The Online Library of Liberty

A project of Liberty Fund, Inc.

• Foreword
• Economic Liberalism the Classical View
• 1: The Classical Psychology of Liberalism
• 1: The Theory of Moral Sentiments
• 2: The Lectures
• 3: The Wealth of Nations
• 4: The Achievement of Smith
• 2: The Political Ideas of the Classical Economists
• 1: The Political Philosophy of Hume and Smith
• 2: The Paradox of Economic and Political Freedom
• 3: Human Nature, History, and Government
• 4: The Nationalism of the Economists
• 5: The Structure of Government
• 6: Economic Improvement and Social Progress
• 3: Liberalism In the Great Century
• 1: The Importance of the Nineteenth Century
• 2: The Practice of Policy
• 3: The Meaning of Economic Liberalism
• 4: The Ideas of Policy
• 5: The Theory of Policy In Mill

2

The Lectures

There are intimations of a new view in the Lectures on Justice, Police, Revenue and Arms that were delivered at the University of Glasgow about the year 1763. Its major difference with The Theory of Moral Sentiments is in making natural rights instead of natural law the governing principle of society. (The idea later was expressed in detail in The Wealth of Nations.) Another and closely related difference is that in the Lectures Smith made environment instead of sympathy the force that restrains self-interest. The economic man as a sensitive creature who pursues beauty in a world of material abundance is succeeded by a pedestrian individual who looks with interest upon only those activities which “pay” and pursues luxuries in a society where they are unmistakably scarce.

NATURAL RIGHTS AND ECONOMIC BEHAVIOR

The economic man of the Lectures, like his predecessor, still is the best judge of his own interests, he is influenced by what he takes to be the feelings of others toward him, and he has a taste for beauty (although it is frail and fleeting). But here their similarities end. The economic man of the Lectures, according to his environment, follows his interest along paths marked out by one or another of two sets of passions. One consists of the “baser” passions of avarice, the instinct for truck, barter, and exchange, the disposition to specialize his labor. They are the more surely grounded, the least in need of any encouragement for their expression. They are traced back to the willfulness in every individual, to his inclination for persuading, imposing upon, and coercing others. As manifestations of self-interest, they usually are regarded with contempt. Yet in the exercise of such “baseness” men discover the more elevated side of their nature, like the sense of beauty, courage, and generosity. These, the other set of characteristics, are delicate and ephemeral. They require much encouragement before they are brought to light, and when they are they attract much commendation.

The individual should be free to express both kinds. It is his natural right to do so. It also is to the interest of others that he do so. His self-interest then will operate to their advantage as well as his own. From the delicate passions comes man’s taste for luxuries; out of it commerce develops, liberty takes hold and is made secure, men are emancipated from superstition and come under the influence of learning and the arts. But the delicacy of man would never have had such consequences if he had not been free to specialize his labor, engage in trade, acquire property—if he had not, in other words, had some economic freedom. Smith believed that one of the achievements of his age was this very freedom. He developed in the Lectures a theory of economic change that explained the accumulation of capital and the rise of representative government as the outcome of this freedom. Actually more than a theory of change, it disclosed Smith’s deep conviction that liberty was both a value in itself and the most effective means of acquiring other values.

