Adam Smith Wasn't A Capitalist

Why Adam Smith is thought to be the original "greed is good" guy

Image: blog_adam_smith

In a recent episode of the podcast Planet Money , titled Adam Smith and the Not So Invisible Hand , host Adam Davidson had his "mind blown" to learn that Adam Smith was not the poster child for free market capitalism that he had been led to believe.

It should be shocking to hear someone who professes to be educated in economics to reveal such a complete misunderstanding of a world famous and widely cited figure in the history of economic theory. Except that the misunderstanding is so widespread that it is actually the standard perception.

Adam Smith is so huge that even people not that familiar with economics have heard of him. He's often thought of as the father of capitalism. The term "capitalism" wasn't in use in Smith's time, but his idea of the "invisible hand" is such a natural precursor to modern ideas of free market economies that he is seen as having been ahead of his time.

Except, of course, that he wasn't the cheerleader for laissez-fair capitalism that he is made out to be. The interviewee, Amartya Sen, author of The Idea of Justice , does a better job than I could of what Adam Smith really meant by "the invisible hand", so I'll leave it to him to dispel illusions for those who are interested.

What I want to share is a hypothesis of why it is that Adam Smith could be famous for having discovered the idea that greed is good, when he so obviously wasn't.

I'm nowhere near as informed about economics as the hosts of Planet Money , but I do apparently have one edge on them. I have actually read the entirety of Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations , which most people know simply as Wealth of Nations . It's actually a 5 book set, but people generally know it as one work.

Having read it, I know that Adam Smith said:

"Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all."

There is just no uncertainty there. Adam Smith, just as Amartya Sen says, is very much aware of the realities of capitalism, and not proposing it as some magical cure-all for societies ills.

When people view Adam Smith as being the originator of the idea that "greed is good", they generally have this quote in mind, where he is talking about merchants:

"By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

People don't have in mind this quote, also about merchants:

" whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it."

That people sift through text to find the quotes that support their existing world view is no surprise.

The question is, how did Smith's obvious and clearly stated criticisms of what we would now call capitalism get so completely lost, leaving only the mythological Smith remaining?

In other words, even if there are pro-capitalist advocates picking out Smith's pro-capitalist quotes, why aren't there an equal amount of people sceptical of capitalism using the other quotes? How do people who are educated at universities come out with such a one sided view of Smith?

Here is my hypothesis. It's pretty simple really. The layout of Wealth of Nations is the problem. The order of information is laid out in a way that offers most people the myth of Smith's capitalism early, and buries the "mind blowing" reality deep down where no one will find it.

If you've heard of Adam Smith, then you've probably also heard of his model of efficiency through specialization, exemplified by a pin factory. I remember clearly in my Grade 9 social studies textbook that Adam Smith was reduced to two essential points. One was the invisible hand takes care of everything, and that specialization leads to greater efficiency. The textbook's terse example for efficiency was Smith's pin factory.

In Wealth of Nations , that whole pin factory business is over and done with by page 8.

That's right. Half of description of what makes capitalism so awesome is finished before you're even 1% into the book.

After that, it gets excruciatingly tedious. For example, lots of text, far more than the pin factory, is about the value of coins. And not just in a theoretical sense. In Smith's day, the value of a coin was actually tied to the kind of metal it was made out of and how much of that metal was actually in the coin. He goes into minute details, like how some people shave the edges of coins to try and get a small edge in the value of their exchange.

Even if you get to things that might still be relevant, like the value of real estate or the shipping of commodities, it's all bogged down in details that were probably even a little tedious in Smiths time. The exact price of beef, for example, which in 1764 was "3d. 4/5ths per pound weight of the whole carcase", whatever the hell that means.

If all the historical measurements and peculiarities weren't enough to make your eyes glaze over, then you still have to contend with Smiths's extremely dull writing style. Everything is in lists and sub lists and more sub lists. He says that the reason for something can be broken down into three parts, and then the first part can be further broken into another four parts. He goes on and on like this, working his way down subcategories, then back up again and down the next set of sub categories, leaving no stone unturned. Thorough, yes. Interesting, no.

In other words, you have to slog through hundreds of pages mind numbingly boring sludge, almost none of which is engaging or provocative economic theory, but is almost entirely just an account of the state of affairs at the time Smith was writing. He is simply describing what is, not what should be or what could be. Which is maybe all he intended to do, except that because of his reputation, the modern reader goes to his book expecting more.

In the last third of Wealth of Nations , things pick up a bit and you start getting some insights that are still applicable.

I really do think that the reason Adam Smith is so widely reduced to such a simple, and wrong, caricature is because few people are willing to go past the gauntlet of all the tedium after page 8. It's not that there are gems of wisdom sprinkled within those hundreds of pages of tedium, it is a wasteland for anyone but the most dedicated historian of prices and commodities.

Or obsessive compulsive jerks like me who are motived by an intellectually insecure need to be able to lord over others the credential of having read the whole damn thing.

I'm sure that further back in time, in the years following the original publication, Wealth of Nations was read in entirety, and probably debated among those who cared with a more complete picture of Smith's ideas. Over time, though, as Smith's style and points of reference became less and less relevant to modern readers, that gauntlet of tedium past page 8 became harder and harder to bear.

Okay, but if people are picking out quotes and relying on derivative references, why did the Smith-as-capitalist view win out over the Smith-as-defender-of-the-working class view?

It's that hit of myth-affirming sugar in the first 8 pages.

I think that as you get to more modern times, people who might pick up the book to find out what's going on read the first eight pages, which validate the Smith-as-capitalist view, and then simply tune out after that. "Yeah, yeah, I think I got it. Pin factory, efficiency. Makes sense. I don't need all this shit about coins and beef carcasses."

Almost all his quotes about what a bitch capitalism can be come somewhere near the latter half of Book 3, long after most readers would have given up with the assumption that everything that could be gained from the book already had been.

The situation might have been different if Smith had started out with this next quote instead. It's in a longer paragraph about how "great proprietors" exploit people resources merely to buy trinkets like "diamond buckles", and how that doesn't really help society. It's a bit wordy, though, like the rest of the book, so I'll just leave you with this:

"All for ourselves and nothing for other people seems, in every age of the world, to have been the vile maxim of the masters of mankind."