Smith became an important voice in the debates of the day, greatly influencing the policy climate that facilitated the Industrial Revolution, which was just taking off when he published his great book (James Watt, whose refinements of the steam engine led to the Industrial Revolution’s big bang, was a young instrument maker and acquaintance of Smith’s at the University of Glasgow). Smith also sympathized with the rebellious American colonists, stressing the excessive cost of controlling North America rather than simply trading freely with it.
His concerns about colonial policy reflected a more general skepticism about the character of politicians and the competence of governments. Above all, he considered it a mistake to imagine that governments could promote economic growth or compensate for the alleged shortcomings of the market, which represented a complex natural order. Such an authority, he noted, “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.”
But folly and presumption die hard.
If Adam Smith were brought back to life today, he would not likely regard current economic problems as worthy of the greatest attention. He would find it perhaps far more astonishing that tens of millions had died in the previous century at the hands of regimes whose primary justification was the alleged evils of the Smithian system. Moreover, he might note that the term “capitalism” (which he never actually heard) appeared to be unpopular even in the countries that had flourished under it. This was largely because its image had been crafted by its enemies, as some of Smith’s most brilliant successors had pointed out. Joseph Schumpeter, for example, wrote that “capitalism stands its trial before judges who have the sentence of death in their pockets.” Friedrich Hayek also noted that the trial was rigged. “With its modern connotations,” he wrote, “[capitalism] is itself largely a creation of [the] socialist interpretation of economic history.”
But socialism wasn’t capitalism’s only enemy. Where markets had bloomed, they had tended to promote one-person/ one-vote systems of representative democracy (inconceivable in Smith’s day). Smith had noted the self-interested nature of businessmen, but believed that competition would prevent them from excess. Yet democratic governments had constructed a huge edifice of rules and regulations whose fundamental assumption was that the invisible hand was feckless and potentially dangerous. Their guiding principles were that workers would be exploited, consumers would be ripped off or poisoned, organizations would grow dangerously large, and that the natural world would be despoiled by capitalist “greed.”
Smith would no doubt find it astonishing that the fruits of the market system seemed to be so taken for granted. In The Wealth of Nations, he pointed to the stunning market coordination reflected in the most basic commercial items. A simple woollen coat, he observed, “as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen.” He concluded that “without the assistance and co-operation of many thousands the very meanest person in a civilized country could not be provided, even according to what we very falsely imagine the very easy and simple manner in which he is commonly accommodated.”
What would Smith think of the infinitely more complex specialization and co-operation involved in producing automobiles, jet aircraft, telecommunications, computers, or modern pharmaceutical products? What would he think of the absorption of his butcher, brewer, and baker into “supermarkets” that sported literally tens of thousands of products from all over the globe? Hadn’t we noticed, he might ask, just how sensationally rich we were compared with the benighted eighteenth- century denizens of Kirkcaldy, whose oatmeal-fed lives tended to be nasty, brutish, and short? If we wanted some perspective, Smith might suggest, what about starting there?
I asked Scots-born Harvard historian Niall Ferguson, an academic superstar whose recent book, The Ascent of Money, puts the current crisis in long-term historical perspective, what Smith might think of the state of the world. “If we imagine Adam Smith joining us now,” said Ferguson during a visit to Toronto, “he would say, ‘Well, it’s just as I said: the division of labour and comparative advantage [i.e., international trade] have generated extraordinary wealth. I’m not surprised to find opulence in a place that, when I lived, was a barren wasteland. But I’m also not surprised to find that the problems I identified in The Wealth of Nations have persisted. Governments continue to distort and disrupt the invisible hand’s work. Imperial policies still get pushed as they were in the eighteenth century, and there are still — even more so than in the eighteenth century — all kinds of parasitical groups who are a dead weight on the economy.’”
We need reminding that economic growth and improvements in general welfare were virtually unknown until the Industrial Revolution, which has increased per capita income in the West (and Japan) by factors of twenty or more. By every objective measure, from life expectancy through food availability, infant mortality, literacy, and access to consumer goods, the lot of humans in capitalist systems has improved, even if — as Ferguson points out — the path has been far from smooth. Why, Smith might ask, would we fret about a mere growth slowdown, or temporary contraction, in enormously rich economies?
Turning his eye to these troubles, Adam Smith would see culpable imprudence on the part of giant financial institutions. He was concerned about potential problems with the separation of management and ownership. He wrote of the directors of limited-liability companies that “being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own…Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.”
