Adam Smith 1723 - 1790 Was brought up in a house overlooking a street market, this influenced much of his thinking and is a basis for some weaknesses in his economic theory. He was a moral philosopher and economist active during the Scottish Enlightenment. His two books mark the start of contemporary rational thinking.
Theory of Moral Sentiments 1759
Wealth of Nations 1759
He advised, do what you do best and trade for the rest.
Don't make (at home) what you can buy cheaper.
He wrote that we have internal conversations with an impartial spectator who is our moral compass.
He argued that the economic activity of humans is action but not design. Even if he was right in the mid 18th century this idea might not be so sound now.
He put forward the idea of a division of labour to increase productivity with the eventual aim of automating the production process
Describes making a pin as an example
During the period of his writing the industrial revolution was taking off and manufacturing technology was advancing rapidly. When Smith worked as a professor and administrator at Glasgow University he made room and facilities for James Watt to work on steam power.
He called the economy of his time 'commercial society. In 1707 Britain united into a free trade area and by the 1750s in company with the Netherlands, Belgium and parts of Italy had become capitalist.
Capitalism is where production is organised to make profits through selling into a market rather than manufacturing for the use of the producer with a small surplus sold locally. It involves the organised use of labour working for wages. Capitalism is organised by the people who own the means of production and distribution.
Smith believed competition would force producers to sell at the most competitive price and that this would benefit everyone. The British Conservative government still holds onto this idea.
In the early part of the industrial revolution, most factories were owned and run by individuals or small partnerships where the owners were personally involved in the day to day running of the process. Most people still worked in agriculture and agriculture was still mainly subsistence farming although change was happening. Slavery was still a major form of labour and wasn't abolished until well after Smith has passed away. Slavery is another inconsistency in his arguments for free and open markets. As was child labour which was normal practice.
Smith was against limited liability companies, he said it was playing with other peoples' money. Throughout his economic thinking, he bases his ideas on small free markets but he does acknowledge markets will become oligopolies or even monopolies. He hated the East India Company. He continually stresses the need for markets to be free like the one he saw every day when he was growing up. In reality, his whole theory is based on his local street market applied nationally and even globally. Most markets at this time except sugar, cotton, wool and textiles, slaves and spices were still local, regional and rarely national.
Most firms were small so competition did exist. It was impossible for one firm to dominate a market but the economy was changing. Oligopolies and monopolies existed and were emerging. The monarch could grant monopolies for example and the East India Company is a prime example. Smith knew his arguments were idealistic and couldn't work.
A small business person, like a butcher in a local market, provides a product for sale that is not from benevolence, it is for the self interest of the provider. In acting such, he is promoting a wider end through other traders and manufacturers that promotes an end result that is not his intention. Buyers vote with their wallets and mould the trading activity of the market. All the individual small transactions happen automatically influencing the whole like an invisible hand. It's like an economic murmuration.
He knew that firms found ways of collaborating to form predatory oligopolies that snapped up and out produced the small firms. He argued for free markets knowing they couldn't be maintained. He argued that governments should keep out of the market other than passing laws to stop the growth of oligopolies and even worse monopolies.
His arguments were based over and over again on small businesses working in open and free markets.
He explained that monarchs can grant monopolies. That rich and powerful people oppress the powerless and the poor. Guilds and regulations prevent free trade. Ordinary working people are left out of the process.
He thought the East India Company was evil and an antithesis to free markets. In fact, the East India Company had become too big to fail and the government had to step in to bail it out with a tax on tea. Something that was to play a part in the American revolution.
Adam Smith's two main philosophical and economic insights are,
Governments should bring about peace, easy taxes and a tolerable administration.
The automatic summation of huge numbers of transactions is guided by an invisible hand.
