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Text of a talk to a Meeting of the ‘Friends of Innerpeffray Library’, on 12 October 2005, at Innerpeffray, near Crieff, Pethshire, Scotland

Recent comments by a student activist at the Adam Smith College on Adam Smith included:

“We didn’t feel that Adam Smith represented the values a student association should stand for.  “He is associated with socio-economic policies that work against the people, that were synonymous with Thatcherite and Reaganite governments.

Jennie Lee [a local socialist MP, who died in 1988] would be an excellent role model for the students because of the courage and conviction she showed in achieving the aims she believed passionately in.

This isn’t an attack upon Adam Smith as a person, but upon what his name has come to represent. Adam Smith’s name is linked to exploitation and greed.”

I use this statement to introduce my short talk on Adam Smith because it incorporates a great deal of what we are up against when we try to explain his ideas and his life’s work to people whose acquaintance with the historical Adam Smith is limited, and the limited bits they know about him are based on 150 years or more of popular distortion.

Professor George Stigler, Nobel Prize Winner, who lectured at the University of Chicago for most of the post-War years, asserted that Smith’s “Wealth of Nations” was a “stupendous palace erected upon on the granite of SELF-INTEREST”.

That Smith accepted that self-interest played a part in human motivations of behaviour is true, but he did not consider it the only motivator of human conduct, nor necessarily the most important, as his criticisms of Bernard Mandeville’s “Fable of the Bees” showed.

Before he wrote a word on “Wealth of Nations”, he had published his less famous book on moral philosophy, “The Theory of Moral Sentiments” (1759).  He was, after all, the Professor of Moral Philosophy at Glasgow University from 1751-1763.   He never held any academic appointment in political economy, though that is what he is most famous for today.

Smith did not believe, like his great teacher and mentor, ‘the never to be forgotten’ Professor Francis Hutcheson, that we are born with a moral sense, like our five senses of Sight, Hearing, Touch, Smell and Taste.  We learn about morality as we grow up in the company of others, first in our family and then with other children, some of whom become our friends, and later with other adults, some of whom also become our friends, others acquaintances, and still others who remain strangers.

It is through contact with others that we learn about moral sentiments.  We observe how we are treated (and mistreated) and identify which behaviours are acceptable to others and to ourselves. This is a two-way street: our misbehaviours are criticised by those who disapprove of them; our acceptable behaviours are praised and applauded, in exactly the same manner as we resent the misbehaviours of others and approve their acceptable behaviours towards us.

In short, living in the society of others we assimilate the acceptable, and become hostile to the unacceptable, behaviours. 

Burns’ poem “To a Louse” is based on a theme in Book III of “Moral Sentiments”:

“Would some Pow’r the gifttie gie us

to see ourselves as ithers see us!

It wad frae monie a blunder free us,

An’ foolish notion;”

Smith wrote in “Moral Sentiments”

“self-deceit, this fatal weakness of mankind, is the source of half the disorders of human life. If we saw ourselves in the light in which others see us, or in which they would see us if they knew all, a reformation would generally be unavoidable.  We could not otherwise endure the sight” (Book III.4.6: page 158-9).

Unlike Burns, whose dramatisation of this chapter took a pessimistic theme for poetic effect, Smith answered the problem by asserting that we did ‘see ourselves as others see us’.

This was achieved by his “impartial spectator”, a sort of conscience.  Through this inner self we judge our conduct by how an impartial spectator would assess us.  This is the mirror of our behaviour; always watching; always within our inner vision.

The mechanism is simple.  If we behave outrageously we are moved to curb our passions by reducing them to that level that an impartial spectator would tolerate. 

Close friends might tolerate passionate outbursts of our unreasonablness;

acquaintances only tolerate cooler expressions of unreasonableness;

and impartial spectators (a proxy for strangers) would require a severe cooling of our passions before they were acceptable. 

From this process, taking place in all parts of society, and involving all of its members to a greater or lesser degree in complex interlocking circles of proximity to each of us, society is relatively harmonious, stable and safe: when we walk down a crowded street, normally we do not feel mortally threatened as we pass strangers.

Humans “stand in need of each others assistance”. 

And society flourishes and is happiest where such assistance is “reciprocally afforded from love, from gratitude, from friendship, and esteem.” 

Society, said Smith, can hold together: “and may subsist among different men, as among different merchants, from a sense of its utility, without any love and affection; and though no man in it should owe any obligation, or be bound in gratitude to any other, it may still be upheld by a mercenary exchange of good offices according to an agreed valuation” (Moral Sentiments, II.ii.3.2: pp. 85-86).

Smith was adamant: no society could subsist long “among those who are at all times ready to hurt and injure one another”.

“Beneficence .. is less essential to the existence of society than justice.”

Smith’s “Wealth of Nations” is not a textbook on economics; it is a “one-man Royal Commission” report addressing the questions:

What is wealth?  How does it originate? Under what conditions does it grow and spread throughout society? What actions inhibit rather than encourage its formation?

In answering these questions, having spent ten years in private research, Smith produced his two heavy volumes, of analysis.  I cannot possibly summarise his weighty and closely argued answers in a few minutes.  I can only make a few general points.

Smith wrote about mid-18^th century Britain from a historical perspective.   He was a classical scholar, reasonably fluent in reading Latin, Greek, Italian, French and German.  

The dominating event of his century in minds of all educated people was still the Fall of the Roman Empire!  Hence the immediate and enduring popularity of Edward Gibbon’s “History of the Decline and Fall of the Roman Empire (1776 – the same year as Smith’s “Wealth of Nations” and the American ‘disturbances’).

