All About Adam Smith: Father of Modern Economics » Nsemwoha.com (2023)

Adam Smith was an 18th-century philosopher who is recognized as the father of modern economics and a leading proponent of laissez-faire economic policy. In his first book, The Theory of Moral Sentiments, Smith proposed the idea of ​​the invisible hand: the tendency of free markets to self-regulate through competition, supply and demand, and self-interest. Smith is also known for his theory of compensating for wage differentials, meaning that dangerous or unwanted jobs are given higher wages to lure workers into those jobs.

But he is best known for his 1776 book: "Inquiries into the Nature and Causes of the Wealth of Nations". Read on to find out how this Scottish philosopher argued against mercantilism to become the father of modern free trade and the founder of the concept now known as GDP.

Early life

The recorded history of Smith's life begins on June 5, 1723, with his baptism in Scotland; however, his exact date of birth is undocumented. Smith entered the University of Glasgow at the age of 14 and later attended the prestigious Balliol College of the University of Oxford. After returning from Oxford studies, Smith began a series of public lectures in Edinburgh. The success of the lecture proved to be a springboard for a professorship at his alma mater. He started with logic, but later taught moral philosophy at the university. Those years of teaching and tutoring culminated in the publication of some of Smith's lectures in his 1759 book, The Theory of Moral Sentiments.

The foundation for the canvas of Smith's work was laid in this year and was the result of his interactions with notable figures from a variety of fields. He was friends with James Watt, the inventor of the steam engine, but also with the philosopher David Hume. Smith moved to France in 1763 because he was offered a better paying job as personal tutor to his stepson Charles Townshend, an amateur economist and future Treasury Secretary. While in France, Smith wrote "An Inquiry into the Nature and Causes of the Wealth of Nations", which would finally cement his place in history.

Theory of moral feelings

Smith is best known for his 1776 work, The Wealth of Nations, but his first major treatise, The Theory of Moral Sentiments, was published in 1759 and many of his ideas are still applied today.

Some may be surprised to learn that Smith, who is also known as the "Father of Capitalism," goes into great detail about charity and human ethics in this book. While much of the philosophy behind Smith's work is based on self-interest and maximizing output, "The Theory of Moral Sentiments" was a discussion of how human communication is based on compassion. The book elaborated on ideas such as morality and human sympathy. Smith argued in the book that people are selfish, but they naturally like to help others. He introduced the concept of the "inner man" and the "impartial observer" responsible for guiding human action. Both help to reconcile passion with reason, which is the foundation of economic systems and the foundation of institution building within human society. In addition to our instinct for self-preservation, the book also contains elements from social psychology. The first is mainly expressed through common morality and a sense of justice. An excess of emotions can be harmful to both; thus the human instinct to control emotions in a socially acceptable way.

The "impartial spectator" is in our mind when we communicate with others. As human beings, we have a similar natural affinity for justice, as it promotes the preservation and expansion of society.

While this seems to contradict his economic views of individuals working to better themselves without regard to the public interest, the idea of ​​an invisible hand helping everyone through the work of self-centered individuals compensates for this apparent contradiction.

Wealth of the people

Smith's 1776 work, "An Inquiry into the Nature and Causes of the Wealth of Nations", also abbreviated as "The Wealth of Nations", appeared at the dawn of industrial development in Europe. While critics point out that Smith did not invent many of the ideas he wrote about, he was the first person to collect and publish them in a format designed to explain them to the average reader of the time. As a result, he is responsible for popularizing many of the ideas behind the school of thought that has come to be known as classical economics.

Other economists drew on Smith's work to solidify classical economic theory, which would become the dominant school of economic thought during the Great Depression.

In this book, Smith discussed the stages of society's evolution, from the hunter-gatherer phase with no property rights or fixed abode to nomadic agriculture with itinerant abodes. Feudal society is the next stage. In this phase, laws and property rights are created to protect the privileged classes. Laissez-faire or free markets characterize modern society in which new institutions are created to carry out market transactions.

Laissez-faire philosophies, such as minimizing the role of government intervention and taxation in free markets, and the idea that an "invisible hand" directs supply and demand, are among the main ideas promoted by Smith's writings. These ideas reflect the concept that by taking care of themselves each person inadvertently helps create the best outcome for all. "We cannot look forward to our dinner because of the benevolence of the butcher, the brewer, or the baker, but because of the consideration of their own interests," Smith wrote.

By selling products that people want to buy, the butcher, brewer and baker hopes to earn money. If they are effective in meeting their customers' needs, they will receive financial rewards. While they are involved in their business to make money, they also deliver products that people want. Such a system, Smith argued, creates wealth not just for the butcher, the brewer, and the baker, but for the nation as a whole when that nation is populated by citizens who work productively to improve and meet their financial needs. Similarly, Smith noted that a man would invest his wealth in a company that would likely help him get the highest return for a given level of risk. Today, the invisible hand theory is often presented in terms of a natural phenomenon that directs free markets and capitalism toward efficiency through supply and demand and competition for resources. meager, rather than something that results in the well-being of the people. individuals

"The Wealth of Nations" is a comprehensive work consisting of two parts divided into five books. It differs from the Theory of Moral Sentiments in one important respect. Together with the "inner man" that was supposed to control and regulate human passion, it relies on an institutional framework that directs people towards productive activities that benefit society. The basis of that framework is competition, which Smith defined as "a desire that comes with us from the womb and never leaves us until we go to the grave." The framework consists of institutions such as the judiciary that are designed to protect and promote free and fair competition.

The ideas promoted by the book attracted international attention and helped shift from land-based wealth to wealth created by assembly-line production methods driven by division of labor. An example Smith gave involved the labor required to make a pin. One man going through the 18 steps required to complete the tasks might only make a few pins per week, but if ten men completed all 18 tasks on the assembly line, production would increase to thousands of pins per week.

In short, Smith argues that division of labor and specialization produce wealth. "The great multiplication of the productions of all the various arts, owing to the division of labor, produces in a well-governed society that universal wealth which extends to the lowest classes of people," asserts Smith. In "The Welfare of Nations ."

Adam Smith created the concept of GDP

Eventually, despite the ideas presented in The Wealth of Nations, Smith changed import and export business, created the concept of what is now known as gross domestic product (GDP), and advocated free trade.

Before the publication of the Wealth of Nations, countries declared their wealth based on the value of their gold and silver reserves. However, Smith's work was highly critical of mercantilism; he argued that countries should instead be judged by their levels of production and trade. This sentiment formed the basis for measuring a country's wealth based on a metric called GDP.

Before Smith's book, countries were reluctant to trade with other countries unless it benefited them. However, Smith argued that free exchange should be created as both sides promote trade. This led to more imports and exports, and countries rated their value accordingly. Smith also advocated limited government. He wanted a hands-off government and legislation that would lead to free and open markets. Smith, however, held the government responsible for some sectors, including education and defence.

it comes down to

Smith's ideas became the basis of the classical school of economics and gave him a place in history as the father of economics. Concepts introduced by Smith, such as the invisible hand and the division of labor, are now essential economic theories. Smith died on July 19, 1790 at the age of 67, but the ideas he promoted live on in the form of contemporary economic research and institutions such as the Adam Smith Institute. In 2007, the Bank of England placed his image on the £20 note.

Fuente: investopedia.com