- Carl Menger’s Theory of Institutions and Market Processes - April 13, 2021
- Dangerous Monetary Manipulations and Fiscal Follies - April 6, 2021
- Wars and “Following the Science” are Sure Paths to Tyranny - March 30, 2021
Adam Smith is, without doubt, the most famous member of that group of Scottish Moral Philosophers who contributed to the development of social and economic understanding of the market economy and how economic liberty makes human prosperity possible.
He was born in Kirkcaldy, Scotland on June 5, 1723 and he died on July 17, 1790, at the age of 67. His father died two months after he was born, and was raised by his mother, with whom he remained close throughout her life.
The story has been told that when he was four years old a band of gypsies stole him away while visiting his grandfather. A posse was formed, the gypsy band was caught up with, and little Adam was soon returned to his mother. How different the history of economic ideas might have been if instead of his release, Adam Smith had grown up among the gypsies and made a living reading tarot cards and picking pockets!
Adam Smith studied at the University of Glasgow and Oxford University, after which he lectured for a time at the University of Edinburgh, and then for thirteen years at the University of Glasgow (1751-1763) as Professor of Moral Philosophy. During this time he published his first book, The Theory of Moral Sentiments (1759).
For three years (1763-1766) he traveled throughout Europe as the private tutor of a young British nobleman, including almost two years in France, during which time Adam Smith came to know many of the leading French Physiocrats in Paris.
He then returned to Scotland for private study and writing, the culmination of which was the publication of An Inquiry into the Nature and Causes of the Wealth of Nations on March 9, 1776. In later years, Adam Smith was a commissioner of customs in Edinburgh, and rector of the University of Glasgow.
Adam Smith is purported to have been a truly absented-minded professor, with one historian of economic thought describing how “once he had fallen into a tanning pit while walking along in earnest [conversation] with a friend, and it was said that he had brewed himself a beverage of bread and butter and pronounced it the worst cup of tea he had ever tasted.”
But as a professor he was greatly admired by his students at the University of Glasgow. One of these students recalled his impressions of Adam Smith, the teacher:
[Adam Smith’s] manner, though not graceful, was plain and unaffected, and as he seemed to be always interested in the subject, he never failed to interest his hearers. Every discourse consisted commonly of several distinct propositions, which he successively endeavored to prove and illustrate. These propositions when announced in general terms had, from their extent, not infrequently something of an air of paradox.
In his attempts to explain them, he often appeared at first not to be sufficiently possessed of the subject, and spoke with some hesitation. As he advanced, however, the matter seemed to crowd upon him, his manner became warm and animated, and his expression easy and fluent . . .
By the fullness and variety of his illustrations the subject gradually swelled in his hands and acquired a dimension which, without a tedious repetition of the same views, was calculated to seize the attention of his audience, and to afford them pleasure as well as instruction in following the same subject through all the diversity of shades and aspects in which it was presented, and afterwards in tracing it backwards to that original proposition or general truth from which this beautiful train of speculation had proceeded.
Adam Smith’s Theory of Moral Sentiments
His first book, The Theory of Moral Sentiments (1759), attempts to explain the origin, nature and purpose of man’s “moral sense” that guides and restrains his conduct in his own life and in his interaction with others. Following the “spontaneous order” concept of his fellow Scottish philosophers, Adam Smith believed that man’s ethical sense is based on the moral principles and values of the society in which the individual is born.
The senses of “right” and “wrong,” “good” and “bad,” and “virtue” and “vice,” are the ones the child absorbs from those around him as he develops consciousness and reflection about the (social) world in which he lives. This fosters the “inner voice” of our conscience – which he called the “impartial spectator” – a voice that judges our actions and our conduct towards others. It praises or condemns all that we do or do not do.
It judges whether we truly deserve the praise or credit we may get for some act or outcome connected with us. Or whether we have been “justly” punished or criticized for something we have said or done, or not said and not done. It also teaches us empathy and sympathy in judging what others do as well as the successes or misfortunes that may befall them.
