Critics of laissez faire—from Cambridge economic historian Emma Rothschild to British Labor Party leader Gordon Brown—have recently attempted to wrestle Adam Smith out of the hands of the free-market camp and into the camp of the social democrats. According to Iain McLean, professor of politics at Oxford University, and Samuel Fleschaker, professor of philosophy at the University of Illinois at Chicago, the Scottish philosopher was a “radical egalitarian” who, while endorsing economic liberalism, had a lively appreciation of market failure and ultimately rejected “ruthless laissez-faire capitalism” in favor of “human equality” and “distributive justice.”

These critics are quick to claim that Smith was no friend of rent-seeking landlords, monopolistic merchants, and conspiring businessmen, and that he advocated an active State authority in support of free education, large-scale public works, usury laws, progressive taxation, and even limits on free trade.

What about the metaphor of the “invisible hand,” the famous Smithian idea that “by pursuing his own self-interest, [every individual] frequently promotes that of the society”? Free-market economists from Ludwig von Mises to Milton Friedman have regarded it as a powerful symbol of unfettered market forces, what Adam Smith called his “system of natural liberty.” In rebuttal the new critics belittle Smith’s metaphor as a “passing, satirical” reference and suggest that he favored more of a “helping hand.” They emphasize that Smith used the phrase “invisible hand” only once in each of his two major works, The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776). The references are so sparse that commentators seldom mentioned the expression by name in the nineteenth century. No notice was made of it during the celebrations of the centenary of The Wealth of Nations in 1876. Until well into the twentieth century, no subject index listed “invisible hand” as a separate entry. It was finally added to the index in 1937 by Max Lerner for the Modern Library edition. Clearly, it wasn’t until the twentieth century that the invisible hand became a popular symbol of laissez faire.

Could the detractors be correct in their assessment of Adam Smith’s sentiments? Is the metaphor central or marginal to his “system of natural liberty”?

Friedman refers to Adam Smith’s symbol as a “key insight” into the cooperative, self-regulating “power of the market to produce our food, our clothing, our housing . . . without central direction.” Economist George Stigler calls it the “crown jewel” of The Wealth of Nations and “the most important substantive proposition in all of economics.”

On the other hand, economist Gavin Kennedy contended in earlier writings that the invisible hand is nothing more than an afterthought, a “casual metaphor” with limited value. Rothschild, the Harvard University economic historian, even goes so far as to declare, “What I will suggest is that Smith did not especially esteem the invisible hand. . . . It is un-Smithian and unimportant to his theory” and was nothing more than a “mildly ironic joke.”

Who’s right?

A fascinating discovery by Daniel Klein, professor of economics at George Mason University, may shed light on this debate. Based on a brief remark by Peter Minowitz, the Santa Clara University political philosopher, that the “invisible hand” phrase lies roughly in the middle of both of Smith’s books, Klein made preliminary investigations. He next recruited Brandon Lucas, then a doctoral student at Mason, to investigate further. Klein and Lucas reported in Economic Affairs (March 2011) that they found considerable evidence that Smith “deliberately placed ‘led by an invisible hand’ at the centre of his tomes” and that the concept “holds special and positive significance in Smith’s thought.”

Klein and Lucas base their conjecture on two major points. First, the physical location of the metaphor: The single expression “led by an invisible hand” occurs almost dead center in the first and second editions of The Wealth of Nations. (It moves slightly away from the middle after an index and other material were added to later editions.)

Moreover, it appears again “well-nigh dead centre” in the final edition of The Theory of Moral Sentiments. Klein and Lucas admit that it was not in the middle of the first edition in 1759, speculating that “physical centrality was not initially a part of his intentions . . . [but that] by 1776, Smith had become intent on centrality.” Indeed, Smith moved the phrase “invisible hand” closer to the center of the book, first by appending an important essay on the origin of language and finally by making substantial revisions in the final edition.

Second, they note that as a historian and moral philosopher, Adam Smith commented frequently on the importance of middleness in architecture, literature, science, and philosophy. For example:

• Smith wrote sympathetically about the Aristotelian golden mean, the idea that virtue exists “between two opposite vices.” For instance, between the two extremes of cowardice and recklessness lies the central virtue of courage.
• In his essays on astronomy and ancient physics, he was captivated by Newtonian central forces and periodical revolutions.
• Klein discovered that in his lectures on rhetoric, Smith admired the poetry of the Greek poet Thucydides, who “often expresses all that he labours so much in a word or two, sometimes placed in the middle of the narration.”

In sum, according to Klein and Lucas, the invisible hand represents the centrality of Smith’s “system of natural liberty” and is appropriately found in the middle of his works. By this discovery, if true, one goes from one extreme to the other—from seeing the invisible hand as a marginal concept to accepting it as the touchstone of his philosophy.

Klein and Lucas’s list of evidence is what a lawyer might call circumstantial, or “impressionistic,” to use their own adjective. Taken as a whole, the documentation is either an ingenious breakthrough or a “remarkable coincidence,” to quote Kennedy.

A few Smithian experts have warmed up to Klein and Lucas’s claim. Kennedy, who previously considered the invisible hand a “casual” metaphor, now sees a “high probability” in their thesis of deliberate centrality. Others are more skeptical. “We have no direct evidence for the conjecture,” states Craig Smith, an expert on Adam Smith at the University of St. Andrews. The idea that Smith deliberately hid his favorite symbol of his philosophy “strikes me . . . as very un-Smithian,” he states, and runs contrary to his policy of expressing thoughts in a “neat, plain and clever manner.” Placing the shorthand phrase “invisible hand” in the middle of his works may not be plain, but is it not neat and clever?

We may never know the truth, since we have no record of Smith’s confession on the matter. Fortunately, one does not need to depend on the physical centrality of the “invisible hand” to recognize the doctrinal centrality of his philosophy.

There are many passages from The Wealth of Nations and The Theory of Moral Sentiments that elucidate the “invisible hand” theme, the idea that individuals acting in their own self-interest unwittingly benefit the public weal, or that eliminating restrictions on individuals’ behaviors “better[s] their own condition” and makes society better off. Smith repeatedly advocated removal of trade barriers, State-granted privileges, and employment regulations so that individuals could flourish.

In The Theory of Moral Sentiments, Smith writes:

The man of system . . . seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

Smith’s argument is comparative. To quote Klein: “Hewing to the liberty principle generally works out better than not doing so—in this respect, [Kenneth] Arrow, Joseph Stiglitz, and Frank Hahn do disfigure Smith when they identify the invisible hand with some rarified perfection. We need not rehearse Smith on the ignorance, folly, and presumption of political power, on the corruption and pathology of political ecology. . . . Smith sees the liberty principle as a moral, cultural, and political focal point, a worthy and workable principle in the otherwise dreadful fog of interventionism.”

To think that Adam Smith, the renowned absent-minded professor, hid a little “invisible” secret in his tomes is indeed the ultimate irony. As Klein concludes, “That the phrase appears close to the center, and but once, in TMS and in WN might be taken as evidence that Smith did intend for us to take up the phrase.”

I find Professor Klein’s story compelling and have enjoyed showing copies of Smith’s works with a bookmark in the key pages to students, faculty, and interested friends.

I have been asked what was my first introduction to libertarian thought. I find that hard to answer, involving as it does looking back nearly three quarters of a century. But if I had to make a guess, I would conjecture that it was John Stuart Mill ‘s Essay on Liberty, which I must have read in my first or second year of college.

Herewith are my five favorite libertarian books.

Adam Smith’s The Wealth of Nations

First, Adam Smith’s The Wealth of Nations. This book, published in 1776, founded economic science. It introduced the notion of the “invisible hand” and explained how free trade could produce cooperation among people in achieving economic productivity. It remains a book well worth reading, full of wonderful comments to warm a libertarian’s
heart.

Mill’s Essay on Liberty

Second, John Stuart Mill’s Essay on Liberty. The most concise and clearest statement of the fundamental libertarian principle, “The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others …. ”

Dicey’s Lectures on Law and Public Opinion

Third, A. V. Dicey’s Lectures on the Relation between Law and Public Opinion in England during the Nineteenth Century. A remarkable work initially presented as lectures at Harvard in the 1890s and reprinted with a new and very important preface in 1914. Dicey saw clearly the ultimate outcome of initial social welfare measures in the first decade of the twentieth century. He essentially predicted the emergence of the full-fledged welfare state. More than a century ago, Dicey explained why the rhetoric in terms of the general interest is so persuasive: “The beneficial effect of state intervention, especially in the form of legislation, is direct, immediate, and so to speak, visible while its evil effects are gradual and indirect and lying out of sight …. Hence the majority of mankind must almost of necessity look with undue favor upon governmental intervention.”

