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Module 4: Adam Smith’s Wealth of Nations (Part I)

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Adam Smith (1723-90) was not the first to try to understand the market economy, but he may have been the most influential and eloquent observer of economic life. His observation that a person may be "led by an invisible hand to promote an end that was no part of his intention" became the guiding star of an investigation of the beneficial unintended consequences of voluntary exchange, an investigation that still continues strong after more than two hundred years. (Others had reached that insight earlier, as the excerpt from the Tao Te Ching of Lao-tzu in the readings indicates; interestingly, the writings of Lao-tzu were distributed by the anti-Nazi "White Rose" group in Germany to undercut the National Socialist regime.)

In addition to seeking to explain how markets work and how order emerges spontaneously from the voluntary interactions of countless market participants, Smith was very concerned with understanding how virtue fares in commercial society. He saw how commercial relations tend to encourage probity, punctuality, and honesty in dealings. As he observed, "Of all the nations in Europe, the Dutch, the most commercial, are the most faithful to their word." He argued that this was not due to some unique Dutch national characteristic or racial distinction but was "far more reduceable to self interest, that general principle which regulates the action of every man, and which leads men to act in a certain manner from views of advantage, and is as deeply planted in an Englishman as a Dutchman. A dealer is afraid of losing his character, and is scrupulous in observing every engagement. When a person makes perhaps twenty contracts in a day, he cannot gain so much by endeavouring to impose on his neighbors, as the very appearance of a cheat would make him lose. Where people seldom deal with one another, we find that they are somewhat disposed to cheat, because they can gain more by a smart trick than they can lose by the injury which it does their character." Smith follows up this observation with a dry remark that certainly rings true: "They whom we call politicians are not the most remarkable men in the world for probity and punctuality."

Enemies of free-market relationships tend to portray voluntary exchanges as "zero sum," that is, a gain to one party can come only at a loss to the other. But Smith showed how trade is based on mutual benefit, rather than conflict over fixed resources. The division of labor, so bemoaned by socialists as the source of "alienation," is seen as the foundation for an enormous system of social cooperation and wealth production. Among Adam Smith’s accomplishments in changing how people think about wealth was his redefinition of "nation"; not only privileged members of the court, but every human being counted as a part of a nation. Eliminating special privileges may be to the short-run detriment of special interests, but free markets and the attendant economic progress and growth are to the long-term benefit of all the members of society, including the least powerful, whose interests count as much as those of the powerful.

A common criticism of classical liberalism is that it focuses too much on the abstract rules of justice, which are, communitarian critics allege, the principles appropriate for abstract men. Benevolence, love, national identity, or some other principle, they believe, would be the proper foundation for a good human society. Smith responded to this criticism in The Theory of Moral Sentiments (excerpted in the readings), and David Boaz examines the issue in his chapter on "Civil Society" in Libertarianism: A Primer.

An Inquiry into the Nature and Causes of the Wealth of Nations, published in the same year as the American Declaration of Independence, is one of the great books of the classical liberal tradition, and one that continues to instruct us in the principles and functioning of the free society.

Readings to Accompany The Tapes

From Libertarianism: A Primer: Chapter 7, "Civil Society" (pp. 127-47); Chapter 8, "The Market Process" (pp. 148-85).

From The Libertarian Reader: Adam Smith, "Justice and Beneficence" (pp. 58-61), "The Man of System" (pp. 209-10), "The Division of Labor" (pp. 253-54), "Society and Self-Interest" (pp. 256-57); David Hume, "Justice and Property" (pp. 135-39); Lao-tzu, "Harmony" (pp. 207-8).

Some Problems to Ponder & Discuss

• If "nothing could be more absurd" than the doctrine of the "balance of trade," as Smith noted, why has this doctrine persisted and continued to dominate most public discussions of trade policy?

• Which is of primary importance or absolutely necessary for the maintenance of society, benevolence or justice?

• Many people who are hostile to the free market assert that commerce undercuts or erodes moral relations; they believe that people are encouraged by market exchange to think of each other solely as competitors or as sources of benefits, rather than as friends and neighbors, so that "profits" replace affection, goodness, and morality. Smith argues, to the contrary, that commerce encourages the virtues of honesty and fair dealing and that those are the foundations for the flourishing of the other virtues. How could we determine which view is right?

• Adam Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations. What, for Adam Smith, is a nation?

• The nightly news reporter announces, "The administration today made major concessions in international trade negotiations by agreeing to open American markets to imports of foreign goods." What might Adam Smith or other economists say about that way of understanding trade relations and policies?

Suggested Additional Reading

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (many editions) and The Theory of Moral Sentiments (many editions). The most elegant and scholarly--and certainly the most affordable--editions of the works of Adam Smith are the paperback editions from Liberty Press. These two works reveal Smith the economist and Smith the moral philosopher and show the relationships between the two ways of viewing humanity.

David Hume, Essays: Moral, Political, and Literary (various editions). Hume was a close friend and collaborator of Adam Smith, and he expressed complementary views in his various books and essays. Of special relevance to this module are the essays "Of the Balance of Trade" and "Of the Jealousy of Trade."

E. G. West, Adam Smith: The Man and His Works (Indianapolis: Liberty Fund, 1976). West offers a sympathetic and enlightening overview of Adam Smith’s ideas.

For Further Study

Ronald Hamowy, The Scottish Enlightenment and the Theory of Spontaneous Order (Carbondale: Southern Illinois University Press, 1987). Hamowy presents a general introduction to the Scottish Enlightenment, the period in the late eighteenth century when such Scottish luminaries as Adam Ferguson, Adam Smith, Francis Hutcheson, and David Hume dazzled the world with the brilliance of their thought, and the central role played in it by the idea of spontaneous order.

T. S. Ashton, The Industrial Revolution, 1760-1830 (Oxford: Oxford University Press, 1962). In a compact presentation, this distinguished economic historian documents the beneficial effects of the Industrial Revolution, which created widespread wealth on a scale never before imaginable, and refutes the many myths about how capitalism and industrialism made the masses miserable.

Neil McKendrick, John Brewer, and J. H. Plumb, The Birth of a Consumer Society: The Commercialization of Eighteenth-Century England (Bloomington: Indiana University Press, 1982). This brilliant work documents the rise of an economy oriented toward satisfying willing buyers, in which, as Neil McKendrick notes, "there were profits—even small fortunes—to be made from very modest artefacts indeed. It is no accident that Adam Smith’s famous example of the division of labour was taken from the manufacture of pins."

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