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Originally published: 1776
590 pages
Chapter 12


Adam Smith

Adam Smith is to capitalism as Thomas Jefferson is to freedom. And Wealth of Nations is to free-market economics as the Declaration of Independence is to American sovereignty. Smith's understanding of commerce and human nature and his conclusions regarding the structure and future of the British mercantile system (which was rife with protectionist fabrications in the eighteenth century) are as germane and applicable today as they were to the emergence of capitalism more than two centuries ago.
     Modern economic life was born with the Industrial Revolution and virtually all of the elements of present-day commerce were in evidence in England by the 1700s. With as much accuracy as if he were a contemporary lecturer in economics Smith writes of markets, trade, incentive-all the ingredients of economic discourse-and the limits of government. He discusses taxes comprehensively delving into how, when, by whom and to what degree they could profitably be levied for both the government and citizens. Finally, he writes about people-the good and the bad of the human condition. Smith's goal was to establish why it is in the best interests of both the governed and the government that consumer sovereignty rule economic markets.
     Although Smith did not enjoy our ease of access to information he cites commercial statistics and cost data (i.e., the costs of doing business) to substantiate his conclusions for England and the European continent. The wealth of detail, which Smith was thoughtful enough to use somewhat selectively, dates from as long as centuries before he


wrote. This makes his work as exhaustive as it is easy to comprehend, not just in its logic but also in the value of his inferences.
     Smith begins his exploration of economic substance one step beyond the infancy of human endeavor. He assumes that the existence of private property has been intellectually accepted and economically justified; thus he does not attempt to defend it as an institution. He found the investigation and explication of property in the works of John Locke both logical and rational. (Locke's template, from which Smith partially assembled his own theories, can be found in The Second Treatise on Civil Government, [Chapter 1]). With that foundation, Smith jumps directly into a consideration of human nature to discover why progress (literally the "progression of improvements") occurs. He sees the catalyst of progress in human dissatisfaction with any status quo. People's ingenuity moves them from the unsatisfactory to the better and toward the unattainable best. Without the achievement of perfection the process neatly self-perpetuates.
     A small digression may be useful at this point. There is in the modern era an often-expressed complaint from the so-called intellectuals (who may over-think such things to a remarkable degree) that there is a malaise infecting the body politic. The suggestion is that our society has produced an overabundance of almost everything-except happiness. They claim there is a general dissatisfaction with life in spite of how much we have achieved both materially, spiritually, and intellectually. The
logical conclusion for this group is that we have accumulated a lot but given not enough. Once they determined that our dissatisfaction results from the fact we have not offered enough of ourselves and our resources to make the world a perfect Eden (in spite of the fact that the United States is the most generous nation on earth-now or ever-and is considered the "can-do" society by almost any measure used) their solution is to take from those who have been successful and award that bounty to those who are not as well-off, their theory being that will make both groups happy. They contend we have not given enough because we are too free to keep the fruits of our labor and that this freedom needs to be curtailed. The proof of this need, they claim, is in the pudding-we have all this success yet in the realization of happiness, emblazoned in the Constitution as our inherent right, we have failed.
     The problem with this straightforward declamation is that it ignores three points; the first is that the allegations of discontent may, unfortunately, be politically not sociologically motivated and constructed 


(another result of manipulation by or by means of the media); the second is that the Constitution doesn't promise happiness, just the right to pursue it. And happiness is achieved in the pursuit, not only in the momentary attainment of something that pleases us. Jefferson and the other Founders knew this thus their intentional phrasing. The third reason that a distorted claim of unhappiness can be made but not substantiated is man's well-understood uneasiness; this element has nothing to do with parsimony.
     Man is uneasy because he sees opportunity-constantly. It is his uneasiness that drives the progress we obtain. The problem is that our uneasiness doesn't disappear with any given success, at least not in the long run. It is in our very nature to be displeased with the status quo thus it can be claimed that we are unhappy when we are not, we are simply exhibiting the human genius for improvement embodied in curiosity, inventiveness, cleverness, and diligence. It is this aptitude for change and invention that pushes us to move on from even the most spectacular success. That is a human condition not the result of some systemic malfunction or failure. Thus changing the system without changing the underlying factors of human nature actually changes nothing. That people can be happy in spite of the fact that they are not wealthy, that they can be happy because they understand the benefits of inequality among human beings and they recognize that none of those inequalities stop them from aspiring is the starting point of human comprehension. If the rules of the game are changed so that to aspire becomes a bootless effort then lives change fundamentally.
     When we see a psychosocial inquiry into why modern man, whose life is abundant, is "unhappy" perhaps we should question the question. What is certain is that the romantic prescription-that because we are alleged to be unhappy with what we have we might as well give it for the benefit of some other group-misses the point of man's journey by a wide margin. Man is not unhappy with what he has achieved, but he does get confused if not disgruntled when someone suggests that removing the fruits of his labor from his bank account will make him happy. He sees such an action making him quite the more unhappy from where he supposedly is in the first place. This of course does not even begin to deal with the question: if economic well-being does not make those who earned it happy what is there in the wealth itself that will make those to whom it is given any happier than those from whom it is taken? For the redistributionists life is seen only in terms of mathematics-never as human reality.


