This blog post calmly examines whom Adam Smith intended to help through the free market and how his ideas relate to the lives of the poor.
For the 99% of the poor!
In March 1776, ‘An Inquiry into the Nature and Causes of the Wealth of Nations’—often called ‘the most important book since the Bible’—finally appeared in the world. This book is the first modern economic treatise and continues to exert a profound influence on countless economic theorists, scholars, and thinkers to this day. Karl Marx’s ‘labor theory of value,’ which became the foundation of communist theory, was actually first discussed by Adam Smith in ‘An Inquiry into the Nature and Causes of the Wealth of Nations.’ The same holds true for the principle of ‘division of labor,’ the basis of Henry Ford’s conveyor belt system, which was also a fundamental driving force of modern industrial society. ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ was the first book to elucidate the mechanisms underpinning the principles of the capitalist market. This is why Adam Smith is called the ‘father of capitalism’.
However, Adam Smith has also faced considerable misunderstanding over the years. He has been perceived as someone who sided with the wealthy. Yet, Adam Smith actually wrote ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ for the sake of the poor and oppressed. Let’s hear from Aiman Butler, Director of the Adam Smith Institute in the UK.
“Adam Smith stood with the poor and sought to support them. He observed the plight of the impoverished firsthand, studying why they became poor and how they could escape poverty. His advocacy for open markets stemmed from concern for the poor.”
Glasgow, UK, where Adam Smith studied during his university years, was a place with quite active trade at the time. It was a dynamic city, especially trading various goods like tobacco and cotton with America. Let’s hear from Christopher Berry, Professor of Politics at the University of Glasgow.
“It was when Glasgow was beginning to become very economically prosperous. It was the center for tobacco import and export. Glasgow, with its port, was thriving. It was the beginning of an economic renaissance.”
Yet even then, there were the haves and the have-nots. Some labored all day hauling cargo at the docks yet remained trapped in poverty, while their labor generated substantial profits for the upper classes. Observing wealth being produced daily in factories large and small, Adam Smith could feel the power of the free market. He also advocated for consumer interests by opposing monopolistic entrepreneurs and emphasized the importance of labor by defining the division of labor as the driving force behind a nation’s wealth creation. While these ideas may seem obvious from today’s perspective, Adam Smith’s thinking was highly innovative at the time.
The Dawn of Commercial Society
Now, to better understand Adam Smith’s ‘An Inquiry into the Nature and Causes of the Wealth of Nations,’ let’s step back into his era.
Born in Kirkcaldy, Fife, Scotland, in 1723, Adam Smith attended Kirkcaldy’s Burgh School, one of Scotland’s finest elementary schools at the time. His father, a lawyer and civil servant, wanted to provide his son with the best education possible. Adam Smith entered the University of Glasgow at age 14, studying mainly moral philosophy. In 1740, he received a scholarship to Balliol College, Oxford, but became disillusioned by the professors and left. After that, he gained significant popularity through public lectures and gradually refined his ideas by meeting intellectuals from various fields.
Returning to the University of Glasgow in the late 1750s, he became a renowned professor of moral philosophy. Though famous for his peculiar gait and speech, his lectures were immensely popular with students. He lived his entire life unmarried with his mother and is said to have had a relatively shy personality.
The first point where Adam Smith’s ideas began was precisely about ‘human nature and behavior’. Having steadily researched this field over time, he compiled his findings into a book titled ‘The Theory of Moral Sentiments’. This book posed a very fundamental question.
‘Humans are selfish beings. So how can humans suppress their selfishness and make moral judgments?’
Adam Smith fundamentally believed that humans are social beings and, as such, must act morally. He argued that this is possible because there exists within our minds a ‘fair and impartial spectator’ who observes our actions. This spectator effectively regulates our selfishness, guiding us toward moral behavior. This claim sparked widespread interest among many people at the time, and Adam Smith became famous almost overnight. And that fame brought him a very special stroke of luck.
