Ideas and Consequences
Mr. President, Meet Mr. Smith
Lawrence W. Reed
December 2008 • Volume: 58 • Issue: 10 •
As I listened to this year’s presidential candidates discuss economic
matters, one thought came repeatedly to mind: Oh, how much they could
learn from Adam Smith! Since it’s obviously possible for people to reach
the pinnacle of politics without seeming to know much about either
economics or Smith, perhaps we’re overdue for a little reminder about
both.
Smith was baptized on June 5, 1723, in Kirkcaldy, Scotland. It’s not
known for certain, but it is presumed that he was either born on that
very day or a day or two before. Whichever date it was, he entered a
world that his reason and eloquence would later transform.
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 came before, it was a system
rooted in error that stifled enterprise and treated individuals as pawns
of the state.
Mercantilist thinkers believed the world’s wealth was a fixed pie, giving
rise to endless conflict among nations. After all, if you think there’s
only so much and you want more, you’ve got to take it from someone
else.
Mercantilists were economic nationalists. They thought foreign goods were
sufficiently harmful that government policy should promote exports and
restrict imports. Exports were to be paid for in gold and silver, not
products. To the mercantilist, the precious metals were the very
definition of wealth, especially to the extent that they piled up in the
coffers of the monarch.
Because they had little sympathy for self-interest, the profit motive,
and the operation of prices, mercantilists wanted governments to bestow
monopoly privileges on a favored few. In Britain the king even granted a
protected monopolyto a particular, highly placed nobleover the
production of playing cards.
Economics in the late eighteenth 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 book, 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 enterpriseand all the motives and actions
in the marketplace that give rise to itwas deserving of careful,
full-time study as a modern discipline of social science. 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.
Smith’s choice of the longer title is revealing in itself. Note that he
didn’t set out to explore the nature and causes of the poverty of
nations. Poverty, in his mind, was what happened 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 mercantilist order.
Wealth was not gold and silver in Smith’s 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.
Exploding an Old Fallacy
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, frowned on for ages as acquisitive, antisocial behavior,
was celebrated by Smith 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.” Moreover, self-interest was 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, he 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 less
of. It wasn’t necessary for the king to assign tasks and bestow
monopolies. Prices and profit would act as an “invisible hand” with far
more efficiency than any monarch or parliament. Competition would improve
quality and reduce prices.
Smith displayed an understanding of government that eclipses that of many
citizens today when he wrote, “It is the highest impertinence and
presumption, therefore, 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.”
The ideas of Adam Smith exerted enormous influence before he died in 1790
and especially in the nineteenth 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. A tribute to him
more than any other individual, the world in 1900 was much freer and more
prosperous than anyone imagined in 1776.
Ideas really do matter. America’s new president should take time to get
acquainted with Adam Smith.
Postscript: In a recent essay in the New York Times Sunday Book
Review, Newsweek editor Jon Meacham revealed that when he
e-mailed Barack Obama about the books that have most influenced him,
Obama included The Wealth of Nations and The Theory of Moral
Sentiments on his list. The country would benefit if the
president-elect would give them a second read before January 20.
http://www.thefreemanonline.org/columns/ideas-and-consequences-mr-president-meet-mr-smith/
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