A is for Adam Smith

March 1st, 2014 at 9:00 am by David Farrar

The will be publishing an A to Z of economic literacy to help improve knowledge during the election campaign. I’m keen to do the same, so as long as I remember will republish them here every week.

They start of course with A:

Few economists are more famous than the Scotsman commonly regarded as the founder of , Adam Smith (1723-1790). On one hand this is understandable and much deserved: Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations (1776) is the book that established as an academic discipline. The Wealth of Nations also contains many important insights into economic logic.

On the other hand, it is also a little bit odd for two reasons. Before Smith appeared, there had already been centuries of economic discussions. And Smith probably would not even have called himself an economist but a moral philosopher.

Smith did not start his intellectual life as an economist. To his contemporaries, he would have been better known as the author of The Theory of Moral Sentiments (1759). In this earlier work, Smith explained how society is held together by people caring for their neighbours. His vision was one shaped by virtues, conscience, moral rules, altruism and law.

The Wealth of Nations is the other side of the same coin in Smith’s thinking. Here he showed how self-interested behaviour fits into his moral philosophy. It fitted surprisingly well.

Smith’s critical insight was that competition harnesses self-interest for the greater good of society. “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 self-interest.” It is as if ‘an invisible hand’ led people to do not just what is good for them but for their neighbours as well.

Smith’s second-most important contribution to economics was understanding the division of labour. By observing how much more efficient a pin factory becomes if workers specialise on different tasks, Smith concluded that it is such specialisation which makes us more productive. This is true for companies, but also for countries – which is why he was an advocate of free trade.

Few ideas he presented in The Wealth of Nations were genuinely new but it was Smith who collected the economic wisdom of his time, gave it a new framework and firmly established economics as a social science.

Two hundred and thirty eight years after The Wealth of Nations, Smith’s timeless ideas are still relevant and inspirational – both for policymakers and for economists. Smith remains the best teacher for anyone aspiring to understand how altruism and self-interest belong together in society.

The Cato Institute has an original copy of The Wealth of Nations in their office in DC. I resisted the urge to steal it!

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24 Responses to “A is for Adam Smith”

  1. duggledog (1,528 comments) says:

    Great idea – wrong country.

    The average kiwi will switch off when they realise A and B has nothing to do with the All Blacks. There will be letters to the editor.

    Expect complaints from Cunliffe. He’s not fond of the ABC part…

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  2. Yogibear (361 comments) says:

    Reminds me of the great saying:

    “Economics used to be written by Scotsmen in English, now it is written by Hungarians in algebra”

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  3. Mobile Michael (446 comments) says:

    Been to his grave in Edinburgh. Every capitalist should.

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  4. thor42 (971 comments) says:

    Should be an interesting series.

    At least 40 percent of New Zealanders are woefully ignorant of economics – the 30 percent who support Labour and the 10 percent who support the Greens or Mana.

    If they realised that two of the most socialist countries in the world are also two of the sickest economically – France and Venezuela – then there should really not be a *single* person out there who supports the socialist parties.

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  5. peterwn (3,243 comments) says:

    Philosophy would have been the root of intellectual thinking, development of systems and advancement of science. So it is not surprising then economics as an intellectual discipline grew out of philosophical thinking. Similarly the law and legal system as we know it today had its roots in philosophy.

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  6. CharlieBrown (1,002 comments) says:

    Thor – the swing vote is complely ignorant of economics as well. I would also go on to say that half of national party voters are ignorant of economics… afterall the current government definitely ignores basic economics on numerous matters eg, minimum wage laws, labour policy, tax policy etc.

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  7. metcalph (1,428 comments) says:

    An exchange between Adam Smith and Samuel Johnson, the lexicographer as recounted by Adam Smith to a group of people including William Wilberforce and the younger Pitt.

    SJ: Dr Smith, how cam you to say that Hume was nearly the best man you ever knew?

    AS: Because he was so.

    SJ: Sir, you lie.

    AS: Sir, You are the son of a bitch

    http://tinyurl.com/jwqlnjw

    Because of this and similar exchanges, I’m not too worried about the internet or twitter debasing social conventions.

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  8. gravedodger (1,552 comments) says:

    So Charlie waddaya doin bout it.
    Any progress in raising levels of economic literacy should be for the betterment of NZ yet the numpties who inhabit The GP and NZLP seem to be able to resist economic theory intruding on their bribery and coercion quotient.
    “Welfare good”
    ” Free Money” doesn’t cost”,
    “Raising minimum wage does not destroy employment opportunities”,
    “Inserting an extra Gummint run layer will reduce electricity prices”,
    “Call printing money Quantitative Easing and it wont destroy savings”,
    “Paying people not to work”,
    “Solving non existent Poverty”,
    “Employ a couple of Padres and Padres spawn to formulate economic policy and Union dropkicks to market it”,

    Sheesh, not attacking you Charlie, you make good points, but it is solutions we need

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  9. Judith (8,534 comments) says:

    And…. B is for Brainwash … which appears to be in full swing already this election year.

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  10. publicwatchdog (2,516 comments) says:

    Gee – wonder why NZ Initiative changed their name from the NZ Business Roundtable?

