Adam Smith’s works should outlast blinkered readings
4 min read . Updated: 28 Feb 2023, 12:08 AM IST
PremiumThe year 2023 marks the birth tercentenary of Adam Smith, the Scottish economist who has had a significant impact on the world
The year 2023 marks the birth tercentenary of Adam Smith, the Scottish economist who has had a significant impact on the world. It seems only appropriate, given the title of this column, ‘A Visible Hand’, that I evaluate Smith’s contribution and place it in today’s context. It also strikes me as an imperative because while he is among the most cited in economic conversation, his works are among the least read.
Adam Smith was born in 1723 in Kirkcaldy (pronounced Kircoddy), Scotland. The young Adam grew up in a market town that was known for its fishing, salt harvesting, mining and trade. Throughout his life, Smith was a keen observer of human beings and the way they went about their economic behaviour in society. Smith was a polymath who joined Glasgow University at the age of 14 and studied under the philosopher Francis Hutcheson. His interests and ideas spanned philosophy, theology, astronomy, law, ethics and the political economy. Even though Smith is remembered for economics, what makes him relevant even today is that he deliberated upon and asked timeless questions about the human condition.
Adam Smith wrote two books, an uber famous one and the other less so. The two books are meant to be read together. Unfortunately, few have even heard of Smith’s first book, let alone read it. Smith’s basic psychological curiosity led him in 1759 to write The Theory of Moral Sentiments. The very first word in this book is ‘sympathy’, a word that the ‘number of characters restricted’ social media world of today would not associate with Smith. In the book, Smith is concerned with the great questions of moral philosophy: Is humankind selfish or benevolent? What does a sense of propriety mean? What should be the nature of reward and punishment? What is the influence of luck? What constitutes a sense of duty? Can virtue be equated to prudence, propriety, or benevolence? If Smith had written only this book, he would have been considered in the same class as John Locke, Immanuel Kant, Jean Jacques Rosseau, Voltaire or David Hume. In fact, Hume was Smith’s closest friend and intellectual sparring partner.
It was not until 1776, the year of Hume’s death, that Smith would publish the now famous book, An Inquiry into the Nature and Causes of the Wealth of Nations. And it is to the ideas in this book that we must look to for Smith’s contribution to economics.
Interpreting these ideas without the full context of Smith’s book on moral sentiments allowed many subsequent economists to draw non-nuanced threads that suited their individual purpose. And so it was that the University of Chicago, particularly led by George Stigler and Milton Friedman, ‘highjacked’ the idea of an invisible hand and broadcast it as an ultimate defence of individualism and laissez-faire market economics.
Stigler’s ideological belief in small government and free markets and Friedman’s charismatic ability to market that idea led to a situation where Adam Smith became synonymous with the Chicago school characterization.
The term ‘invisible hand’ appears in Smith’s book only a couple of times, and even then, only in passing. For instance, In Book 4, Chapter 2, Smith says “[Each individual] generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it... He intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he 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." A simple interpretation of this means that there are some unintended consequences, in many cases positive, of individuals acting in their own interest. Stigler and Friedman picked up on the importance of price as the mechanism by which this so-called ‘positive externality’ would benefit the overall market. Smith was the first to expound on the theory of price and illustrate that in an analytically rigorous way.
Adam Smith himself would probably have been appalled by this narrow interpretation of his work. In context, Smith was against cronyism, against corporate monopoly, against imperialism (though mainly from the point of view of the imperialist), and for individual action and responsibility, for workers and for greater harmony among the rich and poor. Smith recognized that great wealth brought great power, he valued the free market as the best motivator of individual effort, but was equally clear that the responsibility of civilized society was to ensure that wealth should not be achieved at the expense of humanity. Donald Winch, an economic historian described Smith as “infuriatingly balanced and mesmerizingly mundane."
Much of the commercial context, particularly the mercantilist orientation, in which Smith wrote those books does not hold today. But the timeless questions that he raised still do. For India, as for the rest of the world, Smith’s strongly worded ideas against cronyism and unchecked corporate power should sound a note of caution. Smith’s ideas about decentralization are still as valid today as they were back then.
Most importantly, Smith’s ideas about individual responsibility and focus on markets that are ‘fair’ as much as free remain paramount.
P.S: “A nation is not made wealthy by the childish accumulation of shiny metals, but it is enriched by the economic prosperity of (all) its people," said Adam Smith.