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Friday, January 8, 2016

Adam Smith: Ideas Change the World

Real Heroes: Adam Smith

Adam Smith entered a world that his reason and eloquence would later transform. He was baptized on June 5, 1723, in Kirkcaldy, Scotland. It’s presumed that he was either born on that day or a day or two before. He would become the Father of Economics as well as one of history’s most eloquent defenders of free markets.

The late British economist Kenneth E. Boulding paid this tribute to his intellectual predecessor: “Adam Smith, who has strong claim to being both the Adam and the Smith of systematic economics, was a professor of moral philosophy and it was at that forge that economics was made.”

Economics in the late 18th century was not yet a focused subject of its own, but rather a poorly organized compartment of what was known as “moral philosophy.” Smith’s first of two books, The Theory of Moral Sentiments, was published in 1759 when he held the chair of moral philosophy at Glasgow University. He was the first moral philosopher to recognize that the business of enterprise — and all the motives and actions in the marketplace that give rise to it — was deserving of careful, full-time study as a modern discipline of social science.

Wealth to the world’s first economist was plainly this: goods and services.

The culmination of his thoughts in this regard came in 1776. As American colonists were declaring their independence from Britain, Smith was publishing his own shot heard round the world, An Inquiry into the Nature and Causes of the Wealth of Nations, better known ever since as simply The Wealth of Nations. (One of my most prized possessions is the two-volume 1790 edition of the book, gifted to me by an old friend; it was the last edition to incorporate edits from Smith himself, just before he died in that same year.)

Smith’s choice of the longer title is revealing. Note that he didn’t set out to explore the nature and causes of the poverty of nations. Poverty, in his mind, was what happens when nothing happens, when people are idle by choice or force, or when production is prevented or destroyed. He wanted to know what brings the things we call material wealth into being, and why. It was a searching examination that would make him a withering critic of the existing political and economic order.

For 300 years before Smith, Western Europe was dominated by an economic system known as “mercantilism.” Though it provided for modest improvements in life and liberty over the feudalism that preceded it, it was a system rooted in error that stifled enterprise and treated individuals as pawns of the state.

Mercantilist thinkers believed that the world’s wealth was a fixed pie, giving rise to endless conflict between nations. After all, if you think there’s only so much and you want more of it, you’ve got to take it from someone else.

Mercantilists were economic nationalists. Foreign goods, they thought, were sufficiently harmful to the domestic economy that government policy should be marshaled to promote exports and restrict imports. They wanted their nations’ exports to be paid for not with foreign goods but in gold and silver. To the mercantilist, the precious metals were the very definition of wealth, especially to the extent that they piled up in the monarch’s coffers.

Because they had little sympathy for (or understanding of) self-interest, the profit motive, or the operation of prices, mercantilists wanted governments to bestow monopoly privileges on a favored few. In Britain, the king even granted a protected monopoly over the production of playing cards to a particular highly placed noble.

Nobel laureate Richard Stone explains:

Smith was passionately opposed to all laws and practices that tended to discourage production and increase prices…. He viewed with suspicion all trade associations, both formal and informal: as he says, “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” And he devotes chapter after chapter to exposing the harm caused by the combination of two things he particularly disliked: monopoly interests and government intervention in private economic arrangements.

Critics of the market often seize on Smith’s “conspiracy against the public” observation cited in the passage above. They conveniently ignore what he wrote immediately thereafter, which indicates that he saw government as a co-conspirator whose police power was indispensable for those conspiracies to thwart the otherwise potent forces of market competition:

It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

Smith’s view of competition was undoubtedly shaped by the way he saw the universities of his day, loaded as they were with coddled, tenured professors whose pay had little to do with their service to their pupils or the public at large. While a student at Oxford in the 1740s, he observed the lassitude of his professors, who “had given up altogether even the pretense of teaching.”

Wealth was not gold and silver in Smith’s contrarian view. Precious metals, though reliable as media of exchange and for their own industrial uses, were no more than claims against the real thing. All of the gold and silver in the world would leave one starving and freezing if they couldn’t be exchanged for food and clothing. Wealth to the world’s first economist was plainly this: goods and services.

Whatever increased the supply and quality of goods and services, lowered their price or enhanced their value made for greater wealth and higher standards of living. The “pie” of national wealth isn’t fixed; you can bake a bigger one by producing more.

