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RUSSIAN ECONOMIC ACADEMY NAMED AFTER

G V PLEKHANOV

INTERNATIONAL BUSINESS STUDIES

ADAM SMITH

Student: Anton Skobelev

Group: 855

Moscow 1997

After two centuries, Adam Smith remains a towering figure in the history
of economic thought. Known primarily for a single work, An Inquiry into
the nature an causes of the Wealth of Nations (1776), the first
comprehensive system of political economy, Smith is more properly
regarded as a social philosopher whose economic writings constitute only
the capstone to an overarching view of political and social evolution.
If his masterwork is viewed in relation to his earlier lectures on moral
philosophy and government, as well as to allusions in The Theory of
Moral Sentiments (1759) to a work he hoped to write on “the general
principles of law and government, and of the different revolutions they
have undergone in the different ages and periods of society”, then The
Wealth of Nations may be seen not merely as a treatise on economics but
as a partial exposition of a much larger scheme of historical evolution.

Early Life

Unfortunately, much is known about Smith’s thought than about his life.
Though the exact date of his birth is unknown, he was baptised on June
5, 1723, in Kikcaldy, a small (population 1,500) but thriving fishing
village near Edinburgh, the son by second marriage of Adam Smith,
comptroller of customs at Kikcaldy, and Margaret Douglas, daughter of a
substantial landowner. Of Smith’s childhood nothing is known other than
that he received his elementary schooling in Kirkcaldy and that at the
age of four years he was said to have been carried off by gypsies.
Pursuits was mounted, and young Adam was abandoned by his captors. “He
would have made, I fear, a poor gypsy”, commented his principal
biographer.

At the age of 14, in 1737, Smith entered the university of Glasgow,
already remarkable as a centre of what was to become known as the
Scottish Enlightenment. There, he was deeply influenced by Francis
Hutcheson, a famous professor of moral philosophy from whose economic
and philosophical views he was later to diverge but whose magnetic
character seems to have been a main shaping force in Smith’s
development. Graduating in 1740, Smith won a scholarship (the Snell
Exhibition) and travelled on horseback to Oxford, where he stayed at
Balliol College. Compared to the stimulating atmosphere of Glasgow,
Oxford was an educational desert. His years there were spent largely in
self-education, from which Smith obtained a firm grasp of both classical
and contemporary philosophy.

Returning to his home after an absence of six years, Smith cast about
for suitable employment. The connections of his mother’s family,
together with the support of the jurist and philosopher Lord Henry
Kames, resulted in an opportunity to give a series of public lectures in
Edinburgh - a form of education then much in vogue in the prevailing
spirit of “ improvement”.

The lectures, which ranged over a wide variety of subjects from rhetoric

rhetoric
history and economics, made a deep impression on some of Smith’s notable
contemporaries. They also had a marked influence on Smith’s own career,
for in 1751, at the age of 27, he was appointed professor of logic at
Glasgow, from which post he transferred in 1752 to the more remunerative
professorship of moral philosophy, a subject that embraced the related
fields of natural theology, ethics, jurisprudence, and political
economy.

Glasgow

Smith then entered upon a period of extraordinary creativity, combined
with a social and intellectual life that he afterward described as “ by
far the happiest, and most honourable period of my life”. During the
week he lectured daily from 7:30 to 8:30 am and again thrice weekly from
11 am to noon, to classes of up to 90 students, aged 14 and 16.
(Although his lectures were presented in English, following the
precedent of Hutcheson, rather than in Latin, the level of
sophistication for so young an audience today strikes one as
extraordinarily demanding.) Afternoons were occupied with university
affairs in which Smith played an active role, being elected dean of
faculty in 1758; his evenings were spent in the stimulating company of
Glasgow society.

