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ADAM SMITH (1723-1790)  

The works of Adam Smith can be described as being the foundations of economic theory. His collective works were encompassed in ‘The Wealth of Nations Book 1 to 3‘. It is within these books that eighteenth to present day economics are studied upon. Born to a middle class family, He studied initially at a theological level first at the University of Glasgow, then at Oxford, but his dissatisfaction with his tutors led him to abandon his studies leading to him to becoming a priest. Instead he returned to Scotland and took up a teaching position.

It was whilst he was teaching that began to develop his philosophical perspectives which would later lead him to write the ‘Wealth of Nations’. It would take a web-site on it’s own to discuss the entire work of Smith, all we can offer is an insight into this celebrated text. The entire premise of the ‘Wealth of Nations’ was to look at how wealth is generated and distributed in society. Even though this textbook dates beck 1776 it holds as much value now as it did then. We shall now discuss some of the key concepts:

DIVISION OF LABOUR – Smith argued that in order to increase the productive output of manufacturing, the tasks carried out by workers, needed to be broken down into progressively smaller tasks. What he was saying was that when one person would does one task, another person could do something else, with the end result being more products being produced. An example of this would be in a flow line where one person joins two pieces of wood together, another joins two more pieces, with say someone else sticking a top on, the end result could be a table.  Smith argued that by breaking down the task across three people you would make more tables than simply all three people making a table from scratch

Taking the analysis further he stated people who were in a job, which resulted in something being produced, i.e manufacturing, or those who contributed in a surplus being generated. In essence Smith stated only when a product has added value attached from either manufacturing or a service related to adding value could be classed as being productive output.

Although other areas of his analysis of labour have been heavily criticised it is the division of labour theory, which Smith was most remembered.

HUMAN CONDUCT - According to Smith, was actuated by six motives ‘self-love, sympathy, the desire to be free, a sense of prosperity, a habit of labour, and propensity to truck, barter and exchange one thing for another’. Given this, each man was naturally the best judge of his own interest and should therefore be left to pursue it in his own way. If left to himself, he would attain his own best advantage, but he would also further the common good.

NATIONAL PRODUCT – The national product of a nation was seen as consisting of only those from productive output alone. Any output generated from a service was not included in Smiths work, this is different to modern economic analysis which would look at the both output from both manufacturing and service sectors. It must be said that most of the classical economists prior to Smith operated on the same logic, productive value was either seen as the result of agricultural crop or from manufacturing.

GOVERNMENTS – At the time of writing his texts, Governments particularly in the UK were often run by the rich, no matter how democratic the rich presided over UK politics in the form of the Liberals until the mid 1800’s and the emergence of Conservatism, then Labourism. Smith described the activities of government as being un-productive, adding little to the national produce stating ‘some both of the gravest and most important, and some of the most frivolous professions: churchmen, lawyers, physicians, men of letters of all kinds: players, buffoons, musicians, opera-singers, opera-dancers, etc’

Smith did however feel that Governments should focus on ensuring the prosperity of their nations ‘The great object of political economy of every country, is to increase the riches and power of that country’

Like the physiocrats, Smith believed that the ‘Natural Order’ was simple. Government could rarely be more effective than when it is negative. The natural system knows only three proper duties for government, which are ‘Plain and intelligible to consumers understanding’. The first is the duty of government is establish a defence against foreign aggression. The second is to duty of establishing an exact administration of justice, and the third duty is the maintenance of public works and institutions as would not be maintained by any individual or group of individuals for lack of adequate profit. Peace at home and abroad, justice, education and a minimum of other public enterprises such as roads, bridges, canals, harbours are all benefits which governments of the time could confer.

NATURAL & MARKET PRICES – The work of Smith was influenced by the Physiocrats. Smith felt that a free market influenced the value of commodities. To Smith there was the ‘natural price’ for any commodity based on costs, Smith states ‘When the price of any commodity is neither more or less that what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market according to their natural rates, the commodity is then sold for what is called its natural price. The commodity is then sold precisely what it is worth or for what it really costs the person who brings it to the market’

Whilst the market dictated a ‘market price’. What Smith suggested was that market price was often volatile, and that any analysis should be based on natural prices. Smith felt that market forces would ensure that when the market price was too high it would be forced towards the natural price.

DISTRIBUTION OF WEALTH – At the time of his writing, the three major social classes were the working class, the landowners and capitalists. Smith saw the revenues from the natural price of commodities being split between these three groups. The working class was paid the wages, the landowners received rent from land they owned, whilst the capitalists took the lions share through profits.

