The continuing growth in government spending, taxing and regulation of economic affairs in the United States and in many other parts of the world has raised anew the essential issue of political control and intervention in the market place. With June 5th marking the 291st birthday of the famous Scottish economist, Adam Smith, it is, perhaps, worthwhile to recall his insights on the superiority of the free market in place of the heavy hand of government.
Adam Smith was born on June 5, 1723 in the small village of Kirkcaldy, Scotland. His mother raised him following his father’s death when the baby was only two months old. Smith was almost fated for a different future when at the age of four he was kidnapped by a band of roving gypsies. Fortunately for mankind a posse was formed and he was rescued from a possible life of tarot card reading and pickpocketing.
He was notoriously absent-minded. He once fell into a pit by the side of the road while deep in conversation with a friend. On another occasion he made himself a drink of bread and butter and declared that it was the worst tea he had ever brewed.
Smith was as a professor of moral philosophy for over twelve years at the University of Glasgow (1751-1763). He left the university to serve as the tutor of a British nobleman’s son for three years, after which he was awarded a lifetime private pension that gave him the time and leisure to work on the book for which he is most famous, “An Inquiry into the Nature and Causes of the Wealth of Nations.”
“The Wealth of Nations” was published in March 1776, just a few months before the signing of the American Declaration of Independence in July of 1776. If the American Founding Fathers articulated in their Declaration the political case for individual freedom, Adam Smith presented the complementary argument for economic freedom and free enterprise.
A “System of Natural Liberty”
A primary motive for writing the book was to refute the then existing regime of pervasive government controls and regulations known as Mercantilism. Adam Smith stated that if government management of the marketplace were to be repealed there would arise in its place what he called a “system of natural liberty.”
Every individual, as long as he did not violate the “laws of justice” – a respect for every other person’s right to their life, liberty and honestly acquired property – would then be “left perfectly free to pursue his own interest his own way, and to bring his industry and capital into competition with those of any other man” or group of men.
What, then, are the functions of government in this “system of natural liberty”? Adam Smith assigned a small, but what he considered essential, set of responsibilities to the political authority:
First, national defense to protect against the aggressive attacks of other countries that would threaten the citizens’ freedom and security;
Second, police and courts to secure each citizens life, liberty and property from domestic thieves and bandits, and to adjudicate the disputes that might arise among men;
And, third, the provision of a small handful of “public works” such as roads, bridges, the dredging of harbors, and the like. Except for a few other limited and narrow activities, in Adam Smith’s view all other matters should be left up to the choices and decisions of individuals, either on their own or in voluntary association with others in society.
Smith’s system of natural liberty, therefore, came very close to the free market ideal of laissez-faire.
The Dangers from the Social Engineer
He was fearful of extending government’s control much beyond these narrow duties because political power easily was used and abused by the type of person that he called, “the man of system.” This is the individual who today we would refer to as the “social engineer” or the “paternalistic planner” who presumes to know better how men should live than those people, themselves.
The social engineer views the members of society as mere pawns on a “great chess board of society,” to be moved about with little thought or consideration that each of those “pawns” is a living, thinking, valuing and planning individual, who would much prefer to make his own decisions concerning how he will live and act.
As Adam Smith expressed it in his earlier book, “The Theory of Moral Sentiments” (1759):
“The man of system, on the contrary, 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 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.”
The “man of system” considers himself far above and superior to others, who are to be compelled to conform to his political design for them. As Smith observed:
“To insist upon establishing, and upon establishing all at once, and in spite of all opposition, every thing which that idea may require, must often be the highest degree of arrogance. It is to erect his own judgment into the supreme standard of right and wrong. It is to fancy himself the only wise and worthy man in the commonwealth, and that his fellow citizens should accommodate themselves to him, and not him to them.”
The Division of Labor and Human Association
But if governments and social engineers are not to plan and direct how and where people will go about the economic affairs of everyday life, how can it be assured that the goods and services that people both need and want for their survival and desires will be produced and supplied to meet their demands?
Adam Smith was insistent that the economic relationships in society need no guiding and commanding hand from government. They arise quite naturally and spontaneously among people, without political orders or directives.
Because of people’s inherent and acquired talents and abilities, there has emerged in every society a system of division of labor. People begin to specialize in what they discover they are comparatively better at producing than their neighbors and offer to sell their specialized wares to others who, in turn, can produce and supply something they want in a better quality or at a lower cost than if they attempted to produce it for themselves. Explained Adam Smith:
“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers.
“All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbors, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for.
“What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better to buy if of them with some part of the produce of our own industry, employed in a way in which we have some advantage.”
Rational Self-Interest and the “Invisible Hand”
This division of labor creates an inescapable network of human interdependency in which each person specializes in producing one or a small handful of goods, and uses it as his means of payment to purchase from others in society all the other things that he wants, but which they are better at supplying than himself.
If this network of division of labor exists and operates within a “system of natural liberty,” each man will soon find that it is in his own self-interest to apply his own activities in ways that serve and improve the conditions of his fellow human beings as the surest means of attaining his own desired goals and ends.
Precisely because the “system of natural liberty” excludes violence, theft, or fraud, the only way any individual can acquire from others what he desires is by applying his own knowledge, abilities, and resources in a manner that enables him to produce and offer to others what they desire, so they will give in trade what that first individual wants to obtain.
Thus, though it is no part of their motivating intention to improve the conditions of life of others, in their own self-interest each individual must devote his efforts to serving the wants of those others as a means to achieving his own ends. And, thus, while it is no part of the individual’s intention, the cumulative effect for society, Adam Smith argued, was that those goods most valued by others in society were the ones produced and offered on the market.
These outcomes were