Adam's Smith Historical Context

As with the thoughts of all the other thinkers we use in Intellectual Heritage, discussion of Adam Smith's idea could easily consume an entire three credit course. Indeed, one could devote a lifetime to the study of Smith, his ideas, and the wall of books critics and devotees of Smith have already written. As none of us have anything approaching that kind of time, this essay will focus on the relevance of the Source Book excerpts of Wealth of Nations to the teaching of Intellectual Heritage. In other words, this short piece will try to explain how Smith's thought can be related to the larger themes of I.H. 52

In I.H. 52 students are repeatedly exposed to what might be termed the "problems of civilization." The first "problem" is how and why civilization was formed. Locke, for instance, saw civilization as a means of avoiding some of the "inconveniences" of the "state of nature." The second "problem" is the overall efficacy of civilization. Do human beings need it at all? Locke certainly thought so, but others have been more skeptical. Gandhi probably came closest to rejecting civilization in toto but even he seemed to concede the necessity of some form of civilization. Gandhi, then, is best described as a critic of civilization. Most of the thinkers represented in I.H. 52 can be similarly described. Freud, for instance, argued that civilization was a trade-off -- it decreased the physical discomfort of humans only to increase their psychical discontent. Though capitalism ultimately appalled Marx, he saw good in the communist civilization he believed must necessarily stem from it. Frederick Douglass saw much to praise in the U.S. Constitution, if only its true spirit were followed. Similarly, Lucretia Mott, though critical of women's limited rights, would not have subverted the U.S. Constitution, much less the entire superstructure of society, in an effort to enhance women's rights. Though deeply disturbed by commercialization and the intrusive methodology of science, Romantics like William Wordsworth are also better described as critics of civilization than as opponents. Adam Smith too was a critic of civilization.

Given that civilization is imperfect, a third "problem" arises. What precisely is wrong with civilization and how can it be improved? Like Marx and Gandhi, and to some extent Freud, Smith identified economic relations as a key area in need of attention. Unlike Marx, Freud, and Gandhi, who leaned, to various degrees, towards socialism, Smith shuddered at the thought of government regulation of economic life. Smith thought that government ought only to maintain law and order, administer justice, and defend the nation. All other governmental activity, he believed, was not only unnecessary but downright pernicious. Unlike Locke and Jefferson, who feared government power as the breeding grounds of tyranny, Smith feared the economic inefficiency that government regulations invariably brought.

Smith was a product of the Enlightenment, through and through. Friends with other Enlightenment figures like David Hume, Montesquieu, and Benjamin Franklin, Smith shared with those men a firm belief that God's Universe could be understood through the rigorous application of logic and mathematics to empirical observations. Galileo, Kepler, and Newton had seemly conquered the physical world with their science. That induced others, including Vico and Locke, to attempt to systematize the social world. Although those pioneers met far fewer successes than the physicists, the belief in the possibility of a precise "social science" persisted throughout the eighteenth, nineteenth, and early part of the twentieth centuries. Smith thought that civilization would be improved by keeping governments small and focused on protecting citizens' Lockean rights. The rest, like the revolution of the planets around the sun, would take care of itself by means of a force as invisible as gravity.

That force, or "invisible hand," was simply the aggregated activities of many individuals seeking their own, private interests in "free," "open," frictionless markets. Although at first glance Smith's views on education may appear to be a mere diversion included more to raise the spirits of the faculty than to help students to understand the Wealth of Nations, the section on education is important because it shows that Smith conceived of humans as something more than self-serving money-grubbers. Smith's view of students, for example, is a quite positive one. He says that they love to come to class and pay attention, at least when professors offer something worth showing up for. Indeed, Smith's view of the possibility for human development is of interest for this course. Smith believed that human behavior can be changed, but only to an extent. A lazy, tenured professor can be turned into vibrant teacher and scholar merely by changing his remuneration from salary to commission. But Smith believed that human nature was, at root, unchangeable. A human being, he argued, will always desire to seek pleasure and avoid pain, to "truck, barter, and exchange one thing for another," and to "better his condition."

With human nature as a predictable base, the invisible hand sets to work. Confronted with products of equal quality, humans will almost invariably buy the least expensive choice. The producers of the more expensive goods must therefore somehow reduce their prices or find some other way to employ their capital. When the price of a certain commodity is high relative to its cost of production or "natural price," self-interested individuals will "naturally" begin to produce the commodity, thereby increasing its supply and eventually forcing down its market price. If the market price of a commodity sinks below its natural price, a term which includes "normal" profits, producers will shift resources and stop producing it until its market price has risen back to the natural price. Marx knew all of this, but, unlike Smith, who focused on the ability of free markets to keep prices near their natural price, concentrated on the instability of the price swings and not the equilibrilizing tendency of free markets. Of course, when Smith described the effects of the invisible hand he meant the theoretical movement of capital in a unfettered, frictionless market. Marx, on the other hand, dealt with the realities of mid-nineteenth century European markets, which were far from free and open.

