15 december 2008

The wealth of nations (Vincent De Roeck)

As I listen to the discussions among politicians about the economy and about how their policies might be able to put us back on the track to prosperity, I always wonder how much they could learn from real economists like Carl Menger or Adam Smith. And especially Adam Smith needs a little reminder today since politicians from all parties are once again trying to destroy the core of our economic success by imposing more tariffs, quotas and regulations on our industry, and by reinstating trade barriers and import taxes -- exactly the recipe for disaster as proven by Adam Smith in “The Wealth of Nations”. For 300 years, Europe was dominated by an economic system known as mercantilism. It provided improvements in life compared to the feudalism prior to that, alright, but it was nevertheless a corroded system rooted in error that stifled the entrepreneurial spirit and treated individuals as pawns of the State.

Mercantilists were just economic nationalists. They thought foreign goods were sufficiently harmful that government should promote exports and restrict imports. Exports were to be paid for in gold and silver, not products. “To the mercantilist, the precious metals were the very definition of wealth, especially to the extent that they piled up in the coffers of the monarch,” as explained by Larry Reed, the President of FEE, in one of his lectures. “And because they had little sympathy for self-interest, the profit motive, and the operation of prices, mercantilists wanted governments to bestow monopolies.”

Economics in the late 18th century was not yet a focused subject of its own, but rather a poorly organized compartment of what was known as “moral philosophy.” Adam Smith’s first book, “The Theory of Moral Sentiments,” was published in 1759, when he tutored at Glasgow University. He was the first moral philosopher to recognize that the business of enterprise merited being a full-scale discipline of thought among other social and behavioural sciences. In 1776, while American colonists proclaimed themselves independent from Britain and were engaged in a revolutionary war with their former mother land, Smith delivered his literary and ideologically masterpiece, “An Inquiry into the Nature and Causes of the Wealth of Nations”.

Smith wanted to investigate into the link between mercantilism and prosperity and came to the conclusion liberals and libertarians still hold dear today. Markets supersede governments in providing us with goods and services, and mercantilism is counter-productive. The aggregated initiatives of free individuals without burdens imposed on them by the State were the most durable way for a nation to prosper.

Contrary to mercantilists, Smith did not believe that the “pie” of the economy was fixed and that a bigger pie could be baked by lesser government intervention, by the promotion of investments in capital, and by implementing the principles of “division of labour”. Furthermore, Adam Smith was a consummate free trader who was just as eager to trade across political boundaries than within his own fief. He opposed any form of hampering trade by tariffs, quotas or prohibitions, and he exploded the “balance of trade” fallacy of mercantilism claiming that more goods should be exported than imported. According to Adam Smith, self-interest was the indispensable spur to economic progress, regardless of nationalist feelings. “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner,” he wrote, “but from their regard to their own interest.”

In a free economy, he reasoned, no one can put a crown on his head and command that others provide him with goods. Or as Eamonn Butler, the founder of the Adam Smith Institute, stated in a recent article: “To satisfy his own desires, he must produce what others want at a price they can afford. Prices send signals to producers so that they will know what to make more of and less of. It wasn’t necessary for the king to assign tasks and bestow monopolies.” Prices and profit would act as an “invisible hand” with far more efficiency than any monarch or parliament. And competition would improve quality and reduce prices, so the entire society can benefit.

The ideas of Adam Smith exerted enormous influence on politicians before he died in 1790 and especially in the 19th century. America’s founders were greatly affected by his insights. So were Europeans to some extent. Ideas really do matter. Our politicians should hence take time to get acquainted again with this Adam Smith persona.

Meer teksten over Adam Smith op www.iea.org.uk.
Meer teksten van Vincent De Roeck op www.libertarian.be.


At 15/12/08 13:16, Anonymous Anoniem said...

