Three hundred years ago, on June 5, 1723, one of the most important and influential thinkers in modern history, Adam Smith, was born in the small Scottish village of Kirkcaldy. There are few individuals who it can be said have left as lasting and as positive a legacy on humankind as Adam Smith.
He authored only two books, The Theory of Moral Sentiments (1759) and An Inquiry in the Nature and Causes of the Wealth of Nations (1776). Both works, especially the latter, helped transform humanity from a state of almost universal poverty to one of amazing prosperity and human betterment. It might be thought that such lofty rhetoric about Adam Smith is merely an exaggerated instance of poetic license, but if there is any instance of the role and the power of ideas in human events, it is exemplified by the impact of The Wealth of Nations. As economist Thomas Sowell once emphasized:
Adam Smith’s The Wealth of Nations was a revolutionary event in 1776 — an intellectual shot heard around the world. It attacked an economic system prevalent throughout European civilization, both in Europe itself and in the Western Hemisphere colonies. The pervasive and minute economic regulations that encrusted the British economy in the eighteenth century were widely disliked and evaded, as were similar “mercantilist” schemes of economic control in other countries. But while many people chafed and complained it was Adam Smith who first convincingly demolished the whole conception behind these regulations and in the process established the new field of economics.
Not that this outcome was assured. There is the often-told story of how at the age of four, Adam Smith was kidnapped by a band of gypsies while he and his mother were visiting relatives in a neighboring town. Good fortune had it that a posse was formed that successfully caught up with the “party of vagrant tinkers,” as they were called, and thus saved him from a life of reading tarot cards and picking pockets as a means of earning a living! On such strange events does the fate of humankind twist and turn.
Smith attended the University of Glasgow and Oxford University, after which he taught at the University of Edinburgh for a period of time, followed by 13 years at the University of Glasgow (1751–1763) as a professor of moral philosophy. It was during his time at the University of Glasgow that he wrote and published The Theory of Moral Sentiments.
For three years (1763–1766), he served as the private tutor of a young British noblemen, during which he traveled to various parts of Europe with his intellectual ward, including two years in France, which enabled him to get to know many of the leading French Physiocrats in Paris.
One of the attractions in accepting this position as tutor was that it earned him a lifetime pension from the father of his young student. This enabled him to return to Scotland and devote his time to private study and the writing of The Wealth of Nations, which was published on March 9, 1776. In later years, Adam Smith was a commissioner of customs in Edinburgh and rector of the University of Glasgow. He died on July 17, 1790, at the age of 67.
Adam Smith’s world-changing influence
When Adam Smith died, Great Britain was beginning to be embroiled in what turned out to be a nearly 25-year war with first revolutionary France and then Napoleon’s France, which came to a final end only in 1815 with the French dictator’s defeat at the Battle of Waterloo and exile on the island of Elba. As part of Britain’s war effort, economic controls on domestic and foreign trade were intensified more than they already had been, and accompanying the controls were government budget deficits and paper-money expansion to cover the costs of the conflict.
Yet, even with all this, the ideas of one man in the remote Scottish corner of Europe changed the world. Said Hector Macpherson (1851–1924) in Adam Smith (1899):
When Adam Smith began to meditate upon economic problems the world was wedded to the great delusion of protection. What could a solitary thinker do singlehanded to overthrow a system which for centuries held the foremost intellects of the world in thralldom? Only an intellectual Don Quixote could hope by philosophic tilting to destroy a world-wide delusion. And yet the modest, retiring philosopher of Kirkcaldy, from his obscure study, sent forth ideas which, by molding afresh the minds of statesmen, have changed the economic history of the world.