     Freedom is the real issue in these discussions; it is freedom that scares the twenty-first century liberal as much as it did the eighteenth-century Jacobin at the time of the French Revolution. The
fact is that freedom doesn't scare human beings in general, and that is the point of First Principles.
     Let us return to Adam Smith's more practical contentions: In any economic paradigm, relationships are primarily defined and operate in terms of two human characteristics: striving for power (through competition, not as megalomania) and the power of aspiration. In a free market progress is achieved by human endeavor to remove dissatisfaction-the lure of our aspirations-and change is the only constant. Striving for power, to be "the best," creates continual competition-to surpass one's rivals. This can, but rarely does, result in excesses of one sort or another. The reason these excesses are rare is found in Smith's concept of "enlightened self-interest"-a brilliant leap of understanding and expression and the first part of Smith's definition of a workable economic model (the other part being the free, unconstrained market).
     Smith's model for enlightened self-interest is the person who realizes and acts on the fact that he must satisfy his customer to ensure repeated patronage or garner a positive reputation to enlist new business. He must offer fair value at a fair price. Enlightened self-interest is nothing more than understanding that "I will do well for myself, if I do well by others." The philosophy of capitalism is that both parties to any transaction view themselves as being better off when the bargain is struck-and once the deal is complete both actually are better off based on their individual circumstances and goals. There is mutual benefit from and mutual consent to the transaction. The consumer has parted with his money, but received something more valuable-to him-some need is fulfilled that his money as a commodity could not satisfy. The producer has sold his product or service, paid his expenses, taxes and employees, the cost of which is hopefully less than the amount gained from the transaction, and is ready to begin the cycle again. The negative stereotype-that somehow the consumer is being short-changed by paying money for something he wants and only the producer profits is bogus and survives only in a demagogic atmosphere. The consumer profits by attaining his goal more easily by using money made engaging in some other effort. He then exchanges that money for whatever it is someone else makes that he desires more than his pocket full of earnings (and that he could not likely efficiently produce himself anyway).


     The unplanned cooperation when engaging in economic self-interest becomes reciprocally beneficial, and those benefits are not unnoticed by human beings. Social progress is palpable in this paradigm and Smith's discernment and explanation of enlightened self-interest, though it was little more than observing what was happening on the ground, was nevertheless near revolutionary in his era. However, self-interest as a concept also needs to be taught, evangelized; it is not always either self-recognized or self-effecting. The carrot of gain is worthwhile, but the stick of forfeit for behavior that is counterproductive is necessary as well. In making his observations, Smith discusses all aspects of free-market discipline.
     Modern anti-capitalists use Smith’s concept of enlightened self-interest in a derogatory fashion; most importantly they leave out Smith's modifier--enlightened.  They focus on self-interest in order to condemn capitalism as selfish while asserting there is nothing enlightened about it. But Smith was not advocating social policy or suggesting how people should act, he was making real-world observations—that people do act in their own interest.  Smith also was not claiming that self-interest uniformly has beneficial effects; he only observed that self-interest is not by definition, bad, certainly not in a free economic setting.
Theoretical systems postulating economic symmetry, equality, and presumed beauty don't change men from their nature no matter how much we'd sometimes like that to be the case. Men embrace useful versus futile behavior not by the implementation of arbitrary utopian direction, but through individually comprehending the benefits of the former and detriments of the latter while maintaining their intrinsic self-interest. This enlightened state-self-learned through experience and observation-is what encourages unplanned and mutually beneficial cooperation. Idealized systems that attempt to force an equalitarian goal with wholesale uniformity cannot achieve the flexibility to account for individual differences in personality and skill, thus for their implementation they require, first, constraints, then control. Unfortunately, the nature of human affairs, economic affairs in
particular, cannot be remedied by government, or even more remotely, by politics. We can only design society to work within the constraints of human character and human nature. To attempt more is to reach for a fantasy.
     In the end if free-market competition goes awry private or public counter-measures become necessary. If the problem becomes significant