That Adam Smith is one of the foremost and grounding thinkers of modern economic theory is clearly beyond doubt.' The Wealth of Nations' is a monument that even without restoration can be visited regularly to one's intellectual benefit. What is sometimes forgotten, is that the same Adam Smith wrote another impressive book titled: The Theory of Moral Sentiments. In that work Smith develops the notion of the 'inner man' or 'impartial spectator'This means that the human being is not only prey of selfish drives (greed,self-interest,personal power etc) but has a conscience, moral and rational faculties, counterbalancing the animal passions. His notion of 'sympathy' is actualy a pivotal concept in his psychological views of the human being.Without sympathy, without the capacity to participate in the sufferings and joys of the fellowman, one is not really human.This means that Adam Smith was not blind to the exces of the free market.He did not see the commercial system itself as wholly admirable.He treated the the manners and manoeuvres of businessmen with contempt.He had a keen eye for the mental degradation of the worker in a society in which the division of labour went very far....in one word Adam Smith was also a critic of the famous 'laissez-faire' principle.Above all he was an economical thinker, who saw farther and deeper than pure economics: he was an enlightened philosopher....

Frans V.

At 15/12/08 13:23, Anonymous Anoniem said...

@Frans V.: "in one word Adam Smith was also a critic of the famous 'laissez-faire' principle"

I don't agree with you. "Laissez-faire" is about the role of the state in economics, not about the absence of morality.

In "The Theory of Moral Sentiments", Smith says that moral behaviour is important and even necessary. This morality can be stimulated by education, religion, rationality etc. I don't think that Smith pleaded in favor of economic regulation in "The Theory of Moral Sentiments", hence he was not against "laissez faire".

At 15/12/08 14:20, Anonymous Anoniem said...


'Laissez-faire' as such was never used by Adam Smith....but one can say that his 'Wealth of Nations' is a strong plead for this principle. In my opinion he was perfectly aware of some failures of this principle.
Therefore he advocated a governement-supported education to mitigate the deplorable situation of the working class due to the division of labour.He strongly advocated taxing the rich,and observed that state power could be used to protect human rights.He was also strongly opposed to corporate privilege....I believe that Adam Smiths legacy is richer than the 'laisez-faire' principle.He was also a social thinker, compassionate,and not aversive to state-intervention if social justice was at stake.

Frans V.

At 15/12/08 14:48, Blogger Vincent De Roeck said...

Adam Smith never advocated social justice through government intervention. He was a sound freemarketeer, but contrary to others, he was not an anarchist. He believed in limited governments and social justice through private interactions, albeit with the exceptions of education and infrastructural work. But Adam Smith wanted both domains of civil society to be linked to economic progress. State eduation served only one purpose: promoting entrepreneurship.

At 15/12/08 15:59, Anonymous Anoniem said...

@Vincent De Roeck

'It is not very unreasonable that the rich should contribute to the public expence, not only in proportion to their revenue, but something more than in that proportion' Adam Smith Wealth of Nation Book V chapter 2.
It seems that Adam Smith was indeed really preoccupied by the idea of social justice. Asking for higher contributions than proportional to the revenue, is a form of social redistribution of the capital of the nation.

Frans V.

At 15/12/08 16:20, Blogger Ivan Janssens said...

I agree with Frans that the main obsession of Smith was with the idea of social justice. But this was exactly why he argued against mercantilism which was a system for the protection of producer privileges ("People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public...").

Adam Smith was in favor of free markets and free trade because it was beneficial for consumers, fo the common man. Social justice was only possible with free trade and free markets, not under a system of mecantilism (these days we would talk about a system of corporate privileges). Smith defended the free market against corporatism in the name of justice as much as in the name of sound economics.

Still, Smith did advocate some forms of government interventions, like progressive taxes or education. Again because of his obsession with social justice. In the case of progressive taxation this becomes quite evident, because it is now easy to see why he opposed import taxes. These were regressive and thus not only economically unsound but also socially unjust.

At 15/12/08 16:21, Blogger Vincent De Roeck said...

Sadly, in the field of taxation, I have to concur with Frans. Adam Smith was a proponent of progressive taxation, but since his scope of government was so little compared to the current state of affairs, even classical liberals could agree with that. Adam Smith envisaged a maximum government scope of 5% of GDP, and limited the tasks of government to defence, justice, education and infrastructure. An interesting analysis of Adam Smith's view on the State can be found on the website of the Heartland Institute. But even here, once again, the main purpose of Adam Smith was to promote entrepreneurship and to facilitate commerce and trade. He was not a philantropist or social justice activist.

At 15/12/08 18:54, Anonymous Anoniem said...



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