Adam Smith’s Economics

Adam Smith was born on High street in Kirkcaldy across the Firth of Forth from Edinburgh, Scotland by Margaret Douglas posthumous to a Presbyterian church minister and lawyer of the same name in 1723 – a protestant family in the Whig party in an era that Scots and English union was forming with the Jacobite rebellion in earnest, and Americans were resisting taxation by Britain. Adam Smith is now most famous for his book The Wealth of Nations, for which he is wrongly called the father of economics as if he invented the subject. But his philosophical work in The Theory of Moral Sentiments is however more serious and less misunderstood.

Close friend of David Hume (author of A Treatise of Human Nature), and contemporary of Walter Scott, Smith was inclined to analytical notions, system’s thinking and a scientific mind if only because he had enjoyed a technical training including mathematics, astronomy, classical works of Greek philosophers (Plato, Aristotle, Cicero), knew Latin and Greek and was very studious. Many of his terms reached us including manufacture – meaning hand-made, the invisible hand (implying providence or God), propensity and in deviation from the Greek oeconomy, spoke of political economy which was further popularised by John Stuart Mill (1806-1873). Mill introduced the notion of utilitarianism in his Principles of Political Economy, followed by Alfred Marshall (1842-1924)’s Principles of Economics.

As professor of rhetoric – art of persuasion, Smith sought the origin of language, wanted to give a few rules to connect human sentiments and passions, natural jurisprudence and politics, much as in physical science and chemistry at that time a few mathematical rules  and ideas were found to explain gas behaviour, making the steam engine (fire engine) possible. He collected and estimated even if crudely in some cases, statistics to support what he called the arts that contribute to subsistence, accumulation of property and the political institutions concerned with commerce, finance and public establishments. Hence the term political oeconomy. Drawing on Hume‘s notion of the partition of employments which Smith called division of labour, both were aware of Plato‘s notion that quality and quantity is highest in a community when each person focuses on those tasks most fitted to his own nature – his specific aptitudes. To this Smith added the condition that the worker has to be free and not be enslaved in choosing his job. His reason is that cooperative self-interest is what drives men best.  Smith’s considerable volume of The Wealth of Nations reflects the encyclopaedic spirit illustrated by Denis Diderot‘s publication of the first Encyclopédie in 1756.

Turned down by his first love, Smith never married. Before following his father’s footsteps as Commissioner of Customs for Scotland in his later life, Smith lived an academic life holding the chair of logic and rhetoric at the University of Glasgow, moving to Oxford University, tutoring the young duke of Argyll (member of the Order of the Garter, later Duke of Buccleuch) privately in a trip to France (Toulouse) where he met Voltaire, duc de La Rochefoucauld, Jean-Jacques Rousseau, Marie-Jeanne Riccoboni, Francois Quesnay. The royal physician Francois Quesnay was the member of the economistes who circulated his Tableau Economique in 1758, a model elaborating on how national prosperity builds up from the productive classes of farmers and landlords and the unproductive classes of merchants and workmen. Smith built on this model by clarifying the sources of surplus in the classes.

Smith saw the Scottish union with England as a relief from the oppression by the Scottish aristocracy. The Royal Bank of Scotland (RBS), the Bank of Scotland and the Ayr bank were already well established, and the British East India company was bringing tea and cotton from India. For example its Coffee-House in London’s Suffolk street near Charing Cross was an area popular among the Scots and such aristocracy in London.

In similar vein Smith was sympathetic towards American demand for free trade when Britain was building its imperial power. It is not unfair to say that moral concern about civic matters of that age were a prime force behind his life’s work, and not money matters as such. For him political economics was a means for addressing civic morality because he sought an analytical relationship between the love of profit and luxury for the rich and the poor lives of the hardworking farmers and artisans on whose produce merchants prospered so well. He was conversant with Stoic principles and natural liberty and with the works of Hugo de Groot on the freedom of the seas.

