Smith's God is not an interventionist God and, despite some readers suggesting the contrary, the invisible hand is not an indication of God's involvement in creation. It is, instead, just the unfolding of sociological and economic principles. Second, because God is detached from the system, Smith argues that human beings are God's regents on earth. It is up to them to be the judges of their own behavior. Individuals are necessarily most concerned with themselves first, and are therefore best self-governed. Only then can they judge others via the moral system Smith describes.
If individuals understand the general rules as stemming from God, then they will follow them with more certainty and conviction. Religious fanaticism, as Smith points out in The Wealth of Nations , is one of the great causes of factionalism—the great enemy of political society. For Smith, the most precise virtue is justice. It is, as he describes it, "a negative virtue" and the minimal condition for participation in the community.
Obeying the rules of justice, therefore, result in little praise, but breaking them inspires great condemnation:. There is, no doubt, a propriety in the practice of justice, and it merits, upon that account, all the approbation which is due to propriety. But as it does no real positive good, it is entitled to very little gratitude. Mere justice is, upon most occasions, but a negative virtue, and only hinders us from hurting our neighbour.
The man who barely abstains from violating either the person, or the estate, or the reputation of his neighbours, has surely very little positive merit. He fulfils, however, all the rules of what is peculiarly called justice, and does every thing which his equals can with propriety force him to do, or which they can punish him for not doing. We may often fulfil all the rules of justice by sitting still and doing nothing. TMS II. Smith's account of justice assumes that individual rights and safety are core concerns. The most sacred laws of justice, therefore, those whose violation seems to call loudest for vengeance and punishment, are the laws which guard the life and person of our neighbour; the next are those which guard his property and possessions; and last of all come those which guard what are called his personal rights, or what is due to him from the promises of others.
His discussion of justice is supplemented in The Wealth of Nations and would have likely been added to in his proposed work on "the general principles of law and government" that he never completed. His lectures on jurisprudence give one a hint as to what might have been in that work, but one must assume that the manuscript was part of the collection of works burnt upon his death.
It is not even known what was actually destroyed, let alone what the works argued.
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It is frustrating for Smith's readers to have such gaps in his theory, and Smith scholars have debated the possible content of his other work and the way it relates to his first book. It is clear, though, that The Theory of Moral Sentiments is only one part of Smith's larger system, and one truly understands it only in light of his other writing.
It is therefore necessary to switch the discussion from his work on moral philosophy to his political economy. As will be evident, this break is not a radical one. The two books are entirely compatible with one another and reading one supplements reading the other; both contain moral claims and both make assertions classified as political economy. While their emphases are different much of the time—they are two different books after all—their basic points are more than just harmonious.
They depend upon one another for justification. It is a much larger book than The Theory of Moral Sentiments —not counting appendices and indices, it runs pages. To the first time reader, therefore, it may seem more daunting than Smith's earlier work, but in many ways, it is actually a simpler read. As he grew older, Smith's writing style became more efficient and less flowery, but his authorial voice remained conversational. His terms are more strictly defined in WN than in TMS , and he clearly identifies those positions he supports and rejects.
The essential Adam Smith
His economic discussions are not as layered as his comments on morality, so the interpretive issues are often less complex. The logic of the book is transparent: its organizational scheme is self-explanatory, and its conclusions are meticulously supported with both philosophical argument and economic data. There are many who challenge its assertions, of course, but it is hard to deny that Smith's positions in WN are defensible even if, in the end, some may conclude that he is wrong. The text is divided into five "books" published in one, two, or three bound volumes depending on the edition.
The first books outline the importance of the division of labor and of self-interest.
The second discusses the role of stock and capital. The third provides an historical account of the rise of wealth from primitive times up until commercial society. The fourth discusses the economic growth that derives from the interaction between urban and rural sectors of a commercial society. The fifth and final book presents the role of the sovereign in a market economy, emphasizing the nature and limits of governmental powers and the means by which political institutions are to be paid for. Smith, along with his Scottish Enlightenment contemporaries, juxtaposes different time periods in order to find normative guidance.
