Historical Economics: Names and Concepts You Should Know Adam Smith

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Historical Economics: Names and Concepts You Should Know

Adam Smith

As with any other field of study, economics has had a history, and there are books that attempt to trace the trail of economic thought back to its origins. Although the trail can be traced back to the ancient Greeks, it is a difficult trail to follow prior to 1776. In 1776, Adam Smith published The Wealth of Nations, a book that was clearly about economics and that inspired a large number of books, pamphlets, and articles in the next fifty years. Before this book most ideas about economics were scattered in writings that were mostly about politics or ethics or philosophy, not in books that were clearly about economics. Yet if one looks at the topics and theories that modern economics textbooks contain and compares them to those things Smith discussed, one is struck by how little of contemporary economics comes directly from Smith. What does come from Smith is a concern about and an interest in unintended consequences.

The most famous term in The Wealth of Nations is "invisible hand." Smith used this term only once, in the following quotation: "...[B]y directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it."

Another quotation makes clearer what unintended consequences the invisible hand leads to:"Every individual is continually exerting himself to find out the most advantageous employment of whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to society."

Smith was not sophisticated in the level of economic theory that he used. He did not understand concepts that are considered basic today, such as the model of supply and demand. (Alfred Marshall developed the modern treatment of supply and demand a century after Smith.) In his comprehensive survey of economic theory, Joseph Schumpeter dismisses Smith as a theorist, saying, "The fact is that The Wealth of Nations does not contain a single analytic idea, principle, or method that was entirely new in 1776."  

Although the idea that there could be systematic unintended consequences was "in the air" at the end of the eighteenth century, no one articulated it as well as Smith did. Because he expressed so well the idea that these unintended consequences are of vital importance for understanding how a society works, Smith has often been called "the father of economics." His book is concerned with a question that has interested economists for two hundred years: Under what conditions are actions based on self-interest beneficial to society? Much of economic theory has been developed and improved in an effort to get better answers to this question.  

The two most influential economists in the generation after Adam Smith were David Ricardo and Thomas Malthus. Although they disagreed about many things, they were in general agreement about the topic of population growth, and it was for his writings on this topic that Malthus is best known. Malthus believed that there was a tendency for human populations to grow more rapidly than the food supply could be increased. Land was fixed in amount, and more food could be produced either by tilling it more intensively or by adding less-productive land to tillage. In either case an extra hour of labor brought less than an average return of food. The implication of these two different growth rates is clear--eventually a segment of the population would face starvation, and this would cut the growth rate of population.  

Malthus' argument on population is weighty with possible unintended consequences. Suppose that society aids its most needy members by giving them food. As a result, they can survive and reproduce. Helping the poor would, according to Malthus' argument, increase population and in the future lead to even larger numbers on the verge of starvation. Hence, charity would be self-defeating. All attempts to improve society seem doomed to failure, according to a strict reading of the Malthusian argument, a truly "dismal" conclusion. 

However, Malthus and Ricardo were wrong when they applied this argument to human populations. The predictions they made did not occur. They underestimated both the capability of technology to improve crop yields and the future of birth rates. As it became apparent that they were wrong, economists lost their interest in the study of population. It seemed not to have the unintended consequences for them to explore. Since that time, economists have occasionally developed other clever theories with intriguing possibilities of unintended consequences, only to find that they too were in conflict with real-world experience. The reader should bear this in mind as he learns what contemporary economists believe. There is a possibility that today's secure truth may be tomorrow's embarrassing mistake.
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