Adam smith is known to be one of the most influential scholars in Scottish Enlightenment in the mid to late 8th century. His greatest contribution to society was on his writing on economics inquiring the nature and causes of the wealth nations. This was a groundbreaking book that for the first time ever covered on the issue of self-interest, better ways of utilizing labour, forces of supply and demand emphasizing on advantages of competitive business and importance of a fair economy (Ashraf & Loewenstein, n.d). His theories were critical on the strictly regulated government systems at the time. Smith idealized the principle of the invisible hand in which individuals are led by invisible force to ward attaining their desires criticizing government strictness as interference to success (Formaini, 2002). According to him, his principles were meant to reduce poverty and uphold prosperity, bring innovativeness and lift social and moral standards. This paper discusses the economic theory of Adam Smith, giving hid biography, how his economic theories have been applied through the 18th to 20th centuries.
Adam Smith was a Scottish Social philosopher and a father of modern economics. Adam smith was born in 1723, in Kirkcaldy, Scotland. Smith became well educated through his fathers will which was meant to provide funds for his education. He enrolled at Glasgow University for three year then proceeded to England, Balliol College, Oxford for six years then returned to Kirkcaldy in 1746. Smith earned through lecturing and earned reputation, in 1751 he joined Glasgow University as a logic professor. He later got promotions till 1963 when he chaired moral philosophy, then lectured natural theology, ethics then political economy (Formaini, 2002). In 1759, his lectures on ethics became The Theory of Moral Sentiments, a publication that boosted his reputation in the public. His lectures on political economy were transformed into a masterpiece of his works namely, an inquiry into the nature and causes of the Wealth of Nations that was first published in 1776. Smith later in life left his lecturing profession and travelled around Europe with his students, meeting other important thinkers and great writers and made notes on hi observations which later gave empirical support to his theories in the Wealth of Nations (Formaini, 2002).
In 1976 Smith returned to London to work on revisions to his writings on Theory of Moral Sentiments and Wealth of Nations which he completed nine years later. The publications became successful and went through five editions by 1789 (Ashraf & Loewenstein, n.d). He won an appointment with the commissioner of customs for Scotland where he spent his last years implementing a protectionist type of regulations which he argued against in his Wealth of Nations. Smith’s theories in his publication on Wealth of Nations has for a long time been the center of controversy. He had an impressive influence on economic policies of his time (Formaini, 2002). Smith theories were based on convincing people that The Wealth of nations concept could be effective for its simple system based on natural liberty as opposed to national panning of the mercantilist way of governance. In his Wealth of Nations economic theory, he sought to provide solutions to the continuing economic problems and argued that his theory would improve microeconomic performance and uplift national performance (Ashraf & Loewenstein, n.d).
The Theory of Moral Sentiments
The Theory of Moral Sentiments is basically insights on individual preferences through passion and impartial spectator. This are mainly issues relating to individual preference and judgment. This includes loss aversion, or the natural state of an individual’s happiness. In this publication, he draws attention on behavioral economists which is basically underweighting of opportunity costs as compared to expenses (Smith, 2004.p.3). He argues that breach of property such as theft and robbery are greater crimes as compared to breach of contract which only brings disappointment to our expectations (Smith, 2004.p.14). Inter-temporal choice and self-control offers a direct application of smith’s dual process model in moral sentiments. Considering pleasure that can be enjoyed instantly and that which can be enjoyed over a long time, is what he refers to as myopic passions and farsighted impartial spectator in his view on behavioral economics in form of doer and planner (Ythier & Kolm, 2006).
He also goes further to describe the character of overconfidence which is a pattern of judgment that influences preference over risk y choices in men. According to Adams, the chance of gaining is more or less over valued as compared to the chance of losing which is undervalued by most men (Ythier & Kolm, 2006). From the extensiveness given on sympathy by Adam in The Theory of Moral Sentiments, he views sympathy as one of the most unreliable guide to moral behavior (Smith, 2004.p.3). He views Altruism as an erratic force, and believes that other motivations are more reliable in a civic economy. Market interactions require limited degree of benevolence for it to operate as a social organizer. Trust in any economy is important as it lubricates exchange (Ythier & Kolm, p.233).
