Adam Smith (1723-90)

Adam Smith is often seen as the founding father of economics. He developed much of the theory about markets that we regard as standard theory now. In fact he could be seen as being to blame for much of the content of current economics courses!

Adam Smith was Scottish and after graduating from Glasgow (at the amazing age of 17!!) he was a fellow at Oxford and then he lectured back in Scotland again - first at Edinburgh and then Glasgow Universities. Surprisingly this was not in economics. In fact it was not until 10 years after leaving the Chair of Moral Philosophy at Glasgow that he wrote the book (or series of books) for which he is most famous. After Glasgow, he decided to go traveling. He spent much of this time meeting the influential thinkers of the day. It was this that helped him to formulate his ideas, and once he got back to Scotland again, he started writing.

Adam Smith's main work was 'The Wealth of Nations' (actually its proper title was 'An Inquiry into the Nature and Causes of the Wealth of Nations', but we've got lazier these days!). He wrote it in five books and it was published in 1776.

Perhaps the concept most associated with him is the 'invisible hand'. This was not a personal physical problem of Adam Smith's but referred to the operation of market forces. He argued that markets would guide economic activity and act like an invisible hand allocating resources. Prices would be the main means to do this. Prices would rise when there was a shortage of something and fall when it was plentiful.

Adam Smith argues that it was market forces that ensured the production of the right goods and services. This would happen because producers would want to make profits by providing them. Without government intervention, thus forming a laissez-faire environment, public well-being would increase from competition organizing production to suit the public.

This was the basis of the free market economy. Competition would mean producers trying to outsell each other and this would bring prices down to their lowest possible levels (making minimal profit). If there was not enough competition, this would mean that producers would make more profit. This would soon attract more firms to join this industry, bringing prices down. All this would end up benefiting the consumer without any necessary intervention.

This system had 2 requirements, however. One was that the market needed to be free of government intervention, and the other was that there had to be competition. Smith recognized immediately the danger of monopoly:

"A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate."

These are concepts that are so fundamental that they are still present in nearly all economics courses (something to look forward to if you haven't done it already!).

Adam Smith argues that what was good for the worker was good for England and almost as consistently that what was good for merchants and manufacturers (high tariffs and other special favors from government) was bad for England. He was a defender of capitalism-not of capitalists. 

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