Adam Smith and the classical school: how did a book of 1776 turn economics into a science?

How many pins can one person make in a day? Starting from this simple question, the Scottish philosopher Adam Smith laid the foundation of an entire science.

In 1776 his book "An Inquiry into the Nature and Causes of the Wealth of Nations" came out. Britannica calls it a foundational work in the history of economics and the first complete system of political economy.

What did the pin factory prove?

Smith's most famous example is the pin factory. Making a pin consists of about eighteen separate operations: drawing out the wire, straightening it, cutting it, sharpening the point and so on. If one person does them all alone, very few pins are produced a day. If each worker specialises in one or two operations, ten people together, by Smith's reckoning, make more than forty-eight thousand pins a day.

This is the division of labour. Smith had an important addition: specialisation is limited by the extent of the market. If the market for pins is small, there is no point in opening a ten-person workshop.

A present-day example (prepared by the author, hypothetical). At the "Lazzat" samsa bakery one cook kneaded the dough, prepared the minced meat, shaped the samsas and put them in the tandoor: 200 samsas a day. The work was split among three people: one on the dough, one on the filling and shaping, one at the tandoor. Now it is 900 a day. But only 400 samsas a day are sold in the neighbourhood. As Smith said, if the market is small, the full benefit of specialisation is not obtained: the bakery needs to add a delivery service and expand its market.

What did the "invisible hand" and the classical school say?

In Smith's view, even if everyone works in their own interest, in a market with competition this can benefit society as a whole. As Britannica explains, the "invisible hand" is not a mysterious force but a mechanism through which competition brings prices close to their natural level. The book's main target was the "mercantile system", which supported monopolies.

The classical school took shape in Smith's footsteps. One of its leading figures, David Ricardo, published "On the Principles of Political Economy and Taxation" in 1817. It sets out the idea of comparative advantage: even if a country (or a person) does everything better than others, it is more beneficial to specialise in the work in which it is relatively most efficient and to obtain the rest through exchange.

An example of comparative advantage (prepared by the author, hypothetical). In one hour Nodira, an accountant, prepares 4 reports or types up 6 documents. Her assistant Bekzod does 1 report or 3 documents in an hour. Nodira is faster at both tasks. But for Nodira 1 report "costs" 1.5 documents, while for Bekzod it costs 3 documents. So it benefits both of them if Nodira does the reports and Bekzod types the documents.

Then and now: how are the classical ideas living on?

The classical economists showed great faith in the market. The great crisis of the 20th century put this faith to the test and gave rise to a new question: what should be done if the market does not recover on its own?