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7.Legacy and reputationfree

  • Christopher J. Berry

Abstract

‘Legacy and reputation’ considers historical and contemporary views of the Wealth of Nations and why Adam Smith is ritually referred to as the ‘father of economics’. Ever since the Wealth of Nations was published it has been interpreted differently. Karl Marx, his most influential reader on the Left, both praised and damned him. Smith’s principles are central to the ‘free market model’ associated with the ‘New Right’. However, a more accurate picture of Smith’s legacy is his contribution to liberalism. For Smith, what is valuable about liberty is that it makes possible the greater public good. The true public good (the real wealth of nations) lies in the world of material well-being.

p. 100An image of Adam Smith appears on a Bank of England £20 note. The very fact that Smith is represented, and in that context, is a legacy of sorts. But it is doubtful if most users of that note, even if they pay any attention to the image, will be any the wiser as to who he is. If Adam Smith is known at all, it is very likely in the context of the ‘free-market economics’ of Thatcherism and Reaganomics. For some, this is a commendation; for others, guilt by association. Beyond token name-dropping, matters become more complicated. There is ‘Smith’ the icon and ‘Smith’ the thinker. These are not disconnected but the reason why his thought has been culturally or ideologically co-opted is down to contemporary political arguments not intellectual impact. Thatcherism was a reaction to the prevalent politics in Britain and Reaganomics was a weapon in the Cold War. In both cases they thought the ‘free market’ and a non-interventionist government were the tools for the job. Adam Smith enters the picture as the thinker who originally forged those tools. As a consequence he was co-opted to provide intellectual credentials or pedigree. Despite the opportunistic character of this co-option it is not totally fanciful.

The Wealth of Nations today

Similar to other iconic thinkers, like (say) Karl Marx or Sigmund Freud, Smith’s work is invoked more than it is read. This is also p. 101largely true of contemporary economics, the discipline with which Smith is, and always will be, indelibly associated. But the subject has changed dramatically. One marker of that change is its lack of interest in its own history. For example, the books on economics and microeconomics in this series mention Smith only once. One consequence of this change is that any attempt to view the Wealth of Nations through the lens of contemporary economic theory is of comparatively little value. The prevailing orthodoxy is heavily technical with sophisticated mathematical formulae working from a simplified and abstract ‘model’ of human rationality. Nowhere does Smith use statistics or other quantitative methods (he says at one point in the Wealth of Nations that he has ‘no great faith in political arithmetic’ (WN 534)) and his writings across their range, including the Wealth of Nations, provide a complex account of how humans behave.

Why then is Smith ritually referred to as the ‘father of economics’? When this epithet was first applied is unclear but the sentiment is present in the late 19th century in the judgment of Alfred Marshall (the leading British economist of that era). According to Marshall, the Wealth of Nations was ‘the greatest step that economics has ever taken’ because it combined a breadth of knowledge alongside balanced judgment. Smith owes his attributed paternalistic status to the fact that his guiding principles remain foundational. This has to be at the level of ‘principles’ because, of course, the world of 1776 is very different from that of the 21st century.

These principles are few but fundamental. They include the commitment to ‘natural liberty’ where ‘everyman’ is ‘left perfectly free to pursue his own interest his own way’, with its corollary that the ‘sovereign is completely discharged’ from the ‘duty of superintending the industry of private people’, which is just as well since executing any such obligation is beyond any ‘human wisdom or knowledge’. Also included in these fundamental principles is Smith’s basic contention that the job of government is properly limited to the tasks of external defence, internal order, p. 102and the provision of ‘public works’, together with his judgment that the pursuit of their own interests by individuals will generally produce a superior outcome than one emanating from some pre-designed outcome. These principles are central to the ‘free market model’ that Thatcher and Reagan took up in pursuit of their own agendas. The intellectual ballast for this model was not directly provided by Smith but by economists associated with the ‘New Right’.

