The Contribution of Adam Smith to Economics

Introduction

Adam Smith was a philosopher, political economist, and a major enlightenment figure from Scotland who lived between the years 1723 and 1790 (Berry, Paganelli & Smith, 2013). He is known for authoring two literary works that catapulted him to fame as both a political economist and a moral philosopher. These works include The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations (Fry, 2005).

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The second book is commonly referred to as The Wealth of Nations and earned Smith the title “the father of economics.” The book was his main contribution to the field of economics. He is considered the father of economics because he laid the foundations of classical free-market economic theory through his theories and ideas (Fry, 2005). Smith made significant contributions to economics by promulgating ideas that later became the basis of the classical school of economics.

Background

Adam Smith was born in a city in Scotland known as Kirkcaldy in the year 1723. His father was a writer, an advocate, and a prosecutor. Smith was raised by a single parent owing to his father’s death at the age of two months. His mother was very influential because he encouraged him to pursue scholarly endeavors that would later propel him to the top as the pioneer of modern economics (Berry et al., 2013).

Smith enrolled at the University of Glasgow and completed his studies in moral philosophy, which encouraged him to major in three main areas namely free speech, reason, and liberty. After graduating from Glasgow, he attended Balliol College at Oxford where he took his postgraduate studies (Fry, 2005). Smith enjoyed his time at Glasgow more than he did at Oxford because of the many weaknesses of Oxford’s professors.

For instance, he was once punished for reading the works of David Hume. His teaching career began in 1748 when he commenced delivering public lectures. He covered several areas including rhetoric and theories on economic philosophy. Smith left the academic world in 1764 and became the instructor of the duke of Buccleuch. They traveled to many countries and learned many new things. The travels introduced Smith to many philosophers and enlightened individuals such as Voltaire and Jean-Jacques Rousseau who influenced him greatly. He authored The Wealth of Nations after retiring from serving the duke in 1776 (Berry et al., 2013). He was offered the job of commissioner of customs in which he fought against smuggling. He died in 1790 in Edinburgh without ever having a wife.

Contributions to economics

Smith authored the works Wealth of Nations to document the industrial development in Europe in a way that ordinary people could comprehend the various concepts that he addressed (Berry et al., 2013). Historical critics have argued that Smith did not come up with many of the ideas that he promulgated in the book. However, he was the first person during his era to compile and publish the ideas in a way that every person could comprehend and make sense of (Fry, 2005).

The ideas covered in the aforementioned book later became the foundations of a school of thought referred to as classical economics. Economists who came after Smith used many of his ideas and works to make contributions to the classical economic theory. The classical economic theory was the most influential school of thought during the Great Depression that began with the stock market crash of 1929 (Fry, 2005).

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Smith promoted several Laissez-faire philosophies that formed the foundation of his economic philosophy concepts (Berry et al., 2013). They include the need for minimal taxation in free markets, minimal involvement of governments in open markets, and the idea that invisible forces determine the demand and supply in markets. The aforementioned concepts support the idea that individual efforts to gain personal advantages lead to the creation of outcomes that favor the attainment of other people’s endeavors (Smith, 2008).

He believed that people gained advantages not from the goodwill of individuals who offered goods and services but from their own self-interests. People who provide goods and services do so in order to make money. According to Smith, these people gain financial rewards if they successfully meet the needs of their customers (Fry, 2005). Their intentions of engaging in various enterprises are driven by the urge to make money. However, they also provide goods and services that improve the quality of people’s lives.

Smith believed that such a system was necessary in order to create wealth for a nation as well as its people. Such a system is characterized by people who work hard to improve the quality of their lives by meeting their financial needs by pursuing different economic endeavors (Fry, 2005). In that regard, he talked about the idea of investing in businesses with low risks and high.

The Wealth of Nations contained concepts and theories that promoted the idea of wealth creation through assembly-line production. Smith was a proponent of the division of labor, which is a core economic concept in the modern world. In the book, he gave the example of the labor needed to complete the manufacture of a pin. He noted that a single man could undertake all the eighteen steps involved but he would only make a few pins weekly because of the workload involved (Smith, 2008).

On the other hand, if the production of the pin was accomplished in an assembly-line approach by more men who shared the workload, production would increase many times over because of improved efficiency (Berry et al., 2013). Smith applied these ideas to evaluate wealth generation in the British colonies in America. He argued that wealth creation through the colonies was not efficacious because the cost of maintaining them was higher than the returns received (Fry, 2005). Therefore, the colonies were ineffective in generating wealth.

The major philosophy that dominated Smith’s works was based on personal interest and maximizing returns in an effort to create wealth for oneself. His first literary work was titled The Theory of Moral sentiments and covered the importance of sympathy in making human communication successful and effective (Malloy & Evensky, 2012). This book presented views that contradicted his economic views on wealth creation through self-interest in which individuals disregard the greater societal good.