    Penny Bright

    ‘Anti-corruption / anti-privatisation’ Public Watchdog’

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  11. ShawnLH (4,605 comments) says:

    “Gee – wonder why NZ Initiative changed their name from the NZ Business Roundtable?”

    They got tired of the lies, conspiracy theories and hate-mongering being aimed at them by economically illiterate fools and mindless socialists.

    Like you for example :)

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  12. alwyn (417 comments) says:

    The article is correct that Smith is commonly regarded as the founder of economics. It overlooks, as most people do, someone who deserves the title rather more, having come up with a lot of seminal ideas on the subject a hundred years before Smith.
    Meet Sir William Petty, the man who invented economics.

    http://www.economist.com/news/finance-and-economics/21591842-meet-sir-william-petty-man-who-invented-economics-petty-impressive

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  13. ShawnLH (4,605 comments) says:

    Anyone wanting a good economics education really needs only two books;

    Economics in One Lesson by Henry Hazlitt.

    An Introduction to Economic Reasoning by David Gordon.

    Both can be downloaded for free as PDF files from the Mises Institute.

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  14. hj (6,918 comments) says:

    L is for Land Tax (“was all the talk at assn of economists conference”).
    C is for climate change (not happening according to Malpress)
    P is for population (more is better according to NZIER) but not Saving Working Group or Australian Productivity Commision (ours was knobbled not to offend Nat Lab Green).
    F is for Free lunch as in someone has to carry the can for new infrastructure in all these low developer fee places being skited about.

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  15. Kimbo (913 comments) says:

    “Gee – wonder why NZ Initiative changed their name from the NZ Business Roundtable?”

    Umm, for the same reason you are called publicwatchdog, and not Marxist traitor?

    Just saying…

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  16. hj (6,918 comments) says:

    L is for lobbying of Government by the construction sector (who have grown enormously since 2004, but suffer from boom and bust). They require immigration to survive.
    P is for political party patronage. N is for National.

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  17. hj (6,918 comments) says:

    U is for Usefull fool: Keith Locke, Professor Spoonley, Chris Trotter etc

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  18. Fentex (937 comments) says:

    People who think New Zealanders ignorant of economics and who seem to think reading Adam Smith would cure them of it might wish to reconsider if they are also people who promote laissez-faire concepts of diminished government and non-regulated commerce for Adam Smith is much misrepresented on the matter.

    Take for instance the topical issue of government ownership of large enterprises such as power generators. Those who suppose reading Adam Smith would engender support for government’s disinvestment may be surprised.

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  19. tom hunter (4,732 comments) says:

    It’s a nice idea and I wish them well, but I doubt it’s going to work when you consider his most famous quote:

    Smith’s critical insight was that competition harnesses self-interest for the greater good of society. “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 self-interest.” It is as if ‘an invisible hand’ led people to do not just what is good for them but for their neighbours as well.

    That is one of the core aspects of capitalism and yet I guarantee you that the vast majority of leftists (99% perhaps) absolutely do not accept it at all, with much sneering about “the invisible hand ….. of God” and such like.

    The core of that non-acceptance has nothing to do with economics but with philosophy. In this case, with the inherent human preference that rates selflessness above selfishness, and the confusion of selfishness with self-interest – in the case of the Left a deliberate confusion since it is so useful to Leftism.

    The left firmly believe that only self-sacrifice can lead to good things for one’s neighbour, that only self-sacrifice can lead to useful cooperation, and that self-interest will produce the exact opposite result.

    In the face of that desire, what chance has economics education got?

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  20. hj (6,918 comments) says:

    I think Adam Smith lived in a different age. If he were here today he might factor in limits to growth.

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  21. alwyn (417 comments) says:

    @hj.
    Adam Smith lived from 1723-1790. His life overlapped that of Thomas Malthus (1766-1790) who was very concerned with “limits to growth”.
    Unfortunately for the polemicists, and happily for the rest of us, they never happened. It is unclear what Malthus thought was the limit on the population that the earth could support but he did appear to think that the limit would soon be reached. Of course over 200 years have gone past since he published his predictions and we haven’t had the disastrous famines he predicted.

    In that regard Malthus was no different to Paul Ehrlich who predicted in 1968 (in “The Population Bomb”) that there would be massive starvation in the 1970s and 1980s because of over-population.
    It is always a shame when the Green Party and its companions makes predictions of this nature and claim they will happen in a few decades. You should always make such predictions as happening at least a century ahead. The you will be dead before your foolishness is exposed.

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  22. CharlieBrown (1,002 comments) says:

    gravedodger – The most I can do is try to teach those around me about economics and why the NP, LP, GP and NZF all have policies that ultimately are often about self interest without the side effect of being altruistic. Those parties all want to improve their lot by literally taking via taxation, bribing voters with the proceeds of theft from others.

    I would love to get into politics and do more but I have a family that comes first and the damage that going into politics could do to them is too much a risk.

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  23. OneTrack (3,020 comments) says:

    “You should always make such predictions as happening at least a century ahead.”

    They seem to have learned the lesson with Climate Change ™.

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  24. hj (6,918 comments) says:

    @ alwyn being wrong on timing is one thing but being wrong on fact is another. People get their timing wrong, after all weren’t we going to be taking intergalatic travel in 2001?

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