Hayek’s The Road to Serfdom

Foutth, F. A. Hayek’s The Road to Serfdom. This profound book was highly influential in the immediate post-World War II period when it was a lone voice presenting the case for libertarian philosophy and pointing out the consequences of an increase in the role of the state. It was certainly one of the most effective works leading people to take libertarian principles seriously.

My Own Favorite: Capitalism and Freedom OR Free to Choose?

Fifth, I have been asked to include one of my own books. I am torn between Capitalism and Freedom, published in 1962 with the assistance of Rose D. Friedman, and Free to Choose, published in 1980 jointly with Rose D. Friedman. Both present the same philosophy and cover many of the same topics. Capitalism and Freedom is more succinct, scholarly, and abstract; it was a product of a series of lectures that I gave in June 1956 at a conference at Wabash College directed by John Van Sickle and Benjamin Rogge [a long-time FEE trustee] and sponsored by the Volker Foundation.

Free to Choose, based on the television program of the same title, is more popular, less abstract, more concrete. It presents a fuller development of the philosophy that permeates both books; it has more nuts and bolts, less theoretical framework. The TV program on which Free to Choose is based is available in videocassette and, if I were to consider it as a book, would clearly be my favorite.

*Excerpted from an insert that appeared in the April 2002 issue of The Freeman.

by David Gratzer

Encounter Books • 2006 • 233 pages • $25.95

Reviewed by Jane M. Orient

David Gratzer learned one of his most important lessons in medical school on his way to class. He had to wind his way around the gurneys parked in corridors of the emergency department, where elderly patients, stinking of sweat and urine, had been waiting as long as five days for a bed. That destroyed his illusions about what he, like most Canadians, had been taught was the best-run health-care system in the world.

I could identify with the author because I had a similar epiphany in 1970 when volunteering to help out in the emergency room at Columbia-Presbyterian Hospital in New York as a first-year medical student. It too was chaotic, but we did not have patients waiting for days for beds; we did not use the Canadian global budget to put a lid on total expenditures, leading to rationing by limiting supply. What became obvious to me was that the “compassionate” “liberal” ideology of wealth redistribution did not and could not help the social problems that led to most of the ER traffic.

Since 1970 more and more Americans have been funneled into the single-payer systems called Medicare and Medicaid. The waiting rooms at ERs in private hospitals are coming to resemble those of 1970s public hospitals in the inner city, while the inner-city hospitals have become even worse. Just as we’re starting to experience the type of stress so common in Canada, the pressure to finish the job of socializing American medicine grows ever more intense. While our remedies make the patient sicker, reformers suggest applying more leeches. It’s time for regular people to take a field trip to the ER.

Gratzer does a good job of explaining some basic economics. It’s all encapsulated in his graph: “Out-of-Pocket Share Falls and Per Capita Spending Climbs.” The diagnosis is too much third-party payment, not too little.

Doing away with the free-market price mechanism, essential for bringing supply and demand into equilibrium, inevitably leads to “bureaucratic displacement.” Gammon’s Law—that in a bureaucratic system, increase in expenditure leads to a fall in production—was developed by a British physician in the context of the National Health Service. Milton Friedman applied it to American hospitals, as Gratzer recounts.

Gratzer explains many important issues, such as the role of government regulation in increasing the cost of insurance as well as of prescription drugs. He debunks well-worn myths, such as the claim that infant mortality is less in countries with socialized medicine. He outlines reforms that would make the situation better rather than worse: expanded health savings accounts, permitting the purchase of out-of-state insurance, and tax equity.

An important contribution of the book is explaining why the laws of economics don’t seem to apply in medical care. For example, improved technology generally leads to lower prices, not higher ones as in medicine. Basically, “America doesn’t really have a market for health care, it seems, merely a market for health insurance.” The customer—the one spending the money—isn’t the person benefiting directly from the service. Thus normal market processes, such as the role of self-interest, are inverted.

Anyone who understands Gratzer’s account of the government’s role in the current mess will be hard pressed to see it as a potential savior. Consider a couple of paradoxes. Medicaid was supposed to help the poor, but one of its most expensive roles is to serve as “inheritance insurance” for the wealthy. One of the fastest-growing areas of legal practice involves helping the affluent qualify for Medicaid long-term care. And Medicare was supposed to protect the elderly from being financially devastated by medical expenses. Although it covers many small bills, it leaves beneficiaries exposed to potentially catastrophic out-of-pocket expenses. It’s the opposite of sound insurance.

Gratzer fills in what the American media usually omit: the uncounted costs of prolonged pain and disability for Canadians trapped on waiting lists. Allowing people to use their own money to improve their situation has been considered un-Canadian. Fortunately, the situation is changing. In a case involving what Gratzer calls “the hip that changed the world,” the Supreme Court of Canada held in favor of a Montreal physician, Jacques Chaoulli, who took on the system virtually single-handed.

Privatization and free-market reforms are breaking out in all those countries that leftists applaud for having “universal” health care—that is, universally bankrupt, mediocre, and overburdened medical systems. Gratzer looks at Sweden, South Africa, Finland, and Germany, among others.

Americans should benefit from Gratzer’s experience in Canada as well as his mastery of economics. We need to avoid descending further into the chasm of medical-care socialism. At some point, the vortex of socialism could become like a black hole, from which no escape is possible.

Gratzer’s book is a valuable contribution to the struggle to insure against that outcome.

Jane M. Orient, M.D. is executive director of the Association of American Physicians and Surgeons.

* * *

Self-Determination: The Other Path for Native Americans

Edited by Terry L. Anderson, Bruce L. Benson, and Thomas F. Flanagan

Stanford University Press • 2006 • 331 pages • $35.00

Reviewed by William L. Anderson

While driving across the American west in 2006, I passed through Indian reservations, their desert landscapes dotted with shanties, trailers—and casinos. It was a classic picture of wealth surrounded by poverty, a comparison that socialists often love to make when denigrating capitalism.

Yet, as former secretary of the interior James Watt so famously said 25 years ago, one need not go to socialist countries to observe failures of socialism; just go to the reservation. Unfortunately, the truth about Native Americans is as unacceptable now as it was then.

The myths surrounding Native Americans have attracted people who believed Indians were communalistic people who lived in perfect harmony with their natural environment. The Oscar-winning movie Dances with Wolves helped to popularize this view of Native Americans, whose idyllic way of life was destroyed by the invasion of whites who, as the main character claimed, “had no soul.” The private-property ethos of these invaders ultimately resulted in Native Americans’ being shunted to reservations, where they lost their way of life, while whites plundered the environment and brought death, chaos, and the near-extinction of the buffalo.

While such beliefs may satisfy the romantic notions of modern political correctness, they are not true. Some important scholars not only are out to set the record straight, but also present alternatives for Native Americans that can give them a better life than exists today on the reservation. Terry Anderson, Bruce Benson, and Thomas Flanagan have edited Self-Determination: The Other Path for Native Americans. It is no accident that they use the term “the other path”; that is what Hernando de Soto urged South Americans to take instead of the “shining path” of communism and socialism.

Anderson is one of the founders of the Property and Environment Research Center, which promotes “free-market environmentalism” (that is, environmental solutions sans the heavy hand of government coercion that goes with statist environmentalism). He long has researched the history of Native Americans and has found many examples of private property ownership among them, ownership patterns that existed long before the arrival of white Europeans. The contributions of Benson and Flanagan to law, property rights, and other such subjects are well known in the economics profession.

The book seeks to do two things, and it does them successfully. First, it seeks to set the record straight about Native Americans and explode the socialistic and environmental mythology that surrounds this subject. As Nobel Prize-winning economist Douglass North writes in the introduction:

The history of Native Americans has been fundamentally colored by the perceptions—or the belief systems, if you will—of the writers. This is true of all history, but is particularly so in this case. Whether written as a story of conquest, exploitation, paternalism, or greed, it deserves a better story—one that tries to comprehend the complex evolution of Native Americans from their lifestyles before the advent of European occupation.

Second, the book outlines strategies by which Native Americans can break free of the governmental paternalism that not only robs them of their individuality, but also leaves them in poverty and ruin. In a series of ten essays, from “False Myths and Indigenous Entrepreneurial Strategies” to “Property Rights and the Buffalo Economy of the Great Plains” to “Indian Casinos: Another Tragedy of the Commons,” the various writers deal with the real history of the indigenous peoples of North America and point toward another path for those who, in North’s words, deserve “a better story.”

While the briefness of this review keeps me from examining each essay, I wish to single out the first two. The first explodes the myths about Native Americans, and the second looks at the near-eradication of the buffalo from the Great Plains. Craig S. Galbraith, Carlos L. Rodriguez, and Curt H. Stiles in “False Myths” lay out the following viewpoints, and then debunk them with historical facts:

•  Native Americans were purely communalistic;

•  Indigenous populations were collectivist in economic relationships;

•  Indigenous people were the original “environmentalists.”

