Friday, January 24, 2014

Why Adam Smith is still relevant today



People still talk about Adam Smith's "The Wealth of Nations" to this day

People still talk to this day about an economics book that was published in 1776. And though the year I'm talking about is rightfully associated with America, this book was actually published by someone in the mother country that we were then at war with. Adam Smith (the author of this book) was a Scotsman, which meant that he was also British.


John Trumbull's Declaration of Independence

Historical note: Adam Smith sympathized with the American Revolution

But his views about the American Revolution were actually fairly sympathetic to the Patriot side. He favored giving the American colonies either representation in Parliament, or independence from the mother country. (For evidence of this, see this blog post.) Because I discussed this subject at length in my other blog post referenced above, I will not go into it further here; but will now launch into my discussion of his political and economic ideas, and how they apply to our world today.


Adam Smith



The "invisible hand" of the free market inadvertently helps others at times ...

Adam Smith is most famous today for his support of the free market. He said that "an invisible hand" leads people pursuing their own self-interest to inadvertently help the interest of others. Liberals often downplay the importance of the phrase "invisible hand" to his philosophy, by pointing to the fact that it is only mentioned once in "The Wealth of Nations." But anyone who has read his book knows that the idea is central to his work, even if he only describes it once there with that particular phrase.

... by leading people to promote an end "which was no part of [their] intention"

Here is the quote about the invisible hand:

"Every individual necessarily labours to rend the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it ... By directing [his] industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it." (Source: Book IV, Chapter II)


Watt steam engine, developed sporadically from 1763-1775 (in Adam Smith's time)

Allowing individuals to pursue their own self-interest frequently helps society better than the alternative

The idea that allowing individuals to pursue their own self-interest helps society more than directing their economic activities is central to Adam Smith's work. This is not to say that Adam Smith thought we need no regulation - like his conservative followers today, Adam Smith was no anarchist, as he believed there should be government and the rule of law. But he also believed that economic freedom should be maximized, and this is why he is so well regarded today by conservatives. He was a believer in the free market.


Adam Smith

We all meet our needs by appealing to others' self-interest

This belief in the power of self-interest is eloquently expressed in another great quote from "The Wealth of Nations":

"Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages." (Source: Book I, Chapter II)


Exeter work house - England, 1744 (during Adam Smith's lifetime)

Only a beggar depends chiefly on charity ...

One might object that a beggar addresses themselves to the charity of others, rather than to their self-interest. But the very next part of the paragraph answers this argument:

... but even they don't depend upon it fully, according to Smith

"Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely. The charity of well-disposed people, indeed, supplies him with the whole fund of his subsistence. But though this principle ultimately provides him with all the necessaries of life which he has occasion for, it neither does nor can provide him with them as he has occasion for them. The greater part of his occasional wants are supplied in the same manner as those of other people, by treaty, by barter, and by purchase. With the money which one man gives him he purchases food. The old clothes which another bestows upon him he exchanges for other clothes which suit him better, or for lodging, or for food, or for money, with which he can buy either food, clothes, or lodging, as he has occasion." (Source: Book I, Chapter II)

Thus, even a beggar cannot depend entirely upon others' benevolence.


Karl Marx

Is there any economic system that doesn't run on greed?

And here, I will insert some commentary of my own: It is often said that capitalism runs on greed. While this is true, the conclusion liberals base on this - that capitalism is thus a worse system than others - is quite false. Every system runs on greed. In Marxist countries, too, people pursue their own self-interest. The difference is, the system does not reward them for helping the interest of others, or at least does not do so to the same degree. In a communist system, I have no freedom to reward others for getting me food. Thus, my chances for starvation are uncomfortably high. And no one else but the government can reward me for meeting their needs; so in the absence of being forced to do my work, it is in my self-interest to not work, and instead be lazy.

Capitalism harnesses some of people's greed towards more constructive ends

Capitalism, by contrast, harnesses a portion of people's greed towards more constructive ends, like meeting the needs of others. Small wonder, then, that capitalism meets people's needs better than any other system out there. The modern economist Milton Friedman makes the same point in his appearance on Phil Donahue, shown in the video below:


Should statesmen direct private people in what manner they ought to "employ their capitals"?

But if these things were not enough to prove Adam Smith's relevance to the world today, I have one last quote from "The Wealth of Nations," which is relevant to the issue of Obamacare's individual mandate to buy health insurance:

Adam Smith sure didn't think so, as he showed in this quote ...

"The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it." (Source: Book IV, Chapter II)


... and he would have disapproved of the Obamacare mandate today

Would that President Obama had read and listened to this quote.

Conclusion: Adam Smith is still relevant today

So that's a brief summary of why Adam Smith is still relevant to the world today. I hope this has been helpful both to those familiar with Adam Smith, and those who have never heard of him.

If you liked this post, you might also like:

Adam Smith and the American Revolution

Adam Smith and the division of labor

"The Wealth of Nations" and David Hume


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