Biography Of Adam Smith, His Career And Ideas
Early Life
Smith was born on June 5, 1723, at Kirkcaldy, Scotland. His namesake father was by profession an advocate, solicitor and prosecutor. He went to the best schools of Scotland –Burgh School of Kirkcaldy where he learnt writing, mathematics and history. He later studied Philosophy from University of Glasgow when he turned fourteen. It was here Smith got to hone his skills in free speech. He also attended Balliol College at Oxford to study European literature.
Career
Soon after Smith finished graduation, a series of Public Lectures delivered by him at Edinburgh led him to collaborate with philosopher David Hume during the Scottish Enlightenment in 1750. Smith shared a very close intellectual bond with Hume and they wrote on politics, history, religion and economics. Smith became a Professor of Moral Philosophy at Glasgow in 1751. He wrote his Classic ‘Theory of Moral Sentiments’ around this time. He was elected as a member of Philosophical Society of Edinburgh in 1752. Smith spent the next thirteen years as an academic which he recalled as his best years. He was elected fellow of the Royal Society of London and was elected as a member of the Literary Club in 1775. The ‘Wealth of Nations’ was published the next year and it became an instant success. In 1788, Smith returned to France where his mother was living and he was appointed as Commissioner of Customs. Between 1787 and 1789, he was given the position of Lord Rector of the University of Glasgow.
Smith was honoured with the title of ‘Father of Modern Economics’. His magnum opus ‘The Wealth of Nations’ was named among the 100 Best Scottish Books of all time. The book came to be known as the first modern work of economics. This book has had its influence on many a people including Former U. K. Prime Minister, Margaret Thatcher Smith changed the import/export business and created the concept of what is now known as the gross domestic product (GDP). Smith has been commemorated in the UK on banknotes printed by two different banks; his portrait has appeared since 1981 on the £50 notes issued by the Clydesdale Bank in Scotland,and in March 2007 Smith's image also appeared on the new series of £20 notes issued by the Bank of England, making him the first Scotsman to feature on an English banknote.
Smith has been celebrated by advocates of free-market policies as the founder of free-market economics, a view reflected in the naming of bodies such as the Adam Smith Institute in London, multiple entities known as the 'Adam Smith Society', including an historical Italian organization,and the U. S. -based Adam Smith Society,and the Australian Adam Smith Club,and in terms such as the Adam Smith necktie. In his last years, he seemed to have been planning two major treatises, one on the theory and history of law and one on the sciences and arts. Smith also explained the relationship between growth of private property and civil government Focused on ‘ Why are some nations rich and other poor? To contemporary management. Adam Smith’s book published in 1776 ,'An Inquiry into the Nature and Causes of the Wealth of Nations,'appeared at the dawn of industrial development in Europe. He is responsible for popularizing many of the ideas that underpin the school of thought that are now known as classical economics. In this book, Smith discussed the stages of evolution of society, from a hunter stage when there were no property rights or fixed residences to nomadic agriculture with shifting residences. The feudal society was the next stage. In this stage, laws and property rights were established to protect privileged classes. Laissez-faire or free markets characterize the modern society in which new institutions were established to conduct market transactions. Laissez-faire philosophies that refers to minimizing the role of government intervention and taxation in the free markets, and the idea that an 'invisible hand' guides supply and demand are among the key ideas promoted by Adam Smith. These ideas reflect the concept that each person, by looking out for himself or herself, inadvertently helps to create the best outcome for all. Adam Smith’s “invisible hand” and its implications as well as his ideas concerning the division of labor and specialization are of utmost importance.
The invisible hand
The most important idea found in Adam Smith’s “An Inquiry into the Nature and Causes of the Wealth of Nations” is of the “invisible hand”. Smith’s invisible hand states that how a decentralized capitalist system, which lacks any central planner, can still develop and manage to produce goods and services valued by consumers. An insight can be drawn from Smith’s theory that a free market aligns the incentives of a self-interested individual with the objectives of society. The invisible hand theory is often presented in terms of a phenomenon that guides free markets and capitalism in direction of efficiency through supply and demand and competition for scarce resources. Smith noted that a person will invest his money where he will get maximum returns at a given level of risk. An oft-quoted passage in Wealth of Nations reads:
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention “ Example to clarify this point- Suppose the price of maple lumber increases because of higher demand for maple furniture. This price change will change the incentives faced by decision makers throughout the economy which will likely lead to changes in which properties are harvested, the percent of maple sent to sawmills versus other uses, the incentive of non-furniture makers to substitute away from maple, etc.