As TMS does , The Wealth of Nations contains a philosophy of history that trusts nature to reveal its logic and purpose. This is a remarkable scope, even for a book of its size. Smith's achievement, however, is not simply the multitude of his discussions, but how he makes it all fit together. His most impressive accomplishment in The Wealth of Nations is the presentation of a system of political economy. Smith makes seemingly disparate elements interdependent and consistent. He manages to take his Newtonian approach and create a narrative of both power and beauty, addressing the philosophical along with the economic, describing human behavior and history, and prescribing the best action for economic and political betterment.
And, he does so building on a first principle that was at least as controversial as the sentence that began The Theory of Moral Sentiments. He begins the introduction by asserting:. The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniencies of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.
The dominant economic theory of Smith's time was mercantilism. It held that the wealth of a nation was to be assessed by the amount of money and goods within its borders at any given time. Smith calls this "stock. Smith opposed this, and the sentence cited above shifted the definition of national wealth to a different standard: labor. The main point of The Wealth of Nations is to offer an alternative to mercantilism.
Labor brings wealth, Smith argues. The more one labors the more one earns. This supplies individuals and the community with their necessities, and, with enough money, it offers the means to make life more convenient and sometimes to pursue additional revenue. Free trade, Smith argues, rather than diminishing the wealth of the nation, increases it because it provides more occasion for labor and therefore more occasion to create more wealth.
Limited trade keeps the amount of wealth within the borders relatively constant, but the more trade a country engages in, the wider the market becomes and the more potential there is for additional labor and, in turn, additional wealth. This point leads Smith to divide stock into two parts, that which is used for immediate consumption—the assets that allow a person to acquire necessities—and that which is used to earn additional revenue.
This latter sum he calls "capital" WN II. This is, of course, a philosophical point as much as an economic one: Smith asks his readers to reconsider the meaning of wealth itself. Is wealth the money and assets that one has at any given time, or is it these things combined with the potential to have more, to adjust to circumstances, and to cultivate the skills to increase such potential? Smith thinks it is the latter. Smith is also concerned specifically with the distinction between necessities and conveniences.
His overarching concern in The Wealth of Nations is the creation of "universal opulence which extends itself to the lowest ranks of the people" WN I. In other words, Smith believes that a commercial system betters the lives for the worst off in society; all individuals should have the necessities needed to live reasonably well. He is less concerned with "conveniences" and "luxuries;" he does not argue for an economically egalitarian system. Instead, he argues for a commercial system that increases both the general wealth and the particular wealth of the poorest members.
Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.
It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged. Smith argues that the key to the betterment of the masses is an increase in labor, productivity, and workforce.
There are two main factors that influence this: "the skill, dexterity, and judgment with which its labour is generally applied," and "the proportion between the number of those who are employed in useful labour, and that of those who are not" WN intro. Smith repeats the phrase "skill, dexterity and judgment" in the first paragraph of the body of the book, using it to segue into a discussion of manufacture. Famously, he uses the division of labor to illustrate the efficiency of workers working on complementary specific and narrow tasks. Considering the pin-maker, he suggests that a person who was required to make pins by him or herself could hardly make one pin per day, but if the process were divided into a different task for different people—"one man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another"—then the factory could make approximately forty-eight thousand pins per day WN I.
The increase in efficiency is also an increase in skill and dexterity, and brings with it a clarion call for the importance of specialization in the market. The more focused a worker is on a particular task the more likely they are to create innovation. He offers the following example:. In the first fire-engines, a boy was constantly employed to open and shut alternately the communication between the boiler and the cylinder, according as the piston either ascended or descended.
One of those boys, who loved to play with his companions, observed that, by tying a string from the handle of the valve which opened this communication, to another part of the machine, the valve would open and shut without his assistance, and leave him at liberty to divert himself with his play-fellows. One of the greatest improvements that has been made upon this machine, since it was first invented, was in this manner the discovery of a boy who wanted to save his own labour.
