The Online Library of Liberty

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• 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

4

The Achievement of Smith

By relating Smith’s views of social behavior to the questions raised in the opening pages of this chapter, one can find four different areas of conduct described in The Wealth of Nations and in those parts of the Lectures that are most consistent with it. He stated that one part of the behavior of men is like the behavior of all biologic organisms seeking to gratify physical tastes; this area is not described in detail. More important is the behavior of the individual as a psychological mechanism, and throughout Smith’s work this behavior receives the greatest emphasis. Man as a self-interested creature is described in great detail. He is proud, vain, willful, indolent, acquisitive, and, in viewing other persons as useful in getting what he wants, he is immoral in the fundamental sense of treating other people as means instead of as ends. As a psychological mechanism he pursues his interest in a way that is governed by his environment, the economic aspect of which interested Smith most. One element in the constitution of the economic man is compounded of these psychological traits. His behavior in this area is purely mechanical, following an invariable pattern of stimulus and response. He observes an opportunity to become richer and unconsciously adopts certain conventional means in order to take advantage of it. His behavior here is not rational; it is more like that of an automaton than that of a calculating creature.

The third area of conduct is that in which the individual deliberates about the best means of achieving certain given ends, such as fortune or fame. Here the economic man ponders the best way of laying out his fortune and talents in order to acquire the largest returns. The returns are not entirely economic and some of them are not economic at all. He may desire prestige, ostentation, power and other marks of social superiority as well as an increase in his wealth, but whatever is the goal he seeks he does not question it. In the fourth area of conduct, the individual deliberates about the objectives which he ought to pursue. The nature of conduct in this area is such that men consider the most suitable use for wealth; they examine ways of best using their freedom and of increasing it. As a result of such deliberation, their environment is consciously changed, and behavior in all other areas, which assumes given means or given ends, or both, is altered.

So much for what Smith did believe when he wrote The Wealth of Nations. It is instructive to consider what he did not say, by way of contrast and also in order to summarize his principal views of human nature and society. (a) He did not say that the economic man was a rational creature who invariably pursues his pecuniary interest and is uniformly successful in realizing it. He may be acquisitive or not, depending on his environment and on other traits and desires; he may be a rational creature or he may be a passive agent, depending on his ability to rise above the level of mechanical behavior. (b) Smith did not say that the economic man was moved by a providential force and was preordained to occupy a harmonious social order. The economic man is governed by human nature, expressing itself in manifold ways, and how it came into being Smith does not say. In view of the salient omission of any reference to natural law as the origin of human nature, one reasonably may assume that human nature is a datum. The natural order of the economic man is the product of his pecuniary interest seeking expression on a free market. The natural order is simply competition. As competition has its origin partly in the psychological constitution of men and partly in their natural rights, it had a more compelling justification than any alternative form of economic organization. (c) The economic man is not benevolently inclined, and the good works which he performs are no part of his intention. Even in the most competitive of markets, the consequences of his acts can be undesirable and require social intervention. (d) Finally, the economic man is not a free agent with the right of producing what he pleases, selling where he pleases, and of doing with his wealth what he pleases. He is subject to the severe discipline of competition and the more formal restraints imposed by law. His freedom of enterprise stops short of the privilege of denying freedom to others.

None of the conceptions of economic behavior offered by Smith in his three major works conforms to the accepted version of the economic man. If any of Smith’s abstractions resemble this fiction, it is the economic man of The Theory of Moral Sentiments, but even here the resemblance is slight, consisting only in their both being governed by natural law. In Smith’s later works, which contain little or no reference to natural law, his conception of economic behavior is radically different. In The Wealth of Nations particularly, Smith presented a twofold justification of economic freedom. Reasoning from the doctrine of natural rights, he declared that each man should be free to pursue his material interests in his own way. He also said that the psychological traits of man led him to specialization and exchange. The consequence was a social order in which freedom was respected as a value in itself and as the most effective means to other values. Even though he could not be in sympathy with many of the motives and tastes of the economic man, Smith accepted him in preference to those who previously had dominated society. As rough and imperfect as he was, his vigor held more promise than the behavior of the aristocracy. Smith raised the economic man from the class of pariahs, giving him a new status as well as a new freedom, because in competitive behavior he saw the requisites of cultural progress. He gave a new emphasis to individualism by making free economic behavior a natural right, by asserting that men should be free to seek their own welfare because they were men and were not agents in the hands of an inexorable nature, however benevolent, or of a powerful state, however benign.

2

THE POLITICAL IDEAS OF THE CLASSICAL ECONOMISTS

The political ideas of the classical economists have an interesting and a significant relation to their ideas of economic policy. An analysis of the relation uncovers two paradoxes. They are important in themselves and they are important for what they tell us of the development of economic liberalism after the middle of the eighteenth century.

The classicists urged economic freedom on the world and in doing so they were expressly or by implication saying that all men should have the right to seek their material welfare in their own way. This right was “natural” to them in one of two senses or both. It was natural because it was either a psychological characteristic or a political privilege with which they were born, or both. Now to say that each man has a right to make economic choices is to imply that he also has a right to make political choices. I do not mean that a free market, in every argument that can be made for it, necessarily implies a government based on universal consent, i.e., a democracy. A free market can be justified on grounds of efficiency and not of psychology or ethics—as, for example, it could be justified in an authoritarian state as a means of maximizing consumer satisfaction. It need not be justified as a means of permitting people to make choices for the sake of making them, a justification derived from the Stoic conception that virtue consists in the act of choice and not in the thing chosen. The justification given the free market by the classical economists was related to the Stoic conception but was not the same. The economists justified it as a means of allowing the individual to exercise his natural right to make economic choices, and the justification implies he also should have a means of exercising his natural right to make political choices. That implies a democratic form of government and suggests the classical economists should have favored such a government. But they did not.

In the opposition of these views is one paradox: A free market implies what may be called universal economic enfranchisement, but limitations on representative government deny men the political freedom that is the analogue of a free market. This paradox is exactly the opposite of that which usually is attributed to capitalism, namely that capitalism provides political but not economic democracy.

The second paradox is implicit in the opposition between the classical doctrine of free international trade and the belief of the economists in the advantages of a strong national state, a belief manifested in their views on military establishments, on the defense of Britain, and on the relationship of liberty to national power. If all countries traded freely with each other, some commodities that are essential to national power would be produced in only a few countries and not all of them in any one country. Other goods would be produced more widely but not all of them in sufficient quantity to support power. There eventually would come into being a world political condition in which national states, as carriers of decisive power, would be impossible or unlikely. What now are nations would become regional economies, which would be bound together by ties of mutual economic dependence and a common condition of political (or at least military) impotence. This paradox was to succeeding generations a little less evident than the first, but it was more obvious to the classical economists themselves. It was to Smith because he wrote in favor of the Navigation Acts and other measures which increased the national power of Britain but diminished its real income.

In seeking to uncover the source of these paradoxes, I shall refer mainly (although not exclusively) to the writings of Hume and Smith and to the historical circumstances of which they seemed most aware; because in the early period of classicism the paradoxes were most striking. Except for differences in emphasis and detail, what is said here of Hume and Smith will apply also to most of the other figures in the classical school, like Malthus, James Mill, Ricardo, McCulloch, and Senior. The ideas of John Stuart Mill are of a quite different sort and are described separately at the close of this chapter.