ADAM SMITH

Famous Economists


DECEMBER 16, 2013
NAVI SURESH
CIA 4U0
Biography
Adam Smith, the father of Modern Economics, is best known for his book An Inquiry into the
Nature and Causes of the Wealth of Nations. He has been a major influence on economists like Karl
Marx, David Ricardo, John Maynard Keynes and Milton Friedman.
He was born in a village in Scotland in 1732(exact date unknown), where he attended the
Burgh school and learnt Latin, mathematics, history and writing. When he was fourteen years old,
he went to the University of Glasgow on a scholarship, and then to attended Balliol College in
Oxford. After finishing his education at Oxford, he came back home and gave a series of well-
known lectures at the University of Edinburgh. This is where he met his lifelong friend, David
Hume. He was made the first chair of logic at the University of Glasgow in 1751 and then the chair
of moral philosophy in 1752. In 1764, he left his position at the university to tutor the Duke of
Buccleuch, with whom he extensively travelled Europe. This was an opportunity for him to meet
peers (Voltaire, Jean-Jacques Rousseau, Franois Quesnay Anne-Robert-Jacques Turgot and even
Benjamin Franklin).
After working on it for nine years in his hometown, Adam Smith published An Inquiry into
the Nature and Causes of the Wealth of Nations (The Wealth of Nations). This is thought to be the first book
dedicated to political economics. It was so successful that it sold out its first edition in only six
months. He came up with a lot of revolutionary theories. At that time, it was believed that a
countrys wealth should be measured by the amount of gold or silver it had. But, Smith put forward
the idea that a countrys wealth should be determined by the total of its production and commerce
(today, this is known as GDP). He also expanded on one of Platos ideas of division of labour that
specialization would lead to an increase in productivity.
He never married, and was working right until he died (he was name rector of the University
of Glasgow), at the age of 67.
Invisible hand
In The Wealth of Nations, Adam Smith says that each individual strives to becomes wealth intending
only his own gain but to this end he must exchange what he owns or produces with others who
sufficiently value what he has to offer; in this way, by division of labour and a free market, public
interest is advanced. Smith uses the metaphor Invisible hand to explain the phenomenon of a
market regulating itself, striving to maximum profit without government intervention. He says that
the competition between buyers and sellers is what motivates them to make products with better
quality at lower costs. However, this only works when there is a structured society already in place.
For example, strong property rights, theft and misrepresentation must be prevented.
The system is mostly likely to work in a free market, which will allow the market to
determine the price of a product. The buyers and sellers must also be able to change the demand
and supply of goods and the fluctuating prices. Also, suppliers need to have the ability to shift
investment into more profitable enterprises (into producing goods more valued by customers). This
will lead to a growing, positive economy.
These days, the term invisible hand is used in many different ways, from explaining
scientific progress to environmental degradation. Mathematicians also use this as part of Game
Theory.

Division of labour
Adam Smith argued that a main reason for the prosperity of a nation was the division of
labour. Division of labour is a system of organizing production by giving separate tasks to separate
workers or groups of workers, usually by their individual skills and abilities. He coined the example
using pins, which is used even today by economists. In the example, he says that 10 workers could
produce 48,000 pins each day the eighteen specialized tasks were assigned to particular workers. If
labour is divided, on average each worker can make 48,000 pins each day. However, if division of
labour is not carried out, a worker cannot even make one pin a day.
Therefore, if this idea is followed, each worker should become an expert in one type of
operation in the production process. This leads to an increased efficiency of the worker. Another
point to be noted is that, since labourers dont have to switch between different tasks frequently,
money and time is saved. The industrial revolution, in which the assembly line played a major role,
was such a success mainly due to this reasoning. Smith proves that he was in touch with the
practicalities of implementing his ideas by pointing out that making people work on repetitious tasks
all da can lead to dissatisfied workers and declining productivity. To overcome this problem, he
suggests that government have a responsibility to provide education to everyone and that workers
must be assigned work that suits him/her the best. This way, the labour force will have the necessary
motivation to remain productive.
Law of accumulation
Adam Smiths Law of accumulation refers to the theory that accumulation of profits,
retained earnings and using it for business projects such as acquiring more machinery and raw
materials. This will, then, lead to more profits. This theory paved the way to capitalism, because
essentially, capitalists main goal is to accumulate. He argued that if capital was put into machines, it
would multiply a workers productive energy (division of labour). In one of his books, he says,
Accumulate and the world will benefit. However, there is a problem; there would come a point
where further accumulation will not be possible. Accumulation means investing capital in more
machinery, and more machinery meant higher demand for workmen. Effectively, this would lead to
higher and higher wages, which would have to be paid from the accumulated profits. Thus,
accumulating more would be prevented.
It is important to note that Smith was against accumulation for accumulations sake, because
according to him, the sole purpose of accumulation is to use it as capital. He saw the various
advantages to accumulation.
Law of population
The law of population is defined as the theory that the accumulation of capital by
businesspeople requires more workers to operate the equipment, leading to higher wages, which in
turn lead to better living conditions, lower mortality rates, and an increase in population. Simply put,
this means that higher wages will cause an increase in number of workmen population and decrease
in wage will cause decrease in workmen population.
A large number of populations would mean abundance in labor. And an abundance in labor
would, in turn, mean the abundance of productive activities. This is how things are produced, jobs
are created and consumers have a higher purchasing power, and this leads to a robust economy. This
is a reason why Adam Smith stresses the important of labour as a valuable asset to a growing
economy.
The first of The Wealth of Nations says the annual labor of every nation is the fund which
originally supplies it with all necessaries and convenience of life. This is an indication of the
importance Smith placed on labour and its role in the economic system. He uses labour to find the
key to economic development and an increase in a nations wealth.


Works Cited
"Adam Smith." : The Concise Encyclopedia of Economics. N.p., n.d. Web. 13 Dec. 2013.
"Adam Smith and the Division of Labor." Adam Smith and the Division of Labor. N.p., n.d.
Web. 15 Dec. 2013.
"Adam Smith and the Invisible Hand." Plus.maths.org. N.p., n.d. Web. 15 Dec. 2013.
"Adam Smith Biography." Bio.com. A&E Networks Television, n.d. Web. 14 Dec. 2013.
"ECONOMIC THEORIES." Law of Accumulation. N.p., n.d. Web. 15 Dec. 2013.
"The Historian and His Facts." : Economic Philosopher- Adam Smith. N.p., n.d. Web. 15 Dec.
2013.
"Introduction." Adam Smith Institute. N.p., n.d. Web. 15 Dec. 2013.

Adam Smith (2001). An Inquiry into the Nature and Causes of the Wealth of Nations London:
The Adam Smith Institute

Alvin Toffler (1980). The Third Wave New York: Bantam Books