Adam Smith
(16 June 1723 – 17 July 1790) was a famous Scottish author, philosopher, and economist nicknamed "The father of Capitalism". His most influential work, The Wealth of Nations,note is considered the first modern work on economics. It is still influential in the 2020s.
In his first book, The Theory of Moral Sentiments, Smith proposes the idea of an "invisible hand". This refers to the tendency of free-markets to regulate themselves by means of competition, supply and demand, price signals and business owners' seeking their self-interest via profit. Smith is also known for his theory of compensating wage differentials, meaning that dangerous or undesirable jobs tend to pay higher wages to attract workers to these positions.note
In The Wealth of Nations (1776), he says free markets, private property and competition are needed to drive economic growth and encourage innovation. Smith says that division of labour increases productivity. The way to divide labour is to break down the work that needs to be done into its sub-tasks. A baroque lute maker in 1600 might have made all the parts of the instrument himself in a workshop and then assembled and finished them. You paid a high price for that lute, as there were few artisans who knew all the complex steps. A modern industrial guitar factory divides up the labor. It will have one worker who only makes guitar necks, one worker who only adds frets, one who makes guitar tops, one who only makes sides, one who only glues, one who only varnishes, and so on.
Good News, Bad News: the good news is that with workers specializing, productivity goes way up, so the factory owner is happy. As well, the customer is happy, because the factory-made instrument is much cheaper than an artisan-made one built by a craftsman. The bad news is that the former instrument craftsman and artisan of yesteryear is transformed into a factory floor of lower-skilled workers doing repetitive, routine tasks all day (this is a downside of division of labor). Decades after Smith, Karl Marx would say this could make workers feel alienated; if all you do is screw in the same part all day, you'll probably feel less satisfied than the craftsman who makes an entire instrument and then admires it at the end of the day. As well, since the job is de-skilled, the factory worker gets lower pay than their artisan predecessor. Another downside is poor job security; a worker who does routine, repetitive work is easier to replace with a machine or, in the 2000s, a robot.
Another big Smith argument is that competition is good for society. In everyday life, sometimes we think competition is a bad thing. A Bourgeois Bohemian family might send their kid to a hippie-inspired school where the kids play cooperative games to learn to work together. In a business context, though, Smith believed that when businesses compete for customers, this motivates them to trim the costs of production and work more efficiently to produce more "widgets" than the competition and at a lower cost.
This is also a Good News, Bad News situation. If you are buying widgets, this is great, because you get a better widget with more widget features, and for less money. The new Super Widget may work better and do more than yesteryear's. The star example that proves Smith's argument in the 2020s is computers: a schoolkid's $300 laptop in 2020 is exponentially more powerful than a 1970s Cray supercomputer that cost a gazillion dollars. A poor worker's smartphone is way more powerful than the Apollo Moon landing computer.
Advocates of Capitalism use the declining price and increasing power of high technology items to show how Capitalism makes everyone better off. A good point, but there's more to quality of life than fast, cheap computers; Capitalism does a poor job providing affordable, high-quality housing, daycare and eldercare. As well, Capitalism sometimes can focus on getting shareholder profit ahead of taking care of the environment. While MegaCorp firms are starting to "clean up their act" on that front, the nineteenth and twentieth centuries are filled with examples of big companies extracting resources with little care about the human costs (injuries and diseases to workers due to poor safety measures) and environmental impacts (pollution from factories creating Industrial Ghetto areas).
If you work in a computer factory or tech firm, this relentless drive to make faster computers for less money will cause lots of stress and pressure. You'll be pushed to work huge overtime hours and speed up, to produce more computers per hour and what's more, the company will look for ways to cut production costs, so benefits may be cut.
One area where Smith is sometimes misunderstood is regarding the role of government. Since Smith advocates free markets and free competition, some people mistakenly think he calls for completely "laissez-faire" markets. In fact, Smith believed there was a role for government, which was protecting private property rights and setting up systems to ensure orderly trade (courts and laws to ensure contract law is done fairly). That said, he didn't want governments setting price controls or trying to help certain firms, as he thoughtthis reduced efficiency and productivity. Two modern examples of price controls are minimum wage (a government-set price floor on the cost of labor) and rent control (a government-set price ceiling on the rental price of housing). An example of government help to selected firms is regional industrial subsidies; for example, a country may subsidize a factory in an economically depressed region Oop North to help create jobs.
Have we mentioned that he hates your guts yet?
See also Capitalism.
Notable Works
- The Theory of Moral Sentiments
- The Wealth of Nations
- Essays on Philosophical Subjects (posthumously)
