Adam Smith (1723-1790) was a Scottish Moral philosopher.
Adam Smith, as a young man, wrote an essay about the importance of philosophy and science in explaining unexpected phenomena in society, using the history of astronomy as an example. The essay was influenced by David Hume, a philosopher and scientist whom Smith was friends with.
The economic theory of mercantilism advocates for a country to export more than it imports in order to increase the amount of money in the country. This theory was popular in England during the 17th century, and in France as well, where Jean-Baptiste Colbert, minister of finance, attempted to increase tax revenues to support the king's expenses. The mercantilist policies led to economic stagnation in trade and prosperity, though. In the 18th century, a group of French thinkers known as the Physiocrats, led by François Quesnay, began to challenge these protectionist policies. Quesnay, a physician, believed in the principle of non-interference and applied it to economic theory, becoming known as the spiritual father of laissez-faire, or the idea of leaving trade to operate on its own without government interference. He published a work called Tableau economique in which he compared the economy to a biological process, with agriculture as the most important sector. Adam Smith's argued that the level of wages is determined by negotiations between employers and employees, where the employers try to keep wages low and the employees try to get them high. Ultimately, the level of wages is determined by the balance of supply and demand in the labor market. Smith believed there is a natural rate of wages, which is high enough for the worker to support themselves and their family. The profits of an entrepreneur in his eyes were a compensation for the effort and risks they take to bring together the productive factors such as land, capital and labor. The profits are also determined by the balance of supply and demand. Smith wrote that rent of land is determined by the price of the goods produced on that land, and is less sensitive to market conditions than wages and profits.
Adam Smith is often misunderstood as being the father of a morally unprincipled economic theory.
In his work The Wealth of Nations (1776), Smith criticized the mercantilist economic system for its focus on government intervention in the economy and its protectionist policies. He believed that the economy was self-regulating, with supply and demand determining prices and wages, and that trade, industry, and economic growth were driven by the division of labor.
Smith wrote that the state has a responsibility to protect its citizens from injustice and oppression, and to establish a functioning justice system. He believed that the state should create and maintain public institutions and works that are useful for the country but cannot be financed by a single citizen or small group of citizens. These works include things like good roads, bridges, and canals, and ideally, they should generate revenue through tolls and port fees.
He also believed in the importance of education, but thought that the quality of education is better guaranteed in private schools, where teachers are rewarded according to their qualifications.
Reading Smith's original text provides a deeper understanding of his economic theories, helps to dispel misconceptions about his work, and provided insight into the development of economic thought over time. Smith is often associated with the invisible hand, meaning that the market is self-regulating and that government intervention is unnecessary.
Reading the original text reveals that Smith's views on government intervention were more complex and nuanced than this stereotype suggests. Because man uses his capital to further his own interests, the national income rises and the public interest is served. "As in so many things, here he is led by an invisible hand to further an end which he had in no way intended. By pursuing his own interests he often advances the interests of the country more effectively than if he directly trying to promote”.
Smith, A. (2019 ), The Wealth of Nations, Dutch translation with an introduction by J. Veenbaas, Amsterdam: Boom.