Baking that bigger pie, Smith showed, results from investments in capital and the division of labor. His famous example of the specialized tasks in a pin factory demonstrated how the division of labor works to produce far more than if each of us acted in isolation to produce everything himself. It was a principle that Smith showed works for nations precisely because it works for the individuals who make them up.

He was consequently an economic internationalist, one who believes in the widest possible cooperation between peoples irrespective of political boundaries. He was, in short, a consummate free trader at a time when trade was hampered by an endless roster of counterproductive tariffs, quotas, and prohibitions.

Smith wasn’t hung up on the old mercantilist fallacy that more goods should be exported than imported. He exploded this “balance of trade” fallacy by arguing that, since goods and services constituted a nation’s wealth, it made no sense for government to make sure that more left the country than came in.

Self-interest had been frowned upon for ages as acquisitive, antisocial behavior, but Smith celebrated it as an indispensable spur to economic progress. “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner,” he wrote, “but from their regard to their own interest.”

Smith was an economic internationalist, one who believes in the widest possible cooperation between peoples irrespective of political boundaries.

Moreover, he effectively argued that self-interest is an unsurpassed incentive: “The natural effort of every individual to better his own condition … is so powerful, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations.”

In a free economy, Smith reasoned, no one can put a crown on his head and command that others provide him with goods. To satisfy his own desires, he must produce what others want at a price they can afford. Prices send signals to producers so that they will know what to make more of and what to provide less of. It wasn’t necessary for the king to assign tasks and bestow monopolies to see that things get done. Prices and profit would act as an “invisible hand” with far more efficiency than any monarch or parliament. And competition would see to it that quality is improved and prices are kept low. Austrian economist F.A. Hayek wrote in his book, The Fatal Conceit,

Adam Smith was the first to perceive that we have stumbled upon methods of ordering human economic cooperation that exceed the limits of our knowledge and perception. His “invisible hand” had perhaps better have been described as an invisible or unsurveyable pattern. We are led — for example by the pricing system in market exchange — to do things by circumstances of which we are largely unaware and which produce results that we do not intend. In our economic activities we do not know the needs which we satisfy nor the sources of the things which we get.

The Father of Economics placed much more faith in people and markets than in kings and edicts. With characteristic eloquence, he declared, “In the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.”

Smith displayed an understanding of government that eclipses that of many citizens today when he wrote,

It is the highest impertinence and presumption … in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense.… They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.

Smith wasn’t perfect. He left a little more room for government than many of us are comfortable with, especially in light of what we’ve learned of the political process in the centuries since. Much of what we now know in economics he left to later scholars to correct or discover (the Austrian school’s seminal contributions in the 1870s and later regarding the source of value and marginal utility being two of the most important). But Smith’s books, as Ludwig von Mises noted, represented “the keystone of a marvelous system of ideas.”

The last formal job that Smith held in his life was, ironically, commissioner of customs in Scotland. How could such an eminent free trader preside over the collection of the very tariffs he had so eloquently debunked? He certainly evidenced no change of mind on the fundamental virtue of freer trade.

E.G. West, in his excellent 1969 biography of Smith, wrote,

To enter the service of the Customs would not be to compromise on his principles. On the contrary, he would be enabled more practically to study further ways of achieving economies.

And indeed, achieving economies is exactly what Smith did over seven years in the job. Net revenues to the Treasury, we learn in West’s book, rose dramatically during Smith’s tenure, and not from higher rates but from reduction in the costs of collection that Smith had put in place.

The ideas of Adam Smith exerted enormous influence before he died in 1790 and especially in the 19th century. America’s Founders were greatly affected by his insights. The Wealth of Nations became required reading among men and women of ideas the world over. Until his day, no one had more thoroughly and convincingly blown away the intellectual edifice of big government than the professor from Kirkaldy.

A tribute as much to him as to any other individual thinker, the world in 1900 was much freer and more prosperous than anyone imagined in 1776. The triumphs of trade and globalization in our own time are further testimony to his enduring legacy. A think tank in Britain bears his name and seeks to make his legacy better known.

Ideas really do matter. They can change the world. Adam Smith proved that in spades, and we are all immeasurably better off because of the ideas he shattered and the ones he set in motion.

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  • Lawrence W. Reed is FEE's President Emeritus, having previously served for nearly 11 years as FEE’s president (2008-2019). He is also FEE's Humphreys Family Senior Fellow and Ron Manners Global Ambassador for Liberty. His Facebook page is here and his personal website is