Adam Smith Writings
1. An Inquiry into the Nature and Causes
of the Wealth of Nations (1776)
2. The Theory of Moral Sentiments (1759)
3. Lectures on Justice, Policy, Revenue, and
Arms (1895) - notes taken in 1763.
Biographical Information
from Worldly Philosophers
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Adam Smith was born in 1723 in the town Kirkcaldy, County Fife,
Scotland.
At the age of seventeen, he went to Oxford University on a scholarship.
Smith had a passion for reading. He was almost expelled from the
University of Glasgow once for reading a copy of A Treatise of Human
Nature by David Hume.
In 1751 he was offered the Chair of Logic at the University of Glasgow.
He was 28 years old.
In 1758 he became a Dean (or the Dean) at Glasgow.
In 1759 Smith published “The Theory of Moral Sentiments”.
In the 1760s, during a visit to France, Smith was introduced to Quesnay
and the Physiocrats.
Upon returning to England he began the writing of the Wealth of Nations,
which was published in 1776.
Personal
http://www.econ.unt.edu/~dmolina/econ4510.htm
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Born in Kircaldy (Scotland)
Father died before he was born and his mother
lived to the age of 90
Kidnap by Gipsies when he was 4 and was left
abandon
Walked 15 miles in Nightgown until awoken by bells
Professorial Syndrom
http://www.econ.unt.edu/~dmolina/econ4510.htm
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Walk in a distracted fashion and fell in a Pit
Would work through academic matters out loud
Brewed himself a drink of bread and butter and
pronounced it the worst tea he had ever dranked
“I am a beau in nothing but my books”
Tutoring
http://www.econ.unt.edu/~dmolina/econ4510.htm
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His book on moral theology attracted the attention
of Charles Townshend
Notorious to Americans since, as Chancellor of the
Exchequer, he
 Refused
to let colonist elect their own judges
 Increase the duty (tariff) on American Tea
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Townshend married well to the widow of a duke
Tutoring (continued)
http://www.econ.unt.edu/~dmolina/econ4510.htm
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He chose Adam Smith to tutor the son of the widow
The contract was for 500 pounds per year plus
expenses and a pension of 500 pounds per year for
life after done
Smith had never collected more than 100 pounds per
year from fees collected directly from students
His students refused refund when he had to leave
saying they had more than received their return
Tutoring (continued)
http://www.econ.unt.edu/~dmolina/econ4510.htm
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For 18 months Smith and his student went to France
Met Voltaire in the south of France
Met Francois Quesney in Paris
He agreed with the Laissez Faire of the Physocrats
but did not agree with
Agriculture being the source of all productivity
 Believed labor was an important component of production
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Life
http://www.econ.unt.edu/~dmolina/econ4510.htm
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Smith met with Benjamin Franklin
He was impressed with Mr. Franklin and his
descriptions of the Colonies
Probably why he later wrote about the Colonies
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a nation “which, indeed, seemed very likely to become one
of the greatest and most formidable that ever was in the
world.”
An admiration that is later also shared by Karl Marx
Life
http://www.econ.unt.edu/~dmolina/econ4510.htm
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Adam Smith lived with his mother until she reached
the age of 90
2 years after he published the Wealth of Nations
he was appointed Commissioner of Customs for
Edinburgh which paid 600 pounds a year
His death went relatively unnoticed
Smith Summarized
• Three Laws of the Market
1. Self Interest and Competition will lead the market price to equal the
cost of production.
2. Self-Interest and Competition will lead producers to provide the
goods consumers demand.
3. Self-Interest and Competition will erode above-normal profits so
that in the long-run rates of return will equalize for capital and
labor.
• In Smith’s view, markets are self regulating. Government
intervention is unnecessary because the power of the competitive
market limits the power of any one individual.
Human Interest
http://www.econ.unt.edu/~dmolina/econ4510.htm
• Every man…. Is first and principally
recommended to his own care; and every
man is certainly in every respect fitter
and abler to take care of himself than of
any other person (Theory of Moral
Sentiments)
• In other words… Human beings are rational,
calculating and motivated by self interest
Human Interest
http://www.econ.unt.edu/~dmolina/econ4510.htm
• …the desire of bettering our condition [is] a desire
which, though generally calm and dispassionate,
come with us from the womb, and never leaves us till
we to to the grave. In the whole interval which
separates those two moments, there is scarce
perhaps a single instant in which any man is so
perfectly and completely satisfied with his situation,
as to be without wish of alteration or improvement
of any kind (Wealth of Nations)
The Working of Competitive Markets
1. Assumptions
a) Large number of sellers
b) A group of resources owners knowledgeable about profits, wages, and rents
c) Freedom of movement for resources among industries
2. Given these assumptions, the long run rate of profit, wages,and rents will equalize
among the various sectors in the economy.
