Adam SmithHistory of Economic Thought

Boise State UniversityFall 2015

Prof. D. Allen Dalton

The Life of Adam Smith• 1723, Born in Kirkcaldy, north of

the Firth of Forth • father-solicitor, comptroller of

customs• mother-respected and wealthy

family• 1737, begins study of moral

philosophy at Glasgow• 1740-46 at Oxford under

scholarship; classics and foreign language

• 1748-51, private lecturer in Edinburgh

The Life of Adam Smith• 1751, Professor of Logic, University

of Glasgow• 1754, Professor of Moral

Philosophy, University of Glasgow • Lectures in rhetoric, literature

(belle-lettres), ethics, jurisprudence, moral philosophy and economy

• 1759, The Theory of Moral Sentiments

• 1764, resigns professorship to tutor young Duke of Buccleuch and brother on tour of France

The Life of Adam Smith• 1765, while bored in Toulouse,

begins “writing a book”• Visits Voltaire in Geneva• Visits Paris (Hume, Quesnay,

Turgot)• 1766, retreats to Kirkcaldy upon

life pension provided by Duke of Buccleuch

• 1772, moves to London, admitted to Royal Society

• 1776, The Wealth of Nations

The Life of Adam Smith• 1778, accepts appointment as a

Commissioner of Customs in Scotland, trebling his income

• 1787, elected rector of University of Glasgow

• Died 1790 - 16 volumes of unpublished papers burned at his command

• 1795, post-humously published Essays on Philosophical Subjects

• 1895, student notes from lectures on jurisprudence discovered

• 1958, student notes from lectures on belles lettres and rhetoric discovered

Smith’s Research Program

• What makes it possible for men to live in society?

• How is it that man’s hedonism comes to be restrained, preventing the injury of one another and fostering the benefits of civil society?

The Theory of Moral Sentiments (1759)

• Smith’s first book and the foundation of his fame during his lifetime

• An exposition of a general system of morals in an attempt to answer the question of his research program: What makes it possible for men to live in society?

The Theory of Moral Sentiments (1759)

The Argument• we seek the approbation of

our fellows in society• we know what will receive

approval by others by our ability to sympathize with our fellows

• sympathy is simply an ability to imagine behavior from the viewpoint of an impartial spectator

The Theory of Moral Sentiments (1759)

• but sympathy is insufficient in specific cases, because we can not take an unbiased view of our personal actions

• therefore moral rules - generalizations of actions approved or disapproved of - become necessary

• sometimes moral rules are insufficient, and positive laws are required

Lectures on Jurisprudence

• Based on student lecture notes discovered in 1895

• Presents aspects taking up where the argument of The Theory of Moral Sentiments leaves off, in a presentation of a theory of jurisprudence

The Theory of Moral Sentiments (1759)

• The Wealth of Nations can also be considered as a continuation of The Theory of Moral Sentiments, in so far as it is a description of the commercial society (noted in Moral Sentiments), bounded by law, within which utility, rather than affection, binds one with another in civil society

The Wealth of Nations (1776)

• An Inquiry into the Nature and Causes of the Wealth of Nations– continuation of Smith’s

research program

– rebuttal to James Steuart

– continuation of British economics influenced by French and Scottish enlightenments

– summation of political economy for interested lay reader

The Wealth of Nations (1776)

• Analytical Economics– Economic Growth– Production and Capital

Accumulation– Value and Distribution

• Polemics and Philosophy– Anti-Mercantilism– Defense of “Natural Liberty”– Outline for functions of

Liberal Government

The Wealth of Nations (1776)

• Book I - “Of the Causes of Improvement in the productive Powers of Labour, and of the Order according to which its Produce is naturally distributed among the different Ranks of the People”

• Book II - “Of the Nature, Accumulation, and Employment of Stock”

The Wealth of Nations (1776)

• Book III - “Of the different Progress of Opulence in different Nations”

• Book IV - “Of Systems of political Œconomy”

• Book V - “Of the Revenue of the Sovereign or Commonwealth”

Book I: The Division of Labor• Focus: Allocation of resources in

a growing economy– Growth rate of economy depends

upon division of labor• increases dexterity

• saves time

• leads to invention of machines

– Division of Labor depends upon• extent of market

• self-interest (propensity to truck…)

• existence of and increases in stock (=tools and provisions for workers)

Book I: Money and Value• Once division of labor

established, men live by exchange• Problems of barter exchange lead

to natural development of monetary commodity

• monetary commercial society is exchange society - what are rules of exchange?

• Diamond-Water Paradox stated (but no solution!)– compare with Lectures on

Jurisprudence

– Value in use v. Value in exchange

Book I: The Prices of Goods • Real price

– “the real price of every thing…is the toil and trouble of acquiring it.”• labor-cost theory of value

– “the value of any commodity…is equal to the quantity of labour which it enables him to purchase or command.”• labor-command theory of value

– “Labour…is the real measure of the exchangeable value of all commodities.”

