It was the tercentenary of the birth of Adam Smith this month. Nobody is quite sure on what day Smith was born in June 1723, but economists at the University of Glasgow organized a series of events and debates on Smith’s ideas throughout the month.
Adam Smith has become the guru of ‘laisser-faire’, free market economics – the man that Chicago University economists like George Stigler and Milton Friedman turned to as their theoretical mentor for the ‘free market’. He was lauded by right-wing free market politicians like Margaret Thatcher as inspiring them to adopt policies to reduce the size of government and state and ‘let the market rule’ in all aspects of social organization. And the global free market economists like Friedrich Hayek and the Austrian school of free market economics looked to Smith for their basic approach. There is even a ‘think-tank’ based in the UK that claims to develop economic policy based clear ‘free market’ principles. Its slogan is “Using free markets to create a richer, freer, happier world.”
Smith wrote two great books. The first was The Theory of Moral Sentiments in 1759 and his second, the most famous, was The Wealth of Nations, published in 1776. This made his name as “The Father of Economics.” And yet anybody who reads both these books closely will find that Smith was not some raging free market evangelist that denied the role of government or for that matter considered that human behaviour was driven by material self-interest and nothing else.
His most famous statement was about the so-called ‘invisible hand of the market from the Wealth of Nations: “(Each individual) generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it…He intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
Smith is arguing here that, as each individual pursues his or her own economic activity, the individual is unaware that the combination of all these individual actions produce a market for production and consumption that is not under his or her control but leads ‘invisibly’ to a better outcome for all. Behind this was Smith’s great insight that modern industry is based on a division of labour: when the production of commodity is broken down into discrete parts where human labour specializes instead of workers doing every part of the process, productivity rises and costs and prices fall. Marx tells us the dark side of the division of labour: the alienation of humanity turning creative work into toil and drudgery.
Similarly, for Smith, individuals competing on a market will deliver an outcome beneficial to all. And from this flowed the view that “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” This is the classic basis of modern neoclassical economics: based on the myth that the consumer is ‘sovereign’.
Smith was strongly opposed to monopoly of which there were many in his time, often controlled by a corrupt monarchial state. These monopolies ruined industry and reduced entrepreneurial initiative and thus productivity and prosperity. He was in particular opposed to mercantilism, the doctrine of international trade where nations protected their industries and built up surpluses rather than expand trade. He explained why protectionism is always self-defeating. “By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?”
But it is a myth created by today’s free marketers that Smith was opposed to government and to moral behaviour over material interest. On the contrary. Chicago economist Jacob Viner of the 1920s summed it up:
“Adam Smith was not a doctrinaire advocate of laissez faire. He saw a wide and elastic range of activity for government, and he was prepared to extend it even farther if government, by improving its standards of competence, honesty, and public spirit, showed itself enticed to wider responsibilities. . . . He devoted more effort to the presentation of his case for individual freedom than to exploring the possibilities of service through government. . . . [but] Smith saw that self-interest and competition were sometimes treacherous to the public interest they were supposed to serve, and he was prepared. . . . to rely upon government for the performance of many tasks which individuals as such would not do, or could not do, or could do only badly. He did not believe that laissez faire was always good, or always bad. It depended on circumstances; and as best he could, Adam Smith took into account all of the circumstances he could find.”
He was strongly opposed to slavery. “There is not a negro from the coast of Africa who does not possess a degree of magnanimity which the soul of his sordid master is scarce capable of conceiving. Fortune never exerted more cruelly her empire over mankind, than when she subjected those nations of heroes to the refuse of the jails of Europe.”
Marx was a close reader of The Wealth of Nations. He recognized Smith’s contribution in attempting to develop of a theory of value based on labour. As Smith said: “Labor alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price.” But Marx went on to criticize Smith for inconsistency in his labour theory of value, as Smith reverted to a theory of value based of ‘factors of production’ ie rent from landlords, profits from capitalists and wages from labour, rather than all value being created by labour and then appropriated by landlord and capitalists.
Adam Smith was also not a hardline free trade supporter. His position was nuanced by the state of the British economy at the time. He supported the Navigation Acts – which regulated trade and shipping between England, its colonies, and other countries – despite the fact that they mandated that goods be transported on British ships even if other options were cheaper. “Defence,” he wrote in The Wealth of Nations, “is of much more importance than opulence.”
