Is there more to Adam Smith than free markets?

He championed laissez-faire economics but also recognised the need for strong social institutions


No one is more widely quoted by people who have not read his work. Even those who have never visited a library, far less opened a copy of The Wealth of Nations, know that Adam Smith extolled the public benefit of individual selfishness and the necessity of maximally free markets, excoriating the malign impact of government intervention in economic matters. They are familiar with his metaphor of “the invisible hand” and know that it is “not from benevolence” that the baker provides our daily bread. Smith provided inspiration for Margaret Thatcher and Ronald Reagan, and occupies a place as an icon of economic liberalism. When Gordon Brown invited Alan Greenspan to Kirkcaldy, where Smith was born and Brown educated, Greenspan could suggest that the something in the air was not the smell of linoleum — which hung over that town for a century — but a contagious miasma of economic genius.

Those who know a little more of Smith know that he was also the author of The Theory of Moral Sentiments. In that work, the central characteristic of moral sensibility is “sympathy”; we must judge our conduct as would an impartial spectator, and must acquire the ability “to see ourselves as others see us”. Nineteenth-century German philosophers formulated “das Adam Smith Problem”. How could the same man be author of a philosophical work in favour of altruism and an economic work in defence of individualism?

Faced, like Brown, with the Scottish variant of “das Adam Smith Problem” — how to reconcile the leftist tenor of Scottish politics with the rightist views of Scotland’s greatest economist — some suggest that the real Adam Smith was to be found in The Theory of Moral Sentiments, not The Wealth of Nations.

In a remarkable and intensely readable book, Jesse Norman dispels “five myths” about Adam Smith. Norman is a Conservative MP, and the very existence of the book, which draws on his background as a philosopher but also displays wide knowledge of economics and the history of the Enlightenment in 18th-century Edinburgh, is a rejoinder to those who fear that the intellectual has disappeared from politics, along with respect for facts and contact with reality.

“Das Adam Smith Problem” is one such myth. While Smith’s thinking obviously developed over the near 20 years between his two defining books, there was no Damascene conversion in which the young idealist philosopher became the older sceptical economist. His moral philosophy was not as benign as the crass description suggests. More importantly, his economics was not as unforgiving as the crude description suggests. The greatest myth is that Wealth was a rightwing tract, and that its author would have heard the noise of the trading floor as music in his ears and regarded the collateralised debt obligation as the epitome of human ingenuity.

The first and largest part of Adam Smith is devoted to an account of the man in his life and times. Smith numbered David Hume and Edmund Burke among his friends — Burke was the subject of an earlier biography by Norman, who makes a strong case for the essentially parallel development of their thought. And the Edinburgh of his day demonstrated an extraordinary display of intellectual firepower. But Smith was, it would seem, a misanthrope, who lived with his mother until she predeceased him by only six years. He engaged in no known romantic attachments and was the subject of a recent book by a feminist economist entitled Who Cooked Adam Smith’s Dinner?

Smith was supported by earnings from his professorship at Glasgow, where a university teacher’s earnings depended on fees collected directly from students in the class. This contrasted with Oxford, where Smith had spent six unhappy years, and where, he observed, the dons had mostly given up even the pretence of teaching. Smith’s misanthropic scepticism extended widely — to business people (“an order of men . . . who have generally an interest to deceive and even to oppress the public”), to the rich (“the chief enjoyment of riches consists in the parade of riches”), to empire (“a project altogether unfit for a nation of shopkeepers, but extremely fit for a nation whose government is influenced by shopkeepers”), and to statistics (“I have no great faith in political arithmetic”). But Smith relinquished his professorship in 1763, and the writing of Wealth and the remainder of his career was financed by the Duke of Buccleuch, who as a young man employed Smith as a tutor.

The second part of Norman’s book summarises Smith’s thought. We rely on Smith for the clear formulation of two foundational ideas of economics — the division of labour and the associated mutually beneficial character of exchange. Wealth begins with the productive pin factory, which derived economies of scale and developed specialist capabilities, and the exchange of these capabilities made them sustainable. If one needs reassurance that economics is more than gut instinct, then the contrast between Donald Trump’s naive view of trade and Smith’s more thoughtful one is sufficient reminder.

In short, modern humans — uniquely — are productive because they engage in co-operative activity. “It is inconceivable that you ever see two chimpanzees carrying a log together,” writes primatologist Michael Tomasello. Pigeons can fly and humans can’t, but humans can build Airbuses. And what is remarkable is that no one human knows how to build an Airbus, but tens of thousands of people taken together, do. The division of labour has gone far beyond anything Smith imagined, and while praising his insights we need to remember, as Norman does perhaps insufficiently, that Smith was writing in a time when the Carron Iron Works, which opened in 1759, represented the cutting edge of industrialisation. The reason UK gross domestic product per head has risen so much since Smith wrote Wealth is not that we have become more individualistic but that we have become more co-operative.

Now the power of the metaphor of the invisible hand is the recognition that such co-ordination is emergent; it does not require a co-ordinator. The production of the Airbus requires a complex mixture of markets and hierarchies. No entrepreneur could go shopping to buy the parts for an Airbus, and the design emerges through the efforts of many, not the direction of a big boss. As Norman observes, the evolutionary processes that Darwin and Wallace would articulate a century later are present in embryonic form among the 18th-century Scottish thinkers of which Smith was a distinguished member. And the Burkean conservatism to which Norman subscribes is based on a profound respect for the dimly understood processes of social and cultural evolution.

Which leads to the question with which Norman ends: “Why it Matters”. What does a thinker of pre-industrial society have to contribute to solving our 21st-century predicaments? Norman correctly observes that the centre-left and centre-right of politics both lack a coherent economic narrative today, and he argues that we can find relevant pointers to one in Smith. He emphasises that Smith was writing about a market economy, not what came to be called capitalism, and that there is a difference. Smith would not have enjoyed a visit to a trading floor. And he did understand that a successful market economy requires the legal, social and economic infrastructure that only a strong state can provide. That strong state was only tolerable in an environment of pluralism and democracy sustained by wide mutual trust. And Smith identified many of the ways in which markets go wrong — through crony capitalism, in what we now call rent-seeking, and in the commodification of too much of our social lives. Markets function well only when embedded in strong and supportive social institutions. There is no contradiction between Moral Sentiments and Wealth.

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  1. OK, fine, but: the production of the airbus does not require a coordinator? What?

    So the CEO and central design team don’t count? All those government subsidies, don’t count? Pretty much every major modern technology was jump-started by government subsidies. Canals, airports, highways, navigation, electronics, aerospace… Nothing about national industrial policy? With respect, things like the airbus do not ‘just happen.’ Europe wanted a competitor to Boeing. Historically, large and complex industries do not come out of pure private enterprise, the costs and risks are just too big for private actors to stomach.

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