Chapter 10: Economic Ideas (Part 2: Adam Smith)
This week we discuss the life and times of the Father of Economics, including his native Scotland, his early years and education, his intellectual influences, his career, and his magnum opus: The Wealth of Nations.
Sources for this episode include:
Kurz, Heinz D. Economic Thought: A Brief History. Translated by Jeremiah Riemer. Columbia University Press. 2016.
Norman, Jesse. Adam Smith: Father of Economics. Basic Books. 2018.
Rae, John. Life of Adam Smith. Macmillan. 1895.
Screpanti, Ernesto and Stefano Zamagni. An Outline of the History of Economic Thought. Translated by David Field. Oxford University Press. 1993.
Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. W. Strahan and T. Cadell. 1776.
The Glorious Revolution of 1688, and the subsequent coronation of William and Mary as King and Queen, put an end to years of political and religious infighting in England. And it marks a turning point for the country during the so-called “Industrious Revolution” – that is, the era of proto-industrialization.
But it was not the end of such fighting up in Scotland.
To understand why, you need to go way back to the days of William Wallace, of Braveheart fame. The Scottish throne had been usurped by the English in 1296, but 10 years later, it was reclaimed by Robert the Bruce.
The heroic Robert had a son, David, who inherited the throne and continued to fight off English advances for a good 30 years. But he never managed to produce an heir. So the throne passed to his sister’s son, Robert II, by her husband, a man named Walter Stewart. In 1371, the House of Stuart was born.
It would continue through the Protestant Reformation, as the Scottish Parliament usurped the will of the Catholic Mary, Queen of Scots, and outlawed papal oversight of the kingdom. In its place, they established a Presbyterian system that became very Calvinist. They also guaranteed that Mary would lose control of her son, James, and he would be raised Protestant. When Mary was forced to abdicate in 1567, he took the throne as James VI.
He was also a distant cousin of England’s Queen Elizabeth. And so, when she died childless in 1603, he also ascended to the English throne as James I.
With the entire island of Great Britain under his control, James was excited to unite it in as many ways as he could. As far as language and religion went, the two countries were already pretty similar. He combined the two flags – the Scottish cross of Saint Andrew and the English Cross of Saint George – into a single Union Jack. (“Jack” being a nickname for “Jacobus” – the Latin for “James”)
He also knew the opportunities that the English crown could provide. England was richer, had more productive and diverse agriculture, more people, and played a much more significant role in international affairs. He headed down from Edinburgh to London and, soon enough, the Stuarts were spending most of their time there. And what they brought back to Scotland was an English version of Protestantism. It wasn’t Presbyterian or Calvinist. It felt like watered-down Catholicism.
This must have felt like something of a slap-in-the-face to the Scots. After all, the Stuarts were their dynasty.
Then came civil war, both in England and in Scotland, where it left deep, deep divisions. On the one side were those loyal to the House of Stuart – the dynasty that could be traced back to the proud days of Scottish independence. On the other were the Covenanters, fiercely Presbyterian and skeptical about the divine rights of kings.
Those divisions remained, even after the restoration of the monarchy. When James II of England – that’s James VII to the Scots – took the throne, despite his Catholicism, the divisions were further exacerbated. The English called up William and Mary to take over. But without James and his male successors, the Stuart Dynasty would die out. Maybe that was fine for the English, but for many Scots it felt like another English usurpation.
So began the rebellions of the Jacobites, who fought to restore James and his successors.
Now, the Jacobites were an interesting group. Most important among them were Catholics, particularly in Ireland, where all this reformation and civil war had been an afterthought for the Brits. But even in Scotland, Catholics provided critical support for the Jacobite movement, despite making up less than 1% of the Scottish population.
Many Jacobites were Episcopalian. Many were royalists from the days of the civil war. Most romantically, many were the kilt-wearing, bagpipe-playing, Gaelic-speaking soldiers from the traditional Highlands clans.