These myths, they point out, are modern in orientation and reflect a romantic view that came more from our own cultural revolution than historical fact.

Likewise, in his chapter on the “buffalo economy,” Benson notes that Indian tribes already had mostly eradicated the buffalo from the Great Plains even before the onslaught of white settlers and the famed buffalo hunters.

For those who believe that Native Americans really do deserve better than the myths of communalism, this is a book worth reading.

William Anderson teaches economics at Frostburg State University in Maryland.

* * *

The Wal-Mart Revolution

By Richard Vedder and Wendell Cox

American Enterprise Institute • 2006 • 199 pages • $20.00 paperback

Reviewed by George Leef

Without a doubt, Wal-Mart is the most demonized business in American history. The company is widely accused of mistreating and underpaying its workers, ruining communities, aggravating the trade deficit, and that all-purpose sin, “putting profits before people.” No Democratic candidate for national office dares to utter anything but condemnation for fear of appearing “soft” on this horrible scourge.

And yet, despite the constant stream of attacks, the firm attracts vast numbers of customers every day. Wal-Mart keeps growing, and whenever it opens a new store—even in “blue” areas of the country—it is thronged with job applicants.

So what’s going on? Has a corporate monster managed to hoodwink the masses to keep them from seeing its villainy? Or are the critics trying to create an enemy to hate, as in 1984, for their own purposes?

In their book The Wal-Mart Revolution, economist Richard Vedder and public-policy consultant Wendell Cox take a clear, unemotional look at Wal-Mart, beginning with its rise from a tiny Arkansas retailer to America’s largest company, and then examine the charges made against it. To summarize the authors’ conclusions: Wal-Mart has been successful because its founders figured out how to satisfy consumers better than their competitors, and the critics’ case against it is much ado about almost nothing.

Regarding Wal-Mart’s efficiency, Vedder and Cox compare founder Sam Walton with that business genius of a century ago, John D. Rockefeller of Standard Oil fame. Both were highly innovative, hard-working, self-made men who set a personal example for their employees. Both knew how to get the most value for a dollar. Both succeeded by cutting prices to expand their customer bases. And both opposed unionization of their operations, seeing it as the enemy of efficiency. The combination of large profits and unwillingness to cave in to demands for collective bargaining made both Standard Oil and Wal-Mart targets for a swarm of egalitarian social critics.

The middle chapters of the book are devoted to an analysis of the charges that Wal-Mart is a social menace. Does the company underpay its workers? Vedder and Cox show that Wal-Mart employees are paid comparably with other retail workers. As to the comparison that is often drawn with big-box rival Costco (which doesn’t resist unionization and therefore escapes criticism), the authors note that while the average compensation for Costco workers is somewhat higher, that is accounted for by the fact that many Wal-Mart stores are located in rural areas where wages are lower.

What about benefits, particularly health insurance? The critics say that Wal-Mart should give most or all of its workers health-insurance coverage, but doesn’t. The greedy company is therefore a drain on taxpayers since some of its employees who don’t have company insurance have to turn to Medicaid. In response, Vedder and Cox observe that there are also many workers at other retailers who don’t have health-insurance coverage; furthermore, many Wal-Mart employees neither want nor need health insurance through the company. They prefer to take their compensation in other forms. Also, the critics ignore two very substantial benefits employees receive—profit-sharing and employee discounts.

If workers felt that Wal-Mart was underpaying them, the company would have trouble maintaining its workforce. It doesn’t.

Another emotion-laden attack against Wal-Mart is that when it opens a new store the result is often the demise of many small mom-and-pop stores in the area. That can happen, of course, when any modern store opens. Unless we want laws to prevent customers from preferring new and efficient things to old and inefficient things, this “problem” is unavoidable. Again, Wal-Mart is being singled out for the crime of competing too well.

It is no coincidence that the rabid Wal-Mart critics come mostly from labor unions. Unions represent many workers in competing retailers, and those companies, beset by inefficient union work rules, fare poorly against Wal-Mart. The supposedly high-minded campaign against Wal-Mart is actually driven by self-interest.

Vedder and Cox are not Wal-Mart fans, though. They merely argue that the company should not be treated differently than other businesses. They come out firmly against tax breaks and other incentives to lure Wal-Mart (or any other employer) to an area. They’re also against Wal-Mart (and any other business) seeking cheap real estate through eminent domain.

Finally, they criticize the company’s recent public-relations efforts as foolish attempts to “appease the unappeasable.” In recent years, Wal-Mart spokesmen have endorsed, for example, a higher legal minimum wage. The authors give that two thumbs down. They’re rightly appalled at the spectacle of successful capitalists trying to cozy up to the enemies of the free market by advocating increasing governmental coercion in voluntary business relationships.

George Leef is book review editor of The Freeman.

* * *

On the Wealth of Nations

by P.J. O’Rourke

Atlantic Monthly • 2007 • 242 pages • $21.95

Reviewed by Raymond J. Keating

Here’s a great idea for a book: Have the leading libertarian, free-market humorist and satirist P.J. O’Rourke show readers why An Inquiry into the Nature and Causes of the Wealth of Nations ranks as a book that changed the world. Whoever came up with that idea at the publishing house deserves a bonus.

After all, few books have had such a monumental and positive impact on mankind as Adam Smith’s Wealth of Nations. But anyone who has read this weighty tome also understands that Smith offered little evidence of a sense of humor. So, enter O’Rourke.

P.J. O’Rourke’s On the Wealth of Nations is well worth reading. It’s fun—with some laugh-out-loud observations one expects from him—and sometimes insightful. However, it also falls glaringly short on occasion.

O’Rourke grasps the basics from Smith. He observes in the first chapter, “Smith illuminated the mystery of economics in one flash: ‘Consumption is the sole end and purpose of all production.’ There is no mystery. Smith took the meta out of physics. Economics is our livelihood and just that.” A bit later O’Rourke continues: “Even intellectuals should have no trouble understanding Smith’s ideas. Economic progress depends upon a trinity of individual prerogatives: pursuit of self-interest, division of labor, and freedom of trade.” He declares that the essence of Smith’s thinking on the economy is: “It’s none of our business.”

O’Rourke does an able job in laying out the essentials of Smith in these areas, including the importance of property rights and why the private sector works better than government. On government planning, for example, he pithily proclaims: “Smith’s strategy was to convince the people who guide the world’s economy to get lost.”

It should be noted that this is not just a book about The Wealth of Nations. Also featured is an entire chapter on Smith’s earlier book, The Theory of Moral Sentiments. O’Rourke realizes that one cannot fully understand Smith and The Wealth of Nations without also grasping what he had to say in The Theory of Moral Sentiments.

Indeed, O’Rourke’s chapter on Sentiments perhaps ranks as the best in the book. He ably explains the roles that sympathy and imagination play in Smith’s thinking on morality. O’Rourke notes, “Adam Smith personified these conscious imaginative judgments and named our brain’s moral magistrate the ‘Impartial Spectator.’” Taken together, O’Rourke explains, “It’s a mistake to read The Wealth of Nations as a justification of amoral greed. Wealth was Adam Smith’s further attempt to make life better.”

But there are areas where O’Rourke is muddled. That’s most seriously the case when it comes to money. For example, O’Rourke writes that Smith “realized that money was not a government asset, but a government liability.” Wrong—money is neither a government asset nor a liability.

On trade deficits, O’Rourke correctly notes Smith’s arguments against the mercantilists’ emphasis on the balance of trade, and rightly bemoans the fact that those notions persist today, especially in politics. But it’s unclear if the author gets the whole story straight, with money again perhaps causing some confusion. For example, O’Rourke notes that trade deficits mean that money is sent overseas and therefore “American IOUs are piling up.” While acknowledging that “an international ‘current account deficit’ is not comparable to a private debt,” he can’t shake the mistaken notion that it is some kind of debt. In reality, a U.S. current account deficit usually reflects a growing U.S. economy resulting in more purchases of imports and/or increased investment from abroad.

Smith’s simplest declaration on money was: “The sole use of money is to circulate consumable goods.” O’Rourke should have quoted that line, offered an amusing anecdote, and left it at that. He also quoted Smith’s statement that “Nothing can be more absurd than this whole doctrine of the balance of trade.” Again, it would have been better to stop right there.

Adam Smith can be a joy and a challenge. Does P.J. O’Rourke provide some help in better understanding Smith in On the Wealth of Nations? Most of the time, the answer is yes, but not always.

Without a doubt, though, P.J. O’Rourke is funnier than Adam Smith. O’Rourke also is funnier than today’s economists. Don’t get me wrong. There are some very amusing economists out there. Just flip on CNBC most days. The difference is that O’Rourke means to be funny. Those economists do not. We laugh with O’Rourke. But we laugh at those economists because their misguided pronouncements on how the economy works reveal a drift far from the fundamentals laid out by Adam Smith. So, what should the reader do? It’s simple. Read Adam Smith, read P.J. O’Rourke, and change the channel when one of those hilarious economists comes on television.

