Adam Smith Essay Example For Students

Adam Smith Essay Adam Smith, a brilliant eighteenth-century Scottish political economist, had the advantage of judging the significance ol colonies by a rigorous examination based on the colonial experience of 300 years. His overview has a built-in bias: he strongly disapproved of excessive regulation of colonial trade by parent countries. But his analysis is rich with insight and remarkably dispassionate in its argument. Adam Smith recognized that the discovery of the New World not only brought wealth and prosperity to the Old World, but that it also marked a divide in the history of mankind. The passage that follows is the work of this economic theorist who discusses problems in a language readily understandable by everyone. Adam Smith had retired from a professorship at Glasgow University and Was living in France in 1764-5 when he began his great work, The Wealth of Nations. The book was being written all during the years of strife between Britain and her colonies, but it was not published until 1776. In the passages which follow, Smith points to the impossibility of monopolizing the benefits of colonies, and pessimistically calculates the cost of empire, but the book appeared too late to ave any effect upon British policy. Because the Declaration of Independence and The Wealth of Nations, the political and economic reliations of empire and mercantilism, appeared in the same year, historians have often designated 1776 as one of the turning points in modern history. The text On the cost of Empire, the eloquent exhortation to the rulers of Britain to awaken from their grandiose dreams of empire, is the closing passage of Smiths book. Adam Smith was a Scottish political economist and philosopher. He has become famous by his influential book The Wealth of Nations (1776). Smith was the son f the comptroller of the customs at Kirkcaldy, Fife, Scotland. The exact date of his birth is unknown. However, he was baptized at Kirkcaldy on June 5, 1723, his father having died some six months previously. At the age of about fifteen, Smith proceeded to Glasgow university, studying moral philosophy under the never-to-be-forgotten Francis Hutcheson (as Smith called him). In 1740 he entered Balliol college, Oxford, but as William Robert Scott has said, the Oxford of his time gave little if any help towards what was to be his lifework, and he relinquished his exhibition in 1746. In 1748 he egan delivering public lectures in Edinburgh under the patronage of Lord Kames. Some of these dealt with rhetoric and belles-lettres, but later he took up the subject of the progress of opulence, and it was then, in his middle or late 20s, that he first expounded the economic philosophy of the obvious and simple system of natural liberty which he was later to proclaim to the world in his Inquiry into the Nature and Causes of the Wealth of Nations. About 1750 he met David Hume, who became one of the closest of his many friends. In 1751 Smith was appointed professor of logic at Glasgow university, ransferring in 1752 to the chair of moral philosophy. His lectures covered the field of ethics, rhetoric, jurisprudence and political economy, or police and revenue. In 1759 he published his Theory of Moral Sentiments, embodying some of his Glasgow lectures. This work, which established Smiths reputation in his own day, is concerned with the explanation of moral approval and disapproval. His capacity for fluent, persuasive, if rather rhetorical argument is much in evidence. He bases his explanation, not as the third Lord Shaftesbury and Hutcheson had done, on a special moral sense,nor, like Hume, to any decisive xtent on utility,but on sympathy. There has been considerable controversy as how far there is contradiction or contrast between Smiths emphasis in the Moral Sentiments on sympathy as a fundamental human motive, and, on the other hand, the key role of self-interest in the The Wealth of Nations. In the former he seems to put more emphasis on the general harmony of human motives and activities under a beneficent Providence, while in the latter, in spite of the general theme of the invisible hand promoting the harmony of interests, Smith finds many more occasions for pointing out cases of conflict and of the narrow elfishness of human motives. Smith now began to give more attention to jurisprudence and political economy in his lecture and less to his theories of morals. An impression can be obtained as to the development of his ideas on political economy from the notes of his lectures taken down by a student in about 1763 which were later edited by E. Cannan (Lectures on Justice, Police, Revenue and Arms,1896), and from what Scott, its discoverer and publisher, describes as An Early Draft of Part of The Wealth of Nations, which he dates about 1763. At the end of 1763 Smith obtained a lucrative post as tutor to the young duke of Buccleuch and resigned his professorship. From 1764-66 he traveled with his pupil, mostly in France, where he came to know such intellectual leaders as Turgot, DAlembert, AndrMorellet, Helvtius and, in particular, Francois Quesnay, the head of the Physiocratic school whose work he much respected. On returning home to Kirkcaldy he devoted much of the next ten years to his magnum opus, which appeared in 1776. In 1778 he was appointed to a comfortable post as commissioner of customs in Scotland and went to live with his mother in Edinburgh. He died there on July 17, 1790, after a painfull illness. He had pparently devoted a considerable part of his income to numerous secret acts of charity. Shortly before his death Smith had nearly all his manuscripts destroyed. In his last years he seems to have been planning two major treatises, one on the theory and history of law and one on the sciences and arts. The posthumously published Essays on Philosophical Subjects (1795) probably contain parts of what would have been the latter treatise. The Wealth of Nations has become so influential since it did so much to create the subject of political economy and develop it into an autonomous systematic discipline. In the western world, it is the most influential book on the subject ever published. When the book, which has become a classic manifesto against mercantalism, appeared in 1776, there was a strong sentiment for free trade in both Britain and America. This new feeling had been born out of the economic hardships and poverty caused by the war. However, at the time of publication, not everybody was convinced of the advantages of free trade