The Long View: On the Wealth of Nations

Adam Smith and his Inquiry into the Nature and Causes of the Wealth of Nations [Amazon link] often serves as a shorthand for current opinions in economics that favor lighter, or even no regulations on economic activity. That isn’t wholly unwarranted, but it is also worth trying to appreciate Smith in the context of his times.

Smith built his theory of economics on top of a previously articulated theory of morals, which has some similarities to the roughly contemporaneous Kant, and in reaction to/development with the physiocrats, a French school that saw labor as the only true source of value. He was also arguing against the theory of mercantilism, which was part of what drove the American Revolution insofar as the existence of the colonies was seen as a way to build the reserves of precious metal coinage in the Exchequer.

However, Smith himself wasn’t much of a libertarian, as that is seen now. Which isn’t really odd. The past was a different place.

This comment on what Smith’s view of economics is missing is fascinating:

From Ricardo to Keynes, one gets the impression that an economy was like a steam engine that had to be stoked and bled so that it neither lost critical pressure nor blew up. Thereafter, economics tends to become more mathematical, and for that Smith would have been prepared: O’Rourke notes that Smith understood that money is information. Indeed, Smith’s famous “Invisible Hand” was what we would call today a cybernetic feedback system of prices. It is not to be wondered at that Smith did not work out these ideas in detail. As Michel Foucault argued, the 18th century tended to organize knowledge as a static diagram and then the 19th turned those diagrams into timelines. So, for instance, Linnaeus’s chart of lower to higher organisms became a chart of evolutionary descent. The same thing happened in economics, and Smith’s ideas gained an added dimension.

The mathematical and statistical tools of contemporary economics had yet to be developed, so it is not surprising that Smith couldn’t deploy them. The grand view that John J. Reilly advances here is attributed to Foucault, which is an illustration of why so many smart people defended him, despite his obvious depravities. He really did have some remarkable insights. Although there is a characteristic error involved in turning a chart of relationships of currently living organisms into an evolutionary tree.

On The Wealth of Nations
By P. J. O’Rourke
Atlantic Monthly Press, 2007
242 Pages, US$21.95
ISBN-10: 0-87113-949-9

Some books it’s always the right time to read. On that list of perennials, I suppose, we should include An Inquiry into the Nature and Causes of the Wealth of Nations [Amazon link] , which was first published in 1776 by the Scottish philosopher Adam Smith (1723-1790). The question is why P. J. O’Rourke’s brief explication of that famous work has appeared now. The answer to that seems to have two parts. One is that Atlantic Books had the commendable notion of doing a series of accessible commentaries on the sort of works that are usually included in Great Books curricula. The other is that the Cato Institute, where O’Rourke is the Mencken Research Fellow, has been keen to support this work. Interesting though Adam Smith is, the real interest for many readers of O’Rourke’s On The Wealth of Nations may be the insight it offers into the thinking of the Politburo of the Libertarian Central Committee.

Adam Smith’s book does lend itself to synopsis: it’s 900 pages long. By O’Rourke’s account, the prolixity results from the 18th century’s lack of formats to present and analyze statistical data, and indeed from the scarcity and unreliability of numerical information of all kinds in that period. Even when numbers existed, Smith had to sift and evaluate their meaning, a process that he apparently thought necessary to conduct in view of the reader. Smith was not a bad prose stylist, however. His Inquiry (to use an unusual short-title here to distinguish it from O’Rourke’s commentary) contains lucid and relatively brief excursions into one or another aspect of economic history. O’Rourke’s book is generous with quotations from the Inquiry and also from Smith’s other works and from his letters.

O’Rourke emphasizes that Smith’s views on economics grew out of his earlier work, The Theory of Moral Sentiments [Amazon link] . Smith knew empirically that the pursuit of self-interest often improved the circumstances of all concerned. Unlike Bernard Mandeville in The Fable of the Bees [Amazon link] , however, he was not content with the absurdist observation that vice produces prosperity. Rather, he attempted to articulate a model of society, if not quite a theory of society, which recognized that self-interest is closely connected with sociability and was the key to defining the purpose and function of government.

Self-interest, Smith proposed, could be analyzed philosophically by imaginatively assuming the position of what he called the Impartial Spectator. We must consider how our behavior would look to a disinterested third-party (a notion which, as many people other than O’Rourke have noted, bears a family relationship to Kant’s roughly contemporary principle of the Categorical Imperative). Using this analysis, one’s usual concern would be for one’s self, since that is the person about whom one has the best information. Much of Smith’s historical importance rests on the fact that this simple principle had implications that contradicted then-current public-policy fashions as well as long-established principles of statecraft.

The fashion that is contradicted was that of the French physiocrats. Smith was in correspondence with these people and shared many of their views; they have some claim to being the first scientific economists. What Smith objected to was their insistence that the only really productive kind of labor was agriculture. Instead, he pointed to the benefits of specialization and the division of labor, which, of course, only followed from the principle that people know best what sort of activity benefits them.