The fall of Rome led to a millennium, known as the ‘dark ages’, in which the agriculture and commerce of Western Europe were nearly destroyed, and caused centuries of barbarism, rapine and almost constant cycles of local wars (a known feature of medieval Scotland too).  When Smith examined the re-emergence of commerce in Europe, he researched a phenomenon not seen, nor experienced for nearly 1,000 years, namely:

the gradual, continuous, and small but cumulative growth in wealth.  People slowly became better off; across the generations is was more obvious than within them.

He noted that Scotland had experienced nearly a century of slowly growing small increases in real incomes, whereas for the previous centuries it had, at best, experienced no upward changes and mostly was sunk seemingly in permanent abject poverty.  Modern critics of capitalism should answer: “compared to what?”

He defined wealth, not as boxes full of gold and silver held by Kings in their ‘counting houses’, but as the production of physical goods, be it the products of agriculture or the products of “merchants and manufacturers”.  

He clashed directly with believers in Mercantile interests: those who insisted that in trade, the secret was to obtain more than you gave up, to earn a surplus one year with another under the imperative of the zero-sum of “what I gain, you lose”.  Smith said: ‘No!’   Trade benefits both parties. 

Moreover, all the regulations, prohibitions and restrictions placed on the activities of traders, farmers and manufacturers, and common labourers, inhibited the growth of real national wealth and delayed the improvement in the ability of the common poor to share in society’s opulence by their labour.  

Wealthy societies could employ more people; they could produce more real wealth; and more people earning wages would reduce poverty.  Mankind creates wealth; it is its failure to do so that creates poverty.

This was not a licence to wealth creators to do whatever they wanted.  Smith warned against the proclivities of merchants and manufacturers to form monopolies, to conspire against consumers and to persuade gullible legislators to protect them from competition. 

He never used the words laissez faire (leave alone) in either of his books, yet his name is continually linked to laissez faire (usually spelled with a hyphen and italicised).   He was, at best, suspicious of ‘merchants and manufacturers’ and what they would get up to if all restraints were removed, hence he favoured free markets within the law and subject to justice (Smith had a Doctorate in Jurisprudence from Glasgow).

References to him as the ‘Father of capitalism’ and ‘the High Priest(!) of Capitalism’ are born of ignorance of his Works. He never used the word ‘capitalism’ (it was not invented until 1858 – even the word ‘capitalist’ was first used in 1792, two years after he died), nor did he know the phenomenon; the industrial revolution was a feature of the 19^th century (Smith died in 1790). 

Smith’s ‘manufacturers’ were handloom weavers, saddle makers, blacksmiths, ironworkers, candle makers, pin makers, cabinet-makers, wheelwrights, pottery makers and such like. They sold their wares at fairs in small towns and rural villages and through Pedlars.  The ‘dark satanic mills’, inhabited by hundreds or thousands of men, women and children, came two generations later.

Smith focussed his early chapters on ‘the propensity to truck, barter and exchange’.  In commerce, its main characteristic, even today, is of parties negotiating to exchange something voluntarily.  If we look at negotiation we find a familiar mechanism, reflecting the role of the impartial spectator in “Moral Sentiments”.

His famous exposition, and most famous quote, is:

“It is not from the benevolence of the butcher, the brewer and the baker, that we expect our dinner, but from their regard to their own interest.  We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities but of their advantages.” (WN I.ii.2; p. 26-7)

This is the most misunderstood statement of Adam Smith (among many other competing candidates).  Even the great George Stigler misread it. 

If two parties to a transaction care only for their self- interest, they would never reach an agreement.  The seller would always open higher and not move, and the buyer would open lower and not move either.  If they are to agree on price either or both of them have to move:  negotiation is the management of movement!

The dynamics of movement involves each party addressing the interests (or ‘advantages’) of the other.  Self-interest is not enough! They modify their own self-interest by serving the other’s self-interest too. 

 In fact, they serve their own self-interest best by serving the others self-interest.  The buyer gets her family’s dinner and the butcher, brewer and baker, receive income to buy whatever serves their self-interests.  

In competitive markets the penalty for not moving is for the seller to lose the sale to a competitor and the buyer to have to try again with another seller.

Hence, like the impartial spectator modifying the display of excess passions, the excess demands of negotiators are modified by considering the other’s self-interest, as well as their own.

I have only sketched one example of the distortion of Adam Smith’s Legacy in the two hundred years since he died.  I have not covered his Four Stage evolutionary model of society from Hunters, through Shepherds to Farming and (‘at last’) to Commerce; his analysis of rent, wages and profit, and how prices work through supply and demand in markets, nor his ambitious agenda for public expenditure.

Nor have I covered the worst examples of distortion, such as in the so-called invisible hand, which has almost iconic status (he only mentioned it once) and is regularly misrepresented to apply to markets, creating the wholly false image that Smith considered there to be something ‘miraculous’ about markets, when in fact they are fully understood, like the, albeit, wonderful rainbow.

It remains to make a comment on where I started.  I consider the formation of the Adam Smith College, the third largest in Britain, as a bold step to create a fitting monument to its namesake in the area where he was born and bred.  The people who decided to name their College after Adam Smith deserve applause for their initiative from all of us, irrespective of politics, ambitions and origins.   

I hope that before long the College will become, first, a University College and, later, a full University.  I can think of no more fitting memorial to Adam Smith, who argued so well in “Wealth of Nations” for the provision of education to children, from the poorest families to the richest in the United Kingdom, and, by his international reach and reputation, for young people across the whole world.

© Gavin Kennedy 2005