3. Hence, competitive markets lead to the optimal allocation of resources with
consumers receiving goods at the lowest possible cost.
4. One must remember the assumptions if one is to accept the conclusions. (i.e.
without competitive markets one does not achieve these results)
5. Government intervention is criticized.
a) Government intervention restricts individual liberties. This is a criticism of
the government assigning rights.
b) Mercantilist writings that advocate government intervention in the interest of
the public good are not objective.
The Working of Competitive Markets
(cont.)
http://www.econ.unt.edu/~dmolina/econ4510.htm
• In other words, given competitive market &
absence of government intervention,
resulting natural prices bring about optimum
allocation of resources because consumers
receive goods they want at lowest prices and
maximum rate of growth occurs
• THIS IS THE INVISIBLE HAND ANALOGY
The Invisible Hand
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This is the only time Smith usees the words “Invisble Hand”.
But the annual revenue of every society is always precisely equal to the exchangeable value
of the whole annual produce of its industry, or rather is precisely the same thing with that
exchangeable value. As every individual, therefore, endeavours as much as he can, both to
employ his capital in the support of domestic industry, and so to direct that industry that its
produce maybe of the greatest value; every individual necessarily labours to render the
annual revenue of the society as great as he can. He generally, indeed, neither intends to
promote the public interest, nor knows how much he is promoting it. By preferring the
support of domestic to that of foreign industry, he intends only his own security; and by
directing that industry in such a manner as its produce may be of the greatest value, he
intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to
promote an end which was no part of his intention. Nor is it always the worse for the society
that it was no part of it. By pursuing his own interest, he frequently promotes that of the
society more effectually than when he really intends to promote it. I have never known much
good done by those who affected to trade for the public good. It is an affectation, indeed, not
very common among merchants, and very few words need be employed in dissuading them
from it. (p. 364)
The Laws of Accumulations and
Population
1. The Law of Accumulation is that savers will invest,
investment will lead to further wealth and employment
opportunity, and the increases in wealth will lead to
further investment. This cycle can only be stopped by a
lack of labor (i.e. diminishing returns), which will lead to
increases in wages.
2. The Law of Population rescues the Law of Accumulation.
Further increases in wages will lead to a higher standard of
living, lower rates of infant mortality, and a higher
population. The higher population will lead to lower
wages, better investment opportunities, further
accumulation, and the process continues....
What is the Wealth of Nations?
1. Mercantilist viewpoint: Accumulation of
precious metals via trade.
2. Physiocrats viewpoint: Land or agriculture is the
source of wealth.
3. Smith:
a) Wealth is measured in terms of goods and services
which are consumed.
b) The primary source of wealth is stated to be labor,
although ultimately it is capital.
c) Wealth should also be measured in per-capita terms.
Trade not a zero-sum game?
• “Private people who want to make a fortune, never retire
to the remote and poor provinces of the country, but resort
to the capital, or to some of the great commercial towns.
They know where little wealth circulates, there is little to
be got, but that where a great deal is in motion, some
share of it may fall to them.
• The same maxims which would in this manner direct the
common sense of [individuals]...should make a whole
nation regard the riches of its neighbors as a probable
cause and occasion for itself to acquire riches. A nation
that would enrich itself by foreign trade, is certainly most
likely to do so when its neighbors are all rich and
industrious”
Capital accumulation is one key to
the wealth of a nation.
1. Productivity of workers depends upon capital accumulation.
2. The number of productive workers depends upon capital
accumulation.
3. Capital accumulation depends upon
a) a free market without government interference.
b) private property.
c) an unequal distribution of income . WHY?
4. Present wealth depends upon capital accumulation, since this is
what determines the division of labor and the proportion of the
population engaged in productive labor.
5. Capital accumulation is necessary for economic development, or
future wealth.
6. Individual self interest and the accumulation of capital leads to an
optimum allocation of capital among various industries.
Who accumulates capital?
• Wages are too low for labor to accumulate
substantial savings.
• Land owners have the ability to save, but do
not because their purpose is to maintain a
high standard of living.
• Only capitalists have the willingness and
means to accumulate the savings necessary to
acquire future capital.
Productivity of labor, or
Another Key: The Division of Labor
• Division of labor is the primary
determinant of productivity
• Extent of the market limits the division of
labor
• Accumulation of capital allows for the
division of labor and the extent of the
market.
The Pin Factory Story
from Adam Smith (1776, p.3)
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To take an example, therefore, from a very trifling manufacture, but one in which the division
of labour has been very often taken notice of, the trade of a pin-maker:
a workman not educated to this business (which the division of labour has rendered a
distinct trade, nor acquainted with the use of the machinery employed in it (to the invention
of which the same division of labour has probably given occasion), could scarce, perhaps,
with his utmost industry, make one pin in a day, and certainly could not make twenty.