The more entrenched policy that Smith combated was mercantilism, which held that the purpose of national economic policy was to maximize trade surpluses, particularly the surplus import of specie. Smith argued vehemently that there really was no such thing as a trade imbalance: if foreigners were content to send Great Britain goods in exchange for precious metal or for pieces of paper, they should not be discouraged from doing so. Moreover, the beneficial nature of trade was the key to a happy philosophical discovery: in every trade, both sides benefit, which means that the world is not a zero-sum game. It need not be the case that one person is rich because another is poor.

In many ways, Smith was the absent-minded professor, teaching the University of Glasgow (he had studied, unhappily, at Oxford). However, he was a good administrator wherever he served. This commentary sums up his administrative abilities with a classic O’Rourkism: “There is an important difference between absentminded and scatterbrained -- the difference, for example, between the foreign policies of Britain and France.” And speaking of France, Smith had an international reputation as well as being a noted public intellectual at home. His ideas were influential very quickly because Smith himself was so well connected. He was a friend of Pitt the Younger, for instance, and of Voltaire. And of Benjamin Franklin. And Charles Fox. And Edmund Burke. And James Watt. And David Hume. In fact, to judge by this book, the only person in the whole 18th century who did not like Adam Smith was Samuel Johnson, and that may have been because they met on one of Johnson’s numerous bad days.

Fortunately, Smith’s advice was usually wise. His formula for prosperity was “peace, easy taxation, and a tolerable administration of justice”: all those terms require some definition, but they are usually the right things to be trying to define. He seems to have written a memo that persuaded the British government that it would be safe, and even economically beneficial, to allow the colonies to become independent. Still, he made mistakes. As O’Rourke points out, Smith’s ideas would have been more coherent if he had not introduced the labor-theory of value. Much confusion could have been avoided if he had embraced the older principle that there is no price but market price. Additionally, before he became first a moral philosopher and then a economist, he taught English literature, and he seems to have been the most tone-deaf critic on record.

The problem for O’Rourke, and perhaps for the Cato Institute, is that their king was not a monarchist. As O’Rourke notes, Smith was not a libertarian, either in with regard to morals legislation or with free trade. Smith assumed the legitimacy of sumptuary laws. He had no objections to the use of public funds to build infrastructure. And as for taxes, Smith’s idea of tax reform was to make taxes more efficient. He was not scatterbrained at that, either: he was the inspector of customs for Scotland in his later years, and boasted that he had increased the revenues by a factor of seven or eight. O’Rourke is evidently scandalized:

But the subject of taxes can push a person beyond being merely wrong. Smith was starting to sound slightly demented when he proclaimed, “Every tax, however, is to the person who pays it a badge, not of slavery, but of liberty. It denotes that he is subject to government, indeed, but that, as he has some property, he cannot himself be the property of a master.” And Smith must have been completely out of his head when he wrote about income received by a landowner for renting land: “Though a part of this revenue should be taken from him in order to defray the expenses of the estate, no discouragement will thereby be given to any sort of industry.”

O’Rourke draws our attention to the relevance of Adam Smith’s views on the great issues of our day wherever possible, and sometimes where impossible. Thus, we are given to understand that Smith would not have been at all worried by the trade practices of China, or by illegal immigration. There is even an Appendix , called an “Adam Smith Philosophical Dictionary,” that attempts to provide aphorisms drawn from Smith’s writings, set out under O’Rourke’s captions. (The latter consist of items like “Drugs, Why Laws Against Them Won’t Work” above an extract on ale houses, and “Hilton, Paris, The Numerous Feuds Of Explained” above an extract on ambition in dishonorable professions.)

O’Rourke does not try to make Smith out to be a Movement Conservative. Smith had conflicting ideas about public funding for education, for instance, and O’Rourke contents himself with reporting the conflict. However, one might argue that it is anachronistic to sift The Inquiry to see whether Smith was for “school choice.” The chief anachronism in this commentary, though, is the almost total lack of reference to later economic theory, except for a few snarky references to Marxism. It’s as if nothing had happened between Smith and Milton Friedman.

I have not read the Inquiry. Unlike O’Rourke before he took the assignment to write this book, I had not even read sections of it for an undergraduate course. Still, judging only by O’Rourke’s summary, what seems to be missing from Smith’s economics is a sense of an economy as a dynamic system. From Ricardo to Keynes, one gets the impression that an economy was like a steam engine that had to be stoked and bled so that it neither lost critical pressure nor blew up. Thereafter, economics tends to become more mathematical, and for that Smith would have been prepared: O’Rourke notes that Smith understood that money is information. Indeed, Smith’s famous “Invisible Hand” was what we would call today a cybernetic feedback system of prices. It is not to be wondered at that Smith did not work out these ideas in detail. As Michel Foucault argued, the 18th century tended to organize knowledge as a static diagram and then the 19th turned those diagrams into timelines. So, for instance, Linnaeus’s chart of lower to higher organisms became a chart of evolutionary descent. The same thing happened in economics, and Smith’s ideas gained an added dimension.

Does the Cato Institute really want us to forget that?

Copyright © 2007 by John J. Reilly

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