Adam Smith Economic Theory Summary

ADAM SMITH

Origin

Adam Smith who is commonly known as “father of capitalism” was born in the seaport and manufacturing town of Kirkcaldy, Scotland in 1723. He was the son of Adam Smith and Margaret Douglas (Mastin, 2008). His father was a writer to the Signet as well as the comptroller of the customs whereas his mother was the daughter of an important land owner, John Douglas. His father was died in January 1723 which is 5 month before he was born (NNDM, n.d.). Therefore, he was brought up by her mother. When he was four years old, he abducted by gypsies at Strathendry but released without any injured. Adam Smith began to study Latin, mathematics, history and writing in Burgh School since 1729. He had his first school at Burgh School which is one of the best secondary schools at Scotland when he was 6 (Rae & John, 1895).

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When he was fourteen years of age, he was studied social philosophy at University of Glasgow with scholarship and attended Baliol College at Oxford University in 1740. In 1748, Smith gave lectures on rhetoric and literature at the University of Edinburgh. He was met with David Hume and they shared closer intellectual and personal thinking between each other. In 1751, he worked as a professor of logic at Glasgow University and appointed professor of moral philosophy after one year. In 1759, he published ‘The Theory of Moral Sentiments’ that focus on the human morality and sympathy which refer as an ability to make judgment about individual and others.

In 1962, Adam Smith was become a tutor of the future Duke of Buccleuch which namely Charles Townshend and they travelled to France together. He was met with the philosopher Voltaire in France. In year 1776, he was moved to London and published another book which titled ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ or normally known as Wealth of Nations. After two years, he was selected to be a commissioner of customs and helped to enforce laws against smuggling (Library Economics Liberty, 2008). Besides that, he was elected become a member of Royal Society of Edinburgh in 1783 (BBC, 2014). At the end of the life, Adam Smith never married and died at the age of 67 in 1790.

Area of Interest

Adam Smith was aimed to enlarge the welfare of society. In order to achieve this objective, he was advocated the free trade and self-interest in exchange goods or services in the market. It means that society is free to choose the ways to trade and which goods to trade in the market so that to maximize their profit. Besides that, Adam Smith was prompted the limited role of government while he believed that the intervention of government would be a burden of society. But, he recognized that government has responsible to educate society. Furthermore, Adam Smith was purposed to increase the efficiency of market through increase the quantity of workload. He was introduced the concept of ‘Division of Labor’ to increase the output by using scarce resources. With this concept, all the workload is divided into small part. Therefore, workers can get the jobs that suit them well and it also save the time. This is because workers no need to delegate the workload or tools to other workers which are in different places.

Contribution

Theory of Moral Sentiments

In 1759, Adam Smith published his Theory of Moral Sentiments which is based on his lectures and it attracted many students from home as well as abroad (Mastin, 2008). In Theory of Moral Sentiments, Adam Smith developed the foundation for a general system of morals. It showed that the moral ideas and action are the basic elements since human is social creatures. It identified that moral is the basic need as social using it to interact and express their feelings. It also stated that the society need the prudence and justice to survive, and explains the additional, beneficent, and actions that enable it to flourish. It was a very important text in the history of moral and political thought. It provides the ethical, philosophical, psychological and methodological underpinnings to Smith’s later works. In the Theory of Moral Sentiments, Adam Smith highlighted the self-interest and sympathy where we tend to protect ourselves benefits naturally. Individual freedom is rooted in self-reliance as stated by Adam Smith, the ability of an individual to pursue his self-interest while commanding himself based on the principles of natural law (Adam Smith Institute, n.d.).

Wealth of Nations

In this book, Adam Smith opposed government interference in business and commercial transaction; but he agreed on the decisive impact of low tariffs and ideas of free trade on government policies throughout the nineteenth century. Furthermore, Adam Smith refuted the old mercantilist doctrine and he also rejected the Physiocracy view about land is the main source of value but he proposed the basic importance of labour. He emphasized on importance of human capital and the division of labour that will bring a lot of growth in production, destroyed the set of political constraints which hinder the industrial development. The central idea of The Wealth of Nation is the free market seems disorganized but it actually is a self-adjusting mechanism. When there is a shortage of a product, its prices will increase naturally. This helps the producer to obtain the higher profit. Since the profit is higher, more producers tended to produce that product. The increase of quantity supply will help to ease the shortage of product and since the competition existed between manufactures, the growth of supply will lead the prices drop until it is same amount with the production cost. Thus, the problem was solved although everyone not intend to help society to eliminate the shortage (Adam Smith Institute, n.d.).

