06.07.2023

A man much misunderstood

He helped develop the labour theory of value, he influenced Marx and he never worshipped greed. Despite that he is lauded by the ‘small state’, ‘let the market rule’ right. Michael Roberts assesses Adam Smith

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 organised a series of events and debates on Smith’s ideas throughout the month.

Adam Smith has become the guru of laissez faire, free-market economics - the man that Chicago University economists like George Stigler and Milton Friedman turned to as their theoretical mentor. He was lauded by rightwing 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 organisation. And the global free-market economists like Friedrich Hayek and the Austrian school looked to Smith for their basic approach. There is even a ‘think tank’ based in the UK that claims to develop economic policy based on such ‘principles’: the slogan of the Adam Smith Institute is: “Using free markets to create a richer, freer, happier world.”¹

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 who 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, they are unaware that the combination of all these individual actions produces 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 a commodity is broken down into discrete parts, where human labour specialises 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, monarchical 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 30 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?

Myth

But it is a myth created by today’s free marketeers 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.²

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 recognised Smith’s contribution in attempting to develop a theory of value based on labour. As Smith said,

Labour 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 criticise Smith for inconsistency in his labour theory of value, as Smith reverted to a theory of value based on ‘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 landlords and capitalists.

Adam Smith was also not a hard-line supporter of free trade. 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 blogs at thenextrecession.wordpress.com

See www.adamsmith.org.↩︎
J Viner, ‘Adam Smith and laissez faire’ Journal of Political Economy April 1927.↩︎