Contributing editor Raymond Keating is chief economist for the Small Business & Entrepreneurship Council and a columnist with Newsday.

Although Relman has written about the drug industry for years, this statement shows a profound misunderstanding of how profits in that industry, or in any industry, work. Contrary to what Relman says, the main way for a drug company to make money is to promote the health of its customers.

But don’t drug companies make money off our sickness? Yes, just as the food industry makes money off our hunger. But the food industry doesn’t make money by keeping us hungry; it makes money by feeding us. Similarly, drug companies and other health-care providers make money not by keeping us sick, but by making us well.

One day in the fall of 1995 I got very sick quickly. I was unable to keep liquids in my body, and I lost almost ten pounds in less than 24 hours. My wife took me to the Community Hospital of the Monterey Peninsula. There I rested in a quiet private room in a clean, wonderfully comfortable bed, while an intravenous device pumped about eight pounds of fluid into my body. I slept 22 of the next 24 hours. The bill for one day, slightly over $2,000, was mostly covered by insurance. But had I been required to pay the whole amount out of my own pocket, I would have gladly done so. My doctor later told me that every cell in my body had been damaged and that, had I not gone to the hospital that evening, I might have died. For the next few months, whenever I drove by that hospital I cheered. The men and women working there didn’t know me, but spent their best energy making me well and, maybe, saving my life. However much they like helping people heal, they would not have been there if someone hadn’t paid them. They made money off my sickness. Bless them.

The insight that sellers make money by giving customers what they want is not new. One of the most famous quotes in Adam Smith’s The Wealth of Nations is his statement that it’s not from the benevolence of the butcher, the baker, or the brewer that we expect our dinner, but from their regard for their own self-interest. It’s striking that more than two centuries after this insight became famous, a major political magazine that regards itself as a sophisticated commentator on the issues of the day publishes an article that parades such economic ignorance.

I would like to live to age 100 and to be reasonably healthy up to that age. I would like my friends to do so also. That’s unlikely, but what would make it more likely is for drug companies to figure out cures for the diseases that would otherwise kill many of us: heart disease, cancer, diabetes, Parkinson’s, and Alzheimer’s, to name a few. What motivates drug companies is the large revenue they can earn by developing drugs that cure diseases and save lives. Think about your family. I bet you can think of family members who were seriously ill who could have avoided illness had these innovations existed earlier. It’s true of my family. My father had polio in both legs in 1944. My sister had polio in 1952. Unfortunately for them, the drug company Parke-Davis was unable to produce high-quality Salk vaccine until February 1954. Now we take for granted that we won’t get polio—and that’s thanks to a drug company that wanted to make money for its shareholders and thanks to some scientists who wanted to make money for themselves and their families.

Because of his distrust of the profit motive, Relman wants the government to continue regulating and, indeed, regulate more, the actions of drug companies. What is his argument for regulation? Nowhere in his lengthy review of Epstein’s book on drug-industry regulation does Relman actually make an argument. Instead, he settles for quoting authority. Take Epstein’s claim that Food and Drug Administration (FDA) regulations keep drugs off the market, sometimes for years and sometimes forever. Relman dismisses this argument rather than refuting it. Relman writes:

But this“logjam” [preventing new drugs] is pure conjecture, because there is nothing to support such a notion. There was once a problem with delays in reviewing and approving new drugs, but much has been done through legislation and administrative reforms at the FDA to expedite and to simplify the process of drug approval. The FDA now moves with greater alacrity than most analogous agencies in advanced countries.

Notice Relman’s language. Epstein’s idea is not an idea but a “notion.” And Relman regards Epstein’s idea as pure conjecture rather than something that has been backed up by logical argument and ample evidence. The argument for Epstein’s claim is straightforward: all else equal, the more requirements the government puts in the way of drug development, the less development will occur. By starting, in 1962, to require drug companies to show that a drug is effective (the requirement that they be safe has existed since 1938), the FDA added to the delay between innovation and availability to consumers. The evidence is also ample. In 1974, University of Chicago economist Sam Peltzman estimated that the efficacy requirement added a minimum of two years to the drug-approval process. Later studies by economists and pharmacologists found similar results. (See www. fdareview.org/harm.shtml.)

Who Decides?

Some might argue that it’s worthwhile to delay drugs by years to make sure they’re effective. But ask someone who’s dying whether that’s a worthwhile tradeoff.

Relman writes,“Almost everyone familiar with our health care system—including the leaders of the industry!—agrees that prescription drugs should be regulated.” So let’s get this straight. Relman seems to totally distrust the effect of the profit motive on drug companies’ behavior. Somehow, though, we’re not supposed to question one part of the drug companies’ behavior, their support for regulation of their own industry. But why wouldn’t they support regulation for the same reason airline executives supported regulation of their industry—to restrict competition? Relman ignores this question.

The view that the profit motive and health of customers are antithetical is simply incorrect. Drug companies look especially good when one considers the regulatory alternatives. Given a choice between trusting a government agency whose employees are paid the same whether or not they approve drugs or trusting a drug company that makes money by making me healthy, I would choose the latter.

An earlier version of this article appeared in Vital Speeches of the Day (November 15, 2005).

From a liberal perspective the goal of economic development is not simply to maximize output but, rather, to increase freedom of choice. As Peter (Lord) Bauer wrote in Economic Analysis and Policy in Underdeveloped Countries, “I regard the extension of the range of choice, that is, an increase in the range of effective alternatives open to people, as the principal objective and criterion of economic development.” Those countries that have liberalized trade—such as China and South Korea—have expanded individual choices and outperformed those that have clung to protectionism—such as Cuba and North Korea.

When considering how individuals and nations move from poverty to prosperity, one needs to emphasize that natural constraints (scarcity of resources) can be overcome if artificial constraints (such as trade restrictions) don’t impede development. This idea is consistent with Hong Kong Chief Executive Donald Tsang’s call for adherence to the principle of “small government, big market.”

There is a saying in China: “If no artificial constraints, then there is nothing you cannot do.” Nonintervention (wu wei) results in spontaneous order (zi fa) if government is limited to the protection of persons and property. In the fourth century B.C., long before Adam Smith, the great Chinese philosopher Lao Tzu held that when the ruler takes “no action,” “the people of themselves . . . become prosperous.”

Wu wei does not imply “the complete absence of all activity, but only of such as is forced, artificial, and unspontaneous,” according to Derk Bodde, the translator of Fung Yu-lan’s classic A History of Chinese Philosophy.

The Taoists saw a good government as one consistent with nonintervention so people could improve their welfare. Thus in the Chuang-tzu, we read: “Where knowledge and plans are not utilized, one must fall back upon the natural. This is perfect peace, the acme of good government.”

In the Han Fei Tzu (Han Fei was a legalist who died in 233 B.C.), one sees a clear understanding of the importance of free trade for creating harmony and prosperity:

When a man sells his services as a farm hand, the master will give him good food at the expense of his own family, and pay him money and cloth. This is not because he loves the farm hand, but he says, “In this way, his ploughing of the ground will go deeper and his sowing of seeds will be more active.” The farm hand, on the other hand, exerts all his strength and works busily at tilling and weeding. He exerts all his skill cultivating the fields. This is not because he loves his master, but he says: “In this way I shall have good soup, and money and cloth will come easily.” Thus he expends his strength as if between them there were a bond of love such as that of father and son. Yet their hearts are centered on utility, and they both harbor the idea of serving themselves. Therefore in the conduct of human affairs, if one has a mind to do benefit, it will be easy to remain harmonious, even with a native of Yüeh [a barbarian state]. But if one has a mind to do harm, even father and son will become separated and feel enmity toward one another.

This passage was written more than 2,000 years before The Wealth of Nations!

In 1987 China’s paramount leader and reformer Deng Xiaoping recognized the principle of spontaneous order when he said: “Our greatest success—and it is one we had by no means anticipated—has been the emergence of a large number of enterprises run by villages and townships. They were like a new force that just came into being spontaneously.”

Kate Xiao Zhou, in her 1996 book How the Farmers Changed China, describes the demise of China’s collective farms and the creation of the household-responsibility system (baochan daohu), with its township and village enterprises (TVEs), as “a spontaneous, unorganized, leaderless, nonideological, apolitical movement.”

China began to unilaterally liberalize foreign trade well before joining the World Trade Organization in December 2001. The first four special economic zones (SEZs) were created in 1980, and since then the coastal provinces (such as Guangdong, Zhejiang, and Fujian) have become highly “marketized.” The nonstate sector, including private firms, now overshadows the state sector.

