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.
