Adam Smith is history’s most famous economist, yet people know precious little about what he wrote. Perhaps that is because the natural time to reflect on his contributions — the anniversary of his birth — is unknown. However, we do know that he was baptized on June 5, 1723, making the 5th an appropriate time hook to consider his work and insights.
Smith is memorable for the commitment to liberty he had in common with the Declaration of Independence, whose 1776 date The Wealth of Nations also shared, and for his articulation of how the “invisible hand” of market interactions can coordinate a society based upon liberty — i.e., private property rights and voluntary exchange — more effectively than can the coercive power of the state.
Seemingly everyone has heard of that invisible hand, by which market transactions lead people pursuing their own self-interest to advance the interests of others as well. (“By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”) Unfortunately, however, those in government and their political supporters talk of liberty, while legislating and regulating away the voluntary arrangements that comprise it.
That is why we must go beyond Smith’s discussion of the invisible hand, to his analysis of the clumsy visible foot of government, perhaps made clearest when he wrote “I have never known much good done by those who affected to trade for the public good. It is an affectation.” And that analysis is even more practical in application today, when government is exponentially more intrusive than when he wrote.
The reality of government:
“… [governments are] … without exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.”
“The agents of the [government] regard the wealth of their master as inexhaustible; are careless at what price they buy; are careless at what price they sell; are careless at what expense they transport…”
“Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct…. Those unproductive hands … may consume so great a share of their whole revenue … that all the frugality and good conduct of individuals may not be able to compensate the waste and degradation of produce occasioned by this violent and forced encroachment.”
“There is no art which one government sooner learns of another than that of draining money from the pockets of the people.”
“After all the proper subjects of taxation have been exhausted, if the exigencies of the state still continue to require new taxes, they must be imposed upon improper ones.”
Government and the invisible hand:
“…the profusion of government must, undoubtedly, have retarded the natural progress…”
“The uniform, constant and uninterrupted effort of every man to better his condition … is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration … it frequently restores health and vigor to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor … it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations.”
“In the midst of all the exactions of government … capital has been silently and gradually accumulated by the private frugality and good conduct of individuals, by their universal, continual, and uninterrupted effort to better their own condition. It is this effort, protected by law and allowed by liberty to exert itself in the manner that is most advantageous, which has maintained the progress…”
“…the frugality and good conduct of individuals seem to have been able … to repair all the breaches which the waste and extravagance of government had made in the general capital of the society. Let us not, however, upon this account rashly conclude that she is capable of supporting any burden, nor even be too confident that she could support, without great distress, a burden a little greater than what has already been laid upon her.”
The limited defensible role of government:
“…no human wisdom or knowledge could ever be sufficient [for] the duty of superintending the industry of private people, and of directing it towards the employment most suitable to the interest of the society.”
“The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would … assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”
“To judge whether [a workman] is fit to be employed, may surely be trusted to the discretion of the employers whose interest it so much concerns. The affected anxiety of the law-giver lest they should employ an improper person, is evidently as impertinent as it is oppressive.”
“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.”
The invisible hand under limited government
“All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest in his own way, and to bring both his industry and capital into competition with those of any other man.”
Adam Smith long ago recognized that a system of natural liberty needed at most a very small government. He was not far from H.L. Mencken’s view that “The ideal government of all reflective men, from Aristotle onward, is one which lets the individual alone — one which barely escapes being no government at all.”
But that is almost unimaginably far from the layers of American government that take trillions of dollars of taxes and impose innumerable regulations each year. If we are to restore the vision Adam Smith shared with our founders — providing the broadest possible canvas for human freedom — far less government is necessary. We need to rein in its overreaching, so that we can use the invisible hand of voluntary market arrangements more, and the clumsy visible foot of the government less.
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Inspiring quotes, but Rothbard’s History of Economic Thought sure leaves a person with a completely different feeling about Adam Smith. On the subject of laissez faire, alone, Rothbard has several pages of contradictions and inadequancies in Smith’s position.
Smith supported a long list of government interventions: public education to inculcate obedience amoung the populace, regulation of bank paper, public works projects, government coinage, post office, restrictions on export of grain, and a long list of taxes — including soak the rich “progressive” taxes.
According to Rothbard, Smith also “totally discarded Cantillon’s and Turgot’s … analysis of the entrepreneur.
