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In the first memoir of Adam Smith delivered two years after his death in 1790, Dugald Stewart put the difficulty of writing the biography thus: "The history of a philosopher's life can contain little more than the history of his speculations; and in the case of such an author as Mr Smith, whose studies were systematically directed from his youth to subjects of the last importance to human happiness, a review of his writings, while it seems to illustrate the peculiarities of his genius, affords the most faithful picture of his character as a man."

In the first biography of Adam Smith since John Rae's, which was published 100 years ago, Ian Simpson Ross tries his best to do better than the advice offered by Stewart. As a biographer of Lord Kames, who was an early patron of Adam Smith, he is eminently qualified.

Not much is known about Adam Smith beyond his books. The outlines of his life are well known. A posthumous child of a relatively prosperous and well connected Scottish customs official (among other posts), he was a physically weak but intellectually precocious child. After five years at Glasgow University, which were made stimulating by the presence of the philosopher Francis Hutchinson and the mathematician Robert Simpson, Smith spent seven years at Oxford benignly neglected by the fellows of Balliol College. But he gained much from self-motivated hard work, reading and translating.

After a break of three years back with his mother in Kirkcaldy, he was summoned by Kames to give lectures on rhetoric in Edinburgh. A chair at Glasgow soon followed, which he occupied for more than a dozen years. It was here that he made his reputation by his lectures on jurisprudence and, of course, The Theory of Moral Sentiments which came out in 1759. He resigned his chair upon receiving a lucrative offer to travel to Europe as a tutor to the Duke of Buckleach. It gave him a chance to meet the French savants, and a life pension.

Back in Kirkcaldy he spent the next ten years preparing his magnum opus. His fame as a sage adviser in economic policy was already established but the publication of the Wealth of Nations gave him undisputed dominance in this area, as well as immortality. After 1776 life became busy but dull. Like his father, he became a commissioner of customs, received honours, planned to write new books, revised the two books he had published and eventually died at the age of 67, a staid bachelor of moderate habits, absent-minded and prudent, about whom there is not a whiff of scandal, sexual or otherwise. Indeed, as Ross says after exploring the rumours about Smith's amorous entanglements "it is to be feared that the biographer can do little more with the topic of Smith's sex life than contribute a footnote to the history of sublimation".

But one does not read Adam Smith's biography for titillation. It is a story not only of a man of genius who founded the science of political economy, but also of a country, Scotland, and a cultural ferment, the Scottish Enlightenment, which forever changed the course of the way we think about society and its problems.

Much nonsense is written nowadays about how modern economic theory wrongly adopts the methods of physical sciences and uses mathematics. As economists get older they pine for the older political economy which was much easier to grasp. This is rubbish of course: the philosophies of the Scottish Enlightenment were all inspired by Newton's physics and their project was to found a science of society on the same analytical principles as Newton had done when he used a few unifying notions to explain the motion of earthly and heavenly bodies.

Physics and mathematics (Euclidean geometry especially) were Adam Smith's favourite subjects when a teenager at Glasgow. But while it was Hutcheson who had begun to think systematically about theorising about history, it was Smith who was the outstandingly successful theorist. He searched for the one unifying principle and did not publish until he had found one.

In the Theory of Moral Sentiments, the unifying principle is sympathy. This is what allows us to judge other people's actions or their reactions (for instance, suffering). By virtue of sympathy, my reaction to your suffering is stronger than mere apathy. As a person with self-command your reactions will be less extreme than you really feel. One already detects a tendency upwards meeting another downwards. But in moral judgements there need be no equilibrium of strength of feeling. The Newtonian mechanism is, however, present.

In judging our own actions we appeal to this impartial spectator, our conscience as it were - though Smith avoided that religion-laden term in Presbyterian Scotland. He was, after all, trying to fashion a theory of moral judgement which would not appeal to the straitjacket of Calvinism. Indeed, Hume, Smith and their fellow secular philosophers over in France were trying to develop a morality which did not have to rely on religion.

It was a subversive project and seen as such by conservatives such as Dr Johnson and numerous worthies of the churches in England and Scotland. Hume was much more open about his scepticism. Smith was more cautious, not to say cowardly. He tried his best to cover up his true beliefs by writing empty platitudes about the Creator. He disappointed his friend David Hume on his deathbed by refusing to give an undertaking to publish Hume's final manuscript Dialogues Concerning National Religions. Having just published the Wealth of Nations and basking in universal praise, Smith was too worried about Hume's atheism denting his own reputation. As it happened, the manuscript did not contain anything Hume had not said before and Smith was criticised for a short memorial he wrote on Hume anyway.

Whatever Adam Smith's contemporaneous reputation as a philosopher, he is hardly read as one today. It is as the founder of political economy that he is now read and Theory of Moral Sentiments is interesting only in as much as many scholars think there is a contradiction between the emphasis on sympathy and benevolence in TMS and the self-love emphasised in WN. Oceans of ink have been spilled on this issue. The point is that we now consider Smith primarily as the prophet of the system of natural liberty and the man who saw order hidden underneath the "anarchy of market forces".

Smith and the other philosophers of the Scottish Enlightenment lived through a period of extremely rapid change as well as diversity. The Highland economy was "restructured" pretty violently after 1745. Smith recognised, as he went from Glasgow to Oxford, that he was traversing stages of history - hunting and gathering, pastoralism, agriculture and commerce. The philosophers read up contemporary accounts of travellers who told them about other societies at different stages of history. They were all experts on classical history anyway but what was needed was a unifying principle.

The key to the stages of history was the mode of subsistence, the material wherewithals of daily existence. By rooting the mechanism of motion firmly in earthly matters, Smith was implicitly ruling out any overriding role for the supernatural. There was also a theory that each mode of subsistence was held together much like a machine with the various seemingly independent and unrelated parts working in harmony. Ross is very good at establishing the rich web of political and social contacts between these philosophers, also those with their contemporary merchants and politicians. Their theorising was shot through with daily observations and practical problems. It was an active, highly cultured, thickly networked society and Ross's account of this network in the book, especially in the first third, is riveting. Smith is no lonely philosopher; he is a son of the Scottish soil where ideas grew, fed on the collective interactions of intelligent burghers.

Adam Smith was never an uncritical supporter of laissez-faire, an expression he never used. The system of natural liberty was embedded in a legal and moral context. Those who urge a simplistic Adam Smith on the countries of Eastern Europe are bound (I hope) to admit that it is not enough to deregulate and privatise and liberalise if you do not have a framework of legal and moral rules which can sustain social harmony. But then Smith is neither the first nor the last social scientist to be misused by his champions. Ross's book will at least make it more difficult to plead ignorance about Smith's ideas and attitudes. His is a model biography and a fitting finale to the Glasgow project.

Lord Desai is professor of economics and director of the centre for the study of global governance, London School of Economics.