As the American Revolution began, a Scottish philosopher started his own economic revolution. In 1776, Adam Smith
published The Wealth of Nations, probably the most influential book on market economics ever written.
In 1759, Smith published The Theory of Moral Sentiments. His book looked at human nature and ethics. At the beginning of the book, he stated that all people had the capacity to care about others.
But Smith also believed that people often acted in their self-interest, especially in economic matters. He argued, however, that this was not bad. He concluded that self-serving individuals were “led by an invisible hand” that caused them to unintentionally act in ways that still benefited society.
In March 1776, Smith published An Inquiry into the Nature and Causes of the Wealth of Nations. This massive work of almost 1,000 pages was based on his exhaustive research and personal observations. Smith attacked government intervention in the economy and provided a blueprint for free markets and free trade. These two principles eventually would become the hallmarks of modern capitalism.
1. What was Adam Smith’s philosophy about human nature, as he stated in his first book, The Theory of Moral Sentiments?
2. What does the “invisible hand” lead self-serving people to do?
3. What did Adam Smith attack in The Wealth of Nations? A “Simple System of Natural Liberty”
When Adam Smith published his Wealth of Nations in 1776, Britain was just beginning to enter the Industrial Revolution. The first cotton-spinning factory had opened only a few years earlier. Increasingly, workers labored for pennies a day in factories and mines. Most employers believed that to get the poor classes to work, their wages had to be low, just enough to keep them from starving.
Smith began his book with a radical definition of “national wealth”. He rejected the old mercantilist definition of acquiring gold and silver. Nor did he fully accept the Physiocrat view that wealth consisted solely of the produce of a nation’s farms. Instead, Smith proposed that the wealth of a nation consisted of both farm output and manufactured goods along with the labor it took to produce them. To increase its wealth, Smith argued, a nation needed to expand its economic production. How could a nation do this? Smith thought the key was to encourage the division of labor.
Smith argued that workers could produce more if they specialized. He gave the example of a pin factory based on his real-life observations. One worker who did all the operations necessary to make a single pin, he said, could produce no more than 20 in one day. Ten workers could make 200 pins this way. If, however, the 10 workers each specialized in one or two of the pin-making operations - from drawing the wire to putting the finished pin on the paper card - they would work more efficiently. Smith estimated that these 10 workers could produce 4,800 pins per worker or 48,000 altogether in a day.
Smith argued that if all production could be specialized like the pin factory, workers could produce more of everything. Because humans naturally trade with one another, Smith reasoned, those involved in making one product will exchange it (or the wages they earn) for the goods produced by other workers. Thus, Smith concluded, “a great plenty diffuses itself through all the different ranks of society.”
4. How did most employers treat their workers at the beginning of the Industrial Revolution?
5. According to Smith, what is a nation’s wealth consist of?
6. How did a division of labor into specialized jobs make production more efficient?
7. If a division of labor made factories more efficient and productive, how would that benefit everyone in society?
Adam Smith and the Role of Government
Adam Smith advocated a limited role for government. But he recognized significant areas where only it could act effectively.
Smith favored “public works” to create and maintain and infrastructure to promote the free flow of commerce. These works included such things as roads, bridges, canals, harbors, and a postal system that profit-seeking individuals may not be able to efficiently build and operate.
Even in 1776, at the beginning stages of industrialization, Smith recognized that repetitive factory jobs dulled the minds of workers. He said they became “as stupid and ignorant as it is possible for a human being to become.” Smith wanted all classes, even the poorest, to benefit from the free-market system. “No society can surely be flourishing
and happy,” he wrote, when most of its people are “poor and miserable.”
Thus, remarkably for the time, Smith advocated the education of all youth. He believed there was little difference in intelligence between the poor and the rich. Only the social conditions of the poor held them in ignorance, he concluded. He called for a “little school” in every district, supported by public taxes and small parent fees. “An instructed and intelligent people,” Smith wrote, “are always more decent and orderly than an ignorant and stupid one.”
Smith wrote that paying taxes was “a badge, not of slavery, but of liberty.” By this, he meant that a taxpayer was an owner of property rather than the property of a master. Furthermore, Smith was an advocate of setting tax rates according to one’s ability to pay. Taxpayers, he argued, should pay “in proportion to the revenue which they respectively enjoy under the protection of the state.”
8. What kind of projects does infrastructure include?
9. How does a good infrastructure help business?
10. How did Smith propose to improve the lives of the poorer working class?
11. How did Smith feel about paying taxes?
12. How did Smith propose to set tax rates?
Applying The Wealth of Nations to the World We know Adam Smith today as the father of laissez faire (“to leave alone”) economics. This is the idea that government should leave the economy alone and not interfere with the “natural course” of free markets and free trade. But he was mainly thinking about the government granting special economic privileges to powerful manufacturers and
In The Wealth of Nations, Smith only glimpsed the impact of the Industrial Revolution in Britain and later the United States. He did not foresee the development of huge corporate monopolies that suppressed competition without the need for government licenses. He did not imagine the brutal working and living conditions suffered by masses of men, women, and children. Thus, he never fully addressed the issue of whether government should intervene in the economy to prohibit such things as corporate monopolies and child labor.
13. What does laissez faire economics mean?
14. In a free market, the government does not interfere with business. Can you think of any kinds of laws that tell employers or business owners what they can or cannot do?
15. What is the strength of an economy based on Adam Smith’s beliefs?
16. How did Adam Smith’s beliefs affect the growth of the United States economy and the relationship between the government and the economy?