Remembering Adam Smith this July 4th (Part I)

By Richard Ebeling -- July 1, 2020

Editor note: Adam Smith (1723–1790) is considered the father of modern libertarian thought, although economics and political economy have advanced significantly since the 18th century. Many of Smith’s insights have proved prescient, and it is often remarkable how today’s follies bring to mind a quotation or insight from his books, essays, or correspondence.

Smith’s warnings against “the man of system,” for example, apply to today’s Green New Deal and its parts.

Richard Ebeling, a leading scholar in the Smithian tradition, penned this two-part look-back at Adam Smith, which MasterResource reposts this July 4th week.

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 The Declaration of Independence 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 Adam Smith stated that if government management of the marketplace were to be repealed there would arise in its place what he called a “system of natural liberty.”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:

1. National defense to protect against the aggressive attacks of other countries that would threaten the citizens’ freedom and security;
2. 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;
3. 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 far superior to any attempt by those in political power to consciously and purposely try to guide production into various directions. Those in political authority possess neither the knowledge nor wisdom nor ability to do so better than each man in his own corner of society, who is most familiar with the surrounding circumstances and opportunities.

Thus, as if by an “invisible hand,” each individual is led through pursuit of his own personal gain and betterment to simultaneously improve the conditions of others in society. Or as Adam Smith famously stated:

As every individual, therefore, endeavors as much as he can both to employ capital in support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors 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.

This is a great insight and message, for this July 4th weekend.

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Richard Ebeling a leading authority on Austrian School economics, is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel.

His books include author of Austrian Economics and Public Policy: Restoring Freedom and Prosperity (Future of Freedom Foundation, 2016); Monetary Central Planning and the State (Future of Freedom Foundation, 2015); as well as the author of Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition (Routledge, 2010) and Austrian Economics and the Political Economy of Freedom (Edward Elgar, 2003).