government is available to step in as a referee. But Smith notes how well the free market works, referencing the thousands and thousands of transactions occurring each day (in his time) without a hitch. When we compare that with the few misdeeds that make headlines each year it is easy to understand that people not only want a sound and fair system within which to operate but that they will make every effort to ensure that happens. The lawless confusion of previous eras was unpleasant and unrewarding and wholly without any security-thus the unpopularity of anarchy, whether commercial or civil, and the acclaim of its antidote, enlightened self-interest.
     Underlying all of Smith's writing is his view of human nature, both how it works and how it does not. From his acceptance of the existence of property rights to the gains in economy achieved through the division of labor to the establishment of the marketplace (where the pieces and players can freely interact), his systemic logic remains unchallenged. The market is the stage upon which all activity takes place, but in Adam Smith's play the director is the invisible hand of voluntary and enlightened human interaction. Smith mentions the invisible hand only once in Wealth of Nations but it is the part of the equation necessary to understand why liberty and free markets work, and collectivism (or centralized control) does not. The vast interrelationships inherent in any economic structure cannot even be comprehended much less charted, and even less, dictated, by any single or group effort-such a feat is well beyond the power of any human mechanism. The alternative is free interaction. In a system of free interaction decisions are made based on each participant's view of his own well being and his personal desires. The invisible decisions and processes not only allow this unimaginably complex system to function but to work to the advantage of everyone.
     Smith could assume nothing about his readers' intellectual or economic sophistication. Writing at a time when the market itself was in its infancy (although it should be noted that in 1720 London, more than fifty years before the publication of Wealth of Nations, there already existed over 20,000 privately owned shops [and thus Napoleon's later derisive sobriquet that England was but a nation of shopkeepers]) and universal education was still a century in the future, he addresses both the learned and the economically illiterate using a rigorously logical but necessarily pedantic approach. Put simply, Smith was composing from a vantage point not just unappreciated by even above-average individuals but actually unknown


to virtually all of his audience. In today's often contentious political climate enlightened self-interest and the unplanned symmetry of the market's invisible hand can be distorted for electoral gain-and to the detriment of both the voters and the economy-thus the need to reconsider capitalism and the free market in the more elemental form that Smith describes.
     At the end of his practical and philosophical investigation into capitalism, Smith arrives at "opulence" as the result not the goal of human ingenuity and interaction. (In his day, opulence meant personal and national commercial success, not gaudy over-consumption.) How one economic system or any class within an economic system arrives at opulence was grist for Smith's mill.
     While explaining the intricacies of commerce Smith takes the road less traveled. His survey of human beings and their nature differs from the morally needy characterizations that were embedded
in the darker notions and severe punishments of the religious dogma in vogue during the Middle Ages and in practice in Puritan England. He views mankind not as venal and sinful but as worthy of trust-both collectively and individually. His insight was simple: people would effect the common good through their recognition of common goals. In this respect, Smith expresses not social Darwinism (the charge of those who view capitalism as a predatory enterprise), but enlightened self-interest. In his estimation monarchical authoritarianism impeded man's ability to reach his full potential. Personal freedom coupled with economic freedom was the best guarantee of social progress.
     While Smith believed in the need for government he saw government as the arbiter not the director of social interaction. Because human folly cannot be eliminated (no matter how much we've learned about right and wrong) Smith understood people should not set up government in an attempt to control every potentially negative human action. Rather, government should have mechanisms to deal with grand or petty aberrations when they do occur. Having a policeman on every corner to prevent human perfidy is neither achievable nor workable. In Smith's estimation the (free-market) playing field would be largely self-leveling-because of the effects of reciprocal self-interest. If certain individuals were hard to deal with the market would limit their success as recognition of their practices spread.
     There was little anonymity in the eighteenth century-population was low and concentrated, travel limited. Reputation was of paramount importance. Admittedly, however, there was also significant innocence,


