Birth of Adam Smith

June 16, 2018

On 16 June 1723, Adam Smith – the Father of capitalism and founder of classical, free market economics – was born.

A key figure of the Scottish Enlightenment, Smith was a political economist, moral philosopher and classical liberal. He was also blessed with great powers of objective observation, reason (using the Socratic process) and common sense.

Smith observed how markets guide economic activity and act like an “invisible hand” – allocating resources through prices, which rise when goods or services are in short supply relative to demand and fall during abundant supply.

Through his famous 1776 book titled “The Wealth of Nations”, Smith set the framework for modern economics, free markets and capitalism, which has been so pivotal to the development and prosperity enjoyed over the following centuries, particularly in the West.

Smith’s works described how rational self-interest and competition can lead to economic prosperity. He also developed the concept of “division of labour” and explained the potential gains from specialisation and trade.

Smith’s earlier (1759) book titled, “The Theory of Moral Sentiments” laid out invaluable preconditions - particularly social capital and trust - necessary for free and reliable exchange to proliferate. Without those preconditions the benefits and freedoms of markets would likely fall well short of their potential (see further below for more detail).

Celebrate the birth of Adam Smith by:

  • toasting this Father of modern economics, free markets and capitalism
  • reading his “The Wealth of Nations” or important earlier book “The Theory of Moral Sentiments” (or their condensed versions)
  • taking an extra moment to watch, listen or read stock market reports to witness Smith’s principles in action
  • reflecting on the enormous and positive impact that free markets, mutual trust, respect, reciprocity and morality can - and have had - on billions of lives, on prosperity, happiness and Western civilisation, and/or
  • sharing this Action Plan post on social media with family, friends and those understanding and appreciative of the great role markets play in making Western life so free and prosperous (relative to other systems of governance).

More detail on Smith, social capital and trust

For markets to flourish, the community/society had to start with, and maintain, a healthy amount of social capital (trust, respect, connection and common understanding) and agents had to be trustworthy (eg do broadly as they would like to have done to themselves).

Otherwise, exchange would not be as free, riskless, mutual and reliable, leading to either:

  • much less exchange (and only with those you trust, or have “something on” that lowers the other party’s incentive to fleece/cheat)
  • needing witnesses, witnessing and paper-trails (extra frictions), and/or
  • more state oversight, regulation and enforcement to make up for the lack of trust and self-governance among the agents themselves.

While many markets have significant natural frictions and distortions (eg monopoly power, information asymmetries), requiring commensurate regulation, many markets do not. But the latter can still function poorly if agents en masse begin doing the wrong things by each other, inviting the heavy hand of “Big Brother” (the state) to step in to “make the children behave” again. [Arguably, the revelations of the banking Royal Commission (to date) are a classic, but unfortunate, example of this very notion.]

In 2005, Smith’s The Wealth of Nations treatise was named among the 100 Best Scottish Books of all time. And named in his memory is the minor planet “12838 Adamsmith”.

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