_edit.png)
There is a story that George Stigler, one of the leading lights of the Chicago School of economists, gave a seminar at the University of St Andrews on Adam Smith. His opening words, “Adam Smith is alive and well, and living in Chicago,” invited the heckle, “And how is the prisoner?” Given that as well as being a formidable historian of economics, Stigler was also a fabulist, the story may have got better in the telling.
Gathering to celebrate the 300th anniversary of Smith’s birth, economists gleefully recounted that tale. Yet in some ways, their continuing interest in Smith was a response to the Chicago School’s appropriation of him as an intellectual totem. Determined advocates of a small-state liberalism, in the 1960s and 1970s, they had mined Smith’s writings to argue that they were going back to the original intent of the founding father of economics.
In this endeavour, they were entirely sincere. But part of the greatness of Smith’s approach to economic matters was that he sought to express his ideas in very general terms, which emphasised the unity of his analysis. While that accounts for his notorious slowness in bringing his work to fruition, it helps to explain its profundity. Almost every economist, and many other social scientists, can look back to Smith’s work, and find in it a prefiguration of their own ideas. He was the Adam of economics, the last common ancestor of a disputatious tribe.
We can also think of Smith as being a product of the times in which he lived. Scotland became part of the United Kingdom in 1707. In September, 1745, while Smith was still nominally studying theology at the University of Oxford, so that he could become an Episcopal priest, lightly armed Jacobite rebels marched across Scotland, defeated the small British army, and seized control of Edinburgh before continuing on to England. With better military intelligence, they could easily have reached London, and installed the Stuart claimant, James III, on the throne.
Arguably, the lack of resilience among Scotland’s civil institutions in the face of this crisis was important for the emergence of the Scottish Enlightenment, with Smith becoming one of the brightest stars in a brilliant constellation of thinkers. For the historian, Richard Sher, after the rebels’ final defeat in 1746, Scots finally concluded that they had to develop political institutions which were sufficiently robust so that their disputes could be settled peaceably, rather than through armed conflict. (In many ways, this was a wider European project, which
had started a century earlier after the ending of the inconclusive, but brutal religious wars prompted by Luther’s Reformation, and the rise of Protestantism in Northern Europe.)
In Sher’s account, a group of young men quickly established a network of liberal thinkers, under the patronage of Scottish notables. What we now call the Scottish Enlightenment was largely the result of their efforts to create a modern society, based on the ‘reform of manners.’ They debated, and wrote, and were active citizens. It was entirely natural for Adam Smith to have been an integral part of this group. We can think of his published work – and indeed much of his unpublished work – as what remains of his attempt to build a complete science of humanity. All the economists who have contributed to this volume have therefore
rejected the Chicago reading of Smith. Freeing Stigler’s prisoner, they have shown that for Smith, it was impossible to separate economy and society. They have noted that where the Chicago reading emphasised his support of free enterprise and accepted the outcome of markets as being the best possible, Smith instead emphasised the importance of ‘commercial society.’
As Deirdre McCloskey has argued at length elsewhere, it makes sense to treat Adam Smith as a moral philosopher, working within the classical tradition of virtue ethics. Initiated by Aristotle, virtue ethics emphasises the cultivation of tendencies, both in behaviour and thought, which are appropriate to social contexts. In his writings, Aristotle emphasised the importance of the golden mean: virtuous behaviour could fail because of both an excess and a dearth of a tendency. For example, physical appetites could lead to gluttony, or, in a problem which Aristotle struggled to imagine, eating disorders. Aristotelian virtue relied on balance.
Within his analysis of individual and political behaviour, Aristotle proposed that there were four essential virtues for the active citizen of an Ancient Greek city- state: prudence, or practical wisdom; temperance, which is the willingness to defer gratification; courage, which was essential for a citizenry who could be called upon to fight in brutal wars; and justice, located in fair treatment of others. Turning to economic matters, which for Aristotle and his contemporaries was the art of household management, prudence was the essential virtue. Later writers, especially the medieval theologians in France who brought Aristotle’s theories
into Western Christian thought, emphasised justice, along with the contingency of property rights. For Smith, though, temperance was the greatest of the virtues in a commercial society, much as he believed they were all essential. Writing in a time of profound social change, Smith, the social philosopher, looked back to the old tradition which had thought about how we should behave as individuals, within the context of our social relationships, and the implied network of obligations. But, Smith, the careful observer of those social changes, completed the first systematic analysis of political economy. He explained how
individual behaviour, combined with the institutions which had emerged for the management and control of the wider economy by the middle of the eighteenth century, determined both the state of the economy, and the potential for its further development. As the title, An Inquiry into the Nature and Causes of the Wealth of Nations, confirms, Smith’s underlying concern was to understand what constituted wealth, and how it might best be created. He was perhaps the first person to argue that economic development could lead to persistently rising living standards and greater societal well-being. Economics is sometimes called the ‘dismal science.’ There is nothing dismal in Smith. His confidence in the possibility of progress, of social development, and the gradual material betterment of all people shines through his work, especially Theory of Moral Sentiments, with its interest in the potential of human society. Writing in that way, his arguments were consistent with the wider spirit of the
times in which he lived. In the century before Smith wrote, modern science had become firmly established, with the objective of explaining the world in purely natural terms. Smith believed that the same was possible in social science. His political economy was a response to the new intellectual world which the scientific revolution had established, and its seemingly infinite possibilities.