even gullibility, as the era's new products were offered. But for Smith it was up to the people to sort all that out-not the government, for neither the government nor its functionaries were wiser in these matters than were the participants. The participants had far more incentive to protect themselves than did bureaucrats who, even in Smith's time, were alternately indolent and authoritarian-and you could never be sure whether Dr. Jekyll or Mr. Hyde would show up to perform his bureaucratic duties on any given day.
     Smith's basic insight into economic life admits of a succinct summary: free activities and free relationships best guarantee that all economic elements (both human and commercial) will balance one another to maximize progress. If we let government or some other monopolistic force tamper with any aspect of free economic life (absent a direct need to protect the citizenry) there will be widespread side effects-generally to the detriment of those not doing the tampering. Furthermore, we cannot view economic activity in a vacuum; there is a cascade effect no matter how trivial governmental intervention may seem.
     Smith's assessment of the role of government was as concise as his explanation of how the free market works. The time and place where government is beneficial is generally threefold: to protect citizens from foreign invasion, to establish a system of civil justice for relations between citizens, and to construct and maintain public works and institutions that individuals cannot effectively create on their own. A subset of these necessary institutions relates to dealing with fraudulent, destructive or dangerous economic activity, oftentimes (but not always) criminal in nature.
     The universal bugaboo of capitalism and its essential freedom, whether in the time of Adam Smith or today, is the shyster or the charlatan. This is an area in which government plays an important but secondary role. The bad actor, who distorts the existing economic balance, is often held up as exhibit one in defense of government control or intervention in a free-market economy. But the scoundrel, the fraud, and the cheat are not capitalists in the honest sense; each is simply a thief. (Sometimes, indeed, he is not even a thief for it is not gain that drives him but the adventure
and use of his own faculties in outwitting his fellows, or in driving away his boredom, that is the impetus.) We need not alter capitalism to prevent their misdeeds; we alter their relationship with their fellow economic actors by removing them from the system. This allows capitalism to work properly. When a bad apple is in the barrel we simply remove it hopefully before it corrupts the


other apples. To deal with fraud and its cousins Smith recommends only two remedies: individual responsibility and the government's enforcement of clearly defined criminal statutes.
     Smith's position is that personal responsibility is the first line of defense in all economic relationships. "Let the buyer beware" is one of many familiar aphorisms coined to make people cognizant of their role in protecting themselves. It expresses the obligation of individuals to use good judgment. Smith argues that it is our duty to act on the fact that if something sounds too good to be true it probably is.
     Smith observes an unfortunate but simple fact regarding human institutions: it isn't capital or capitalism or the free market that is bad. Neither is democracy or unbridled free speech deleterious. It is always individuals who create the distortions. Moreover, there is not even a hint that if the government were to control the economy or any other aspect of our lives that frauds, cheats, or even incompetents (who appear so innocent, but do so much harm) would cease to exist, or, more to the point, avoid government employment. There would simply be no way to prevent such people from worming their way into positions of authority. Both moral and intellectual failings are human, not institutional, and are as commonly found in government workers-especially government workers with great power and indubitable job security-as in corporate chieftains or local shopkeepers who have to answer in the marketplace. After all, each of us suffers in equal measure from the human condition.
     Over time Smith's canny observations about human nature became useful in creating solutions to those instances when capitalism did, indeed, suffer from its own excesses. However, the focus on the difficulties and criticisms of the free market often ignore the obvious and incredible progress for the societies in which it operates. The aberrant minuscule part of the story of capitalism becomes the flea that wags the tail that wags the dog. The public perception of materialistic perfidy-because of the existence of capitalism's infrequent failings and the omission of its achievements-is intentionally created and encouraged by the few. Such a view is often fostered by unjustified and erroneous media and political tumult and results in ingrained and sometimes ubiquitous, arrogant hectoring. This negative campaign works for both the press (to increase its own profit by encouraging public conflict) and the political hand-wringers who view, almost wholly through ignorance and emotional misapprehension, any individual failure as total or systemic failure, and a demagogic opportunity to encourage their own political