Allied with France, where the decedents of James lived in exile, the Jacobites attempted several risings beginning in 1689. They were finally defeated when Bonnie Prince Charlie, the dispossessed grandson of James VII, was defeated at the Battle of Culloden in 1746.
And it was also during this Jacobite period that the last monarch from the Stuart line – James’ second protestant daughter, Queen Anne – formally united the kingdoms of England and Scotland in 1707, setting them both up for the Hanover Dynasty when she died.
The new Kingdom of Great Britain still provided Scotland some autonomy over its national church, its education system, and its legal court system. But in terms of its economy and its politics, Great Britain would always be dominated by English interests. It was an arrangement hated by the Jacobites and – at best – tolerated by the Presbyterians and Whigs, the ideological descendants of the Covenanters.
Among other things, English lords led clearances throughout Scotland to modernize agriculture, caring not that it seriously disrupted the traditional Scottish way of life, especially in the Highlands. And, critically for our story, the Parliament in London passed tariffs for trade into Scotland and the so-called Navigation Acts, which required that trade with English colonies used English ships, and that commodities like cotton, tobacco, and sugar had to land in England and taxed there before shipped to Scotland.
The Scottish economy remained stagnant for at least two or three decades after the union, despite a boom south of the old border.
It was in this Scotland – with its people deeply divided by history, ideology, and religion; depressed by the economy; and dominated by the English – that Adam Smith was born in 1723.
Smith’s life and work was rooted in this experience. His life and his work would also have a profound influence on philosophy, politics, and economics across the world, right up to the present day.
Most roads of economic thought lead back to Adam Smith. Everyone from Margaret Thatcher to Karl Marx used his work to explain their own worldviews. As a result, he’s widely remembered today as the Father of Economics.
This is the Industrial Revolutions
Chapter 10: Economic Ideas (Part 2: Adam Smith)
Adam Smith was born in the town of Kirkaldy in the county of Fife, about 12 miles north of Edinburgh, across the Firth of Forth. For those interested in modern British history, it’s also the childhood hometown of former Prime Minister Gordon Brown.
Smith’s father, a lawyer and customs house comptroller, died when he was just two months old. His mother, Margaret Douglas, was left a widow. But she was able to raise her son thanks to a tight-knit community that looked out for them, sometimes financially.
Margaret would often send her son to his grandparents’ house at nearby Strathendry. As a Douglas, Margaret was the descendent of a long line of Scottish nobles, and Strathendry is a small Medieval castle that still stands today. According to Smith’s 1895 biographer, John Rae, it was during one of these visits to Strathendry when Smith was four years old that he was kidnapped by a passing band of gypsies.
Apparently, there was a gentleman visiting Strathedry who had met a gypsy woman on his way there. She had been carrying a crying child. When he got to the castle everybody figured out what had happened, and a team of scouts was sent out to find the gypsies and Smith. They came across the woman in the woods, who then dropped Smith and took off running. He was returned unharmed.
Now, whether these were actual Romani people or another kind of travelling people, who knows? Either way, the story seems a little fantastic, but that’s history for you.
Smith was descendant of the Covenanter side of Scottish history. They were Presbyterians and Whigs.
He also benefited from Scotland’s world-class system of primary education. The Scottish Presbyterians tended to see Catholicism’s continued success in Europe as being the result of poor education. They thought that by educating the wider population they could ensure the success of the Reformation.
Smith attended the local Burgh School of Kirkcaldy – now called Kirkaldy High School – starting at age 6. The school had been established in the 1500s and benefited from Scotland’s Education Acts of 1633 and 1646, taxing local landholders to pay for nearly universal primary education (at least for boys).
After graduating at age 14, Smith entered the University of Glasgow, where he studied moral philosophy under the instruction of Francis Hutcheson, a Scots Irish enlightenment philosopher. Hutcheson was a controversial figure in Scotland at the time. A Presbyterian in background, he raised the eyebrows of the Presbyterian clergy by suggesting human beings were capable of making moral judgments with an inherent sense of right and wrong.