Smith also made his career in government as an enthusiatic collector of import duties! Rothbard also demolishes Smith as an economic theorist, of course, saying that his errors set us up for the Marxian misadventure into socialism.
David Friedman claims Rothbard grossly misrepresented Smith
http://groups.google.com/group/alt.society.anarchy/msg/60875a12ab17acdd?hl=en&
TGGP,
Thanks for the reference. I wouldn’t be able to take either side without a lot more reading into the original works. I will say, though, that Rothbard’s work did seem to be extremely harsh, so I can easily accept the idea that Friedman might be correct on this.
Thanks again.
Beyond the Invisible Hand challenges readers to fundamentally rethink the assumptions underlying modern economic thought and proves that a more equitable society is both possible and sustainable, and hence worth striving for. In Beyond the Invisible Hand, Kaushik Basu lays bare the implications of this gross misrepresentation of Smith’s theory which, he argues, has resulted in hampering our understanding of how economies function, why some economies fail and some succeed, and what the nature and role of state intervention might be.
Kaushik Basu
I think that Rothbard was “harsh” on Adam Smith because no other free market economists were critically analyzing Smith’s contributions. Instead of treating Smith as “the revolutionary”, Rothbard treated him as one contributor toward economic thought (and not a particularly original, nor particularly exceptional, contributor at that). I think treating Smith in this fashion is much more fair than how Smith is usually treated.
I always assumed Smith was being dishonest anyway–that the so-called invisible hand actually describes a nefarious state apparatus acting behind the scenes to usurp wealth and liberty, while free markets contain many thousands of hands that remain visible and thus ethical. The market itself appears to be inert until influenced by the Human Action of many hands (which IMO implies for Austrians–as well as wanna-be Austrians like myself–that the market atrophies when influenced by a single invisible hand of state intervention).
Also, wasn’t Rothbard a self-proclaimed radical? If so, no one should expect him to have been anything other than harsh when criticizing writers he felt performed a disservice to the evolution of economic theory.
Man, it’s tiring trying to shed ignorance. I need a lie-down.
Vanmind, I think your “invisible hand” comments are attacking a strawman. Smith may not have been an anarchist, but his invisible hand was a reference to the combined effects of many individuals acting freely. Any government intervention he may have supported is not described as being part of the “invisible hand”. Maybe you could give Friedman a piece of your mind if you posted at alt.society.anarchy though.
Smith had no theory of an invisible hand; it was a simple metaphor for the unintended consequences of human motivation, and in the only three cases in which Smith used the metaphor, none of them were to do with markets. One was about pagan religious superstition; the second was about feudal lords having to feed their retainers and the third was about traders’ fears of letting their scarce capital-stock out of their sight.
After Rothbard’s ill-tempered and inaccurate rant against Smith’s writings on the division of labour (see my articles on this site on ‘Murray Rothbard’s Myths’) I think the Mises.org has a blind spot about Smith in an otherwise brilliant array of ideas it promotes, most of which I sympathise with, but its scholarship on Adam Smith is well below the standard it shows elsewhere.
Smith had no theory of an invisible hand; it was a simple metaphor for the unintended consequences of human motivation, and in the only three cases in which Smith used the metaphor, none of them were to do with markets. One was about pagan religious superstition; the second was about feudal lords having to feed their retainers and the third was about traders’ fears of letting their scarce capital-stock out of their sight.
The new metaphor about ‘visible feet’ is an excellent parody of the nonsense written about Smith’s use of a metaphor (actually Shakespeare’s in 1605 Macbeth, 3: 2, repeated by Daniel Defoe in Moll Flanders, in 1722).
After re-publishing Rothbard’s ill-tempered rant against Smith’s writings on the division of labour, I think the Mises.org has a blind spot about Smith in the otherwise brilliant array of ideas it promotes, most of which I sympathise with, but its scholarship on Adam Smith is well below the standard it shows elsewhere.
“and in the only three cases in which Smith used the metaphor, none of them were to do with markets. One was about pagan religious superstition; the second was about feudal lords having to feed their retainers and the third was about traders’ fears of letting their scarce capital-stock out of their sight.”
I don’t think that’s correct. The passage you are referring to with your third case is:
“By preferring the support of domestic to that of foreign industry, 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.”
The first half has to do with keeping his capital nearby, but “by directing that industry” goes beyond that. And Smith goes on to write:
“What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him.”
which I think makes it clear that, in the “directing” part of the argument, he is arguing that self-interest leads to socially desirable consequences in the context of markets.
