Adam Smith and Competitive Equilibrium

A view has emerged which sees Adam Smith’s main contribution to economics in terms of his equilibrium theory. This paper argues that equilibrium economics was neither Smith’s main contribution nor his chief concern. It is true that Smith made a few observations which may be construed as equilibrium economics in some loose sense. For example, his observation that the market price of a commodity has a tendency to gravitate towards its natural price; or the rate of profit in different employments tends towards equality. But from this it cannot be concluded that Smith was chiefly an equilibrium theorist. In the first place, it needs to be emphasised that the ‘tendency’ towards equilibrium, which Smith talked about, is not the same thing as an equilibrium ‘outcome’. Equilibrium as an outcome is more likely to be reached in a stationary state than in an evolutionary system in the process of continuous dynamic motion. Smith’s evolutionary perspective, his analysis of the division of labour, capital accumulation, and the institutions most conducive to the generation of wealth, all point to the fact that Smith was more concerned with dynamic analysis than with static equilibrium. Finally, barring a few observations on the equilibrating tendency in the system, most of the Wealth of Nations is not devoted to this question.