In 1726, in one of the most important events in economic history, a three-year-old Scottish boy was stolen by gypsies.
Whether or not the boy, as his biographer later noted, “would have made, I fear, a poor gypsy,” our praise is due to the quick-acting uncle that returned young Adam Smith to his family.
Smith’s shadow over American politics is a long one. The author of the seminal On the Wealth of Nations, today the great economist serves largely as an adopted hero of the political right — founding genius of modern capitalism, optimistic icon of laissez-faire, unwavering apostle of the market’s “invisible hand.”
The old Scot is certainly no stranger to the campaign trail. Speaking at the University of Chicago in March, Mitt Romney proclaimed that “when the heavy hand of government replaces the invisible hand of the market, economic freedom is the inevitable victim.” Nobel Prize-winning economist Joseph Stiglitz countered that “the reason that the invisible hand often seems invisible is that it is often not there.” It took mere days for the debate over the “you didn’t build that” to revive an argument over whether Adam Smith would have supported Democratic government activism or Republican laissez-faire.
Why does Smith’s famous tagline, despite appearing only once in his 700-page opus, still feel so central to us two centuries later?
Because nearly all of the economic debate between progressives and conservatives in 2012 — reenacted ad nauseam in convention speeches, around water coolers, and on cable TV — boils down to this question: is the free market, left to itself, the greatest guarantor of human happiness? Does “the invisible hand” really work?
Let’s find out what Adam Smith thought.
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The odd duck.
First, a few words to bring the man himself into focus. Smith was, by all accounts, an odd duck. Blessed with an ample nose, bulging eyes, and a prominent lower lip — “I am a beau in nothing but my books,” he once quipped — Smith was a lifelong bachelor who spent most of his adulthood living with his mother. He was also almost comically absent-minded. Known for murmuring constantly to himself since boyhood, he once wandered 15 miles in his nightshirt, puzzling over a late-night query, until the churchbells of the next village brought him back to earth.
This absent-minded professor par excellence was also wildly popular with his students, and in his extensive European travels was flattered and fêted by such non-slouches as Benjamin Franklin and Voltaire. The mid-1700’s was also, Bonnie Prince Charlie excepted, a fantastic time to be a Scot. By Smith’s heyday, Edinburgh was known as “the Athens of Britain;” in contrast with Oxford and Cambridge, its university lay in the physical heart of a dense urban culture which hummed and brimmed with new ideas. Edinburgh’s intellectuals — led by the eloquent and searingly anti-religious David Hume — threw themselves at the widest range of disciplines, using clear-eyed Scottish practicality to clear the cobwebs of European abstraction and superstition.
“1776: A good year for new ideas.”
Out of this rich Enlightenment brew came Smith’s two great works, A Theory of Moral Sentiments (1759) and The Wealth of Nations (1776). These works are built on a premise Smith inherits from Hume: that as inherently social creatures, human beings deeply depend on one another. The Theory of Moral Sentiments and Wealth of Nations take man as a social animal and ask, respectively, ‘What makes us happy?’, and ‘What makes us rich?’.
To those of us not surnamed Kardashian, these questions may seem at cross-purposes. To Smith, however, understanding the mechanisms of the marketplace and the mechanisms of the human heart formed a single and essential mission.
His answers to both questions boil down to a single word: sympathy.
In A Theory of Moral Sentiments, the Scotsman argues that each one of us naturally seeks out a “mutual sympathy of sentiments” with the people around us, sharing our joys and frustrations with our friends and taking on theirs as our own.
This seemingly simple impulse, Smith writes, is made possible by a series of intricate, imaginative leaps beyond ourselves — both to let us feel what others might feel, but also to judge our own situation based on how a spectator would see us. We make these leaps a thousand times a day, on matters great and small, and how well we perform them determines our success as a member of society. Two hundred years before our notion of “soft skills,” Adam Smith had the idea worked out in full.
But whatever may be the cause of sympathy, or however it may be excited, nothing pleases us more than to observe in other men a fellow-feeling with all the emotions of our own breast; nor are we ever so much shocked as by the appearance of the contrary. Those who are fond of deducing all our sentiments from certain refinements of self-love, think themselves at no loss to account, according to their own principles, both for this pleasure and this pain. Man, say they, conscious of his own weakness, and of the need which he has for the assistance of others, rejoices whenever he observes that they adopt his own passions, because he is then assured of that assistance; and grieves whenever he observes the contrary, because he is then assured of their opposition. But both the pleasure and the pain are always felt so instantaneously, and often upon such frivolous occasions, that it seems evident that neither of them can be derived from any such self-interested consideration. A man is mortified when, after having endeavoured to divert the company, he looks round and sees that nobody laughs at his jests but himself. On the contrary, the mirth of the company is highly agreeable to him, and he regards this correspondence of their sentiments with his own as the greatest applause… (I.I.14)
The sympathy, which my friends express with my joy, might, indeed, give me pleasure by enlivening that joy: but that which they express with my grief could give me none, if it served only to enliven that grief. Sympathy, however, enlivens joy and alleviates grief. It enlivens joy by presenting another source of satisfaction; and it alleviates grief by insinuating into the heart almost the only agreeable sensation which it is at that time capable of receiving. (I.I.15) (From Bk. 1, Chap. II : “Of the Pleasure of Mutual Sympathy.”)
