This guest post was written by my long-time friend, college classmate, and co-author, Gary Pecquet, an associate professor of economics at Central Michigan University.
Today, June 5th is celebrated as Adam Smith’s birthday. In just nine years Adam Smith’s 300th will be celebrated. Not many thinkers have had the impact on the world as he over these previous three centuries.
Adam Smith’s brief biography: http://www.biography.com/people/adam-smith-9486480#awesm=~oGjIQ8sfw9CIvA
They do not know his actual day of birth, but on June 5, 1723 his birth was actually recorded in Kirkaldy, Scotland. His father, a custom’s official, came from the lower middle class ranks of Britain died before Adam’s birth. Thanks to his mother’s meager savings and help from relatives Adam Smith received an education and became a professor of Moral Philosophy in Glasgow University. Glasgow was not a prestigious institution. It was like what is today what would be referred to as a teaching college. At Glasgow Professors were paid only a pittance from the University and were required to produce good lectures in order to receive most of their income from the contributions of their students at the end of the term, like tips. (These teaching evaluations were thus very effective.)
It was at Glasgow University where he wrote his first major work Theory of Moral Sentiments (1756). It was a product representative of the Scottish Enlightenment. Smith embraced the classical virtues from Aristotle (prudence, temperance, fortitude and justice) and the three Christian virtues (faith hope and charity). What made Smith’s book so interesting was that he tried to explain the process that people learn and practice the virtues in society. According to Smith, people develop the moral sentiments through a process of at first evaluating the actions of others and then internalizing them by becoming conscious of how others may evaluate us. People seek the approval of others and both judge others and attempt to be seen as worthy by others by acting appropriately. Thus, in contrast to Jean Jacques Rousseau, Adam Smith did not believe that modern society “corrupted”modern man. Thus, to Smith primitive man was a not so noble savage, who became corrupted by modern civilization. On the contrary, Smith believed that social interaction helps us to develop our moral sentiments and helps us to advance morally as the volume and quantity of our interpersonal exchanges increases.
The Theory of Moral Sentiments won Adam Smith success and fame so this helped him to gain connections from important British officials. After travel and examination of many businesses, Adam Smith wrote and published his most famous work in 1776. Its complete title is An Inquiry into the Nature and Causes of the Wealth of Nations. This work is oft-considered to be the founding document of modern economics. The very name of this work indicates that Smith’s primary purpose was to study “growth theory.” Smith directly challenged the prevailing theories and practices of mercantilism. Mercantilism embraced three fallacies: bullionism, the false notion that national wealth consisted of gold and precious metals, protectionism and artificial trade barriers to save domestic industries and jobs and the zero-sum view of wealth.
Smith showed that a nation’s wealth consisted of its ability to produce goods and services and gold or money was only a unit of account.
Protecting domestic industries and jobs from foreign competition by high tariffs and other import restrictions was also a bad idea. Adam Smith argued that the Wealth of Nations could be enhanced by specialization and division of labor according to the most productive employments. Production should be based upon the most efficient mans to serve consumers. Smith correctly recognized that the goal of production is to deliver the goods to consumers. (Producers exist to satisfy consumers, not the other way around. “Jobs” (at least particular jobs) are not ends in themselves and should not be granted immunity from competition. Moreover, protectionist trade restrictions in Smith’s time lead the nations of Europe into many costly colonial wars against each other to secure monopoly profits at the expense of other nations and consumers in general.
This brings us to the third fallacy which still rears its ugly head today. The idea that wealth is a fixed sum or static quantity that cannot be increased but only fought over is perhaps the greatest fallacy made by non-economists. Specialization and division of labor result in increasing the economic pie. So do domestic policies that secure property rights and promote trade and technological innovation. Adam Smith wrote that “the division of labor is limited by the extent of the market.” As we reduce trade barriers, the market expands. In a small isolated village the same person may produce all furniture, but in a larger city separate businesses will likely produce tables, desks, beds, etc. And Smith also described the dynamic of learning by doing as we specialize we can become more productive over time.
We economists also assert that the test of a theoriy’s usefulness is in its ability to predict: Well Adam Smith made a number of remarkable predictions that have proven the test of time. Smith was a technological optimist. He believed that despite the many misdeeds of politicians to steer the economy into senseless protectionism and wars, the long term consequences was for the vast majority of people would realize the rise of opulence that would benefit even the lowest ranks of society. Today we can observe untold commodities that have become available to the poorest of Americans. Many of these modern goods and conveniences were not even conceived in Smith’s own time.
Smith believed in both the moral and material progress of the human race. Commerce increased the linkages between people and tended to raise the moral standards that we expect from each other as our connections increase and the gains of trade are increasingly realized we began to appreciate the value that other can bring to us. As we become more urbanized, we tend to adopt more urban values of tolerance and respect for diversity.
Human material and moral progress does not advance evenly or without interruptions and its does not proceed as rapidly as we may hope, but comparing data shows that historical decline in murder rates. (For example the number of homicides in Europe gradually fell from between 10 and 100 per 100,000 per year in 1400 AD to about 1 per 100,000 per year today.) Slavery was abolished throughout the western world during the 19th century and colonialism declined during the 20th century. People hold officials up to higher standards of human rights than a century ago. Scientific advances continue. Globalization in the 21st century has created networks of multinational firms reducing the tendency for nations to fight border wars.
Happy Birthday, Adam Smith