Regards to Adam Smith (and Why He is Important Even Today)

“To prohibit a great people [the American colonials]…from making all that they can of every part of their own produce, or from employing their [capital] and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind.” Adam Smith, The Wealth of Nations, 1776.

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness.” Thomas Jefferson, “Declaration of Independence,” 1776.

In these two passages we find one of the common elements in the two significant bicentennials we celebrate this year. The common element is the conviction that man is endowed by a source greater than himself with certain natural and hence inalienable rights, (in-a-lien-able). This common element in the two bicentennials is one of the themes I shall develop in these comments of mine. But first let me hasten to admit that, in the households of the United States in 2013, his name (the publication of The Wealth of Nations and the proclamation of the Declaration of Independence) is not held in equal awareness or veneration, nor does Adam Smith’s name compete for the attention of the young with that of Thomas Jefferson. Yet it is my firm conviction that the members of our own society (and in fact of all societies based on the concept of freedom under law) must look to Smith as well as to Jefferson (and his fellow Founding Fathers) to fully understand our goodly heritage of freedom with order.

Here, as in all matters of judgment, I admit to bias. Adam Smith is generally known as the Father of Economics, the field of study which is also my own. Moreover, Smith’s brand of economics, carrying the trademarks of voluntary exchange, freedom in the marketplace and limited government, is also my brand of economics—Brand X though it may have become in today’s intellectual marketplace. Finally, I believe Adam Smith not only to have been possessed of true wisdom about the nature and possibilities of the human condition but also to have been possessed of a capacity to communicate those ideas with great clarity and great style. In other words, I am an admitted, card-carrying Adam Smith buff.

With no embarrassment, I admit that I hope through these words to encourage some of you who may now know little of Smith and his work to come to want to know more. Even for those who bring to their studies of Smith a presupposition against his strong free market policy position, there is something to be gained. His writing is free of that obscurantism, technical jargon and complicated mathematics that distinguish most modern materials in economics. In Smith’s writings, the case for what might be roughly called “capitalism” is put in so clear and straight-forward a fashion that it makes a useful stone against which even the convinced socialist can hone his own counter-arguments. Finally, no one who professes to understand even commonly well the course of events of these last two hundred years can afford to be ignorant of the influence on that course of events of the ideas of Adam Smith, whether they have been proven right or wrong. In the words of the historian, Henry Thomas Buckle, in his The History of Civilization, published in the middle of the last century: “In the year 1776, Adam Smith published his Wealth of Nations, which, looking at its ultimate results, is probably the most important book that has ever been written…(p. 122) Even a true Smith buff may be at least mildly embarrassed by this claim, but that his ideas did have consequences no one can really doubt (but more on this later).

Who was this man, what did he have to say in 1776 and how, if at all, is his thinking relevant to the world of 2013? Adam Smith was born in Kircaldy, Scotland in 1723 and died in Edinburgh, Scotland in 1790. In between he lived a life free of scandal, wife or children, great incident and severe disappointment. He was a student (at Glasgow and Oxford), a teacher (at Glasgow and Edinburgh) and a scholar, and his friends were students, teachers and scholars—but also artists, writers, businessmen and men of affairs. In a sense, though, he was the true “spectator” of the human scene, involved in that scene, yes, but always capable of detached analysis and appraisal of everything that came within his view.

My intent here is to concentrate on Smith’s words and ideas and on their usefulness (if any) in interpreting the modern scene. Those of you who wish to know more of Smith’s life or of the intellectual influences that shaped his thinking or of his weaknesses and strengths as a pure technician in the science of economics will need to look elsewhere.

My plan is as follows: First, to present in concise form what I see as Smith’s view of the social order. Next, to identify the ways in which he applied this view to the world of his day, particularly the British treatment of the American colonies. Finally, to identify those ways in which it seems to me that Smith speaks most directly to the problems and possibilities of today’s world.

Section I — Smith’s basic argument

We begin with what I believe to be the essence of the Smith argument—but first a word of preparation. Smith is known as the Father of Economics and the book whose bicentennial year we now celebrate has as its complete title, An Inquiry into the Nature and Causes of the Wealth of Nations. The first sentence of Chapter I, Book I, reads as follows: “The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour.” These substantial straws in the wind would seem to imply that we are about to grapple with a pure piece of economic analysis applied to the essentially vulgar question of how to multiply the quantity of “things” in a nation—and indeed Smith does have a kind word for those vulgar “things” when he writes that, “No society can surely be flourishing and happy, of which the greater part of the members are poor and miserable.” (p. 79)

But to see Smith as nothing more than an early-day consultant on how to make everyone rich is to do him an injustice. Smith was first and foremost a professor of moral philosophy and his economic analysis was in a sense a by-product of his concern with such questions as the nature of the universe, the nature of man and the relationship of the individual to society.

When curiosity turns his attention to “the wealth of nations,” he begins in effect by reaching into his philosopher’s cupboard for the basic materials of his proposed studies. First and foremost he draws out his conviction that there exists a natural order in the universe which, if properly understood and lived in accordance with, tends to produce the “good.” Coordinate with and deriving from this natural order is a set of natural rights of individuals (recall the phrasing of the opening passage from Smith—”the most sacred rights of mankind”). For a society to live in harmony with the natural order requires that it respect those “most sacred rights of mankind.”

But what does all this have to do with getting more bread on the table? Comes now Smith, the eternal spectator, the observer of all that transpires around him, who is also curious as to what puts more bread on the table. His observations tell him very quickly that the wealth of a nation is primarily determined “by the skill, dexterity and judgment with which its labour is generally applied.” But by what in turn are these determined? By two primary factors: (1) the extent to which the division of labor is carried in the society, and (2) the stock of capital available to the laborers.

But what forces give rise to or permit of the division of labor and the accumulation of capital? Must it be the forces of the ruler, commanding one man to do this and another to do that and ordering all to go without so that the stock of capital may grow? Not at all, replies Smith, the observer-philosopher. In the natural order of things, man is so disposed to act as to promote these very ends without the necessity of external commands.

The division of labor finds some part of its initial support in man’s natural instinct to truck and barter. More importantly, the apparent problem of securing each man’s cooperation in serving the needs of others proves to be no problem at all. His cooperation is readily secured, not out of his benevolence, but out of his natural regard for his own interest. “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest.”

Thus the seeds of the division of labor lie in the very nature of man, that is, in the natural order. In the same way, man’s desire for improvement induces him to save and hence to accumulate the capital needed to add even further to the productivity of labor.

But how are the activities of all of these specialists coordinated, what assures that the various parts and processes will be brought together properly in time and place and quantity and quality and all other relevant attributes? Surely here the offices of government must be required. Not at all, Smith replies; a spontaneous order emerges in the very nature of things, an order that arises out of the interaction in the marketplace between the two great forces of supply and demand.

If any one element in this complex chain comes to be in short supply, its price will rise and suppliers will be induced to bring more to the market; in cases of excess supply, the reverse. In this way, in Smith’s words, “the quantity of every commodity brought to market naturally suits itself to the effectual demand.” (p. 57)

The marketplace, then, as a spontaneously emerging and self-regulating process, is but the natural order at work in the ordering of economic life.

The pattern is now complete and he concludes as follows:

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenues of the society as great as he can. He generally indeed neither intends to promote the public interest, nor knows by how much he is promoting it…[H] e intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. (p. 423)

Continuing with Smith’s words,

All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society. According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions. (p. 651)


Tomorrow, I shall continue with Smith’s thinking applied to the problems of his day….

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