Smith loved Hutcheson and his radical views, going so far as to call him, “the never-to-be-forgotten Hutcheson.” It was a title he would use to describe only one other friend and mentor: David Hume.
David Hume was born in the intellectual, cosmopolitan city of Edinburgh in 1711. Like Smith, his father had died when he was too young to remember him, and his mother raised him as a widow.
But unlike Smith, Hume hated the education he was given, particularly his teachers. He dropped out and became a merchant’s assistant, making trips to France.
But there was no helping the fact that he had a brilliant mind, and he couldn’t stop writing. In particular, he was obsessed with the idea that moral philosophy could be treated like a science, with rational reasoning. He read as much as he could and managed to get an academic job, writing several important essays.
But it was his 1738 book, completed when he was just 28, that would be so transformative: A Treatise of Human Nature.
Treating life, the universe, and everything as his thought laboratory, Hume’s Treatise is an empirical investigation of human nature. It’s way too long and all encompassing for me to get into here. But just know that the Treatise wasn’t just groundbreaking, it scared the crap out of people. At least the people who could make sense of it at the time.
Like Hutcheson, Hume believed people did have an inherent sense of right and wrong. But it doesn’t always matter, because people also act in their own self-interest. We tend not to do things to hurt others, knowing it would hurt our own position in society. Selfishness threatens society, yes, but people tend to cooperate for their own interests, and ultimately it benefits everyone.
Intent, he argued, isn’t a useful concept. Nor is John Locke’s state of nature. Nor is good and evil – there are gray areas.
People have the right to resist a tyrannical government, he argued, a typical Whig talking point. But our sense of justice is a human convention.
A lot of his ideas got him into trouble. Hume was an atheist at a time when you weren’t allowed to be an atheist, and he did what he could to cover his tracks. But also, a lot of his ideas had an impact on the economic thought developing in the Scottish Enlightenment.
In his 1749 book, Political Discourses, Hume laid the foundation for free trade as a serious economic idea. Like the Physiocrats we discussed last week, Hume argued the Mercantilists were making trade surpluses out to be more important than they actually are. Trade balances naturally adjust as they influence prices, because, you know, supply and demand. But also, he figured, economics isn’t a zero-sum game. A country can increase its wealth without taking wealth away from another.
He wasn’t alone. Another Scottish Enlightenment thinker, James Denham Steuart, expanded on these ideas in his 1767 Inquiry into the Principles of Political Economy. In it, he argues that by trying to accumulate and hoard gold and silver, trade will be weakened, not strengthened. Screw trade monopolies and tariffs. People know what they need. Let them buy and sell accordingly.
Steuart also worried, earlier than almost anyone, that improved mechanization could lead to unemployment. But he figured that the extra productivity mechanization created would lead to greater profits, which could be redistributed by the state.
And all these ideas would in time influence the work of Adam Smith.
Upon his graduation from the University of Glasgow, Smith earned a scholarship to study further and earn a Master’s degree at Balliol College, Oxford. This would be the first time we know of, in 1740, that Smith left Scotland. As he traveled through England, he must have noticed the economic disparity between it and his home country.
And he hated Oxford, for some good reasons. First of all, despite the fact that they gave scholarships to Scots, they weren’t very welcoming of them. Scots got the worst lodgings at Balliol. Smith in particular got in big trouble for reading a copy of Hume’s Treatise.
Smith hated the politics there. He was a Whig, whereas Oxford was Tory to the point that it had pro-Jacobite sympathies. Smith was Presbyterian (at least in upbringing) and secular, whereas Oxford was Anglican and the students went to church services more than lectures. Smith didn’t have a lot of money, having been raised by a single mom, whereas Oxford cost a lot of money. Even after his two scholarships, he was still falling far short of the income he needed to afford the Oxford experience, and he had to write home for the occasional top-up.
But most importantly, Smith was a genius. His classmates were all duds, and as far as he was concerned, his professors were living too comfortably to care about their students.
