Adam Smith /1723 – 1790/ gave the first scientific explanation of the working of the capitalistic market economy in the conditions of a free competition. For the first time in the history of economic thought Adam Smith worked out a complete economic theory that corresponds exactly to the interests of the developing industrial capital. The interesting is that he made it in the time when a men organizational form of the large scale industry was the manufacture and the manual labor was predominant.
Adam Smith was born in a small village in Kirkcaldy, Scotland. There his widowed mother raised him until he entered the university of Glasgow at age 14 as was the usual practice on scholarship. He later attended Balliol college of Oxford, graduating with an extensive knowledge of European literature and an enduring contempt for English schools. He returned home and after delivering a series of well-received lectures was made first chair of logic (1751), then chair of moral philosophy (1752) at Glasgow University. He left Academia in 1764 to tutor the young duke of Buccleuch.
For over 2 years they lived and traveled throughout France and into Switzerland – an experience that brought Smith in contact with contemporaries Voltaire, Jean-Jacques Rousseau, Francois Quesnay and Anne Robert Jacques Turgot. With the life pension he had earned in the service of the duke Smith retired to his birthplace of Kirkcaldy to write “The Wealth of Nations”. It was published in 1776. In 1778 he was appointed commissioner of customs. This job put him in the uncomfortable position of having to curb smuggling which in “The Wealth of Nations” he had upheld as a legitimate activity in the face of unnatural legislation.
Adam Smith never married. He died in Edinburg on June, 19th 1790. 1. Methodology The most distinctive feature of the methodology of Smith was the dualism. The reason for it was that Smith did not manage to combine the induction and the deduction as two parts of the uniform (единен) scientific method. As a result of that he frequently presented the surface of the things as their internal essential nature. The separate application of two methods without necessary connection between them is the reason for the Smith`s dualism but he failed to notice such contradictions.
The major method that he used was the logical abstraction. It gave him opportunity to get to the heart of the matter. The aim of the political economy is to investigate the creation of the wealth and it has 2 sides. One – positive side to analyze the objective economic reality and to reveal the objective laws of its development. Two – normative side to elaborate recommendations for the firms and state economic policy. Smith managed to investigate two sides of the man – moral and economic – in two works. The first is “The Theory of moral sentiments” (1759).
According to Smith in the moral world a man is driven by the feeling of a sympathy (striving for participation in that is happening to the others) and is guided by altruistic motives. Very important element of the book is the idea of equality of men. The second work is “An Inquiry into the Nature and Causes of The Wealth of Nations” (1776). Smith asserts there that in economic world a man operates leaded by egoism (personal mercenary interest pursuit in economic activity) and is guided by the “Invisible Hand”.
Smith, however, fails to notice any connection between two worlds, i. e. a man acts in one way in his social relationship with the others and in other way in business relations. Under “Invisible Hand” Smith understands the spontaneous action of economic objective laws that people obey nevertheless their wishes. According to Smith in society exist natural order and natural laws. He considers them as eternal and constant being not subject of any change in the future and namely the spontaneous unforeseen, unintentional action of these natural laws is the “Invisible Hand”.
Invisible Hand manifests its impact at best on the market in a competition environment. Smith considers the human person as “homo eoconomicus”. Homo eoconomicus pursues his egoistic interests but in the same time in the best way contributes to the growth of the productive forces and wealth and in general to the development of a society as a whole. He wrote “Every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it.
By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value he intends only his own gain and he is in this as in many other cases led by an “Invisible hand” to promote and end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectively that when he really intends to promote it. I have never known much good than by those who affected to trade by the public good.
It is affection indeed not very common among merchants and very few words need by employed in dissuading them from it. ” Next passage strikes at the futility of central planning, the ineptness of the bureaucrats and politicians. “The man of system… is apt to be very wise in his own conceit; and is often so enamored with the supposed beauty of his own ideal plan of government that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts without any regard either to the great interests or to the strong prejudices which may oppose it.
He seems to imagine that he can arrange the different members of great society with as much ease as the hand/head arranges the different pieces upon a chessboard. He does not consider that the pieces upon the chessboard have no other principle of motion besides that which the hand impresses upon them; but that in the great chessboard of human society every single piece has a principle of motion of its own altogether different from that which the legislature might choose to impress upon it. This passages indicate Smith`s conviction that a natural harmony exists in the economic world that makes government interference in most matters both unnecessary and undesirable. The “Invisible Hand”, the doctrine of natural liberty, the wisdom of God are all part of the argument. But there is a foundation underfoot stronger that mere metaphysics.
