In the middle of the nineteenth century, Robert Owen, a British mill operator who sought to overturn the nascent capitalist system, found his collectivist schemes crumbling. He turned for support to the dead, proclaiming that he had the backing of Benjamin Franklin, Thomas Jefferson, Shakespeare, Shelley, Napoleon, the Duke of Wellington, and the prophet Daniel — not to mention the dearly departed Duke of Kent, whom Owen complimented for never being late for a seance.
Owen was an important figure in the development of anti-capitalist sentiment. Marx and Engels were among his early fans. The fact that he was actually a capitalist is not as peculiar as it might seem; so was Engels. Many capitalists have claimed to be exceptional in being motivated by more than the desire to make money, elevating themselves by impugning the motives and short-sightedness of their competitors, and in the process supporting the claim that capitalism is a system based on greed and exploitation. This demonic characterization would perhaps surprise Adam Smith, the kindly eighteenth-century bachelor frequently dubbed “the father of capitalism.” His great book, An Inquiry into the Nature and Causes of the Wealth of Nations, is widely regarded as the seminal work on economics, his master metaphor the market- guiding “invisible hand.”
If you go to the museum in Smith’s birthplace of Kirkcaldy, Scotland, which lies across the Firth of Forth from Edinburgh, you will find displayed, in the inconspicuous nook devoted to him, a quote from the economist John Kenneth Galbraith. “With Das Kapital and the Bible,” it says, “The Wealth of Nations enjoys the distinction of being one of the three books to which people may refer at will without feeling they should read it…There is so much in the book that every reader has full opportunity for exercise of his own preference.” Galbraith, who rejected Smith’s market-oriented world in almost every way, was on this point gallingly correct.
As an iconic figure, Smith tends to be as much channelled as quoted. His ideas are often twisted, much as Owen mangled Shakespeare and Jefferson. Even his fans are guilty of the charge. For example, Smith made only one reference, itself tangential, to the invisible hand in The Wealth of Nations. It was later free-market enthusiasts who embraced and glossed the term.
In the wake of the international credit crisis, Smith has often been recalled either as the face of a system that doesn’t work, or as a fan of more extensive government regulation. On one side, for instance, a headline in BusinessWeek last October read, “Forget Adam Smith, Whatever Works.” On the other, disgraced New York governor Eliot Spitzer — who, as the state’s attorney general, had been the grand moralizing scourge of Wall Street — wrote, in a self-exculpating piece in the Washington Post, “Those who truly understand economics, as did Adam Smith, do not preach an absence of government participation. A market doesn’t exist in a vacuum. Rather, a market is a product of laws, rules and enforcement. It needs transparency, capital requirements and fidelity to fiduciary duty. The alternative, as we are seeing, is anarchy.”
Canada’s finance minister, Jim Flaherty, took a more nuanced approach when he wrote in the Financial Times, “The open market system did not fail in this crisis. However, some forgot Adam Smith’s maxim that the invisible hand needs to be supported by an appropriate legal and regulatory framework.” But what does “appropriate” mean? And is the present crisis the result of market anarchy, or of counterproductive regulations pursued by grandstanding and often-hypocritical politicians such as Spitzer? There’s the rub.
Will the real Smith please stand up?
Adam Smith was born in 1723, less than two decades after Scotland entered into commercial and political union with England. Smith’s father, who died before his birth, was a prominent lawyer and public official. Smith had an extended education, even by today’s standards, first at the University of Glasgow and then at Oxford, where he spent six unhappy years. He returned to Edinburgh to begin the life of a public intellectual, and was soon appointed to a professorship at the University of Glasgow; he taught there for thirteen years. In 1759, he published a well-received book, The Theory of Moral Sentiments, which led him to a three-year tutorship of the Duke of Buccleuch. The position came with a life pension, enabling Smith to return to his mother’s house in Kirkcaldy to work on his magnum opus. When it was published in 1776, it made his name.
The Wealth of Nations is long and discursive, and promotes the critical, controversial, and counterintuitive view that the pursuit of commercial self-interest without government interference yields the greatest improvements in the general welfare. “It is not,” he famously wrote, “from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Smith wasn’t suggesting that butchers, brewers, and bakers lacked the milk of human kindness, or a sense of family or community. It was just that we should recognize that arm’s-length commercial exchange benefits all participants, and that enormous good is done by allowing self-interest free rein under the rule of law.
Two human tendencies — to trade and to specialize — serve as the engines of productivity growth in Smith’s system. He used the famous example of the pin factory to demonstrate how specialization within an organization could also enormously boost output. A single unskilled worker, he pointed out, would have trouble making a single dress pin in a day, but ten people coordinating their activities with fairly rudimentary equipment could produce 48,000. Widespread and free trade was desirable, he argued, because larger markets spurred specialization and thus further productivity increases, although he expressed concern about the mind-numbing work to which the division of labour might lead.
