Adam Smith: The Father of Modern Economics

On a wet Tuesday in March 1776, a fifty-two-year-old professor of moral philosophy from the University of Glasgow walked into the shop of the publisher William Strahan in Paternoster Row, London, and delivered to him the manuscript of An Inquiry into the Nature and Causes of the Wealth of Nations. Strahan was one of the great London publishers of the period, the printer of Samuel Johnson, of Edward Gibbon, of David Hume, of William Robertson. He was, by the spring of 1776, recovering from the loss of his great friend Hume the previous August and was, by his own private confession, in a state of low spirits that he hoped the new book would lift. The book did more than that. Within a decade it had sold out four English editions, been translated into seven languages, and transformed the way that educated Europeans thought about the wealth of their nations.

The book was the work of a man who had been a professor of moral philosophy at Glasgow for thirteen years, who had been the personal tutor and traveling companion of the young Duke of Buccleuch for three years, and who had spent the previous ten years in what was, by the standards of the 1770s, a remarkably long period of research and writing. The book is, in this writer’s judgment, the most important single work of social science ever written, and the most underrated. The reason is partly that the book has been, in the standard textbook accounts, reduced to the doctrine of the “invisible hand,” and the doctrine has been, in the standard textbook accounts, misunderstood.

The Life

Adam Smith was born in Kirkcaldy, Scotland, in June 1723. His father, also named Adam Smith, was a lawyer who had died a few months before the philosopher’s birth. He was raised by his mother, Margaret Douglas, and was educated at the Kirkcaldy grammar school and then at the University of Glasgow, where he studied moral philosophy under Francis Hutcheson. The encounter with Hutcheson was the formative intellectual event of his life. Hutcheson was the central figure of the Scottish Enlightenment of the early eighteenth century — the man who had, in the 1720s, developed the doctrine of the moral sense, who had founded the most influential school of moral philosophy in the English-speaking world, and who had, by his careful combination of the new natural philosophy with the new historical scholarship, set the terms of the Scottish philosophical tradition that Smith was to inherit.

In 1740, Smith won a scholarship to Balliol College, Oxford, where he spent six years studying on his own, reading widely in the classics, in history, and in the new philosophy. The English universities, in his view, were intellectually stagnant, and his experience at Oxford helped shape his later insistence on the importance of reform in higher education. The English years were lonely, and they were also, in their own way, formative. The young man who returned to Scotland in 1746 was, in fact, a more serious and more careful thinker than the one who had gone south.

In 1748, Smith was invited to give a series of public lectures in Edinburgh on rhetoric and belles-lettres. The lectures were successful, and he was soon invited to give a more ambitious course on the “history of civil society” — a kind of philosophical history of the development of human institutions. These lectures were the forerunners of both the Theory of Moral Sentiments and the Wealth of Nations.

In 1751, Smith was appointed to the chair of logic at the University of Glasgow, and in 1752 he transferred to the more prestigious chair of moral philosophy. He spent the next thirteen years at Glasgow, where he developed his ideas, published the Theory of Moral Sentiments (1759), and established himself as one of the leading figures of the Scottish Enlightenment.

In 1764, Smith resigned his professorship to serve as the tutor and traveling companion of the young Duke of Buccleuch. Over the next three years, they traveled extensively in France and Switzerland, where Smith met Voltaire, d’Alembert, Turgot, Quesnay, and the other leading figures of the French Enlightenment. These encounters were important for the development of his economic thought, and they provided him with the materials that would eventually become The Wealth of Nations. The meeting with Quesnay, the leader of the French physiocrats, was particularly important. Smith acquired from Quesnay a high respect for the systematic study of political economy, and he acquired from the physiocrats the central insight of the Wealth of Nations — that the wealth of a nation depends, in the last analysis, on the productivity of its labor.

Smith spent the next ten years working on his great economic treatise. He returned to his native Kirkcaldy in 1766, and then moved to London in 1773, where he had access to the books, the data, and the people he needed to complete the work. An Inquiry into the Nature and Causes of the Wealth of Nations was published on March 9, 1776, and it was an immediate success. Smith spent the rest of his life in Edinburgh, revising his works, writing essays on various topics, and enjoying the friendship of the leading figures of the Scottish Enlightenment. He died on July 17, 1790, having lived to see the success of his work and the beginning of the great debates it would inspire.

The Theory of Moral Sentiments

The Theory of Moral Sentiments (1759) was Smith’s first major work, and it provides the moral and psychological foundation for the economic analysis of the Wealth of Nations. The book develops a theory of moral judgment based on the idea of “sympathy” — the capacity of human beings to share in the feelings of others.

Smith argues that moral judgment is not based on reason alone, as the rationalist philosophers had claimed, nor on self-interest, as the egoistic philosophers had claimed. It is based on sympathy, the natural human capacity to feel with others. When we judge an action to be right or wrong, we imagine ourselves in the position of the person affected, and we ask whether we could sympathize with the feeling that motivated the action.

The moral psychology of the Theory of Moral Sentiments was important in itself, and it was also the foundation for Smith’s later economic work. The human being of the Theory is not the purely self-interested “economic man” of later economic theory. He is a complex creature with natural sympathies, with a sense of justice, and with a desire for the approval of others. Smith’s economics is, in this sense, a moralized economics, in which the analysis of markets and prices is grounded in a broader account of human nature and human flourishing.

The most important of the doctrine is the one that Smith himself called the “impartial spectator.” The impartial spectator is the imagined observer from whom we cannot hide — the internal monitor that judges our actions and our feelings according to standards that are independent of our own private interests. The doctrine is, in fact, the most important of Smith’s contributions to moral philosophy, and it is the foundation of the modern tradition of the moral sense in the Scottish Enlightenment.