This example of a boy looking to ease his work day, illustrates two separate points. The first is the discussion at hand, the importance of specialization. In a commercial society, Smith argues, narrow employment becomes the norm: "Each individual becomes more expert in his own peculiar branch, more work is done upon the whole, and the quantity of science is considerably increased by it" WN I. However, the more important point—certainly the more revolutionary one—is the role of self-interest in economic life.
A free market harnesses personal desires for the betterment not of individuals but of the community. Echoing but tempering Mandeville's claim about private vices becoming public benefits, Smith illustrates that personal needs are complementary and not mutually exclusive. Human beings, by nature, have a "propensity to truck, barter, and exchange one thing for another" WN I. This tendency, which Smith suggests may be one of the "original principles in human nature," is common to all people and drives commercial society forward.
In an oft-cited comment, Smith observes,. 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 self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Philosophically, this is a tectonic shift in moral prescription.
Dominant Christian beliefs had assumed that any self-interested action was sinful and shameful; the ideal person was entirely focused on the needs of others. Smith's commercial society assumes something different. It accepts that the person who focuses on his or her own needs actually contributes to the public good and that, as a result, such self-interest should be cultivated. Smith is not a proponent of what would today be called rampant consumerism. He is critical of the rich in both of his books.
Instead, his argument is one that modern advocates of globalization and free trade will find familiar: when individuals purchase a product, they help more people than they attempted to do so through charity. Observe the accommodation of the most common artificer or day-labourer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation.
The woollen coat, for example, which covers the day-labourer, as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country!
What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them.
Compared, indeed, with the more extravagant luxury of the great, his accommodation must no doubt appear extremely simple and easy; and yet it may be true, perhaps, that the accommodation of an European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages. The length of this excerpt is part of its argumentative power. Smith is not suggesting, simply, that a single purchase benefits a group of people.
Instead, he is arguing that once you take seriously the multitude of people whose income is connected to the purchase of the single coat, it is hard to even grasp the numbers we are considering. A single purchase brings with it a vast network of laborers. Furthermore, he argues, while one may be critical of the inevitable class difference of a commercial society, the differential is almost inconsequential compared to the disparity between the "haves" and "have-nots" in a feudal or even the most primitive societies.
Smith's reference to "a thousand naked savages" is just thoughtless eighteenth century racism and can be chalked-up to the rhetoric of the time. It ought to be disregarded and has no impact on the argument itself. It is the effect of one minor purchase on the community of economic agents that allows Smith to claim, as he does in TMS , that the goods of the world are divided equally as if by an invisible hand.
For Smith, the wealthy can purchase nothing without benefiting the poor. According to The Wealth of Nations , the power of the woolen coat is the power of the market at work, and its reach extends to national economic policy as well as personal economic behavior. Smith's comments relate to his condemnation of social engineering in The Theory of Moral Sentiments , and he uses the same metaphor—the invisible hand—to condemn those mercantilists who think that by manipulating the market, they can improve the lot of individual groups of people.
But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours 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 an 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 effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. WN IV. Smith begins his comments here with a restatement of the main point of The Wealth of Nations : " Smith's remarks about the invisible hand suggest that one can do more damage by trying to manipulate the system than by trusting it to work.
This is the moral power of unintended consequences , as TMS's account of the invisible hand makes clear as well. What Smith relies upon here is not " moral luck " as Bernard Williams will later call it, but, rather, that nature is logical because it operates on principles, and, therefore, certain outcomes can be predicted. Smith recognizes that human beings and their interactions are part of nature and not to be understood separately from it.
As in The Theory of Moral Sentiments , social and political behavior follows a natural logic. Now Smith makes the same claim for economic acts. Human society is as natural as the people in it, and, as such, Smith rejects the notion of a social contract in both of his books. There was never a time that humanity lived outside of society, and political development is the product of evolution not his term rather than a radical shift in organization.
The state of nature is society for Smith and the Scots, and, therefore, the rules that govern the system necessitate certain outcomes. Smith's account of history describes human civilization as moving through four different stages, time periods that contain nations of hunters, nations of shepherds, agricultural nations, and, finally commercial societies WN V. This is progress, Smith insists, and each form of society is superior to the previous one. It is also natural. This is how the system is designed to operate; history has a logic to it. It marks the important beginning of what would be called social science—Smith's successor to the Chair of Moral Philosophy, Adam Ferguson, is often identified as the founder of modern sociology—and is representative of the project the Scottish Enlightenment thinkers referred to as "the science of man.