Nicholas Lardy, a China specialist at the Institute for International Economics, has pointed out that in 1978 only 12 large state-owned enterprises (SOEs) were authorized to conduct foreign trade. However, by 2001 there were 35,000 domestic firms engaged in international trade, including private enterprises, and more than 150,000 foreign-funded enterprises. Today any registered firm can engage in foreign trade. Moreover, China reduced the average tariff rate from 55.6 percent in 1982 to 15.3 percent at the beginning of 2001. The average tariff on manufactured goods is now less than 9 percent. As a result of this dramatic liberalization, China is now one of the world’s most open economies.

China’s approach to development has been primarily “bottom-up,” or experimental. Typically, local leaders would permit reform on a trial basis and not penalize entrepreneurs who were experimenting on their own. When successful, politicians would take credit and let the experiment spread. At some point Beijing would sanction the reforms.

Piecemeal reform has led to numerous ownership forms, including cooperative shareholding, foreign-funded enterprises, private firms, and TVEs. Economists Gary Jefferson and Thomas Rawski call this process “induced privatization.” Under it the state sector has shrunk from a dominant position in 1978 to less than one-third of industrial output value today.

Property Far from Secure

By letting the nonstate sector grow, China has avoided the difficult political decision of outright privatization of large SOEs. Private firms were not legal until 1988, and in 2004 the PRC constitution was amended to give greater protection to the growing private sector. Private property rights, however, are still far from secure, and corruption is rampant. So while economic liberalization has progressed, and China has become the world’s third-largest trading nation, the Chinese Communist Party (CCP) retains its monopoly on power.

Nevertheless, China’s opening to the outside world has increased personal freedom and prosperity, and has led to a demand for safeguarding private property rights. Jianying Zha, in her fascinating book China Pop, writes, “The economic reforms have created new opportunities, new dreams, and to some extent, a new atmosphere and new mindsets. . . . There is a growing sense of increased space for personal freedom.”

Kathy Chen of the Wall Street Journal notes that the development model adopted by the newly emerging urban centers, such as Shishi in Fujian, is “small government, big society” (xiao zhen fu, da she hui).

When the National People’s Congress amended the constitution to make “legally acquired private property inviolable,” that was a clear signal the market was here to stay—and a far cry from Mao Zedong’s admonition to “strike hard against the slightest sign of private ownership.”  

There is no doubt that globalization and the information revolution have increased personal freedom in China. More than 100 million Chinese have access to the Internet. 

And I am sure that computer whiz-kids will stay one step ahead of government censors. Moreover, if Shanghai is to become a world-class financial center, there will have to be a freer flow of information and open capital markets.

President Hu Jintao has recently indicated his adherence to a policy of “peaceful development,” which is precisely the policy that China has been following since 1978. The United States would be wise to continue a policy of engagement and avoid destructive protectionism. Foreign-funded enterprises and private firms account for more than 60 percent of China’s foreign-trade sector. U.S. protectionism would harm the very sector that is working to decrease poverty, increase exposure to the West, and pressure the CCP to accept change.  

Institutional reform (especially trade liberalization) has substantially reduced poverty in China—real per capita income has increased nearly fivefold since 1978, with significantly larger increases in the highly marketized coastal areas. But there has been little increase in political freedom. Further economic liberalization—especially privatization of large SOEs and capital freedom—is constrained by political issues. Whether reformers in the CCP will gain the upper hand remains to be seen.

An array of government interventions continues to restrict economic and personal freedom, and, hence, China’s future development. Artificial constraints include capital and exchange controls, state-owned banks and enterprises, interest-rate controls, and especially the lack of a transparent legal structure that protects persons and property.

“Free Private Markets”

In 1988, at the Cato Institute’s historic conference in Shanghai, Milton Friedman called for China to abandon its socialist market economy and make the transition to a full-fledged system of “free private markets.” Progress has been made since that time, as markets not planners determine most prices. There is private housing and private enterprise, but China is still plagued by widespread state ownership and control, especially in the financial sector. Without capital freedom, investment alternatives will be limited and investment decisions will continue to be politicized.

Privatization is the only way to rid the system of corruption. But as long as the CCP gains from the present socialist market system, change will proceed slowly, if at all. Economic reform eventually will require political reform. The question is whether the gradual increase in economic freedom will be sufficient to bring about political change that supports, rather than retards, further liberalization.

We should not forget that trade expands choice and, therefore, should be promoted as a fundamental human right. U.S. protectionism would be self-defeating and strengthen Chinese nationalism and anti-American sentiments. Engagement is the only rational policy to promote peace and prosperity.

The decline in the core curricula of universities and the growing “cultural illiteracy” of high school and college graduates have been lamented in many books and articles. As universities have redesigned their curricula to fit the demands of political correctness and the particular interests of their faculties, we have seen an alarming rise in the number of college graduates who know little about the basics of American history and the Western tradition. But as troubling as this is, we need also to examine the state of economic education in America.

Though college economics programs have not suffered the same degradations that have occurred in many other disciplines, the fact is, in most major universities economics has never really been taught as well as it should have been.

The problem with the way most universities teach economics is the overwhelming emphasis on mathematics. When I was an undergraduate at the University of California, San Diego, in the 1980s, I remember one economics professor who, after displaying one particularly confusing mathematical function, stated bluntly that if you don’t understand advanced calculus, you’ll never understand economics. As I was struggling through calculus at the time, this was of concern to me.

Mathematics is, of course, useful in understanding economics. Unlike other disciplines, such as political science, which have increasingly used mathematical formulations to explain principles, mathematical formulations actually do make sense in the study of economics. Though given the inability of economists to forecast GDP growth from quarter to quarter, and continual doubts about the accuracy of how we measure GDP in any case, the mathematical exactitude economists sometimes like to pretend exists in this “science” is a bit comical.

But as good and useful as mathematics is in economics, we have to remember what is behind all the variables in these formulas. The great economist and philosopher Wilhelm Röpke reminded us in his classic, A Humane Economy, that the economy is nothing more than the interaction of human beings. Or, similarly, the basis of economics is the title of Ludwig von Mises’s tome, Human Action. The founding work of economics, An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith, is a work of observations that, without the use of advanced mathematical formulas, explains how markets function and how resources are effectively deployed. Smith’s “invisible hand” may not be possible to graph or to represent as a mathematical formula, but it is as important in understanding market economics as are supply and demand curves.

In the course of obtaining a B.A. in economics at UC San Diego, I was never assigned a single page of The Wealth of Nations. (Nor, for that matter, was I ever assigned anything by Wilhelm Röpke or Ludwig von Mises.) All the core courses I took in microeconomics and macroeconomics were focused on mathematical theorems and models (invariably Keynesian, not Austrian). Elements of human action did occasionally come up in explaining things like “Giffin goods” (goods that people consume less of as their incomes increase), which posed “quirky” exceptions to the economic models we were being taught. And in microeconomics the intuitive assumptions of human behavior behind the shapes of demand and supply curves were routinely explained. But for the most part, a typical college course in basic micro or (particularly) macroeconomics was 90 percent mathematical equations with scant attention paid to the vagaries of human behavior. (This is still the case, as confirmed by my perusal of standard textbooks and course syllabi, and my speaking with recent college graduates.) And when such behavior is explicitly discussed, it’s usually in the context of how it can be neatly captured in a mathematical model.

More Than Mere Science

One factor behind the stress on mathematical modeling is the belief by the fraternal order of economists that being able to construct models and mathematical proofs elevates economics from a mere academic discipline to a “science.” One of the outcomes is the conceit that the economy (the decisions and interactions of millions of individuals) can be accurately understood, modeled, and manipulated, which in turn encourages faith in central economic planning–a faith which is belied by history.

When I was an undergraduate, Ronald Reagan was president. Keeping up with current affairs, one of my macroeconomics professors devoted some class time to the ideas behind the so-called “Laffer Curve,” which was the basis of the Reagan administration’s argument that lower tax rates would increase revenue. Though this professor was more or less “conservative,” he nonetheless scoffed at the notion because, as he proceeded to show, getting more tax revenue through lower tax rates was mathematically impossible. Of course, the mathematically impossible proved possible after all. In the wake of Reagan’s tax cuts the revenue generated by even the highest income tax brackets increased, though they experienced the greatest percentage rate reductions.

My economics professor, like many economists, put too much stock in mathematical formulas and not enough in the study of the complex dynamics of human behavior in which incentives, interaction, preferences, and even individual “quirkiness” cannot be effectively plugged into a mathematical model. Although modeling can be a useful tool, we have to recognize its limitations, since we cannot predict with any degree of precision the various, and often far-reaching and unforeseen, effects of particular policy decisions on the behavior of millions of individual human beings.

My old economics professor who thought advanced calculus was the key to understanding economics was wrong. The key to understanding economics is understanding human action. Economic education will improve in this country when works that portray the grand nature of the economic process-works by Adam Smith, Wilhelm Röpke, Ludwig von Mises, F. A. Hayek, and others-are given an important place in the university.

