Adam Smith

"I am a beau in nothing but my books." - Adam Smith

The dismal science Economics

Economic Systems

$  Market Economy   €  Mixed Economy   ☭ Socialist Economy

Major Concepts

Too big to fail Supply-side economics Monetarism Universal health care Thomas Malthus

The Worldly Philosophers

Amartya Sen Friedrich Hayek Timothy Geithner Robin Hanson v - t - e

Adam Smith was an 18th-century Scottish economist often considered to be one of the fathers of modern economics, discussing the role of the free market. His 1776 work An Inquiry into the Nature and Causes of the Wealth of Nations contains several important ideas that continue to be relevant in contemporary politics and social science, such as the "invisible hand." He is also one of the most prominent figures in classical liberalism. Like Machiavelli, the poor guy's legacy is tarnished by a very unearned public perception as an evil dickhead.

Smith's views

The invisible hand

“”The ‘invisible hand’ appears once in Smith’s History of Astronomy (Smith 1980, 95) referring to pagan and heathen superstitions about the existence of the Roman god, Jupiter; once in Moral Sentiments (184-185) referring to feudal lords divvying up their produce among their retainers and tenants in roughly the same proportions as would be distributed if the land had been divided equally; and once in Wealth of Nations (456), referring to degrees of caution about the risks associated with distant trade with the British colonies in North America, which incentivised some, but not all, merchants to act circumspectly in their preference for domestic projects, thereby unintentionally benefiting the domestic economy. This is only three times in over a million words published in his surviving essays and books, written between c.1744 and 1790.

Smith used what appears to have been a common 18th-century metaphor of an "invisible hand" just three times in his writings, referring to three different things. Today, Chicago school and Austrian school economists claim that what Smith had meant in the third instance in which he is known to have used it is that when an economy is dominated by private power, an invisible hand "guides" the allocation of resources in the most efficient and optimal manner for everyone in it. However, Smith himself only used the term once in The Wealth of Nations in reference to the effect of international trade on domestic trade, specifically between Britain and North American colonies. He argued against the idea that liberalized international trade would destroy the English economy, writing that a "home bias" among English investors who didn't speak foreign languages or have reliable contacts overseas would probably prevent this.

Adam Smith: Trickle-downer?

Smith is often invoked by conservatives and supply-side economics advocates (Alan Greenspan, adoring Smith's "clarity to the seeming chaos of market transactions," is the most infamous) despite the fact that Smith's actual beliefs are considerably more moderate than they are often portrayed. One of Smith's more famous quotes is:

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. 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.

Or: businesses love to form cartels to increase profits.

One of the key elements of The Wealth of Nations was his theory of rent. He rejected the idea that landlords deserved rent as payment for looking after and improving properties, noting that even unimproved land receives rent, and saw that an essentially antagonistic and monopolistic relationship exists between landlord and tenant. He deduced that the landlord will always set rent at the highest possible level at which the tenant can exist and be productive, so the tenant is left with "the smallest share [of his income or production] with which the tenant can content himself". Specifically in agriculture, the landlord seeks to leave the tenant farmer with only the basic share necessary for life and work: "Whatever part of the produce, or, what is the same thing, whatever part of its price, is over and above this share, he [the landlord] naturally endeavours to reserve to himself as the rent of his land, which is evidently the highest the tenant can afford to pay in the actual circumstances of the land." Marx praised this aspect of Smith's thought, while taking issue with Smith's views expressed elsewhere (e.g. on the value of labour).

Amartya Sen, in an article for the Financial Times, notes "It is often overlooked that Smith did not take the pure market mechanism to be a free-standing performer of excellence, nor did he take the profit motive to be all that is needed." In addition, Smith supported the government intervening for the purposes of universal education or poverty relief, something agreed upon more by the center-left than conservatives.

Wealth of Nations should also be understood in the context of Smith's Theory of Moral Sentiments, which provided an overarching description of his moral system. Moral Sentiments argues that two of the most important guiding factors in human life are sympathy and conscience (which he referred to as "the impartial spectator") and generally explores many philosophical themes outside of economics proper.

It has also been pointed out that Smith basically supported some form of progressive taxation, writing in The Wealth of Nations:

The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

Smith worked for 12 years as Commissioner of Customs from 1778 to 1790, in charge of collection of customs and excise duties, during which time he recommended new taxes on inhabited property and malted barley to fund the war against the USA. This doesn't fit well with the American vision of Smith as a defender of freedom and enemy of taxation and tariffs.

Often ignored quotes

Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all.

Wherever there is great property, there is great inequality.

Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favor of the masters.

As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.

The violence and injustice of the rulers of mankind is an ancient evil, for which, I am afraid, the nature of human affairs can scarce admit a remedy.

In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of people, comes to be confined to a few very simple operations [...] The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.

No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.

Adam Smith Institute

The Adam Smith Institute (ASI) is an extreme free market neoliberal think tank and lobbying organisation based in the UK. It calls for slashing the size of the state and leaving pretty much everything up to the market. Hence it represents the absurd caricature of Adam Smith that our article attempts to critique.

It was founded in 1977 by Madsen Pirie, Eamonn Butler, and Stuart Butler. After a year Stuart Butler moved to the US to join the Heritage Foundation, while Pirie remained President and Eamonn Butler Director, positions they still hold as of 2022. It comprises three organisations: a British company, a British charity, and an American non-profit foundation.

In the 1980s it was closely associated with Margaret Thatcher and policies such as privatisation of state assets and the 1980s Poll Tax whose failure played a significant part in Thatcher's departure from the premiership. Pirrie was famous for saying "We propose things which people regard as being on the edge of lunacy. The next thing you know, they're on the edge of policy." This doesn't alter the fact that they're still lunacy.

Amongst its crazier ideas was to abolish all arts funding in the UK, and instead give every British citizen a £11 entertainment voucher that they could spend on what they liked.

According to DeSmog, it has repeatedly argued that left-wingers and environmentalists are panicking and exaggerating the dangers of global warming, and the ASI has claimed a "mild warming" resembling natural climate change is all we can expect.

In 2018 it was investigated by the Charity Commission after offering contact with Conservative ministers in return for donations; it removed the offer from its website.

It is not transparent about its funding sources, but it has received US$ 1.4m from the John Templeton Foundation.

External links

• Wealth of Nations
• The Theory of Moral Sentiments
• Adam Smith and the Invisible Hand, Plus Magazine
• Adam Smith's Lost Legacy, a blog detailing the use and abuse of Smith's philosophy