On Adam Smith, 1723-1790

There is no art which one government sooner learns of another than that of draining money from the
pockets of the people.

Adam Smith

Today Adam Smith’s reputation rests on his explanation of how rational self-interest in a
free-market economy leads to economic well-being. It may surprise those who would
discount Smith as an advocate of ruthless capitalism that his first major work
concentrates on ethics, morals and charity. As one of the leading representatives of the
Scottish Enlightenment, he is most famous for his magnum opus, An Inquiry into the
Nature and Causes of the Wealth of Nations (1776), which was the foundation of
classical economics. At a time when absolutist nations were grabbing the world’s
precious metal reserves and trying to increase their own wealth with prohibitive export
policies, Smith developed a new theory of ​​a country’s wealth: Not gold or silver but the
work done by the country’s people is the source of wealth. Thus, Smith supported
foreign trade to be as free as possible, and concluded that the larger the market, the
higher the degree of the division of labor and thus productivity. Smith emphasized the
role of the division of labor, of free markets and the state and wrote about the core
problem of economics: the theory of value (his Labor Theory of Value even influenced
Karl Marx). However, 104 years later the Labor Theory of Value was crushed by Carl
Menger’s Marginal Utility Theory of Value. Smith’ fundamental and seminal contribution
were his explanations and the positive assessment of human striving for gain. He called
for a rigorous deregulation of production and argued that distribution must be left to the
market. He rigorously promoted the abolition of any price- and wage controls, of guilds,
of privileges and monopolies and thus stood firmly for free markets. His idea was a
dynamic economic order, driven by the ‘natural’ human striving for acquisition and
ownership and the competition of the producers, which will lead to The Wealth of
Nations.

I: Widows mother’s only child

It is 2023, and lest we forget one of the most seminal scholars of all times, we should
briefly recall the life and work of Adam Smith who was born sometime in early June, 300
years ago. Church records show that he was baptized in Kirkcaldy on June 5, 1723.
Although labeled by many as the ‘Father of modern Capitalism’, Smith never took up
the term Capitalism, as the word entered into widespread use not before the late 19th
century. Because his father died before he was born, Adam Smith was raised as a single
child by his mother and spent his childhood in Kirkcaldy, a small town north of
Edinburgh. His mother dedicated herself entirely to her son and made it possible for him
to receive a comprehensive education. Rumor had it, that he was kidnapped when he
was just four years old, but was soon brought back to his caring mother. Subsequent of
his years in Kirkcaldy’s primary school, Smith moved to Glasgow and entered university
there at the tender age of 14. After only three years of study and deeply influenced by
Francis Hutcheson, an Irish philosopher he graduated from Glasgow University in 1740.
In addition to the intellectual impact the teaching of Hutcheson left on Smith, the sudden
economic upswing and the rapidly developing prosperity of the city due to some
‘deregulations’ of trade and shipbuilding, made also a lasting impression on Smith’
thinking.

II: Friendship with David Hume

Due to an attractive scholarship, Smith was able to continue his studies at Oxford
University between 1740 and 1746. He dealt there with the classic writers and thinkers
of antiquity as well as with French literature. However, the deficiency of vitamin C
(Scurvy) led to serious health problems, which forced Smith to return to Kirkcaldy in
1746 where he stayed rather feebly and unemployed for some 2 years. It was only
through the efforts of his influential mother that in 1748 he was able to join the lower
ranking teaching staff at the University of Edinburgh to acquire the necessary
prerequisite for a position as a lecturer. His academic courses on rhetoric, English
literature, law and especially philosophy were well received and soon earned him a
respectable name.
While in Edinburgh he made the acquaintance of the Scottish philosopher David
Hume with whom he developed a lasting and prosperous friendship over time. Despite
the lack of any major publication, in 1750 Adam Smith was appointed professor of logic
at the University of Glasgow and soon thereafter he was even promoted to the Chair of
Moral Philosophy, a position he kept until 1764.
In 1759 Smith published his first major work, The Theory of Moral Sentiments
which he developed from his lectures on moral and ethical matters. In this book Smith
characterized compassion as the decisive motive for any moral judgment, such as the approval or rejection of any human actions. As human nature is the basis for moral
action, Smith followed here his friend David Hume and thus stood in contrast to
individualistic philosophers, among them Thomas Hobbes or Bernhard de Mandeville,
who interpreted one’s own ego as the motivation of morality. This book established
Smith’ international reputation as a moral philosopher.

