More than Just Capitalism: Discovering the True Adam Smith

“Adam Smith was opposed to government”.

“Adam Smith is the ‘father’ of capitalism”.

“Adam Smith was a great defender of capitalists”.

Adam Smith often finds himself the subject of misconceptions. Many believe they possess a grasp of his ideas, but the reality is often a bit askew. Perhaps they've caught wind of Adam Smith in short YouTube videos that extoll the virtues of self-interest or witnessed a professor wearing the 'Adam Smith tie', captivating the audience about the wonders of the free market. Maybe they've encountered the concept of the 'invisible hand' and its alleged miracles. There exists a wealth of Adam Smith notions that remain concealed from the consensus. In this series, I hope to rectify that. 

I will mainly discuss the origin and development of and key ideas and arguments from The Wealth of Nations. Numerous online sources often recommend this book to business professionals, it's important to note that Adam Smith intended it to be a guide for statesmen and legislators. Practical people of commerce and trade will not find this influential text very helpful, considering they would even understand the text. The political philosopher as the teacher of lawmakers was one of the oldest traditions of the man of learning, reaching back to Aristotle. 

Scotland during Smith’s time was the incubator of British intellectual innovation in the middle of the eighteenth century. He was raised in a milieu in which property, patronage, education, and government service were closely linked- this coordination would continue to chart Adam Smith’s social course. In Oxford, Smith would begin to make his name in the intellectual world through a series of lectures in Edinburgh. At the age of twenty-eight, he was appointed to the chair of logic and rhetoric, and then to the chair of moral philosophy. Smith’s lecture on ethics formed the basis of The Theory of Moral Sentiments. Even before completing that book, he had begun to lecture on ‘jurisprudence’, a topic that included not only the principles of law but those of government and political economy as well. Unfortunately, these lectures did not accumulate into another book, leaving many misunderstandings of Smith’s ideas to endure.

Adam Smith’s Britain

Most people in the Great Britian of Smith’s day lived in what we would regard as poverty. Hundreds of thousands were willing to risk the possibility of death in transit just for the hope of a somewhat better life in the New World. Yet the population of Britain was probably better off economically than that of any major nation on the globe. The reason behind this relatively lower poverty was the commercial revolution. The Wealth of Nations grew out of Smith’s reflections upon the real successes of eighteenth-century Britain in producing economic growth. The gradual but unmistakable rise in the standard of living not only of the rich but of the working poor was real enough. But it was hampered, in Smith’s eyes, by some of the protectionist restrictions to which his countrymen attributed their growing riches, and it could be speeded up by expanding the greater market freedom already visible in parts of the economy. The old system of economic regulation of domestic trade — in which the price of goods was set by guilds, and the rate of wages set by justices of the peace—was being increasingly abandoned by the middle of the eighteenth century. Much of Smith’ book was an argument for expanding the freer market regime already dominant in internal trade to the realm of international trade.

Trade with other European powers was generally viewed by policy makers as a form of undeclared warfare, with the object of maximizing benefits to England while minimizing those to rival nations. The prime weapon in this war was the duty on imported goods. Sure, these customs duties provided the government with tax revenue, but by Smith’s day they were increasingly seen as a means of protecting British producers by raising the prices that consumers had to pay for imported goods. In its efforts to protect British industries from foreign competition, parliament went so far as to prohibit some foreign imports entirely. Yet despite these barriers and prohibitions, the most important economic fact of Smith’s day was that the nation was becoming wealthier- not only its elite, but its laboring masses as well. For perhaps the first time in history, a basic minimum of food, shelter, and clothing was a nearly universal expectation. Contemporary observers were struck by the relative ease with which an ordinary laborer could provide the means of subsistence for himself and for his family. Wage rates increased gradually for most of the century, growing most rapidly in the 1760s and 1770s, when Smith was working on The Wealth of Nations. New manufacturing technologies made it possible to employ women and even children—whose labor had usually been confined in the past to the farm or the home—in remunerative jobs. As a result, total family wages rose to the point where a substantial portion of the laboring classes could reasonably hope to purchase goods once beyond their aspirations. As wages moved upward and as the costs of production fell in agriculture and in the manufacture of basic necessities such as textiles for clothing, the standard of living rose. What had once been regarded as “luxuries” came to be seen as mere “decencies,” what had been “decencies” became “necessities,” and the very definition of “necessities” changed. Tea, a luxury beverage of the upper classes when the century began, was a daily drink of road workers by midcentury, as the per capita consumption increased fifteenfold in the course of the century. 