Craig Smith has neatly divided Smith’s legacy on the ‘New Right’ into three streams. The ‘Chicago’ represented by Milton Friedman, the ‘Virginia’ represented by James Buchanan, and the ‘Austrian’ represented by Friedrich Hayek. All three representatives received the Nobel Prize in Economics. Friedman’s ‘Smith’ is the one who emphasizes natural liberty and the benefits that come from individuals being left to pursue their own interests, and he quotes the ‘invisible hand’ in support. Buchanan’s ‘Smith’ is the thinker who was distrustful of government and who appreciated the need for a legal framework. Of the three Hayek is the one who not only knows most about Smith but also has been his most influential exponent. Hayek’s ‘Smith’ is above all the philosopher of what Hayek calls ‘classical liberalism’. His Smith recognized the limits of individual rationality, realized that social order comes about spontaneously, and thus provided the basis of all critiques of planned or managed economies. Hayek’s most famous book, The Road to Serfdom (published in 1944), is the one above all others that reputedly supplied the intellectual basis for Thatcherism and Reaganomics. But, while this helps explain the popular image of Smith today, it is still partial or incomplete.

This is appreciated by some modern-day economists. Despite the apparent gulf between Smith’s methods and assumptions and those adopted by mainstream contemporary economics, bridges across it do exist. Two in particular are worth a look, each also represented by a Nobel laureate in economics and who pays attention both to the Moral Sentiments and to the Wealth of Nations.

p. 103The first bridge is the growth of behavioural and experimental economics. Vernon Smith, one of its leading figures, has openly and fulsomely praised his namesake. This type of economics is less concerned with what in theory humans should as rational actors predictably do to achieve their goals (or, in the jargon, maximize their utility) than how they actually behave. In order to gauge behaviour, experimental economists devise a variety of scenarios or ‘games’. The ‘dictator game’, for example, gives one player $10 as long as some of it is given to another player. According to the mainstream account, $1 would be offered and accepted, because $1 is better than none. However, when played that is not the result; a low offer is often spurned. It is in an attempt to explain that result that the interactions outlined in the Moral Sentiments, such as the desire for approval, have seemed pertinent.

The second bridge is built by Amartya Sen. He has written an introduction to a recent popular edition of the Theory of Moral Sentiments, and his own economic thinking criticizes what he sees as the narrowness of the prevalent orthodoxy, especially its account of rationality. As Sen interprets him, Smith’s emphasis is on the imperfections of markets not their theoretical perfection derived from allowing the invisible hand to operate. More positively Sen detects in Smith a serious concern with the effects of poverty and deprivation, and sees Smith as a forerunner of his own ‘capabilities’ approach that focuses on the actual ability of people to make effective choices about how they want to live their lives.

But the fact that current distinguished economists differ over Smith’s message is not novel. Ever since the Wealth of Nations was published it has been interpreted differently.

The history of the Wealth of Nations

The book was rapidly translated—it appeared in Danish, French (twice), and German (twice), all before Smith’s death in 1790. p. 104The initial reception in Scotland was enthusiastic. Hume, who read it shortly before his death, exclaimed his delight, and others reproduced Smith’s arguments (including his ‘trivial’ example of pin-making and his worries about the effects on the pin-makers). Although, it is an exaggeration to claim that the Wealth of Nations made an immediate impact or that the book penetrated deeply into the reading public, there is no denying that Smithian principles did percolate into the political/policy sphere.

Prime minister William Pitt in a 1792 speech declared that it is only in the Wealth of Nations that an explanation has been given as to how capital will accumulate when not obstructed by some ‘mistaken or mischievous policy’; and he continued to remark that it is Smith who has furnished the ‘best solution to every question connected with the history of commerce or systems of political economy’.

