This week marks the 245th anniversary of the most famous book by the most famous economist in history: Adam Smith’s “An Inquiry Into the Nature and Causes of The Wealth of Nations,” published in 1776. The anniversary merits celebration because of the book’s impact, but also because of its continued relevance today.
Wealth of Nations is memorable for its articulation of how the “invisible hand” of market interactions can coordinate a society based upon liberty — private property rights and voluntary exchange — more effectively than can the coercive power of the state.
And Smith’s commitment to liberty, which he shared with the Declaration of Independence less than four months later, was equally influential. As Lawrence Reed put it, “America’s Founders were greatly affected by his insights,” and “The Wealth of Nations became required reading among men and women of ideas the world over…no one had more thoroughly and convincingly blown away the intellectual edifice of big government,” leaving the world in 1900 “much freer and more prosperous than anyone imagined in 1776.”
Seemingly everyone has heard of Smith’s invisible hand, by which, given liberty, market transactions lead people pursuing their own self-interest to advance the interests of others as well. (“By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”)
Unfortunately, however, those in modern government and their political supporters talk of liberty, while legislating and regulating away the voluntary arrangements that comprise it.
That is why it is useful to go beyond Smith’s discussion of the invisible hand, to his analysis of the alternative, the clumsy visible foot of government, perhaps made clearest when he wrote “I have never known much good done by those who affected to trade for the public good. It is an affectation.” That understanding is more important today, with government exponentially more intrusive than when he wrote, than when it led America’s colonies to declare independence from England.
Following are some key quotes from Smith’s classic work.
The reality of government:
“[Governments are]…without exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.
“Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct…Those unproductive hands…may consume so great a share of their whole revenue…that all the frugality and good conduct of individuals may not be able to compensate the waste and degradation of produce occasioned by this violent and forced encroachment.
“After all the proper subjects of taxation have been exhausted, if the exigencies of the state still continue to require new taxes, they must be imposed upon improper ones.”
Government and the invisible hand:
“The uniform, constant and uninterrupted effort of every man to better his condition…is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration…it frequently restores health and vigor to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor…it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations.
“In the midst of all the exactions of government…capital has been silently and gradually accumulated by the private frugality and good conduct of individuals, by their universal, continual, and uninterrupted effort to better their own condition. It is this effort, protected by law and allowed by liberty to exert itself in the manner that is most advantageous, which has maintained the progress.
“The frugality and good conduct of individuals seem to have been able…to repair all the breaches which the waste and extravagance of government had made in the general capital of the society. Let us not, however, upon this account rashly conclude that she is capable of supporting any burden, nor even be too confident that she could support, without great distress, a burden a little greater than what has already been laid upon her.
“The profusion of government…retarded the natural progress.”
The limited defensible role of government:
“No human wisdom or knowledge could ever be sufficient [for] the duty of superintending the industry of private people, and of directing it towards the employment most suitable to the interest of the society.
“The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would…assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.
“To judge whether [a workman] is fit to be employed, may surely be trusted to the discretion of the employers whose interest it so much concerns. The affected anxiety of the law-giver…is evidently as impertinent as it is oppressive.
“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.”
The invisible hand under limited government:
“All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest in his own way, and to bring both his industry and capital into competition with those of any other man.
“Adam Smith long ago recognized that a system of natural liberty needed at most a very small government. He was not far from Thomas Jefferson, the author of the Declaration of Independence, who said, “What more is necessary to make us a happy and a prosperous people?…a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.”
However, that is almost unimaginably far from American governments that take trillions of dollars of taxes, impose innumerable costly regulations and mandates and promise to burden future citizens even more by borrowing trillions as well.
If we are to restore the vision Adam Smith shared with our founder — that of providing the broadest possible canvas for human freedom — far less government is necessary. We need to rein in its overreaching, so that we can use the invisible hand of voluntary market arrangements more, and stumble less over the clumsy visible foot of the government.
Gary M. Galles is a professor of economics at Pepperdine University.