Clouston was born in the Birsay parish of Orkney, and educated at Aberdeen Grammar School and the University of Edinburgh. Clouston qualified M.D.(Edinburgh) with a thesis on the nervous system of the lobster, supervised by John Goodsir.
His early interest in insanity resulted in an apprenticeship with David Skae, the eminent Superintendent of the Royal Edinburgh Asylum. In 1863, Clouston was appointed superintendent of the Cumberland and Westmoreland Asylum (Garlands Hospital) in Carlisle; and in 1873, in succession to Skae, Superintendent of the Royal Edinburgh Asylum. In 1879, Clouston was appointed successor to Thomas Laycock as Lecturer on Mental Diseases in the University of Edinburgh, a post which he held in conjunction with his position at the Royal Edinburgh Asylum. Clouston became a celebrated lecturer with an international reputation for his exposition of the psychiatric disorders of adolescence. Clouston published extensively, beginning with his remarkable Clinical Lectures on Mental Diseases (1883), followed, much later, by his more popular work Unsoundness of Mind (1911). Another book aimed at the general public was entitled Morals and The Brain; and he remained an unreconstructed believer in "masturbational insanity" and an uncompromising advocate of teetotalism in opposition to his exact contemporary, the psychiatrist James Crichton-Browne. In 1888, Clouston served as President of the Medico-Psychological Association.
Clouston retired in 1908 and was knighted in 1911. He is commemorated by a brass plaque on the eastern aspect of the North Transept of St Magnus Cathedral in Kirkwall. His son was the author Storer Clouston. He Received the Freedom of the Burgh of Kirkwall on 28 August 1908. 
He is buried in Dean Cemetery in Edinburgh with his wife Dame Harriet Secur Storer (1835-1917). The grave lies on the obscured southern terrace.
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- "Sir Thomas Clouston (1840–1915)". Nature 145 (3677): 619. 1940. doi:10.1038/145619c0.
- Beveridge, Allan (2004) "Clouston, Sir Thomas Smith (1840–1915)", in Oxford Dictionary of National Biography, Oxford University Press doi:10.1093/ref:odnb/38634
- "Gazetteer for Scotland – Sir Thomas Clouston". Retrieved 20 January 2010.
- "Unsoundness of Mind (1911) – Sir Thomas Clouston". Retrieved 11 June 2015.
- Anon (1915) Obituary. Edinburgh Medical Journal 14 pp. 385–388