Men, by their nature, think and act in terms of their perceived “self-interest.” But this pursuit of self-interest is restrained and confined, as well as guided, by the “moral sense” concerning how we should act in our deeds toward others and ourselves.
Adam Smith’s System of Natural Liberty
In The Wealth of Nations, Adam Smith applied Francis Hutcheson’s idea of “natural liberty” in formulating a conception of the meaning of individual freedom and the role and functions of limited government in a free society. He argued that each individual should be at liberty to live his life his own way, guided by his own goals and purposes, and in peaceful association and competition with any and all others.
In this system of natural liberty government’s role would be narrow and limited to national defense, domestic law enforcement, and a small handful of what today goes under the name of “public goods.”
In Adam Smith’s own words:
All systems either of [government] preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.
The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.
According to the system of natural liberty, the sovereign has only three duties to attend to: First, the duty of protecting the society from violence and invasion of other independent societies. Secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice. And, thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.
Division of Labor and Spontaneous Order
Adam Smith begins his study of society and human association with an analysis of the benefits from a system of division of labor: By cooperating in a system of specialization, individuals are able to dramatically increase their potential productivity in comparison to self-sufficient production, under which each individual attempts to produce all that he needs through his own labor.
Through specialization of tasks, men develop speed, dexterity, and technical precision with the assistance of machines that focus their activities on one or a small handful of tasks. The productivity of labor – output per worker – increases, as a result, the quantities, qualities, and varieties of goods available. He used the imagery of a small enterprise such as pen factory to show the gains from division of labor:
. . . The trade of a pin-maker; a workman not educated to this business . . . nor acquainted with the use of machinery employed in it . . . could scarce, perhaps, with his utmost industry make one pin in a day and certainly could not make twenty. But in the way in which this business is now carried on . . . the important business of making a pin is divided into about 18 distinct operations . . .
I have seen a small factory of this kind where ten men only were employed . . . But though they were very poor, and indifferently accommodated with the necessary machinery, they could, when they exerted themselves . . . make among them upwards of 48,000 pins in a day.
The huge benefit and human betterment that comes from this division of tasks, Adam Smith emphasized, is not the result of any planned or imposed economic order on humanity to bring this improvement about. Instead, it is a part of the spontaneous emergent outcome of the interactive associations among men. Said Smith:
This division of labor, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.
Whether this propensity be one of those original principles in human nature, and which no further account can be given; or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to enquire. It is common to all men, and to be found in no other species of animals, which seem to know neither this nor any other species of contracts.
Through the method of what many of the Scottish Philosophers called “conjectural history,” Smith asks us to imagine a small primitive tribe in which one man has a particular knack and ability to make sturdy bows and straight arrows the awareness of which lead his fellow tribesmen to offer him in exchange some other simple tools and products that they, in turn, have a productive advantage in making. Over time each, without any conscious intention of bringing about a social system of division of labor, discover the self-interested gain from increasingly specializing their labor in one or a few tasks and trading their specialized outputs for the wares of their neighbors.
Only retrospectively, indeed long after the societal fact, can it be seen and understood how the social system of division of labor, from which we all so much benefit, has emerged and taken form out of the cumulative interactions of multitudes of individual’s decisions to focus their, respective, efforts on a particular task for which they possess a productive advantage over others in their society.
Adam Smith marveled at the complexity of the provision of people’s wants through this developed system of division of labor, and which generates the prosperity that raises standards of living to amazing heights. In the 1770s, he pointed out the intricate network of already global commerce and trade that was brought to bear to produce even the simple and crude coat of an unskilled day laborer. In Adam Smith’s own words:
It is the great multiplication of the productions of all the different arts, in consequence of the division of labor, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people . . .
Observe the accommodation of the most common artificer or day-laborer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation.
The woolen coat, for example, which covers the day-laborer, as coarse and rough as it may appear, is the produce of the joint labor of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production.
