Adam Smith: Father of Economics

The work of Adam Smith was unique in that he built an entire system of economic thought instead of solving a single problem (Ekelund and Hébert, 1997). The main features of Smith’s analysis were (1) a division of labor, (2) analysis of price and allocation, and (3) the nature of economic growth. Adam Smith’s work described in The Wealth of Nations helped define economics as a separate discipline of scientific inquiry.

Smith sought to resolve the issue of an individual’s responsibility to the state and the state’s role in dealing with the individual. Should or could the state plan what might be the optimal economic outcomes for individuals? Smith argued that the combined actions of the invisible hand, the workings of G-d, and Laissez Faire combine to produce outcomes more advantageous than those proposed by a central planning authority.

One of Adam Smith’s most enduring concepts was that of a natural division of labor. The division of labor is a starting point for economic growth. If the worker performed fewer tasks and concentrated on developing an increased skill level, time is saved and, eventually, economies of scale result. As each process is defined and refined in terms of a single function, this same function can be automated much more easily. The primary force behind the division of labor is closely linked to an exchange theory of value; Smith argued that human nature includes a natural propensity to exchange and each person must have an excess of some good trade, presumably labor. Smith saw market forces in society driven by desire of liberty and inexpediency of control. In another era, Smith could have been a cognitive psychologist with his observations that humans are most interested in what is perceived to be nearest in space or time, least interested in what is at a perceptual distance, and the desire of man to improve his condition.

Smith further explained, borrowing from Hume, how labor contributed to value and therefore was partly a measure of value. Smith discussed real and nominal prices and observed the difference between the two. His discussion of prices included a description of a complete market model of equilibrium forces. Smith understood that many products had component parts that also had differing values determined by production costs and market evaluation. On the subject of wages, he laid the groundwork for the wages-fund theory. Smith detailed a very useful set of principles that describe the inequities of wages and profits from employment. Smith described rents as prices determined and heavily influenced by the next best alternative use for the non-labor resource.

Adam Smith detailed a blueprint for economic growth that framed the discussions throughout the classical period from 1776 to 1873 (Ekelund and Hébert, 1997). His blueprint rested on the idea that the division of labor is a natural tendency of society unless disturbed by outside forces and that it leads to more capital being generated and accumulated, which in turn leads to refinement and expansion of the division of labor. Smith designed a system arising from his own ideas and the previously disjointed theoretical pieces of other economists. Smith’s brilliance as a builder of an economic system is why The Wealth of Nations is still widely read today.

Reference

Ekelund, R. B., Jr., & Hébert, R. F. (1997). A history of economic theory and method (4th ed.). New York: McGraw Hill.