The reason: Adam Smith is the first major figure to articulate in a profound way what has become known as the first fundamental theorem of welfare economics: that the invisible hand of competition automatically transforms self-interest into the common good. George Stigler rightly labels Smith’s model of laissez-faire capitalism (Smith never used the phrase) the “crown jewel” of The Wealth of Nations and “the most important substantive proposition in all of economics.” He states, “Smith had one overwhelmingly important triumph: he put into the center of economics the systematic analysis of the behavior of individuals pursuing their self-interests under conditions of competition.”^[2]

In short, Smith’s thesis is that a “system of natural liberty,” an economic system that allows individuals to pursue their own self-interest under conditions of competition and common law, would be a self-regulating and highly prosperous economy. Eliminating restrictions on prices, labor, and trade meant that universal prosperity could be maximized through lower prices, higher wages, and better products. Smith assured the reader that his model would result in “universal opulence which extends itself to the lowest ranks of the people.”^[3]

Indeed it has. Published in 1776, The Wealth of Nations was the intellectual shot heard around the world, a declaration of economic independence to go along with Thomas Jefferson’s declaration of political independence. It was no accident that the industrial revolution and sharply higher economic growth began in earnest shortly after its publication. As Ludwig von Mises declares, “It paved the way for the unprecedented achievements of laissez-faire capitalism.”^[4]

For or Against Smith

The most amazing discovery I made in researching and writing over the past three years is that every major economic figure—whether Marx, Mises, Keynes, or Friedman—could be judged by his support of or opposition to Adam Smith’s invisible-hand doctrine. Karl Marx, Thorstein Veblen, John Maynard Keynes, and even British disciples Thomas Robert Malthus and David Ricardo denigrated Adam Smith’s classical model of capitalism, while Alfred Marshall, Irving Fisher, Ludwig von Mises, and Milton Friedman, among others, remodeled and improved on Smithian economics.

For example, Keynes is unsympathetic to Adam Smith’s worldview. “It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities . . . . Nor is it true that self-interest generally is enlightening . . . . Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately.”^[5] The basic thesis of Keynes’s magnum opus, The General Theory of Employment, Interest, and Money (1936), is that laissez-faire capitalism is inherently unstable and requires heavy state intervention to survive. Keynesian disciple Paul Samuelson correctly understood the true meaning of Keynes: “With respect to the level of total purchasing power and employment, Keynes denies that there is an invisible hand channeling the self-centered action of each individual to the social optimum.”^[6] Thus, I conclude that Keynesian economics, rather than its savior, is an enemy of Adam Smith’s system of natural liberty.

Karl Marx went even further. Instead of creating a system of natural liberty, Marx set out to destroy it. Modern-day Marxist John Roemer agrees. The “main difference” between Smith and Marx is: “Smith argues that the individual’s pursuit of self-interest would lead to an outcome beneficial to all, whereas Marx argued that the pursuit of self-interest would lead to anarchy, crisis, and the dissolution of the private property-based system itself . . . . Smith spoke of the invisible hand guiding individual, self-interested agents to perform those actions that would be, despite their lack of concern for such an outcome, socially optimal; for Marxism the simile is the iron fist of competition, pulverizing the workers and making them worse off than they would be in another feasible system, namely, one based on the social or public ownership of property.”^[7]

Adam Smith as a Heroic Figure

By measuring economists against a single standard, Adam Smith’s invisible-hand doctrine, I found a fresh way to unite the history of economic thought. Virtually all previous histories of economics, including Robert Heilbroner’s popular work, The Worldly Philosophers, present the story of economics as one conflicting idea after another without resolution or a running thread of truth. This hodgepodge approach to history leaves the reader confused and unable to separate the wheat from the chaff.

My approach places Adam Smith and his system of natural liberty at the center of the discipline. Think of it as a story of high drama with a singular heroic figure. Adam Smith and his classical model face one battle after another against the mercantilists, socialists, and other enemies of liberty. Sometimes even his “dismal” disciples (Malthus, Ricardo, and Mill) wound him. Marx and the radical socialists attack him with a vengeance and leave him for dead, only to have him resuscitated by the leaders of the marginalist revolution (Menger, Jevons, and Walras) and raised up to become the inspiration of a whole new science.

But the “neo-classical” model of capitalism faced its greatest threat from the Keynesian revolution during the Great Depression and the postwar era. Fortunately, the story has a good ending. Through the untiring efforts of free-market advocates, especially Milton Friedman and F. A. Hayek, Adam Smith’s model of capitalism is re-established and in the end triumphs. As Milton Friedman proclaims, “To judge from the climate of opinion, we have won the war of ideas. Everyone—left or right—talks about the virtues of markets, private property, competition, and limited government.”^[8]

Long live Adam Smith!

Notes

1. The Making of Modern Economics (Armonk, N.Y.: M. E. Sharpe Publishers, 2001).
2. George Stigler, “The Successes and Failures of Professor Smith,” Journal of Political Economy, December 1976, p. 1201.
3. Adam Smith, The Wealth of Nations (New York: Modern Library, 1965 [1776]), p. 11.
4. Ludwig von Mises, “Why Read Adam Smith Today,” in The Wealth of Nations (Washington, D.C.: Regnery, 1998), p. xi.
5. John Maynard Keynes, “The End of Laissez-Faire,” Essays in Persuasion (New York: Norton, 1963 [1931]), p. 312. Keynes’s speech was given in 1926, a full decade before The General Theory came out.
6. Paul A. Samuelson, “Lord Keynes and the General Theory,” The New Economics, ed. Seymour Harris (New York: Knopf, 1947), p. 151.
7. John E. Roemer, Free to Lose (Cambridge, Mass.: Harvard University Press, 1988), pp. 2-3. Note the title, imitative, albeit negatively, of Milton and Rose Friedman’s popular Free to Choose (New York: Harcourt Brace Jovanovich, 1980).
8. Milton and Rose Friedman, Two Lucky People (Chicago: University of Chicago Press, 1998), p. 582.

Adam Smith was not solely an economist, though that is almost exclusively how he is known today. His Inquiry into the Nature and Causes of the Wealth of Nations (WN) is one of the most important books in the Western tradition. Aside from ushering in the modern market-based economic order, which to varying extents has become the worldwide norm, WN laid out several of the fundamental elements of what has become standard economic theory. The crucial importance of the division of labor, the dependence of specialization on the extent of the available market, the dynamic relation between supply and demand that sets prices, and the generally salutary effects of free trade are all notions that students learn in their first economics class. These topics are all investigated systematically for the first time in Smith’s book.

The argumentative strategy of WN is simple: given the way these elemental factors operate, we should expect that material prosperity will vary indirectly with governmental regulation of the marketplace (the less governmental interference, the greater the prosperity); and when one looks at the historical record—which Smith does in enormous and awesome detail—our expectations are in fact borne out.^[1] WN’s conclusion, then, is in the form of a hypothetical imperative: if we want increasing material prosperity, we must decrease governmental interference in the operations of marketplaces.

WN was published in 1776, and the subsequent history of the nations that adopted Smith’s recommendations to the greatest extent—America and England—would seem to have vindicated his argument: no place in the world has seen as much increase in material prosperity, before or since, as post-1776 America and England.^[2] Because of its enormous historical influence and the corroboration of its central tenets, then, Smith’s Wealth of Nations has rightfully earned for itself a central place in the canon of great works of the Western tradition.

Smith became quite famous in both Britain and on the continent during his lifetime, but, perhaps surprisingly, not so much for the Wealth of Nations. Rather, it was for his earlier book, first published in 1759, on ethics. The Theory of Moral Sentiments (TMS) was written during an extraordinarily active period in ethical thought. Francis Hutcheson, who founded the so-called sentimentalist school of ethics, was Smith’s teacher; David Hume was Smith’s best friend and intellectual sparring partner; and Immanuel Kant, who read Smith carefully, was about to come onto the scene. It is no exaggeration to say that Smith’s book was able not only to synthesize the important theoretical work done before him, but also to set the program for ethical philosophy for at least a generation after he died in 1790. Since about the middle of the nineteenth century, however, when Smithian economics began to make influential converts, WN has eclipsed TMS in recognition, readership, and, hence, influence.

I think that the inattention to Smith’s first book has been a mistake. TMS is a sufficiently subtle and sophisticated book to merit serious scholarly attention even absent its great influence on moral philosophy during the eighteenth century. Indeed, TMS has another asset that recommends it: as is the case with WN, its argument is, in its essentials, sound. Let me summarize the argument here, then, in the hopes that you will come to see Smith not merely as an economist, but as Smith saw himself, something perhaps grander: a moral philosopher.

