Free-market
economics has been taking some heavy hits lately, what with the
likes of the Enron scandal, Arthur Andersen obstruction verdict,
insider trading revelations, the Merrill Lynch conflict of interest
ruling, and on and on.
Once again
we're hearing (from the usual elites — politicians and journalists)
the same old litany of censure of the most productive economic process,
and the most freedom-engendering system ever devised by humankind.
Mention
Adam Smith in public, and be prepared for a chorus of condemnation.
The father of free-market economics must be spinning in his grave,
fearful that we'll throw out the baby with the bathwater.
Maybe it's
time to go back and reacquaint ourselves with the man who wrote
"An Inquiry into the Nature and Cause of the Wealth of Nations"
(1776), and in the process gave us the first practical insights
into the working principles of the free market — and its connection
to political freedom.
Is the
problem with the concept, or those who participate in it, or those
who attempt to regulate it?
Smith was
born near Edinburgh, Scotland, in 1723, educated at the University
of Glasgow and later at Oxford, and was first professor of logic,
then moral philosophy at Glasgow during 1750-1764. His first important
book was "Theory of Moral Sentiments" (1759), in which he reconciled
moral obligations and judgements, inspired by his mentor, professor
and pastor Francis Hutcheson, with the detached rational self-interest
of his friend, philosopher David Hume.
Smith himself
was a deeply rooted moral spirit who believed that "Theory of Moral
Sentiments" was his best book. Supported by his patron, the Duke
of Buccleuch, he lived and worked in London while he completed "Wealth
of Nations," and was subsequently influential among British politicians
and ministers of all administrations.
In 1780,
he returned to Edinburgh as Commissioner of Customs, where he died
in 1790. He never married.
Smith was
an influential participant in the Scottish Enlightenment, a flowering
of pragmatic intellectualism that flourished in Edinburgh and Glasgow
from about 1730 to about 1800, during the period when Scottish industry
and commerce expanded rapidly following the merging of the parliaments
in 1707, and the suppression of the clans, consequential establishment
of law and order, and gradual cessation of hostilities between England
and Scotland.
Look at
the names of the key figures who regularly met together and discussed
dynamic new ideas in half a dozen Edinburgh salons and clubs during
the 1750s:
- Lord Kames (jurisprudence,
societal evolution).
- David Hume (philosophy).
- Joseph Black (chemistry).
- William Robertson
(history).
- James Watt (engineering).
- William and John
Hunter (medicine).
- James Hutton (geology).
- Robert Adam (architecture).
- James Boswell (biographer).
- Robert Burns (poet).
- Allan Ramsey (painter).
There were
many more, too, including our man Adam Smith.
Certainly
there was corruption and scandal in British business and politics
during Smith's time. Nevertheless, Scottish commerce was deeply
influenced by the rigorous ethics of the Presbyterian Kirk of Scotland.
Moreover, Scottish jurisprudence, guided more by reason and equity
than by simple precedent, was alive and well during the Enlightenment.
The greatest
barrier to prosperity was the oppressive, favoritist mercantilism
of the English-dominated Tory government.
In "Wealth
of Nations," Smith made a series of remarkably astute observations:
Natural efficiencies accompany specialization and the division of
labor (physical as well as intellectual), which improve productivity
and increase wealth.
Prosperous commerce leads to and is associated with cultural advancement.
Lawful individual self-interest is one driving force behind thriving
free-market economics, the other being voluntary cooperation, which
together create Smith's "invisible hand," leading to the magic of
the marketplace.
Though imperfect, free markets are superior to economic orders stipulated
or controlled by government, which are inefficient, throttle trade
and reduce prosperity.
The myriad innate interactions of the marketplace engender freedom
of thought and action, and thus political freedom; individual freedom,
the functioning marketplace and private property are irrevocably
linked.
Government does have essential, defined, limited roles:
- Providing national
defense.
- Maintaining internal
order through efficient, equitable law enforcement, so activities
such as commerce and education can occur.
- Carrying out important
public works such as roads, bridges and harbor maintenance.
- Overseeing a stable
currency.
Government interference in private business often leads to negative
and unintended consequences, hence should be minimized. "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."
Consumers are the primary beneficiaries of the free market, not
businessmen, who can be expected sometimes to seek unfair advantage
through unlawful acts, as well as improper governmental influence
and/or dereliction, which free-market competitive forces and vigilant
law enforcement or regulation will correct.
Untrammeled capitalism can dehumanize and obsess the human spirit,
alienating it from family, friends and the enriching activities
necessary for a whole life; continuing education and spiritual guidance
are remedies.
But all
in all, the improved standard of living is worth it.
Ill-advised British mercantile policy would lead to the American
colonies' independence, and the establishment of a remarkably prosperous
new free nation that would become a world powerhouse under free-market
capitalism.
Smith did
not, however, explicitly recognize that free-market capitalism also
depended on a prevailing ethic of honesty, hard work and reliability
— as a moral philosopher, it was implicit in his view of the world.
In our
own time, the rise of secular humanism (another "gift" from U.S.
elites, politicians and journalists) with its attendant de-emphasis
of standards and personal judgement (i.e., "anything goes," and
"who am I to judge?") appears to have eroded prevailing business
ethics. It is also true that an overly complex tax code may have
provided loopholes that facilitated the Enron/Arthur Andersen chicanery.
Indeed,
Adam Smith probably is turning over in his grave, because free-market
capitalism is being blamed for sins that were the result of unethical
behavior, reinforced by government regulators who were not doing
their jobs.
There's
a lesson for us all — in business, in ethics, in citizenship.
Recommended
reading:
In writing
this column, I've depended substantially on a superb new book on
the Scottish Enlightenment, How the Scots Invented the Modern
World, by Arthur Herman (2001 Crown Publishers).
Read it,
you'll like it!