Tag Archives: “The Wealth of Nations”

Is Adam Smith’s “Invisible Hand” Misunderstood? A Declaration

From the New York Times opinion blog “The Stone” comes this article by John Paul Rollert, who teaches business ethics at the University of Chicago Booth School of Business and leadership at the Harvard Extension School.  In the piece, Rollert argues that Adam Smith’s comment regarding the “invisible hand” of market forces was an idea that had only fleeting appearances (three total) in all of Smith’s writings and that Smith never argued for the elimination of government because of inherent qualities inimical to the growth of capitalism or human liberty. Rollert’s analysis of Smith seems to have more to do with his qualms with the Romney/ Ryan ticket than refuting what he considers a common “misunderstanding” of Smith’s fundamental descrition of market forces and human economic cooperation. He writes:

In other words, the invisible hand did not solve the problem of politics by making politics altogether unnecessary. “We don’t think government can solve all our problems,” President Obama said in his convention address, “But we don’t think that government is the source of all our problems.” Smith would have appreciated this formulation. For him, whether government should get out of the way in any given matter, economic or otherwise, was a question for considered judgment abetted by scientific inquiry. He offered “The Wealth of Nations” in service of such an inquiry, a two-volume tome he painstakingly revised for years after it was published. Had he known that a single phrase plucked from the dense thicket of ideas would become the first and last word of his philosophy, I suspect he would have made one more revision.

Perhaps. None other than Milton Friedman had a clear understanding of the phrase, which he examined in detail during his monumental television series Free to Choose and in the accompanying book written in conjunction with his wife Rose. Smith, Friedman wrote, argued that government had its uses (blocking monopolies, for example) but it was the poorest stimulant for economic growth. (Take the time to watch this clip from Episode 1, “The Power of the Market,” where Friedman brilliantly uses a simple pencil to describe the invisible hand as a force for peace and cooperation. You will understand why he won the Noble Prize in Economics.)

Where Rollert hits the mark (I could care less about his politicking in the article) is correctly pointing out that Smith’s seminal work The Wealth of Nations includes a withering blast against mercantilism, the prevalent national economic policy of Britain which regulated the economy of the American colonies. Smith’s book is published the same year as the Declaration of Independence and there is superb evidence that many of the delegates to the Second Continental Congress were familiar with his ideas. Jefferson and Smith would have been agreement when discussing the economic charges leveled at George III specifically and the British government generally in the Declaration:

He has erected a multitude of New Offices, and sent hither swarms of Officers to
harrass our people, and eat out their substance … He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation: … For cutting off our Trade with all parts of the world: For imposing Taxes on us without our Consent … .

The condemnation of taxation without representation is one that every school child should know. What often goes unsaid or unknown are the economic arguments in the Declaration that make clear that “life, liberty, and the pursuit of happiness” should be free from the unwarranted regulation of government that does not enjoy broad consent of the people. If the people wish to alter or abolish that form of government it can be for economic reasons as much as for political reasons.

I often wonder if either President Obama or Gov. Romney would sign the Declaration if they truly understood what it meant. If both would read it and The Wealth of Nations they would understand that the United States should not measure its wealth by how government imposes a visible hand of “fairness” but how it promotes cooperation between free individuals who use the power of the market to improve their lives.

Leave a comment

Filed under Commentary, History of the Declaration of Independence

Adam Smith and American Liberty

Adam Smith, commentator on the American Revolution

Across the Atlantic, many intellectuals and statesmen in Europe noted that the American Revolution was an event with global implications, and they correctly linked the international significance of the war to the global significance of the Declaration of Independence. Undoubtedly, there are many ways that the American Revolution was a unique international event prompting much hope for change and progress by spreading republicanism. One often ignored aspect is the Declaration of Independence was the first political manifesto so titled – no other political document in history had carried that name. America was about to join “the powers of the earth,” in other words, become a nation with sovereign rights and sovereign powers.  During an age of global bridges when an Atlantic world existed through interconnections between Europe and the Americas through trade and mercantilism, this revolution that resulted in British colonies declaring their independence could not avoid being an international event. If nothing else, many Americans believed it, ranging from the hundreds of thousands who read Thomas Paine’s Common Sense to the some the central figures who eventually draft the Declaration of Independence. To a generation of politicians and scholars who came of age in the world shaped by imperial rivalry and global competition resulting from the Seven Years’ War (part of which was fought as the French and Indian Wars in North America), this was an event worth noting, and the Continental Congress could rest assured that the rest of the European world would take notice.

