Adam Smith and the Wealth of Nations: The Birth of Economics

posted on 06-07-2019

Perhaps no other man in the history of economics enjoys the rock-star status Adam Smith holds. Dubbed the father of capitalism, Adam Smith was a Scottish academic, an only son and lifelong bachelor, and a person who didn't much care for writing.

Smith was interested in being known for his work, not his personality, and he succeeded mightily in that goal. Today, over 200 years after his death, he's still the world's most famous economist.

Adam Smith's Life

Adam Smith was born in Kirkcaldy, Scotland, in 1723. He attended the University of Glasgow, and 12 years after his 1740 graduation, he became the Chair of Logic there. The next year, he became the Chair of Moral Philosophy. In 1759, Smith published his first book, The Theory of Moral Sentiments, which contained many of his lectures.

In 1764, Smith quit his job and became a "travelling tutor" to the Duke of Buccleuch (who incidentally is the fifth great-grandfather of Sarah, Duchess of York) for two years. On the job, Smith met many leading philosophers and economists who influenced his work. 

In 1766, Smith went back home to his mother in Kirkaldy and began work on what is still his most well-known treatise, The Wealth of Nations, which took about ten years to write and was published on March 9, 1776. But quite the mover, Smith uprooted again and went to London to work and write. While he was there, the colonies were enduring some of their most contentions pre-Revolutionary times, including the Boston Massacre in 1770, the Boston Tea Party in 1773, and the Battles of Lexington and Bunker Hill in 1775. Smith was very interested in the colonies' political activities, at one point wondering whether the seat of the British Empire would eventually move from London to America.

The Wealth of Nations was so popular that five editions were published while Smith was still alive. He died on July 17, 1790, allegedly stating on his death bed that he'd wished he'd achieved more.

Adam Smith's Big Ideas

If Adam Smith were alive today, however, he and could say only one thing to the government, it would probably be "Leave us alone; we'll figure it out ourselves."

After all, one of Smith's biggest theories was that people work naturally toward maximizing their self-interests. The exchange of goods and services facilitates this goal, he argued, and market participants engage in those activities most beneficially when regulations and government intervention do not inhibit them from doing so. That is, the invisible hand of self-interest guides participants into exchange that is the most mutually beneficial.

Smith said, for example, that by selling products people want to buy, butchers, brewers, and bakers make money. However, they only get that money if they can meet the needs of their customers effectively--that is, if they offer things people want to buy. By doing so, they are financially rewarded and they create wealth for the nation as a whole by being productive citizens. In other words, they inadvertently create the best outcome for everyone by looking out for their own self-gics. As Smith put it, "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest."

This idea—that self-interest actually serves a greater good—sits at the heart of why even today people invest their retirement money, college funds, and other savings in companies or enterprises that are most likely to give them a high return for a given level of risk. And because people look out for their own self-interests, Smith argues, others benefit: money is more likely to flow from investors into viable companies, which creates companies, jobs, and a bigger economy.

It is important to emphasize another central tenet of Smith's philosophy: that, generally speaking, government should not interfere in this natural course of commerce activities. In particular, Smith rejected the mercantile system, which was an economic system prevalent in 18th century Europe, where by the objective of commerce was to increase a nation's wealth via government regulation of all the nation's commercial interests. Smith dismissed as "absurd" the mercantile system's regulatory restraints on imports and encouragement of exports in order to build a trade surplus. Rather, he felt that a nation's wealth lay in its trade rather than its capital. Smith wrote:

"No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can only divert a part of it into a direction into which it might not otherwise have gone; and it is by  no means certain that this artificial direction is likely to be more advantageous to the society than that into which it would have gone of its own accord."

Smith argued that government regulation not only created commercial headaches, it harmed society at large by infringing on the rights of the masses to tend to their own well-being. Instead, the best contribution government can make to society is to leave people to their own tendencies to do business. (However, Smith did believe government should enforce contracts, patents, copyrights, and other items that encouraged entrepreneurial activity.)

Adam Smith Today

Modern capitalism owes its roots to Adam Smith and his Wealth of Nations, which many consider the single most important economic work in history. Though other economists such as Marx and Keynes have fathered monumental economic theories as well, Smith and his theories rest at the apex of transcendent economic thought.

by Christian Hudspeth What's even better than earning rewards for spending on your credit cards? Getting paid hundreds of dollars worth in sign-up bonuses in three months or sooner -- just for tr...
by Christian Hudspeth Tired of dragging credit card debt around with you? Taking 15 minutes to transfer your debt to a credit card with generous balance transfer perks could save you thousands in...
by Christian Hudspeth If you're going to spend money anyway, then why not get paid for it?Whether you're looking for credit cards with up to 6% cash back, double flight miles, or even a free hote...
by Christian HudspethIn times where interest rates are on the rise, you may start hearing financial advisors and bankers sing the praises of an income strategy called "CD laddering" (short for ce...
by Susan Campbell Those of us familiar with selling property know real estate agents don't come cheap. With real estate agent commission and fees amounting to as much as 6% of the sel...
Beverly Harzog is a nationally recognized credit card expert, author, and consumer advocate. She blogs about credit cards at BeverlyHarzog.com. Being in credit card debt is the pits. I've bee...
by Christian Hudspeth If you haven't already felt the pressure to refinance your mortgage, you're probably really feeling it now. Mortgage rates are still hovering near historic lows. But ...
by Christian Hudspeth If you or someone you know is thinking about getting a home mortgage, you may want to know about the thousands of dollars in hidden charges that some lenders are quietly...
by Christian Hudspeth Money market accounts (MMAs) and savings accounts make great places to set aside your emergency fund money and earn some interest income at the same time.Simply put, these s...
by Christian Hudspeth It's true that auto loans and home loans offer attractively-low annual percentage rates (APRs), while credit cards offer borrowing power without the risk of ever seeing the ...
by Christian HudspethWant to keep your emergency fund safe while earning interest yields that are three to five times higher than a typical savings account? Putting your money into an FDIC-insure...
by Christian Hudspeth Question: Hi there. I need your advice. I'm only 19 and I really need to start investing. Where can I start? -- Tirelo M., Gaborone, Botswana Answer: You've defini...