success. Reading Smith's views re-engages the citizen in the reality of free enterprise without politicizing the subject. That is fruitful today almost beyond measure.
     The ultimate form of governmental economic intervention in the twentieth century and the polar opposite of Smith's investigations was pervasive socialism. In defending socialism its proponents claimed that government can best control the multiple and ever-more-complex forces of commerce and do so to create the greatest good. In fact, it turns out that just the opposite is true; the more complicated an economy becomes the more necessary is the freedom of individuals to act in their own interests. Any centralizing force becomes less able to direct all segments at all times in any efficient or productive direction.
     Socialism was and is every free marketer's worst nightmare. Its horrible reality took root in those places where the most egregious forms of governmental monopolistic controls already existed and thus did the most harm where it could be least tolerated. These excesses, as awful as they turned out to be in the twentieth century, were a perfect counterpoise to the value and utility of the free enterprise system. The pendulum thus swung back and socialism suffered accordingly. Although Smith foresaw a glimmer of socialism's economic madness, its salient characteristic-state ownership of production processes and facilities-was far enough from his world of monarchy that its eventuality was not central to his investigation. However, its ultimate place in the potential chain of events was certainly evident in his logic.
     Socialism's twenty-first-century progeny, state welfarism, is the subject of other chapters in First Principles. Welfarism's characteristics and effects are so similar to those of socialism that the consistencies become a continual theme. As will be seen, when the fundamentals of economic understanding are followed during the period between Smith's eighteenth century and our twenty-first neither the community of concerns nor the array of misapprehensions regarding government intrusion into the marketplace suffers any significant mutation. Nor does the discussion abate.
     In Wealth of Nations Smith's relatively modest goal is to demonstrate the foolishness of many British tax and trade policies. The operational foundations of England's international exchange system had become gravely convoluted-often in response to the policies of other nations-and frequently accomplished the exact opposite of what


was intended. In spite of his somewhat narrow focus Smith knew he had to build a foundation to make his case for change. In doing so he created a critical volume that has been effectively applied across the globe and across the centuries. Today the topic of trade couldn't be more timely. What Smith would think of modern international tax and trade policies becomes self-evident as one reads his criticisms; Wealth of Nations regains its status as a most effective primer. He understood that what might appear as national self-interest, which was far more rarely "enlightened" than personal self-interest, was an impediment to rational economic policy. This was true in his time and we see its effects yet today. Even though the jargon of Smith's era did not include our "law of unintended consequences" his insights reveal its timeless operation.
     Certainly Smith wasn't the only bright or perceptive person of his era. But one must wonder why he was nearly alone in recognizing the pernicious quality of so much government intervention in the marketplace. Most of the answer lies in the rigor of his efforts, which when shaped by means of his intellectual acuity made Smith unique. He had an ability to discern and differentiate between those policies that were the causes of economic missteps and those that were just symptoms.
     Wealth of Nations is difficult neither to read nor comprehend. Its truths have withstood the tides of more than two centuries of economic practice thus its value is well established. Applying Adam Smith's eighteenth-century understanding to the two centuries of economic battles following his era was accomplished in two thin volumes: The Law (1850) by Frederic Bastiat and Economics In One Lesson (1946) by Henry Hazlitt (Chapters 7 and 24 respectively). In these books the faith that is often placed in government supervision and regulation is exposed as invariably counterproductive and counterintuitive-but almost always politically useful.
     Smith's detailed conclusions make Wealth of Nations illuminating reading especially when we recall that he worked and studied at a time when mass production and comprehension of the value of the division of labor were in their infancy. Each scene in Smith's play reflects a different segment
of economic activity. Smith starts with the division of labor and the creation of the market and ends with basic concepts of international trade and national taxation. His investigation proceeds with uniformly meticulous attention to cause and effect so that the whole has a footing that easily supports the structure.


     The timelessness and utility of Smith's observations may be seen in current political confrontations. It is also visible in the history of U.S. political battles from 1929-when the Great Depression began-to 1980 when the Reagan Revolution toppled what were thought to be American political and economic verities. These former "truths" turned out to be philosophical and psychological conceits that had little correlation to human incentive or self-sufficiency. As we re-read Smith in the twenty-first century it is obvious that the accuracy of his commentary and his apprehensions regarding human nature have not been tarnished since he first penned them. His lessons remain valuable today when silly and even dangerous utopian notions of economic equality or political direction of an economy can seem attractive, until their details and consequences become evident.

About the Author
Adam Smith, whose father died before he was born in 1723, was raised in his mother's world of Scottish gentry. He entered the University of Glasgow when he was 14 and was at Oxford by the time he was 17. He remained at Oxford for the next six years as a student and nascent professor. Upon graduation he returned to Scotland and the University of Glasgow as a lecturer. There he met and befriended David Hume (Scottish philosopher, economist, and historian, 1711-1776). Smith's career took him to France for several years as a tutor to the French court where he met many of Europe's economic and political thinkers, including Voltaire (French dramatist and historian, 1694-1778). Smith began working on Wealth of Nations in 1766. It was published in 1776 to significant scholarly and public acclaim. After Wealth of Nations Adam Smith intended to write two philosophical overviews, one on the theory and history of law, the other on the sciences and art. Smith did not complete either of these works, and shortly before his death inexplicably destroyed all of his manuscripts. After spending more than a decade on his unfinished treatises while working as a Scottish customs official, Smith died in 1790.

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