Why Adam Smith is still relevant, 250 years on
The teachings of Adam Smith, the great philosopher of capitalism and the father of economics, are not just for the present, says Stuart Watkins, but for the ages
In 1776, Adam Smith, often described as the father of economics, published his masterwork, The Wealth of Nations. It was in many ways a very different world to the one we now know, as John Kay recounts in The Corporation in the 21st Century. The men founding the new nation flattered themselves that it would become “the greatest and most formidable that ever was in the world”, and that “indeed seem[ed] very likely”, as Smith wrote. That seems prescient, but it was not for his political acumen that he is remembered, but for his economic insights.
“It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions in a well governed society that universal opulence which extends itself to the lowest ranks of the people,” said Smith in The Wealth of Nations. Since he wrote those words, inflation-adjusted GDP per head in Britain has grown more than tenfold. The scale of that change can perhaps better be imagined, as Kay recounts, by remembering that Adam Smith wrote his manuscript with a quill pen and that his Edinburgh residence was lit by candlelight. Smith, you could say, had barely glimpsed the modern world. It's unlikely he had even seen inside that famous pin factory he used as an example to describe the power of the division of labour. And yet he saw further and deeper than most men – of his own time, or indeed since.
Adam Smith's “invisible hand” is omnipresent
The true depth and greatness of Adam Smith's writings are unlikely to be fathomed by those who content themselves with commentary about them. A great deal of the latter was produced last month to celebrate the 250th anniversary of the publication of The Wealth of Nations, but those ploughing through it all would be unlikely to come to a true appreciation of Smith's contribution. It was dispiriting to read pieces intended as celebrations of Smith that were really little more than pretexts for marshalling, for a narrow ideological or political cause, some of Smith's most familiar and overused quotations – those making the case for and championing free trade and the power of the “invisible hand”, if of one ideological persuasion; those lamenting the power of the rich and the damaging effects of monopoly and the division of labour if of another.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Go to the source instead, however, and you will find an embarrassment of riches. Shortly before his death, Adam Smith was still working on revisions to his earlier book, The Theory of Moral Sentiments, which should be seen as a companion volume to his better-known work and be read alongside it. Anyone who has will see what a nonsense it is to claim, as some do, that Smith only mentioned the “invisible hand” a few times and that therefore the concept is not as of great importance as later commentators have made of it. It would be more true to say that the invisible hand is at work in pretty much every sentence Smith wrote, in both of his books.
In The Theory of Moral Sentiments, for example, Smith considers the natural sympathy that arises in our breast for the suffering of others. When another man is ill, for example, and especially if that man is Adam Smith saw further than most men near and dear to us, we imagine what it would be like to suffer ourselves as he is, and hence really do suffer on his account, and because of that seek to do what we can to alleviate his pain. Our natural sentiments assist us in this noble endeavour, yet if they did all the work perfectly naturally then our efforts to help wouldn't be seen as noble at all, rather just what happens as instinctively as a dog salivating at mealtimes. Because most of us are not perfectly selfless, at least not all the time, and because our ability to enter imaginatively and sympathetically into the suffering of others has its limits, we are apt to act in ways somewhere short of saintliness when confronted with the travails of others, especially if we consider that they are not making every possible effort to pull themselves together and get well.
Perhaps we go to see our relative in hospital, for example, but are secretly rather glad to get away from all the complaining when visiting time is over. This may seem something short of virtuous from the point of view of our own conscience, and yet because our limitations are probably all too well known by the sick person, that enters as a factor into their own recovery. They moderate expressions of their own suffering to levels that others can sympathetically enter in to, keep a stiff upper lip with regard to the rest, and make every effort to get well and return to social life. These efforts are in themselves conducive to healing. This explains why the best thing we can do when depressed is get out and spend time in company, even if it is the last thing we feel like doing. Selfishness, in short, in the right doses, can act as if by an invisible hand in ways that promote the general wellbeing of ourselves and indeed of society as a whole. A judicious mix of the sympathy and the selfishness of others helps lift us up and move us on.
The case for progress
This kind of deep psychological and spiritual insight is the sort of thing you expect more from the classic novels of the 19th century than from a philosopher or economist, and The Theory of Moral Sentiments abounds in them. They lay the basis for a true appreciation of The Wealth of Nations. Many take the later work to be a kind of dry economics textbook, but it is more fascinating than any manifesto for neoliberalism or free markets could ever be, and remains deeply relevant to modern-day issues.
