard Keynes, and Milton Friedman.

Smith studied European literature at Balliol College (Oxford).

After Oxford, he became the Chair of Moral Philosophy at Glasgow University.

After getting bored as a professor, he went to tutor the young Duke of Buccleuch.

They traveled in France and Switzerland while educating the young duke.

During their travels, Smith met contemporaries Voltaire, Jean-Jacques Rousseau, François Quesnay, and Anne-Robert-Jacques Turgot.

Smith’s first major work published in 1759 was “The Theory of Moral Sentiments.”

It concentrated on ethics and charity.

WEALTH REDEFINED

“How selfish soever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others and render their happiness necessary to him though he derives nothing from it except the pleasure of seeing it.” Adam Smith “Theory of Moral Sentiments”

Up until the 1700s, people defined wealth as gold and silver.

Adam Smith’s “Wealth of Nations” book redefined wealth.

It created economics as a distinct academic discipline.

Smith started his book with the example of a Pin Factory.

The factory broke down making pins in stages.

The workers specialized in a stage.

By specializing, workers made more pins than if they created the whole pin themselves.

Smith realized the technological innovations of the Industrial Revolution transformed how economies worked.

The division of labor transformed the productiveness of the economy.

Wealth became productivity; the ability to produce stuff efficiently.

It was no longer about the quantity of gold but what was made with the gold.

Countries did not derive their wealth based on precious metals.

But, by the ability to produce things people wanted.

Smith’s reputation is based on his explanation of how self-interest in a free market economy creates economic well-being.

Smith called it the “Invisible Hand.”

Smith believed in free trade.

He argued smuggling was a legitimate activity because of “unnatural” legislation.

Echoing back to his prior work “The Theory of Moral Sentiments,” Smith saw sympathy and self-interest as complementary.

Charity alone cannot supply all the people’s needs.

Self-interest can fix this deficiency.

“Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only,” Adam Smith “Wealth of Nations”

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