The development of ideas over the long term
The literature on the history of Scottish economic thought is dominated by attention to the work of Adam Smith (see Ross, 1995 for a biography). Yet Smith was influenced by a range of others, from his precursors Carmichael and Hutcheson to his contemporaries such as Hume and Anderson.
Further, his ideas should be considered in relation to the range of economic ideas put forward by others within the Scottish tradition: Smith was not an author generous in giving credit to others (see Dow, 1984). The key figures in the eighteenth and nineteenth centuries can be identified as Francis Hutcheson, David Hume, Adam Smith, Sir James Steuart, Adam Ferguson, Dugald Stewart, John Rae, Thomas Chalmers, W.S. Nicholson and William Smart. But there was a much wider range of contributors to economic debate over these two centuries, meticulously recorded by Rutherford (2012). We will discuss below the sense in which the approach taken to analysing economic issues followed a particularly Scottish tradition. But first we outline a selection of the main economic ideas and areas of debate within that tradition; a more comprehensive coverage would include additional areas, such as public finance, where Smith in particular made a pioneering contribution.Stages approach to development
Before the enlightenment, indeed with origins dating back to ancient times, there had been discussion of change in the means of subsistence and associated modes of organisation by means of stages of development. But the eighteenth century saw a much greater focus on understanding economic history in terms of advance from one stage of development to another. Smith identified these stages as: hunting and gathering, pastoral and agricultural stages, leading to the final stage of commercialisation, while other Scottish writers suggested different ways of classifying the stages.
In the French approach, notably that of Turgot, the emphasis was on agriculture, but Smith changed the focus to one of growth in prosperity once the fourth stage, commercialisation, had been reached. He introduced the idea, drawing on natural law philosophy, that such growth might be the normal condition for commercial societies. The Scottish analysis of the stages put primary emphasis on social organisation, identifying the development of human institutions with respect to property rights and the rule of law as a necessary condition for progression from pastoral to agricultural to commercial stages of development.Moral issues with development
There was debate as to how far movement through the stages was to be interpreted as progress. Indeed the Scottish enlightenment studies of different ‘savage’ societies indicated a respect for their moral legitimacy. There was widespread concern (expressed particularly by Ferguson, 1767) as to how far commercialisation would challenge the moral fabric of society. The specialised nature of non-subsistence production methods raised a widespread concern at what we would now call worker alienation, justifying state-sponsored education as a means of alleviating the stultifying effects on the mind.
Yet Hume emphasised also the positive, transformative features of commercial employment, arguing that it was a civilising influence and encouraged the ‘arts’ leading to further productivity growth. But the population movements into towns associated with commercialisation, with its disruptive social consequences, was a further concern which gathered force into the nineteenth century. Chalmers (1821) argued for community-based moral education as the most effective means of promoting moral behaviour and alleviating poverty through self-help (as well as communitybased income redistribution), in opposition to the monetary payments of the Poor Laws.
Population
The focus on moral, social, psychological and political forces is also evident in debates in eighteenth-century Scotland over the nature and causes of demographic change.
These debates were given empirical grounding by early attempts at compiling population statistics for Scotland. Hume's concern in looking at changes in these forces over the very long term was to consider whether population had increased or decreased from ancient times. Of more contemporary concern, particularly in relation to the depopulation of the Highlands, was whether increasing population was to be welcomed as a symptom of growth and a spur to further growth, or alternatively regretted as putting undue pressure on limited resources. But Smith differed from his contemporaries in being more sanguine that population movements would respond to the demand for labour. Malthus credited several Scottish writers as having influenced his theory of population.The division of labour
While the idea was anticipated by Hutcheson, the division of labour is the cornerstone of Smith's (1776) theory of economic development. Originally conceived by him in terms of an account of specialisation in philosophy, Smith drew on his extensive studies of different types and ages of society the general principle that commercial development arises from specialisation in production. Specialisation allowed for productivity gains, which in turn facilitated the build-up of capital for further investment. The range of application of this principle was debated in Scotland, and Smith himself accepted that the agriculture and manufacturing sectors might be developed in parallel. The principle encountered particular challenge when applied to Highland improvement, with Anderson (1777) for example arguing that diversification was preferable in geographically isolated regions. The theoretical foundations of the principle were later challenged by Rae (1834), who argued that invention was prior to the division of labour, so that growth should be understood as being built on invention and the necessary policy directed to promoting it.
Free trade
A direct implication of the principle of the division of labour is that it is limited by the extent of the market.
As a corollary, free trade allows much more scope for the division of labour and thus for growth. Thus a central mechanism for encouraging growth, which could be observed to an increasing extent in Scotland in the eighteenth and nineteenth centuries, was international trade. This argument shifted the policy focus away from mercantilism, which had prioritised stocks of monetary wealth over the productive capacity of the economy. Not only did trade allow ever-increasing productivity, but trade had a dynamic effect on exporters and importers. Hume's (1752) price-specie-flow theory focused on the way in which foreign earnings spurred exporters on to ever-higher levels of inventiveness and thus productivity (the attendant money flows being part of the process, but not the causal mechanism). At the same time, imports of luxury goods into lower-productivity economies exposed the population to new products which encouraged new tastes and the development of local import-substituting production. It was through this mechanism that Hume saw the catching-up process operating, such that other economies would also develop.Theory of value
The theory of value which emerged from Scottish enlightenment thought was prompted by moral concerns with commercialisation as well as the more practical considerations of exchange; what was a fair price given the effort and resources which went into a product and the nature and degree of its usefulness? Influenced by Hutcheson and natural law philosophy, Smith developed the notion of a natural price around which actual prices would fluctuate with changes in demand. The natural price was measured by the labour embodied in a product; by the same token, welfare was measured by labour commanded (Skinner, 2006a).
The invisible hand
One of the ideas most frequently drawn from Scottish economics is that markets are selfregulating, since self-interest is guided as if by an invisible hand to produce a socially optimal outcome. Smith had pointed out that commercial production would be aligned with demand by means of the price mechanism and the profit motive. But Smith's use of the term ‘invisible hand' referred to a limited range of positive externalities (such as the tendency for capital investment to occur in the home economy), rather than as a general phenomenon. Indeed Smith warned of tendencies for market competition to be reduced (by monopolies or collusion), thus limiting the benefits of market forces. Nevertheless Smith's account of the benefits of market forces, based on a systemic analysis of markets, was one of the most influential Scottish economic ideas.