Wealth

Part 22 - ADAM SMITH

In the first modern work of economics, Adam Smith (1723 - 1790) described how free markets, competition and specialization of labour could eliminate poverty and lead to economic prosperity.  Adam Smith noted that free markets were self organizing systems, like language, and required no designer.  Ecosystems, including all life on Earth, were also spontaneous self organizing systems; an observation that greatly influenced Charles Darwin.

His ideas about the "invisible hand" of economic liberalism considerably influenced the Industrial Revolution that turned Britain into the 'workshop of the world' in the 19th century.

Adam Smith described the economic system of the market economy (capitalism) in two books, The Theory of Moral Sentiments (in 1759) and An Inquiry into The Nature and Causes of the Wealth of Nations (1776). Centuries later both books are as relevant as ever.

However, today's politicians, and much of the voting public, are ignorant of Smith's warnings about the conceit of central planning. Smith wrote, 'The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would 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.'

Adam Smith described the, 'man of the system who 'is apt to be very wise in his own conceit and 'enamoured with the supposed beauty of his own plan of ideal government.' 

Smith defended free trade and warned of the danger of government control. In order to make profits businesses have to produce things people want to buy. In a free market people wanting to serve their own interests must promote the public interest. Today, many politicians, who pay no price for their mistakes, demonstrate their incompetence by directing our financial affairs. The results of this is more waste, a less productive economy and a lower standard of living.

Smith was educated at the University of Glasgow and at Balliol College, Oxford, and later travelled throughout Europe where he met the philosophers Immanuel Kant and Voltaire and François Quesnay and Jacques Turgot who were promoting a relaxation of trade barriers and laissez-faire (literally leave to do) economic policies.

Smith returned to Britain and discussed ideas with David Hume, James Watt (who revolutionized industry with improved steam engines), geologist James Hutton and chemist Joseph Black as well as influential politicians, philosophers and statesmen Edmund Burke, Prime Minister Frederick (Lord) North and Prime Minister William Pitt the Younger.

Adam Smith and David Hume wondered what economic institutions contributed to human prosperity, allowing people to rise out of poverty. Why were some people desperately poor while others were wealthier, Smith noted that while a businessman was concerned only with his profit he nevertheless benefitted society by providing goods or services at reasonable prices. 

'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 . . . generally, neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security; and intends only his own gain. So, he is led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it'.

Impressed by François Quesnay's ideas that unproductive labour did not contribute to growth, Smith reasoned that productivity could be improved by increasing the division of labour. This would lead to reduced prices, thus, 'increasing the standard of living—"general plenty" and "universal opulence"—for all'. Smith argued that competition in the free market benefitted society by keeping prices low, and warned against, "conspiracy against the public or in some other contrivance to raise prices".

Smith was strongly opposed to government giving special protections or privileges to businesses and allowing businesses to conspire against consumers.

He repeatedly warned that business owners tended to form cabals or monopolies to fix higher prices. Therefore, any proposed law or regulation of commerce should never be adopted without 'carefully examination, with the most scrupulous and suspicious attention'.

Smith understood that, for any society to survive and prosper, peace and justice were essential. Governments should protect citizens from invasion and not permit them to harm others, either directly or by refusing to honour a debt. He also argued that it was the duty of government to erect and maintain, 'certain publick works and certain publick 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 . . . though it may frequently do much more than repay it to a great society.'