The Duke of Charles Townsend, a British politician, asked him to accompany his adopted son, Henry Scott, on a continental tour and serve as his tutor. This was one of the popular methods of educating children among aristocratic families at the time. Adam Smith had no reason to refuse, as he could travel and receive financial support. Thus began his three-year journey through Toulouse, southern France, Mont Blanc, Geneva, and Paris. During this trip, he met prominent thinkers who greatly inspired him. Director Eamon Butler described the situation at the time:
“Encounters and exchanges with thinkers of the time profoundly influenced Adam Smith. While traveling through Europe with the young duke, he began taking notes—which essentially marked the beginning of ‘An Inquiry into the Nature and Causes of the Wealth of Nations’.”
People who influenced ‘An Inquiry into the Nature and Causes of the Wealth of Nations’!
The 18th century, when Adam Smith was traveling, can be described in a word as an ‘era of change’. It was a time when the feudal order was crumbling and modern capitalism was just beginning. In Britain, the Industrial Revolution had started, leading to an explosive increase in manufactured goods and the flourishing of free trade. During this period, mercantilist thought, which viewed a nation’s wealth as the accumulation of gold and silver, was dominant. Yet it was precisely this mercantilism that most angered Adam Smith. Governments at the time claimed that the path to becoming wealthy lay in holding large quantities of gold and silver, and that this was the standard for a nation’s wealth. However, during his travels in France, Adam Smith encountered François Quesnay, a French economist, physician, and physiocrat, from whom he gained a truly groundbreaking idea.
Quesnay, originally Louis XV’s personal physician, was also famous for his ‘Economic Table,’ which schematically illustrated economic processes. Drawing on his medical experience, he viewed society as a single body and studied the conditions necessary for its health. He believed that just as individuals need food to survive, so does society. He believed society would grow only when people labored to produce food and raw materials, create goods, and distribute them. Furthermore, he saw society as composed of three classes: peasants (the productive class), artisans or merchants (the non-productive class), and owners (the owning class). Money, he thought, circulated between these three classes, supplying products—much like blood in our bodies. Quesnay also believed that ‘land’ alone was the source of wealth.
Quesnay’s ideas greatly inspired Adam Smith. While Smith did not fully agree with Quesnay’s theories, his methodology provided Smith with considerable food for thought. Particularly, Smith found another source of ideas in Quesnay’s opposition to the traditional mercantilist claim that ‘a nation’s wealth lies in the accumulation of gold and silver’. As a result, Adam Smith resolved to formulate a new definition of national wealth and to study methods for increasing it.
After his three-year journey concluded, Smith returned to his home in Kirkcaldy and began writing ‘An Inquiry into the Nature and Causes of the Wealth of Nations,’ drawing upon the experiences and knowledge gained during his travels. During this time, frequent exchanges with the British philosopher David Hume provided Smith with further assistance. Hume pursued a highly empirical philosophy, believing that understanding phenomena required observing real objects rather than relying on abstract ideas. It was precisely this attitude that influenced Smith, enabling him to witness the production of wealth and the system of free competition unfolding before his eyes and to grasp its inherent value. Furthermore, Smith maintained ongoing gatherings not only with Hume but also with other leading scholars of the era. He interacted with chemist Joseph Black and geologist James Hutton.
A Fully Free Market System
As a result, Smith newly defined ‘national wealth’ as ‘the quantity of necessities and conveniences consumed by all the people in a year’. This crystallized the idea that ‘wherever labor is performed, wealth can be produced’. Furthermore, since all value arises from labor, he argued that the exchange value of a commodity should be determined by the amount of labor expended in its production. This was an entirely new idea, distinct from both the physiocracy and mercantilism of the time.
Many people have heard the phrase, “An invisible hand guides our economy.” What does this famous ‘invisible hand’ signify?
Smith argued that we can eat bread not because of the baker’s benevolence, but because of his self-interest in making money. He believed that the accumulation of such self-interests drives the economy. In other words, there is an invisible hand determining prices that keeps the market economy functioning smoothly. He asserted that only such a free market could enrich both individuals and the nation. This ‘invisible hand’ appears only once in ‘An Inquiry into the Nature and Causes of the Wealth of Nations’. Yet, with this single sentence, Smith described the ideal world he envisioned: a ‘perfect free market system’.
