Passages From The Wealth of Nations
The following passages from Adam Smith’s An Inquiry Into the Nature and Causes of the Wealth of Nations have received enormous attention over the centuries following their publication in 1776.
- “[A man] will be more likely to prevail if he can interest their self-love in his favour, and show that it is for their own advantage to do for him what he requires of them … 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.”
- “As every individual, therefore, endeavours as much as he can both to employ his capital in the support of. . .industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render 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. . .(B)y directing that 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. I have never known much good done by those who affected to trade for the public good.”
These passages are seen as evidence of Adam Smith promoting laissez-faire capitalism. Note the introduction of the “invisible hand” meme in the second passage, one that has been propagated around without much regard for context. These famous quotes convey the idea that it is through the selfish pursuit of our own goals that the good of the economy results, and this is more desirable than a direct, motivated pursuit of social good. The anti-free market positions advocated by Adam Smith, therefore, come as a shock to those who imagine him as the paragon of the laissez-faire paradigm.
The Anti-Libertarian Positions of Adam Smith
Below is a short list of statist policies advocated by Adam Smith.
- Government education as a way to tame the masses, dissuading them from opposing the government.
- Militarization of the nation state.
- Government control of coinage.
- Regulation of banking, in addition to allowing fractional reserve banking . Note that fractional reserve banking was rightly viewed as inflationary and opposed by economists who were his contemporaries.
- Expansion of public works.
- Government control of the post office.
- Interest rate ceilings (capping rates at 5%), which would effectively eliminate most forms of lending.
- A large array of taxes.
Not the Founding Father of Economics
Rather than being the founding father of Economics (Cantillon, Turgot, and many others preceded him), Adam Smith was responsible for much retardation of the field. His models were rife with inconsistencies, providing broken solutions to problems answered long earlier. His writings lent themselves to various contradictory interpretations; both capitalists and Marxists would go on to find inspiration from his works.
Faulty Proclamations
Division of Labor
Adam Smith, in his view of economics, emphasized division of labor to the point it superseded other important matters such as the role of capital accumulation and technological progress. The established common sense explanation that two individuals enter an exchange due to both benefiting or expecting to benefit from the consequence of the exchange was replaced by the Smithian notion of irrational, innate propensity of humans to “truck, barter, and exchange.” Smith’s egalitarian outlook could not accommodate differences in natural skills and personal preferences of workers. All laborers, to him, were equal; all differences among laborers were a result of division of labor, rather than the cause of such division.
Division of labor itself is presented in contradictory light within The Wealth of Nations. In book 1, he lauds division of labor for promoting civilization, expanding human intelligence, and increasing affluence. In book 5, he turns around, blaming division of labor for intellectual and moral degeneration.
Unproductive Labor
Adam Smith made stark distinction between productive and unproductive labor. Agriculture was productive. The production of capital goods was productive. But the production of consumer goods (including durable consumer goods such as housing) was unproductive. Similarly, he held that services were unproductive. Any labor (outside of agriculture) engaged in the production of something to be consumed was unproductive labor. Thus, there was an exclusive emphasis on capital production and accumulation.
Theory of Value
The mental gymnastics around the water-diamond paradox is a curious case. (The paradox is as follows. Water is essential for life, yet is free. Diamond, which is nonessential, commands a high price. Are diamonds more valuable than the very thing that sustains life?) Adam Smith, in his early years, resolved it by presenting arguments around relative scarcity between the two commodities. While not as elegant a resolution as the marginal utility argument that would be formulated later by Ludwig von Mises, it was far better than the dubious dichotomy of “value in use” vs “value in exchange” presented in The Wealth of Nations, per which Smith concluded that water had great utility and small value.
Much emphasis is also exerted on the idea of long term normal (equilibrium). Rather than treating it as a tool to make inferences about the direction of market movements, and recognizing that this equilibrium is never really achieved because of the flux in the fundamentals of supply and demand resulting in shifting of the equilibrium, Smith instead held that the economy remained in equilibrium most of the time with occasional deviations from it. The role of the entrepreneur, the capital allocation, the risk assumption, etc, are entirely dismissed as a result.
Smith also presents various erroneous notions about the cost of production theory (that prices are proportionate to wages + rent + profit, ignoring market supply and demand), the quantity of labor pain theory (that the relevant cost of production that determines equilibrium price is simply the quantity of labor embodied in the production process), and labor command theory along the way.
Theory of Money
Adam Smith failed to notice the relationship between the quantity of money supply and prices and balance of trade. He supported fractional reserve banking and did not see excess money printing as inflationary. Bank notes were necessarily tied to the underlying money, in his view; and any excess bank notes in circulation would simply return to the banks, without exerting any upward pressure on prices.
Lessons
The theory of linear progress holds that knowledge builds upon itself (that scholars and researchers study those who came before them, test their ideas carefully, and incorporate their knowledge into their own bodies of work), and that science progresses upward in a straight line over time. Whether this belief is valid needs to be examined. The Kuhnian paradigm is more apt. People seldom study, or have the time to patiently test anything. Knowledge is often lost to history. Adam Smith, the man, the meme, has somehow successfully blotted out the works of the great economists who came before him. It is on us to excavate the works of scholars such as Cantillon and Turgot, and later on, the Austrians, who in the modern era are sidelined by a different kind of retardation of Economics (one brought about by blind mathematization).
References
- Murray Rothbard, Economic Thought Before Adam Smith (1995), Chapter 16.
- Adam Smith, And Inquiry Into the Nature and Causes of the Wealth of Nations (1776).