Adam Smith
The Doctrine of Adam Smith
Beginnings of Modern Capitalism
The ideas of Adam Smith represented more than just the first systematic treatise on economics; they were a frontal attack on the doctrines of mercantilism. Like the physiocrats, Smith tried to show the existence of a “natural” economic order, one that would function most efficiently if the state played a highly limited role. Unlike the physiocrats, however, Smith did not believe that industry was unproductive or that only the agricultural sector was capable of producing a surplus above the subsistence needs of society. Rather, Smith saw in the division of labor and the extension of markets almost limitless possibilities for society to expand its wealth through manufacture and trade.
Thus, both the physiocrats and Smith contributed to the belief that the economic powers of governments should be limited and that there existed a natural order of liberty applicable to the economy. It was Smith, however, far more than the physiocrats, who opened the way for industrialization and the emergence of modern capitalism in the 19th century. (1)
The Capitalism contents in this legal Encyclopedia also include: Capitalism, Capitalism Characteristics, Capitalism Origins, Capitalism Mercantilism, Modern Capitalism Beginnings, Physiocrats, Adam Smith, Industrialization Rise, Capitalism in the 20th Century and Capitalism Future.
Views from 1889
The following information about Adam Smith is from the Cyclopaedia of Political Science, Political Economy, and the Political History of the United States by the Best American and European Writers:
“While he occupied his chair at Glasgow, Smith was in the habit of giving certain lectures on the elements of political economy, as it was understood in his time, i.e., upon those artificial regulations and restraints of civil society which statesmen conceive to be necessary or expedient. Here he was accnstomed to draw those inferences in favor of a policy of freedom which he afterward expanded into his celebrated work. Neither he, nor, indeed, any one else, had ever elaborated at this time the laws under which the production of wealth is effectually secured.
Political Economy
The modern science of political economy has been developed from a host of negative inductions. Statesmen, misled by the selfish misrepresentations of reputed experts, have from time to time controlled and misdirected trade in the fancied interests of trade. They have attempted to be wiser than nature. They have seen that order and government have been necessary to the well-being of society, and that confusion and mischief are the invariable result of uninstructed self-interest. But. forgetting that the business of government is to check aggression only, and to secure every man a fair field for the exercise of his own labor, they have unconsciously aided aggression, curtailed liberty, and narrowed the field in which labor could exercise itself. There is of course a border, for the occupation of which the advocates of liberty and control constantly contend.
The wisdom of government in the days of Adam Smith, and frequently enough in our own time, is to extend the area of government, and, with it, to assert the just control of an administration over the innocent acts of individuals. Such a line of action on the part of a government may be adopted with the best possible intentions, as Smith shows in the ninth chapter of his fourth book, where he sketches the policy of Colbert. Such a policy found its earliest and most complete refutation in the reasonings which are contained in the “Wealth of Nations.” * * It has been objected to Adam Smith and Hume, that they did not foresee the French revolution, intimately as they were acquainted with the state of France. But the objection is shallow What is called political prophecy is often mere guess work, which no wise man will seriously indulge in. The easiest way in which weak men think they can gain a reputation is by sinister predictions of political events.
No one can anticipate the conservative forces of society, no one can gather enough information to make a safe induction as to the resistance which may be made to change, or, indeed, as to the forces which will compel change. But there is such a thing as political prescience. It is not difficult to discover the inevitable consequences induced by certain kinds of political action. This faculty Smith possessed in the highest degree, in a far higher degree than Hume, whose sagacity and acuteness he admired so much. Of this prescience his great work is the most noteworthy illustration. No person has ever pointed out with more exactness the effects of a mistaken commercial policy. the invariable reaction from a course of legislation which does not commend itself to the moral sense of a nation, and the mischievous consequences which ensue when a public law gives its sanction to private selfishness.
