10 Enduring Lessons From Adam Smith

From technocrats to central planners, the temptation to engineer society persists. Adam Smith saw the dangers clearly.

A statue of Adam Smith in Edinburgh, Scotland, in this file photo. Travel Telly/Shutterstock

Commentary

Adam Smith (1723–1790) is widely considered to be the father of modern economics. There were precursors, such as the School of Salamanca and the French Physiocrats, but Smith’s 1776 magnum opus, “An Inquiry Into the Nature and Causes of the Wealth of Nations,” was the first comprehensive treatise.

In this 250th anniversary year, much ink will be spilled—and with good reason—celebrating the legacy of Smith. My purpose here is as joyous as it is modest: to share 10 quotations that are particularly relevant today, and demonstrate Smith’s enduring influence. I like to weave them into my lectures—on markets, on political economy, on constitutional economics, or on the moral foundations of capitalism. Smith, in the versatility of his writings, was indeed a man for all seasons.

1. The Invisible Hand Acts

Smith wrote: “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. ... By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”

Perhaps the single best-known concept from Smith, the invisible hand was famously picked up by the Austrian school of economics and its key lesson of spontaneous order. F.A. Hayek, especially, noted the importance of phenomena that were “the result of human action, but not of human design.” Alas, interventionists of all stripes still think that they can supersede the invisible hand of the market.

2. People Are Not Pawns

The flip side of the invisible hand involves social and economic engineering. Smith was prescient in describing the psychology of social engineers, those self-proclaimed experts who believe, in their hubris, that they can run an entire economy.

“The man of system ... is apt to be very wise in his own conceit; and is often so enamored with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it,” he wrote.

“He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.”

3. Collective Action Can’t Be Imposed

The “man of system” quotation is long enough that it bears cutting in two. In the second part, Smith laments the unintended consequences of social engineering. If the policymaker is cautious and respects both human nature and local knowledge, the results can be a marginal improvement over the status quo (this is the basis of James Buchanan and Gordon Tullock’s theory of collective action through the state).

“If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful,” Smith wrote. “If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.”

4. Markets Coordinate Effort

Smith’s key theoretical contribution is the division of labor. But this is not merely an economic model, to be calculated with production charts by eager students of microeconomics. For Smith, it is something more, an instrument of cooperation to overcome the limitations of human beings.

He wrote: “This division of labor, from which so many advantages are derived, is not originally the effect of any human wisdom. ... It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature ... the propensity to truck, barter, and exchange one thing for another.”

The division of labor solves a social problem: “It is thus that man, who can subsist only in society, was fitted by nature to that situation for which he was made. All the members of human society stand in need of each others’ assistance, and are likewise exposed to mutual injuries.

“Where the necessary assistance is reciprocally afforded from love, from gratitude, from friendship, and esteem, the society flourishes and is happy. All the different members of it are bound together by the agreeable bands of love and affection, and are, as it were, drawn to one common centre of mutual good offices.

“But though the necessary assistance should not be afforded from such generous and disinterested motives, though among the different members of the society there should be no mutual love and affection, the society, though less happy and agreeable, will not necessarily be dissolved.

“Society may subsist among different men, as among different merchants, from a sense of its utility, without any mutual love or affection; and though no man in it should owe any obligation, or be bound in gratitude to any other, it may still be upheld by a mercenary exchange of good offices according to an agreed valuation.”

5. Self-Interest Actually Helps Everyone

Smith was excited about the potential for markets to align incentives. In another famous quip, he reminded us that markets transform private interest into public harmony: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

In more recent terms, we are reminded of Deirdre McCloskey and Art Carden (both fellows of the American Institute for Economic Research). The title of their book speaks for itself: “Leave Me Alone and I’ll Make You Rich: How the Bourgeois Deal Enriched the World.”

