Adam Smith's Legacy

On this day in 1790, the great economist, moral philosopher and social psychologist Adam

Smith died. The story is that he was entertaining friends at his home, Panmure House off

Edinburgh’s Canongate, when he felt unwell, rose and said: “Friends, we will have to

continue this conversation in another place.” He died soon after.

It’s a nice story, though greatly exaggerated for effect. Adam Smith’s religious beliefs are a

matter of debate, and it unlikely he believed in an afterlife anyway. Indeed, though he died

seventy years before Darwin’s Origin of Species, he was grasping towards an evolutionary

explanation of why human life, in economics, morality and other areas, seems to serve us in

generally beneficial ways, without the need for any conscious direction from governments

or anyone else. As if directed by an Invisible Hand, he wrote, though he knew there was no

conscious entity moving that hand. Or Providence, he suggested. How it generated the

harmony that F A Hayek would later call spontaneous order was a mystery to Smith, and to

his friend David Hume and other scholars of the age.

Smith ordered that, on his death, all his papers should be burned, apart from one essay on

The History of Astronomy. It was not such an uncommon request at the time: people did not

want to be judged on the basis of their random notes and half-though-out jottings. But we

were lucky he spared The History of Astronomy, which is a remarkable essay in the

philosophy of science, advancing a trial-and-error thesis that would not be lost on the

twentieth-century author of The Logic of Scientific Discovery, Sir Karl Popper.

The fact that Smith wrote on scientific method demonstrates how wide his interests

and his expertise were. As well as the economics for which he is most remembered today, he also

wrote and lectured on the use of language, on the arts, on justice, on politics and on moral

philosophy. In fact it was his first book on ethics, The Theory of Moral Sentiments, that in

1759 made him internationally famous — and guaranteed him a generous income for life

that would give him the freedom to think about economics and write his 1776 masterpiece

An Inquiry into the Nature and Causes of the Wealth of Nations, which he referred to as his

Inquiry, but to us is known as simply The Wealth of Nations.

In this, Smith offers an explanation of why, in economics, the spontaneous order idea

works. For centuries, people imagined that the only gainers in any economic transaction

were those who ended up with the money. But Smith noted that their customers benefited

too, by getting goods or services that they valued more than the cash. Indeed, the trade

would not happen unless both sides thought they were getting value from it. To maximise

the creation and distribution of value, he concluded, we need to be facilitating free

exchange — not thwarting it with protectionist measures against foreign imports or

domestic regulations on what and how people are allowed to trade.

This simple ‘system of natural liberty’, explained Smith, was what allowed the spontaneous

society to flourish and raised nations from poverty to prosperity. It enabled individuals to

strive to ‘better their condition’, and that of their families. By contrast, regulations and laws

were too often laid down by politicians and their business cronies: to promote their own

interests, most generally in opposition to the interests of the working poor.

Smith would have regarded a government that controls nearly half the economy, spending

nearly half the nation’s GDP — a concept that he introduced to the world on the very first

page of The Wealth of Nations — as the greatest tyranny. Taxes, he thought, were another

way in which established interests skew things in their favour and block potential

competition. Taxes, he argued, should be as low as possible, should encourage rather than

restrict free trade and innovation, and should be simple, understandable and convenient to

pay. One can imagine what he might have thought of a tax code like the UK’s, which is

longer than The Wealth of Nations itself, and a regulatory rule book that is even longer.

When economic freedom, tempered by Smith’s moral virtues of prudence, justice,

beneficence and self-control, has been allowed to flourish, it has led to the greatest

increase, and spread, of human prosperity. The free trade era of the nineteenth century

enriched much of the world and brought humanity cheap food and manufactures. The

globalisation of the twentieth and twenty-first brought nearly all nations into the world

trading system and thereby pulled a billion people out of dollar-a-day poverty.

Adam Smith’s intellectual and practical legacy is plain enough. The issue is whether the

world’s governments will ever stop frittering it away.