Morality, according to Smith, derives from sympathy, giving us propriety – a sense of right or wrong according to the degree of congruence we feel with the actions or opinions of another, and in consequence also of ourselves. We let us be guided more by the merits of the motive behind an action than by the outcome, focusing on how we as individuals would have acted in similar situation. Smith distinguishes between praise and praiseworthiness; the one guides public judgement based on observation, the other guides impartial judges based on reasoning. Similarly, he distinguishes between blame and blameworthiness. Both could lead to differences in the severity of the punishment deemed appropriate in a situation. Conscience promotes praiseworthiness and has aversion to blameworthiness. As a result, conscience develops scruple – regard for propriety or morality in one. Hence scrupulosity expresses conscientiousness.

By inducing respect for wealth, riches establish social class and maintain subordination in society, often with regrettably little consideration of how one comes about the specific riches. Luxury in consumption seems to start when man ascribes values to qualities (often  sensual such as colour, form or rarity) that have nothing to do with any superior advantage in meeting the wants of nature. Thus diamonds are valued more than ordinary pebbles simply for their shiny look.

Smiths greatest fallacy is perhaps his faith in the invisible hand that he supposes will distribute the necessities of life efficiently between portions of society. This ignores the inequalities that result from birth, prejudice, propensity to greed, and both physical and mental endowment, quite apart from the warping impact of government as powerful elites dominate or subjugate others. It was rather naive of Smith as a Scot to ignore this warping effect of the ruling classes, given his awareness of the feudal history of Europe and certainly of the English domination of British social opportunities. As a result of this oversight, the dynamics of division of labour in relation to reward, the role of money and the determination of prices were treated ineffectually by Smith, and in large measure till this day in 2010.

Consumption as word became popular from Adam Smith’s term consumptibility used in 1763 as a replacement for comestibleness (comeasttibleness) coined by Mandeville from comestible or edible based on comedere Latin to eat. Mandeville used the term for the opulence or virtue of prostitutes above honest women offering the conveniences and necessaries of life. The idea is that anything of value derives its value from those conveniences and comfort it offers. In Mandeville’s view, prostitutes offer the rich a certain comfort; in Adam Smith’s view, treasures offer a value that can eventually be used up.

Smith conceived Political Economy as a branch of study as to how to provide plentiful subsistence or revenue for the people and generate enough revenue (tax) for public services. Such a study would rest not on mineral gemstones in the ground, nor on abstract princely or philosophical wisdom, but on the division of labour in the production system to multiply total possible output of the working community. The freedom to exchange goods and services, plus individual aptitudes would generate the value of the labour of each one – yielding the natural price of his product.

Rather ignorant of the real history of money, Smith assumed that the prices of all goods would move towards their natural prices. By underestimating the merchant’s penchant for high profits, Smith relied on the invisible hand to make prices gravitate to their natural levels. Faced with the difficulty of explaining the role of resources before a production process yields actual output, Smith turned to the idea of capital – in the form of latent output worth in fixed assets, and in the form of cash outlay required for paying variable costs. In grappling with this, banking came to his aid, if only in explaining the need for savings (frugality) during periods of substantial yield, so as to provide for means on rainy days. He expects capital to flow to those uses which give the highest prosperity in society – a notion akin to opportunism and profiteering with little or no input.

Smith’s concern was about imperial royal encroachment on individual economic freedom through restrictions on exports, shipping and trade in general. He ignored the potential for industrial or sectoral collusion. Yet he saw tax as an expression of liberty if collected on an equality basis, and preferably on luxuries rather than on necessities. Pioneering as his work was, Smith ignored the treatment of issues like population growth, innovation and the creativity of entrepreneurs in the original opportunist sense of go-betweens without adding to value. This last point puzzled him as to why paintings for example should cost much more than the objects painted.

Pro Whigs and less of a Tory, Smith benefited from the landed estate lost by a family for supporting James (Jacobian) feelings in 1715. Smith as Commissioner of Customs had the duty to enforce trade restrictions, despite his preaching the ideals of free trade. His Wealth of Nations might mention the corruption and tyranny of East India Company, but he showed little opposition to the prohibition on trade with France. Even as Lord Rector of the University of Glasgow shortly before his death, he saw the disposition to admire and almost worship the rich and the powerful as the great cause of corruption, the jet setter that makes vices fashionable and reduces solid virtues to ordinary contempt. By bestowing on the rich the respect by his equals, wealth brings not luxury but the strong desire for esteem irrespective of character.