Adam Smith was an 18th century Scottish economist who published two influential works, The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations. He is considered the father of modern economics and developed theories of capitalism, values, prices, and economic welfare. Smith's work was influenced by the emerging industrial revolution and rise of manufacturing in England and Scotland during his lifetime.
Adam Smith was an 18th century Scottish economist who published two influential works, The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations. He is considered the father of modern economics and developed theories of capitalism, values, prices, and economic welfare. Smith's work was influenced by the emerging industrial revolution and rise of manufacturing in England and Scotland during his lifetime.
Adam Smith was an 18th century Scottish economist who published two influential works, The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations. He is considered the father of modern economics and developed theories of capitalism, values, prices, and economic welfare. Smith's work was influenced by the emerging industrial revolution and rise of manufacturing in England and Scotland during his lifetime.
Adam Smith was an 18th century Scottish economist who published two influential works, The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations. He is considered the father of modern economics and developed theories of capitalism, values, prices, and economic welfare. Smith's work was influenced by the emerging industrial revolution and rise of manufacturing in England and Scotland during his lifetime.
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Adam Smith (1723 1790)
Adam Smith was born in Kirkcaldy,
Scotland in 1723. He was educated at the Universities of Glasgow and Oxford and was a professor at Glasgow from 1751 to 1764. He is known for publishing two major works The Theory of Moral Sentiments (1759), a philosophical book, and more famously An Inquiry into the Nature and Causes of the Wealth of Nations (1776) usually referred to simply as The Wealth of Nations. Smith was one of the first economic thinkers to develop a complete and relatively consistent abstract model of the nature, structure and workings of the capitalist system. He is widely regarded as being the founder of modern economics. Smith recognised interconnections between social classes, various sectors of production, wealth and income distributions, commerce, the circulation of money, price formation It is important to appreciate the social and economic context of Smiths writings. Smith lived during a period when the industrial revolution was taking root in England and Scotland. The main industries of the industrial revolution were textiles and iron. Indeed the wool industry of Britain obtained a ban on the import of Indian made calico (cotton) thereby securing a monopoly for itself in the home market. The industrial revolution was also characterised by the development of a lot of early technologies mainly based on steam power. During the time, growth in manufacturing was remarkably high. It was accompanied by the rise of major manufacturing cities, notably Manchester and Glasgow. In manufactories, the precursors of the modern factory, the capitalist owned the building, equipment and raw material and hired wage labourers to do the work. Smith distinguished between profits that accrued to industrial capital and wages, rents and profits on merchant capital. He was also the first to recognise that the three important functional categories of income profits, rents and wages, corresponded to the three important social classes in the capitalist system capitalists, landlords and labourers (who had to sell their labour power for a wage). Smith developed historical and sociological theories which he used to explain the evolution of the capitalist form of class society and the power relations between the classes. A persistent theme in Smiths theories is that even though individuals and indeed classes acted in their own self interest, which might even lead to individual or class conflict, an invisible hand guided these seemingly contradictory This invisible hand derived from the laws of nature or divine providence and not from the actions of human beings. Smith believed that the way humans produced and distributed the material necessities of life was the most important determinant of any societys social institutions as well as of the personal and class relationships among its members. Smith identified four distinct stages of economic and social development hunting, pasturage, agriculture and commerce. Hunting was the lowest state of society. In such societies, poverty and the precariousness of existence prevented the emergence of institutionalised forms of power and privilege. The next higher stage was that of pasturage. Production was based on the domestication of animals, while herding required a nomadic existence. In pastoral societies the first form of wealth that could be accumulated emerged, namely cattle. Ownership of cattle became the first form of property relationship leading to the establishment of institutionalised protection of privilege and power. Agriculture, the third social state, was seen in the medieval, feudal economy of western Europe. Societies permanently settled in one area and agriculture became the most important economic activity. Ownership of land thus became the most significant property relationship and it acted to differentiate classes according to their privileges and power. Ownership of large tracts of land gave social and political power, leading to a class of rulers who formed the nobility, deemed superior to the ruled. However, the nobility were limited