3 - Adam SmithThe Case for Laissez-Faire in Money and Banking

Summary

Introduction

Adam Smith’s (1723–1790) contributions to the rise of classical economics are well known. Many consider the publication of The Wealth of Nations in 1776 to have established Smith as the founding father of the hegemonic analytical approach to the study of political economy for many years. Smith knew David Hume, who was twelve years younger than Smith; the two Scottish philosophers exchanged views on various subjects, including money, banking, and credit. Hume’s and Smith’s philosophical agreements and differences, including their mutual debts and association with Francis Hutcheson, the great Scottish enlightenment philosopher, are well recorded. As we shall see, the monetary theories of Smith and Hume, though similar in some respects, are not identical; there is enough room for interpretation to allow the secondary literature to debate their actual positions on important aspects of their theories to this day.

In the famous discussion of the “division of labor” in Book I of Inquiry into the Nature and Causes of the Wealth of Nations (as the full title runs), Adam Smith addressed money for the first time. The division of labor was at the heart of the theoretical conceptualization that Smith used in the book to explain the real growth phenomena that we know by now had changed the world. The inquiry into the theory of growth, as moderns would have called it, led Smith to conclude that “[t]he division of labour, however, so far as it can be introduced, occasions, in every art, a proportionable increase of the productive powers of labour” (p. 9).