Smith's discussion of history illustrates two other important points. First, he argues that the primary economic tension, and, as a result, the primary economic engine, in any given society can be found in the interaction between "the inhabitants of the town and those of the country" WN III. According to Smith, agricultural lands supply the means of sustenance for any given society and urban populations provide the means of manufacture. Urban areas refine and advance the means of production and return some of its produce to rural people. In each of the stages, the town and country have a different relationship with each other, but they always interact.
Here, Smith is indebted to the physiocrats, French economists who believed that agricultural labor was the primary measure of national wealth. Smith accepted their notion that productive labor was a component of the wealth of nations but rejected their notion that only agricultural labor should be counted as value. He argues, instead, that if one group had to be regarded as more important, it would be the country since it provides food for the masses, but that it would be a mistake to regard one's gain as the other's loss or that their relationship is essentially hierarchical: "the gains of both are mutual and reciprocal, and the division of labour is in this, as in all other cases, advantageous to all the different persons employed in the various occupations into which it is subdivided" WN III.
Again, there are philosophical issues here. First, is what one is to regard as labor; second is what counts towards economic value. Additionally, Smith is showing how the division of labor works on a large scale; it is not just for pin factories. Rather, different populations can be dedicated to different tasks for everyone's benefit. This might be an anticipation of David Ricardo's notion of "comparative advantage. Again, the butcher, brewer, and baker gain their livelihood by manufacturing the lunch of their customers.
Returning to Smith's account of history, Smith also argues that historical moments and their economic arrangements help determine the form of government. As the economic stage changes, so does the form of government. Economics and politics are intertwined, Smith observes, and a feudal system could not have a republican government as is found in commercial societies. What Smith does here, again, is anticipate Marx's dialectical materialism, showing how history influences economic and political options, but, of course, he does not take it nearly as far as the German does close to a century later.
Given the diversity of human experience— WN 's stage theory of history helps account for difference—Smith is motivated to seek unifying standards that can help translate economic value between circumstances. Two examples are his discussions of price and his paradox of value. Within these discussions, Smith seeks an adequate measure of "worth" for goods and services.
Consumers look at prices to gauge value, but there are good and bad amounts; which is which is not always transparent. Some items are marked too expensive for their actual value and some are a bargain. In developing a system to account for this interaction, Smith offers a range of different types of prices, but the two most important are natural price—the price that covers all the necessary costs of manufacture—and the market price, what a commodity actually goes for on the market. When the market and the natural prices are identical, the market is functioning well: "the natural price, therefore, is, as it were, the central price to which the prices of all commodities are continually gravitating" WN I.
Here, the term "gravitating" indicates, yet again, that there are principles that guide the economic system, and a properly functioning marketplace—one in which individuals are in "perfect liberty"—will have the natural and market prices coincide WN i. Smith defines perfect liberty as a condition under which a person "may change his trade as often as he pleases" WN I. Whether this is a normative value, whether for Smith the natural price is better than other prices, and whether the market price of a commodity should be in alignment with the natural price, is a matter of debate.
Following the question of worth, Smith poses the paradox of value.
Analysis and Summary of “The Essential Adam Smith” by Robert L. Heilbroner
He explains: "Nothing is more useful than water: but it will purchase scarce any thing; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it" WN I. Smith's question is straightforward: why is water so much cheaper than diamonds when it is so much more important for everyday life? Obviously, we are tempted to argue that scarcity plays a role in the solution to this paradox; water is more valuable than diamonds to a person dying of thirst.
However, Smith is also searching for a normative or objective core in a fluctuating and contextual system, as with the role of impartiality in his moral system.
