Farewell, Dr Smith
We don’t know exactly when Adam Smith was born. It was some time in July 1723. But we do know that he died, on this day, in Edinburgh, in 1790.
The story is that he was entertaining friends at his home, Panmure House off the Canongate, as he often did, being a lover of informed and educated conversation. At some point in the evening, he felt unwell, rose and said: “Gentlemen, we will have to resume this conversation in another place.” He died that very night.
Well, not exactly, it was a few days later. But the story is in the right spirit. And Adam Smith’s religious beliefs are a matter of debate; it unlikely he believed in an afterlife anyway. Indeed, though he died seventy years before Darwin’s Origin of Species, from 1759, in his own Theory of Moral Sentiments, 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. Smith’s mentor David Hume, in the last book of his 1739 A Treatise of Human Nature, was also grasping for an evolutionary explanation, and he was certainly not a believer.
A few days later, the smoke of a bonfire could be seen rising up from the garden of Panmure House. Smith had 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 their random notes and half-though-out jottings. But we were lucky he spared The History of Astronomy, 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.
Smith was indeed a polymath. 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. It was The Theory of Moral Sentiments that in 1759 made him internationally famous — and brough 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.
Today we call that simply The Wealth of Nations. And in it, he shows how the spontaneous order of the free market 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 got value from it. So we need to be facilitating free exchange — not thwarting it with protectionist measures against foreign imports or domestic regulations on trade.
This ‘system of natural liberty’, he explained, allowed the spontaneous society to flourish and raised nations from poverty to prosperity. It enabled families to strive to ‘better their condition’. 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. Unlike today’s.
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 of human prosperity. The free trade era of the nineteenth century enriched 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 pulled a billion people out of dollar-a-day poverty.
Adam Smith’s lessons are plain enough. The question is why governments so rarely learn them.