Moving on from these generalities, Smith was very much a man of his time, who responded to what he observed. (This is perhaps true of all great economists – they see the same things as everyone else, but they understand them in new ways, allowing other people to share their vision. While they might imagine. wonderful possibilities, their thinking is grounded in careful observation of social relationships.) Travelling to Kirkcaldy to take part in events in the Old Kirk in June 2023 was therefore a considerable privilege, though with elements of
pilgrimage. Local guides showed the participants that Smith’s family home would have backed on to the Firth of Forth. Climbing to the top of the tower of the Old Kirk, and facing into the stiff onshore breeze, it was possible to make out th outline of the Bass Rock and Fidra in the sea mist, and to look past them at the choppy waters which, for Smith, would not have been a barrier, but the highway to England, and the European mainland.
Up until Smith’s youth in the first half of the eighteenth century, Scotland faced East to Europe. A large majority of Scottish burghs – towns which could hold markets, and which were self-governing, even in feudal times – are on the East side of the country. That led to a web of connections, especially with Dutch Calvinists in the seventeenth and eighteenth centuries. But by the time Smith was appointed a professor at the University of Glasgow in the middle of the century, the Union had made a new Atlantic trade possible. Scots had begun to play a very substantial role in the expansion and management of the British
Empire, and Glasgow, whose population increased from about 20,000 to 80,000 during the second half of the century, had started on the path of industrialisation which would make it the ‘Second City of Empire.’ With its trade based on sugar and tobacco, Glasgow was also intimately involved with the slave trade. It is very likely that some of Smith’s students failed to pay close enough attention to his strictures against slavery, and participated actively
in the economic opportunities afforded by the burgeoning Caribbean economy. There is even evidence that James Watt, initially an instrument maker at the University, dabbled in the slave trade. That, of course, is not why we remember him. Watt’s tinkering with steam engines led to the improvements which enabled steam power to replace water power early in the industrial revolution. Finally accepting the repeated invitations of his future partner, Matthew Boulton, to move to Birmingham, after the Carron Ironworks failed to produce tough enough steel for his engines to work safely, Watt’s inventions were one of the foundations of the new industrial age, Smith could see all these changes happening, as well as their political management. Realising that governments could affect the ‘causes’ of national wealth, he strongly opposed what seemed to him the wrong-headed approach
of the state management of industry and trade, which was common in the eighteenth century. His critique involved much more than the well-known arguments against what we now call mercantilist thought, in which the acquisition of bullion was the essence of national wealth. Smith demolished those claims in the first half of The Wealth of Nations with his careful account of how value comes from the use of resources in production.
Turning to Book IV, we see Smith, the expert in rhetoric, carefully but emphatically demolish the political programme of mercantilism which had shaped European governments’ practice of managing trade and external relations. Slavery was of course one of the practices which Smith condemned. But he was unsparing in his criticism of the institutional arrangements underpinning Britain’s imperial expansion, specifically the way in which the East India Company’s management of Britain’s interests had turned into a licence for wanton cruelty, exploitation, and rampant corruption. He also predicted that without substantial reforms, Britain’s North American colonies would obtain their independence, through use of arms,
if necessary. His predictions bore fruit with the Declaration of Independence less than four months after the publication of The Wealth of Nations, and the United States finally defeating British forces in 1783. For Smith, these policies were the result of governments being far too pliable when confronted with organised commercial interests. Any growth in wealth ended up concentrated in the hands of a few corrupt statesmen, and the
managers of the colonial ventures – at the expense of general well-being. For Smith, the possibility of acquiring economic power was valuable because it encouraged imagination and innovation. But there was always a risk that, in becoming an end in itself, the ceaseless pursuit of economic power and the social prestige which would come with the resulting wealth, would corrupt our behaviour.
