The Spirit Of Adam Smith

ADAM SMITH (1723-1790) IS A MAN FOR OUR TIME--OR ought to be. This is less because he championed free markets than because he cared about so much more than free markets. What concerned Smith was constructing a decent society. Free markets were only one means to that end. Government was another, and Smith constantly probed the proper roles for government and the market. Smith was long on wisdom, short on self-righteousness. We could use his spirit today, because we seem to have arrived at the opposite mix: surplus self-righteousness and scarce wisdom.

Liberals are so protective of government that they cannot concede the great power of Smith's ""invisible hand.'' Self-interest is not simply greed, selfishness or narcissism. If properly constrained, it is an immense force for social good, and much human progress stems from the independent exertions and creative energies of individuals and enterprises. Liberals recoil at this notion because it deprives them of the power, social status and psychological gratification of seeming to deliver (through government) all the trappings of the good society.

Meanwhile, conservatives are so contemptuous of government that they cannot admit that it is often more than a necessary evil. It creates the legal and political framework without which tolerably free markets could not survive. It also supplies the collective services--from defense to roads--that the private market doesn't and deals with the market's unwanted ""excesses.'' Smith realized that government produced these benefits, but many conservatives who cite him seem oblivious to their existence or importance.

I don't claim to have read Smith's ""The Wealth of Nations'' (1776) from cover to cover. But anyone who doubts the complexity of his thinking ought to plunge into a short but superb intellectual biography by historian Jerry Muller of Catholic University (""Adam Smith in His Time and Ours,'' Princeton University Press). In it, he demolishes the stereotype of Smith as an anti-government zealot. That image founders on one fact: Smith served for years as a bureaucrat, Scotland's Commissioner of Customs. He collected import duties, then the government's largest source of revenue. The job was akin to the head of the IRS today.

Smith's theories explained changes that had already occurred. In 18th-century Britain, feudalism had collapsed. Farm production rose, as did living standards. In England, people felt ashamed to go without shoes; in France, being shoeless was still common. Blankets, linens and ironware became common in England. Smith attributed the new wealth to the triumph of the market: buying and selling. Before, food was mostly consumed by those who produced it or their feudal lords. Manufacturing was also transformed. ""Goods once produced laboriously at home--clothes, beer, candles ... furniture--could now be purchased,'' writes Muller.

The market multiplied wealth, Smith reasoned, because it led to economic specialization: the ""division of labor'' that--through more knowledge, experience and customized machinery--raised production. None of this was planned. It flowed (as if by an invisible hand) from the striving of sellers to maximize their wealth. ""It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner,'' Smith wrote memorably, ""but from their regard to their own interest.''

Smith grasped that incentives count: that is, how people are motivated and toward what ends. The lesson endures. Similar peoples with dissimilar incentives--embedded in national policies--fare differently, as economist Mancur Olson says: ""[In] most of the postwar period, China, Germany and Korea have been divided ... The economic performance of Hong Kong and Taiwan, of West Germany, and of South Korea have been [much] better than [those] of mainland China, East Germany and North Korea.''

Government's ability to cripple the market appalled Smith. ""The Wealth of Nations'' aimed to fortify legislators against ""the pressures of economic groups'' for special privileges, Muller says. But Smith's skepticism of government wasn't a revulsion for it. He ""enjoyed the work'' as customs commissioner, writes Muller. This was not hypocrisy, because Smith saw three vital roles for government: a) providing defense, b) ensuring justice and protecting property, and c) building roads, canals, harbors--""infrastructure.'' Government had to be properly financed.

Nor did Smith believe that wealth was all that mattered. Quite the opposite. He wanted a society that would be less violent and more civil--one that tempered people's worst ""passions.'' Greater wealth, by relieving suffering, enabled people to be more ""benevolent.'' And though the market could be cruel and crass, it also encouraged stable commercial relations. That was a civilizing influence, Smith argued. Finally, Smith believed in the primacy of the family as a moral force (the place where children learn self-control) and as a source of personal happiness.

Deciding what government should do is harder in our era than Smith's, precisely because its activities--ranging from the social safety net to environmental regulation--are so much greater. But his pragmatic approach, unburdened by dogma and sensitive to how people (and institutions) actually behave, is more needed than ever. He assigned social tasks where he thought they could best be met, whether that be the market or government. By contrast, today's liberals often assume that the ""market is wasteful or immoral,'' writes Muller. Ignoring how government can harm incentives--killing initiative, creating dependence--they often substitute ""good intentions for sound policies.''

As for conservatives, their use of Smith ignores what he said about the defects of markets. He supported, for example, universal education as an antidote to the numbing effects of economic specialization. Why wouldn't our debates seem so unsatisfying? The antagonists talk past each other. Smith combined a lofty vision of a decent society with an exacting analysis of the means of attaining it. Our modern luminaries often assume that their means are always up to their ends.