While the British and other governments were regulating, controlling, and restricting in the name of winning a war between 1790 and 1815, beneath the surface, an intellectual and ideological transformation was occurring, especially in Great Britain. While the winds of war blew over the European continent, others were reading The Wealth of Nations. By the time the war finally ended, a growing body of liberal thinkers had become increasingly influenced by Adam Smith’s ideas. Not that actual government policies immediately reflected this growing interest and appreciation of the ideas of economic liberty. Indeed, protectionism became even more restrictive, particularly in the British agricultural sector in the form of the Corn Laws, which severely limited the importation of foreign wheat in the name of shielding the interests of the landed aristocracy.
But beginning in the 1820s and 1830s, a group of free-trade advocates formed what became known as the Anti-Corn Law League. With determination, drive, and direction greatly inspired by Adam Smith’s ideas, they succeeded in 1846 in ending virtually all the protectionist restrictions on agriculture by an act of the British Parliament, and this was soon followed by reduction and removal of the remaining restrictions on industrial products and resources.
In the 1850s, 1860s, 1870s, and into the 1880s, the trend toward greater economic freedom at home and free trade abroad made amazing headway in other parts of Europe and in North America. Due to the global scope of the British Empire in the nineteenth century, the principles and fairly wide practice of freedom of trade, investment, and migration made much of the “civilized world” an open arena of commercial liberty and increasing economic prosperity. Indeed, toward the end of the nineteenth century, political economists were hallmarking the growing internationalization of commerce and culture due to the freeing of people to trade, associate, and travel for personal and peaceful purposes and mutual gain.
Protectionist, interventionist, and militarist ideas and policies began to make their reactionary comeback in the late nineteenth and early twentieth centuries, particularly under the sway of increasing paternalist and welfare-statist programs introduced in Imperial Germany. Nevertheless, the underlying insights and truth of Adam Smith’s ideas and his vision of what he called in The Wealth of Nations “a system of natural liberty” has time and again over the last 100 years inspired people and policies to retain or even restore policies of greater, if not perfect, economic liberty.
Adam Smith’s system of natural liberty
What was this vision of freedom that Adam Smith offered in The Wealth of Nations?
All [government-created] systems either of preference or of restraint, therefore, being thus taken completely 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.
The role and responsibility of government in such a system of natural liberty, Smith went on, were national defense and domestic peace and justice through police and courts of law. He saw a variety of other tasks for the political authority that often today would go under the heading of “public goods” of various sorts. He also believed that it was the government’s responsibility to fund and provide basic education for purposes of a literate and informed citizenry.
But certainly, by the standards of our own time, when governments intrude and interfere with virtually everything we do in our social and economic lives, Adam Smith’s list of governmental functions was very limited in number and in scope. His was a vision of a fundamentally free society in which each individual was to be left alone to guide and direct his own life according to his own purposes and plans, in voluntary and peaceful association with others.
Self-Interest and social institutions
If individuals are to be considered at “natural liberty” to live their lives as they choose, without government command or control, then what ensures coordinated harmony among multitudes of people who rely and are dependent upon each other for most of the necessities, amenities, and luxuries of everyday life? Adam Smith explained the process by which this is made possible on the basis of individual incentives and social institutions.
Individuals constantly need the assistance of their fellow man, Smith said:
He will be more likely to prevail if he can interest their self-love in his favor, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers another a bargain of any kind, proposes to do this. Give me that which I want and you shall have this which you want is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. 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.
It is in the nature of human beings that they have “interests.” Anyone who also reads Adam Smith’s The Theory of Moral Sentiments soon discovers that he understands and emphasizes the ethical senses and the empathic ties that bind people together, out of which arises the moral codes and benchmarks that come to guide one’s actions. There is nothing in Adam Smith to justify the misrepresentations that portray him as a preacher of “selfishness” or “greed,” taken to mean a disregard for the existence or rights of others. Smith’s entire outlook was entirely the opposite.
Individual freedom and voluntary exchange
What he did believe was that only individuals can really know their own circumstances, the value other people and things may have for them, and what actions they consider best to advance the betterment of themselves and those others they care about.