Among his circle of acquaintances were not only remembers of the
aristocracy, many connected with the government, but also a range of
intellectual and scientific figures that included Joseph Black, a
pioneer in the field of chemistry, James Watt, later of steam-engine
fame, Robert Foulis, a distinguished printer and publisher and
subsequent founder of the first British Academy of Design, and not
least, the philosopher David Hume, a lifelong friend whom Smith had met
in Edinburgh. Smith was also introduced during these years to the
company of the great merchants who were carrying on the colonial trade
that had opened to Scotland following its union with England in 1707.
One of them, Andrew Cochrane, had been a provost of Glasgow and had
founded the famous Political Economy Club. From Cochrane and his fellow
merchants Smith undoubtedly acquired the detailed information concerning
trade and business that was to give such a sense of the real world to
The Wealth of Nations.

The Theory of Moral Sentiments

In 1759 Smith Published his first work, The Theory of Moral Sentiments.
Didactic, exhortative, and analytic by turns, The Theory lays the
psychological foundation on which The Wealth of Nations was later to be
built. In it Smith described the principles of “human nature “, which,
together with Hume and the other leading philosophers of his time, he
took as a universal and unchanging datum from which social institutions,
as well as social behaviour, could be deduced.

One question in particular interested Smith in The Theory of Moral
Sentiments. This was a problem that had attracted Smith’s teacher
Hutcheson and a number of Scottish philosophers before him. The question
was the source of the ability to form moral judgements, including
judgements on one’s own behaviour, in the face of the seemingly

ehaviour, in the face of the seemingly
overriding passions for self-preservation and self-interest. Smith’s
answer, at considerable length, is the presence within each of us of an
“inner man” who plays the role of the “impartial spectator”, approving
or condemning our own and others’ actions with a voice impossible to
disregard. (The theory may sound less naive if the question is
reformulated to ask how instinctual drives are socialized through the
superego.)

The thesis of the impartial spectator, however, conceals a more
important aspect of the book. Smith saw humans as created by their
ability to reason and - no less important - by their capacity for
sympathy. This duality serves both to pit individuals against one
another and to provide them with the rational and moral faculties to
create institutions by which the internecine struggle can be mitigated
and even turned to the common good. He wrote in his Moral Sentiments
the famous observation that he was to repeat later in The Wealth of
Nations: that self-seeking men are often “led by an invisible hand...
without knowing it , without intending it, to advance the interest of
the society.”

It should be noted that scholars have long debated whether Moral
Sentiments complemented or was in conflict with The Wealth of Nations,
which followed it. At one level there is a seeming clash between the
theme of social morality contained in the first and largely amoral
explanation of the manner in which individuals are socialized to become
the market-oriented and class-bound actors that set the economic system
into motion.

Travels on the Continent

The Theory quickly brought Smith wide esteem and in particular attracted
the attention of Charles Townshend, himself something of an amateur
economist, a considerable wit, and somewhat less of a statesman, whose
fate it was to be the chancellor of the exchequer responsible for the
measures of taxation that ultimately provoked the American Revolution.
Townshend had recently married and was searching for a tutor for his
stepson and ward, the young Duke of Buccleuch. Influenced by the strong
recommendations of Hume and his own admiration for The Theory of Moral
Sentiments, he Approached Smith to take the Charge.

The terms of employment were lucrative (an annual salary of Ј300 plus
travelling expenses and a pension of Ј300 a year after), considerably
more than Smith had earned as a professor. Accordingly, Smith resigned
his Glasgow post in 1763 and set off for France the next year as the
tutor of the young duke. They stayed mainly in Toulouse, where Smith
began working on a book (eventually to be The Wealth of Nations) as an
antidote to the excruciating boredom of the provinces. After 18 months
of ennui he was rewarded with a two-month sojourn in Geneva, where he
met Voltaire, for whom he had the profoundest respect, thence to Paris
where Hume, then secretary to the British embassy, introduced Smith to
the great literary salons of the French Enlightenment. There he met a

e he met a
group of social reformers and theorists headed by Francois Quesnay, who
are known in history as the physiocrats. There is some controversy as to
the precise degree of influence the physiocrats exerted on Smith, but it
is known that he thought sufficiently well of Quesnay to have considered
dedicating The Wealth of Nations to him, had not the French economist
died before publication.

