Adam Smith was a 18th-century philosopher renowned as the father of modern economics, and a major proponent of laissez-faire economic policies. In his first book, "The Theory of Moral Sentiments," Smith proposed the idea of the invisible hand—the tendency of free markets to regulate themselves by means of competition, supply and demand, and self-interest. Smith is also known for his theory of compensating wage differentials, meaning that dangerous or undesirable jobs tend to pay higher wages to attract workers to these positions, but he is most famous for his 1776 book: "An Inquiry into the Nature and Causes of the Wealth of Nations." Read on to learn about how this Scottish philosopher argued against mercantilism to become the father of modern free trade and the creator of the concept now known as GDP.

Early Life

The recorded history of Smith's life begins on June 5, 1723, at his baptism in Scotland; however, his exact birthdate is undocumented. Smith attended the University of Glasgow at age 14, later attending the prestigious Balliol College at Oxford University. He spent years teaching and tutoring, publishing some of his lectures in his 1759 book, "The Theory of Moral Sentiments." The material was well-received and laid the foundation for the publication of "An Inquiry Into the Nature and Causes of the Wealth of Nations," (1776), which would ultimately cement his place in history.

The Theory of Moral Sentiments

Smith is most famous for his 1776-piece, "The Wealth of Nations," but his first major treatise, "The Theory of Moral Sentiments," released in 1759 created many ideas still practiced today.

Some may be surprised to learn that in this book, Smith, notoriously known as the “Father of Capitalism,” discusses charity and human ethics extensively in this first book. While much of the philosophy behind Smith's work is based on self-interest and maximizing return, "The Theory of Moral Sentiments," was a treatise about how human communication relies on sympathy. The book extensively explored ideas such as morality and human sympathy. In the book, Smith argued that people are self-interested but naturally like to help others.

While this may seem to be at odds with his economic views of individuals working to better themselves with no regard for the common good, the idea of an invisible hand that helps everyone through the labor of self-centered individuals offsets this seeming contradiction.

Adam Smith Creates the Concept of GDP

Ultimately though the ideas presented in "The Wealth of Nations," Smith changed the import/export business, created the concept of what is now known as gross domestic product (GDP) and argued for free exchange.

Before the release of "The Wealth of Nations," countries declared their wealth based on the value of their gold and silver deposits. However, Smith’s work was highly critical of mercantilism; he argued that instead countries should be evaluated based on their levels of production and commerce. This sentiment created the basis for measuring nation’s prosperity based on a metric called GDP.

Before Smith’s book, countries were hesitant to trade with other countries, unless it benefited them. However, Smith argued that a free exchange should be created, as both sides trading become better off. This led to the increase in imports and exports and countries judging their value accordingly. Smith also argued for a limited government. He wanted to see a hands-off government and legislation conducive an open and free market. Smith did see the government responsible for some sectors, however, including education and defense.

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