But in the way in which this business is now carried on, not only the whole work is a peculiar
trade, but it is divided into a number of branches, of which the greater part are likewise
peculiar trades. One man draws out the wire; another straights it; a third cuts it; a fourth
points it; a fifth grinds it at the top for receiving the head; to make the head requires two or
three distinct operations; to put it on is a peculiar business; to whiten the pins is another; it is
even a trade by itself to put them into the paper; and the important business of making a pin
is, in this manner, divided into about eighteen distinct operations, which, in some
manufactories, are all performed by distinct hands, though in others the same man will
sometimes perform two or three of them.
The Pin Factory Story
from Adam Smith (1776, p.3)
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I have seen a small manufactory of this kind, where ten men only were employed,
and where some of them consequently performed two or three distinct
operations. But though they were very poor, and therefore but indifferently
accommodated with the necessary machinery, they could, when they exerted
themselves, make among them about twelve pounds of pins in a day.
There are in a pound upwards of four thousand pins of a middling size. Those ten
persons, therefore, could make among them upwards of forty-eight thousand pins
in a day. Each person, therefore, making a tenth part of forty-eight thousand pins,
might be considered as making four thousand eight hundred pins in a day. But if
they had all wrought separately and independently, and without any of them
having been educated to this peculiar business, they certainly could not each of
them have made twenty, perhaps not one pin in a day; that is, certainly, not the
two hundred and fortieth, perhaps not the four thousand eight hundredth, part of
what they are at present capable of performing, in consequence of a proper
division and combination of their different operations.
More on the Division of Labor
1. Division of labor is discussed from two perspectives
1. Specialization of tasks within a firm.
2. The social division of labor (i.e. the economic system is in
essence a vast network of interrelations among specialized
producers.
2. The division of labor “encourages every man to apply himself
to a particular occupation, and to cultivate and to bring to
perfection whatever talent or genius he may possess for that
particular species of business”.
3. The division of labor is constricted by the extent of the
market. Such an observation leads one to a discussion of
returns to scale.
Exceptions to Laissez-Faire
• Regulation of Banking
• Regulation of Competition
• Public education
• Infant industry argument
• National defense considerations
Adam Smith and Bank Regulation
• Such regulations may, no doubt, be considered as in some
respect a violation of natural liberty. But those exertions of
the natural liberty of a few individuals, which might
endanger the security of the whole society, are, and ought to
be, restrained by the laws of all governments; of the most
free, as well as or the most despotical. The obligation of
building party walls, in order to prevent the communication
of fire, is a violation of natural liberty, exactly of the same
kind with the regulations of the banking trade which are
here proposed.
Business should be regulated
http://www.econ.unt.edu/~dmolina/econ4510.htm
• People of the same trade seldom meet together,
even for merriment and diversion, but the
conversation ends in a conspiracy against the
public, or in some contrivance to raise prices. It is
impossible indeed to prevent such meetings, by
any law which either could be executed, or would
be consistent with liberty and justice. But though
the law cannot hinder people of the same trade
from sometimes assembling together, it ought to
do nothing to facilitate such assemblies, much
less to render them necessary. Wealth of Nations,
Book 1, Chapter 10.
The Downside to the Division of Labor
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In the progress of the division of labour, the employment of the far greater part of those who live by
labour, that is, of the great body of the people, comes to be confined to a few very simple operations;
frequently to one or two. But the understandings of the greater part of men are necessarily formed by
their ordinary employments.
The man whose whole life is spent in performing a few simple operations, of which the effects, too, are
perhaps always the same, or very nearly the same, has no occasion to exert his understanding, or to
exercise his invention, in finding out expedients for removing difficulties which never occur. He naturally
loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible
for a human creature to become.
The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational
conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming
any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive
interests of his country he is altogether incapable of judging; and unless very particular pains have been
taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of
his stationary life naturally corrupts the courage of his mind, and makes him regard, with abhorrence, the
irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders
him incapable of exerting his strength with vigour and perseverance in any other employment, than that
to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired
at the expense of his intellectual, social, and martial virtues. But in every improved and civilized society,
this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall,
unless government takes some pains to prevent it.
Smith against and for
• from Heilbroner (1999)
• What Smith is against is the meddling of the government with the market
mechanism. He is against restraints on imports and bounties on exports,
against government laws that shelter industry from competition, and
against government spending for unproductive ends. Notice that these
activities of the government all bear against the proper working of the
market system.
• One should note that Smith was in favor of public education and his last
job was working for the government (he was commissioner of customs in
Scotland).
• He was also in favor of progressive taxation (i.e. the more income you
have, the higher the precentage of income you should be in taxation).
• Smith also wrote before the Industrial Revolution. So he didn’t
understand the role technology played in continual economic growth. In
fact, he didn’t think the British economy would continue to grow forever.