Later in life, he disparaged Oxford and refused to visit it, even when traveling nearby. He complained bitterly of the Oxford-Cambridge system – what the Brits call Oxbridge – calling them, “sanctuaries in which exploded systems and obsolete prejudices found shelter and protection, after they had been hunted out of every other corner of the world.”
Smith was someone often lost in his own head and absent-minded to the world around him. There’s a famous story about him showing a politician around a Glasgow tannery, going on and on about free trade and the division of labor, and then falling into the tanning pit, needing help from others to get him out. On another occasion, he was having tea with a lady and going on about some subject when he put a piece of bread and butter into the tea pot. A few moments later he poured the tea into his cup, sipped it, and said it was the worst tea he ever tasted.
But living in one’s own head isn’t always a laughing matter. From what we can tell, with our modern understandings of mental health, Smith suffered from anxiety and depression, which came and went in bouts throughout his life. They certainly increased during his studies in England.
After finishing at Oxford, Smith returned to Scotland. He earned the attention of a judge and Enlightenment era Renascence man, Henry Hume, the Lord Kames. Among other things that happened in his extraordinary life, Kames would sit on a judicial panel that ruled slavery was illegal in Scotland, freeing a man named Joseph Knight, who had been brought to Scotland from Jamaica. (Sort of a Scottish version of the later Dread Scott case in America – except, with a better outcome.)
In 1748, Kames hooked Smith up. He got the Philosophical Society of Edinburgh to sponsor a series of public lectures for Smith to deliver. With the recognition he earned, he was able to secure a faculty position at his alma mater in Glasgow in 1751, teaching logic. A year later, he took over as head of Moral Philosophy at the college.
While at Glasgow, his office was a short walk from that of James Watt, and the two men probably knew one another and shared ideas. They certainly shared a few mutual friends, so it’s unlikely that they didn’t meet.
It was also during this tenure he published one of his most famous works, his 1759 Theory of Moral Sentiments.
In a sense, this was supposed to be his magnum opus, and he always thought of it as such. At the heart of it is the human sense of sympathy for one another’s burdens. In this way we’re able heal one another of our emotional wounds. He goes on to address just about ever facet of life.
When it comes to intent, though, he argues along the same lines as Hume. People tend to make decisions in which their own self-interests will be realized. They can’t help but think about what will make them and those close to them happy.
By this point, Hume and Smith had met one another and become good friends. Hume wrote to Smith to congratulate him on his Theory, and shared it with other Enlightenment thinkers, including Horace Walpole (the son of Britain’s first Prime Minister) and Edmund Burke.
Smith’s time in Glasgow came to an end in 1763, when he was hired to tutor the 17-year-old Duke of Buccleuch. The salary would be £500 per year, with another £300 per year pension – roughly twice the compensation he earned at the university.
Apparently, his parting was both bittersweet and a bit awkward. After finishing his final lecture to his Glasgow students, he announced his coming departure and then tried to give back some of the pay he had earned from university fees to the students, which he had wrapped in individual parcels. The first young man refused to accept his fees back, declaring “the instruction and pleasure he had already received was much more than he either had repaid or ever could compensate,” to which every student in the room cried out “here here!” or something to that effect.
At first, Smith was quite moved by this display, but insisted he had made his mind up to give them their money back. Excuse my terrible Scottish accent here… “You must not refuse me this satisfaction; nay, by heavens, gentlemen, you shall not!” he shouted. And then grabbed the nearest student by his coat, forced the money into his pocket, and violently pushed him away.
In January 1764, he met up with his new student, the Duke, and they set sail for the continent.
During the next two years, they travelled around France and met Enlightenment thinkers including Voltaire, Benjamin Franklin, probably Jean-Jacques Rousseau, and critically, the Physiocrat François Quesnay.
Smith was an incredibly awkward person who was much better at writing than speaking, and so he didn’t make any notable impression on Quesnay or his friends. But Quesnay didn’t seem to mind that Smith kept hanging around, practically living in his apartments at Versailles. Although Smith didn’t agree with all their conclusions, he found himself fully immersed in the Physiocrats’ ideas.