Scarcity would not solve this problem because that, too, is fluctuating; usefulness is largely subjective and depends on an individual's priorities and circumstance. Smith seeks a more universal criterion and looks towards labor to anchor his notion of value: "labour," he writes, "is the real measure of the exchangeable value of all commodities" WN I. What Smith means by this is unclear and a matter of controversy. What seems likely, though, is that one person's labor in any given society is not significantly different from another person's.
Human capabilities do not change radically from one time period or location to another, and their labor, therefore, can be compared: "the difference of natural talents in different men is, in reality, much less than we are aware of. Labour, therefore, it appears evidently, is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times and at all places.
We cannot estimate, it is allowed, the real value of different commodities from century to century by the quantities of silver which were given for them. We cannot estimate it from year to year by the quantities of corn. By the quantities of labour we can, with the greatest accuracy, estimate it both from century to century and from year to year. From century to century, corn is a better measure than silver, because, from century to century, equal quantities of corn will command the same quantity of labour more nearly than equal quantities of silver.
From year to year, on the contrary, silver is a better measure than corn, because equal quantities of it will more nearly command the same quantity of labour. In other words, for example, a lone person can only lift so much wheat at one go, and while some people are stronger than others, the differences between them don't make that much difference. Therefore, Smith seems to believe, the value of any object can be universally measured by the amount of labor that any person in any society might have to exert in order to acquire that object.
While this is not necessarily a satisfying standard to all—many economists argue that the labor theory of value has been surpassed—it does, again, root Smith's objectivity in impartiality. The "any person" quality of the impartial spectator is analogous to the "any laborer" standard Smith seems to use as a value measure.
Ultimately, according to Smith, a properly functioning market is one in which all these conditions—price, value, progress, efficiency, specialization, and universal opulence wealth —all work together to provide economic agents with a means to exchange accurately and freely as their self-interest motivates them. None of these conditions can be met if the government does not act appropriately, or if it oversteps its justified boundaries. The Wealth of Nations is a work of political economy. It is concerned with much more than the mechanisms of exchange.
It is also concerned with the ideal form of government for commercial advancement and the pursuit of self-interest. This is where Smith's reputation as a laissez faire theorist comes in. He is arguing for a system, as he calls it, of "natural liberty," one in which the market largely governs itself as is free from excessive state intervention recall Smith's use of the invisible hand in TMS. As he explains, there are only three proper roles for the sovereign: to protect a society from invasion by outside forces, to enforce justice and protect citizens from one another, and "thirdly, the duty of erecting and maintaining certain publick works and certain publick institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence to any individual or small number of individuals, though it may frequently do much more than repay it to a great society" WN IV.
Each of the responsibilities of the sovereign contains its own controversies. Regarding the first, protecting society, Smith debated with others as to whether a citizen militia or a standing army was better suited for the job, rooting his discussion, as usual, in a detailed history of the military in different stages of society WN V. Rather, his ideas are clearly presented and he illustrates his most complex sentiments, such as the idea of the invisible hand, with images that help the reader envision a concept rather than attempt to think abstractly about it.
The concept of the Invisible Hand comes up frequently throughout the text, although it is not mentioned explicitly. It is not until one has finished reading the entirety of the text that all of the references begin to come together and make sense. In order to simplify this analysis, there are two different ways the analogy or image of the invisible hand is used. First of all, it is a concept that can be applied to morality such as is discussed above. This idea makes a more general statement about the individual within society.
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The second sense the concept is used is in relation to actual economics, which will be explored after this first point is demonstrated. In term s of the moralistic sense, in essence, the principle behind the invisible hand is that people benefit their peers simply by acting out of their own selfish interest instead of acting according to some deep sense of altruistic motivation. In other words, it is the self-interest of individuals that almost by default creates the general interest. This is not always a popular idea, even today, since there are many who believe that it is right and natural to do the right thing for the good of the whole rather than according to base self-interest.
In fact, Smith was not supportive of those who were greedy or overtly selfish. Interestingly, this is a more interpretative form of the invisible hand since Smith did not appear to use this as part of his definition. Because of human self-interest, this kind of competition would be beneficial for society as a whole. It is clear how this would later form the basis for modern economic systems and rationality and in sum, it sounds like an excellent ideal for any economy to work towards.
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