in the ways in which they could use their wealth. In the absence of foreign trade or manufacturing, a large landowner could only use his surplus wealth to maintain large numbers of staff or retainers who owed their absolute loyalty to the landlord. The fourth stage of development, commerce, came about as a result of the rise of European cities. Within the cities producers enjoyed greater freedom relative to other stages of economic development. Accompanying this freedom was a wider extension the rights of property which permitted producers to create wealth for themselves rather than for an overlord. Differing conditions of property ownership formed the basis of major class divisions. The division of the produce of labour between wages and profits was determined by the struggle between labourers and capitalist over what the wage rate would be. The struggle was, however, unequal. Smiths value theory While Smith never presented a consistent theory of value, his ideas formed the basis of more sophisticated labour theories of value provided by Ricardo and Marx. Smiths insight was to recognise that in all societies the process of production can be reduced to a series of human endeavours or exertions. Over time, humans increased their productivity by producing new tools. Tools are used to produce other products and are themselves produced by humans. On their own tools do nothing. All products are, in the end, a manifestation of human labour. In contemporary economic thought, tools are classified as capital which, in conjunction with labour, contribute to the production of Thus, in Smiths view, the necessary prerequisite for any commodity to have value was that it be the product of human labour. The exchange value of a commodity is also determined by the amount of labour embodied in it and the relative allocation at different points in time of indirect labour, i.e. the labour embodied in tools or other means of production. However, Smith saw labour as the determinant of exchange value only in pre- capitalist economies, where there were neither capitalists nor landlords. Once capitalists gained control over the means of production and landlords gained control over land and natural resources, Smith believed that exchange value or price came to be a sum of three components: wages, profits and rents. Profits and rents must be added to wages in order to determine prices. Hence, Smiths theory is sometimes called an adding up theory. In contrast to pre-capitalist economies, the profit component did not necessarily have any relationship to the labour embodied in the commodity. Competition would tend to equalise profits earned on capitals of the same value. In other words, if a capitalist received (say) $30 profit on $100 worth of owned capital, competition would tend to lead to a situation in which $100 of any other kind of capital would also generate $30 worth of Under this principle, prices would only remain proportional to the amounts of labour contained in a commodity if the value of capital per worker was the same in different lines of production. However, if this value was different in different lines of production the proportionality would not hold. Smith accepted this, or at least was unable to incorporate it in a labour theory of value that would hold more generally. Later, Ricardo and Marx showed that the relationship between embodied labour and exchange value was much more general. Smith also distinguished between natural price and market price. The natural price was the price which just covered the landlords, capitalists and workers rent, profit and wages. Market price fluctuated around natural price. There were two major weaknesses in Smiths theory of prices. First, wages, profits and rents were themselves either prices or derived from prices. So, a theory which tries to explain prices in general cannot be derived from other prices. Smith also rejected the utility theory of value (or use value) as the foundation of a theory of price. The second weakness of Smiths cost-of-production theory of prices was that it led to conclusions about the general level of prices rather than the relative value of different commodities. Smiths theory of economic welfare Smiths economic theory was normative, or policy-oriented in nature. He was concerned mainly with how to increase human welfare. In Smiths view of history, laissez-faire capitalism represented the highest stage of civilisation. The forces of supply and demand would regulate all aspects of the economy without any form of government restriction or intervention. Smith rejected the ideas of the mercantilists and the physiocrats. He called laissez-faire capitalism the obvious and simple system of natural liberty the best possible economic system. Any form of government intervention would prevent capital from being directed to its most productive use. Government can only have three broad functions national defence, law and order, provision of public goods and services. Smith naturally held that the obvious and simple system of natural liberty would lead to an economic system in which harmony prevailed. He admitted the possibility of selfish motive but the invisible hand would, in the long run, resolve all apparent conflicts. However, there is an apparent contradiction between Smiths vision of a conflict free society and his labour theory of value, which proponents argue would inevitably lead to class conflict, which is also fundamental in understanding capitalism. Smiths intellectual influence can be seen in the two rival traditions which form a major part of contemporary economic thinking one that emphasises the labour theory of value and the other which emphasises the utility theory of value, social ahrmony and the invisible hand.