The most important scholarly debate about the Theory is the one between the two leading interpreters. The first is the moral philosopher D. D. Raphael, who argued in his The Impartial Spectator (1994) that the moral theory of the Theory is, in fact, a careful essay in the modern tradition of the moral sense, and that the proper reading of the book is as an essay in the tradition of the rational defense of moral judgment. The second is the political theorist Dennis C. Rasmussen, who has argued that the moral theory of the Theory is, in fact, a careful essay in the commercial republican tradition of civic virtue, and that the proper reading of the book is as an essay in the tradition of the commercial defense of the modern commercial republic. The Raphael–Rasmussen debate is, in this writer’s judgment, the most important interpretive debate in the contemporary reception of Smith’s moral philosophy, and the proper response to the debate is not the postmodern dismissal but a careful re-reading of the Theory in the light of the best of the contemporary work in the history of moral philosophy.

The Wealth of Nations

The Wealth of Nations (1776) is the work on which Smith’s reputation principally rests. It is a comprehensive analysis of the economic system, dealing with the division of labor, the nature of money, the determination of prices, the role of government in economic life, the causes of economic growth, and the history of commercial society.

The book opens with the famous example of the pin factory. Smith observes that ten workers, each performing a single operation in the production of pins, can produce thousands of pins a day, while a single worker, performing all the operations himself, can produce only a few. The division of labor, Smith argues, is the source of the great improvements in productivity that distinguish modern commercial society from earlier, more primitive, forms of economic organization.

The division of labor, Smith argues, is not the result of human wisdom. It is the gradual, unintended consequence of the human propensity to “truck, barter, and exchange one thing for another.” The development of markets, and the increasing specialization of economic activity, has produced an unprecedented increase in the productivity of human labor, and this increase in productivity is the foundation of the wealth of nations.

The most famous concept in the Wealth of Nations is the “invisible hand.” Smith argues that individuals, in pursuing their own private interests, are “led by an invisible hand” to promote the public interest in ways that they did not intend. The butcher, the brewer, and the baker provide our dinner not out of benevolence but out of self-interest, and yet they provide it better than if they were motivated by a direct concern for the public good.

The doctrine of the invisible hand has been the subject of intense debate ever since. Some readers have seen in it a defense of the free market and of the principle of laissez-faire. Others have noted that Smith’s argument is more limited: he is describing a tendency, not a universal law, and he was well aware of the many cases in which the pursuit of self-interest could lead to public harm. Smith’s economics, like his moral philosophy, is a system of tendencies and counter-tendencies, not a simple doctrine of market perfection.

The most important of the qualifications is the one in Book V of the Wealth of Nations, where Smith identifies three duties of the sovereign: protecting society from violence and invasion, establishing an exact administration of justice, and erecting and maintaining certain public works and public institutions that would never be built or maintained by private interest. The doctrine is, in this writer’s judgment, the most important of Smith’s contributions to the political economy of the modern state, and it is the foundation of the modern tradition of the welfare-state intervention in the market.

A Judgement

Adam Smith is widely regarded as the founder of modern economics, and the Wealth of Nations is one of the foundational texts of the modern economic tradition. The classical economists of the nineteenth century — David Ricardo, Thomas Malthus, John Stuart Mill — all drew on Smith’s pioneering work. The neoclassical economists of the late nineteenth century developed Smith’s insights in a more mathematical and abstract direction. The contemporary economics profession, whatever its disagreements, still operates within a framework that Smith established.

But Smith is more than a founding figure of a single academic discipline. He is one of the great thinkers of the modern world, whose work on moral philosophy, political economy, history, sociology, and the philosophy of law has had a lasting influence on the development of modern thought.

The most underrated feature of Smith’s work is, in this writer’s judgment, the systematic connection between the Theory of Moral Sentiments and the Wealth of Nations. The standard textbook account has, in the twentieth century, treated the two works as separate enterprises, and has tended to read the Wealth of Nations as a defense of the free market in the modern libertarian sense. The proper response to the standard textbook account is not the postmodern dismissal but a careful re-reading of the two works as a single, integrated, and carefully constructed philosophical system. The proper response is also, in this writer’s judgment, to take seriously Smith’s argument that the human being is, in fact, a moral and social creature, and that the analysis of markets and prices cannot, in the long run, be separated from the analysis of the moral and social institutions within which the markets operate.

The contemporary revival of the scholarship on Smith — the work of Nicholas Phillipson in his Adam Smith: An Enlightened Life (2010), of Dennis C. Rasmussen in his The Infidel and the Professor (2017), of Emma Rothschild in her Economic Sentiments (2001), and of the work of the Glasgow Adam Smith Tercentenary project — has done a great deal to bring the proper reading of the two works back to the center of the contemporary curriculum. The verdict that comes out of this body of work is that Smith was, in fact, a much more sophisticated thinker than his twentieth-century reputation allowed, and that the proper response to the standard textbook accounts is not the postmodern dismissal but a careful re-reading of the two works in the light of the best of the contemporary work in moral philosophy, in political economy, and in the history of modern thought.

The most lasting of Smith’s contributions is, in this writer’s judgment, the systematic study of the relationship between the moral, the political, and the economic. The relationship has been the basis of the modern tradition of the political economy, of the modern tradition of the welfare-state intervention in the market, and of the modern tradition of the sociology of the commercial republic. The proper response to the contemporary neo-liberal appropriation of Smith is not the postmodern dismissal but a careful re-statement of the doctrine in the light of the best of the contemporary work in political economy and in the history of modern thought.

The Life

The Theory of Moral Sentiments

The Wealth of Nations

A Judgement

Further Reading