A THEORY OF DEVELOPMENT

Toward his ancestors of the Middle Ages, Smith looked with feelings of compassion and also of reproof, frowning upon their waste of time, effort, and wealth; shocked by their depraved pastimes, their callous attitude toward the poor and weak, appalled by their superstition; yet at the same time tolerating their vices in the belief that the environment permitted nothing better. In that period, the more elevated side of human nature could not develop. The inequalities of ownership and opportunity, the restrictions placed upon exchange, the primitive form of agriculture, and the contempt with which most economic activity was regarded—all turned man’s baser instincts away from those activities which in time would supply him with the means of indulging his finer nature. His animal spirits, not to be denied, found an outlet in oppressing the weak and in making war against the strong. But eventually his avarice broke down the obstacles to exchange and he then was able to turn his efforts to providing more than the necessities of life. With the appearance of “luxuries” (which Smith called all those goods beyond what are required for a bare subsistence), the aristocracy found a new use for its income and turned out its retainers, servants, and other dependents. When Smith wrote The Wealth of Nations he enlarged upon this view of the decline of feudalism and related disdainfully how the aristocracy had squandered its birthright for trinkets and baubles. It finally was forced to turn to commerce out of a “principle of avarice” and in so doing struck away the final restraint on enterprise—the disesteem with which it had been regarded by the ruling class. Meanwhile those who had been dependent upon the nobility were forced into productive occupations, and their characters improved remarkably. Once slothful because they did not have to work, demeaning before their patrons and insolent to inferiors, depraved in their tastes and amusements, they now became industrious, prudent, honest, and enterprising. The transformation of the economy and of social standards brought with it the development of representative political institutions. As opportunities grew for accumulating wealth, men demanded security and the rule of law: the protection of every man in his person and his property, and the opportunity to trade and acquire wealth. As men became materially more secure they were able to look beyond their immediate affairs and to devote themselves to learning and the arts, to throw off superstition, and to pursue virtue.

These ideas are what today would be called a theory of economic development and in the past was called a theory of progress. They can be compared instructively with today’s theory. Smith’s explanation of how a market economy came into being is a piece of speculative history, a statement of how it could have originated, not of how it did in fact originate. Smith meant his theory to be the latter and cited some facts to support it. But they only illustrate it. The practice of mistaking illustrative for demonstrative evidence is common among historians who present great and inclusive generalizations to explain historical change. The failing is a part of a more basic—and actually a rather simple—error, which is to suppose that because something could have happened in a certain way it must have happened that way, especially if there is no conflicting evidence or recognition of any. About the reasons for the development of capitalism there is a great deal of conflicting evidence, so much that any conjecture like Smith’s is unsatisfactory.

What can be said of today’s theories of how an industrial system can develop in a backward country? An industrial system is not, to be sure, identical with a market economy. But that is immaterial, because what we want to compare is the method of today’s economists with that of Smith (not today’s explanation of the origins of capitalism with that of Smith). Except for the area studies made today, which often are quite empirical, the doctrine of development in its conceptual aspect does not have much more empirical foundation than Smith’s theory had. Today’s doctrine is mainly deductive, consisting of models of development that are made of propositions from micro-and macro-economics relevant to conditions in which per capita output is rising or can be made to rise. The propositions are logical statements, describing what could happen, not what probably will happen.

What is even more interesting is to compare the two doctrines in their normative aspect. Why should a country develop? Modern economists said originally that development is a necessary and probably a sufficient condition for democratic government. More recently they have said development is a necessary condition of political stability, and political stability is prudently left undefined. Some to be sure do say that political stability will be conducive to world peace, and others that development will keep a country independent of the Communist bloc (or blocs).

The view of Smith is, by comparison, a grand vista, a panoramic conception that includes economics, politics, morality, knowledge, and the arts. He believed in development because he believed it to be a condition for political progress, for an improvement in other social relations, for elevating the moral quality of a country, for progress in knowledge and in the arts. In short, he believed an increase in income made the good life possible.

What is most often criticized in Smith’s theory of development is the assumption that self-interest will operate beneficently when it is expressed in a free market. If the theory seems simple-minded, one must recall that Smith here was engaged partly in a polemic against restrictions on commerce and partly in expressing his optimistic convictions. When it is summarized so briefly, many of the insights are glossed over, and the rich lesson it held for future generations is discernible only by implication. If any one aspect is to be singled out for emphasis, it is Smith’s belief in the power of free economic behavior to produce free, enlightened men. (That this power was not always used wisely Smith was fully aware.) Nothing corrupts an individual so much, he said, as to make him dependent on others for a livelihood and security, and nothing more increases his self-reliance than the opportunity to find his own way in the freedom afforded by equal laws.

