In Economics and Moral Philosophy
The Wealth of Nations was a precursor to the modern academic discipline of economics. In this and other works, Smith expounded how rational self-interest and competition can lead to economic prosperity. Smith was controversial in his own day and his general approach and writing style were often satirized by Tory writers in the moralizing tradition of Hogarth and Swift, as a discussion at the University of Winchester suggests. In 2005, The Wealth of Nations was named among the 100 Best Scottish Books of all time. Former British Prime Minister Margaret Thatcher, it is said, used to carry a copy of the book in her handbag.
In light of the arguments put forward by Smith and other economic theorists in Britain, academic belief in mercantalism began to decline in England in the late 18th century. During the Industrial Revolution, Britain embraced free trade and Smith's laissez-faire economics, and via the British Empire, used its power to spread a broadly liberal economic model around the world, characterized by open markets, and relatively barrier free domestic and international trade.
George Stigler attributes to Smith "the most important substantive proposition in all of economics." It is that, under competition, owners of resources (for example labor, land, and capital) will use them most profitably, resulting in an equal rate of return in equilibrium for all uses, adjusted for apparent differences arising from such factors as training, trust, hardship, and unemployment.
Paul Samuelson finds in Smith's pluralist use of supply and demand as applied to wages, rents, profit a valid and valuable anticipation of the general equilibrium modeling of Walras a century later. Smith's allowance for wage increases in the short and intermediate term from capital accumulation and invention added a realism missed later by Malthus, Ricardo, and Marx in their propounding a rigid subsistence-wage theory of labour supply.
On the other hand, Joseph Schumpeter dismissed Smith's contributions as unoriginal, saying "His very limitation made for success. Had he been more brilliant, he would not have been taken so seriously. Had he dug more deeply, had he unearthed more recondite truth, had he used more difficult and ingenious methods, he would not have been understood. But he had no such ambitions; in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along."
Classical economists presented competing theories of those of Smith, termed the "labour theory of value". Later Marxian economics descending from classical economics also use Smith's labour theories, in part. The first volume of Karl Marx's major work, Capital, was published in German in 1867. In it, Marx focused on the labour theory of value and what he considered to be the exploitation of labour by capital. The labour theory of value held that the value of a thing was determined by the labor that went into its production. This contrasts with the modern understanding of mainstream economics, that the value of a thing is determined by what one is willing to give up to obtain the thing.
The body of theory later termed "neoclassical economics" or "marginalism" formed from about 1870 to 1910. The term "economics" was popularized by such neoclassical economists as Alfred Marshall as a concise synonym for "economic science" and a substitute for the earlier, broader term "political economy" used by Smith. This corresponded to the influence on the subject of mathematical methods used in the natural sciences. Neoclassical economics systematized supply and demand as joint determinants of price and quantity in market equilibrium, affecting both the allocation of output and the distribution of income. It dispensed with the labour theory of value of which Smith was most famously identified with in classical economics, in favour of a marginal utility theory of value on the demand side and a more general theory of costs on the supply side.
The bicentennial anniversary of the publication of The Wealth of Nations was celebrated in 1976, resulting in increased interest for The Theory of Moral Sentiments and his other works throughout academia. After 1976, Smith was more likely to be represented as the author of both The Wealth of Nations and The Theory of Moral Sentiments, and thereby as the founder of a moral philosophy and the science of economics. His homo economicus or "economic man" was also more often represented as a moral person. Additionally, economists David Levy and Sandra Peart in "The Secret History of the Dismal Science" point to his opposition to hierarchy and beliefs in inequality, including racial inequality, and provide additional support for those who point to Smith's opposition to slavery, colonialism, and empire. They show the caricatures of Smith drawn by the opponents of views on hierarchy and inequality in this online article. Emphasized also are Smith's statements of the need for high wages for the poor, and the efforts to keep wages low. In The “Vanity of the Philosopher”: From Equality to Hierarchy in Postclassical Economics Peart and Levy also cite Smith's view that a common street porter was not intellectually inferior to a philosopher, and point to the need for greater appreciation of the public views in discussions of science and other subjects now considered to be technical. They also cite Smith's opposition to the often expressed view that science is superior to common sense.
Smith also explained the relationship between growth of private property and civil government:
"Men may live together in society with some tolerable degree of security, though there is no civil magistrate to protect them from the injustice of those passions. But avarice and ambition in the rich, in the poor the hatred of labour and the love of present ease and enjoyment, are the passions which prompt to invade property, passions much more steady in their operation, and much more universal in their influence. Wherever there is great property there is great inequality. For one very rich man there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many. The affluence of the rich excites the indignation of the poor, who are often both driven by want, and prompted by envy, to invade his possessions. It is only under the shelter of the civil magistrate that the owner of that valuable property, which is acquired by the labour of many years, or perhaps of many successive generations, can sleep a single night in security. He is at all times surrounded by unknown enemies, whom, though he never provoked, he can never appease, and from whose injustice he can be protected only by the powerful arm of the civil magistrate continually held up to chastise it. The acquisition of valuable and extensive property, therefore, necessarily requires the establishment of civil government. Where there is no property, or at least none that exceeds the value of two or three days' labour, civil government is not so necessary. Civil government supposes a certain subordination. But as the necessity of civil government gradually grows up with the acquisition of valuable property, so the principal causes which naturally introduce subordination gradually grow up with the growth of that valuable property. (...) Men of inferior wealth combine to defend those of superior wealth in the possession of their property, in order that men of superior wealth may combine to defend them in the possession of theirs. All the inferior shepherds and herdsmen feel that the security of their own herds and flocks depends upon the security of those of the great shepherd or herdsman; that the maintenance of their lesser authority depends upon that of his greater authority, and that upon their subordination to him depends his power of keeping their inferiors in subordination to them. They constitute a sort of little nobility, who feel themselves interested to defend the property and to support the authority of their own little sovereign in order that he may be able to defend their property and to support their authority. Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all." (Source: The Wealth of Nations, Book 5, Chapter 1, Part 2)
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