He returned to Great Britain and spent a little time in London before returning home to Kirkaldy. It’s not clear what he all did during the next ten years, but we know he was inducted in the Royal Society in 1773 and then the Literary Society in 1775. And he was writing something about his new favorite topic: economics.
This work finally culminated in 1776 when he published his true magnum opus: An Inquiry into the Nature and Causes of the Wealth of Nations.
If it seems strange that a moral philosopher should be the Father of Economics, remember that most economic thought up to this point has been the product of philosophers talking about morals. From Plato and Aristotle to Saints Augustine and Thomas Aquinas, and even up to David Hume and the Milan school, most of these guys were discussing economics in the context of moral philosophy.
Plus, the work Smith had poured into The Wealth of Nations was supposed to be part of a broader work he would publish on political philosophy, including the nature of the state and of government, the law, and even religion. But he never finished it, and on his death bed in 1790 – frustrated with the unfinished work – had it burned. Only the economic stuff he’d published 14 years earlier survives.
It wasn’t just his friends Hume and Quesnay who influenced his economic thinking. Throughout his life, he saw a massive transformation of the economy in his home country. Thanks in part to the hated, English-led clearances, the Scottish agricultural sector had modernized. Despite the tariffs and Navigation Acts, trade to Scotland increased, thanks to its inclusion the British Empire. And manufacturing was starting to pick up.
Smith concluded that union with England had a detrimental impact on Scotland’s morale – especially in the early years – but that it had an overwhelmingly beneficial impact on Scotland’s economy in the long-run. And The Wealth of Nations attempted to explore the reasons for that improvement.
In the first sentence of the introduction, Smith jumps right in. “The annual labor of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of the labor, or in what is purchased with that produce from other nations.”
Guys, you know what he just described?
Wealth is not how much gold and silver you have. It’s not your trade surplus. Wealth is a reflection of all the income in an economy. What he described is a concept we today call the Gross Domestic Product. GDP.
Well, arguably he’s describing Gross National Product or Gross National Income or Gross Value Added or whatever – all of which are their own distinct ways of measuring an economy, but all based on the same concept. You can add up everybody’s income in the economy – and/or you can look at the value of new goods and services produced. They are two sides of the same coin: Economic value. Wealth.
And the great thing about this idea? Economic value can grow. Not just through profitable trade, not just through mining and agriculture, but through manufacturing and through every other imaginable form of earning a living.
Well, maybe not every form. He was particularly harsh in the book on landowners who did nothing but accumulated wealth from their tenant farmers, and then spent that wealth lavishly on servants and luxuries.
But generally speaking, you could grow an economy by growing incomes. And the key to it was increasing productivity.
As workers become more productive, he reasoned, overall income in the economy will grow. Economic growth doesn't have to be limited. Among the ways to increase productivity, Smith saw, was to improve labor specialization – what he called the Division of Labor.
This is where Smith famously points to his time observing a pin factory. As he explains it, the process of making a pin is very difficult. An individual worker would need to spend hours drawing out the wire, straightening it, cutting it, pointing it, and grinding it to add the head. At the end of the day, he’d be able to produce no more than 20 pins.
But in a factory of just 10 workers, where each specializes in one of those individual tasks, they’re able to turn out as many as 48,000 pins per day. Working as a team, each individual has an output capacity that is 240 times greater than his output capacity working alone.
To explain it, Smith pointed to three facts.
First of all, being familiar with a specific task, like pointing the wire, and then doing it over and over makes you more proficient at it. If you are someone who makes all sorts of products and does very different work to make them, you won’t be very efficient. A jack of all trades is a master of none.
Second, you waste a lot of time switching between different tools. If you’re holding the same tool in your hand all day, you can get a lot done. But even ten-second time-outs to pick up different tools really add up over the course of a day.