right away: the British public and Parliament still clung to mercantilism for many years to come (Tindall and Shi). However, controversial views have been expressed as to the xtent of Smiths originality in The Wealth of Nations. Smith has been blamed for relying too much on the ideas of great thinkers such as David Hume and Montesquieu. Nevertheless, The Wealth of Nations was the first and remains the most important book on the subject of political ecomomy until this present day. It has never, I think, been the good fortune of any founder of a scientific system to think out to the very end even the more important ideas that constitute his system. The strength and lifetime of no single man are sufficient for that. It is enough if some few of the ideas which have to play the chief art in the system are put on a perfectly safe foundation, and analysed in all their ramifications and complexities. It is a great deal if, over and above that, an equal carefulness falls to the lot of a few other favoured members of the system. But in all cases the most ambitious spirit must be content to build up a great deal that is insecure, and to fit into his system, on cursory examination, ideas which it was not permitted him to work out. We must keep these considerations before us if we would rightly appreciate Adam Smiths attitude towards our problem. Adam Smith has not overlooked the problem of interest; neither has he worked t out. He deals with it as a great thinker may deal with an important subject which he often comes across, but has not time or opportunity to go very deeply into. He has adopted a certain proximate but still vague explanation. The more indefinite this explanation is, the less does it bind him to strict conclusions; and a many-sided mind like Adam Smiths, seeing all the many different ways in which the problem can be put, but lacking the control which the possession of a distinct theory gives, could scarcely fail to fall into all sorts of wavering and contradictory expressions. Thus we have the peculiar phenomenon that, while Adam Smith has not laid down any distinct theory of interest, the germs of almost all the later and conflicting theories are to be found, with more or less distinctness, in his scattered observations. We find the same phenomenon in Adam Smith as regards many other questions. The line of thought which seems to commend itself principally to him as explaining natural interest occurs in very similar language in the sixth and eighth chapters of book i of the Wealth of Nations. It amounts to this, that there must be a profit from capital, because otherwise the capitalist would have o interest in spending his capital in the productive employment of labourers. (1*) General expressions like these have of course no claim to stand for a complete theory. (2*) There is no reasoned attempt in them to show what we are to represent as the actual connecting links between the psychological motive of the capitalists self-interest and the final fixing of market prices which leave a difference between costs and proceeds that we call interest. But yet, if we take those expressions in connection with a later passage,(3*) where Smith sharply opposes the future profit that rewards the resolution of the capitalist to the present enjoyment of immediate consumption, we may recognise the first germs of that theory which Senior worked out later on under the name of the Abstinence theory. In the same way as Adam Smith asserts the necessity of interest, and leaves it without going any deeper in the way of proof, so does he avoid making any systematic investigation of the important question of the source of undertakers profit. Homeless Research EssayThe workers discontent with his small share is not lessened, as it used to be in the case of the handicraft assistant, by the expectation of himself in time enjoying the lions share; for, under large production, the worker has no such expectation. On the contrary, his discontent is aggravated by the knowledge that o him, for his scanty wage, falls the harder work; while to the undertaker, for his ample share in the product, falls the lighter exertion-often enough no personal exertion whatever. Looking at all these contrasts of destiny and of interest, if there ever came the thought that, at bottom, it is the workers who bring into existence the products from which the undertaker draws his profit and Adam Smith had come wonderfully near to such a thought in many passages of his widely read book it was inevitable that some pleader for the fourth estate should begin to put the same question with regard to natural interest as ad been put many centuries earlier, by the friends of the debtor, with regard to Loan interest, Is interest on capital just? Is it just that the capitalist- undertaker, even if he never moves a finger, should receive, under the name of profit, a considerable share of what the workers have produced by their exertions? Should not the entire product rather fall to the workers? The question has been before the world since the first quarter of our century, at first put modestly, then with increasing assertiveness; and it is this fact that the interest theory has to thank for its unusual and lasting itality. So long as the problem interested theorists alone, and was of importance only for purposes of theory, it might have slumbered on undisturbed. But it was now elevated to the rank of a great social problem which the science neither could nor would overlook. Thus the inquiries into the nature of Natural interest were as numerous and solicitous after Adam Smiths day as they had been scanty and inadequate before it. It must be admitted that they were as averse as they were numerous. Up till Adam Smith the scientific opinion of the time had been represented by one single theory. After him opinion was divided into a number of theories conflicting with each other, and remaining so with rare persistence up till our own day. It is usually the case that new theories put themselves in the place of the old, and the old gradually yield the position. But in the present case each new theory of interest only succeeded in placing itself by the side of the old, while the old managed to hold their place with the utmost stubbornness. In these circumstances the course of development since Adam Smiths time presents not so much the picture of a progressive reform as that of a schismatic accumulation of theories. The work we have now before us is clearly marked out by the nature of the subject. It will consist in following the