Adam smith

Adam Smith was a Scottish moral philosopher and a pioneering political economist. He is known primarily as the author of two treatises: The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations.

The Wealth of Nations, published as a five-book series in 1776, sought to reveal the nature and cause of a nation’s prosperity. Smith saw the main cause of prosperity as increasing division of labour.

Smith explained how rational self-interest in a free-market economy leads to economic well-being. Smith claimed that charity cannot alone provide the essentials for living. He stated that self-interest is the mechanism that regulated the market, as suppliers sell items from their regard to their own interest. Smith assumed that someone earning money by his own labour benefits himself. Unknowingly, he also benefits society, because to earn income on his labour in a competitive market, he must produce something others value.

Smith claimed that an individual would invest a resource—for example, land or labour—so as to earn the highest possible return on it. Consequently, all uses of the resource must yield an equal rate of return. Otherwise reallocation would result. George Stigler called this idea the central proposition of economic theory, although, Smith’s idea was not original. The French economist Turgot had made the same point in 1766.

Smith explained why wage rates differed. Wage rates would be higher, he argued, for trades that were more difficult to learn, because people would not be willing to learn them if they were not compensated by a higher wage. His thought gave rise to the modern notion of Human Capital. Similarly, wage rates would also be higher for those who engaged in dirty, unsafe or odious occupations (Job Safety). In short, differences in work were compensated by differences in pay. Modern economists call Smith’s insight the theory of compensating wage differentials.

Smith vehemently opposed Mercantilism—the practice of artificially maintaining a trade surplus on the erroneous belief that doing so increased wealth. The primary advantage of trade, he argued, was that it opened up new markets for surplus goods and also provided some commodities from abroad at a lower cost than at home.

Adam Smith believed that government had an important role to play. Smith believed that the government should enforce contracts and grant patents and copyrights to encourage inventions and new ideas. He also thought that the government should provide public works, such as roads and bridges. Interestingly, though, he wanted the users of such public works to pay in proportion to their use.

Adam smith

Adam Smith was a Scottish moral philosopher and a pioneering political economist. He is known primarily as the author of two treatises: The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations.

The Wealth of Nations, published as a five-book series in 1776, sought to reveal the nature and cause of a nation’s prosperity. Smith saw the main cause of prosperity as increasing division of labour.

Smith explained how rational self-interest in a free-market economy leads to economic well-being. Smith claimed that charity cannot alone provide the essentials for living. He stated that self-interest is the mechanism that regulated the market, as suppliers sell items from their regard to their own interest. Smith assumed that someone earning money by his own labour benefits himself. Unknowingly, he also benefits society, because to earn income on his labour in a competitive market, he must produce something others value.

Smith claimed that an individual would invest a resource—for example, land or labour—so as to earn the highest possible return on it. Consequently, all uses of the resource must yield an equal rate of return. Otherwise reallocation would result. George Stigler called this idea the central proposition of economic theory, although, Smith’s idea was not original. The French economist Turgot had made the same point in 1766.

Smith explained why wage rates differed. Wage rates would be higher, he argued, for trades that were more difficult to learn, because people would not be willing to learn them if they were not compensated by a higher wage. His thought gave rise to the modern notion of Human Capital. Similarly, wage rates would also be higher for those who engaged in dirty, unsafe or odious occupations (Job Safety). In short, differences in work were compensated by differences in pay. Modern economists call Smith’s insight the theory of compensating wage differentials.

Smith vehemently opposed Mercantilism—the practice of artificially maintaining a trade surplus on the erroneous belief that doing so increased wealth. The primary advantage of trade, he argued, was that it opened up new markets for surplus goods and also provided some commodities from abroad at a lower cost than at home.

Adam Smith believed that government had an important role to play. Smith believed that the government should enforce contracts and grant patents and copyrights to encourage inventions and new ideas. He also thought that the government should provide public works, such as roads and bridges. Interestingly, though, he wanted the users of such public works to pay in proportion to their use.