Adam Smith - Boise State University

Adam Smith
History of Economic Thought
Boise State University
Fall 2015
Prof. D. Allen Dalton
The Life of Adam Smith
• 1723, Born in Kirkcaldy, north of
the Firth of Forth
• father-solicitor, comptroller of
• mother-respected and wealthy
• 1737, begins study of moral
philosophy at Glasgow
• 1740-46 at Oxford under
scholarship; classics and foreign
• 1748-51, private lecturer in
The Life of Adam Smith
• 1751, Professor of Logic, University
of Glasgow
• 1754, Professor of Moral
Philosophy, University of Glasgow
• Lectures in rhetoric, literature
(belle-lettres), ethics,
jurisprudence, moral philosophy
and economy
• 1759, The Theory of Moral
• 1764, resigns professorship to
tutor young Duke of Buccleuch and
brother on tour of France
The Life of Adam Smith
• 1765, while bored in Toulouse,
begins “writing a book”
• Visits Voltaire in Geneva
• Visits Paris (Hume, Quesnay,
• 1766, retreats to Kirkcaldy upon
life pension provided by Duke of
• 1772, moves to London, admitted
to Royal Society
• 1776, The Wealth of Nations
The Life of Adam Smith
• 1778, accepts appointment as a
Commissioner of Customs in
Scotland, trebling his income
• 1787, elected rector of University
of Glasgow
• Died 1790 - 16 volumes of
unpublished papers burned at his
• 1795, post-humously published
Essays on Philosophical Subjects
• 1895, student notes from lectures
on jurisprudence discovered
• 1958, student notes from lectures
on belles lettres and rhetoric
Smith’s Research Program
• What makes it possible
for men to live in
• How is it that man’s
hedonism comes to be
restrained, preventing
the injury of one another
and fostering the
benefits of civil society?
The Theory of Moral Sentiments
• Smith’s first book and the
foundation of his fame
during his lifetime
• An exposition of a
general system of morals
in an attempt to answer
the question of his
research program: What
makes it possible for men
to live in society?
The Theory of Moral Sentiments
The Argument
• we seek the approbation of
our fellows in society
• we know what will receive
approval by others by our
ability to sympathize with
our fellows
• sympathy is simply an ability
to imagine behavior from the
viewpoint of an impartial
The Theory of Moral Sentiments
• but sympathy is insufficient
in specific cases, because
we can not take an unbiased
view of our personal actions
• therefore moral rules generalizations of actions
approved or disapproved of
- become necessary
• sometimes moral rules are
insufficient, and positive
laws are required
Lectures on Jurisprudence
• Based on student
lecture notes discovered
in 1895
• Presents aspects taking
up where the argument
of The Theory of Moral
Sentiments leaves off, in
a presentation of a
theory of jurisprudence
The Theory of Moral Sentiments
• The Wealth of Nations can
also be considered as a
continuation of The Theory
of Moral Sentiments, in so
far as it is a description of
the commercial society
(noted in Moral Sentiments),
bounded by law, within
which utility, rather than
affection, binds one with
another in civil society
The Wealth of Nations (1776)
• An Inquiry into the Nature
and Causes of the Wealth
of Nations
– continuation of Smith’s
research program
– rebuttal to James Steuart
– continuation of British
economics influenced by
French and Scottish
– summation of political
economy for interested lay
The Wealth of Nations (1776)
• Analytical Economics
– Economic Growth
– Production and Capital
– Value and Distribution
• Polemics and Philosophy
– Anti-Mercantilism
– Defense of “Natural Liberty”
– Outline for functions of
Liberal Government
The Wealth of Nations (1776)
• Book I - “Of the Causes of
Improvement in the
productive Powers of Labour,
and of the Order according to
which its Produce is naturally
distributed among the
different Ranks of the People”
• Book II - “Of the Nature,
Accumulation, and
Employment of Stock”
The Wealth of Nations (1776)
• Book III - “Of the different
Progress of Opulence in
different Nations”
• Book IV - “Of Systems of
political Œconomy”
• Book V - “Of the Revenue of
the Sovereign or
Book I: The Division of Labor
• Focus: Allocation of resources in
a growing economy
– Growth rate of economy depends
upon division of labor
• increases dexterity
• saves time
• leads to invention of machines
– Division of Labor depends upon
• extent of market
• self-interest (propensity to truck…)
• existence of and increases in stock
(=tools and provisions for workers)
Book I: Money and Value
• Once division of labor
established, men live by exchange
• Problems of barter exchange lead
to natural development of
monetary commodity
• monetary commercial society is
exchange society - what are rules
of exchange?
• Diamond-Water Paradox stated
(but no solution!)
– compare with Lectures on
– Value in use v. Value in exchange
Book I: The Prices of Goods
• Real price
– “the real price of every thing…is the
toil and trouble of acquiring it.”
• labor-cost theory of value
– “the value of any commodity…is
equal to the quantity of labour
which it enables him to purchase or
• labor-command theory of value
– “Labour…is the real measure of the
exchangeable value of all
• Nominal price
– money price
Book I: Wages, Profits, and Rent
• In early society, before accumulation
of stock and appropriation of land,
the whole produce belongs to labor
• Accumulation of stock leads to wage
payment, and profits for those that
“hazard” their stock by supplying
tools and payments to workers
• Private property leads to third
payment- rent to the landlord
– what is economic function?