But it would be a distortion to call Smith a more theoretical or abstract thinker than Marx. Both thought that social outcomes were rational, predictable, and hence controllable. Also, like most adherents of Enlightenment, Smith and Marx tended to think teleologically. Unlike Marx, however, Smith was not a Utopian; "progress," though possible, was not a certainty. Societies, Smith believed, passed through four hierarchical stages: hunting, pasturage, farming, and commerce. Smith did not posit the existence of any inexorable conditions that forced societies to move into the next stage, however, and reversions, as occurred after the fall of Rome, were not uncommon. Even commerce-based societies, like France, could remain under despotic control. Also, non-despotic commercial nations, like Britain, continued to fetter markets.

What Smith clearly saw was that the main agent for change or betterment, the open competition of the invisible hand, was not always, and was perhaps rarely, in operation. Political squabbles within and between nations prevented the market from exerting its natural influences. Self-interest, then, though very powerful when allowed to operate, was ultimately weak because political actors easily fettered it. Those political barriers were difficult to remove because statesmen did not usually perceive their own self-interest, or the general interest, clearly, and because political systems, unlike markets, were inflexible and ultimately conservative in nature. Thus, government tended not only to decrease the wealth of nations but also impeded their historical development.

As hinted above, Smith's Wealth of Nations slots in nicely between Locke's chapter "On Property" and Marx's and Engels's Communist Manifesto. Smith's "early and rude state of society" (p. 61 col. 2) is sometimes like Locke's state of nature and at other times like Locke's description of a pre-monetarized, but civil society. Learned opinions on this point are bound to differ, but I believe that Locke, Smith, and Marx each did a good job of describing the actual state of the economy when they wrote. Locke's England, for instance, was characterized more by financial innovation than by the specialization of labor. Locke therefore concentrated on issues of storing wealth. Within a decade after the publication of Second Treatise new methods of storing wealth without waste, i.e. banknotes, government securities, and annuities, proliferated throughout much of Britain. The creation of additional ways of storing wealth induced people to look for ways of producing more of it and hence spurred the specialization of labor that Smith found so compelling. Smith's England, likewise, was essentially one of many small producers engaged in competition, at least against other Englishmen. Although with the benefit of hindsight we might chastise Smith for not foreseeing the rise of megacorporations, there were very few corporations in Smith's Britain and, unless granted monopoly privileges, they were not usually the most competitive businesses. Entry and exit costs into most industries were either low or merely political in nature. By Marx's time, however, the economic landscape had changed considerably. Though entry into many fields was "free," as in legally "open," start up costs were often prohibitive. Wealthier producers could eliminate smaller and poorer ones simply by realizing efficiency gains linked to the "scale and scope" of their operations. Free markets, in other words, contained built-in barriers to the free flow of capital. That created, or as Marx would argue exacerbated, feelings of class differences. By the time Marx wrote the Manifesto it was generally no longer feasible for workers to become their masters' competitors.

The nature of work also grew more onerous in the half-century between the Wealth and the Manifesto. Tasks became increasingly more specialized, minute, and boring. As power supplies shifted from water to steam, machines became more daunting to operate. They got bigger, faster, noisier, and less prone to break down. That is not to argue that working conditions in Smith's England were easy. You might want to ask your students to consider what it would be like to whiten pins all day long, 10 to 12 hours a day, 6 days a week. Fifty years later workers would put in the same hours, but in close proximity to deafeningly loud machines and even more potent and noxious bleaches!

Also, the business cycle, the continual booms and busts of the economy, was more pronounced in Marx's time than in Smith's. There were good times and bad times in the eighteenth century to be sure, but the distances between the peaks and the troughs were not as large and the downturns were not as sudden as in the nineteenth century. Indeed, as the forces of production grew ever more powerful depressions grew ever deeper until a very serious one in the first half of the twentieth century plunged the world into global conflict. About half of the world emerged from that conflict willing and able to pursue open trade. Backed by tremendous technological advances in communication speeds and information processing that slowly blossomed into the Information Age of the late twentieth century, the economy of the "free" world greatly ameliorated the business cycle Marx thought would destroy it. Businesses no longer pursued profits until markets were glutted and prices fell because economists, supplied with reliable data and cheap computing power, could predict price outcomes, future demand, etc. But just as the business cycle appeared to have been overcome, the other half of the world suddenly opened its markets too and a dearth of information again induced businesses to overproduce, a fact they could not hide from creditors forever.

It is interesting to note that Smith's Wealth was not immediately popular. Several decades after its publication, as the workplace became more onerous and increasingly frequent and loud calls for factory regulations were heard, it started to catch on, some argue, because capitalists could use it to oppose factory legislation. Smith, of course, argued that government regulation fettered free markets by raising production costs and hurt the entire nation by necessitating higher taxes. Smith also saw laborers as free agents able to choose between different occupations and employers, and hence as protected by the market, and not victimized by it.

Finally, I.H. 52 students are also repeatedly exposed to the concepts of "freedom" and "equality." Smith's system requires that individuals be "free" to follow their own self interests and that they have "equal" opportunities to do so.