Denouncing desirable security policies as “protectionist” was beside the point then and now. After all, security of the capitalist state was more important than the free market in international trade. And the ‘free market’ is only lauded as long as it does not reduce the profitability of enterprise.
Michael Roberts Blog 
Like Marx’s work was all about the critique of the then prevalent political economy, too Smith’s was a critique of a mercantile polity before. And of course, men are ought to regard criticism of the past in the same vein as the advocacy of the future.
For the invisible hand, we all know that the society is composed of the individuals and thus their collective is what we may regard as public with some synergistic effects from the famous “the whole is always greater than the some of its parts”. I take this last statement seriously in my recent post.
Indeed
I suppose Adam Smith serves neoclassical economy as a moral philosopher and a fictitious “founding father” of the field. I very much doubt any postwar vulgar economist ever read Adam Smith.
Here are my arguments:
1) Adam Smith was not a vulgar economist, but a classical economist. It is weird for an entirely different and antagonist school to elevate a natural enemy as their founding/spiritual father under scientific arguments;
2) Adam Smith was not even the apex of classical economy (political economy) — that was David Ricardo. If the vulgar economists (neoclassical) really wanted to inherit some alleged prestige of political economy, they would have chosen David Ricardo, which, by elimination, only leaves us the “moral philosopher” option.
If #2 turns out to be correct, then this would be a similar — and contemporaneous — movement that happened in philosophy, where Hegel was buried into oblivion and, to fill the vacuum, the bourgeoisie unearthed the corpse of Immanuel Kant in the form of Neo-Kantianism, which is the dominant philosophic framework the non-Marxist philosophers (i.e. bourgeois) use nowadays. The only difference is that, in Philosophy, the American attempt to create the new dominant school on their image during the Cold War, Pragmatism (whose greatest philosopher was Richard Rorty), failed to stick for some reason, while, in Economics, the Americans managed to successfully supplant the old world guard with the invention of Monetarism.
But it seems to be true that Immanuel Kant was the father if not epic of German idealism of which Hegel was a student plus others like schoepenhauer. Usually, Kant is to be graded with Aristotle and Plato.
For economics of reality ended with Mr Keynes and all subsequent works have been recitals, consider for example an Austrian intrigued by the eclectic gold standard, whoops!
Neo-Kantianism is not Kant, but the corpse of Kant.
I don’t think Keynes was “economics of reality”. As the true disciple of Alfred Marshall, he’s the postwar champion of vulgar economy. The thing is, since Keynes was a politician for most of his adult life (and during a very urgent and critical time of the UK’s history, the Depression and WWII), he had, inevitably, to impose some immediate practicality to his “theory” — something his vulgar colleagues and rivals, say, the Austrians, did not have to do.
On the contrary, the whole keynesianism is based on Michael Kalecki (under the hood), the then prevalent progressive socialism. And it worked.
Vulgar economics is, mind you, all about subjective theory of value which was none at all a necessity at the time.
Must say, Michael Perlman The Invention of Capitalism, is well worth reading.
It’s perElman!
Yes,unfortunately now deceased
Succinct and to the point, well done. If Smith was alive today would he describe the ‘algorithm hand’ which seeks to make visible the ‘invisible hand’. Algorithms, what an alienated way of finding out what society wants and needs. He is right about economies needing to be driven by consumption, but that requires an end to private ownership, so that consumption is now placed in the hands of society in the form of the freed up producers. Hence consumer led planning.
I love your blog, it’s pretty much my favorite economic writing right now.
I was surprised that you took the out of context quote of Adam Smith, that implies the invisible hand means something different than Smith intended in context. Smith is talking about employing “domestic” industry. In the invisible hand section, he is explaining why business owners tend to invest and hire labor domestically.
“As every individual, therefore, endeavours as much as he can, both to employ his capital in the support of domestic industry, and so to direct that industry that its produce maybe of the greatest value; every individual necessarily labours 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. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
There is certainly evidence of the “invisible hand” concept as commonly understood by bourgeois economists in other parts of his writing, but certainly not when he actually uses the term.
