Adam Smith's Influence to Classical Economy in 19's Century

Adam Smith was a key figure during the 18th and early 19th centuries Scottish enlightenment. He was an economist who pioneered the initial foundations of a classical political economy, a moral philosopher, as well as an esteemed author who produced two renowned works in The Theory of Moral Sentiments and his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations , these were considered critiques of the political-economic system most common at the time known as mercantilism. This political theory, when practiced, relied heavily on state intervention when accumulating sparse resources at the expense of other countries, through methods such as imperialism. Although his ideas in these books weren’t without criticisms from academics such as David Ricardo and Karl Marx, his influence shouldn’t be understated. This essay will aim to discuss the most important contributions made by Adam Smith to classical political economy, as well as discussing why his subsequent influence has been so large. This will be done by examining the ideas he presented in the two books mentioned, whilst then analysing why the influence of these ideas became so large. These ideas include some of his revolutionary economic theories such as; the invisible hand, the labour theory of value, the division of labour, as well as the role of the state in an economy among many others. Classical political economy is an economic school of thought which developed in the late 18th and early 19th century, predominantly in Britain. The main premise being to attempt to understand society in terms of its economic base. “A branch of science of statesmen, aimed at providing its citizen with plentiful revenue or subsistence and sufficient revenue for state for public service. It proposed to enrich both the people and sovereign.” This was Adam Smith’s description of classical political economy from his book the Wealth of Nations , and for many, is considered as the origin of it, a clear example of how Adam Smith has influenced this theory. One of the main points Smith makes in his book is that he believes our society should be based on a market which consists of three main features of production, these being; capital, land and labour. When these features of production are implemented, they will create three main classes within our society; capital owners, landowners, and labourers. These classes will independently collect income, regardless of each of the other classes, the main theory being that each class would benefit from the range of the market being increased, however, a complication would occur if the free-market was to be disrupted in any way. It was important for there to be no disruption of the free-market because of, arguably one of Smiths most prominent ideas, the ‘Invisible Hand’. This concept is still contested between economists as to how to interpret what Smith meant by it, but the consensus is that he is referring to a metaphor to describe how sparse resources are issued in a free-market. For a market to be described as free, there needs to be no government intervention, this would allow for market prices to be dictated by the relationship between supply and demand. The buyers and sellers involved in this process would be acting in solely in their own self-interest, Smith claimed. Smith also stated that, suppliers are able to select freely the goods they supply, as well as determine the cost and quantity of these goods, whilst the consumers are free to decide where they purchase their goods from, this would only be possible if there was an absence of government intervention. This concept is hugely influential to this day and is considered to be one of the cornerstones of capitalism, it was also an extremely important contribution to the classical political economy because it was in direct opposition to the main economic theory at the time, mercantilism, which relied heavily on government intervention, an example being tariffs on imports. However, this isn’t to say Smith believed that no government intervention at all was the most ideal theory. 

Smith was a supporter of progressive income taxes, and specifically named a luxury-goods tax as well as a tax on rent among other things. Smith presumed that this theory would primarily be an advantage for the consumers, considering they would be purchasing goods in their own self-interest, choosing from the cheapest suppliers. As a result, this would cause for suppliers to introduce competitive prices, this is a means of acquiring the largest number of customers to expand their profit margin; a result of functioning in their own self-interest. In order to gain these customers, suppliers would need to be efficient with their resources in order to have these competitive and cheap prices, if they were to be inefficient, their prices would not be able to compete, and as a result they would lose their position in the market, thus, going out of business. This is a hugely influential idea, and was a revelation at the time, examples of it can still be seen in our modern economy, such as the company Toys ‘R’ Us filing for bankruptcy in September 2017. This was due to the company being unable to compete with the rise of big box retailers such as Walmart, and the eventual challenge of online retailers like Amazon, both these companies introduced more competitive prices which Toys ‘R’ Us could not match due to them being less efficient. In order for suppliers to compete they will need to be more efficient with their resources, also ensuring that the consumers are receiving their products at the highest quality, and/or most competitive price. The supplier which is most efficient in meeting these demands and maximises their utility will enjoy the largest profit margin. Smith expressed that, individuals which maximised their utility would result in a growth of the societies utility, as well as the free-market being the superior way of distributing sparse resources. These theories of the free-market and the ‘Invisible Hand’ are some of Smiths greatest contributions to classical political economy. The influence of them can be seen most accurately through the current economic structure of the United States of America, that is based primarily around these concepts which lay the foundation for capitalism and is the most accurate representation of it in the present day. However, it is debatable whether this is the most effective and successful method of distributing resources or reducing prices. Another important contribution made by Smith in the Wealth of Nations , was his theory on the division of labour. This massively influential idea applies to the division of separate sections of a production line, in relation to the worker’s equipment and/ or skill. Smith firmly believed that if you applied this theory to a production process, it would greatly benefit from it by resulting in a more effective use of sparse materials, also reducing the price of manufacturing. In addition, Smith believed that this theory would immensely increase the number of products a supplier and/or worker could generate. Workers would now be extremely proficient and specialised in a certain skill; the downtime during the switching of a production process would be greatly reduced, and workers would begin to innovate and invent new machines which would greatly increase the efficiency of their work, enabling them to complete tasks which would usually take more than one worker to complete. All these debatable improvements were due to Smiths theory, the division of labour. 