Gavin,
You haven’t been paying full attention. There is plenty of discussion by Austrians, including on Mises.org, of what Smith said and meant. For instance, see The Mystery of Adam Smith Resolved by Mark Thorton (Working Papers).
I am copying below a slightly edited version of David Friedman’s critique of Rothbard’s assessment of Adam Smith (I have removed the references to the discussion in which Friedman was taking part).
1. Cantillon
At one point in the chapter, Rothbard says that Cantillon “was not a consistent free trader internally just as he was not in the foreign trade area.” Later, however, he writes that “While he inconsistently suggested, in accordance with the state-building notions of the age, that the king should amass treasure from a favorable balance of trade, the entire thrust of Cantillon’s work was in a free trade, laissez-faire direction.” He does not mention Cantillon’s discussion of how some trade injures one of the trading partners for the benefit of the other, or his endorsement of trade regulations designed to maximize the inflow of money to the country. Nor does Rothbard mention anywhere I could find Cantillon’s belief that an inflow of treasure would benefit the economy as well as the King.
In general, I think Rothbard’s discussion of Cantillon is mildly misleading but not to the point of dishonesty or clear error […].
2. Smith, Turgot, and public education
Rothbard refers to Smith’s “call for government-run education.” He claims that it was Smith’s desire to see government foster a martial spirit, and inculcate obedience to government among the populace, that motivated that call.
This is in part false and in part misleading. To begin with, Smith did not call for government-run education. He offered arguments both for and against government education, and his conclusion, which Rothbard does not mention, was that subsidizing the education of the masses would be a legitimate government activity, but that it would be equally legitimate, and might be better, to leave education entirely private.
Furthermore, Rothbard’s reference to “martial spirit” is highly misleading. Smith writes:
“But the security of every society must always depend, more or less, upon the marital spirit of the great body of the people. In the present times, indeed, that martial spirit alone, and unsupported by a well disciplined standing army, would not, perhaps, be sufficient for the defence and security of any society. But where every citizen had the spirit of a soldier, a smaller standing army would surely be requisite. That spirit, besides, would necessarily diminish very much the dangers to liberty, whether real or imaginary, which are commonly apprehended from a standing army. As it would very much facilitate the operations of that army against a foreign invader, so it would obstruct them as much if unfortunately they should ever be directed against the constitution of the state.”
Or in other words, Smith’s argument on the virtues of a martial spirit is the same as the argument often offered for the right to bear arms. It makes a standing army less necessary, and it means that if a standing army ever tries to take over, the people will be able to stop it. That is very nearly the opposite of what Rothbard implies.
Smith goes on, concerning the virtues of a martial spirit, to write:
“But a coward, a man incapable either of defending or of revenging
himself, evidently wants one of the most essential parts of the character of a man. [...] Even though the martial spirit of the people were of no use towards the defence of the society, yet to prevent that sort of mental mutilation, […] would still deserve the most serious attention of government […].” (Bk V Ch1 part III art III)
This may or may not be correct, but it is at the opposite pole from the position Rothbard is attributing to Smith – in favor of individuals standing up for themselves, not being obedient.
So far, Rothbard’s account is consistent with either of two explanations – that he was deliberately dishonest or that he had never
really read the book he was criticizing, merely skimmed it for quotes suited to his purposes.
What makes Rothbard’s bias particularly striking is the contrast of Smith with Turgot. I have already posted Turgot’s argument, directed to the King of France (when Turgot was finance minister of France), in favor of establishing centralized government control over the whole educational system. Rothbard discusses Turgot at length, and favourably – but somehow fails to mention that particular argument.
3. Smith’s value theory
This is a complicated subject. Rothbard misrepresents, probably through lack of understanding, Smith’s position, but establishing that would require more than I intend to write for this post. Anyone interested may want to look at my lecture notes on The Wealth of Nations, webbed at
http://www.best.com/~ddfr/Academic/Course_Pages/History_of_Thought_98/History_of_Tht_Notes_1.html
and
http://www.best.com/~ddfr/Academic/Course_Pages/History_of_Thought_98/Smith_Final_Lecture.html
and contrast them (and the original) to Rothbard’s description.