There was nothing new in the idea that material dependence is debasing. Vauvenargues said as much in his epigram, “Servitude degrades men even to making them love it.” It was a current coin of eighteenth-century thought. So was the apothegm, “He who controls a man’s subsistence controls his will.” But it was Smith who first emphasized that only through a free market could men emancipate themselves from dependency. Not even Hume, to whom Smith credits the idea, showed so clearly and in such detail the relationship between economic and political freedom. The political institutions of a country are not to be explained, Smith said, by the nature of the governed. That is much the same everywhere. If a Frenchman acts differently from an Englishman, the reason is that the self-interest implanted equally in them finds expression in different economic orders.

In the Lectures Smith regarded free government as the product or effect of the free market, not the other way around. Government had important work to do, and that was to protect the free institutions that the free market had brought into being; but it was a passive or protective agency, not one that initiated improvement. This conception departs considerably from Smith’s earlier belief that government exists because men find pleasure in submitting to authority; in the Lectures, the penchant for authority is merely mentioned and no more. There, the excellence of a government is to be measured by the protection it gives to the natural rights of the individual, and a government which does not provide such protection should be overthrown.

ECONOMIC MORALITY

Not everyone took so favorable a view of the free market as Smith did. He knew that very well. As if in anticipation of what has become a common objection to laisser faire, or to settle with himself the conflicts between the Lectures and The Theory of Moral Sentiments, he examined the question of justice in relation to economic activity. The economic man of the Lectures is virtuous simply because he believes virtue pays. His acquisitiveness is restrained not by the desire for moral approbation but by a disinterested calculation of the returns to be expected from moral as compared with immoral conduct. The calculation shows that on balance there is a net in favor of virtue. By transferring the origin of virtue from man’s moral sentiments to his profit and loss statement, Smith worked a very great change indeed in ethical doctrine. Nevertheless he did not touch the reality of virtue itself, nor did he question the comforting notion that whatever prompts men to action the action itself can only be beneficial.

How an individual would act if the calculation by some perverse stroke went in favor of immorality is a troublesome question. And Smith did not evade it. In fact, his willingness to consider the problem of monopoly suggests he was aware of the question. In a monopolistic market, the economic man is not restrained by the rule that honesty equals profitability. By acquiring exclusive privileges of sale or purchase, he can turn dishonesty to a profit, and by carefully managing his power he can so far reduce the menace of potential competitors and outraged customers that his dishonesty can be capitalized for an indefinite period. Smith’s solution to the problem was not convincing. He seemed to think that potential monopolists would behave themselves once they realized that monopoly is a game everyone can play and one that in the long run produces losses all around. Neither of these observations happens to be true but they were as much as Smith had to offer in the Lectures. In The Wealth of Nations, however, there is much more.

An unsure sense of justice is not the only weakness of a free economy. For all of its material, political, moral, and cultural superiority over early forms of economic organization, it was not ideal. The specialization upon which it is based produces a number of undesirable effects, Smith said. The upper classes become preoccupied with acquiring wealth or exhibiting it and they lose sight of the end it should serve: the development of moral and intellectual excellence. They neglect their responsibilities to others, being particularly remiss in the military arts. He took the neglect of military duty to be serious because he believed national defense and power were more important than wealth. The rich are remiss about other responsibilities, and their greatest failing is to become so attached to their wealth that it becomes their sole mark of distinction. In the ostentatious use of wealth Smith saw what was to him perhaps the most unbecoming side of self-seeking. He remarked on it in almost all of his writings, and nowhere more expressly than in an essay on the Imitative Arts:

The quotation is also interesting because it contains the idea of conspicuous consumption and, what is close to it but not identical, the idea of commodities as status symbols.