Acquiring Moral Standards

Smith’s goal in TMS is to discover by means of empirical investigation the process that explains two phenomena: on the one hand, the adoption by individuals of moral standards by which they judge others; and, on the other, their adoption of moral standards by which they judge themselves. One striking feature about both phenomena is that during their lifetimes people seem to go from having virtually no such standards as children to having standards that are commonly shared with others as adults. What explains this transition?

Smith argues that all human beings innately have something he called a desire for “mutual sympathy” of sentiments. What Smith means is that each of us gets pleasure on seeing his own sentiments echoed in others. It gives us pleasure when, for example, our friends find the same things funny that we do, to the same degree, or we find the same things distasteful as our friends do, to the same degree. Smith thinks it is simply a fact about human nature that we find this mutual accord, or concordance of sentiments—what Smith terms “sympathy”—pleasurable. (And note, incidentally, Smith’s special use of the term “sympathy”: it means harmony or concord with any emotion whatsoever; it does not mean only pity or compassion.) In fact, he thinks this pleasure is one of the finest that human beings experience.

Since everyone finds this pleasurable, everyone seeks it out; and this mutual seeking-out of sympathy of sentiments becomes, for Smith, the engine of social cohesion and the centripetal force, as it were, of human communities. It encourages people not only to enter into groups, alliances, and communities with others (so that they have opportunities to achieve the much-sought-after mutual sympathy of sentiments), but also to form associations of like-minded people (because this increases the chances of actually achieving such a sympathy).

The mechanism, Smith thinks, is this: I desire mutual sympathy of sentiments with you, which leads me to moderate my sentiments to the level that I think, based on my past experience, you are likely to “enter into.” You, on the other hand, because you desire the same thing, also moderate your sentiments to the level you think, based on your past experience, I am likely to enter into. Over time this process trains our sentiments to gravitate toward mutually acceptable levels. Smith’s picture thus has a clear anti-Freudian thrust: it denies the hydraulic picture of human emotions according to which emotions build up “pressure” that must be “released.” Instead, and more plausibly, it conceives of emotions as things that can be controlled and trained by exercising what Smith calls “self-command.” The activity of reciprocal adjustment is then repeated numberless times in every person’s lifetime, as it is between and among the people in one’s community, resulting in the creation of an unintended and largely unconscious system of standards. These standards then become the rules by which we determine in any given case what kind of behavior is, as Smith calls it, “proper” in a situation and what “improper”—meaning what others can reasonably be expected to enter into.

Think of a person laughing too long at a joke: at some point you start to form the judgment that his laughter is simply too much; you judge it, that is, to be “improper.” But how do you know at what point the laughing becomes too much? According to Smith, you know by judging this case against the standards you have unintentionally, and probably unconsciously, developed in conjunction with the members of your community over time. In different situations, the amount of laughter that is acceptable may differ; but in each case our experience with our fellows in similar situations sets the parameters for our judgment of propriety.

The same holds true with attire: there is such a thing as dressing inappropriately—in either direction, as it were: wearing black tie to a beach party, or wearing a bathing suit to a wedding—and your judgment of when a person’s attire becomes inappropriate is a function of the mechanism Smith describes. To take a final example, there is even, Smith thinks, such a thing as too little anger. If a man’s wife is being publicly humiliated by another man, then we think he ought to show anger, or what Smith calls “spirit.” If he does not—if he cowers, without rising to her defense—then we judge him to have acted improperly. The propriety or impropriety of a person’s behavior, then, is constituted by its accordance or discordance with what is recommended by this system of standards.

To facilitate our ability to predict what our own behavior should be (that is, what would enjoy mutual sympathy with others), Smith thinks we learn to adopt the standpoint of an “impartial spectator” from which to judge our own behavior. He believes that in time we come to take the impartial spectator’s judgments as the standard of morality—first for ourselves and then also for others. We have all experienced the unpleasantness of being judged unfairly, that is, on the basis of biased or incomplete information (people who do not know our situation thinking poorly of us). This leads us to desire that others refrain from judging until they know the whole story; but because we all want this, our desire for mutual sympathy of sentiments subtly encourages us to adopt an outside perspective, as it were, in judging our own conduct. That is, because we want others to be able to “enter into” our sentiments, we strive to moderate them to be what we think others will sympathize with; but we can only know what that is if we ask ourselves what the impartial observer would think. The voice of the impartial spectator becomes our second-nature guide of conduct. Indeed, Smith thinks it is what we call our “conscience.” The phrase “let your conscience be your guide” really means to let the imagined impartial spectator be your guide. And because we come to rely on this impartial spectator to give us accurate moral guideposts by which to judge our own behavior, our confidence in his judgments leads us also to employ him to judge others. In this way the impartial spectator becomes the standard of morality.

Let me summarize Smith’s explanation of the process of developing moral standards. Babies have only desires; they have no tincture of remorse, shame, or guilt at desiring something improper. As they grow into children, however, they have the first experience of discipline, which teaches them that others judge them and expect them to behave in particular ways. And they make the shocking, arresting discovery that they are not the most important person in everyone’s life—only in their own. Their desire for mutual sympathy then encourages them to discover what others expect of them and to strive to achieve it. The more experience they have, the better they become at anticipating others’ expectations and hence of behaving in ways that lead to mutual sympathy. The children then develop habits of behavior that reflect what they have learned; what were once rules handed down from on high become internalized principles by which the children routinely order their lives.

As adults, larger and larger experience leads to more and more complicated, internalized principles. These principles now cover a large range of actions and motivations, and they have been revised, corrected, and fine-tuned as necessary. The principles inform Smith’s procedure of making moral judgments: they are the standard against which people judge themselves and others. They are what, in practice, render the moral judgment. A moral judgment, then, is the result of a deduction by which one determines whether a given act or motivation accords with these principles.

Institutional Theory

Smith’s analysis of the way in which people and communities come to have common moral standards is intriguing—and, indeed, may in large part be true. This alone would recommend it for serious consideration. But Smith’s examination of human morality reveals a model for explaining the development and maintenance of large-scale human institutions generally—which would mean that the book’s import is yet greater than initially thought. I call Smith’s model a “marketplace model.” Let me sketch it briefly, drawing on the discussion so far.

First, Smith argues that moral judgments, along with the rules by which we render them, develop in the way I have described, without an overall, pre-arranged plan. They arise and grow into a shared, common system of morality—a general consensus regarding the nature of virtue, or what Smith calls propriety and merit—on the basis of countless individual judgments made in countless particular situations.

Second, Smith argues that as we grow from infants to children to adults we develop increasingly sophisticated principles of action and judgment, which enable us to assess and judge an increasingly diverse range of actions and motivations.

Third, what seem when we are children to be isolated and haphazard interactions with others lead as we grow older to habits of behavior; as adults the habits solidify into principles that guide what we call our “conscience.”

Fourth, people’s interests, experiences, and environments change slowly enough to allow long-standing associations and institutions to arise, which give a firm foundation to the rules, standards, and protocols that both set the parameters for the initial creation of these associations and in turn are supported by them. (These “associations” would today include everything from Elks clubs, YMCAs, and Boy Scouts, to the American Medical Association, the National Academy of Sciences, and even the Catholic Church.)

Smith next argues that the development of personal moral standards, of a conscience and the impartial spectator procedure, and of the accepted moral standards of a community all depend on the regular associations people make with one another. It is in these associations, in the daily intercourse people have with one another, that they encourage each other to discover and adopt rules of behavior and judgment that will lead to mutual sympathy. Without such interactions with others, Smith argues, people would have no occasion to pursue such rules, and hence they would not. In that case moral judgments would not be made at all, and people would not, as a Robinson Crusoe would not, have thoughts about virtue or vice, propriety, or impropriety. (Smith, in fact, speaks of a “solitary islander,” who, with no “societal mirror” by which to view his actions, does not think of the virtue or vice of his actions—just as he would not think about the “beauty or deformity” of his physical appearance.)

Finally, a person’s (largely unconscious) adoption of general rules, development of a conscience, and employment of the impartial spectator procedure are motivated by a fundamental, innate desire—the desire for mutual sympathy. This desire is the sine qua non for Smith’s theory of moral sentiments: without it, there would have been no reason to devise rules that enable people to achieve it, and, on Smith’s theory, there would therefore have been no moral standards at all.