The stay in Paris was cut short by a shocking event. The younger brother
of the Duke of Buccleuch , who had joined them in Toulouse, took ill and
perished despite Smith’s frantic ministration. Smith and his charge
immediately returned to London. Smith worked in London until the spring
of 1767 with Lord Townshend, a period during which he was elected a
fellow of the Royal Society and broadened still further his intellectual
circle to include Edmund Burke, Samuel Johnson, Edward Gibbon, and
perhaps Benjamin Franklin. Late that year he returned to Kirkcaldy,
where the next six years were spent dictating and reworking The Wealth
of Nations, followed by another stay of three years in London, where the
work was finally completed and published in 1776.

The Wealth of Nations

Despite its renown as the first great work in political economy. The
Wealth of Nations is in fact a continuation of the philosophical theme
begun in The Theory of Moral Sentiments. The ultimate problem to which
Smith addresses himself is how the inner struggle between the passions
and the “impartial spectator’ - explicated in Moral Sentiments in terms
of the single individual - works its effects in the larger arena of
history itself, both in the long-run evolution of society and in terms
of the immediate characteristics of the stage of history typical of
Smith’s own day.

The answer to this problem enters in Book 5, in which Smith outlines he
four main stages of organization through which society is impelled,
unless blocked by deficiencies of resources, wars, or bad policies of
government: the original “rude’ state of hunters, a second stage of
nomadic agriculture, a third stage of feudal or manorial “farming”, and
a fourth and final stage of commercial interdependence.

It should be noted that each of these stages is accompanied by
institutions suited to its needs. For example, in the age of the
huntsman, “there is scar any established magistrate or any regular
administration of justice. “ With the advent of flocks there emerges a
more complex form of social organization, comprising not only
“formidable” armies but the central institution of private property with
its indispensable buttress of law and order as well. It is the very
essence of Smith’s thought that he recognized this institution, whose
social usefulness he never doubted, as an instrument for the protection
of privilege, rather than one to be justified in terms of natural law:
“Civil government,” he wrote, “so far as it is instituted for the
security of property, is in reality instituted for the defence of the
rich against the poor, or of those who have some property against those

e poor, or of those who have some property against those
who have none at all.” Finally, Smith describes the evolution through
feudalism into a stage of society requiring new institutions such as
market-determined rather than guild-determined wages and free rather
than government-constrained enterprise. This later became known as
laissez-faire capitalism; Smith called it the system of perfect liberty.

There is an obvious resemblance between this succession of changes in
the material basis of production, each bringing its requisite
alterations in the superstructure of laws and civil institutions, and
the Marxian conception of history. Though the resemblance is indeed
remarkable, there is also a crucial difference: in the Marxian scheme
the engine of evolution is ultimately the struggle between contending
classes, whereas in Smith’s philosophical history the primal moving
agency is “human nature “driven by the desire for self-betterment and
guided (or misguided) by the faculties of reason.

Society and “the invisible hand”

The theory of historical evolution, although it is perhaps the binding
conception of The Wealth of Nations, is subordinated within the work
itself to a detailed description of how the “invisible hand” actually
operates within the commercial, or final, stage of society. This becomes
the focus of Books I and II. In which Smith undertakes to elucidate two
questions. The first is how a system of perfect liberty, operating under
the drives and constraints of human nature and intelligently designed
institutions , will give rise to an orderly society. The question, which
had already been considerably elucidated by earlier writers, required
both an explanation of the underlying orderliness in the pricing of
individual commodities and an explanation of the “laws” that regulated
the division of the entire “wealth” of the nation (which Smith saw as
its annual production of goods and services) among the three great
claimant classes - labourers, landlords, and manufacturers.

This orderliness, as would be expected, was produced by the interaction
of the two aspects of human nature, its response to its passions and its
susceptibility to reason and sympathy. But whereas The Theory of Moral
Sentiments had relied mainly on the presence of the “inner man” to
provide the necessary restraints to private action, in The Wealth of
Nations one finds an institutional mechanism that acts to reconcile the
disruptive possibilities inherent in a blind obedience to the passions
alone. This protective mechanism is competition, an arrangement by which
the passionate desire for bettering one’s condition - a “desire that
comes with United States from the womb, and never leaves United States
until we go into the grave “ - is turned into a socially beneficial
agency by pitting one person’s drive for self-betterment against
another’s.

