Adam Smith

Just as progress has its chosen beneficiary from one century to the next, every age has its own grand misconception. In the Middle Ages it was alchemy; with the great explorers it was the Northwest Passage; in the 1970s it was disco; and in the pre-industrial era of the 17th and 18th centuries, the grand misconception was mercantilism. This, the great uncle of another enduring error, protectionism, was public policy enchanted with the idea that national wealth and power are derived from the hoarding of precious gold and silver acquired from colonial conquests and from export sales abroad. Adam Smith, Professor of Moral Philosophy at the University of Glasgow, found this system quite ludicrous. He knew that money was not equivalent to wealth, and that the wealth of nations was derived from more than just pillaging and exports. In his famous multi-volume treatise, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), he explains the real reasons, and in so doing created an entirely new discipline, economics, and introduced its most enduring ideal, market capitalism.* While John Locke laid the foundations upon which is built all that is good in our modern system of government, Adam Smith did the same for our modern economy.

As indicated by the title, Smith's Wealth of Nations is foremost an inquiry, an analysis of how the beginnings of the industrial revolution became so industrious. In this he credits many things, without exception the result of spontaneous initiative, all invariably contributing to a general shared wealth. Typical among these is his description of the "division of labor," whereby labor productivity is increased by the specialization of factory tasks. Though inevitably he surely started his analysis with widgets (like the rest of us), the example he settles on is the pin factory: "One man draws out the wire, another straights it, a fourth points it, a fifth grinds it …" and so forth until "the important business of making a pin is, in this manner, divided into about eighteen distinct operations," each perhaps performed by a separate person. In this way, among them they may produce "upwards of forty-eight thousand pins in a day," while each worker, attempting to do all tasks himself, could not "have made twenty, perhaps not one pin a day." Left free to pursue improvements, individuals and enterprises in the free economy create endless such efficiencies. The obstacle to this is the Luddite who, rather than join and benefit from these improvements, takes nostalgic pride in his ability to create his single pin.

Smith also describes the great benefits to society that self-interested individuals create. Progress of society is driven by the "uniform, constant, and uninterrupted effort of every man to better his condition." "Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the publick [sic] interest, nor knows how much he is promoting it ... 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." This "invisible hand" is one of Smith's more enduring insights, hoisted by free market comrades as the linchpin of capitalism's efficiency, derided by naysayers as hocus-pocus, the lure of a magician to certain fraud. Yet the idea persists, it being a very decent illustration of the manifestation of something undeniable: that the freedom to choose will necessarily lead us all to strive to be chosen.

Economists and historians are quick to point out that Smith is not all laissez-faire capitalist. He warned of the monopolistic tendencies of merchants, believed in the value of labor, and bemoaned the distributive nature of capitalism. In fact, Smith was no anarchist, and the image of him rendered is as true as the image of Jacques Chirac as pacifist: poster-boys are not always fanatics. He believed that government had its functions, of which he identified four: to prevent the success of the natural, monopolistic urges of merchants; to provide for the defense of its citizens from enemies abroad; to provide for the defense of its citizens from each other through law enforcement and judicial courts; and to provide for "public goods" and manage economic externalities (like pollution).

Though scant attention is paid to his first major work, The Theory of Moral Sentiments (1759), this is a truly insightful book which has its admirers among those who can read verbose eighteenth-century English without resorting to matchsticks. For present-day marketeers who regard Smithian capitalism to be supremely rational, if not always soft and schmaltzy, expectations would hold that the moral philosophy of such a man would tend to a stoic, anti-emotive path. Yet in his primary field of moral philosophy, Smith is all heart no head. He sees people as finding their morality in their sympathies, their passions, and their fellowship for the species. His breakthrough is a foreshadow of Kantian categorical imperatives: the "impartial spectator," a conscience of sorts, an imaginary being representative of all mankind in witnessing and judging all of our actions. Perhaps this explains the intensity of moral sentiment in religious adherents, who imagine the imaginary deific judge as somewhat less so. Smith makes this connection too: "As to love our neighbor as we love ourselves is the great law of Christianity, so it is the great precept of nature to love ourselves only as we love our neighbour, or … as our neighbour is found capable of loving us." How tragic if such wholesomeness is unexpected in the greatest of free trade defenders; as tragic as the apparent need today for labels of falsely implied contradiction, like "welfare capitalism" or "compassionate conservative."

Smith once proclaimed that the discovery of America was one of the "two greatest and most important events recorded in the history of mankind." This statement is well-taken by patriotic, red-blooded inhabitants of ours or any other country in the Western Hemisphere. But his choice for the other event, the discovery of a passage to the East Indies around the Cape of Good Hope, exposes profundity for gaffe. Or perhaps not. While Aristotle singled out laughter as the distinguishing feature of human beings, Smith perceived trade as that which divides us from the beasts: "the propensity to truck, barter and exchange one thing for another ... is common to all men, and to be found in no other race of animals." Historians would do well to heed an economist's perspective that the Reformation and the French Revolution were less relevant than the dispatch of these ideas to the far corners of the earth—their delivery ever on the heels of speculative commercial ventures.

* The term "capitalism" was not used by Smith or his contemporaries; it was coined by Marx. To Smith, free economics was simply the natural way of things, what he called "the system of natural liberty." That being a mouthful, and the endearing of the term "capitalism" over time by free market successes, have combined to make the term acceptable to its defenders despite Marx's original derogatory intent.