But even then the divergence in his legacy was already evident. In contrast to Pitt’s view, Samuel Whitbread cited Smith in parliament in 1795 in support of a bill for minimum wage legislation. Whitbread was not alone and Smith’s work was rapidly taken up by other ‘radicals’. Thomas Paine, for example, commended Smith’s views on banks in an argument about the role of the Bank of North America. One effect of this adoption was that in the early 19th century Smith was criticized from the Right. A case point is the 19th-century dispute over the Corn Laws, which deliberately restricted imports of food and grain to keep grain prices high and thus favour domestic producers. Smith was quoted by those who wished to repeal these laws, while the repeal was resisted by the landed aristocrats. It was only much later in that century that he was criticized from the Left because he had by then become associated with the glorification of competition and self-interest. This has persisted. For example, the influential British historian, E. P. Thompson, in 1971, identified Smith as an exponent of the ‘new political economy’, whereby, in a nice phrase, the economy was ‘disinfected of moral imperatives’.

p. 105Thompson is only one in a long line of critics following the lead of Karl Marx, who was Smith’s most influential reader on the Left. Marx both praised and damned him. His evaluation depended on where Smith stood in the history of class conflict. Smith represents a bourgeoisie ‘still struggling with the relics of feudal society’. As a representative of the rising and still revolutionary bourgeoisie, Smith could provide an insightful analysis of the old order. In this respect Marx could freely adopt and adapt a range of Smith’s views, including the distinction between use and exchange value; the central importance of labour; along with the difference between its productive and unproductive forms. But for Marx, Smith’s view is limited. He fails, above all, to acknowledge that his ‘commercial society’ is destined to be superseded by a new communist order. What Smith treats as unalterable facts about human nature, such as self-interest or competitiveness, are rather the transient products of a particular historical era. Once the bourgeoisie had gained its ascendancy (in about 1830) then, in Marx’s view, Smith’s ‘economics’ was used to justify the status quo. More particularly it was used to serve the interests of the ruling class and oppose those of the working class.

On the long view, Smith and Marx share one basic principle. They both think that labour is the key factor in explaining price and value. This is often labelled the ‘classical’ or objectivist view. In the late 19th century there was a fundamental shift to what Ludwig von Mises, one of its prime movers, called subjectivist economics. And here is the root of the so-called ‘marginal revolution’ that lies at the heart of the dominant orthodoxy.

The focus is on individual preferences not the process of production. In an often quoted remark, Lionel Robbins defined economics as ‘the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses’. The value of any good depends solely on a comparison with other goods. It is an expression of relative scarcity and price is the monetary expression of how much people are willing to pay. p. 106There is nothing more. Gold, for example, is not ‘valuable’ because it is a particular metal or has required so much labour to extract, but because it is scarce relative to demand.

The relation between Marx and Smith throws up another aspect of the legacy of the Wealth of Nations. From its early translations the book was used to argue for (or against) particular policies in, among other places, Spain, Portugal, and Latin America. This same pattern has been repeated more recently in Japan and China. When Japan made the self-conscious decision to end a long period of isolation from the outside world and modernize (the ‘Meiji Restoration’ of 1868) Marx and Smith were the two obvious models, with both discussing the transition from a feudal to a capitalist or commercial society. Marx’s model was initially more dominant and Smith tended to be read in the light of Marx’s theory. But this changed, partly through the outlawing of the Communist Party and partly through the post-Second World War re-alignment toward ‘the West’. On a scholarly front, this was complemented by an appreciation of Smith as the author also of Moral Sentiments. Japan has now become an important centre for the study of Smith (the University of Tokyo Library holds about half of Smith’s own library).

In Japan, Marxism never succeeded in becoming the official ideology; in China it did. A Chinese translation of a version of the Wealth of Nations was published in 1901 but it was undertaken to push for internal reform rather than for pure scholarship (as was also the case earlier in Spain, for example). The real development of interest in Smith, as opposed to a Marxian gloss, had to wait until 1979 and the acknowledgement that the Marxist/Maoist model of social and economic development needed supplementing. Milton Friedman, for example, was translated in 1982. From this followed interest in Smith, so that there is now a flourishing body of academic work greatly aided by new and accurate translations. Smith himself said little about Japan (information was relatively sparse) but did make a number of comments on China. From the p. 107reports that he had read, he judged the Chinese economy to be stagnant. In line with his basic arguments, he recommended that it should open itself to foreign trade and that it needed to implement and ensure the rule of law.