There is the empirical argument on which Smith also depended that indicts government as incompetent, in fact and underscores the brazen impertinence of the bureaucrat telling us what to do in the areas where we clearly know our own interest much better than anyone else ever can. Smith was neither a strict rationalist, nor an idle dreamer. He was a hard-headed realist who took people as he found them and based his analysis of society on an unchanging human character. According to Smith there were two innate features of the psychology of humans.
The first is that as humans we are interested primarily in things nearest us, much less so in things at a distance (in either time or space); thus we are all of considerable importance to ourselves. The second characteristic which is actually a corollary of the first is the overwhelming desire of every man to better his condition. Smith wrote: “… the desire of bettering our condition is a desire which though generally calm and dispassionate comes with us from the womb and never leaves us till we go to the grave.
In the whole interval which separates those two moments there is scarce, perhaps a single instant, in which any man is as perfectly and completely satisfied with his situation as to be without any wish of alteration or improvement of any kind. ” According to Smith humans are self-interested but in economy the competition restrains self-interest. In fact, competition ensures that the pursuit of self-interest will improve the economic welfare of society. In Smith`s day this was a liberal idea because it implied that the society without extensive government control would not degenerate into chaos as might be supposed.
Monopoly, on the other hand, represents unbridled self-interest and the consequence is distraction of economic welfare. Although all sellers or goods and services would like to charge the highest possible price for their wares or skills they generally cannot unless they have some monopoly privilege which in Smith`s day was granted by government. Competition or the absence of monopoly will force all sellers to lower their prices (within limits) to attract more customers and the natural outcome of that action is lower consumer prices and improved economic welfare.
Smith opposed the monopoly privileges. “People of the same trade seldom meet together even more merriment and diversion, but conversation ends in a conspiracy against the public or in some contrivance to raise the prices… monopoly is a great enemy to the good management which can never be universally established but in the consequences of that free and universal competition which forces everybody to have recourse to it for the sake of self defense. “ According to Smith the history of civilization has 4 evolutionary stages.
The first is the Hunting, the 2nd Pastoral periods of pre-feudal nomadic cultures, the 3rd is the farming stage and 4th – the commercial era. Each stage is marked by somewhat different structure of property rights. The source of wealth, according to Smith, is labor productive activity, nevertheless its type and branch in which it was applied. Smith defends liberalism and opposes governmental interference in economic affairs (laissez-faire doctrine). The society is viewed by Smith as union for exchange based on exchange of different types of labor.
Smith makes no difference between manufacture division of labor and public division of labor. Therefore Smith speaks for society as one huge manufacturer. The exchange he considered as a natural phenomenon being inherent feature of a man. In principle by nature everyman is tended to exchange things and so the division of labor came into existence. Following the emergence of exchange and division of labor consequently according to Smith they developed simultaneously and stimulate each other, i. e. evelopment of the former inevitably leads to development of the latter. The origin of money he finds in mutually development of exchange and division of labor. He considers its appearance as a natural phenomenon. They were separated spontaneously from commodity world as a result of development of exchange. Smith notices 2 of the functions of money – measure of value and means of exchange. According to him the money is ordinary commodity which is most demanded and most convenient. 2. Division of Labor
Smith also believed that the labor is a source of economic growth. One example he used to demonstrate the importance of division of labor was the making of pins in a given manufacture. If one worker works alone he could probably make only 20 pins per day. However, if 10 people divided the 18 steps required for making a pin they could make 48000 pins in one day, i. e. 4800 pins per worker instead of 20. Thus he derived 3 principle reasons whether the division of labor results in increase of productivity – It increases skill, ability and expertise of individual worker. 2- It saves time required for shift from one work (operation) to another. 3- Conditions are created and machines are invented which allow one worker to perform functions of more workers. The volume of production and consumption for every nation depends on the number of population engaged in production and on the level of labor productivity. Where Smith rightfully emphasizes the decisive role of second factor (labor productivity) and connects it closely with the growth of division of labor.
