What Would Adam Smith Think?

Free-market Economics Taking Heavy Hits

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.

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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!

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