It is in the unintended outcome of this competitive struggle for
self-betterment that the invisible hand regulating the economy shows

shows
itself, for Smith explains how mutual vying forces the prices of
commodities down to their natural levels, which correspond to their
costs of production. Moreover, by inducing labour and capital to move
from less to more profitable occupations or areas, the competitive
mechanism constantly restores prices to these “natural” levels despite
short-run aberrations. Finally, by explaining that wages and rents and
profits (the constituent parts of the costs of production) are
themselves subject to this natural prices but also revealed an
underlying orderliness in the distribution of income itself among
workers, whose recompense was their wages; landlords, whose income was
their rents; and manufacturers, whose reward was their profit.

Economic growth

Smith’s analysis of the market as a self- correcting mechanism was
impressive. But his purpose was more ambitious than to demonstrate the
self-adjusting properties of the system. Rather, it was to show that,
under the impetus of the acquisitive drive, the annual flow of national
wealth could be seen steadily to grow.

Smith’s explanation of economic growth , although not neatly assembled
in one part of The Wealth of Nations, is quite clear. The score of it
lies in his emphasis on the division of labour (itself an outgrowth of
the “natural” propensity to trade) as the source of society’s capacity
to increase its productivity. The Wealth of Nations opens with a famous
passage describing a pin factory in which 10 persons, by specialising in
various tasks, turn out 48,000 pins a day, compared with the few,
perhaps only 1 , that each could have produced alone. But this
all-important division of labour does not take place unaided. It can
occur only after the prior accumulation of capital (or stock, as Smith
calls it ), which is used to pay the additional workers and to buy tools
and machines.

The drive for accumulation, however, brings problems. The manufacturer
who accumulates stock needs more labourers ( since labour-saving
technology has no place in Smith’s scheme), and in attempting to hire
them he bids up their wages above their “natural” price. Consequently
his profits begin to fall, and the process of accumulation is in danger
of ceasing. But now there enters an ingenious mechanism for continuing
the advance. In bidding up the price of labour, the manufacturer
inadvertently sets into motion a process that increases the supply of
labour, for “the demand for men, like that for any other commodity,
necessarily regulates the production of men.” Specifically, Smith had in
mind the effect of higher wages in lessening child mortality. Under the
influence of a larger labour supply, the wage rise is moderated and
profits are maintained; the new supply of labourers offers a continuing
opportunity for the manufacturer to introduce a further division of
labour and thereby add to the system’s growth.

Here then was a “machine” for growth - a machine that operated with all
the reliability of the Newtonian system with which Smith was quite

ystem with which Smith was quite
familiar. Unlike the Newtonian system, however, Smith’s growth machine
did not depend for its operation on the laws of nature alone. Human
nature drove it, and human nature was a complex rather than a simple
force. Thus, the wealth of nations would grow only if individuals,
through their governments, did not inhibit this growth by catering to
the pleas for special privilege that would prevent the competitive
system from exerting its begin effect. Consequently, much of The Wealth
of Nations, especially Book IV, is a polemic against the restrictive
measures of the “mercantile system” that favoured monopolies at home and
abroad. Smith’s system of “natural liberty”, he is careful to point out,
accords with the best interests of all but will not be put into practice
if government is entrusted to, or heeds, the “mean rapacity, who neither
are , nor ought to be, the rulers of mankind.”

The Wealth of Nations is therefore far from the ideological tract it is
often supposed to be. Although Smith preached laissez-faire (with
important exceptions), his argument was directed as much against
monopoly as government; and although he extolled the social results of
the acquisitive process, he almost invariably treated the manners and
manoeuvres of businessmen with contempt. Nor did he see the commercial
system itself as wholly admirable. He wrote with decrement about the
intellectual degradation of the worker in a society in which the
division of labour has proceeded very far; for by comparison with the
alert intelligence of the husbandman, the specialised worker “generally
becomes as stupid and ignorant as it is possible for a human being to
become”.