Reducing the number of tasks that a worker is assigned during a production process, makes them more specialised in a certain area, greatly increasing their proficiency and performance. This is due to the worker never having to change task, resulting in more time being dedicated to a certain area in the production process. However, the idea of a production line makes it easier for suppliers to rely on machinery rather than workers, due to the machinery only needing to do one task, this is far more efficient than employing human workers. Not only are they quicker, they also reduce the cost of production; the fewer workers you have, the fewer wages there are to pay. This idea was adopted by factory owners during the 18th century and became hugely important to their production lines during the industrial revolution. This theory was a huge contribution to classical political economics and can still be seen in more modern economic schools of thought. Another huge contribution made by Smith was the idea we now know as gross domestic production (GDP). Through the theories he presented in the Wealth of Nations , Smith changed the way a countries wealth was judged. Previously, a countries’ wealth would be based on the amount of valuable assets they owned; gold and silver. Smith was highly critical of this mercantilist approach, he believed that a country should be judged on their levels of production and commerce . This base idea was so influential that it is now the metric of which we judge a countries’ prosperity, in modern day economics. This measurement was introduced due to free trade becoming more popular, Smith believed that if countries were to be importing and exporting on a market free from government intervention, the value of these countries needed to be judged accordingly. Smith’s influence became so large due to the contributions he made to classical political economics, his theories became the foundation for many other economic thinkers, and influenced the likes of John Maynard Keynes, Karl Marx, Friedrich Hayek and David Ricardo. These theories were so influential because they were suited to an industrialised world. With the advancements of technology that came with the industrial revolution, travelling and transporting goods became far easier, and were appropriate for economic policies which encouraged free trade, rather than the mercantilist approach of seizing and hoarding valuable assets, which was more pertinent during the previous era of imperialism. As previously stated, Smith’s influence became so substantial because his theories were well suited to the industrialised world, as discussed, his division of labour theory was adopted by factory owners during the period. This theory is still prominent during our modern economic climate as, again, it is extremely applicable to the advancement in technology, a prime example of it being the motorcar industry. This industry is nearly completely automated, production lines allow for the cars to be assembled quickly and efficiently by specialised machines only tasked with one function. 

In conclusion, some of the most important contributions that Smith made to classical political economics, which we have discussed, were the division of labour, the introduction of a new measurement when judging a countries’ prosperity, as well as the introduction of a free market based on the theory of the ‘Invisible Hand’. These laissez-faire ideas were so important because they laid the foundation for modern day capitalism, and were suited to the rapid expansion of production associated with the industrial revolution. His subsequent influence became so large because of how applicable his ideas were, not only to the industrialised era, but also in a modern-day economy. Some would argue that these ideas were part of the reason that countries were able to industrialise so rapidly, the division of labour made it far simpler to produce a large quantity of goods, more efficiently and at much less of an expense. As stated, the influence of this idea can still be seen, factories across the globe have adopted production lines in order to produce goods more efficiently. Arguably, his most important theories, the free market and the “Invisible Hand”, was so influential because it became the backbone for capitalist ideas. However, as previously stated Smiths ideas did not involve zero government intervention, such as his belief in a luxury-goods tax, he just believed in minimal intervention. The current world economy is based on these initial ideas that countries and their people should be able to trade with each other with minimal intervention from their governments, and will reap the benefits of it. This idea is suited to a society which is able to travel around the globe with ease and is why the influence of Smith is still being felt. Although as economic thinking developed, Smith’s theories were met with critics, however, at the time his thinking was revolutionary, and, as discussed, is arguably one of the main causes of success for the industrial revolution.