The Wealth of Nations
This is a massive work consisting of two volumes subdivided into five books. The theory has led to international attention in economic growth, bringing improvement from land based wealth to wealth created as a result of assembly line production methods through labour utilization (Formaini, 2002). His greatest example of a man taking 18 steps to make a pin, the steps involved in making the pin will only enable the labor to produce just a few pins in a whole week. On the other side as pertains to his theory on labour utilization, if the 18 tasks are divided amongst more men production will definitely increase and at the same time saving time (Ythier & Kolm, 2006). Most of his theories are based on self-interest to maximize return. His idea was to promote domestic industry by encouraging individuals to put in their capital and in return the produce will be of value not just to the individual but the whole society. This according to smith is possible through individuals laboring without putting in mind their public interest, but only concentrating to gain as an individual which will be led by an invisible hand to promote an end which he did not intent (Southerland, Copley & Smith, 1995.p.67).
By pursuing personal interest an individual is able to promote the societies interest more than he could have done that directly. This theory brings in the idea of free market as self-interest competition as the society will benefit through low prices, and a wide spread incentive of goods and services. He addressed the issues of collusive tendencies in businesses to raise prices through monopolizing and conspiracy against the consumers (Ythier & Kolm, 2006). He argues that the interest of manufacturers and suppliers in any type o trade may be different to that of the public. Any law coming from either side has to be well understood and agreed upon before implementing. Smith’s idea on self-interest comprised of the desire for making profits, security, interest and freedom from doing the desired business with independence in decision making (Southerland, Copley & Smith, 1995.p.67).
However the modern economists have turned round smiths concepts of free market in his idea on wealth of nations to be a link to be unintelligent approach towards doing business. The invisible hand in business in the current economies gives the rich the upper hand to benefit from the gains in business leaving the poor in stagnated poverty situations. This is from the concept that individual gain contributes to the social general gains, ironically the rich have turned this and have granted themselves most of the opportunities that bring income leaving the lower class with the work of laboring for salary and not profits (Southerland, Copley & Smith, 1995.p.67). The rich have put more effort in business by maximizing profits which the society doesn’t benefit much from. Adams smith concepts on has motivates individual to earn more gains has in current economic set up been reduced to only the interest of gaining profit without considering the society at large. Adams concept on sovereign hand of nature where by motivation, direct individual investments that benefit the whole society has been replaced by technical and sophisticated concepts of economic efficiency (Southerland, Copley & Smith, 1995.p.67).
As time has passed through the 18th century to the 21st century, Adams text continues to be misused by investors with personal interest in the market. This brings a big difference between Adams concept of a comprehensive political economy and the modern science of advanced economics. There have been deliberate attempts to transform Adam’s simplified concepts of economics through simplified models of self-regulating mechanisms to the economic life of society. His concepts were based on natural and basic economic political and social realities he had in mind when developing the concepts (Southerland, Copley & Smith, 1995.p.67).
Being among the best among economists and philosophers, Adam Smith writings in economic theories have continued to play a significant role in market place economics for over 250 years. His strong academic background and the studies he undertook in Edinburgh and Glasgow Universities gave him a chance to make great inquiries and findings in his career. He is considered to have possessed great intelligence which was ahead of his years as he was thinking ahead of his time. In his breakthrough books, the inquiry into the Nature and Causes of Wealth of Nations and the first work on Theory of Moral Sentiments put Smiths work on the limelight as his teachings became the framework to University lectures for many years. He died in 1790 after leaving a legacy as a respectable thinker who helped bridge the 18th century economic and social issues into a more usable system that many scholars and scientists have used to date.