Our gift for sympathetic imagination ends up paying huge dividends: when our emotions run hot, sympathy helps them cool; when we don’t know what to do, sympathy helps us figure out right from wrong. And (foreshadowing alert!) from thousands and millions of individual acts of sympathetic imagination arise, without any prescription from above, in near-invisible fashion, the shared habits and communal rules that allow human societies to flourish.
After all this, however, the emotions of the spectator will still be very apt to fall short of the violence of what is felt by the sufferer. Mankind, though naturally sympathetic, never conceive, for what has befallen another, that degree of passion which naturally animates the person principally concerned. That imaginary change of situation, upon which their sympathy is founded, is but momentary…
The person principally concerned is sensible of this, and at the same time passionately desires a more complete sympathy… But he can only hope to obtain this by lowering his passion to that pitch, in which the spectators are capable of going along with him. He must flatten, if I may be allowed to say so, the sharpness of its natural tone, in order to reduce it to harmony and concord with the emotions of those who are about him.
What they feel, will, indeed, always be, in some respects, different from what he feels, and compassion can never be exactly the same with original sorrow … [t]hese two sentiments, however, may, it is evident, have such a correspondence with one another, as is sufficient for the harmony of society. Though they will never be unisons, they may be concords, and this is all that is wanted or required. (I.I.36)
… As nature teaches the spectators to assume the circumstances of the person principally concerned, so she teaches this last in some measure to assume those of the spectators. As they are continually placing themselves in his situation, and thence conceiving emotions similar to what he feels; so he is as constantly placing himself in theirs, and thence conceiving some degree of that coolness about his own fortune, with which he is sensible that they will view it … And as the reflected passion, which he thus conceives, is much weaker than the original one, it necessarily abates the violence of what he felt before he came into their presence, before he began to recollect in what manner they would be affected by it, and to view his situation in this candid and impartial light. (I.I.37)
(From Bk. 1, Chap. III: “Of the manner in which we judge of the propriety or impropriety of the affections of other men, by their concord or dissonance with our own.”)
But if humans create this kind of spontaneous social order from below, what do we need government for? The Wealth of Nations is Smith’s answer.
With his magnum opus, Smith set himself two main goals: first, create the most comprehensive account ever written on political economy; second, stop politicians from acting like idiots. On this, he went a strong one for two.
As a friend and advisor to many senior British officials, Smith was convinced that the protectionism then in vogue in European capitals — taxing or blocking foreign imports to boost domestic industries — was a disastrous mistake. He had strong opinions about taxation and education reform as well, as we shall see, but defending free trade was Smith’s real idée fixe.
Just as in the Theory of Moral Sentiments, Smith chooses to begin his grand project not with abstract principles or grand figures, but with common-sense facts of social life.
“Capitalism starts here.”
This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.
Whether this propensity be one of those original principles in human nature, of which no further account can be given; or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to enquire. It is common to all men, and to be found in no other race of animals, which seem to know neither this nor any other species of contracts…
Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that…
In civilized society [man] stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature.
But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them.
Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. 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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
Notice the resonances between Smith’s genesis of capitalism and his genesis of human morality. Smith is no wide-eyed optimist about human nature. The sympathy that drives markets and creates manners is not an altruistic sympathy: it’s a social one.
And neither markets nor morals work without that basic imaginative exchange: What does he want? What do I want? How do we meet in the middle?
And so, on to the most famous buzz-phrase in economic history. What follows is the sole appearance of the “invisible hand” in Smith’s work. The phrase is delivered as part of one of Smith’s many salvos against protectionism. Specifically, it arrives just after an explanation of why English merchants will prefer to invest more of their capital in England — they enjoy being able to check up on it personally; they know English courts are more likely to uphold their rights — without needing any further encouragement from government.
Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society. (IV.2.4)
…As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. 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. Nor is it always the worse for the society that it was no part of it. 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. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. (IV.2.9)
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. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but 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. (IV.2.10)
To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation…If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. (IV.2.11)
exceptions: defence of the country, and taxing a foreign good whose domestic counterpart is already taxed
As the passage makes clear, Smith trusts the spontaneous order of individual human choice over the fanciful designs of the state. But over the course of Books IV and V, Smith makes it equally clear that the “invisible hand” is not a cure-all. Markets tend toward monopoly, and would-be monopolists are not to be trusted any more than utopian politicians. As such, a wise government will step in to invest where the market won’t, and stop the excesses to which all markets are prone.
The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expence to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain…
After the public institutions and public works necessary for the defence of the society, and for the administration of justice, both of which have already been mentioned, the other works and institutions of this kind are chiefly those for facilitating the commerce of the society, and those for promoting the instruction of the people.
