Reading Adam Smith

March 22, 2011 Leave a comment Go to comments

from David Ruccio

The next time some conservative economist, politician, or pundit invokes Adam Smith in favor of a “get-government-off-our-backs” argument in favor of free markets and the invisible hand, just tell them to actually read some Smith. Suggest they read the Theory of Moral Sentiments and the Wealth of Nations and then report back to you. 

Or, if they don’t want to do the work, just have them read George Scialabba’s review of Nicholas Phillipson’s new book, Adam Smith: An Enlightened Life, which was published in the American Conservative.

Everyone knows, of course, what Adam Smith stood for: free trade, the division of labor, the minimal state, the invisible hand, the illimitable growth of wants and needs. “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.” “Every individual … 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.” “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.” Case closed.

What everyone knows is seldom altogether wrong; but often it is not altogether right, either. As Emma Rothschild notes at the outset of Economic Sentiments, her superb study of Smith and Condorcet, “They think and write about self-interest and competition, about institutions and corporations, about the ‘market’ and the ‘state.’ But the words mean different things to them, and their connotation is of a different, and sometimes of an opposite, politics.” It is far from obvious that Smith would have entertained cordial feelings toward Alan Greenspan or Margaret Thatcher.

For one thing, Smith roundly mistrusted businessmen. In addition to the sallies already quoted, he insisted that businessmen, for all they may talk of freedom and fairness, “generally have an interest to deceive and even oppress the public.” . . .

Nor was Smith a proponent of the minimal state. Government has the duty of “erecting and maintaining those public institutions and those public works which may be in the highest degree advantageous to a great society,” but which “are of such a nature that the profit could never repay the expense to any individual or small number of individuals.” And as Emma Rothschild points out, “Of Smith’s great diatribes in The Wealth of Nations, only one is concerned with what would later have been understood as a principally economic activity of national government.”

Smith was, in short, a mensch. He would not feel at home in the American Enterprise Institute or the Heritage Foundation.

That’s what reading Adam Smith does: it disrupts the simple-minded, doctrinaire appropriations of his ideas that have found currency in modern economic and political debates.

  1. Mike Meeropol
    March 22, 2011 at 2:32 pm
    Reply

    Click to access WP79.pdf

    To follow up on David’s post, folks might want to have a look at the PERI Working Paper pasted above (there’s a shorter version in CHALLENGE called “Distorting Adam Smith on Trade.”).

    The crux of the story is that the two times ADAM SMITH used the term “Invisible Hand” in an economics sense (once in the Theory of Moral Sentiments and the other times in TWN) he explicitly used it to describe behavior that was not free-market, free trade, laissez faire oriented. In the Wealth of Nations the “invisible hand” led capitalists to prefer DOMESTIC INVESTMENTS to FOREIGN INVESTMENTS — which Smith felt was a good thing because the domestic investments would create more domestic employment! (Check the page references in the linked paper if you are surprised by this.)

    In the Theory of Moral Sentiments it gets even better. He uses the “invisible hand” to guide a landlord to distribute the food that’s produced on his land equally among his workers because (Smith opined) he can only eat so much! Smith would have hardly been willing to write off the inequalities of today as the result of HIS version of the “invisible hand.”

    I have to give a tremendous thank you to Noam Chomsky who alerted me to this.

    (It is also true that the specialized literature acknowledges this as well — the most easily accessible piece is by Joe Persky in the JEL.)

    As far as I can tell, there is not one single Principles of Economics textbook (even on the left!) that notes the specific way Smith introduced the term “invisible hand” into the vocabulary of (as it was then called) Political Economy.

    Some (like Mankiw’s Principles text) cobble together sentences from hundreds of pages apart to virtually commit textbook malpractice!

    (So it goes!)

  2. Jesse Frederik
    March 22, 2011 at 4:49 pm
    Reply

    I’ve recently had the same experience while reading John Stuart Mill, who is in my opinion severely underestimated and should be read along with Smith, Ricardo and Marx. He doesn’t seem to be invoked as much as Smith, I suspect this is a result of his open sympathies for socialism.

    Just to mention one of his many interesting observations, he mentions the fact that “competition is the best security for cheapness, but by no means a security for quality.” He then carries on to make the argument that once some producers start making products of lesser quality, other market participants are incentivized to follow. “Thus the frauds, begun by a few, become customs of the trade, and the morality of the trading classes is more and more deteriorated.” Mill then proposes a partial solution to this problem. Mill mentions the fact that the laws against commercial fraud are very deficient and then observes that even the laws that do exist, do not get enforced. “It is still to be discovered how far it is possible to repress by means of the criminal law a class of misdeeds which are now seldom brought before the tribunals, and to which, when brought, the judicial administration of this country is most unduly lenient.” He then proposes a solution which does not require the heavy and inefficient hand of big government. “The most important class of these frauds, to the mass of the people, those which affect the price or quality of articles of daily consumption, can be in a great measure overcome by the insitution of co-operative stores.” Mill sees two advantages in this. 1) Consumers could rid themselves quickly of “perpretrators of adulterations and other frauds,” because distribution becomes the work performed by “agents selected and paid by those who have no interest in anything but the cheapness and goodness of the article.” 2) Consumers could buy from producers so that the prices of the “articles of daily consumption” could be lowered, thereby eliminating the “heavy tax now paid to the distributing classes.”

    I found this interesting, since this is not the type of solution you hear in the 21st century. It does however still seem quite a good idea to organize our supermarkets as consumer co-operatives. The market power of these co-operatives, which I assume will be more conscientiousness about the products they buy, will also spread de facto regulation trough the supply chain.

  3. John McDonald
    March 23, 2011 at 6:27 pm
    Reply

    I was quite surprised by your very interesting point about the context of Smith’s use of the invisible hand.
    I also find perplexing the notion that Smith can be used to promote the value of individual freedom and self-interest and thus free markets. Is it not obvious that for Smith human self-interest was not a value to be promoted, but rather a problem to be solved? To that end, the function of competitive markets is to harness (i.e. control, not set free) self-interest. Those who doff their cap at Smith in their defense of the value of individual freedom and self-interest have turned Smith on his head.

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