III: Duke’s private tutor

In 1764 he retired from university teaching, was appointed private tutor to the young
Duke of Buccleugh and accompanied him on his travels to the continent, especially to
France and Switzerland. During these roughly 2 years on the road, they not only met
several of the Philosophers of Enlightenment such as Voltaire or Jean le Rond d’Alambert. They also entertained contacts with some Physiocrats such as Anne Robert
Jacques Turgot or Françoise Quesnay.
After returning to England in 1766, Adam Smith was honored with the prestigious
title ‘Fellow of the Royal Society’ in London. However and despite his standing he
retired to Kirkcaldy and kept enjoying his generous life pension, which he had earned in
the service of the Duke. That year he started to work on his magnum opus An Inquiry
into the Nature and Causes of the Wealth of Nations.  This famous economic treatise
appeared in 1776, the same year the American Declaration of Independence was
signed and in which also his close friend and fellow representative of the Scottish
Enlightenment David Hume died.
The Wealth of Nations is not just a study of economics but a survey of human
social psychology, about life, welfare, political institutions, the law and morality. Although
some of the most decisive insights into the problems of value and of money have been
gained a generation before Smith, The Wealth of Nations is a massive achievement.
The basis for his economic theory pointed to his moral philosophy, in which sympathy
and self-interest is the motor for striving for the betterment of one’s own situation. For
Smith man’s self-interest unintentionally promotes the welfare of others. He realized that
social harmony would emerge naturally as human beings struggled to find means and
ways to live and work with each other. Thus, freedom and self-interest does not produce
chaos, but – as if guided by an ‘invisible hand’ – it will create order and synchronize
markets. And as people struck bargains with each other, the nation’s resources would
be drawn automatically to the ends and purposes that people valued most highly. A
prospering social order would spontaneously grow as a product of human nature and
not of design. For Smith, however four controlling forces that discipline personal striving
are required. First he mentions compassion that helps to find and observe moral norms.
The second force he points out are the natural rules of ethics, rules that are voluntarily
agreed and followed. A system of positive laws, the observance of which emphasized is
enforced by a state is his fourth prerequisite. And lastly he the evolutionary competition
of free markets. Under these conditions, a voluntary exchange of goods and ideas is
possible and in turn, will allow for specialization in production. Individuals no longer
have to produce all the goods they need every day by themselves, but can limit the
endeavors to the production of those goods that they can produce best and thus
facilitate the exchange for other goods they need. Specialization increases productivity
and allows for freedom of acquisition and competition. As trade benefits both sides, it
increases our prosperity.
Smith vehemently opposed mercantilism — the practice of artificially maintaining
a trade surplus on the erroneous belief that doing so increased wealth. He showed that
the vast ‘mercantilist’ edifice of his era was irrational and argued instead, that the
primary advantage of trade, was that it opened up new markets for surplus goods and
also provided some commodities from abroad at a lower cost than at home. This
argument paved the way for David Ricardo’s and John Stuart Mill’s theories of free trade
due to a comparative advantage about a generation later. A nation’s wealth is not the
quantity of gold and silver in the state’s treasury, but in a modern term its GNP, the total
of its production and commerce. Smith’ treatise not only provided the theoretical
foundation of individual and economic freedom, of free trade and markets, and the
division of labor. The Wealth of Nations also deeply influenced the rulers, politicians and
academics of the time. Among the countless admirers of his work was even Karl Marx.

IV: Back with mother

In 1778 Adam Smith was appointed commissioner of Customs Control of
Scotland and went to live with his mother until 1784. It is worth mentioning here, that
even though he had defended smuggling as a legitimate activity in the face of
‘unnatural’ legislation in his The Wealth of Nations, he used this position to strictly
enforce laws against smuggling.
In addition to his professional activities, Smith devoted himself to studying
philosophy and founded the Royal Society of Edinburgh. Smith became one of the
leading representatives of the Scottish Enlightenment, which was characterized, among
other things, by precise observation.
Today Smith’s reputation rests on his explanation of how rational self-interest in a
free-market economy leads to economic well-being. It may surprise those who would
discount Smith as an advocate of ruthless capitalism that his first major work
concentrates on ethics, morals and charity.
Adam Smith never married and died in Edinburgh on July 17, 1790.