The first edition of ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ sold out all 1,000 copies within six months. This was not only an astonishing record for the time but also earned Adam Smith the honor of being called ‘the greatest thinker of his age.’ But that’s not all that’s remarkable. The first chapter of ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ reveals many concepts we use in modern economics. Let’s continue listening to Director Aiman Butler’s story.
“‘An Inquiry into the Nature and Causes of the Wealth of Nations’ is truly as important a book as Darwin’s ‘On the Origin of Species’ or Newton’s ‘Philosophiæ Naturalis Principia Mathematica’. It laid the foundations of modern economics. The division of labor, gross national product, the importance of trade and openness, and the problems of trade barriers have become standard economics textbooks over the past decades.”
Therefore, Adam Smith’s ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ is not an ‘outdated classic’. It is the foundational framework that first explained the free market system and remains the most accurate masterpiece explaining how capitalism operates today. However, after ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ was published, people who disliked government intervention or regulation began to constantly invoke his theories. They argued that government intervention or regulation should be eliminated, citing the ‘invisible hand’. This is precisely where the misunderstanding of Adam Smith began. Many people mistakenly perceived Adam Smith as ‘on the side of the wealthy rich.’ This was because he advocated free trade, opposed big government, and supported the free market economic system. These points made it possible, depending on one’s perspective, to interpret Smith as ‘on the side of the rich.’
The most misunderstood aspect is precisely the notion of ‘the free pursuit of individual self-interest.’ However, Smith did not endorse the unlimited pursuit of profit by the wealthy. He drew a line, stating that ‘economic self-interest is permitted only within the moral bounds of society.’ Adam Smith never condoned endless human selfishness. Instead, he confined everything within the ‘framework of human behavioral norms.’ This ultimately means that both the rich and the poor can pursue wealth equally within that framework. This aligns precisely with his earlier arguments in ‘The Theory of Moral Sentiments’. This is according to Gavin Kennedy, Professor of Business at the University of Edinburgh.
“You can’t understand it by reading just one of the two books. The theories from ‘The Theory of Moral Sentiments’ reappear in ‘An Inquiry into the Nature and Causes of the Wealth of Nations’. He feels compassion for the poor. He sharply criticized laws preventing the poor from joining labor unions. But employers could exploit that. He also voiced dissatisfaction with workers’ conditions. ‘A commercial society is the answer. Make them work,’ he said. Give them jobs because there was no work. Work brings income, allowing them to support their families. Infant mortality rates were extremely high at the time.
A woman in ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ bore 19 children, only two of whom survived. He had a particular interest in such matters.”
Smith, who felt great compassion for the poor, believed the best way to help them was through a free market economy, which he strongly advocated.
He also believed that while humans are self-interested, the respect and consideration we hold for one another in our hearts can transform that self-interest into actions that serve the public good. He never once used the word ‘capitalism,’ but his ideal can be summarized as ‘a completely free market system within the bounds of human morality.’
A world where everyone prospers!
The free market economy Adam Smith believed in made a significant contribution to creating wealth, but it proved powerless to ensure its ideal distribution. As a result, the poor grew poorer, and the rich grew richer. If he were alive today, how would he react to current inequality and the global economic crisis? This is Director Aiman Butler’s perspective.
“He would be very surprised. He would likely be somewhat disappointed, especially regarding countries like the United States and the United Kingdom. There are so many people who are relatively poor compared to the wealthy. There’s a famous line in Adam Smith’s writing: ‘A nation cannot be said to be rich when the majority of its people live in poverty and misery.’”
In fact, the original title of ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ is not ‘Wealth of Nation’. It includes the plural form ‘Nations’. This signifies that the book studies how all nations and all people can prosper together, not just a specific country or its citizens. The world he envisioned was not one where the greed and corruption of the 1% caused suffering for the remaining 99%, but a world where everyone thrives together.
