The revolution of 1776
Americans weren’t the only revolutionaries in 1776. On March 9 of that year, Adam Smith published a book that would revolutionise how humans thought about economic life—The Wealth of Nations.
Smith’s book laid the groundwork for all the economic theory that followed it. It showed the mutual benefits from trade and commerce, the importance of markets and prices, the key roles of saving and capital, the virtues of specialisation and competition, and the dangers of overblown governments, regulation and protectionism.
In economics, The Wealth of Nations is the foundation of Classical and Neoclassical economics. Smith’s ideas like the comparative advantage of nations were built on by David Ricardo. His ‘invisible hand’ concept showed how self-interested action could combine into a beneficial overall social outcome, inspiring liberal and libertarian thinkers such as John Stuart Mill and Milton Friedman. His emphasis on the merits of free trade, the limited role of government intervention and the potential damage wrought by over-regulation informed the Industrial Revolution, the repeal of the ‘Corn Laws’ protectionism and the trade boom that followed it, and in more modern times, the free-market ideals of Ronald Reagan, Margaret Thatcher and a new wave of leaders in post-Soviet Europe.
In trade, Smith’s principles informed the creation of GATT, now the WTO, after the Second World War, promoting more open markets and falling tariffs. He understood the politics of protectionism and would not be surprised to see it rising again today. But he would point to the enormous benefits, particularly to the world’s poorest, of the era of globalisation and would insist that free trade was the best way to promote world peace and prosperity.
The Wealth of Nations continues to influence today’s economic policy in many ways. He pointed to the far-flung, international supply chains that we take for granted today. He advocated infrastructure projects that would allow commerce and trade to flow more smoothly. He noted the importance of innovation in driving product development and progress. And he realised how technological changes—steam engines in his era, perhaps, and AI in ours—created challenges for the human beings whose satisfaction is what economic production is all about. He knew that repetitive jobs would lead to what Marx later called ‘alienation’ and he advocated educational and cultural measures to counter it. To him, the focus of all economic thinking should be human beings, their prosperity and happiness—and that of the poorest human beings in particular.
We cannot know precisely what Smith would make of the modern world. His own was very different. He would probably be greatly impressed by how far specialisation had progressed, and the global prosperity—and greater equality—that it has engendered. He would applaud our efforts to keep trade free, while deploring arbitrary tariffs, controls and protectionism. He would admire the investments we have made in establishing property rights, the rule of law and the other institutions that are needed to make trade and commerce flourish and to build trust between all partners in them. He would recognise our greater focus on helping the poor, while insisting that the best help was not government-led welfare programmes, which raised taxes and depressed incentives and wealth-creation, but creating the conditions by which everyone could be an active part of the economic process and realise their desire to, as he put it, better their condition and that of their families and communities.
He would, however, see government of the size of ours as the greatest tyranny. Yes, he would say, governments have a duty to protect their citizens through defence and the institutions of justice. And yes, they can usefully provide public goods such as education and infrastructure which help the wealth-creating processes of trade and commerce to operate more easily and contribute to the health, prosperity and happiness of human beings. But he would despair at how much modern governments ‘drained from the pockets of the people’. He would warn about the incentive-crushing effect of high taxes and denounce their complexity and unfairness. He would note with disappointment how large, powerful and costly governments allow officials far more scope to abuse their powers and invite cronyism between politicians and big business for their mutual benefit, against the interests of ordinary citizens. In a far better-connected world, he would recognise the rising need for international cooperation in many policy areas; but he would wish this to be achieved by private individuals and national governments working together, not by giving powers to unelected international bodies that were not properly accountable to anyone.
But Smith was much more than a dry economist. He wrote of the importance of virtue in life, including economic life: of the social benefits of prudence, justice, beneficence and self-command. Not things that you hear much from economists today, nor from politicians. As a philosopher of ethics, he argued, and was one of the first to argue, that business was not an immoral activity. On the contrary, business was about delivering service to others, about creativity and progress; and ultimately it produced not just prosperity but social harmony. Nobody is forced to act in particular ways, as they might be in the social and economic dreams of planners. The basic human characteristic of empathy, part of our nature of social creatures, extends to a business’s staff, suppliers and customers. It would not thrive without them.
Self-interest, to Smith, was not the same as greed. Self-interest is what induces us to use our talents and abilities to serve others. The self-interest of suppliers is what delivers us our dinner. But it is long-term self-interest: a vibrant economy depends on suppliers that can be trusted, not those just out to exploit in the short term.
In his usual spacious style, Smith wrote to a friend that “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice…” We have followed his wisdom in so many ways. But do we really enjoy, today, any of those essentials?
Eamonn Butler