The model at work in TMS, then, comprises four central structural features: a system of order arising unintentionally from the actions of individuals (Smith was the first person to develop and work out the notion of what Hayek made famous two centuries later as “spontaneous order”), an unconscious and slow development of rules by which the system operates, the system’s dependence on regular exchange among freely associating people, and a system that receives its initial and ongoing impetus from the desires of the people who make use of it. These four central features of Smith’s account are, I would like to suggest, also the central characteristic features of an economic market. We can, then, accurately view Smith’s conception of the system of interactions in which moral standards develop as a marketplace of morals.^[3]

Other Marketplaces

By calling Smith’s model a “marketplace” model, I already suggest in what way Smith’s analysis can explain areas of human life outside of moral judgment-making. The first and most obvious application is to economic marketplaces, where the model Smith sets out in TMS matches up perfectly. Another application is to the human institution of languages. In an early essay titled “Considerations Concerning the First Formation of Languages,” Smith lays out how he suspects languages first came into being and how they change over time. The processes he describes in that essay are instances of the processes he set out at greater length in TMS, and his model for language change foreshadows in important ways contemporary theories about language change^[4]—a remarkable feat considering that linguistics was only in its infancy at the time. In fact, the three areas of morality, economics, and linguistics can be mapped onto one another quite nicely in terms of the four central features I listed above:

Motivating Desire

1. TMS: the “pleasure of mutual sympathy” of sentiments;
2. WN: the “natural effort of every individual to better his own condition”;
3. “Languages”: the desire to make our “mutual wants intelligible to each other.”

• Rules Developed

1. TMS: rules determining propriety and merit;
2. WN: protocols protecting private property, contractual agreements, and voluntary exchanges;
3. “Languages”: rules of grammar, pronunciation, and so on.

• Market (medium or arena of exchange)

1. TMS: mutual exchange of personal sentiments and moral judgments;
2. WN: exchange of private goods and services;
3. “Languages”: verbal communication.

• Resulting “Unintended System of Order”

1. TMS: commonly shared standards of morality and moral judgment;
2. WN: economy (large-scale network of exchanges of goods and services);
3. “Languages”: language.

I can now suggest why Smith’s analysis in TMS is of general applicability: the model it constructs for explaining the development of moral standards can be fruitfully employed to understand not only the development of morality, economic markets, and languages, but indeed the development of all human social institutions. It can, for example, account for the accepted protocols of behavior in a fifteenth-century Indian bazaar as well as those of late-twentieth-century American business; it can explain why certain forms of address and speech are peculiarly acceptable among academic professors, on the one hand, and among inner-city gang members, on the other; it can explain why Americans think the English are stuffy and why the English think Americans are loose. Smith’s model is thus extraordinarily powerful, and its scope may be coterminous with the whole of human social activity itself.

This is not to say that the model as Smith presents it is perfect or flawless. One possible problem is its almost exclusive reliance on the desire for mutual sympathy of sentiments: although this desire may well be a foundational element of human nature, it seems clear that there are also other motivating desires. Thus one might object that Smith’s picture of human motivation may be too simplistic. On the other hand, I see no reason to think that a richer view of the range of human motivation would necessarily be incompatible with the formal elements of Smith’s model. As long as people still strive to satisfy the desires that motivate them, and as long as the satisfaction of those desires requires the presence and sometime cooperation of others, Smith’s model would still seem to hold.

Another possible problem is that the moral standards that develop in the way Smith describes would not seem to have any ultimate sanction—they would seem justified, that is, solely because their peculiar historical course of social interaction produced them. That would seem to imply a cultural moral relativism that many—including me—find distasteful. It is a disputed point among Smith scholars whether he in fact thought that moral judgments had any kind of transcendent justification. I think the fact that they issue from natural human desires and needs begins to lend them objectivity, as does Smith’s claim that these “natural” desires and needs were implanted in us by God—which would mean that the moral standards that unintentionally arise by their operation actually reflect the will of God.

Some scholars maintain, however, that Smithian moral standards, like the standards of etiquette, are simply a matter of convention driven by their relative utility at satisfying local, contingent, or changing desires. But I would point to what Smith actually said, and it seems to me that human nature is enough of a constant to anchor a “middle-way” objectivism—between personal subjectivism and absolutely transcendent objectivism—that is sufficient to answer most worries about relativism.

Smith’s Theory of Moral Sentiments is thus full of far-reaching possibilities. One astonishing surprise is that, although published exactly 100 years before Darwin’s Origin of Species in 1859, TMS’s examination of the way in which these systems of unintended order, as I call them, develop and change over time adumbrates in substantial part the way in which Darwin’s theory explains the development and change of species. If recent work in what is called “sociobiology”—the field of inquiry that attempts to explain large parts of human social behavior by employing evolutionary insights^[5]—has merit, then Smith’s TMS, which is the first book in the Western tradition to try to work out such a view, might well have been on to something important indeed.

Thus The Theory of Moral Sentiments has had enormous historical influence, is subtle and sophisticated, develops an account of morality that is plausible and persuasive, and works out a model for explaining human interaction that is powerful enough to encompass virtually the entire range of human life. On top of that, some recent empirical research suggests his theory might be true. I can think of little else a book would need to be included as one of the greatest works of the Western tradition. I therefore commend it to you for your consideration, and I hope you will think of Smith not merely as an economist, but rather as he thought of himself: a moral philosopher. []

Notes

1. For contemporary evidence substantiating Smith’s conclusions, see the annually updated Economic Freedom of the World compilation, available at www.freetheworld.com/release.html.
2. For a recent study supporting this claim, see David S. Landes, The Wealth and Poverty of Nations: Why Some Are So Rich and Some Are So Poor (New York: Norton, 1999).
3. For further discussion of this claim, see James R. Otteson, “Adam Smith’s Marketplace of Morals,” Archiv für Geschichte der Philosophie (forthcoming).
4. Two examples are Rudi Keller, On Language Change: The Invisible Hand in Language (London: Routledge, 1994) and Steven Pinker, The Language Instinct: How the Mind Creates Language (New York: Harper-Collins, 1995).
5. A classic statement of this view is E. O. Wilson’s On Human Nature (Cambridge, Mass.: Harvard University Press, 1978); a more recent treatment that draws explicitly on Smith’s work is James Q. Wilson, The Moral Sense (New York: Free Press, 1993).

If you ever wondered what books Adam Smith’s father kept in his library, then Ian Simpson Ross’s The Life of Adam Smith is for you. Indeed, Ross’s biography of the father of free-market economics is jam-packed with such facts regarding Smith, his family, teachers, friends, and associates.

It’s rather striking, when you consider Adam Smith’s impact on mankind, that more has not been written about his life. As Ross notes, the last full-scale biography on Smith was published 100 years ago. The Life of Adam Smith paints a technically complete picture of Adam Smith—complete in the sense that the major endeavors of Smith’s life are addressed. That is, we see Smith the student, the moral philosopher, the rhetorician, the historian, the teacher, the customs official, and of course, the economist.

Overall, we gain a portrait of Smith as a self-confident man, though modest and self-deprecating, absent-minded, charitable, and committed to scholarship to the point that his health sometimes suffered. Various particulars about Smith’s personal life are noted, including a deep dedication to his mother, being kidnapped by gypsies at the age of three, a possible nervous breakdown as a student, and lifelong bachelorhood with one or two lost loves along the way. Ross concludes that first and last [Smith] was a moralist whose character bore the impress of the Roman Stoics.

Ross warns, however: We must not think that Smith’s life was all labor over his books, worry over their reception, and refuge from concentration on chains of complex ideas in the endless ramifications of the business routine of the Customs Board. He enjoyed a stimulating social life, particularly through entertaining visitors from other countries in Edinburgh.

Ross discusses Smith’s works in their entirety, naturally giving great attention to The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations. In summary, Ross notes that The Theory of Moral Sentiments contributed to a better understanding of the role of sympathy in moral judgments and developed the idea of the impartial spectator to account for the formation of our judgements of ourselves. As for The Wealth of Nations and the economics model developed within, Ross observes: The leading features of the model, with its concept of a freely competitive and self-regulating market, have proved highly attractive up to the present day. As defined by Smith himself, the Smithian model was the obvious and simple system of natural liberty.

Ross illustrates that Smith’s free-market ideas were brewing for some time before the publication of The Wealth of Nations in 1776. For example, Ross provides a quote from a 1755 paper prepared by Smith to be read to a society in Glasgow: 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. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point are unnatural, and to support themselves are obliged to be oppressive and tyrannical.

This biography particularly excels when examining the many people who influenced Adam Smith to varying degrees. Most important were his teacher Francis Hutcheson, his friend David Hume, and Francois Quesnay and the French Physiocrats.

The Life of Adam Smith is well worth reading. However, I must admit that the book left me wanting more in two particular areas. First, from the perspective of reading a biography, the tidbits regarding Smith’s personal life were not enough to satiate me. This is probably an unfortunate consequence of the amount of information available, though, and not necessarily the fault of the author.

Second, the final chapter cried out for a stronger discussion regarding the massive and durable impact of Smith’s economics for more than two centuries. Unfortunately, at the book’s close, the reader possesses some doubt as to whether or not Ross fully grasps Smith’s deep influence to this very day.

There is much for the free-market reader to appreciate in The Life of Adam Smith, with still a bit left to be desired.