dam Smith is widely recognized as the founding father of economics. However, he didn’t create such knowledge out of nothing. The English words “economy” and “economics” can be traced back to the Greek word “οἰκονόμος” (that is, “household management”). This is the reason why the “Economics” — a work ascribed to the Greek philosopher Aristotle — deals with how to run a household. Roughly two thousand years later, Adam Smith published a book called The Wealth of Nations; a book that changed everything. To understand why Smith’s thought was that revolutionary, it is fundamental to know what was the role of economics among the other branches of knowledge before The Wealth of Nations publication in 1776. Clearly, Aristotle’s ideas had already been abandoned a long time before.
Since the Sixteenth Century, Mercantilism had been the dominant school of thought among economists. The mercantilistic perspective viewed economy, which was already under governmental control, as a means at the disposal of the political power for the territorial unification of the State. At that time, thus, an economic theory was perceived as a set of proposals aimed at guiding the sovereigns in the daily administration of their State to prevent them from abusing their power.
The first revolutionary idea
Smith challenged this idea by addressing several economic issues without taking into account the government’s involvement in their resolution. The first revolutionary idea of the Scottish philosopher is exactly this. He detached from politics and ethics, thus enhancing the independency of economics as a science.
In other words, before Adam Smith, the issue of economic policy was typically framed in a moral form, in terms of the benevolence of the king towards the citizens. This conception of economics relied on a fundamental assumption according to which the effect of an economic policy depends on the intentions of the policy-maker. Smith challenged this assumption. He introduced the idea that — sometimes — even though we have very good intentions, our policies might lead to negative outcomes. Economics, thus, should not depend on the intentions of the policy-maker.
The second revolutionary idea
According to Smith, when something bad happens, people instinctively think either that it is someone’s fault or that someone caused it to benefit from it. Of course, sometimes this happens, but most times there are no responsibilities. The same reasoning can be applied to economics, and, in particular, to an economic disaster. Things may also happen when nobody wants them.
Smith is remembered for having identified a mechanism called the “mechanism of the invisible hand”. This kind of mechanism turns an individual’s self-interest into positive social consequences. In The Wealth of Nations, Smith made a useful example. Consider a merchant who is interested just in his gain. Even though the merchant is not interested in the good of society, in the end — by pursuing his interest — he promotes it as well. According to Smith, we don’t need to be unselfish to do something good, we can also be selfish. The invisible hand turns the self-interest into something that benefits a whole society.
The idea of the invisible hand was particularly shocking, as Smith proposed it in a context where the Christian morality prevailed. However, this idea helped Smith to separate economics from ethics. This very idea is still challenged nowadays, as lots of people want more morality and ethics in both politics and economics.
History, Politics & Economics – A place for uncomfortable truths.