We can see from this how the Chicago School could find much in Smith about
the damaging effects of corrupt public institutions. But to reach the conclusion that Smith was opposed to entirely free markets required much more than that. Without a substantial simplification of Smith’s concept of ‘self-interest’ so that it could be reduced to something like selfishness, it was impossible to treat Smith as a champion of laissez-faire economics. Yet if we accept that Smith was working within a virtue ethics tradition, the Chicago interpretation cannot be correct. Selfishness – thinking purely of self – must be a deformation of virtue given the obligations which come from being members of society.
Here I need to touch on the ideas in Bob McMaster’s paper, which turns on the question of what Smith might have meant by self-interest and self-love. If we take love – in an economic context – as being the disinterested promotion of others’ well-being, then self-love must also be our disinterested promotion of our own well-being. In Smith’s thinking, since we are social animals, true self-love does not involve the self-absorption which is necessary for selfish behaviour. Instead, it is a careful balance between the pursuit of our own interests, and the promotion of others’ interests. That makes it very similar to the formulation of Odd Langholm,
one of the leading experts on Scholastic economic theology, that for Thomas Aquinas justice lay in not exploiting others, while avoiding the sacrifice our own interests.
That line of argument could easily vanish into metaphysical speculation, which we never find in Smith’s practical analysis. Help is at hand in Sheila Dow’s paper in which she has argued that Smith’s writings resonate (sympathetically) with the approach to behavioural economics, which emerged from Herbert Simon’s analysis of bounded rationality as a response to pervasive uncertainty. There is sharp dividing line between the widespread understanding of rational behaviour in economics as the maximisation of clearly defined objectives and Simon’s arguments about the impossibility of optimisation in the face of uncertainty, and the necessity of having robust rules to guide behaviour. Although the
maximisation approach emerged in the 1930s, especially in early work of John Hicks and Paul Samuelson, it later became central to the Chicago School’s approach to economics,
For Simon, it was often better to make some decision than to dither over what might be best. Reflecting on how misplaced confidence in the seeming precision of the maximisation approach contributed to the failures of corporate governance, which ended in the financial crisis of 2008, some eminent economists, including the Nobel laureates, George Akerlof and Robert Shiller, have suggested that behavioural approaches have considerable value in guiding conduct in situations of intractable uncertainty. Shiller has proposed that there
is a need for a ‘narrative economics.’ In many ways, this seems to be a call for a return to virtue ethical thinking, in which we cultivate the dispositions which would enable both personal, and corporate resilience.
For Sheila Dow, Smith’s broader philosophical understanding of how we engage
with the external world ensured his commitment to what we now think of as behavioural approaches. Presenting a theory of human nature where individuals are understood as social beings, Smith highlighted the role of an imaginary ‘impartial spectator’ as promoting behaviour which meets with social approval, ensuring that we would not simply be selfish. In a virtue ethical setting, such self-management involves the exercise of temperance, and fair dealing, or justice. Together with beneficence – doing well for others – these are the foundations of Smith’s commercial society in which there is a high level of trust, and a tendency to cooperate, in the expectation of sharing gains in future. For example, confident about what will happen in future, there will be many people who are willing to save, and others who are able to turn those savings into investment in productive resources. Saving and investment therefore increase the capacity of society to meet needs, leading to economic growth and social development. For Smith, while productive capabilities determined the wealth of nations, the extent of those productive capabilities depended on the exercise of virtue.
Were that all that Smith had argued, his political economy would have been incomplete. In Smith’s critique of the coincidence of political and economic power, we have seen how economic power could suborn political power so that statesmen ended up serving specific economic interests rather than striving to achieve the public good. It follows that it is not just in individual behaviour that we see virtue, but also in the design and function of great institutions. Realising that with great power, there could be massive corruption, in the last two books of The Wealth of Nations, Smith set out how effective institutional design could
promote public well-being in the commercial society of the late eighteenth century, within which processes of industrialisation and urbanisation had begun. With low trust in government and public institutions such an argument is as relevant today as in the eighteenth century. We might conclude that as well as people, institutions might benefit from an impartial spectator, ensuring their effective governance.
Robbie Mochrie is an Associate Professor of Economics at
Heriot-Watt University, and the Director of the Economics
Teaching Programme. He is the author of How to Think Like an
Economist, which Bloomsbury is publishing in May 2024. He is
a former director of the Association for the Study of Religion,
Economics and Culture, where his efforts concentrated on
understanding the economic structure of the market for
religious services in nineteenth century Scotland. A Chartered
Banker, he has worked with the Global Ethical Finance Initiative
and the Market Mind Hypothesis research group on the
application of virtue ethics in financial markets.
Comentários