It’s explained fairly well here:
http://rankinfile.co.nz/rf98_InvisibleHandQuote.html
“The key omission in the popular version is the double omission of the reference to “domestic industry”. Smith was in fact arguing that possessors of capital are led to investing their capital in their domestic (ie national) economies, even though market signals might suggest that they might get a higher return from investing in foreign industry. In this passage, as in others, Adam Smith was arguing for economic nationalism.
Smith argued that capitalists have a deeper sense of their true self-interest than to greedily follow market signals as the only indicator of self-interest. It is clear from Smith’s three references to the word “society” that the metaphorical hand is guiding capitalists towards their true self-interest; a self-interest which contains a social component that the capitalists may not be fully conscious of.”
Yes, interesting
…Also interesting in that England’s bourgeois national interest was quickly blossoming into world empire. Smith hated slavery, etc. but was apparently blind to the critical relation between the expropriated weatlh (still flowing for over 200 years!) of the enslaved colonies of the “New World” and the blind mouths of the Europe’s nacent industrial system.
Such concept wasn’t an innovation by Adam Smith. Immanuel Kant also theorized about that with his concept of “commercial spirit”, while Hegel would later come up with his concept of “Cunning of Reason” (List der Vernunft).
Both concepts are much more sophisticated, complete and logically sound than Adam Smith’s “Invisible Hand”, so Adam Smith is outdated even in this department. But even this debate itself is outdated, because Marx made all of them obsolete.
I’ve always understood the invisible hand to be the urge to please others. Ie to produce useful value for others. That explains why markets work as a result of people’s care to make them work.
On the other hand the all too visible hand of greed distorts the market to cause mass starvation in the face of plenty.
It’s just as well the ultra greedy are a small minority
The problem is that’s with someone like. Marketers (anogram) It’s difficult to see the insecure boy underneath grabbing at the world in carefully constructed castles of self importance to keep people away from his childhood insecurities. it’s sadly something that happened to a lot of working class grammar school boys.
https://www.revistalacomuna.com/formacion-politica-y-opinion/en-su-tercer-centenario-una-reapropiacion-militante-de-adam-smith-parte-2/
ON ITS THIRD CENTENARY: A MILITANT REAPPROPRIATION OF ADAM SMITH. PART 2
Posted by Jorge Alvarez Mendez
A real gift to current liberalism has been to grant the theoretical legacy of Adam Smith to that philosophical position as a natural belonging. When the class struggle settled in the bourgeoisie-proletariat antagonism, the former acquired a reactionary connotation at the height of the era of the revolution (around 1848). Already entered the world in the imperialist phase, capital tends to ideologically obscure any scientific explanation of social historical processes: encyclopedism and enlightenment have thrown themselves overboard in terms of their humanist vein that reaps feudal privilege.
Klein has gobbled up the poisoned saucer of the ahistoricity of capital. It has been served in generous supply by Friedman and his proselytes in attacking government regulatory policies. Such neoliberal attacks were launched in the debacle of the Keynesian measures in the United Kingdom and the United States, countries where there was a fight between fractions of the capitalist class, but it was dressed as an academic fight between Chicago and Cambridge. The Friedmanian method not only eternalizes capital in general, but also the interests of financial capital; and equally naturalizes the State. All this seasoned with the ingredient of the intellectual dishonesty of the guru of the Chicago boys. In his polemic with the Keynesian John K. Galbraith, he carried out a crude maneuver to match the needs of a State governed by the Tory aristocracy of the 18th century, with the State hegemonized by capital in the second half of the 20th century. Friedmann speaking:
“I quote from Adam Smith;
It is the greatest impertinence and presumption of kings and ministers to pretend to monitor the economy of private people and restrict their expenses with sumptuary laws and or prohibiting the importation of foreign luxuries. They themselves are always and without exception the biggest spenders in society.
Let them take care of their own expenses and they can calmly let private people take care of theirs. If his own extravagance does not ruin the state, neither will that of his subjects.
This is a really great series of articles. Part 3 addresses the quote directly in its original meaning.
For those interested in a refutation of Monetarism, I recommend Friedman student Elton Rayack’s Not So Free to Choose, which is unfortunately out of print, while Friedman’s manifesto (Free to Choose) not only remains in print, the Amazon page with that book contains references to videos (PBS!) and companion books, while Rayack’s work simply demolishes Friedman.