Centsible Thoughts

The “Father of Economics”, Adam Smith built much of the philosophical, ideological and methodological framework that later economic thought built on. This can be seen in his The Theory of Moral Sentiments and his later magnum opus: The Wealth of Nations.

Smith began writing in the backdrop of mercantilist philosophy. Mercantilism focused on acquiring positive trade balances and accumulating massive amounts of precious metals; this inevitably led to heavy government intervention in the nascent economies of Europe.

Building upon the ideas of The Physiocrats, Adam Smith was a significant proponent of laissez-faire capitalism and free markets. In other words, he thought that the best and most efficient way for an economy to run is through the government doing nothing and for the people to do what they would always do. The logical basis for this declaration stemming from his theory of market forces. Essentially, when left to their own devices, individuals act in their own interest. These unlimited wants coalesce into market forces which force a more efficient outcome. He referred to these market forces as “The Invisible Hand”.

Other than the invisible hand, Smith’s other foundational theory was that of the division of labor. Smith argued that when workers specialize in performing specific tasks rather than trying to do everything themselves, they become more proficient and efficient at those tasks. Furthermore, the division of labor enables the utilization of economies of scale, where larger quantities of a good can be produced at lower average costs. When tasks are divided among workers, machinery and tools can be specialized, leading to greater efficiency in production processes. The famous example from his work was that of a pin factory in which he described how

“One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head…in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands.” – Adam Smith, The Wealth of Nations

He applied to this to a larger scale than the individual/factory level. He also justified international trade through the lens of the idea of division of labour. By having France only produce its superior wine whilst Britain produced its superior garments, the total productive capacity/prosperity of Europe (and indeed the world) could be increased.

These ideas (and his labour theory of value which will be discussed in a later post) are the basis of all of economic thought. In fact some could even argue that the publishing of The Wealth of Nations was the most important event of 1776 (nothing else of substance happened that year).