Economic Theory

The 18th century also witnessed a new intellectual approach to explain and harness the economic dynamics of the era. The most influential thinker was Adam Smith (1723-1790), who became the notable proponent of laissez-faire economics. His significance is more surprising because of his provincial upbringing. Smith was born in a rural

Scottish village where iron nails rather than minted coins were used for money. He experienced an unhappy childhood. His father died six months before his birth, and at a young age he was kidnapped by gypsies. Only the strong-willed perseverance of his uncle resulted in the reunion of Adam with his family. He grew up to be a near-sighted but inquisitive, brilliant scholar who also had eccentricities such as absentmindedness and having lengthy conversations with himself or falling into trance-like states. In 1759 he published The Theory of Moral Sentiments, a work that explored the motives, self-interest, and impartiality of society. He became a professor at Glasgow University in Scotland and spent two years traveling throughout Europe, where he conversed with David Hume, Voltaire, and Benjamin Franklin. Smith’s seminal work was the 1,000 page The Wealth of Nations, published in 1776, the year of the outbreak of the American Revolution. Smith attempted to put complicated economic theories into a narrative that the common man could comprehend. This work was so influential that it appeared in Danish, French, German, Italian, and Spanish within just a few years. Smith is often referred to as the world’s first economist, although he did not view himself as a revolutionary. He set out to describe his version of how an economy should move from agriculture to mechanization. He proposed three key principles of economics, and in so doing argued against the state-directed mercantilism, the prevailing economic theory of the day. His main focus was the advocacy of free trade. He first attacked the idea of protective tariffs, proposing that if one nation could sell its product to another more cheaply than the latter could produce it, that nation should purchase the product rather than make it.

Smith’s second major principle was the labor theory of value. He did not see the soil, gold, or silver as the basis for a nation’s wealth but rather the combined labor of agrarian workers, artisans, and merchants as the natural wealth of a country. He viewed the new factory system as one in which each worker performed a specific task in the process of production, an approach that was essential to the development of a thriving economy. Finally, Smith argued that the state should not interfere in economic affairs but rather focus only on its defense, law, and order and infrastructure (roads, canals, etc.). Smith advocated letting the consumer, not the government, determine the price of goods and asserted that institutions were not responsible and did not contribute to more efficient production. His belief in letting the forces of the marketplace dictate the nation’s economic tempo came to be referred to as the ‘‘invisible hand’’ theory. He believed the sum of individual economic interests, even those motivated by greed, were compatible with the interests of the nation at large. These ideas may seem somewhat elementary today but in the late 18th century they were revolutionary, a clear statement opposing the medieval idea of wealth as sinful. His view, known as economic liberalism, meshed neatly with the interests of the growing manufacturing sector of Great Britain by the beginning of the 19th century and in turn was embraced by those same classes that emerged in other nations as the Industrial Revolution spread.3