Adam Smith (1723 – 1790) was a Scottish moral philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations. The latter, usually abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics. Adam Smith is widely cited as the father of modern economics.
An Inquiry into the Nature and Causes of the Wealth of Nations was published on March 9, 1776 during the Scottish Enlightenment. It is a clearly written account of political economy at the dawn of the Industrial Revolution and is widely considered to be the first modern work in the field of economics. The Wealth of Nations was written for the average educated individual of the 18th century rather than for specialists and mathematicians. There are three main concepts that Smith expands upon in this work that forms the foundation of free market economics: division of labor, pursuit of self interest, and freedom of trade.
The Wealth of Nations expounds that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called “invisible hand”. Smith believed that while human motives were often driven by selfishness and greed, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services.
An often quoted passage from The Wealth of Nations is:
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”
Value theory was important in classical theory. Smith wrote that the “real price of every thing is the toil and trouble of acquiring it” as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.
Smith also believed that a division of labor would effect a great increase in production. One example he used was the making of pins. One worker could probably make only twenty pins per day. However, if ten people divided up the eighteen steps required to make a pin, they could make a combined amount of 48,000 pins in one day.
The Wealth of Nations, one of the earliest attempts to study the rise of industry and commercial development in Europe, was a precursor to the modern academic discipline of economics. In this and other works, Smith expounded how rational self-interest and competition can lead to economic prosperity and well-being. It also provided one of the best-known intellectual rationales for free trade and capitalism, greatly influencing the writings of later economists.