Adam Smith, the Father of Economics (Source: Fee)
Adam Smith was a Scottish college professor, writer, and government official that lived from 1723 to 1790. He is regarded as the father of economics—a discipline that didn’t really exist before him. His intention was to take the methods that evolved in the Scientific Revolution and apply them to the human world.
In the 18th century, England experienced a substantial increase in wealth, and Smith tried to answer two questions about it: What explains this wealth increase, and how can we make this increase even more dramatic? To answer his questions, Smith created a scientific model based on four basic observations of the economy.
The first observation was self-interest. Smith believed that when people are acting in the economic realm, they are pursuing their own self-interest. He originated the term “homo economics”, which translates to “economic man” and means that humans behave in accordance with basic economic desires.
The second observation was that the division of labor is very important to economic productivity. During the 18th century, many of England’s small artisan shops changed into factories with a division of labor. Smith noticed an increase in production and that workers not only got faster at their jobs but better too.
His third observation was the law of supply and demand, which is arguably the most important law he discovered. He applied Newton’s thinking in the Scientific Revolution (“For every action, there is an equal and opposite reaction” to predict a very reliable model of the economy.
His last observation is the “invisible hand” metaphor that he’s most well-known for. He predicted that humans will always act in their own self-interest in the economic sector, and therefore, everyone’s self-interests will balance each other out, acting like an “invisible hand”. This metaphor started “laissez-faire” economics or a movement for less government regulation of businesses.
Based on his four observations, Smith also made four predictions for the future:
- As wealth increases, there will be a greater need for national defense.
- The long-term effects of the division of labor can be harmful.
- A healthy economy produces a rise in human virtues, as it requires and rewards good human behavior.
- A healthy economy would make society kinder because once necessities are met, people will be more caring of others.
Economists often debate whether Smith’s predictions were accurate, but one thing is for certain: Smith’s contributions have clearly shaped our economy as we know it today.
Discussion Questions:
Do you agree with Smith’s four observations?
Do you agree with Smith’s four predictions?
Where do you see Smith’s observations or predictions in your life today?
Vocabulary:
Economics: the study of the economy, or the business environment
Dramatic: big, contrasting
Realm: area
Accordance: together with, in harmony
Productivity: effectiveness and efficiency
Reliable: dependable
Sector: area
Regulation: rules and limitations
Predictions: informed guesses
Virtues: moral qualities
Contributions: the value of his work
