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This week 250 years ago, Adam Smith published An Inquiry Into the Nature and Causes of the Wealth of Nations – and invented economics. The anniversary has been marked by opinion columns, new books and academic conferences. How different it was 50 years ago. The 1976 bicentenary produced the definitive scholarly edition and helped cast Smith as the father of free-market economics. This was an easy sell during the 1970s slow collapse of the postwar economic order. Smith was useful as a symbolic figure for the revival of free-market ideas. Yet the truth is more complicated.
Milton Friedman, a Nobel laureate, recruited Smith as the patron saint of neoliberal economics in his 1980 book and television series Free to Choose – a manifesto that anticipated Reaganism in the US. He reduced Smith to two claims: that a voluntary exchange benefits both parties and that self-interest is led by an “invisible hand” that unintentionally promotes the public interest. In short: greed is good. In fact, Smith used the phrase “invisible hand” only once in The Wealth of Nations, to describe whether merchants invest their capital at home or abroad – and not, as Friedman claimed, as a general theory of markets.
Smith was a nuanced thinker. Many academics, most notably the Nobel laureate Amartya Sen, have suggested that the figure invoked by free-market apostles is little more than caricature. Smith’s first work, The Theory of Moral Sentiments, opens with a clear rebuttal of self-seeking behaviour: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others … though he derives nothing from it except the pleasure of seeing it.”
Margaret Thatcher was on surer ground by invoking Smith in her argument that “wealth is not generated by government” but by “the enterprise of individual men and women”. But this was an incomplete picture, as Smith clearly thought economic life depended on social justice and institutions. The Scottish philosopher was no doctrinaire advocate of laissez-faire economics. He supported public education and legal caps on interest rates.
The Cambridge historian Emma Rothschild, in her book Economic Sentiments, argues that Smith warned against an 18th-century commercial system and colonial policy driven by mercantile interests rather than national welfare. These debates remain today. Nicholas Kaldor, one of the great Keynesian economists, credited Smith with a very modern insight that economic development depends on the expansion of markets and specialisation. The rise of China and India suggests he was right.
Few economists stand beside Smith in intellectual stature. The only comparable figure is Karl Marx. Yet Smith was far more radical than the free-market icon he was later taken to be. He wrote that civil government defends “the rich against the poor”, that too much property breeds great inequality and that the greed of the “masters of mankind” was such that they wanted everything with “nothing [left] for other people”. He even suggested a form of capitalist conspiracy, writing that employers work in a “tacit” combination against workers. Unlike Marx, however, Smith believed growth could gradually lift wages and living standards. His great contribution was to recognise the tensions within commercial society that Marx later radicalised. The question today is whether anyone will radicalise them again.