Take the contemporary debate about the desirability of economic growth and progress, for example. One side argues that these represent, if not everything, then nearly everything we should care about when it comes to human flourishing and happiness. The other side mocks this crudely materialist understanding and argues instead for other, higher values, and for indifference to or even the reversal of growth, all the while unconsciously enjoying the fruits of it, and making arguments that would be unthinkable if we did not have that foundation to stand upon. The latter argument these days is more associated with the political left, the former with the right. Adam Smith sees more clearly than both. In chapter 8 of the first book of The Wealth of Nations, where Smith examines what determines wage rates, he argues that it is progress itself, far more than the level of wealth, that is important:
“…[I]t is in the progressive state, while the society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the labouring poor, of the great body of the people, seems to be the happiest and the most comfortable,” he wrote. “It is hard in the stationary and miserable in the declining state. The progressive state is in reality the cheerful and the hearty state to all the different orders of the society. The stationary is dull; the declining, melancholy.”
Human beings, in short, are goal-oriented creatures, and are miserable if they are poor, just as they may be miserable if they are rich, if there is not a sense of progress towards higher states of flourishing and prosperity. It is not solely a question of whether or not more money can deliver happiness; it is a question of understanding human nature.
Similarly, in the same chapter Adam Smith addresses another contemporary issue – population. If you want to increase the population, as many thinkers say is now urgently necessary, then the answer according to Smith is simple. If increasing levels of wealth through economic growth were delivered, wages would inevitably rise, and hence so would population: demand creates its own supply. Stated baldly like that it sounds mechanical and deterministic, but Adam Smith is simply well attuned to the conditions most conducive to the desired course of action. When people are thinking about having families, or about the size of them, naturally their state of mind about their own situation and prospective future will enter into the decision. Happy, creatively active people whose wages and general levels of prosperity are going up might feel more positively about the prospect of a larger family and its ability to survive and thrive than miserable drudges who can barely make ends meet as it is. The economic and the moral, the selfish and the selfless, are two sides of the same coin. The thing to rely on is the invisible hand, if we were just wise enough to allow it its sway.
Shining a light on modernity
Reading Adam Smith's books will inevitably shine a light on many other contemporary issues. What is “astonishing”, as Jesse Norman, the author of Adam Smith: Father of Economics, points out in The Washington Post, is that Smith still, 250 years on, “frames the central questions we face, not just about free markets, trade and capitalism, but about the nature of human society, and even what it is to be human at all”. Smith is, for example, often cited in rows about Donald Trump's tariffs. One of the central aims of Smith's book was, after all, to counter the mercantilism of his own day, and reading it “clarifies the stakes” at issue today. The central question, says Norman, is not whether tariffs or other government interventions are ever justified. Smith himself allowed that they could be, when national defence is concerned, for example. It is “whether trade policy strengthens or weakens the competitive foundations of prosperity”. The fact is they weaken it, impose costs not on foreign rivals but domestic consumers, and lay the foundation for “institutional drift” and “crony capitalism”.
Or take another contemporary issue, the rise of AI. Adam Smith recognised that the division of labour and rise of machinery, while leading to huge increases in general efficiency and prosperity, could also lead to the crippling of human abilities if not corrected by education. Today, new technologies threaten our cognitive abilities by allowing us to delegate them to a machine. That too may lead to huge efficiency gains and prosperity, but we must be alive to the risks, as Smith was to the risks of machinery in his day. There are, as ever, moral issues too. Smith's moral philosophy revolved around what he called “the impartial spectator”, the internalised voice through which we each evaluate our conduct. AI does not have a conscience or sense of responsibility. So if institutions “shift authority from human deliberation to algorithmic outputs – because those outputs are so much cheaper, faster or statistically superior – the habits of accountability, and the demands we make for them, may weaken”, says Norman. “The danger is subtle. It is not that machines will suddenly rule us. It is that we will grow accustomed to deferring to them.”
Calling Adam Smith an economist “seriously understates his significance”, says Clive Crook on Bloomberg. The breadth of his thinking is hard for modern readers to grasp, but the effort is worth it because his followers, “intent on narrowing and thereby desiccating the field, have let him down”. Smith “delighted above all in observing and disentangling unforeseen or unintended consequences” and “as a result he ranged far beyond economics… through moral and political philosophy, sociology, and social psychology… driven by curiosity more than conviction”. Above all, Smith was a pragmatist. “He saw that commercial society worked, and applied his open mind to asking why. After 250 years, his answers are still enlightening.”
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