6. Permissionless Societies Create Prosperity

The bourgeois deal has alternately been described in Physiocrat A.R.J. Turgot’s plea: “laissez-faire, laissez-passer” (let us act, let us pass). Ever the professor of moral sentiments (and not just the founder of modern economics), Smith was quick to show that the bourgeois deal was instrumentally good, indeed—but it was also the grounding for a free society: “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.”

7. Cooperation Connects Us

Smith’s first major work, “The Theory of Moral Sentiments” (1759), predated “The Wealth of Nations” by almost two decades.

While demonstrating how markets advance the public good by appealing to and channeling private interests, Smith made it clear that human beings are fundamentally creatures of cooperation: “How selfish ’soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.”

8. Individual Responsibility ... With Limits

While emphasizing the importance of individual responsibility, Smith was also realistic about the limitations of what human beings could do.

He warned: “The administration of the great system of the universe ... is the business of God and not of man. To man is allotted a much humbler department, but one much more suitable to the weakness of his powers, and to the narrowness of his comprehension; the care of his own happiness, of that of his family, his friends, his country: that he is occupied in contemplating the more sublime, can never be an excuse for his neglecting the more humble department.”

In a similar spirit, Ludwig von Mises explained in his 1927 book, “Liberalism”: “[Classical] liberalism limits its concern entirely and exclusively to earthly life and earthly endeavor. The kingdom of religion, on the other hand, is not of this world. Thus, liberalism and religion could both exist side by side without their spheres’ touching.”

Smith, Mises, and the classical liberal tradition stand as a foil against the busybodies—on the right and on the left—who would attempt to administer the universe through temporal means.

9. Collusion Threatens Competition

If Smith was worried about the political “man of systems,” he was also worried about business colluding against the consumer, instead of serving the market through competition.

“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,” he wrote.

However, Smith cautioned us against state efforts to prevent industry collusion: “It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.”

But he did offer a solution, in the form of more free trade and fewer regulations to discourage competition: “But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.”

10. Institutions Drive Economic Growth

I am an institutional economist. I first came to economics from a preoccupation with economic development and ending (or at least abating) poverty. With economist Robert Lucas (if not with the same success), I am obsessed with such questions.

When observing that some countries are rich and others poor, and that some grow slowly and others quickly, he commented: “I do not see how one can look at figures like these without seeing them as representing possibilities. Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s? If so, what, exactly? If not, what is it about the ‘nature of India’ that makes it so? The consequences for human welfare involved in questions like these are simply staggering: once one starts to think about them, it is hard to think about anything else.”

International development is infuriating, for two reasons. First, it has been a massive failure—well, international aid has been a massive and expensive failure; behind the futile efforts of the men and women of systems, markets have been plugging along, and poverty has fallen radically in the past 200 years.

Second, because the recipe for growth is so obvious. It works every time it’s applied, from the United States and Western Europe in the early 1800s to China after Chinese leader Mao Zedong’s death and India after the end of the licensing raj, and to every country that embraced globalization and market reforms.

It’s the recipe that Smith offered as early as 1755, 20 years before “The Wealth of Nations” and well before the Enlightenment ideals were translated into economic policy: “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 ... [the] rest being brought about by the natural course of things.” (This quotation is thought to come from a transcript of a 1755 Smith lecture, from Dugald Stewart’s lecture notes.)

In more modern language, peace is obvious, as is low and transparent taxation. A “tolerable administration of justice” might be translated as rule of law. Taken together, we have economic freedom, which is closely correlated with growth and wealth. Instead of fancy macroeconomic policies, imposed from the top down by the men and women of systems, the New Development Economics proposes a radical and simple solution. Focus on microeconomics, institutions, incentives, and the transmission of knowledge in the Austrian tradition.

Smith warned us what happens when the basic conditions for economic growth are ignored by conceited policymakers and politicians: “All governments which thwart this natural course, which force things into another channel, or which endeavor to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”

Tyranny is the midwife of poverty; liberty, of prosperity.

Reprinted from The Daily Economy, a publication of the American Institute for Economic Research