In all of this, it is notable that Smith was writing in an age of
preindustrial capitalism. He seems to have had no real presentiment of
the gathering Industrial Revolution, harbingers of which were visible in
the great ironworks only a few miles from Edinburgh. He had nothing to
say about large-scale industrial enterprise, and the few remarks in The
Wealth of Nations concerning the future of joint-stock companies
(corporations) are disparaging. Finally, one should bear in mind, that,
if growth is the great theme of The Wealth of Nations, it is not
unending growth. Here and there in the treatise are glimpsed at a
secularly declining rate of profit; and Smith mentions as well the
prospects that when the system eventually accumulates its “full
complement of riches” - all the pin factories, so to speak, whose output
could be absorbed - economic decline would begin, ending in an
impoverished stagnation.

The Wealth of Nations was received with admiration by Smith’s wide
circle of friends and admires, although it was by no means an immediate
popular success. The work finished, Smith went into semiretirement. The
year following its publication he was appointed commissioner both of
customs and of salt duties for Scotland, posts that brought him Ј600 a
year. He thereupon informed his former charge that he no longer

ormer charge that he no longer
required his pension, to which Buccleuch replied that his sense of
honour would never allow him to stop paying it. Smith was therefore
quite well off in the final years of his life, which were spent mainly
in Edinburgh with occasional trips to London or Glasgow (which appointed
him a rector of the university). The years passed quietly, with several
revisions of both major books but with no further publications. On July
17, 1790, at the age of 67, full of honours and recognition, Smith died;
he was buried in the churchyard at Canongate with a simple monument
stating that Adam Smith, author of The Wealth of Nations, was buried
there.

Beyond the few facts of his life, which can be embroidered only in
detail, exasperatingly little is known about the man. Smith never
married, and almost nothing is known of his personal side. Moreover, it
was the custom of his time to destroy rather than to preserve the
private files if illustrious men, with the unhappy result that much of
Smith’s unfinished work, as well as his personal papers, was destroyed
(some as late as 1942). Only one portrait of Smith survives, a profile
medallion by Tassie; it gives a glimpse of the older man with his
somewhat heavy-lidded eyes, aquiline nose, and a hint of protrusive
lower lip. “I am a beau in nothing but my books, ”Smith once told a
friend to whom he was showing his library of some 3,000 volumes.

From various accounts, he was also a man of many peculiarities, which
included a stumbling manner of speech ( until he had warmed to his
subject), a gait described as “vermicular”/ and above all an
extraordinary and even comic absence of mind. On the other hand,
contemporaries wrote of a smile of “inexpressive benignity,” and of his
political tact and dispatch in managing the sometimes acerbic business
of the Glasgow faculty.

Certainly he enjoyed a high measure of contemporary fame; even in his
early days at Glasgow his reputation attracted students from nations as
distant as Russia, and his later years were crowned not only with
expression of admiration from many European thinkers but by a growing
recognition among British governing circles that his work provided a
rationale of inestimable importance for practical economic policy.

Over the years, Smith’s lustre as a social philosopher has escaped much
of the weathering that has affected the reputations of other first-rate
political economists. Although he was writing for his generation, the
breadth of his knowledge/ the cutting edge of his generalization, the
boldness of his vision, have never ceased to attract the admiration of
all social scientists, and in particular economists. Couched in the
spacious, cadenced prose of his period, rich in imagery and crowded with
life, The Wealth of Nations projects a sanguine but never sentimental
image of society. Never so finely analytic as David Ricardo nor so
stern and profound as Karl Marx, Smith is the very epitome of the
Enlightenment: hopeful but realistic, speculative but practical, always

ut realistic, speculative but practical, always
respectful of the classical past but ultimately dedicated to the great
discovery of his age - progress.

BIBLIOGRAPHY:

John Rae. “Life of Adam Smith” 1985

William Scott. “Adam Smith as Student and Professor” 1987

Andrew S. Skinner. “Essays on Adam Smith” 1988

IBS-Plekhanov

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Anton Skobelev

Group 855


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