development of all the diverging systems from their origin down to the present time, and in trying to form a critical opinion on the value, or want of value, of each individual system. As the development from Adam Smith onwards simultaneously pursues different lines, I think it best to abandon the chronological order of statement which I have hitherto observed, and to group together our material according to theories. To this end I shall try first of all to make a methodical survey of the hole mass of literature which will occupy our attention. This will be most easily done by putting the characteristic and central question of the problem in the foreground. We shall then see at a glance how the theory differentiates itself on that central question like light on the prism. What we have to explain is the fact that, when capital is productively employed, there regularly remains over in the hinds of the undertaker a surplus proportional to the amount of this capital. This surplus owes its existence to the circumstance that the value of the goods produced by the assistance of apital is regularly greater than the value of the goods consumed in their production. The question accordingly is, Why is there this constant surplus value? To this question Turgot had answered, There must be a surplus, because otherwise the capitalists would employ their capital in the purchase of land. Adam Smith had answered, There must be a surplus, because otherwise the capitalist would have no interest in spending his capital productively. Both answers we have already pronounced insufficient. What then are the answers given by later writers? At the outset they appear to me to follow five different lines. One party is content with the answers given by Turgot and Smith, and stands by them. This line of explanation was still a favourite one at the beginning of our century, but has been gradually abandoned since then. I shall group these answers together under the name of the Colourless theories. A second party says, Capital produces the surplus. This school, amply represented in economic literature, may be conveniently called that of the Productivity theories. I may here note that in their later development we shall find the productivity theories splitting up into many varieties; into Productivity theories in the narrower sense, that assume a direct production of surplus on the part of capital; and into Use theories, which explain the origin of interest in the roundabout way of making the productive use of capital a peculiar element in cost, which, like every other element of cost, demands compensation. A third party answers, Surplus value is the equivalent of a cost which enters as a constituent into the price, viz. abstinence. For in devoting his capital to production the capitalist must give up the present enjoyment of it. This postponement of enjoyment, this abstinence, is a sacrifice, and as such s a constituent element in the costs of production which demands compensation. I shall call this the Abstinence theory. A fourth party sees in surplus value the wage for work contributed by the capitalist. For this doctrine, which also is amply represented, I shall use the name Labour theory. Finally, a fifth party for the most part belonging to the socialist side answers, Surplus value does not correspond to any natural surplus whatever, but has its origin simply in the curtailment of the just wage of the workers. I shall call this the Exploitation theory. These are the principal lines of explanation. They are certainly numerous enough, yet they are far from exhibiting all the many forms which the interest theory has taken. We shall see rather that many of the principal lines branch off again into a multitude of essentially different types; that in many cases elements of sever theories are bound up in a new and peculiar combination; and that, finally, within one and the same theoretical type, the different ways in which common fundamental thoughts are formulated, are often so strongly contrasted and so characteristic that there would be some justification in recognising individual shades of difference as separate theories. That our rominent economic writers have exerted themselves in so many different ways for the discovery of the truth is an eloquent witness of its discovery being no less important than it is hard. We begin with a survey of the Colourless theories. NOTES: 1. In exchanging the complete manufacture either for money, for labour, or for other goods, over and above what may be sufficient to pay the price of the materials and the wages of the workmen, something must be given for the profits of the undertaker of the work, who hazards his stock in the adventure. He could have no interest to employ them unless he expected from the sale of their ork something more than what was sufficient to replace his stock to him; and he could have no interest to employ a great stock rather than a small one unless his profits were to bear some proportion to the extent of his stock (MCullochs edition of 1863, p. 22). The second passage runs: And who would have no interest to employ him unless he was to share in the produce of his labour, or unless his stock was to be replaced to him with a profit (p. 30). 2. See also Pierstorff, Lehre vom Unternehmerggwinn, Berlin, 1875, p. 6; and Platter, Der Kapitalgewinn bei Adam Smith (Hildebrands Jahrbcher, vol. xv. p. 317, etc. ) 3. Book ii. chap. i. p. 123, in MCullochs edition. 4. When Plater in the essay above mentioned (p. 1) comes to the conclusion that, if Smiths system be taken strictly, profit on capital appears unjustifiable, it could only be by laying all the weight on the one half of Smiths expressions, and leaving the other out of account as contradictory to his other principles. 5. Book ii. chap. iii. 6. Book i. chap. vi. The sentence was written primarily about landowners, but in the whole chapter interest on capital and rent of land are treated as parallel s against wages of labour. The Invisible Hand Adam Smith first described this principle . Since that time it has become the basis of the concept of the free market. Self Regulating prices Consider glove manufacturers. If a glove manufacturer were to raise his prices on his gloves way above his costs, a competitor with lower prices on gloves would receive all of the orders for gloves. If all of the glove manufacturers were to raise their prices way above their costs, someone else would begin to manufacture gloves and sell them at a price closer to the manufacturing costs. This competiti