That the erection and maintenance of the public works which facilitate the commerce of any country, such as good roads, bridges, navigable canals, harbours, &c. must require very different degrees of expence in the different periods of society is evident without any proof….When the toll upon carriages of luxury, upon coaches, post-chaises, &c. is made somewhat higher in proportion to their weight, than upon carriages of necessary use, such as carts, waggons, &c. the indolence and vanity of the rich is made to contribute in a very easy manner to the relief of the poor, by rendering cheaper the transportation of heavy goods to all the different parts of the country. (V.I.71-75)
The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become…Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war…His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it. (V.I.178)
The education of the common people requires, perhaps, in a civilized and commercial society the attention of the public more than that of people of some rank and fortune… But though the common people cannot, in any civilized society, be so well instructed as people of some rank and fortune, the most essential parts of education, however, to read, write, and account, can be acquired at so early a period of life that the greater part even of those who are to be bred to the lowest occupations have time to acquire them before they can be employed in those occupations. For a very small expence the public can facilitate, can encourage, and can even impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education. (V.1.180-182)
Though the state was to derive no advantage from the instruction of the inferior ranks of people, it would still deserve its attention that they should not be altogether uninstructed. The state, however, derives no inconsiderable advantage from their instruction. The more they are instructed the less liable they are to the delusions of enthusiasm and superstition, which, among ignorant nations, frequently occasion the most dreadful disorders. An instructed and intelligent people, besides, are always more decent and orderly than an ignorant and stupid one. They feel themselves, each individually, more respectable and more likely to obtain the respect of their lawful superiors, and they are therefore more disposed to respect those superiors. They are more disposed to examine, and more capable of seeing through, the interested complaints of faction and sedition, and they are, upon that account, less apt to be misled into any wanton or unnecessary opposition to the measures of government. In free countries, where the safety of government depends very much upon the favourable judgment which the people may form of its conduct, it must surely be of the highest importance that they should not be disposed to judge rashly or capriciously concerning it. (V.I.189)
Adam Smith’s passages on taxation are the ones least likely to be quoted on Fox News. Yes, the hero of the invisible hand did in fact say, “Every tax is to the person who pays it a badge, not of slavery, but of liberty.” But Smith’s ideal government is a strictly limited one, and as seen in the above two passages, he was determined that every government project should, to the greatest possible extent, pay its own way.
Smith clearly prefers individual choice to central planning. At the same time, he returns time and again to the idea that fairness and interdependence are what enable all human endeavors. Where government can best safeguard that fairness and interdependence, Smith observes, it has a responsibility to do so.
The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expence of government to the individuals of a great nation is like the expence of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation… (V.2.25) The necessaries of life occasion the great expence of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expence of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be any thing very unreasonable. It is not very unreasonable that the rich should contribute to the public expence, not only in proportion to their revenue, but something more than in that proportion… (V.2.71) Taxes of so much a head upon the bondmen employed in cultivation seem anciently to have been common all over Europe. There subsists at present a tax of this kind in the empire of Russia. It is probably upon this account that poll-taxes of all kinds have often been represented as badges of slavery. Every tax, however, is to the person who pays it a badge, not of slavery, but of liberty. It denotes that he is subject to government, indeed, but that, as he has some property, he cannot himself be the property of a master. (V.2.110)
As fertile a mind as he had for ideas, Adam Smith was no idealist. He knew that the real world adheres to no system, and that, at least in politics, no good idea goes unpunished. The following passage shows Smith to be especially well-attuned to the “special interests” of his own day.
To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it… …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. 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. The legislature, were it possible that its deliberations could be always directed, not by the clamorous importunity of partial interests, but by an extensive view of the general good, ought upon this very account, perhaps, to be particularly careful neither to establish any new monopolies of this kind, nor to extend further those which are already established. Every such regulation introduces some degree of real disorder into the constitution of the state, which it will be difficult afterwards to cure without occasioning another disorder. (IV.2.43-44)
So would Adam Smith support the Romney vision of government, or the Obama vision?
On the President’s side, the Wealth of Nations is decidedly not the Quran of market fundamentalism some of its defenders would have us believe, nor would its author be likely to side with the 1% on most issues. Romney could, for his part, justifiably invoke Smith’s warnings about government excess, and his unwavering faith in individual choice over state prescription. The Scot may well have welcomed a plague on both their houses.
Nevertheless, it is worth remembering in our age of economic turmoil that Adam Smith’s free market is in tune with, and an extension of, that most basic human conversation: we need each other’s help; I’ll give you this if you give me that. A Smithian economy thrives not on selfishness, but on decency; its watchword is harmony, not greed.
At our core, Smith teaches us, we behave decently not because the police or the FEC tell us to, but because we naturally want to — because we enjoy the dialogue and do far better for ourselves when it works. Whether our real motivation is kindness or self-interested practicality, in the end, hardly matters.
We’re human. We can imagine it from both sides.
[The Citizen’s Book Club is dedicated to raising civic awareness and stimulating informed debate, one classic text at a time. Session One, on the roots of American democracy, can be found here; Session Two, on what ails the American political system, is here.]
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