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Another event of profound and enduring significance we should also celebrate.
Our nation will soon celebrate its 234th birthday. Another event of profound and enduring significance also occurred in 1776. It was the publication of Adam Smith’s The Wealth of Nations.
Our Declaration of Independence and the subsequent Constitution turned out to be enormously important for the cause of freedom not only in this country but what they inspired in other countries around the world. The Wealth of Nations and the lessons it taught have also reverberated far and wide since its publication. Smith’s insight and genius are reflected in the book’s full title — An Inquiry into the Nature and Causes of the Wealth of Nations. In a systemic way Smith set out to understand and explain the sources of a country’s economic health and growth.
The average life expectancy in England at the beginning of the 19th century was 41 years. At the beginning of the 21st century in the U.S. the life expectancy was 78 years. What accounts for that unprecedented improvement in human welfare? There are numerous factors — better nutrition, sanitation, refrigeration, advances in medical knowledge, for example — but most of them would not be possible without dramatic improvements in productivity and material wealth.
Recent history has reminded us of the widespread hardship resulting from economic stagnation. The worldwide recession has made virtually all our societal problems worse. More than two and a quarter centuries ago Adam Smith recognized the critical importance of economic growth and vitality.
Smith took issue with the prevailing political-economic philosophy of the time, something called “mercantilism.” The mercantilists believed that a nation’s power and strength depended on accumulations of gold. The mercantilists advocated government policies encouraging exports and discouraging imports, something we now refer to as “protectionism.” It is a policy that some still advocate.
Smith built a devastating case against mercantilist logic. He showed that a nation’s strength stemmed from its productivity and the efficiency of workers and businesses. He explained how a free market economy generates incentives and signals that push the economy in the direction of productivity and growth.
The first sentence in The Wealth of Nations makes the following observation: “The greatest improvement in the productive powers of labor, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labor.” Smith was referring to what we now call specialization, and it continues to be one of the most important sources of economic progress. If not for the market and voluntary exchange we would all need to be self-sufficient. Self-sufficiency makes specialization impossible.
Just as our Constitution laid the groundwork for political freedom, The Wealth of Nations established the intellectual foundation and rationale for economic freedom. He showed that government interference with the free market almost always does far more harm than good. He showed that unfettered voluntary exchange is the best path to economic progress.
Smith explained that in a market economy, “Every individual necessarily labours to render the annual revenue of society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how he is promoting it. He intends only his own security; and by directing that industry in such a manner as to produce the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
Smith was a persuasive and masterful writer. For example, “Taxes on the necessaries of life have nearly the same effect upon the circumstances of the people as a poor soil and a bad climate.”
Smith did not invent the free market. No single person did. He was the first, however, to grasp and understand how a market system functions. He therefore made it possible for others to understand and see the benefits of the market.
The primary value of having a theory of the free market is to provide a defense against those who want to interfere with it. Since well before Smith’s time there has been no shortage of those who want to substitute their judgment for that of the market.
A market economy can function whether or not anyone understands how it functions. A free market system is one of “spontaneous order.” The auto-pilot nature of the market is one of its greatest strengths, but it is also its greatest vulnerability. The market’s immense benefits get taken for granted. Since being aware of how the market functions is not a necessity, most people don’t bother learning about it.
The central theme of Milton Friedman’s classic Capitalism and Freedom is that a free market is a necessary condition for achieving political freedom. You can’t have one without the other. As we celebrate the birth of our political freedom we should also give thanks for another event that year that helped make our freedom meaningful and enduring. We can give thanks for those freedom-loving geniuses who lived on both sides of the ocean.
And using Adam Smith as an inspiration we should all do what we can to combat the latter day “mercantilists” in all their various incarnations. Many things have changed since 1776, but our fundamental challenges remain the same.