The lower classes also are injured by specialization. Although it improves their living conditions, it also confines their views and blunts their imaginations, turning them to vulgar diversions, leaving them witless and without spirit. By making the employment of children profitable, it puts obstacles in the way of education and weakens the family. The neglect of education leaves the great mass of the people insensible to the more creative forms of leisure and abandons them to the alehouse. So he argued.

It is instructive to contrast Smith’s attitude toward the working class with that of the mercantilists, which is described in the other volume. Smith deplored the condition of the workers, regretted their weakness before the greater power of businessmen, hoped that in some way the development of the market would make them richer, freer, wiser, and more virtuous. He expressed his good will toward the poor and weak in the warmest, most generous language. He could find something admirable even in the most lowly, as when he found the coal heavers to be superb specimens of manhood and when he observed that the Irish prostitutes of London were the most beautiful women, “perhaps,” in the British empire. The mercantilists, on the other hand, were constantly at the workers, admonishing them, rebuking, scolding, wheedling, cajoling, punishing, and preaching virtues of the early-to-bed, early-to-rise variety. They showed they had very little of the tolerance and generosity expressed by Smith. Yet it was the mercantilists who came forward with explicit and practical proposals for improving the condition of the workers. Whatever one may think of the proposals, either by the standards of their own time or by ours, one must acknowledge that they were an effort to improve the condition of the poor. Indeed, the very harshness that is so repellent today was an indication that the mercantilists cared about the working class (in the same way a stern parent cares about his children). One does not scold and want to improve those to whom one is indifferent. Nor does one urge diligence, enterprise, and self-reliance upon those whom one wishes to become obedient servants of an all-powerful state (which is a common misinterpretation of the mercantilists’ views of the laboring classes).

Smith, for his part, did not go much beyond expressing a generous attitude toward the poor. They had his good will in abundance and little more. He did not offer any particular advice about how they could better their condition, either by their own efforts or with the assistance of the state, except to imply that progressive taxation would be desirable. His strongest proposal was to increase the wealth of the nation. When that happened, everyone—the lowly along with the middling and the great—would improve his position. An interesting question is why he did not have practical proposals for helping the poor. The answer may seem to be that he adhered to laisser faire and hence was opposed to trade unions or the regulation of labor markets by the state. But that will not do, because in fact he did not adhere strictly to laisser faire, as this chapter explains farther along. His successors in the nineteenth century were most of them in favor of repealing the prohibition against union organization (the Combination Acts). That does not make them advocates of unions, but does indicate they believed the workers should have the right to form them.

Another direction in which Smith’s sympathies lay is disclosed in his frequent comparisons of merchants and manufacturers with the landed gentry. By the time he wrote The Wealth of Nations he had no fondness for businessmen, but he still believed their avarice could be turned to public advantage with no great injury to private liberty. He thought quite otherwise of the landholders. He believed their interests were in direct conflict with those of workers and businessmen. When one compares what he wrote about businessmen and land owners, one can see that he considered the businessman more useful to the nation. His attitude was unusual for the age. To claim that a merchant and manufacturer were entitled even to as much esteem as a landholder was uncommon. To claim they were entitled to more—because they were superior in prudence, energy, social usefulness, learning, and morality—was notable.

