Adam Smith as an Enlightenment thinker

In: Uncategorized

16 Jul 2006

My review of a new biography of Adam Smith which puts him into context as a thinker of the eighteenth century Age of Reason. From the 10 July issue of Fund Strategy magazine:

Adam Smith (1723-1790) was one of the first and greatest thinkers of the modern age. Although nowadays he is normally seen as an economist, his preoccupations encompassed what today would be classified as history, international relations, philosophy, politics and sociology. Smith developed tools to understand the modern world that are in many respects superior to those commonly used today.

James Buchan’s new biography of Smith is particularly welcome for two reasons. As would be expected from a novelist, his writing is clear and jargon-free. Even more importantly, he reclaims the legacy of Adam Smith from the contemporary charlatans who want to use him for their own narrow purposes.

Perhaps the best-known – although erroneous – image of Smith is as the founder of free-market economics. Towards the end of the 1970s, it became fashionable to uphold Smith as a defender of markets against state regulation. His the Wealth of Nations, first published in 1776, was promoted as the foundation for Margaret Thatcher’s policies in Britain and Ronald Reagan’s in America. Even today this view of Smith is popular.

Buchan points out that Smith only used the term “invisible hand” three times in the million words that he wrote in his lifetime. Although this phrase is often upheld as an expression of the free market, he does not use it in that context once. Nor does he use the phrases laisser faire or laissez faire. Such omissions should not be a surprise as Smith lived way before the more recent preoccupations on the relationship between state and market emerged.

However, while it is wrong to portray Smith as an 18th century Thatcherite, it is equally misleading to see him as an early New Labourite. Gordon Brown, who like Adam Smith was brought up in the Scottish town of Kirkcaldy, portrays him as an early socialist. Brown has argued that Smith’s invisible hand was underpinned by a “helping hand” in the Theory of Moral Sentiments (1759), his great philosophical work. Yet Buchan points out that Smith does not use the phrase “helping hand” even once. In any case, it makes little sense to draw parallels between ideas being developed in the 18th century and contemporary policy.

None of this means that Smith’s work is irrelevant to today’s world. On the contrary, he remains of central importance. The paradox is that to understand Smith’s significance he must be put in his proper historical context.

Smith was above all a thinker of the 18th century Enlightenment. During this period, a new breed of thinkers developed ideas based on key notions such as reason, science and progress. Smith, for example, was inspired by the breakthroughs of Isaac Newton in natural science.

Although the Enlightenment is often associated with France, and sometimes America, another centre was Scotland. David Hume, one of the most important thinkers of the Enlightenment, was Smith’s closest friend. Other key figures of the Scottish Enlightenment included Adam Ferguson, Francis Hutcheson and Dugald Stewart.

Smith’s concern in The Wealth of Nations was to understand the economy, as well as society more generally, using Enlightenment principles. He famously started with a description of work in a pin factory – an example taken directly from the encyclop├ędie compiled by French Enlightenment thinkers – to illustrate the importance of the division of labour. Through specialisation, he argued, productivity could be raised substantially. Society could become more prosperous as a result.

Smith was not the first to recognise the advantages of specialisation. Buchan points out that back in the 17th century Sir William Petty had already recognised the benefits of specialisation. And long before that Plato had written about it in The Republic.

However, Smith’s treatment of the division of labour differs from earlier writers in significant ways. The importance he attaches to it is apparent from its place at the start of The Wealth of Nations. It is the foundation on which his system is based. Smith then goes on to explain the central role the market plays in allowing for the exchange of goods that are made by specialist producers.

Despite the high overall quality of Buchan’s work, it does contain flaws. Like some of the critics Buchan criticises, he makes the mistake of reading history backwards. For example, he criticises Smith for excluding the role of innovation or the entrepreneur from his theory. Yet Smith was writing in the early stages of capitalism, before even the Industrial Revolution, so it is unreasonable to expect him to use such recent terminology.

More seriously, Buchan makes the mistake of arguing that Smith’s “world is static, even frozen”. It is hard to think of a criticism that is further from the truth. Admittedly, Smith nowhere uses the term “economic growth”, let alone the idea of GDP, which was not invented until the 1930s. But, making allowances for his 18th century language, it should be clear that Smith has a dynamic view of economics.

For instance, Smith talks about the accumulation of capital rather than economic growth. By this term he meant the gradual amassing of wealth through economic activity. For Smith, this concept was in turn linked to a notion of social progress or humanity’s drive to better its condition.

In contrast, it is contemporary economics that has a static perspective. It is preoccupied with short-term shifts in supply and demand far more than the long-term factors driving economic growth. It also focuses on the consumption side of the economy rather than the underlying relations of production.

Even more importantly, we can learn from the sense of optimism characteristic of Smith and the early epoch of capitalist development. While the contemporary world is marked by pervasive pessimism, the ideas of Smith were designed to help understand and create a better society. It is an approach that we in the 21st century would do well to learn from this 18th century thinker.