One man may want a pair of shoes for himself or his children. Another person may want to acquire a set of clothes for his own use or to assist a friend or relative who has fallen upon hard times and who could use something new to wear. A shoemaker sells a pair of shoes to the tailor who wants the shoes, while the tailor trades to the shoemaker the clothes desired by the shoemaker.
Each of them has given up what they value less highly, in the circumstances, for what they value more highly. Each has gained from the trade, and each has had an incentive to produce something that another wants as the means of acquiring what they desire from the other.
What makes this possible are a set of moral and legal institutions that guide and direct the incentivized actions of each. First, the individual is taken to have a right to his own life, thus freely choosing his own ends and the decisions concerning the best means to attain them. Second, human relations are based on the principle and practice of voluntary association and exchange. That is, individuals are prohibited, both in the moral and legal sense, from killing, stealing, or defrauding each other in acquiring from others any and all things that may be desired.
This leaves only one avenue remaining to those unable to produce and supply for themselves all that they want. They must turn their abilities, skills, and knowledge to devoting themselves to finding some niche in the social system of division of labor in which they can specialize in the provision and sale of what their fellow human beings may value enough to purchase, so through this exchange the means may be acquired to buy all that is wanted and desired.
The fact that exchange is voluntary and requires the mutual agreement among the participants means that any other individual may attempt to compete in trying to obtain the business of others in society. This is what Smith meant when he said, in his explanation of the system of natural liberty, that anyone is free to apply his industry and capital in competition with others.
This means that the self-interest of each is also directed to always attempting to make the better product, the new product, the less-expensive product as the means of the gaining customers in rivalry with one’s competitors. Hence, that same motive of self-interest and the institutional setting of nonviolence act as the engines for general human betterment, in that one’s own success and fortune is bound up with improving the lives of others.
Society as an evolving spontaneous order
Adam Smith did not believe that society, with its ethics and institutions, was the product of government planning or design. He was part of a body of Scottish scholarship in the eighteenth century that focused on the evolutionary and “spontaneous” development of much of the social order. Few things were as profoundly important to the material improvement of humankind than the system of division of labor, by which each tends to specialize in what he can do better than other members of the community, from which emerges an interdependent system of global trade.
Already in 1776, Smith was able to point to the international network of resource supplies and production when looking at how the simple and coarse woolen coat worn by a common day laborer is made. From the shepherd with his flock, to the spinners and dye makers, to the ship builders and seamen who bring from far flung corners of the world other materials and ingredients that go into manufacture of that coat, the interconnectedness of human care and comfort was already pronounced. Smith concluded:
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…. 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.
A division of labor, and similar to language, custom, mores, rules of conduct, and a variety of other social institutions, had not been created by political decree or government imposition. It had started to emerge long ago in human history as people discovered and saw advantages in making things in greater number than they could use themselves, precisely because of a realization that others would take parts of this surplus production in trade for what they wanted and could not fully or effectively provide for themselves.
The generalized conclusion from this is found in one of the most famous passages in The Wealth of Nations, in which Adam Smith explains that it is in everyone’s personal interest to try to apply his labor, resources, and capital in those ways that he believes will bring forth the greatest possible return. But in doing so, he not only may further his own interest but also that of all those he is attempting to supply and serve in the marketplace, since he is directing his efforts into those avenues in which he thinks his fellow men find them of the greatest value in advancing their own purposes:
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…. 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.
Individuals know far better their own interests and circumstances
The last point — that Smith had never known much good from trade in which people intentionally try to promote the “public good” — highlights his insistence that individuals know far better their own circumstances and discovered opportunities than those in political power who always know little or nothing about the actual individual human beings over whom they rule:
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.
Smith was warning, in other words, of a most particular danger from the government having control and command over the economic affairs of the citizenry. Those who most frequently gravitate to positions of regulatory and planning authority are the very ones possessing the greatest hubris and arrogance in believing so highly in their own wisdom and ability that they will practice little hesitancy in imposing their designs on the rest of humanity; they give no thought that they may not know enough to presume to do so, and may be completely wrong in thinking that their “plan” for society would or could be superior to simply leaving people alone to design their own lives and associative relationships.
