AUTHOR: ADAM SMITH
DATE: 1776
An Inquiry into the Nature and Causes of the Wealth of Nations (to give it its full title) was published in the same year that the American colonies declared their independence from Britain. It was a fitting coincidence, given that Adam Smith’s landmark work has come to be regarded as the foundation text of classical economics – a blueprint for the sort of free market economic model upon which the US based its rise to global dominance. Almost single-handedly, Smith created economics as a heavyweight academic discipline, and established the free market as the system of choice for nations across the globe.
Smith was born in Kirkcaldy, Scotland, in 1723 and studied moral philosophy at the University of Glasgow before spending several years at the University of Oxford. Greatly influenced by Enlightenment philosophy, his own worldview was informed by his belief in the principles of liberty, reason and free speech. After winning good public notices for a series of lectures he delivered in Edinburgh in the 1750s, he became a professor at the University of Glasgow. Specializing in the fields of logic and moral philosophy, he struck up a notable friendship with his fellow Scottish philosopher, David Hume. Then, in 1764, Smith moved to France where he became acquainted with Voltaire and began to work on what would become his magnum opus, The Wealth of Nations – a book whose influence extended far beyond its author’s death in 1790.
MY SECOND-BEST BOOK
While The Wealth of Nations is the book that ensured Smith’s reputation as a great thinker, he is believed to have considered it inferior to his Theory of Moral Sentiments, published seventeen years earlier in 1759. A study of moral philosophy and conscience, he sought to understand from what source Man derives moral judgement. In concluding that it stems from our innately social and sympathetic nature, it has prompted many critics to suggest that the book is in stark contrast with his later, more celebrated work and its promotion of self-interest.
Published in two volumes, it was a revolutionary work in several respects. Primarily, it challenged the then prevailing orthodoxy of mercantilism, which argued that government intervention was necessary to maintain economic equilibrium. Under mercantilist thought, for instance, world trade was governed by the competing protectionist policies of different countries. Smith, though, argued that all nations would benefit from the wholesale removal of such protectionism.
These ideas required some fundamental intellectual adjustments. From time immemorial, the wealth of a nation had been thought of in terms of how much it possessed of whatever particular commodity it used as a store of wealth – typically gold or silver. But Smith argued that wealth was rather better measured by looking at the volume of all the goods and services that were traded by the population as a whole. A strongroom full of coinage in the royal palace means little if nobody has food to eat or clothes to wear or a public house to relax in. ‘The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes,’ Smith wrote. In effect, he was introducing the concept of Gross Domestic Product (GDP), which has become the standard – if itself imperfect – measure of a country’s economic wellbeing.
That being established, Smith then made what at the time was a very bold claim: that this flow of goods and services is best encouraged not by the intervention of the government, but by non-intervention. By imposing tariffs or granting subsidies, he said, the natural flow of trade is skewed. Prices become artificially set and all actors, especially the poor, suffer. But by allowing genuine competition between suppliers in a free market, those goods and services most wanted and needed by the largest number of consumers will be provided. This is not the result of suppliers’ goodwill towards the consumer, but because the supplier’s own self-interested wish for profit impels them to provide what the market demands. Equally, the self-interest of consumers compels them to buy from suppliers irrespective of any personal connection to them. In Smith’s own words:
Every individual necessarily labours to render the annual revenue of the society as great as he can. Generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it … by directing that industry in such a manner as its produce may be of the greatest value, he 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.
He famously described the unseen force that makes free markets function as the ‘invisible hand’. However, he did not believe that there was no role for government at all. Rather, it should play only a limited role under certain conditions. For example, he was sceptical that the free market was well placed to provide in the areas of health and education – sectors that are essential to the proper functioning of society but that are not subject to the same rules of self-interested supply and demand that govern, for example, consumer products. Smith – recognizing the perils of unfettered greed – also advocated for taxation to deter consumers from improper or overly indulgent conduct. He also believed that the state ought to enforce the laws that protect private property in order to create the secure environment necessary for the free market to prosper.
Much of what he discussed has since become economic orthodoxy. He persuaded a vast swathe of the world that its interests are best served not by interfering in economic matters but by letting self-interest do the hard work. Of course, not everyone agreed – not least Karl Marx, who saw the pitfalls of the free market where Smith saw its advantages. But William Ewart Gladstone, Britain’s four-time Liberal prime minister, was convinced, saying of Smith in 1890 that he was ‘the man who first taught us that in our intercourse with other nations, as well as among ourselves, it was better to have our hands free than to have our hands and arms in manacles – who taught the great doctrines of Free Trade, and who has imbued the world with these doctrines’.