Before you read on: which of these did Adam Smith argue?
Smith opened The Wealth of Nations with the division of labour, which he saw as the main cause of rising output. Piling up gold and silver was the view he set out to attack.
- Lived
- Baptised 5 June 1723 in Kirkcaldy, Scotland; died 17 July 1790 in Edinburgh
- Nationality
- Scottish
- Work
- Taught at the University of Glasgow; tutor to the young Duke of Buccleuch in the 1760s; later a commissioner of customs in Scotland
- Key works
- The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776)
- School
- Classical economics, which The Wealth of Nations began
What Smith was reacting to
In Smith's day, governments across Europe followed what he called the mercantile system. Its idea was that a nation grows rich by selling more abroad than it buys, and by building up a store of gold and silver. Governments kept that trade surplus going with restrictions on imports and with monopolies granted to favoured companies, such as the East India Company.
Smith thought these rules served the merchants who lobbied for them, at the expense of everyone who bought their goods.
Smith's key ideas
Can you name Smith's four key ideas?
Splitting production into many small tasks, each done by a worker who specialises in it. Smith saw it as the main cause of rising output per worker.
Can you think of an example?
In Smith's pin factory, ten workers sharing eighteen tasks made about 48,000 pins a day, or 4,800 each. Working alone, he wrote, each might have made twenty at most, perhaps not even one.
People work and trade to better their own condition, and competition turns that self-interest into goods and services for others. Smith described a person led in this way as guided by an invisible hand.
Can you think of an example?
A baker bakes to earn a living. Because customers can buy elsewhere, the way for the baker to earn more is to sell good bread at a fair price.
Buying goods from whoever makes them most cheaply, at home or abroad, instead of shielding home producers. Smith argued that what is sensible for a household is sensible for a nation.
Can you think of an example?
A family buys its shoes from a shoemaker instead of making them. In the same way, a country gains by importing goods others make more cheaply and paying with goods it makes well.
Smith gave the state three jobs: defending the country, running courts of justice, and providing public works and institutions that private trade would not supply.
Can you think of an example?
Roads, bridges and canals. Smith thought the people who use them should pay for them, through tolls charged in proportion to use.
Check yourself
Which of these is an example of the division of labour?
Where his ideas went
The Wealth of Nations is counted as the start of classical economics. David Ricardo built on Smith's case for trade and developed it into the idea of comparative advantage: a country gains by specialising where its advantage is greatest, even if it is better at making everything.
Smith's system later became known as laissez-faire capitalism, the idea that governments should leave markets largely alone, though he made important exceptions to it. Ideas from Smith run through the work of Ricardo and Marx, and later Keynes and Friedman.
Check yourself
Three of these are duties Smith gave to government. Which one is not?
The critics
Karl Marx drew heavily on Smith's work but reached the opposite conclusion. He argued that the market system would concentrate wealth among a few owners until workers rose up against it. Where Smith saw self-interest driving change, Marx saw a struggle between classes.
Later, John Maynard Keynes challenged the classical belief, which grew out of Smith's work, that a market economy soon returns to full employment after a slump. He argued that government spending is needed to get it there.
Some sharp criticism came from Smith himself. He warned that a worker who repeats a few simple tasks all day can be dulled by the work, and he distrusted merchants who sought monopolies.
He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.
Check yourself
A writer argues that when a slump leaves millions out of work, the state must spend to bring the jobs back. Whose view is this closest to?
Where Smith stands today
Smith is seen as a towering figure in the history of economic thought, and The Wealth of Nations as one of the most influential books on the subject. How to read him is still argued over. Free-market writers cite him as their founder. Other scholars point out that he wanted the state to provide justice and public works, was sharply critical of monopoly, and saw no objection in principle to helping the poor.
Check yourself
Who argued that a nation grows rich by selling more abroad than it buys and building up gold and silver?
- Specialisation and the division of labourThe pin factory idea, worked through as theory.
- Absolute and comparative advantageHow Ricardo took Smith's case for trade further.
- The price mechanismHow prices guide buyers and sellers, the idea behind the invisible hand.
- Market, command and mixed economiesWhere markets end and the state begins.
Adam Smith, a Scottish philosopher, published The Wealth of Nations in 1776 against the mercantile system. He argued that the division of labour raises output, that competition turns self-interest into goods for others, and that nations gain from free trade, with the state providing defence, justice and public works. Marx, and later Keynes, challenged ideas that grew from his work, and scholars still argue over how far he trusted markets.