Although Smiths perceptions on the distribution of wealth may appear simplistic, they were pertinent to the time of his writing. Subsequent economists have shown the problems with his model. Smith believed that three social classes were not so divided, that one person could move between the groups. He believed that the national product was distributed amongst the three classes, based on the power of each class, and the prevailing national economic circumstances.

Much of Smith’s work suggested that only the landowners and capitalists accrued more wealth over time. He did feel society would benefit by a more equal spread of wealth.  Smith was not a great admirer of the landlord and capitalist groups, often in his works they would be described as the biggest ‘spendthrifts’ in society contributing little but spending their wealth.

WAGE RATES – As stated above, the income received by different groups were determined by their social class. Smith did however point out in very crude terms that some form of bargaining took place, based on the actual nature of the job, worker skills, location, etc. In addition this bargaining power was often very much against that of the workforce, Karl Marx later picked this up.

In terms of the actual wages paid to employees, Smith describes the notion of wages being given to workers for sufficient living needs and nothing else. The term phrased for this is ‘subsistence wages’. Smith argued that if workers were given anything more than they required living off, the effects would be nothing. Smith believed wage increases resulted in a population increase which in effect meant more mouths to feed, so those workers who thought they had become better off were actually the same as before. Smith states ‘The liberal reward of labour, therefore, as it is the effect of increasing wealth, so it is the cause of increasing population.’

SMITH & MERCANTILISM - Adam Smith believed the opposite of what the Mercantilists believed. He believed in free markets, very little government intervention and the opening up of international trade. The mercantilists were criticised by Adam Smith because their ideas benefited the producer at the expense of the consumer and created inefficiency in the economic system. As Smith stated:

'The monopoly of the colonial trade, therefore, like all other mean and malignant expedients of the mercantile system, depresses the industry of all other countries, but chiefly that of the colonies, without in the least increasing, but on the contrary diminishing, that of the country in whose favour it is established ... The monopoly indeed, raises the rate of mercantile profit, and thereby augments somewhat the gain of our merchants.

But as it obstructs the natural increase of capital, it tends to diminish than to increase the sum total of the revenue which the inhabitants of the country derive from the profits of stock; a small profit upon a great capital affording a greater revenue than a great profit upon a small one.

The monopoly raises the rate of profit, but it hinders the sum of profit from rising so high as it would otherwise do. 

All the original sources of revenue, the wages of labour, the rent of land, and the profits of stock, the monopoly renders much less abundant than they otherwise would be.

To promote the little interest of one little order of men in one country, it hurts the interests of all other orders of men in that country, and of all men in all other countries'

SMITH & PHYSIOCRACY - Smith had a tremendous regard for the physiocrats, he called them the ‘nearest approximation to the truth’. The influence of the physiocrats economic doctrine on Smith is difficult to establish. He was certainly acquainted both with the writings of the school and with many of its leaders. The wealth of nations has references to at least two eminent physiocrats, Quensay and Mercier de la Riviere, and  the final chapter of the fourth book is devoted to a critique of physiocracy. Moreover, despite his own beliefs to the contrary, Smith had many views which were similar to the Physiocrats, both in the adherence to nationalism and his interest in the problem of surplus, his path is parrallel to theirs.

The major similarity between Smith and the physiocrats was the belief in the ‘Natural Order’, which was the characteristic of their philosophy. Smith emphasises in the ‘Wealth of Nations’ the benefits of the natural order and for pointing out the imperfections of human institution. Take away artificial preferences and restraints, he says, ‘the obvious and simple system of natural liberty will establish itself’ again ‘that order of things which necessity imposes  …. Is promoted by the natural inclinations of man? Human institutions only too often thwart these natural inclinations.’.

LAW OF DIMINISHING RETURNS - Smith elaborated on the notion of diminishing returns first discussed by Turgot, by stating ‘As capitals increase in any country, the profits which can be made by employing them necessarily diminish. It becomes gradually more and more difficult to find within the country a more profitable method of employing any new capital’


  • First real formal outline of economics.
  • Set out the division of labour theory. 
  •  The role of government should be to ensure prosperity of a nation.
  • Stated that the price of goods was dictated by market forces, not true reflections of price.  
  • Further elaboration of the law of diminishing returns .
  •  The Wealth of Nations although not entirely original, they were the first true collection of economic ideas to be published. The books have often be derided, but its reasoning as to why man accumulates wealth and the pursuit of the differing classes and nations within society, remain highly prevalent today.

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