Blending history, philosophy, psychology, and sociology, the Scottish intellectual single-handedly invented modern political economy
The Guardian: Monday, 11 September 2017
1776 was an annus mirabilis for English and American prose, a year to compare with 1859 (Darwin’s On the Origin of Species; Dickens’s A Tale of Two Cities; Mill’s On Liberty). In February, Gibbon published the first volume of his The History of the Decline and Fall of the Roman Empire; while in March a brilliant intellectual, a star of the Scottish Enlightenment, single-handedly invented the subject of modern political economy with An Inquiry Into the Nature and Causes of the Wealth of Nations which swiftly became established in the minds of intelligent readers as The Wealth of Nations. When the first edition sold out in six months, the story went round that another celebrated Scot, the philosopher David Hume, was now joking that The Wealth of Nations probably required too much thought to be as popular as Gibbon’s Decline and Fall.
Gibbon, in fact, was full of generous praise for his rival. He wrote to the Scottish historian and philosopher Adam Ferguson: “What an excellent work is that with which our common friend Mr Adam Smith has enriched the public! An extensive science in a single book, and the most profound ideas expressed in the most perspicuous language”.
Smith’s work, indeed, was every bit as singular as Gibbon’s. Although it provided a comprehensive and magisterial treatment of its subject, it was also a work of robust common sense, intelligible to any careful reader, braiding history, philosophy, psychology, and sociology in a compelling tapestry of theory and experience. Smith, writes one commentator, was concerned to improve “the human condition in practical ways for real people”. This was a book that had begun as a series of lectures delivered to audiences in Glasgow. Smith’s friend Hume, joking aside, declared that the book had “depth and solidity and acuteness, and is so much illustrated by curious facts, that it must at last take the public attention”.
Crucially, for Smith, a civilised society is a trading society
For Smith, in a doctrine that would have been music to the ears of any energetic new Americans, a nation’s labour is the source of its basic means. Moreover, Smith argued, there is an intrinsic value to the division of labour, where labour was the sole determinant of price. This simple proposition becomes complicated in more advanced societies by the intervention of wages, profit, and rent, three elements that complexify the basic economic model. Combined with Smith’s wide-ranging, lucid, and profound exposition, there’s also his assault on the mercantile system, an outmoded throwback that he conceived as restrictive, repressive, and inimical to individual self-expression in the marketplace.
At the heart of The Wealth of Nations is the provocative suggestion that self-interest is perhaps the only criterion of economic behaviour, and that the universal, unfettered pursuit of self-advantage was the only sure guarantee of general welfare. Arguably, it is the collision of Smith’s ideas with the political ambitions of the American revolution that would, eventually, make a decisive contribution to the development of western capitalism.
Crucially, for Smith, a civilised society is a trading society. There’s a famous passage in book 1 where he argues for the natural place of competitive trade.
“Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that… But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour…”
Accordingly, Smith’s opening theme is that the regulations imposed on commerce are ill-founded and counterproductive. In Smith’s day, the conventional wisdom was that gold and silver was wealth, and that countries should boost exports and resist imports in order to maximise this metallic treasure. It was Smith’s transformative insight that a nation’s real wealth lies in the constant traffic of goods and services thereby created – what we would call the gross national product. To maximise this, he argued, government should not restrict an individual nation’s productive capacity, but set it free.
Another central theme was that such productive capacity rests on the division of labour and on the accumulation of capital that such activity makes possible. Huge efficiencies can be gained by breaking production down into a multiplicity of small tasks, each undertaken by specialists. In book 1, Smith cites the example of pin-makers.
“A workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion) could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make 20.”
The division of labour, he demonstrates, will leave producers with a surplus that they can exchange with others, or use to invest in more efficient labour-saving machinery. It was ideas of this kind that persuaded later readers such as Lord Acton to describe The Wealth of Nations as providing the “scientific backbone to liberal sentiment”, declaring that it was the “classic English philosophy of history”.
Smith’s third theme is that a country’s future income depends upon this capital accumulation. The more that is invested in better productive processes, the more wealth will be created in the future. But if people are going to build up their capital, they must be confident that it will be secure from theft. The countries that prosper are those that grow their capital, manage it well, and protect it. Smith demonstrated that this system is automatic. Where things are scarce, people are prepared to pay more for them; there is more profit in supplying them, so producers invest more capital to produce them. Where there is a glut, prices and profits will be low, and then producers switch their capital and enterprise elsewhere. Industry thus remains focused on the nation’s most important needs, with no need for central direction.
But, says Smith, the system is automatic only when there is competition. When governments grant subsidies or monopolies to favoured producers, or shelter them behind tariff walls, they can charge higher prices. The poor suffer most from this, facing higher costs for the necessities that they rely on. The Wealth of Nations also says that competition and free exchange are under threat from the monopolies, tax preferences, controls, and other privileges that producers extract from the government.
For all these reasons, Smith believes that government itself must be limited. Its core functions are to maintain defence, keep order, build infrastructure and promote education. It was the duty of good government to keep the market economy open and free, and not act in ways that might distort it. Enter George Washington, Thomas Jefferson, John Adams et al. The Wealth of Nations was, of course, published in the year of the Declaration of Independence. This strange fact lends added significance to Smith’s prediction that the Americans “will be one of the foremost nations of the world”.
A signature sentence
“Compared, indeed, with the more extravagant luxury of the great, [the blacksmith’s] accommodation must no doubt appear extremely simple and easy; and yet it may be true, perhaps, that the accommodation of an European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many an African king, the absolute masters of the lives and liberties of 10,000 naked savages.”
Three to compare
David Hume: The History of England (1754-61)
Henry Thomas Buckle: History of Civilization in England (1857)
Karl Marx: Capital, Volume I (1867)