How many merchants and carriers, besides, must have been employed in transporting the materials from some of these workmen to others who often live in a very distant part of the country! How much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which come from the remotest corners of the world!
What variety of labor too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver . . .
If we examine, I say, all these things and consider what a variety of labor is employed about each of them, we shall be sensible that without the assistance and cooperation of many thousands, the very meanest person in a civilized country could not be provided, even according to, what we very falsely imagine, the easy and simple manner in which he is commonly accommodated.
Self-Interest and the Market Order
Adam Smith argued that through this system of division of labor and a rule of voluntary exchange, men become interdependent for all the necessities and luxuries of life. But precisely because the “system of natural liberty” excludes violence, theft, or fraud, the only way any individual can acquire from others that which he desires is by applying his own knowledge, abilities, and resources in a manner that offers to those others what they desire, so they will give in trade what they have, which that first individual wants to obtain.
Thus, though it is no part of their motivating intention to improve the conditions of the life of others, in their own self-interest each individual must devote his efforts to serving the wants of others as a means to his own ends. While this is no part of the individual’s intention, the cumulative effect for society, Adam Smith argued, was that those goods most valued by others in society were the ones produced and offered on the market.
This outcome was far superior to any attempt by those in political power to consciously and intentionally guides production into various directions. Those in political authority possess neither the knowledge, wisdom, nor ability to do so better than each man in his own corner of society, who is most familiar with the surrounding circumstances and opportunities.
In one of the most famous passages in The Wealth of Nations, Adam Smith explained the logic and workings of the free market order:
Every individual who employs his capital in the support of domestic industry necessarily endeavors so to direct that industry, that its produce may be of the greatest possible value . . . In proportion as the value of this produce is great or small, so will likewise be the profits of the employer. But it is only for the sake of profit that any man employs a capital in the support of industry; and he will always, therefore, endeavor to employ it in the support of that industry of which the produce is likely to be of the greatest value, or to exchange for the greatest quantity of money or of other goods . . .
As every individual, therefore, endeavors as much as he can both to employ capital in support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors 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 . . . By 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 . . .
What is the specie of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his own situation, judge much better than any statesman or lawgiver can do for him.
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 can 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.”
Adam Smith had already warned of the danger from the social engineer – “the man of system,” as he calls him in The Theory of Moral Sentiments – who with great arrogance attempts to redesign society with little regard for the desires and goals of the members of that society. The end result, Smith warned, is resistance and conflict when the social engineer imposes his coercive power on the people whose wills are to be bent to the planner’s design:
The man of system, on the contrary, is apt to be very wise in his own conceit, and is often so enamored with the supposed beauty of his own ideal plan of government that he cannot suffer the smallest deviation from any part of it.
He goes on to establish it completely and in all its parts, without any regard either to the great interests or to the strong prejudices which may oppose it; he seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board;
He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.
If these two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder . . .
To insist upon establishing, and upon establishing all at once, and in spite of all opposition, every thing which that idea may require, must often be the highest degree of arrogance. It is to erect his own judgment into the supreme standard of right and wrong. It is to fancy himself the only wise and worthy man in the commonwealth, and that his fellow citizens should accommodate themselves to him, and not him to them.
Here in its essence was a conception of a society of liberty not needing and potentially threatened by a controlling and dominating government, and nowhere so dangerous as in the arrogant and presumptuous hands of the social engineer and political planner who believes himself wise, knowledgeable and good enough to direct the affairs of all the others in society.
But this was not the end of his insights and arguments about the nature and workings of the social and economic order. Adam Smith also explained how and why government need not and cannot successfully direct the trading patterns of nations better than the individual citizens of these countries can do. He attempted to analyze what determined the values and prices of goods in the market, and how this brings about a coordinated balance between supply and demand. And he applied the logic of spontaneous order to demonstrate how freedom came increasingly to replace the status society of privilege and favoritism.
These themes will be discussed in part 2 on Adam Smith.
[Originally Published at the Future of Freedom Foundation]