• Labor measures the value of labor,
the value of rent, the value of profit
(labor measures price)
Book I: The Prices of Goods
• Natural price
– equal sum of the natural rates of
wages, profit and rent
• (labor-command v. labor-cost theory)
• Market price
– relation between supply and
“effectual demand”
• Relationship between Market Price
and Natural Price regulates product
and resource allocations
– if Market Price > Natural Price, then at
least one of components of natural price
must be above natural rate (wage, profit)
- probably not rent…
Book I: Wages and Profits
• Wages depend upon change in
stock; being high when stock is
• High real wages lead to increases in
• Money wages regulated by demand
for labor and price of “necessaries
and conveniences of life”
• Profits fall with increase of stock (via
• Wages and Profits inversely related
• Wages across occupations vary due
to costs; Profits across industries
vary due to certainty
Book I: Rent
• Rent is produce above that
necessary to pay ordinary profits
• The rent of land is “naturally a
monopoly price…not at all
proportioned to what the landlord
may have laid out upon the
improvement of the land”
• “Every improvement in the
circumstances of the society tends
either directly or indirectly to raise
the real rent of land, to increase
the real wealth of the landlord…”
Book II: Capital
• A stock of goods is necessary
to supply labor tools and
goods sufficient to maintain
laborers while they toil
• Saving is source of capital
(both circulating and fixed)
• Money is a part, but small
part, of the capital of a
country but is not any of the
nation’s revenue (only goods)
Book II: Money
• The volume of trade
determines the quantity of
money in society
• Banknotes enable country to
convert dead stock into
active and productive stock
• Value of paper money is
regulated by value of specie
which is determined by the
labor costs of production
Book II: Types of Labor and Capital
• Productive v. Unproductive labor
– productive labor creates goods
– unproductive labor creates services
• Rate of accumulation
– productive labor and saving
– prodigal spending destroys capital
• Saving is consumed as regularly as
• Argument in favor of maximum
interest legislation to divert
loanable funds away from
profligates and speculators
Book III: Economic History
• A review of rise and
progress of industry and
• Smith, however, is generally
oblivious to the important
economic events
surrounding him
– iron works, Watt’s inventions
– canal boom, cotton textiles
– potteries, new methods of
Book IV: Political Economy
“Political œconomy, considered as
a branch of the science of a
statesman or legislator,
proposes two distinct objects:
first, to provide a plentiful
revenue or subsistence for the
people, or more properly, to
enable them to provide such a
revenue or subsistence for
themselves; and secondly, to
supply the state…with a revenue
sufficient for the public
Book IV: Mercantilism
• Identification of bullionism
with “Mercantile system”
• Argument against export
subsidies, import restraints,
monopoly grants
• Argument for free trade
(without use of division of
labor) on basis that
consumption, not
production, is end of all
industry and commerce
Book IV: Physiocracy
• Overlooks contributions of
manufacturing and
commerce to revenue of
• Despite errors, physiocracy
has made valuable
contributions in its
opposition to the mercantile
system and position in favor
of commercial liberty and
free trade
Book V: State Expenditures
• Duties of Sovereign
– defense from invasion
– protecting each member from
injustice of oppression by
others in society
– erecting and maintaining public
works that are not profitable for
individuals to carry out
roads, canals, bridges, harbors
primary education
navigation acts
post office
government coinage
Book V: Canons of Taxation
• Contribute in proportion
to ability, that is in
proportion to revenue
they enjoy from
protection of state
– ability-to-pay v. benefits
• certainty
• convenience of payment
• economy in collection
Popularizing Smith
• Dugald Stewart (1753-1828)
– Professor of Mathematics and Moral
Philosophy, University of Edinburgh
• successor to Adam Ferguson in Chair of
Moral Philosophy
• attracts wide range of students, including
Walter Scott, James Mill, and J.R.
– from 1800, lectures on political economy
as a separate class
– Elements of the Philosophy of the
Human Mind (1792-1827)
– Outlines of Moral Philosophy (1793)
– Life and Writings of Adam Smith (1793)
Smith: An Evaluation
• Social Impact
– vagueness led to several interpretations
– Arguably the father of “socialism,” “Georgism,” as
well as “British classical economics”
– first or second in impact on policy
• Impact on Development of Economics
– standard of reference
– loss of earlier contributions
• Originality
– original not true, true not original
– deterioration from late Spanish scholastics,
Cantillon, Turgot, even Smith’s own earlier writings
Smith: An Evaluation
• Smith’s “Calvinism” (Rothbard on Smith)
favors productive v. unproductive labor
favors capital v. consumer durables
favors saving over luxury
criticized high profits and luxury spending
emphasis on labor value
favored taxation of luxury consumption,
distilleries, and retail liquor sales
– favored usury laws to reallocate funds into
“most productive” hands and away from
“prodigals” and “projectors”
• The Smithian Diversion?
The Heirs of Adam Smith
• The (Utilitarians) Ricardians
– Jeremy Bentham
– David Ricardo
– James Mill and John Stuart Mill
• The British Anti-Ricardians
– Thomas Malthus
– Nassau Senior
– The Dublin School
• The Manchester School
– Richard Cobden
– John Bright