Adam Smith

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This article is part of the Basic Liberalism Course -> Module 4: Main Schools of Economics

Last updated: 2026-04-10

Adam Smith

Adam Smith (baptized June 5, 1723 in Kirkcaldy, Scotland – died July 17, 1790 in Edinburgh) was a moral philosopher and political economist from Scotland, central figure of the Scottish Enlightenment.

He is considered the father of modern economics and one of the founders of classical liberal thought in economics. Although today he is mainly associated with economics, Smith was above all a philosopher who integrated ethics, human psychology, history, and institutional analysis.

His life unfolded in an environment of relative comfort (his father had been a customs official). He studied at the University of Glasgow (where he later became a professor of moral philosophy) and at Oxford. He was a close friend of David Hume and part of an extraordinary intellectual circle. He published two main works in his lifetime:

The Theory of Moral Sentiments (1759)
An Inquiry into the Nature and Causes of the Wealth of Nations (1776), commonly known as The Wealth of Nations.

He died unmarried and devoted his last years to revising his texts and his work as a commissioner of customs.

Main ideas

Smith did not sharply separate ethics and economics: both arose from the observation of human nature. His ideas complement each other between his two great books.

1. In The Theory of Moral Sentiments (ethics and human psychology)

Morality does not arise from an “innate moral sense” or pure selfishness, but from sympathy (or empathy): the imaginative capacity to put ourselves in the place of the other and share (or judge) their emotions.
He introduced the concept of the impartial spectator: an internal judge that allows us to evaluate ourselves as if we saw ourselves from outside, seeking moral approval and avoiding excess of passions.
The key virtues are: justice (the most important, as it protects society), prudence (care of oneself), and benevolence.
He criticizes both pure egoism and utopian altruism: human beings are selfish to a certain degree, but also sociable and desirous of mutual approval. This avoids a reductionist view of man as a mere utility maximizer.

This work is fundamental to understanding that Smith was not an apologist for crude egoism; on the contrary, he saw morality as a social mechanism that moderates self-interest.

2. In The Wealth of Nations (political economy)

This is his masterpiece and the foundational text of economics as a systematic discipline. His central ideas are:

The real wealth of nations:
- are not precious metals (as the mercantilists believed), but the productive capacity of a country: the goods and services that satisfy human needs.
- Economic growth comes from increasing productivity, not from accumulating gold or favorable trade balances.
Division of labor:
- It is the main engine of economic progress.
- In his famous example of the pin factory, he shows how specializing in simple tasks multiplies productivity enormously (a single worker makes few pins; with division of labor, thousands).
- The division of labor generates specialization, dexterity, innovation, and economies of scale.
- However, Smith warned that excessive repetitive work could “dull” the minds of workers, so he advocated for basic public education.
Self-interest and the “invisible hand”:
- It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their own self-interest.
- Each individual, by pursuing their personal benefit (and guided by prices, competition, and market signals), is “led by an invisible hand” to promote the interest of society, often without intending it.
- This is a spontaneous order: social coordination emerges without central planning.
Free market and critique of mercantilism:
- He defended international free trade, open competition, and the reduction of regulations, monopolies, and state privileges.
- Mercantilism (protectionism, import restrictions) impoverishes nations by distorting resource allocation.
Capital accumulation and market extension:
- The division of labor is limited by “the extent of the market”. The larger the market (free trade), the more specialization and prosperity.
Limited role of the State:
- Only three legitimate functions for the sovereign: national defense, administration of justice (including protection of property), and public works that the private market would not provide efficiently (roads, bridges, basic education).
- Beyond that, intervention is usually counterproductive.

Who or what inspired his ideas?

He drew from a combination of personal influences, philosophical, scientific, and economic influences from his time and the classical tradition.

1. Personal and environmental influences (Scottish Enlightenment)

Smith was a central product of the Scottish Enlightenment, an intellectual movement that emphasized reason, empirical observation, and the study of human nature.

Francis Hutcheson (his professor at the University of Glasgow): He is the most direct influence and whom Smith called “the never-to-be-forgotten Dr. Hutcheson”. Hutcheson developed the theory of the “moral sense” (moral sense theory), which held that moral judgments arise from feelings rather than pure reason. This profoundly marked The Theory of Moral Sentiments, where Smith explores sympathy (the capacity to put oneself in the place of the other) as the basis of morality. Hutcheson also influenced ideas about the common good and property.
David Hume (his great friend and intellectual mentor): Hume was one of the most important figures for Smith. They shared a skeptical vision based on human psychology. Smith adopted and refined ideas from Hume on sentimentalist morality, passion as the motor of action, and religious skepticism. Smith described Hume after his death as someone who approached the ideal of “perfectly wise and virtuous man”. Almost everything in Smith’s works has some connection or revision of Hume, although Smith did not always fully agree.

