Adam Smith and the Birth of Modern Economics

Economics is ...

The study of what, how, and for whom a society produces

Smith provided revolutionary ideas on these three questions

The Setting

Western Europe: 1500-1750

Hobbes' Leviathan (1651)

Along comes Adam ... Chair of Moral Philosophy, University of

Glasgow (1751), Scotland Travels throughout Europe on a

personal tutoring assignment First big hit

The Theory of Moral Sentiments (1759) In 1766 begins "writing a book to pass

the time ..." An Inquiry into the Nature and Causes of the

Wealth of Nations (1776)

Smith's Questions Inspired by Newton's laws of motion and

planetary behavior "...the greatest discovery that was ever made..." Smith sought equivalent laws for the

organization of society What fosters innovation and growth? What if government removes all the rules? What happens if individuals serve their self

interest? What is a country's true source of wealth?

Smith's Answers

"But the principle … of bettering our condition… comes with us from the womb, and never leaves us till we go into the grave."

Smith's Answers

"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 interest…"

Smith's Answers

"Division of labor is the great cause of the increase of public opulence … and not to the quantity of gold and silver, as is foolishly imagined."

Smith's Answers

Society's best possible outcome occurs under a laissez-faire government structure

The "Forgotten" Smith

Competition required to offset the potential vices of self-interest

In defining "self-interest", Smith emphasized the role of moral and ethical decision making

Smith argued for strong government in areas of judiciary, education, and national security

Implications for Today?

Business and technological innovation

Economic and financial crises Growing inequality

Tax structures Climate change