Adam Smith notoriously believed that the state should make way for the “invisible hand” (his best-known phrase), which is guided by self-interest, the best and ultimate incentive. The 18th-century thinker is thus a fine scapegoat for inequality, greed, boom-and-bust economics and other woes.
As Jesse Norman explains in his masterly book on the Scottish sage, this simplistic picture is wrong in every respect. For a start, mainstream economics — an arid, arrogant, overly mathematical affair, based on flimsy premises about individual utility and equilibrium — has little to do with Smith’s work. Indeed, it subverts most of its premises. Still less can modern financial markets claim his support. Indeed, he would probably be aghast at the speculation, self-indulgence and unfairness of modern “capitalism” (a word that, incidentally, never appears in his works).
In fact, Smith’s thinking, properly understood, holds vital lessons for the greatest questions in modern political economy, such as the state’s role in dealing with crony capitalism, or the infuriating asymmetries of power and information accelerated by technological change.
The author, a government minister and MP for Hereford, faces plenty of such questions in his day job. But Norman towers over his colleagues, not only because of his physical stature (he is 6ft 5in), but because of his academic heft. He read classics at Oxford and has a doctorate in philosophy. He has a good claim to be the brainiest member of the present House of Commons. In 2013 he produced an acclaimed biography of Edmund Burke, the intellectual father of British conservatism.
His new book, like that one, comes in two parts: the subject’s life, and his intellectual afterlife. The biographical bit paints an attractive flesh-and-blood portrait from the rather slender available material. (Smith was an austere, reserved bachelor who ordered his executors to destroy all his papers.) His most notable personal feature was absent-mindedness: he once put a piece of buttered bread in the teapot to make tea. But he was an able administrator and a revered teacher; when he tried to refund his students for some cancelled lectures, they refused the money, scuffling as he tried to press it on them.
His intellectual development started with grammar and language (and prompted a feud with Dr Johnson, whose dictionary Smith thought was amateurish). His little-read Lectures on Rhetoric and Belles Lettres could, Norman argues, be seen as the beginning of the modern study of English literature. Even less known are his Lectures on Jurisprudence, which survive only because of notes taken by three people who attended them. Next came The Theory of Moral Sentiments, published in 1759, and then his masterpiece, The Wealth of Nations, published in 1776.
That book’s insights are often seen as the pinnacle of Smith’s achievement. He explained with unprecedented (and unmatched) clarity that we get our daily bread not because of the baker’s benevolence, but because it is in his interest to bake and sell. His other memorable, and related, insight was the advantage of the division of labour. One man on his own will be hard-pressed to mine, smelt and forge enough metal to make a single pin in a day, but by specialising in one tiny part of the production process, and combining his work with others, he can be part of an effort that produces them in huge numbers.
One feature of this is indeed efficiency. Yet what fascinated Smith was something else: the civilising effects of commerce, through the co-operation it induces and the choices it enables. The ties and habits thus engendered underpin civilised life.
To see Smith as an economist in the modern sense, Norman argues, is therefore far too narrow. What makes free markets interesting are the causes and effects of the interchange it enables. The mathematical models that have entranced later economists are useful for clarifying what is happening, but often miss the more interesting whys and wherefores.
Smith was indeed sceptical of government intervention, but not because he disliked public services. He argued strongly for state education (and thought that women got a raw deal on that front, in the workplace and in statistical measures of output). What bothered him was incumbent-friendly intervention, to create cosy cartels that ensure persistently high profits. These were a sure sign of inefficiency and failure. The economy’s true purpose is to foster innovation, trust and happiness. Wealth is a by-product of individual initiative, not its goal. After all, we mostly spend our time doing other things than buying and selling.
As Norman notes, Smith got some things wrong. He missed the impending Industrial Revolution; he misunderstood the origin of money and had confusing ideas about what constitutes value: a blind alley more fully explored by Karl Marx a century later. His insights explain brilliantly the markets for hamburgers and haircuts, but work poorly with the pricing of assets, which is swayed by fashion, second-guessing and borrowed money.
In most ways Smith was ahead of his time. He could rightly be seen as the father of behavioural economics, which brings moral, psychological and cultural motives into decision-making. Norman also devotes a few tantalising paragraphs to Smith’s influence on the (now undeservedly neglected) Austrian School of economics, which highlights the role of individual relationships and transactions in creating a social and moral order.
Norman could have teased out further the ambiguities in Smithian thinking about morality. We seek not only to love and be loved, but also to be lovely. That loveliness depends not only on transactions with individuals, but on condign merits, displayed in unforced, spontaneous behaviour.
We can try to measure our own virtues, but they may actually exist outside the realm of individual experience, while bearing on our decision-making. Such questions do not fit easily with Smith’s reductionist, individualistic approach.
The author abundantly fulfils his promise, explaining what Smith really thought and why it matters now, especially in light of the uninvestigated, unpunished, financial crash of 2008 (about which Norman is scathing). The book tells the reader something else too: that amid the superficiality and hysterics of modern British politics, an admirably thoughtful brain is lurking.
[This article was first published in the The Times on June 30, 2018 (£)]