Other contemporaries like Lord Kames (Henry Home) also supported him in his early lectures.

2. Philosophical and scientific influences

Stoic philosophy: Smith admired Epictetus and Marcus Aurelius. The Stoic idea of a harmonious natural order in the universe influenced his concept of the “invisible hand”, where individuals pursuing their self-interest contribute (without intention) to the social good. Also in the idea of resignation before greater forces and personal virtue.
Isaac Newton and the scientific method: The Scottish Enlightenment was imbued with Newtonian principles (systems, mechanisms, and natural laws). Smith sought to explain society as an ordered system, similar to how Newton explained the physical universe.
Ancient classics: Aristotle (on topics of virtue, imagination, and morality), Plato, and others. Smith saw parallels between his moral system and that of Aristotle.
Post-Calvinist thought: In Scotland, a moderate version of Protestantism influenced his work ethic and civic virtue.

3. Influences in economics and political thought

For The Wealth of Nations, Smith synthesized and surpassed previous ideas:

French Physiocrats
- (François Quesnay and his school): During his travels in Europe (as tutor to the Duke of Buccleuch), Smith met the Physiocrats, who emphasized agriculture as the source of wealth, the “natural order”, and laissez-faire (let do).
- Smith praised them as the system closest to the truth until then, although he criticized their excesses (for example, their exclusive obsession with land).
- Ideas like free trade and economic circulation influenced him.
Predecessors in economics:
- Richard Cantillon (Essay on the Nature of Trade in General, 1755): Systematic analysis of the economy as a circular process (production, circulation, consumption). Influenced concepts of entrepreneurship, population, and money.
- Bernard Mandeville (The Fable of the Bees): The idea that “private vices” (selfishness) can generate “public benefits” (prosperity). Smith refined this, but avoided extreme cynicism.
- Others: John Locke (property), Montesquieu (laws and societies), and mercantilists whom he strongly criticized.

Smith also read widely from 17th-century authors and French encyclopedists like Voltaire (whom he met).

Summary: What mainly inspired him?

Smith did not “invent” the market economy or sentimental ethics from scratch. He took the theory of moral sense from Hutcheson, the human psychology from Hume, the natural order from Stoic-Newtonian thought, and the proto-liberal ideas of the Physiocrats and Cantillon, to build a coherent system that integrated morality, psychology, and economics.

His key ideas—division of labor, invisible hand, sympathy, free market—arise from observing human nature and history, always within an ethical framework (economics is not separated from morality).

In essence, Smith was a great synthesizer of the Enlightenment: he combined British empiricism, continental rationalism, and the classical tradition to explain how societies prosper through freedom, exchange, and human passions moderated by social morality.

Criticisms of his ideas

1. Contemporary and early criticisms (18th-19th centuries)

Mercantilists: They rejected his frontal attack on protectionism, trade restrictions, and the idea that wealth consists of precious metals. For them, Smith destroyed the “commercial system” that favored exports and a positive trade balance through state intervention. Smith responded that true wealth is productive capacity (goods and services), not accumulated gold.
Physiocrats (Quesnay and followers): They criticized that Smith did not consider agriculture as the only source of “net product” and that he gave too much weight to manufacturing and trade. They saw his system as insufficiently “natural” by not limiting the productive role only to land.

2. Marxist and socialist criticism

Karl Marx and his followers recognized in Smith significant advances (analysis of the division of labor, capital accumulation, conflict of interests between classes), but considered him a limited bourgeois thinker. Main objections:

Smith did not see the inherent exploitation of wage labor: although he recognized that capitalists seek to lower wages, he did not develop a complete theory of surplus value.
His “invisible hand” would be an ideological illusion that hides the antagonistic character of capitalism.
The contradiction between The Theory of Moral Sentiments (sympathy, impartial spectator) and The Wealth of Nations (self-interest) —the famous “Adam Smith Problem”— was interpreted as proof that Smith idealized nascent capitalism without seeing its (supposed???) historical contradictions.
Marx used Smith (and even more Ricardo) as a base, but went beyond to a radical critique of the mercantile production system.