However, Smith counteracted this negation by introducing the idea of the existence of an invisible hand that helps individuals thrive despite the self-centered approach to wealth creation (Malloy & Evensky, 2012). In contemporary society, the invisible-hand theory that was developed by Smith is recognized in free markets and capitalistic economies. This theory is responsible for the efficiency that is observed in free markets and capitalist economies that are characterized by stiff competition for scarce resources as well as their supply and demand. Smith lived during an era of the great industrial revolution.

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The outcomes of specialization and division of labor on productivity made an impression on him so much that he based much of his works on these concepts (Malloy & Evensky, 2012). He is considered the father of economics because he was the first person to compose a model of the nature and functioning of the capitalist economic system. Smith lived during an era that was characterized by increasing economies of scale, great inventions, and the creation of huge factories that encouraged specialization and division of labor (Malloy & Evensky, 2012).

One of the concepts that made a great impression on him was a division of labor. In that regard, he introduced the idea of the distinction between return on investment resulting from merchant capital and industrial capital. Smith demonstrated the benefits of specialization and division of labor by giving the aforementioned example of the manufacture of pins.

Many people consider Smith as a proponent of capitalism. However, he was frustrated by the social and individual degradation that resulted from capitalism during the time of the industrial revolution. He developed ideologies that were later used to oppose mainstream capitalism and socialism. In that regard, he has become known as the father of capitalism, socialism, and communism. Smith developed ideas to argue that wealth primarily emanated from production and not exchange (Malloy & Evensky, 2012).

He developed concepts that supported the assertion that value is determined by the time used to labor in production and not the utility enjoyed in mercantilism. He later rejected these assertions. Many of Smith’s ideas supported the capitalist system especially with regard to division o labor, productivity, free markets, and specialization (Smith, 2008). He considered markets as important features in wealth creation and as such discussed comprehensively the benefits of foreign trade. His thoughts on foreign trade laid the foundation for modern neoclassical trade theory by asserting the significant role it played in providing a destination for the surplus in the home market.

Smith believed that free trade increased a nation’s productivity because of more access to opportunities for specialization and division of labor. In Wealth of Nations, he wrote that foreign trade is beneficial because it exposes nations to a greater variety of products and services at affordable and competitive prices (Smith, 2008). In addition, it creates a platform that nations use to exchange their products with other nations thus increasing their enjoyments. Smith was a proponent of the idea that countries should manufacture and trade products that offer them a competitive advantage over other nations (Smith, 2008). This concept is evident in contemporary society in the form of specialization, which is used to gain a competitive advantage and quell stiff competition.

In Wealth of Nations, Smith discusses three critical theories namely a theory of history, a theory of value and price, and a theory of sociology. He considers history as a component of the way in which people produced and shared the resources necessary for human sustenance (Smith, 2008). Smith cites four stages of economic and social development that were evident during his time. They include hunting, agriculture, pasturage, and commerce (Malloy & Evensky, 2012).

Each of these stages had different events that marked a shift from low productivity to higher productivity that generated greater amounts of wealth. Smith made contributions in the field of development economics too. In that regard, he believed that increased efficiency in agriculture was necessary for creating an economic platform that would initiate the expansion of manufacturing industries (Smith, 2008).

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He noted that successful capitalism was based on the mutual relationship between the development of agricultural and commerce industries. Smith’s theory of sociology recognized that social classes in capitalist societies resulted from varied relations with regard to property ownership. Capitalist individuals dominate because of three reasons that include wealth, government support, and power to influence public opinion (Smith, 2008).

According to Smith, wages and profits are key aspects of struggles between laborers and capitalists (Malloy & Evensky, 2012). Capitalists acquire wealth because of the power they possess to manipulate public opinion and gain government support. Smith noted that an invisible hand was responsible for the part played by each individual in a competitive market. The invisible hand mitigates the problems that arise from the struggles between workers and capitalists.

Conclusion

Adam Smith was born in Scotland in the year1723 and died in 1790. He is widely considered as the father of economics because of his various contributions. He authored and published two literary works titled The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations. Both books contain ideas that were used to form the foundation of classical economics.

He laid the foundations of classical free-market economic theory and developed important theories such as the theory of history, theory of value and price, and theory of sociology. He was a proponent of capitalism especially with regard to the positive effects of specialization and division of labor in production. His works were based on the impression made on him by the effects of specialization and division of labor during the great industrial revolution that occurred during his time.

References

Berry, C. J., Paganelli, M. P., & Smith, C. (2013). The Oxford Handbook of Adam Smith. London, England: Oxford University Press.

Fry, M. (2005). Adam Smith’s Legacy: His Place in the Development of Modern Economics. New York, NY: Routledge.

Malloy, R., & Evensky, J. (2012). Adam Smith and the Philosophy of Law and Economics. New York, NY: Springer Science & Business Media.

Smith, A. (2008). Wealth of Nations. New York, NY: Cosimo Inc.

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