Reading: Adam Smith: The Influence of John Locke and the Birth of Modern Economics

Adam Smith: The Influence of John Locke and the Birth of Modern Economics

Introduction: Adam Smith, the Father of Economics

Adam Smith (1723–1790) is widely regarded as the father of modern economics. His seminal work, The Wealth of Nations (1776), laid the foundation for classical economics and introduced concepts such as the division of labor, free markets, and the "invisible hand" of competition. Smith's economic theories have had a profound and lasting impact on economic thought, influencing both policy and practice to this day.

But Smith did not develop his ideas in isolation. He was deeply influenced by the Enlightenment thinkers who came before him, particularly the British empiricist philosopher John Locke (1632–1704). Locke’s ideas about individual rights, private property, and the role of government were foundational to Smith’s economic philosophy. In this reading, we will explore how Locke's influence on Smith helped shape modern economic theory and how this intellectual lineage spilled over into the development of economics as a distinct field of study.

John Locke’s Influence on Adam Smith

Locke’s Concept of Natural Rights and Property

One of John Locke’s most influential contributions to political philosophy was his theory of natural rights, particularly his emphasis on life, liberty, and property. In Two Treatises of Government, Locke argued that individuals have a natural right to property, which is derived from their labor. He famously wrote that:

"Every man has a property in his own person. This nobody has any right to but himself. The labor of his body, and the work of his hands, we may say, are properly his."
(Second Treatise of Government, Chapter V)

This idea—that property arises from labor and that individuals have a right to the fruits of their labor—was revolutionary. It provided the intellectual groundwork for later economic thought, particularly in how societies understand the ownership of goods and services. Locke’s notion of property being fundamental to human freedom and self-determination became a cornerstone of liberal political theory, and it was in this context that Adam Smith found inspiration.

The Role of Government: Locke’s Social Contract

Locke’s vision of the role of government was also instrumental in shaping Smith’s ideas. Locke argued that governments are created through a social contract in which individuals agree to form a political society in order to protect their natural rights, particularly property rights. According to Locke, the primary role of government is to protect these rights and to ensure that individuals can pursue their interests without interference. He emphasized that the government’s power must be limited, and that its primary purpose is to protect life, liberty, and property:

"The great and chief end... of men uniting into commonwealths, and putting themselves under government, is the preservation of their property."
(Second Treatise of Government, Chapter IX)

This limited view of government’s role in protecting property and enforcing contracts laid the groundwork for Smith’s later ideas about the importance of limited government intervention in economic affairs. Locke’s political philosophy, with its emphasis on individual liberty and property rights, helped create the intellectual environment in which Smith’s economic theories could flourish.

Adam Smith’s Economic Philosophy: Locke’s Legacy in Action

Private Property and the Division of Labor

In The Wealth of Nations, Smith builds on Locke’s ideas about property by discussing the economic importance of private ownership and the division of labor. For Smith, private property is not only a natural right but also a key driver of economic productivity. He argued that when individuals are free to own property and pursue their own economic interests, they naturally seek ways to increase their wealth and well-being, which leads to the efficient allocation of resources.

One of Smith’s most important contributions to economic thought was his analysis of the division of labor. He observed that when tasks are divided among individuals, each person can specialize in a specific part of the production process, leading to greater efficiency and productivity. Smith famously illustrated this with his example of a pin factory, where the division of labor allowed workers to produce far more pins than if each person attempted to make an entire pin on their own.

The division of labor, according to Smith, is made possible by private property and the ability of individuals to exchange goods and services freely. This aligns with Locke’s notion that property is essential to human flourishing. For both Locke and Smith, the protection of private property was fundamental to creating the conditions for economic prosperity.

The Invisible Hand: Locke’s Natural Law in Economics

Smith’s concept of the invisible hand is one of his most famous contributions to economics. He argued that when individuals pursue their own self-interest in a competitive market, they unintentionally contribute to the overall good of society. This happens because market forces—guided by what Smith called the "invisible hand"—align individual self-interest with social welfare. Smith wrote:

"Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... 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."
(The Wealth of Nations, Book IV, Chapter II)

This idea can be seen as an economic application of Locke’s natural law theory. For Locke, the natural law of reason governed human behavior, ensuring that individuals acted in ways that preserved their own rights and the rights of others. In a similar way, Smith’s invisible hand suggests that individuals, by following their own economic interests within the framework of private property and free exchange, will naturally promote the public good. The market itself becomes a mechanism of social coordination, allowing people to interact freely without the need for heavy government intervention.

Limited Government and Laissez-Faire Economics

Smith was also heavily influenced by Locke’s view that the role of government should be limited to protecting property, enforcing contracts, and ensuring national defense. In The Wealth of Nations, Smith advocated for a system of laissez-faire economics, where the government refrains from interfering in the economy except to provide the basic functions necessary for a well-functioning market.

Smith wrote:

"The sovereign has only three duties to attend to... first, the duty of protecting the society from violence and invasion; second, the duty of protecting... every member of the society from the injustice or oppression of every other member of it; and thirdly, the duty of erecting and maintaining certain public works and certain public institutions."
(The Wealth of Nations, Book V, Chapter I)

This minimalist view of government echoes Locke’s idea that the state’s primary function is to safeguard the natural rights of individuals, particularly the right to property. Smith believed that markets function best when left to their own devices, with minimal government interference, and that individuals, guided by their self-interest, would naturally create a prosperous and stable society. Locke’s belief in the social contract and the protection of property is reflected in Smith’s economic emphasis on the importance of free markets and the limitations of government intervention.

The Spillover: How Locke’s Influence Extended to Economics

The intellectual lineage from Locke to Smith represents a shift from political philosophy to economic theory, but the core principles remain consistent. Locke’s emphasis on natural rights, individual liberty, and the protection of property served as the philosophical foundation for Smith’s economic theories. By applying Locke’s ideas to the realm of commerce, Smith was able to develop a coherent system of economic thought that prioritized free markets, the division of labor, and limited government.

Locke’s influence on Smith also reflects a broader Enlightenment shift toward empiricism and reason as the basis for understanding human behavior and society. Just as Locke grounded political rights in natural law and individual experience, Smith grounded economic behavior in observable market dynamics and the natural tendencies of individuals to pursue their self-interest.

The spillover of Locke’s ideas into economics also had significant real-world consequences. Smith’s work laid the intellectual groundwork for the development of capitalism and free-market economies, which became dominant systems in the Western world. The focus on individual liberty, private property, and limited government intervention would come to define modern economic policy and practice, shaping the rise of industrial capitalism and the global market system.

Conclusion: Locke’s Legacy in Smith’s Economics

Adam Smith’s economic philosophy, while distinct from Locke’s political theory, is deeply indebted to Locke’s ideas about natural rights, property, and limited government. By applying Locke’s principles to the realm of economics, Smith was able to articulate a vision of free markets and individual liberty that would revolutionize economic thought.

Locke’s influence on Smith is a testament to the interconnectedness of political and economic theory during the Enlightenment. Both thinkers shared a commitment to individual freedom, private property, and the belief that governments should be limited in their role. In this way, Locke’s philosophical legacy not only shaped modern liberal democracy but also laid the foundation for the development of classical economics, the effects of which continue to resonate in the world today.