Range of the subjects treated in Smith’s work
The range of the subjects treated in Smith’s work is very wide. Social history and the politics of commerce occupy his attention as much as mere abstract reasonings. His educational theories have been generally accepted. His rules of taxation are classical. His vindication of free trade is complete. His criticism of the great company has been the basis of the latest legislation on the Indian empire. His conception of the mutual relations in which nations stand, is as comprehensive as it is generous. It should not be forgotten that Smith did not propose to himself the discovery of a scheme which should make any one country wealthy or prosperous at the expense of the rest of mankind, but how the wealth of nations should be developed. He rose far above the peddling maxim, that the gain of one people is the loss of another Hence his work is international, and has formed an effective protest against those shams of a sordid self-interest which masks itself under the name of patriotism.
Criticism
—Among economists, Smith possesses the inductive mind in the highest degree. His work not only displays a wealth of varied reading, but is full of facts. Considering, too, how inexact were the statistical data on which he could in his time rely, his sagacity is remarkable. No example of this quality seems to me more striking than his inference that the precarious occupants in the ancient manor must have passed through a métayer tenancy before they reached the independence of the fifteenth-century yeoman, as described by Fortescue. Such was actually the fact, as I have been able to discover from a very large investigation of farm accounts during the epoch referred to by Smith. But, in fact, to be scientific, political economy must be constantly inductive.
Half, and more than half, of the fallacies into which persons who have handled this subject have fallen, are the direct outcome of purely abstract speculation. In consequence, though he was the progenitor of the science, and necessarily left it incomplete, Smith is far more frequently in the right than his critics are. Almost every blemish in his work (some few inaccuracies of expression excepted, which arise from a somewhat loose use of terms,) is due to his exaggerated sympathy with the economic theories of his French friends and teachers. It is to this influence that we can trace his errors as to the nature and causes of value, and whatever is defective in his exposition of rent. Even here, however, he seems to me to be much more in the right than Ricardo, who accounts for the origin of rent on grounds which have absolutely no warrant in fact.
His most adverse critics have, however, united with his warmest admirers in his vindication of private liberty against the interference of government; that is, in his advocacy of what are called free trade principles. To the modern reader, who recognizes the vast services which the merchants and manufacturers of Great Britain have done for such principles as Smith advocated, the language which the author uses about the mercantile classes seems singularly harsh and bitter. “The passionate confidence of interested falsehood”; the policy of a “great empire” being guided by the policy of “shop-keepers”; “impertinent badges of slavery, imposed by the groundless jealousy of merchants and manufacturers”; “illiberal and oppressive monopolies”; “the mean and malignant expedients of the mercantile system,” and similarly pungent comments on the machinations of the trading classes a century ago, are expressions of active animosity against interests which Smith must have thought hostile to the public good. But, at that time, the leading merchants deserved little sympathy from any person who considered this public good as the paramount object of economy and legislation.
Their intrigues had prevented the establishment of bonded warehouses. The mercantile classes drove Walpole into the war of the right of search. The real or reputed interests of the same order precipitated and prolonged the seven-years war. The costs of that war, and the sustentation of the East India company, whose conquests had made it bankrupt, led to the uprising of the American colonists, and the war of independence. The merchants who stimulated, and the nabobs and planters who continued, these costly struggles, were no doubt powerful in Change alley. They were, moreover, ready to make the highest biddings for rotten boroughs. But they were detested by the people, and especially by those free-holders in whom, as Smith thought, the strength and hope of the nation resided Macaulay has given, in a few words, a statement of how public opinion estimated these people, in his “Life of Lord Clive, “the greatest of the race.
East India Company
The most energetic attack, however, which Smith made on any institution of his time, was that on the East India company. To us the company is a thing of the past. In Smith’s day it was the most brilliant phenomenon that the world had ever witnessed. A very few years had created the Indian empire; had changed a few timid and servile traders into a force of heroes, by whom successes had been achieved more amazing than those of Cortez and Pizarro. In the face of this extraordinary prestige, which affected the whole western world, the author of the “Wealth of Nations” dissected the pretensions of the great company, showed that it failed as a trader, and failed as a ruler; and proved that its government was mischievous to its subjects, and its monopoly a wrong upon the English people.—THOROLD ROGERS.”
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