Invisible Hand Theory

Adam Smith was developed the theory of invisible hand which guiding the market to an optimal level and society can get the benefit from it. However, the intervention of government is not necessary in the market, therefore there is no regulation from government exists to control the production or consumption of goods and services. According to the Helen (2001), the process of invisible hand is often worked in the free or unregulated market. It is assumed that consumers would demand for the goods with lowest price, while suppliers choose to produce more for the goods that can earn more profit. In free market, every person can become producer or consumer; therefore they will try to maximize their self-interest through the exchange of goods and services. People are free to make any decision in their economic activity and this concept would be bring an efficient market, then increase the economic well-being.

Through invisible hand theory, Adam Smith argued that demand and supply are plays important roles in order to achieve the efficient level of production, and distribution of the good and services (Kumar, 2010). An increase in the demand of market would be lead market price of goods raises. This may attracts producers to produce more due to the higher earning. In contrast, the huge number of producers may increase the market supply, and then reduce the price. This is commonly known as price mechanism. In principles, supply may be greater than demand and this condition is called surplus. Producers would cut the market price of product until the equilibrium price, so that consumers will continue buy the product. Inversely, condition of shortage may exists when the demand is higher than supply. Producers would increase the market price until equilibrium price, thereby it may achieve the objective of maximize the welfare.

The Division of Labor

In Wealth of Nations, one of main concept of Adam Smith was division of labor. This concept was associated with the specialization of the labor force. Through this theory, a large industry will be break down into many small parts of operation. Each worker becomes more experience and expert since they just concern on a small area of production with simple operation. The job market would become efficient since division of labor would assign each worker to the job that suits him best (Yousuf, 1996). This is the reason for workers could be more concentrating on the small part of production process; therefore it would save the time and money. Besides that, quantity of work also increases by using the machines which can easier the work. Adam Smith also stated that government should provide the education to workers so that the knowledge of workers would be improved. In short, under the division of labor, the quantity of work and productivity would be increased.

Harmony of Interests and Limited Government Theory

Another contribution of Adam Smith to economics was the theory of Harmony of Interests and Limited Government. Adam Smith argues that intervention of government in any form such as tax and quota might effect on economy and prevent the market from work efficiently (Christian, 2005). Government can hinder the free circulation of labor and stock and then eliminate the free competition. However, he agreed with the action of government in some areas. For example, government increases the spending in order to improve the infrastructures and make easier the transaction of trade. Besides, the public education that provided by the government can increase the ability of workers. Adam Smith indicated that people often acted in their self- interest, this means that they were focus in their basic needs. However, the interaction among people can motivate human behavior and contribute to achieve economic objectives.

References

Adam Smith Institute. (n.d.). The theory of moral sentiments. Retrieved from http://www.adamsmith.org/moral-sentiements

BBC. (2014). History Adam Smith (1923-1970). Retrieved from http://www.bbc.co.uk/history/historic_figures/smith_adam.shtml

Christian, S. (2005). Adam Smith’s view of the market and the government- An analysis of the wealth of nations. Retrieved from http://www.christiansandstrom.org/english/articles/smith.PDF

Helen, J. (2001). Adam Smith and the invisible hand. Retrieved from http://plus.maths.org/content/adam-smith-and-invisible-hand

Kumar, V. (2010). Adam Smith’s theory of invisible hand. Retrieved from http://business.wikinut.com/Adam-Smith-s-theory-of-invisible-hand/5-hamixs/

Library Economics Liberty. (2008). The Concise Encyclopedia of Economics. Retrieved from http://www.econlib.org/library/Enc/bios/Smith.html

Mastin, L. (2008). By individual philosopher: Adam Smith. Retrieved from http://www.philosophybasics.com/philosophers_smith.html

NNDB. (n.d.). Adam Smith. Retrieved from http://www.nndb.com/people/309/000030219/

Rae & John. (1895). Life of Adam Smith. Retrieved from http://www.econlib.org/library/YPDBooks/Rae/raeLS1.html

Yousuf, D. (1996). Adam Smith and the division of labor. Retrieved from http://www.victorianweb.org/economics/division.html