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Peter Foster: Adam Smith's The Wealth of Nations at 250

The downside of a market system that invisibly answers people's needs is that they fail to appreciate this source of their well-being

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Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations (TWON), published on March 9, 1776, shares the year of its birth with the U.S. Declaration of Independence. Both documents were revolutionary. Smith described his book — which is considered by many the seminal work of economics — as a “very violent attack … on the whole commercial system of Great Britain.” However, he was optimistic about the prospects of the North American colonies, which he saw as a laboratory for his free market ideas. He predicted that the U.S. would eventually become a great nation and Britain’s senior trading partner, which it did.

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Intriguingly, the current incumbent of the White House has pursued some of the economic policies that Smith criticized.

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Adam Smith was born in Kirkcaldy, a little seaport just across the Firth of Forth from Edinburgh. He attended the Universities of Glasgow and Oxford before returning to a professorship at Glasgow, where he produced his first great work, The Theory of Moral Sentiments (TMS). Edmund Burke, the great conservative thinker and politician, wrote: “It certainly shows the author to have been a man of uncommon observation, not only of his own mental states, but of the life and ways of men about him.”

The book so impressed Charles Townshend, another prominent politician, that, after several years of trying, he eventually lured Smith away from Glasgow to accompany his stepson, the Duke of Buccleuch, on an educational Grand Tour of Europe. The assignment came with a pension that enabled Smith to return to his mother’s house in Kirkcaldy to write his magnum opus.

The crisis over the North American colonies, triggered in part by taxes Townshend imposed on them as Chancellor of the Exchequer, was unfolding as Smith was in London preparing his manuscript for publication. His insights in TWON were a key part of the intellectual atmosphere that both informed the U.S. founders and boosted the Industrial Revolution.

Smith pointed out that economic growth, and thus national wealth, is driven by three factors: the universal desire of people to “better their condition,” the division of labour, and free trade. “It is not,” wrote Smith, in perhaps the most oft-quoted passage from TWON, “from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

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Smith wasn’t suggesting that butchers, brewers and bakers lacked the milk of human kindness. It was just that we should recognize how much systemic good is done by profit-driven voluntary exchange.

Smith noted that people naturally “divide” their labour between trades and professions because this increases their productivity; that is, the amount of goods or services produced in a given period. The division of labour within enterprises also leads to potentially enormous increases in output. Smith used the example of a pin factory. Any individual, working alone, would have trouble making a single dress pin in a day, but 10 individuals with rudimentary machinery could produce an astonishing 48,000. Widespread free trade was desirable because larger markets spurred specialization and thus further productivity increases.

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This whole process was mediated by the “invisible hand” of the market.

In fact, Smith uses that famous phrase only once in TWON, but the concept pervades the work. It reflects how the price system facilitates and guides co-operation and competition, rewards efficiency and innovation, and creates wealth.

Smith observed how people fail to appreciate the commercial complexity embodied in even the most mundane products. He took as an example a plain woollen coat, which, “as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen.” Smith enumerated all the parts of the wool industry, all the merchants and carriers, all the elaborate machinery that would have been involved. “Without the assistance and co-operation of many thousands,” he wrote, “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.”

There is a downside to this unconscious aspect of the market, however. If you don’t have to think about it, you don’t have to understand or appreciate it, and you become more vulnerable to superficially attractive but damaging policies.

Smith’s principal policy target was mercantilism, the notion that a nation can be made great(er) by taxing or otherwise restricting imports, favouring exports, promoting national “champions,” and accumulating gold. He was not opposed to tariffs per se, as a source of revenue, but only as an instrument of what we today call “industrial strategy.”

Smith did not believe that markets could ever be “perfect,” or trade completely “free.” The business of the market was achieved through a rough “higgling and bargaining.” The division of labour had come about as the “consequence of a certain propensity in human nature … to truck, barter, and exchange one thing for another.” Smith refuted the notion that markets required perfection. “If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered.” He promoted free trade but never expected that it would be achieved. “To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that Oceana or Utopia should ever be established in it. Not only the prejudices of the publick, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it.”

Which brings us back to the present. Smith in fact conceded that tariff retaliation might be justified as a way of forcing trading partners to lower, or abandon, their own tariffs. “The recovery of a great foreign market,” he wrote, “will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods.”

But then comes the problematic part: “To judge whether such retaliations are likely to produce such an effect,” he wrote, “does not, perhaps, belong so much to the science of a legislator, whose deliberations ought to be governed by general principles, which are always the same, as to the skill of that insidious and crafty animal vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs.”

That cynical designation perhaps applies to the majority of current democratic politicians, but Smith appears to be saying “If you are in a trade war, Trump is your man!” Would it not be rash, though, to imagine that such an “animal” might be trusted with economic policy more broadly?

President Donald Trump’s main economic policy target is China, a persistent trade “cheat,” but he regards tariffs, not as an unfortunate stopgap to bring China (and other nations) to the negotiating table, but as a key revenue-generator and element of a broader interventionist strategy designed to “Make America Great Again.”

China, the world’s foremost mercantilist state, appears to have been a success. But its success is due more to the loosening of the shackles of Communism than to the embrace of mercantilism. Meanwhile — and relevant to China’s alleged success — President Trump’s policies are far from the most egregious recent example of the devastation threatened by Smith’s “men of system,” who treat economic actors as so many chess pieces. That dubious distinction goes to the almost universal embrace of “green” industrial strategy to promote “technologies of the future” in order to address an alleged “climate crisis.” That is one bad policy that has never been embraced by Trump. China, however, has taken the lead in the production of electric vehicles and wind and solar equipment. That thrust is now crumbling in the face of economic and scientific reality and the growing realization in the West of the threat it poses to national security.

Smith was certainly no mouthpiece for the nascent capitalist class of his day, even if they were the agents of his system. His observation that “people of the same trade seldom meet together … but the conversation ends in a conspiracy against the public” is much quoted by purveyors of competition policy. But Smith believed the problem was best dealt with by removing restrictions on the market and relying on competition.

Smith was an economic revolutionary but no anarchist. He believed that governments were essential not merely to enforce property and contract laws and punish the use of force or fraud, but to mount defences against external threats and provide infrastructure that could not be built privately. But he warned of the perpetual “folly and presumption” of policy-makers even as he expressed faith in the ability of private ingenuity to overcome it.

He wrote: “The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor.”

Tariff prescriptions have recently been overturned by the U.S. Supreme Court, albeit on legal rather than economic grounds. That example of another kind of “vigour” of the Constitution, and the wisdom of the “separation of powers” might be taken as further confirmation of Adam Smith’s optimism about that great land across the Atlantic.

Peter Foster, a Toronto-based journalist, is the author of 10 books, including Why We Bite the Invisible Hand: The Psychology of Anti-Capitalism. His most recent, How Dare You!, is a selection of his columns in the National Post. This piece was written for the Frontier Centre on Public Policy.

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