The other Smith

Smith is more than an economist. He knew, thought about, and wrote on history, science, culture, as well as ethics. The legacy of the Theory of Moral Sentiments is far less eventful than the Wealth of Nations. However it was far from ignored when it first appeared. Across the Enlightenment it received a warm reception, with 18th-century translations into French and German. Although editions continued to appear periodically through the 19th century, its impact was muted. In Britain, neither of the two 19th-century mainstream philosophical approaches—Utilitarianism nor Idealism—paid it much attention.

Walter Bagehot, in a not unkind if rather patronizing essay of 1876, notes that the Theory of Moral Sentiments was once celebrated but is now judged to be of ‘inconsiderable philosophical value’ (though he also dubbed the Wealth of Nations an ‘amusing book about old times’). A year earlier in his compendious The Scottish Philosophy, James McCosh, the president of Princeton, gave a reasonable overview of The Theory of Moral Sentiments but concluded it is more likely now to be read for its style rather than the theory it expounds. This judgment and others that were similar were echoed in other books.

One influential exception to this is H. T. Buckle. In his History of Civilization in England (1861), in the context of high praise of Smith’s work as a whole, he floated the idea that the Moral Sentiments rested on sympathy, while the Wealth of Nations was based on the very different premise of selfishness. Buckle was popular in Germany and, as a part of that country’s own internal debates, his book helped to fuel what became known as ‘Das p. 108Adam Smith Problem’. Was Smith’s moral philosophy, as expressed in the Moral Sentiments, consistent with his economics in the Wealth of Nations? At stake was the acceptance of Buckle’s dichotomy, whether the supposed sympathetic altruism of the Moral Sentiments was at odds with the supposed selfishness as the governing principle of the Wealth of Nations. Since it rested on misreadings of both the meaning of ‘sympathy’ and of ‘self-love’, this version has been thoroughly discredited.

The study of the Moral Sentiments received a fillip, thanks chiefly to the appearance of a scholarly edition in 1976 as part of the Glasgow edition of Smith’s works. This matters to scholars but is hardly a development that in itself catapults Smith to wider attention. What it has done is spread the message that Smith’s legacy is distorted if it represents him as the apostle of laissez-faire. A much more accurate picture of Smith’s legacy is his contribution to liberalism.

Smith’s liberalism

By linking Smith to liberalism more is at stake than his inspiration for the principles of the free market. That is too limited a perspective because Smith’s thought is best appreciated ‘as a whole’. For Smith ‘economic’ activity took place within society; the individuals who truck, barter, and exchange are already socialized beings. The key theme in the Moral Sentiment is that socialization was also necessarily a moralization. Thanks to parents, peers, and the general social environment, everyone learns how to ‘fit in’, how to behave acceptably. To engage in barter not only presupposes some form of communication but also some notion of fairness.

This means that for Smith economic activity does not occupy some ‘ethics-free zone’. But he rejected a longstanding alternative version of a moralized economy. That account rested on a particular idea of the ‘good life’. This idea relegated the role of economics. It made the moral judgment that a preoccupation with economic p. 109activity was less fulfilling than the truly or fully human activities of philosophy or politics. The place of ‘the economy’ was limited to ‘means’ (essentially staying alive, which animals and slaves do) not the ‘ends’ that make a human life worth living. This version of the good life treated as potentially degrading or inferior the pursuit of material pleasures, such as the desire for a linen shirt, fresh bread, or a comfortable home. And should these morally inferior economic means become valued in their own right then this was judged a corruption or transgression of moral standards. Smith rejected that whole argument but that does not mean that he morally ‘disinfected’ the economy.

Just as Smith has no qualms about butchers selling their meat on the basis of their own interest nor has he anything against bankers doing their proper business on the same basis. But it would be a mistake to see this as a separation of ethics from economics. Smith did think social well-being was best advanced by individuals making their own decisions, and he was thus opposed to central attempts to direct ‘the market’. However, what he really opposes is the attempt to direct individuals’ activities, their ‘natural liberty’ to pursue their own ends in their own way, always, of course, within the constraints of acting justly. This commitment to individual liberty is itself a ‘moral’ position. From that vantage point, the power of the state cannot, for example, rightly or justly enforce what jobs its citizens can or cannot do, or what clothes they can or cannot wear. Smith, the Professor of Moral Philosophy (as he identifies himself on the title page of the Wealth of Nations), never forsakes that perspective.