3. Criticisms from the Austrian School

Murray Rothbard, in his History of Economic Thought, launched one of the harshest and most systematic criticisms of Smith, seeing him not as a founder but as a regressor compared to predecessors like Cantillon, Turgot, or the Spanish scholastics.

Theory of value:
- Smith oscillated between a subjective view (influenced by his teachers) and an embryonic labor theory of value (“labor is the real measure of value”).
- This opened the door to Marxism and delayed the development of the marginalist subjective value (Menger, 1871).
- The Austrians prefer the pre-Smithian tradition of value as the result of individual valuation.
Focus on the equilibrium of “natural price” in the long term
- Instead of dynamic market processes, entrepreneurship, and business error.
- Smith emphasized the division of labor as the main driver, but underestimated the role of the entrepreneur as a coordinator of dispersed knowledge.
Plagiarism and omissions:
- Rothbard accused him of not adequately citing Cantillon, Hutcheson, and others, and of presenting as novelties ideas already developed.
Interventionist residues:
- Although he criticized mercantilism, Smith accepted certain interventions (basic public education, usury laws in some cases, public works, moderate taxes).
- He was not a pure defender of radical laissez-faire. Hayek and Mises value him more positively for the spontaneous order (“invisible hand”) and the critique of the “man of system” (the constructivist who believes he can fix society like a chessboard), but agree that Smith did not reach full methodological individualism nor the theory of capital and the business cycle of Böhm-Bawerk and Mises.

For the Austrians, Smith is a valuable precursor of classical liberalism and spontaneous order, but his work contains ambiguities that diverted economics toward the objectivism of labor value and Ricardianism, delaying the “marginal revolution” and praxeology.

4. Other modern criticisms

Lack of a complete theory of the entrepreneur:
- He did not sufficiently emphasize how entrepreneurs break inefficiencies and create new markets (criticism shared by Schumpeter and Austrians).
Division of labor:
- Some (like Stigler) point out that Smith brilliantly described its benefits, but did not elaborate a formal operable “theory” of economic progress.
Moral vs. economic vision:
- Contemporary critics (both from the left and right) accuse vulgar interpretations of reducing Smith to an apologist for pure egoism, ignoring his ethics of sympathy and his distrust of monopolies, corporations, and collusion among merchants (“they never meet without conspiring against the public”).
Unintended consequences of capitalism:
- He is reproached for not having fully anticipated extreme inequality, alienation, or cycles (although he did warn about negative effects of excessive division of labor on workers' minds).

Balance

Smith was a great destroyer of mercantilist errors and an acute observer of human nature and spontaneous order.

His greatest merit remains showing how self-interest, under rules of justice and private property, generates prosperity without central planning.

However, his ambiguities in the theory of value, his excessive emphasis on labor as a measure, and certain interventionist residues made him vulnerable to later interpretations (Marxist or equilibrating neoclassical) that diluted subjectivism and entrepreneurial dynamism.

The Austrians (especially Rothbard) prefer to see the roots of true economic liberalism in the Spanish scholastics, Cantillon, and Turgot, and consider Smith an important but imperfect link that, involuntarily, facilitated the path to Ricardo and Marx.

Some of his famous quotes

“It is not from the benevolence of the butcher, the brewer, or the baker that we can expect our dinner, but from their own self-interest.”

(Smith's most famous phrase. Explains how self-interest generates social benefits).

“He is led by an invisible hand to promote an end which was no part of his intention… By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.”

(The famous “invisible hand” of the market).

“No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”
“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.”
“Governments… are, without exception, the greatest spendthrifts in society.”
“No wisdom or knowledge of any human being could ever be sufficient to supervise the industry of private individuals and direct it towards the occupations most suitable to the general circumstances of the country.”

(Critique of excessive state interventionism).

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

(On the dangers of monopolies and cartels).

Other very powerful quotes:

“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as may be necessary for promoting that of the consumer.”
“A person is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniencies, and amusements of human life.”
“Science is the great antidote to the poison of enthusiasm and superstition.”
“The real and effectual discipline which is exercised over a workman is that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence.”
“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.”

From The Theory of Moral Sentiments (more philosophical):

“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others…”

(Speaks of sympathy and morality, which complements his economic vision).

Adam Smith was not just a cold economist of “egoism”; he combined self-interest with morality and human sympathy. His central idea was that, under freedom and competition, individual actions tend to generate social order and prosperity.

This article is part of the Basic Liberalism Course -> Module 4: Main Schools of Economics

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Last updated: 2026-04-10

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