Our students need Smith now perhaps more than ever.
Smith still has so much to teach us today because of his deep understanding of human nature.
Adam Smith was born in 1723. This year he turns 300.
To celebrate, National Review Capital Matters offers the Adam Smith 300 series. An essay on Smith will appear monthly throughout 2023, written by various students of Smith’s thought. Smith’s birthday is June 16, so the essays will appear on the 16th day of each month. Daniel Klein and Erik Matson of George Mason University are helping curate the series for Capital Matters along with Dominic Pino. To read previous months’ essays, click here.
I t is a moral and intellectual crime to discard Adam Smith in the teaching of modern economics. Today’s mainstream and elite universities do not give Smith the attention he deserves. You can earn an undergraduate degree in economics without ever turning the pages of The Wealth of Nations, in which Adam Smith presents himself, a moral philosopher, as the world’s first development economist. Those same students may not even know of its precursor, the Theory of Moral Sentiments.
Smith’s foresight into the potential for increasing standards of living, egalitarian in nature, before the Industrial Revolution took hold is remarkable, then and now. His understanding of what we now call economics relies on personalism; the human being is conscious, social, and purposeful and is the locus of analysis. We are inherently social rather than atomistic individuals and must habituate virtue over time, which begins in the family and extends to our community and commercial relationships. Adam Smith provides a cohesive framework for what we now call the economic way of thinking.
When mainstream economic education discards Smith, we are left with growing scientism, which yields economic hubris. Smith had a capability for wonder that encourages the humility necessary to avoid scientism. Smith also engaged in comparative institutional analysis, which is some of the most valuable work in economics today. It’s easy to see Smith’s influence on Mises’s and Hayek’s contributions to the socialist calculation debate and economist Richard Wagner’s work on entangled political economy, just to give two examples. Smith is one of the intellectual giants on whose shoulders we stand today.
Smith has influenced my teaching in economics. I have the great pleasure of teaching students from around the country at The Fund for American Studies at George Mason University in courses such as comparative economic systems and international economics. I also teach economics for foreign policy-makers at the Institute for World Politics. Whether I am teaching undergraduate or graduate students, we always begin with human nature and Adam Smith. We can’t start with trade deficits or even demand curves before we understand what we are trying to do as economists. Economics is the study of how humans make decisions under conditions of scarcity and uncertainty. Even on our best day, we never have the complete knowledge necessary to make the best decisions.
This is where we must begin our study and teaching of economics — with the human person — and that is what Smith does. Economists today talk about “human capital,” the resources such as education, skills, and knowledge that are the essential to economic development and wealth creation. Smith scholar Deirdre McCloskey reminds us that human capital is “the stuff between your ears.” It’s the potential for unleashing ideas and using your gifts to contribute to the common good. Before Smith’s time, people were often told, and often experienced, a different story. We were stuck in zero-sum social and economic games wherein the strongest survived because they could use their strengths to exploit rather than serve others. Plunder and poverty were the status quo.
Smith showed the way to break out of the poverty equilibrium. The path to development lies in two things: Everyone has human capital, and with the appropriate institutional environment, everyone faces incentives that promote positive-sum games or mutual human prosperity. Today, the ordinary person is 20 to 100 times better off than their ancestors in 1800, 24 years after the publication of the Wealth of Nations.
The quest for wealth creation is not about finding the most benevolent among us and asking them to govern us. Instead, Smith’s insights into the human condition force a different set of questions. How can self-interested people, devoid of complete knowledge and often stupid, work together peacefully? Smith responded with respect for person, property, and promises due.
As Smith wrote in the Theory of Moral Sentiments, “the most sacred laws of justice, therefore, those whose violation seems to call loudest for vengeance and punishment, are the laws which guard the life and person of our neighbour; the next are those which guard his property and possessions; and last of all come those which guard what are called his personal rights, or what is due to him from the promises of others.” Person, property, and promises due are human rights. They provide incentives for us to direct our human capital and all other forms of capital to the service of others. When we protect and defend those rights, we allow social learning; we induce entrepreneurial discovery. We no longer appeal only to the charity of others who have more than we do, but rather, we appeal to their desires, and in doing so, they serve us well.
The wealth of nations grows because we adhere to what Smith deemed “a system of natural liberty.” Natural because it aligns with human nature, and liberal because we can engage in commerce according to our talents and desires. To allow this system to function, the government’s job is to “protect every citizen from the injustice or oppression of every other member of it,” as Smith wrote in Wealth of Nations. Historian of economics Robert Heilbroner describes Smith’s system of natural liberty as follows:
A man who permits his self-interest to run away with him will find that competitors have slipped in . . . will find himself without buyers in the one case and without employees in the other. Thus, very much as in the Theory of Moral Sentiments, the selfish motives of men are transmuted by interaction to yield the most unexpected of results: social harmony . . . . If output or prices or certain kinds of remuneration stray away from their socially ordained levels, forces are set into motion to bring them back to the fold. It is a curious paradox which thus ensues: the market, which is the acme of individual economic freedom, is the strictest task master of all.
We can see this well as Smith discusses specialization, which results from the growing division of labor. He wrote that the division of labor is limited by the extent of the market. It is both an insight and a warning. When we restrict trade, we limit property rights (which means we limit human rights) and learning because there are fewer people with whom we can cooperate. In his famous pin-factory example, the mere addition of capable workers immediately and significantly increases pin output. We don’t need to seek out people with experience or advanced education to make better pins; we can add able-bodied people to the manufacturing process, further refining it. In that refinement, three key improvements occur: dexterity, time-saving, and invention.
The market process cannot eliminate greed or error; it does not transform us into angels but disabuses us of our tendency to plunder and exploit. Perhaps the best summary of the magnificent and lasting contributions of Adam Smith comes from Hayek:
The main point about which there can be little doubt is that Smith’s chief concern was not so much with what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst. It would scarcely be too much to claim that the main merit of the individualism which he and his contemporaries advocated is that it is a system under which bad men can do least harm. It is a social system which does not depend for its functioning on our finding good men for running it, or on all men becoming better than they now are, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid.
Adam Smith was a student of society, and understanding his contributions encourages us to be as well. Smith injects intellectual humility into our questions about how to improve the world. He provides a framework for reasoned optimism and the hope that things can continue to improve despite all the problems with human nature and the world today. Our students need that now perhaps more than ever.