NATURAL RIGHTS VERSUS NATURAL LAW

Smith noted some major failings of a free market when he gave the Lectures and many more of them in The Wealth of Nations. Nevertheless he has been described repeatedly as the great apologist for laisser faire. His doctrine is said to rest on a faith in a natural order in economic affairs. Actually the idea of nature appears only remotely in the Lectures. Its hand is more than invisible; it is unpredicitable and capricious. One of the two distinctive features of the Lectures, which marks it off from The Theory of Moral Sentiments, is the ambiguity surrounding the idea of natural law. The other is the appearance of the idea of natural rights. Smith refers to the natural right of each person to his life and to security against violence, the natural right of inheritance, and the natural right to private property. He refers also to the political analogues of these rights, the most important of which is the natural right of each man to associate with others on terms agreeable to all of them. As Smith uses the term, a natural right is the liberty each man should have to act in a way that is consistent with his inclinations, to some of which he is disposed by psychological traits and to others by choice. The belief that each man possesses undeniable rights necessarily implies that he must respect the rights of others. It also implies that all men together must so arrange their social behavior that each may have what is due him. Since man is psychologically disposed to specialize his economic effort, he has a right to exchange his product for that produced by the specialized effort of others. It follows that there can be no legitimate interference with exchange, either by private persons or by public bodies. In the property which a man acquires by his activity he has a natural right, and when the property passes to his heirs they too have a natural right in it. Because the free exercise of individual inclinations depends most fundamentally on personal security, the right of each man to his life is the primary natural right. Any interference with the free expression of individual desires is a deprival of natural rights. Any serious attempt to stifle them is therefore a signal for justifiable if not obligatory resistance. In liberal philosophy from Hooker onward, the greatest menace to freedom was thought to dwell in the state, or in those agencies like monopolies that Smith thought derived their power from the state.

Just where natural rights originate is not made clear. There is evidence that they simply are the data of social behavior. All of man’s traits and desires when taken together exhibit a harmonious design. All fall into one of two categories of “passions” which serve to reinforce and complement one another. Smith gave the Lectures not many years after The Theory of Moral Sentiments was published and he may still have thought of nature as incorporating mankind in its harmonious design. Whatever is the origin of the “passions,” they are not, in the Lectures, governed by nature. They may be its work but no longer are its “darling charge.” Many of the Lectures are taken up with showing how natural characteristics are stifled or distorted, with showing the difficulties encountered by self-interest, and with the reforms that should be made in order that man can be free to express himself. If Smith had really believed (as he has been said to have believed) that the will of nature inevitably is realized, there would have been no reason for him to condemn the effort to obstruct it and no reason for him to suggest ways in which its work could be made easier.

THE NATURAL ORDER AS COMPETITION

A more plausible interpretation is that Smith gave a secular explanation of human behavior, not one derived from natural, or suprahuman law. The Lectures say that the way men behave depends on their environment and that human nature is governed by the interaction between the individual and society. In this idea there are the beginnings of a new conception of natural order. Natural order is no longer the expression of divine will. It now is the kind of social organization that develops when men can use their traits in their own interest. The conception is radically different from that in The Theory of Moral Sentiments where the natural order is the outcome of man’s bringing his moral sentiments into accord with God’s will. The world that results has no economic problems because it experiences no scarcity. The concern Smith shows in the Lectures for the protection of natural rights connotes a new conception of economic behavior. He no longer believed in natural abundance. He did say that if man wanted no more than subsistence he never would engage in economic activity. But he does want more. To get it he utilizes his talents for specialization and exchange, thereby obtaining a greater satisfaction than he would acquire by producing for his own use. In this idea is the suggestion that the meaning of economic behavior is the maximizing of returns from scarce means.

The effective use of talents is not, however, realized only by specialization and exchange. It depends also on the conditions of exchange. In order to satisfy wants most effectively, the products of specialized effort must be exchanged on a free market. For this reason, Smith condemned monopolies and restrictions on international trade. With disarming candor, he asked, “Unless we use the produce of our industry, unless we can subsist more people in a better way, what avails it?”5

From these considerations of the role of natural law and natural characteristics in the Lectures, one can infer that the natural order is the competitive market. The natural order has little or no relation to a purposive nature disposing and ordering the social relations among individuals. It is ideal, not because it reveals the design of nature but because competition is the most practicable (thus, “ideal”) method of protecting the natural rights of individuals and of providing the greatest possible wealth to the nation. Stated in a somewhat different way, competition is the ideal instrument for securing freedom as a value in itself and as an effective means to other values.

[4] Smith Essays, p. 143.

[5] Adam Smith, Lectures on Justice, Police, Revenue and Arms, ed. Edwin Cannan (Oxford, 1896), p. 205.