• Nominal price– money price

Book I: Wages, Profits, and Rent • In early society, before accumulation

of stock and appropriation of land, the whole produce belongs to labor

• Accumulation of stock leads to wage payment, and profits for those that “hazard” their stock by supplying tools and payments to workers

• Private property leads to third payment- rent to the landlord– what is economic function?

• Labor measures the value of labor, the value of rent, the value of profit (labor measures price)

Book I: The Prices of Goods • Natural price

– equal sum of the natural rates of wages, profit and rent• (labor-command v. labor-cost theory)

• Market price– relation between supply and

“effectual demand”

• Relationship between Market Price and Natural Price regulates product and resource allocations– if Market Price > Natural Price, then at

least one of components of natural price must be above natural rate (wage, profit) - probably not rent…

Book I: Wages and Profits• Wages depend upon change in stock;

being high when stock is increasing• High real wages lead to increases in

population• Money wages regulated by demand

for labor and price of “necessaries and conveniences of life”

• Profits fall with increase of stock (via competition)

• Wages and Profits inversely related• Wages across occupations vary due

to costs; Profits across industries vary due to certainty

Book I: Rent• Rent is produce above that

necessary to pay ordinary profits• The rent of land is “naturally a

monopoly price…not at all proportioned to what the landlord may have laid out upon the improvement of the land”

• “Every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land, to increase the real wealth of the landlord…”

Book II: Capital

• A stock of goods is necessary to supply labor tools and goods sufficient to maintain laborers while they toil

• Saving is source of capital (both circulating and fixed)

• Money is a part, but small part, of the capital of a country but is not any of the nation’s revenue (only goods)

Book II: Money• The volume of trade

determines the quantity of money in society

• Banknotes enable country to convert dead stock into active and productive stock

• Value of paper money is regulated by value of specie which is determined by the labor costs of production

Book II: Types of Labor and Capital

• Productive v. Unproductive labor– productive labor creates goods– unproductive labor creates services

• Rate of accumulation – productive labor and saving– prodigal spending destroys capital

• Saving is consumed as regularly as consumption

• Argument in favor of maximum interest legislation to divert loanable funds away from profligates and speculators

Book III: Economic History • A review of rise and

progress of industry and wealth

• Smith, however, is generally oblivious to the important economic events surrounding him– iron works, Watt’s inventions– canal boom, cotton textiles– potteries, new methods of

beer-making

Book IV: Political Economy“Political œconomy, considered as

a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state…with a revenue sufficient for the public services.”

Book IV: Mercantilism

• Identification of bullionism with “Mercantile system”

• Argument against export subsidies, import restraints, monopoly grants

• Argument for free trade (without use of division of labor) on basis that consumption, not production, is end of all industry and commerce

Book IV: Physiocracy• Overlooks contributions of

manufacturing and commerce to revenue of nation

• Despite errors, physiocracy has made valuable contributions in its opposition to the mercantile system and position in favor of commercial liberty and free trade

Book V: State Expenditures• Duties of Sovereign– defense from invasion– protecting each member from

injustice of oppression by others in society

– erecting and maintaining public works that are not profitable for individuals to carry out• roads, canals, bridges, harbors• primary education• navigation acts• post office• government coinage

Book V: Canons of Taxation

• Contribute in proportion to ability, that is in proportion to revenue they enjoy from protection of state– ability-to-pay v. benefits

• certainty

• convenience of payment

• economy in collection

Popularizing Smith

• Dugald Stewart (1753-1828)– Professor of Mathematics and Moral

Philosophy, University of Edinburgh• successor to Adam Ferguson in Chair of

Moral Philosophy

• attracts wide range of students, including Walter Scott, James Mill, and J.R. McCulloch

– from 1800, lectures on political economy as a separate class

– Elements of the Philosophy of the Human Mind (1792-1827)

– Outlines of Moral Philosophy (1793)

– Life and Writings of Adam Smith (1793)

Smith: An Evaluation• Social Impact– vagueness led to several interpretations– Arguably the father of “socialism,” “Georgism,” as

well as “British classical economics”– first or second in impact on policy

• Impact on Development of Economics– standard of reference– loss of earlier contributions

• Originality– original not true, true not original– deterioration from late Spanish scholastics,

Cantillon, Turgot, even Smith’s own earlier writings

Smith: An Evaluation• Smith’s “Calvinism” (Rothbard on Smith)– favors productive v. unproductive labor– favors capital v. consumer durables– favors saving over luxury– criticized high profits and luxury spending– emphasis on labor value– favored taxation of luxury consumption,

distilleries, and retail liquor sales– favored usury laws to reallocate funds into

“most productive” hands and away from “prodigals” and “projectors”

• The Smithian Diversion?

The Heirs of Adam Smith• The (Utilitarians) Ricardians– Jeremy Bentham– David Ricardo – James Mill and John Stuart Mill

• The British Anti-Ricardians– Thomas Malthus– Nassau Senior– The Dublin School

• The Manchester School– Richard Cobden– John Bright