4. Smith, free trade, and wool:
Rothbard objects that Smith was not really a free trader, and offers as one example his support for export taxes on wool. There are two things wrong with this:
A. Smith – like Cantillon and Turgot – was not an anarchist; all of them believed in a government providing (at least) national defense and paying for it with taxes. That leaves them with the problem of picking the least bad form of taxation. Smith offers a rather sophisticated argument (involving the theory of joint production) for why an export tax on wool would have relatively little effect on quantity or quality of wool produced, and hence why it is a relatively innocuous tax.
What makes Smith a free trader is that he regards the effect on the economy of import and export taxes – including that one as bad, a cost of raising needed money, not a policy objective. The difference between him and Turgot was not that one believed more in the virtues of free trade than the other, but that Turgot (along with other physiocrats) thought the ideal system of taxation would collect all of its revenue from one tax, on the net produce of land, while Smith discusses the advantages and disadvantages of a wide range of alternative taxes – including revenue tariffs.
B. Rothbard does not mention that at the time Smith was writing the export of wool was a criminal offense, which the government tried to prevent by extensive regulations over the wool trade. What Smith is actually advocating is thus a sharp reduction in government interference with trade, although not a total elimination of it. Rothbard has to have known that, and I do not see any way of interpreting his failure to mention it as due to anything but deliberate dishonesty – the attempt to mislead his reader by omission.
5. Other claims about Smith:
Rothbard makes a variety of other assertions about Smith’s views for which he provides no support, and which I suspect are false, since I cannot find anything in The Wealth of Nations to support them. […]
6. The general tone of Rothbard’s comments on Smith.
I think anyone reading the chapter has to conclude that Rothbard’s purpose is to attack both Smith’s importance as an economist – in part by correctly pointing out that many of his ideas appear in earlier works, in part by correctly, in part by incorrectly, criticizing his ideas – and his claim to be a libertarian. Having such a purpose is not necessarily a bad thing – although I think the tone is strong enough to make a prudent reader suspect that the author may be letting the conclusions he wants to reach bias his arguments. But the combination of that purpose with extensive misrepresentation of Smith, at least some of it clearly deliberate, seems to me to justify my description of that part of Rothbard’s book as a hatchet job.
I should add that I have no opinion of the bulk of the book, since I have not read it and it deals with people I know much less about than Smith. The sections I have read say some things that are interesting and true and some things that are interesting and might be true. But from looking at Rothbard’s discussion of Smith, which is the one part I am most competent to judge, I conclude that Rothbard’s discussion is in general not to be trusted, and that I would therefore have to go through the primary sources in some detail to determine which parts of his account are true and which are not. I may end up doing so for Cantillon and Turgot, who are interesting, but probably not for the earlier writers.
David Friedman
(original URL: http://tinyurl.com/sxzqm)
Cynical
I try to pay attention to anything written on Adam Smith and did indeed see Mark Thornton’s research paper, and was fairly ‘soft’ on it.
I gave a brief review of Mark Thornton’s research paper on 14 May at my blog: http://www.adamsmithslostlegacy.com
My review contains the following paragraphs:
“I read and much enjoyed your paper and will take some time to study it and its sources. My initial comment is that modern usage of Smith’s metaphor is to take it far too literally, almost to subject it to metamorphosis, well beyond what Smith intended. Smith lectured and wrote in a rhetorical style, common in the 18th century.
While justly exposing the fallacies of the ten interpretations of the invisible hand, I find your painstaking analysis of them terminating in a another fallacy, albeit brilliantly argued from his links to Cantillon’s Essai. You seem to say Smith started using the metaphor in 1749, and again in 1759, both usages suspected as being just ‘metaphors’, but in 1776, after reading Cantillon’s manuscript in French (there have been suggestions that Smith translated it – I am sorry but my references are at my Edinburgh home and not with me here in France), found a real theory of markets to which the metaphor could be applied and that he used it in this sense in Wealth of Nations, though when he did he was not writing about markets!
If you had confined yourself to establishing a source for Smith’s use of Natural and Market prices and the rewards to land, labour and capital stock, you would have done enough. At his moment I think you went too far in trying to invest his casual use of a mere metaphor with deeper meaning.
Despite this preliminary conclusion, congratulations on a well researched paper.”
The general tenor of mises.org is either hostile to Adam Smith’s reputation or, almost worse, follows the general misinterpretations found in US academe, originating I think from Chicago. On other subjects mises.org is very good and I sympathise with them.
Adam Smith, WoN: Book II, Chapter II:
“Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as or the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.”
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