The same moral argument that endorses liberty at the same time justifies actions to regulate that liberty in order to enhance the general welfare. This is why Smith does not contradict himself by seeing a proper role for government regulation. In the light of the financial crisis of 2008, an apt example of this role is his willingness to impose restraints on banks. Smith’s own moralized economics can throw further light on the crisis. The financiers p. 110became so wrapped up in their own projects that they became oblivious to the weakness of their assumptions, as they enthusiastically pursued ever more elaborate ways of parcelling up debt, superstitiously following mathematical formulae (which most seemingly couldn’t understand) that supposedly underwrote them.

Just as the mirror in which the pin-makers see themselves reflects back to them their own narrow horizons so too does that of the financial elite. They lacked critical distance to enable the moral self-reflection that would have instilled a sense of responsibility. In these ‘masters of the universe’ (to use Tom Wolfe’s satirical expression in his novel Bonfire of the Vanities) the human propensity always to over-value the chances of gain and under-value those of loss was given free rein. Smith says this propensity explains the success of lotteries; and what the bankers did, it might be said, was play a lottery with money they didn’t have. Or, at the very least, their calculations of risk were misjudged due to their self-enclosed environment, which also included the supposed regulators and credit-rating agencies.

These elaborate financial manoeuvres are far-removed from anything Smith could have contemplated. But the underlying psychology and dynamics remain. His cool opinion of joint-stock companies bears this out. He judged that this now prevalent form of economic ownership had definite downsides. In particular, because the directors of these companies managed other people’s money, and not their own, they tended to be negligent and exempted themselves from close scrutiny by the share-holders.

The fact that Smith never severs ethics from economics gives a distinct tone to his legacy for subsequent liberal thought. Liberalism is a mansion with many rooms. Smith’s chamber has a commitment to equality. Everyone is equal under the law. This is consistent with the fact that some will inevitably be wealthier than others. But it is inconsistent with distinctions or privileges based p. 111on birth or inherited rank. He is committed to equal liberty and equal respect—to which the porter just as much as the professor is entitled. Everyone should be free to make their own way in the world. Public authorities should respect that freedom and not presume to steer that personal itinerary on the specious grounds that they know better.

For Smith, individual liberty is not the only principle or moral value. It is less valuable in its own right than for what it makes possible. This follows from his moral theory. Individuals are social beings. Unlike some other rooms in the house of liberalism, individuals in Smith’s chamber are not separate beings whose behaviour can be understood independently of their social environment or who possess ‘natural rights’ outside a network of social obligations. For Smith what is valuable about liberty is that it makes possible the greater public good. This ‘good’ is not about perfection. Smith does not envisage a society within which all is sweetness and light. He is not in the business of drawing up a blueprint for a ‘godly city’ or a ‘land of virtue and wisdom’. Smith’s ‘good’ is more down to earth.

For him the true public good (the real wealth of nations) lies in the world of material well-being. Consumption is the purpose of production. To consume more and better goods is to enjoy opulence, which, as he said in his Glasgow classroom, is a blessing. This is most effectively obtained through humans acting on their own judgment of their interests. But these interests are not merely self-serving. As the opening sentence of the Moral Sentiments stated, humans ‘as a principle of their nature’ incorporate disinterestedly the well-being of others (TMS 9). And yet, as his work strived to establish, that is not to reject on moral grounds the role of the pursuit of one’s own self-determined best interests.

The business of ‘economics’—the organizing framework for the provision of the wherewithal for living—is of itself valuable. Carrying out that business is a worthwhile task. It matters that p. 112humans can live lives not dragged down by miserable poverty. It is a noble endeavour to lift humans from penury. The endeavour itself is set within a framework of moral values such as justice, humanity, probity, and law-abidingness. They, along with the desire for praise-worthiness, underwrite the actual operation of the rule of law; the bulwark of liberty. Liberty like opulence is a blessing.

It is in this conjunction of opulence and liberty that Smith’s legacy lies.