Trade with other European powers was generally viewed by policy makers as a form of undeclared warfare, with the object of maximizing benefits to England while minimizing those to rival nations. The primary weapon in this economic battle was the imposition of duties on imported goods. These customs duties did indeed contribute to government revenue, but by Adam Smith's time, they were increasingly seen as a means of safeguarding British producers by driving up prices for imported goods. In their efforts to shield British industries from foreign competition, Parliament even went to the extent of prohibiting the import of certain foreign goods. Despite these trade barriers and prohibitions, the most noteworthy economic development of Smith's era was the nation's growing prosperity. This extended not only to the elite but also to the working class. For the first time in history, there was a widespread expectation of securing basic necessities like food, shelter, and clothing. Observers of the time were surprised by how an ordinary laborer could easily provide for himself and his family. Wage rates saw gradual increases throughout most of the century, with the most significant growth occurring in the 1760s and 1770s, while Smith was working on The Wealth of Nations. The advent of new manufacturing technologies made it possible to employ women and even children, whose labor had traditionally been confined to the farm or home, in well-paying jobs. Consequently, total family incomes rose to a point where a substantial portion of the working class could reasonably aspire to purchase goods that had once been considered out of reach. As wages continued to rise and production costs fell, particularly in agriculture and the manufacture of essential items like textiles for clothing, the standard of living improved. What were once viewed as "luxuries" became "decencies," "decencies" transitioned into "necessities," and the very definition of "necessities" transformed. For instance, tea, once a luxury reserved for the upper classes at the century's outset, became a daily beverage for road workers by mid-century, with per capita consumption increasing fifteenfold over the course of the century.

The British consumer revolution of the time played a dual role: it both propelled and benefited from an industrial revolution still in its infancy. Items that were once considered lifetime purchases could now be acquired multiple times, not because they had become less durable, but because they had become significantly more affordable. Products that had once been painstakingly crafted at home, such as clothing, beer, candles, cutlery, and furniture, were now readily available for purchase. Another facet of this consumer revolution was the transformation of marketing. Goods that had previously only been accessible at weekly markets, occasional fairs, or through traveling peddlers could increasingly be bought on any day of the week, except for Sundays. It was during the eighteenth century that England earned the moniker (or derision)  "a nation of shopkeepers" - a shift driven by the convenience it offered to customers. Advertisements for new and fashionable products made their debut and soon dominated newspapers. Driving and guiding this newfound ability to make purchases was the concept of social emulation. People aspired to mirror those slightly higher on the social ladder, with the middle classes seeking to adopt the manners, morals, and merchandise of the gentry, and maids emulating their mistresses. What set this era apart wasn't the desire to consume; it was the unprecedented ability to do so, a feat made possible by the nation's increasing wealth and the declining cost of goods. 

Elite writers of the time often responded with dismay to the noticeable improvement in the living standards of the working classes. In addition to the traditional moralistic criticism of "luxury" as a driver of sin and a underminer of civic virtue, new economic arguments were introduced into the discourse. Some argued that rising wages would diminish the motivation to work, as workers would only be inclined to labor enough to meet their basic needs, after which they might prefer more leisure over higher income. While there is some, albeit not very reliable, evidence of this trend in England during the first half of the eighteenth century, by the latter half of the century, wage earners appeared increasingly willing to work longer and harder to earn more. This shift might have been influenced by the growing availability of new goods at prices they could afford. Economists and writers on economic matters also issued warnings that the high wages in Britain would drive up the prices of its manufactured goods, rendering them uncompetitive in the global market.

Adam Smith took precisely the opposite position. Although he was not the first to challenge the theory that poverty had utility, his work definitively settled the argument against it. He depicted Britain as a nation where real wages had consistently increased throughout the century due to declining food prices and the enhancement in the quality and variety of essential subsistence goods. To Smith, high and steadily rising real wages, which he referred to as "the liberal reward of labor," were something to be celebrated. He expressed that "to complain of it is to lament the necessary effect and cause of the greatest public prosperity." Smith shared Voltaire's perspective that being wealthy was preferable to being poor, but his focus was on enabling a decent life for all members of society.

Adam Smith's approach to legislation was influenced by the civic republican tradition's focus on the common good. However, he felt that this tradition fell short in its narrow emphasis on the involvement of a privileged elite in politics, neglecting the broader impact of politics on all members of the community. Smith's concern was to ensure that the political process contributed to the well-being of the entire nation, going beyond the political elite. He defined this well-being primarily in terms of enhancing people's quality of life in their everyday family, work, and consumption activities. Smith's emphasis reflected a growing recognition of the importance of "ordinary life" and a shift from the Christian virtue of charity to the Enlightenment virtue of practical benevolence. In essence, while Smith shared the civic republican concern for the common good, his interpretation placed greater importance on the moral and material welfare of individuals in their daily lives.

When you size up the modest digs of a hardworking, penny-pinching peasant against the extravagant luxuries of the high and mighty, it might make you wonder, "Is the peasant onto something?" In fact, one could argue that the peasant's pad surpasses the accommodations of quite a few African kings, who have an iron grip on the fates of thousands of naked tribespeople. 

The material advantages of the lowly laborer over the powerful chief was the riddle which The Wealth of Nations set out to explain.