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Adam Smith’s Wealth of Nations

By Barry Stocker
September 10th, 2009 at 3:35 pm | 1 Comment | Posted in Economics, UK Politics

carosmithAdam Smith is famous as the founder of economics, then known as political economy. There is never a completely clear case about who is that first at anything but Smith has a very strong case.

His post was that of a Professor at Moral Philosophy at the University of Glasgow.  As a student at Glasgow he studied with the distinguished moral philosopher, Frances Hutcheson.  Hutcheson held the Chair that Smith himself held later.  Hutcheson’s predecessor was the first holder of that chair, Gershom Carmichael, an early figure in the Scottish Enlightenment.  Smith himself was succeeded by Thomas Reid, another major figure of the Scottish Enlightenment.  Smith was a close friend of the philosopher and historian David Hume, who also wrote on economics.  Hume, along with Smith, is the greatest figure in the Scottish Enlightenment; and a leading figure in the whole European movement towards a rational critical attitude towards all areas of knowledge, freed of blind obedience to tradition and authority.  Smith cannot be understood as just an economist. Wealth of Nations is informed by interests in history, political thought, moral philosophy, aesthetics, natural science, sociology, law and so on.

Wealth of Nations contains at the heart of its economic thought the idea that markets should very largely be left alone.  The market works through the desire of individuals to improve their situation, which is a civilising and good thing for the whole of society, as well as individuals.  Voluntary exchanges in the market are liberating compared with exchanges enforced from above, and lead to economic benefits for both sides of the exchange.   Damaging restraints from various sources include: guilds which restrict entry into a trade, monopolies on export and import imposed on trade between colonies and colonising countries, merchants combining to raise prices, aristocratic power over tenant farmers and labourers, and at the extreme – slavery.

Smith recognised that businesses might conspire against the market, but his solution is not for the state to act in a way which limits freedom in the market place, and even less to substitute for market exchanges.  The state should avoid actions which encourage anti-market activities, such as requiring merchants to join some local corporate body where they will meet and very probably conspire to raise prices.  Smith’s concern is to avoid state actions which undermine the market.  A big concern is free trade between nations, though in Smith’s time there was a still a big issue of free trade between different parts of a nation.  The lifting of such barriers was nearly complete in Britain, but as Smith notes is far from complete in France which was much poorer.

In Britain, Smith was concerned with the damaging effects of external customs duties and other import restrictions.  He was also concerned with state enforced monopolies, particularly with regard to the colonies.  He argued that these made the nation weaker by raising prices artificially on goods made in Britain when exported, making them less competitive; and by rising prices artificially on goods imported in Britain, harming consumers.  A major concern was the Corn Laws, which restricted imports and exports on wheat and all grains, raising prices in way which greatly harmed the poorest.

Smith favoured a tax system which favoured the poorest, but not through redistribution of income.  He assumes that normally taxation is on consumption rather than on income or wealth, and favours higher taxes on those goods most consumed by the rich.      Smith believes in an economy in which everyone can become richer, and some people can become very rich; but he has moral reservations about the rich spending money on luxuries, and their apparent tendencies to less morally restrained behaviour than the poor.  Smith’s main arguments for ‘free trade’, in the very broadest sense, are that it enables the poor to improve their condition and become free of dependency on feudal, or monopolistic, employers.

The description of Smith’s economic vision already leads us into his moral and political vision.  His more specific comments on those areas favour representative government and greater individual freedom.  He argues not only that representative government is the best government, but that Ireland and the colonies should be represented equally in the British parliament.  His view of colonialism is that it is bad but comes about from the necessity of protecting trade.  It is best avoided, and if it is not avoided, colonies should be confederated with the coloniser, with equal political rights.  He sees the functions of government as restricted to national defence, law and order, enforcement of property and contracts, and to anything else of public benefit that  private individuals cannot provide.  That last proviso is very open to interpretation. Smith’s own examples suggest that he thinks the proviso should be interpreted in a very modest way.  For example, he discusses education extensively as a public benefit.  Smith argues that education should be compulsory, but that it should be provided by a multiplicity of private sources, and there should be charges with charitable assistance for those too poor too meet the charges .

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