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| The dismal science|
Adam Smith was an 18th-century Scottish economist often considered to be one of the fathers of modern economics, discussing the role of the free market. His 1776 work An Inquiry into the Nature and Causes of the Wealth of Nations contains several important ideas that continue to be relevant in contemporary politics and social science, such as the "invisible hand."
The invisible hand
“” The ‘invisible hand’ appears once in Smith’s History of Astronomy (Smith 1980, 95) referring to pagan and heathen superstitions about the existence of the Roman god, Jupiter; once in Moral Sentiments (184-185) referring to feudal lords divvying up their produce among their retainers and tenants in roughly the same proportions as would be distributed if the land had been divided equally; and once in Wealth of Nations (456), referring to degrees of caution about the risks associated with distant trade with the British colonies in North America, which incentivised some, but not all, merchants to act circumspectly in their preference for domestic projects, thereby unintentionally benefiting the domestic economy. This is only three times in over a million words published in his surviving essays and books, written between c.1744 and 1790
Smith used what appears to have been a common 18th-century metaphor of an "invisible hand" just three times in his writings, referring to three different things. Today, Chicago school and Austrian school economists claim that what Smith had meant in the third instance in which he is known to have used it is that when an economy is dominated by private power, an invisible hand "guides" the allocation of resources in the most efficient and optimal manner for everyone in it. However, Smith himself only used the term once in The Wealth of Nations in reference to the effect of international trade on domestic trade, specifically between Britain and North American colonies. He argued against the idea that liberalized international trade would destroy the English economy, writing that a "home bias" among English investors who didn't speak foreign languages or have reliable contacts overseas would probably prevent this.
Adam Smith: Trickle-downer?
Smith is often invoked by conservatives and supply-side economics advocates (Alan Greenspan, adoring Smith's "clarity to the seeming chaos of market transactions," is the most infamous) despite the fact that Smith's actual beliefs are considerably more moderate than they are often portrayed. One of Smith's more famous quotes is:
“”People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.
Or: businesses love to form cartels to increase profits.
Amartya Sen, in an article for the Financial Times, notes "It is often overlooked that Smith did not take the pure market mechanism to be a free-standing performer of excellence, nor did he take the profit motive to be all that is needed." In addition, Smith supported the government intervening for the purposes of universal education or poverty relief, something agreed upon more by the center-left than conservatives.
Wealth of Nations should also be understood in the context of Smith's Theory of Moral Sentiments, which provided an overarching description of his moral system. Moral Sentiments argues that two of the most important guiding factors in human life are sympathy and conscience (which he referred to as "the impartial spectator") and generally explores many philosophical themes outside of economics proper.
It has also been pointed out that Smith basically supported some form of progressive taxation, writing in The Wealth of Nations:
“”The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
Smith worked for 12 years as Commissioner of Customs from 1778 to 1790, in charge of collection of customs and excise duties, during which time he recommended new taxes on inhabited property and malted barley to fund the war against the USA. This doesn't fit well with the American vision of Smith as a defender of freedom and enemy of taxation and tariffs.
- Wealth of Nations
- The Theory of Moral Sentiments
- Adam Smith and the Invisible Hand, Plus Magazine
- Adam Smith's Lost Legacy, a blog detailing the use and abuse of Smith's philosophy
- Gavin Kennedy. Adam Smith and the Invisible Hand: From Metaphor to Myth. Econ Journal Watch, 6(2): May 2009, p.240
- Gavin Kennedy. Adam Smith and the Invisible Hand: From Metaphor to Myth. Econ Journal Watch, 6(2): May 2009, pp. 239-263
- Adam Smith is not the antidote to Thomas Piketty, Washington Post
- Adam Smith's market never stood alone, Amartya Sen
- "Adam Smith in the Customhouse", Gary M. Anderson, William F. Shughart II and Robert D. Tollison, Journal of Political Economy, Vol. 93, No. 4 (Aug., 1985), pp. 740-759
- Life of Adam Smith, John Rae