Among those who took notice was the great British economist and moral philosopher Adam Smith (1723-1790), often called the father of classical economics, the first great definer of capitalism, and in many ways one of the first great commentators on American independence. Smith also was unsentimental in his assessment of the American Revolution: If the colonists wished to remain Englishmen, they should pay for their share of the enormous debt incurred to raise armies and fight the French and Spanish in their defense. Besides, Smith accuses the North American colonies of constant political turmoil and factions. He doubted that an independent America would survive because “those factions would be ten times more virulent than ever.” But most importantly, any nation that would result from the “the present disturbances” would prove that the British Empire in North America —a Protestant, commercial, maritime, politically free entity that was then at the apex of its experience –existed in the imagination only, a situation hardly worth the expense of maintaining. Smith was clearly aware that a global shift in the balance of power would result from an independent America.
Yet, Smith considered the events of the American Revolution so momentous that he also offered a detailed comparative analysis of the motivations and results of colonization both ancient (Greece and Rome) and contemporary (16th-18th-century European efforts). He acknowledged that the pursuit of “wealth and greatness” spurred almost all colonial enterprises in history; however, the results were uneven or delayed – even Spain in the New World did not find the near legendary amounts of gold and silver that built an empire that was a paragon of overseas success to the other ambitious nations of 1500s and 1600s. However, it is the English colonies that Smith said had a unique advantage because of light taxes and slight regulation. “But there are no colonies of which the progress has been more rapid than that of the English in North America,” Smith wrote in his seminal work, An Inquiry Into the Nature and Causes of the Wealth of Nations, published in 1776 and (not surprisingly) later known to many of the delegates who wrote or edited the Declaration. “Plenty of good land, and liberty to manage their own affairs their own way, seem to be the two great causes of the prosperity of all new colonies. In the plenty of good land the English colonies of North America, though, no doubt, very abundantly provided, are, however, inferior to those of the Spaniards and Portuguese, and not superior to some of those possessed by the French before the late war. But the political institutions of the English colonies have been more favourable to the improvement and cultivation of this land, than those of any of the other three nations.”
Smith points out that the British colonists “never yet contributed any thing towards the defence of the mother country, or towards the support of its civil government,” but they also possess cheap, efficient local governments that have “generally been confined to what was necessary for paying competent salaries to the governor, to the judges, and to some other officers of police, and for maintaining a few of the most useful public works.” The colonists’ liberty by the standards of the time is notable:

But though the policy of Great Britain with regard to the trade of her colonies has been dictated by the same mercantile spirit as that of other nations, it has, however, upon the whole, been less illiberal and oppressive than that of any of them.
In every thing, except their foreign trade, the liberty of the English colonists to manage their own affairs their own way is complete. It is in every respect equal to that of their fellow–citizens at home, and is secured in the same manner, by an assembly of the representatives of the people, who claim the sole right of imposing taxes for the support of the colony government. The authority of this assembly over–awes the executive power, and neither the meanest nor the most obnoxious colonist, as long as he obeys the law, has any thing to fear from the resentment, either of the governor, or of any other civil or military officer in the province. The colony assemblies, though, like the house of commons in England, they are not always a very equal representation of the people, yet they approach more nearly to that character; and as the executive power either has not the means to corrupt them, or, on account of the support which it receives from the mother country, is not under the necessity of doing so, they are perhaps in general more influenced by the inclinations of their constituents. The councils, which, in the colony legislatures, correspond to the House of Lords in Great Britain, are not composed of an hereditary nobility. In some of the colonies, as in three of the governments of New England, those councils are not appointed by the king, but chosen by the representatives of the people. In none of the English colonies is there any hereditary nobility. In all of them, indeed, as in all other free countries, the descendant of an old colony family is more respected than an upstart of equal merit and fortune: but he is only more respected, and he has no privileges by which he can be troublesome to his neighbours. Before the commencement of the present disturbances, the colony assemblies had not only the legislative, but a part of the executive power. In Connecticut and Rhode Island, they elected the governor. In the other colonies they appointed the revenue officers who collected the taxes imposed by those respective assemblies, to whom those officers were immediately responsible. There is more equality, therefore, among the English colonists than among the inhabitants of the mother country.

Tom Paine, no member of the Congress but a brilliant commentator on the international significance of the American Revolution, wrote with more meaning than perhaps he understood: The Cause of America is in a great measure the cause of all mankind. Consequently, the Declaration carried several powerful messages, first to Great Britain, then to the rest of the world. The United States, in seeking independence, owed the rest of the world an explanation regarding its challenge to established, legitimate government and the existing international order. In addition, the United States intended to be treated equally and with respect by the rest of the world. Given time, it would be a nation to reckon with because of its numerous advantages. Like Adam Smith, anyone in 1776 who had observed and considered the new nation’s potential would know that the United States at its birth possessed a unique marriage of advantages: Economic resources envied throughout the European world and a political culture whose love of rights and individual freedoms were admired and respected.  The opening paragraph of the document announcing the birth of the United States is clear in its intent. The United States had permanently dissolved “the political bands” that held it to the British Empire, and it was ready to assume its place among “the powers of the earth” where it would shape world history in astounding ways.

Leave a comment

Filed under Commentary, History of the Declaration of Independence, Scholarship and Historians