EconoMatters, Global Pairings

The Harsh Realism of Adam Smith

Adam Smith was no blind worshipper of the market economy. He pointed to many of the deformations of human behavior that we still deplore today.

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Takeaways


  • Adam Smith was no blind worshipper of the market economy. He pointed to many of the deformations of human behavior that we still deplore today.
  • Many people around the world continue to have a remarkably distorted view of The Wealth of Nations. Not much beyond the (in)famous “invisible hand of the market.”
  • Though there are no “good guys” in The Wealth in Nations, the government comes in for special criticism.
  • Market economy, commerce and general economic accoutrements of civilization make use of our worst instincts and transform them into tolerable or respectful behavior.

Under the influence of Amartya Sen, we have been “nudged” towards a reassessment of the relative merits of “The theory of moral sentiments “ (TMS) and “The Wealth of Nations” (WN). Sen has done a lot to bring Smith’s early work out of relative obscurity where it was consigned by two centuries of success of The Wealth of Nations.

What remains true is that many people around the world continue to have a remarkably distorted view of The Wealth of Nations. Not much beyond the (in)famous “invisible hand of the market.”

Bad government

In reality, there are no “good guys” in The Wealth in Nations. Of course, the government comes in for special criticism.

Smith argues against its rapacity in putting up high tariffs, its foolishness in following mercantilist policies, its pettiness in constraining the system of “natural liberty,” its attempts to decide where people should live (the law of settlement, a hukou-like system was then in existence in Britain).

He dissects all of these unenlightened policies with righteous anger.

Bad aristocracy

Next to it in terms of “badness” is the aristocracy: ”Entails are thought necessary for maintaining this exclusive privilege of the nobility to the great offices and honors of their country; and that order having usurped one unjust advantage over the rest of their fellow-citizens, lest their poverty should render it ridiculous, it is thought reasonable that they should have another” (Book 3; Ch. 2, p. 491).

Bad businessmen

But businessmen are no better. As soon as they are given half a chance, perhaps just after having gotten rid of some particularly nefarious government regulation, they are back to plotting how to “restrain” the market, to pay suppliers less, destroy competitors, cheat workers (see today’s IT companies, Walmart, Amazon).

In the famous quote, “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices” (Book 1, Ch. 8).

In their mad ambition, they try to rule the world (see Davos): “…the mean rapacity, the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind” (Book 4, Ch. 3, p. 621).

Bad multinationals

Short of the world they try to rule countries: Companies of merchants (the British and the Dutch East India Companies) grew immensely rich by mismanaging and exploiting India and Indonesia: “The government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatever” (Book 4, Ch. 7, p. 722).

And their profits are often a price for general impoverishment: “Have the exorbitant profits of the merchants of Cadiz and Lisbon augmented the capital of Spain and Portugal? Have they alleviated the poverty, have they promoted the industry of those two beggarly countries?” (Book 4, Ch. 7, p. 779).

Bad politicians

Businessmen depend on lobbyists and politicians. Those who support them (read K Street and Mass. Avenue in Washington, D.C.) will be praised: “The Member of Parliament who supports every proposal for strengthening this monopoly is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance” (Book 4, Ch.2, p. 595).

Those who try to oppose their drive for monopoly profits will be destroyed:

“If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists” (Book 4, Ch. 2, p. 592).

Are NGOs any better?

Are “do-gooders” and religious orders (read: NGOs) any better? They are all treated with implacable irony by Adam Smith: “The late resolution of the Quakers in Pennsylvania to set at liberty all their negro slaves, may satisfy us that their number cannot be very great” (Book 3, Ch 2, p. 496).

Or: “I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it” (Book 3, Ch. 2, p. 572).

Bad soldiers

Adventurers and soldiers who conquered colonies attracted by the promise of quick gain (see military “contractors” today) “commit[ed] with impunity every sort of injustice in those remote countries” (Book 3, Ch. 7, p. 795).

Led by their selfishness they destroyed a great occasion for the beneficial encounter of two civilizations: “The savage injustice of the Europeans rendered an event, which ought to have been beneficial to all, ruinous and destructive to several of those unfortunate countries” (Book 4, Ch. 1, p. 563).

Human selfishness, rapacity, need for pillage crosses places and times: The crusaders were “the most destructive frenzy that ever befell the European nations” and they were spurred on by the merchant republics of Venice, Genoa and Pisa for whom the crusade “was a source of opulence” (Book 3, Ch. 3, p. 513).

No end of “badness”

There is no end of “badness.” Even Smith’s most famous invention (the invisible hand) takes place despite the natural selfishness of men (“he intends only his own gain”).

Note that through the invisible hand, we fulfill a project which was not part of our original design, i.e., our original intention was selfish, but we could not satisfy it except by catering to the needs of others.

And, of course, we do not count on “the benevolence of the butcher…but [on] his regard for own interest”. We do not count on the butcher’s benevolence because Smith knows that benevolence is not there, while we can be sure that self-interest is.

Toward a tolerably civilized society

Market and the invisible hand indeed turn out to be the almost miraculous contraptions. They transform this landscape of hard men, inured to bleakness, pursuit of self-interest and cheating, into a tolerably civilized society. That way, people treat each other with consideration, at least on the surface.

But, I think, there is no doubt to anyone who has read the Wealth of Nations that this is only a veneer. Once it cracks, we are quickly back in the animal kingdom, as we indeed got there during wars, colonial conquests or crusades.

And this is perhaps an additional, strong reason for the importance of market economy, commerce and general economic accoutrements of civilization. Making use of our worst instincts, they transform them into a tolerable or respectful behavior.

Editor’s note: All page numbers are from “The Wealth of Nations”, Bantam Classic, 2003; edited with notes and marginal summary by Edwin Cannan; preface by Alan B. Krueger.

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About Branko Milanovic

Branko Milanovic is the Presidential Professor at the City University of New York's Graduate Center, and Senior Scholar at Luxembourg Income Survey.

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