It’s easy to become pessimistic. But perhaps we can learn something from Adam Smith, who was the ultimate optimist.
Three-hundred years after his birth, the influence of the father of economics lives on.
T his year, Adam Smith, considered the father of economics, turns 300. How relevant is his free-market model today? Would he approve of trillion-dollar deficits, ever-growing regulations, the military–industrial complex, and the Federal Reserve’s unstable monetary policies?
Or would he be impressed that despite world wars, depressions, and government interference, his model has moved a long way towards achieving the “universal opulence” that he predicted?
As a professor of moral philosophy at the University of Glasgow, Smith became famous after writing the Wealth of Nations, published in 1776. The book was an intellectual shot heard ’round the world and a declaration of economic independence.
Shortly thereafter, the West, then the East, and finally the rest of the world took off economically, as this chart demonstrates. Smith’s book did not cause modern economic growth; it’s not some kind of secret guide to becoming rich. The industrial revolution that spurred modern economic growth was, however, consistent with Smith’s thesis about the division of labor as a driver of national wealth.
As Catholic University professor Jerry Z. Muller states in his book The Mind and the Market, “The Wealth of Nations is the most important book ever written about capitalism and its moral ramifications. It was intended to make men better, not just better off.”
Smith’s primary purpose was to help government leaders find the best formula to generate the most rapid increase in a country’s wealth and standard of living. Hence, his complete title: “An Inquiry into the Nature and Causes of the Wealth of Nations.” He wondered if mercantilism, the dominant school of thought among 1700s policy-makers, was the best way to achieve maximum growth.
After lengthy research, Smith concluded that mercantilism was a failure. For several hundred pages, he meticulously detailed the massive interference in the economy by the state — imposing tariffs, bounties (what we now call “subsidies”), monopoly grants, apprentice rules, and even permits to move from one town to another. He spent much of the second volume (books four and five) lambasting government mismanagement of the economy, which he himself called “the very violent attack I had made upon the whole commercial system of Great Britain.”
The consensus view before the Wealth of Nations was that wealth is fixed, so nations grew at the expense of others. Consequently, the state established government-authorized monopolies at home and supported colonialism abroad, sending administrators and armies into poorer countries to seize gold and other precious commodities.
Smith had a better formula for economic growth: the powers of enlightened self-interest. Rather than depend on top-down government decision-making, leaders should maximize economic freedom from the bottom up. The wealth of nations could increase most rapidly if everybody was allowed the fullest opportunity to decide how to use his or her labor and capital.
Smith himself put it this way: “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, or order of men.” (emphasis added)
As Columbia professor Wesley Mitchell stated in one of his lectures, “You see how bold and sweeping that argument is from Adam Smith’s eyes; everybody quite obviously is pursuing his own interest; it is evident, in his own local situation, [that he] is a better judge of where his economic interest lies than any statesman could be. Therefore, the individual will get on best if he is left alone by the government. . . . This is the great argument for laissez faire.”
Smith’s challenge was a tall order: How could individual decision-making lead to a self-regulating growing economy that would benefit all? How could market anarchy lead to social order?
His solution was brilliant: By channeling self-interest through a reasonably established legal system and into a robust competitive marketplace, society’s wants and needs could be met as never before. Smith argued that competition, the rule of law, and a good moral climate would benefit economic growth and, in fact, would deliver “universal opulence which extends to the lowest ranks of the people.” He promised a new world, not just for the rich and the rulers, but for the common man.
He called his model “the system of natural liberty.” It would not eliminate entirely the passions of greed, selfishness and fraud, but it could moderate them, just as marriage civilizes lust.
Today, almost 250 years later, how much of the system of natural liberty still exists? At the top of the list, free trade has been widely adopted. Despite recent trends in American political discourse, protectionism worldwide is on the wane. World trade as a percentage of GDP is near an all-time high as country after country has reduced tariffs and exchange controls.
Second, since the collapse of the Soviet Union in the early 1990s, most countries have rejected the socialist model of nationalization, import-substitution laws, and wage/price/rent controls. There has been a wave of privatization of nationalized industries over the past 50 years.
Robert Heilbroner, a self-proclaimed socialist, famously declared “The Triumph of Capitalism” when he wrote, “Capitalism organizes the material affairs of humankind more satisfactorily than socialism.” Capitalism delivers the quantity, quality, and variety of goods and services that a centrally planned economy never could.
The Economic Freedom Index, which is based on the Smithian measures of laissez-faire, balanced budgets, sound money, free trade, and rule of law, shows a marked increase from the 1970s to 2001.
However, since 2001, economic freedom has stagnated, and it even started to decline after the Covid-19 pandemic in 2020. During this time, the Adam Smith model has come under attack by interventionists who want a return to top-down policies of authoritarian government, deficit spending, tax hikes, “fair” trade, and overregulation all in the name of fairness, equity, and saving the planet.
If Adam Smith were alive today, he would be appalled by the never-ending federal deficits and out-of-control national debt. He would likely disapprove of the size of the welfare state and the military–industrial complex. He would probably be disappointed to see the U.S. tax code at around 7,000 pages, or about 75,000 pages if Treasury regulations are included in the total. The bloated bureaucracy would likely remind him of the mercantilist policies of his age.
It’s easy to become pessimistic. But perhaps we can learn something from Adam Smith, who was the ultimate optimist. Nearly 250 years ago, he wrote, “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.”