The signals sent by the prices enable self-interested workers and businesses to identify changes in which goods and services create the most income for them, and the most value for the society. Price signals not only tell us when new opportunities are arising; they also help us to find out when what we are doing is no longer as highly valued, or when the resources we are using have found an alternative use in which they create even more value. An important consideration in determining whether incentives will be aligned, then, is the extent to which the “hand” is able to freely operate. Smith noted this, again in reference to the differences in countries’ successes, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace,easy taxes, and a tolerable administration of justice; all the rest being brought by the natural course of things” (Stewart, 1793). To invoke modern terminology, Smith was referring to the role of institutions in determining economic outcomes. In this context, institutions are the “rules of the game” under which individuals operate (North, 1990, 1991). When the institutions allow the invisible hand to align interests, wealth is created; when the rules of the game get in the way, however, less desirable outcomes are created.
The relationship between inputs, institutions, and outcomes-Iinputs such as raw materials and labor are used to produce tangible goods and services. When the “right” institutions (including the protection of private property, reasonable taxes, etc. ) are in place, we can achieve the maximum possible output from a given set of inputs. When the institutions are not good, the same amount of inputs results in less output. In the context of management, the invisible hand principle has clear implications. It is a plea for decentralization rather than command and control (i. e. “central planning”) by firm managers. Decentralized decision making can and will result in the best outcomes, as long as the proper “rules of the game” are in place. In particular, all that is required is that an incentive structure exists to align the individual self-interest of workers with the outcomes desired by the firm. For example, incentives such as stock options or profit-sharing can help to create this alignment of individual incentives with firm objectives. Note, however, that while it is important that workers face benefits that relate to the revenue of the firm, it is equally important that they understand (and bear some of) the costs their decisions have on the firm. A department within a firm would have, for example, little incentive to conserve on the physical space it uses unless, like the firm as a whole, it bears a cost for the space it utilizes. In the presence of the right incentive structure, Smith’s invisible hand will do the rest.
Specialization And Division Of Labour
Smith considered specialization and the division of labour as the driver of productivity and economic progress. From the observations made by at the French pin factory, Smith noted that each individual worker working alone and making the entire pin by himself could not make more than 20 pins per day. But when the process was divided up in such a way that
- one worker draws out the wire,
- another straightens it,
- a third cuts it,
- a fourth points it,
- a fifth grinds it at the top for receiving the head, and
- a sixth puts the head on the pin,
- then the average output per worker jumps to 4,800 pins per worker per day.
The division of labor allows individual workers to specialize in specific phases of the production process and collectively produce more than what the produced individually. Similarly, when individuals specialize across different industries similar gains are realised. This increase in labor productivity not only leads to higher output but also leads to increases in wage rates. However, Smith also presents an overlooked caveat to this argument. A group’s ability to specialize is limited by the “extent” of the market to which it sells. In large markets more specialization is possible. .
The implications of Smith’s observation concerning the benefits of a division of labor and specialization are clear. Workers are more productive when the steps involved in production are divided and workers are allowed to specialize in specific tasks. Smith’s caveat concerning the extent of the market is important, A firm producing and selling ten units of output per day will not be able to specialize as finely as one selling 10,000 units. When firms can find ways to reach out to larger marketplaces, they will be more productive. For example, a specialty store might survive in a small town if it can sell its products on the internet, reaching out to a larger market. When firms can penetrate the markets of other states or nations, and sell to a global marketplace, they can specialize more finely The ideas promoted by the book generated international attention and helped drive the move from land-based wealth to wealth created by assembly-line production methods driven by the division of labor. One of the example Smith gave, involved the work required to make a pin. One man undertaking the 18 steps required to complete the tasks could make but a handful of pins each week, but if the 18 tasks were completed in assembly-line by 10 men, production would jump to thousands of pins per week. Hence, Smith argues that the division of labor and specialization produces prosperity. Smith states in “The Wealth of Nations' ,“It is the great multiplication of the productions of all the different arts, in consequence of the division of labor, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people,”
Adam Smith: The Creator Of The Concept Of GDP
Through his ideas Smith changed the import/export business, and created the concept of GROSS DOMESTIC PRODUCT (GDP) and argued for free exchange. Before the release of this book countries declared their wealth based on the value of their gold and silver deposits. However, he argued that instead countries should be evaluated based on their levels of production and commerce. This created the basis for measuring a nation’s prosperity based on a metric called GDP. Before smith's book, many countries were hesitant to trade with other countries, unless it benefited them. Smith argued that a free exchange should be created, as both sides trading become better off. This led to an increase in exports and imports and countries started judging their value accordingly. Smith also argued for a limited government. He wanted to see a hands-off government and legislation conducive an open and free market. Smith did see the government responsible for some sectors, however, including education and defense.
