He might be the poster boy for free-market economics, but that distorts what Adam Smith really thought
If you’ve heard of one economist, it’s likely to be Adam Smith. He’s the best-known of all economists, and is typically hailed as the founding father of the dismal science itself.
Furthermore, he’s usually portrayed as not only an early champion of economic theory, but of the superiority of markets over government planning. In other words, Smith is now known both as the founder of economics, and as an ideologue for the political Right.
Yet, despite being widely believed, both these claims are at best misleading, and at worst outright false.
Smith’s popular reputation as an economist is a remarkable twist of fate for a man who spent most of his life as a somewhat reclusive academic thinker. Employed as professor of moral philosophy at the University of Glasgow, the majority of Smith’s teaching was in ethics, politics, jurisprudence and rhetoric, and for most of his career he was known for his first book, The Theory of Moral Sentiments (1759). His professional identity was firmly that of a philosopher – not least because the discipline of ‘economics’ didn’t emerge until the 19th century, by which time Smith was long dead. (He died in July 1790, just as the French Revolution was getting into full swing.)
Admittedly, Smith’s reputation as an economist isn’t entirely mysterious. His oft-quoted An Inquiry into the Nature and Causes of the Wealth of Nations (1776) was undoubtedly important in the eventual formation – in the next century – of the discipline of economics. But even here things are not as straightforward as they appear. For The Wealth of Nations – a 1,000-page doorstopper that blends history, ethics, psychology and political philosophy – bears little resemblance to the ahistorical and highly mathematical nature of most current economic theory. If anything, Smith’s best-known book is a work of political economy, a once-prevalent field of enquiry that suffered a striking decline in the latter half of the 20th century.
Smith’s reputation, however, began to get away from him early on. Shortly after publication, The Wealth of Nations was fêted in the British Parliament by the Whig leader Charles James Fox. Ironically, Fox later admitted that he had never actually read it (few subsequent non-readers of the book have showed such candour, despite plenty of them citing it). Indeed, Smith suspected that those quickest to sing his praises had failed to understand the main arguments of his work. He later described The Wealth of Nations as a ‘very violent attack … upon the whole commercial system of Great Britain’. Despite this, his vocal political cheerleaders in Parliament continued to prop up the very system that Smith was railing against.
Yet if Smith was disappointed by his work’s immediate reception, he would likely have taken even less cheer from the future uses to which his name would be put. For it has been his fate to become associated with the strain of Right-wing politics that rose to dominance in the early 1980s, and which continues to exert a strong influence on politics and economics today. Usually known as neoliberalism, this development is most famously associated with Ronald Reagan and Margaret Thatcher. But it is in fact a movement with deep intellectual roots, in particular in the mid-century writings of the economists Friedrich Hayek and Ludwig von Mises. Later, the Chicago economist Milton Friedman and the British policy adviser Keith Joseph championed it during the 1980s, as did the extensive network of academics, think tanks, business leaders and policymakers associated with the Mont Pelerin Society.
Neoliberals often invoke Smith’s name, believing him to be an early champion of private capitalist endeavour, and a founder of the movement that seeks (as Thatcher hoped) to ‘roll back the frontiers of the state’ so as to allow the market to flourish. The fact that there is a prominent Right-wing British think tank called the Adam Smith Institute – which since the 1970s has aggressively pushed for market-led reforms, and in 2016 officially rebranded itself a ‘neoliberal’ organisation – is just one example of this tendency.
It is certainly true that there are similarities between what Smith called ‘the system of natural liberty’, and more recent calls for the state to make way for the free market. But if we dig below the surface, what emerges most strikingly are the differences between Smith’s subtle, skeptical view of the role of markets in a free society, and more recent caricatures of him as a free-market fundamentalist avant-la-lettre. For while Smith might be publicly lauded by those who put their faith in private capitalist enterprise, and who decry the state as the chief threat to liberty and prosperity, the real Adam Smith painted a rather different picture. According to Smith, the most pressing dangers came not from the state acting alone, but the state when captured by merchant elites.
The context of Smith’s intervention in The Wealth of Nations was what he called ‘the mercantile system’. By this Smith meant the network of monopolies that characterised the economic affairs of early modern Europe. Under such arrangements, private companies lobbied governments for the right to operate exclusive trade routes, or to be the only importers or exporters of goods, while closed guilds controlled the flow of products and employment within domestic markets.
As a result, Smith argued, ordinary people were forced to accept inflated prices for shoddy goods, and their employment was at the mercy of cabals of bosses. Smith saw this as a monstrous affront to liberty, and a pernicious restriction on the capacity of each nation to increase its collective wealth. Yet the mercantile system benefited the merchant elites, who had worked hard to keep it in place. Smith pulled no punches in his assessment of the bosses as working against the interests of the public. As he put it in The Wealth of Nations: ‘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.’
The merchants had spent centuries securing their position of unfair advantage. In particular, they had invented and propagated the doctrine of ‘the balance of trade’, and had succeeded in elevating it into the received wisdom of the age. The basic idea was that each nation’s wealth consisted in the amount of gold that it held. Playing on this idea, the merchants claimed that, in order to get rich, a nation had to export as much, and import as little, as possible, thus maintaining a ‘favourable’ balance. They then presented themselves as servants of the public by offering to run state-backed monopolies that would limit the inflow, and maximise the outflow, of goods, and therefore of gold. But as Smith’s lengthy analysis showed, this was pure hokum: what were needed instead were open trading arrangements, so that productivity could increase generally, and collective wealth would grow for the benefit of all....MORE