And finally, and perhaps most importantly, individuals doing the same task all day figure out ways to increase the efficiency of the process. Smith pointed out that, in one of the earliest steam engines, a boy was employed to constantly open and close a valve between the boiler and cylinder. But he was a child and wanted to go play with his friends instead. So he tied a string from the handle of the valve to the piston, so it would open and close automatically, making his job redundant.
This is the legend of one Humphrey Potter who worked with a Newcomen engine sometime around 1713. If you listened to Chapter 7 of this podcast, however, you didn’t hear about it because it’s probably not true. But inaccurate example aside, the point is still valid. Advancements in mechanization were eliminating the need for labor in certain elements of production. And that left workers free to focus on other elements of production, increasing their overall productivity.
Money, Smith points out, only developed when people began dividing their labor in the first place, and needed an easy way to exchange with one another. Gold and silver are only valuable because we’ve decided they were.
He also puts forth a labor theory of value. Smith notes that gold and silver were worth less after they were discovered in the Americas. All real wealth in the economy, he argues, is the product of human labor. And while Smith views were instrumental in the development of liberalism, it’s this concept that would go on to aid the development of socialism.
If the measure of an economy is all the income in that economy, then wage growth means economic growth. And to make it happen, Smith believed, it’s good for capital to accumulate. He called this the “virtuous circle” whereby workers got paid for what they produced, the capitalist sold the goods they produced, the capitalist earned a profit on that sale, and then reinvested the profits into the business – by buying new machines or hiring more workers. This way, they would produce more, more workers would get paid, the value of labor would increase, and thus the wages of that labor would increase.
For this system to work, Smith argued for an environment of free competition, where innovation could spur productivity growth. Among the problems he saw were the Medieval urban guilds, trade monopolies, and the work obligations peasants were expected to perform for their lords. The system he envisioned wasn’t the lassaiz-fare one envisioned by the Physiocrats, strictly speaking, but was wary of regulations that inhibit market competition.
This is where people sometimes get confused about the concept of a “free market.” It’s a phrase that doesn’t very well describe the kind of market Smith had in mind. He envisioned a decentralized market with limited barriers to entry or exit.
That’s not to say the government should keep its hands off. Smith believed the role of the state was to take on those tasks that private agents could not – policing, national defense, administration of justice, regulating the unstable banking sector, financing schools, and building public infrastructure and other large scale projects that would benefit the public at large.
But guaranteeing a trade surplus? Hell no.
First of all, he argued, a trade deficit isn’t necessarily a bad thing. The value of a good is the same regardless of the country it comes from, so why not pay less to consume it? Second, if it’s a raw material you’re importing, getting it cheaper means you can sell more of the finished product you’re making with it. Third – well third was about imprecise measurements of trade imbalances, which we don’t worry about so much today.
But even then, he figured there were probably cases in which free trade wasn’t beneficial, and in those cases, yeah, have tariffs. But, generally speaking, free trade will benefit everybody.
Now, this brings us to a concept Smith had that has been largely misunderstood or misapplied in economic debate ever since: the “invisible hand” of the free market.
Referring back to the ways in which humans are driven by self-interest, Smith describes a capitalist who is trying to make as much money as he can for his business and, as a result, is unintentionally making as much money as he can for the economy at large, as if he was being “led by an invisible hand.”
This isn’t to say “greed is good” like Gordon Gekko, and it’s certainly not to say that the “invisible hand” represents market forces that direct prices, as is often believed. It’s simply to say that when it came to industrialization, the private interest and the public interest were generally one and the same. The Industrial Revolution was going to make everyone better off.
Next week, we’re going to turn our attention back to the trunk of the tree – the innovations that helped industrial growth along. And in particular, we’ll look at some of those massive government interventions in the economy. To be frank, those interventions might sound kind of boring to you now, but just wait, because they were instrumental in the advent of capitalism, economic growth, and the modern world we enjoy today.
Canals – next week on the Industrial Revolutions.
I want to make some special shout-outs this week to Rick Happy and to Eric and Laura Hogensen. Thank you so much for your support helping make the Industrial Revolutions possible.
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