This point was emphasized even more forcefully in The Theory of Moral Sentiments when he discussed the social engineer and the central planner, who Adam Smith called “the man of system”:
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, everything 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.
Greater prosperity through free trade
His warnings of the dangers from overbearing and intrusive government were, perhaps, most famous in his criticisms of government trade restrictions in the form of tariffs and import prohibitions. No one makes for himself, he said, what he can buy less expensively from another. He pays for it by specializing in some line of production in which he has a greater cost advantage than some trading partner. If this is true for any one of us, then it is no less true for all of us as the citizens of a country. Why make at home what will cost more than if purchased from some supplier in another country and pay for it with one of our products that we can make for a more attractive price than if our foreign trading partner made it for himself at home?
What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better to buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. It is certainly not employed to the greatest advantage when it is directed towards an object which it can buy cheaper than it can make it…. The industry of a country, therefore, is thus turned away from a more, to a less advantageous employment, and the exchangeable value of its annual produce, instead of being increased, according to the intention of the lawgiver, must necessarily be diminished by every such regulation.
All that was necessary, Adam Smith argued, was to leave men free to follow their own self-interests: Production and prosperity will then be forthcoming in the directions and forms most advantageous to the members of the society as a whole, whether that trade is geared toward domestic or foreign demand and supply.
Prejudices of the public and the power of the interests
In The Wealth of Nations, Adam Smith expresses little optimism that the case for economic liberty or his criticism of government intervention would succeed in bringing about the needed reforms for the establishment of a free society. He believed that two forces were at work to make it unlikely. He referred to them as “the prejudices of the public” and “the power of the interests.” By the prejudices of the public, Smith meant the difficulty of getting the ordinary citizen to follow the economist’s logic of how markets work without the directing hand of government, and why government restrictions and regulations only succeed in standing in the way of the economic prosperity and general human betterment that freedom makes possible.
The power of the interests referred to the various special-interest groups in society that live off government favors and privileges of various and sundry sorts at the expense of the larger majority in society. They will do all in their ability to prevent their privileges and favors from being reduced or abolished, and they will attempt in any and all ways to have them increased at the expense of potential competitors and the general consuming public. The critic of government interventions who challenges their trade barriers, domestic monopolies, and financial subsidies are often subject to “infamous abuse” and “sometimes real danger” due to the furious outrage of those who would lose from the establishment of a freer and more open market society.
Smith transformed the world
Yet, in spite of Adam Smith’s pessimism, within one lifetime after his death in 1790, his ideas of natural liberty widely existed in practice, especially in Great Britain and the United States, and other countries were moving in the same direction, even if not as thoroughly. That is not to say that a world of laissez-faire freedom of trade triumphed completely anywhere. But it nonetheless transformed much of the Western world and beyond into the direction of personal and economic liberty, lifting humanity out of poverty. In his History of Civilization in England (1857), British historian Henry Thomas Buckle declared:
In the year 1776, Adam Smith published his Wealth of Nations; which, looking at its ultimate results, is probably the most important book that has ever been written, and is certainly the most valuable contribution ever made by a single man towards establishing the principles on which government should be based. In this great work, the old theory of protection applied to commerce, was destroyed in nearly all its parts … and innumerable absurdities, which had been accumulating for ages, were suddenly swept away…. At the present day [1857], eighty years after the publication of Smith’s Wealth of Nations, there is not to be found anyone of tolerable education who is not ashamed of holding opinions which, before the time of Adam Smith, were universally received.
The insights and truth that Adam Smith dedicated his life to articulating and sharing with the rest of humankind stand out, as various commentators have stated, as one of the great contributions to human understanding and betterment. It is only appropriate, therefore, that we pay homage to Adam Smith on, this, his 300th birthday.
This article was originally published in the June 2023 edition of Future of Freedom.