Economics

Stop Associating Adam Smith with Laissez-Faire Economics

Modern misuses of the father of economics

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By Jag Bhalla

Adam Smith was no fan of greed. And Smith fans who hold selfishness a virtue, distort what he called his best work.

1. “Adam Smith was a behavioral economist,” says Richard Thaler (noted Misbehaving adder of empirical psychology to economics).

2. Smith got famous first for what we’d now call psychology. Edmund Burke called The Theory of Moral Sentiments “fittest to explain those natural movements of the mind with which every Science relating to our Nature” needed (commending Smith’s “illustrations from common Life“).

3. Smith begins Sentiments by observing that “the virtuous” have no monopoly on sympathy—“the most hardened violator of… laws” has sympathies. Even the “greatest ruffian,” however selfish, “evidently [has] some principles in his nature which interest him in the fortunes of others, and render their happiness necessary.”

4. Sentiments “entranced a public caught up in the cult of sensibility and virtue” (virtue—>logical life skills).

5. Smith had a lifelong preoccupation with virtues and their connection with republicanism ( = rule for the “public good” ≠ sum of private interests).

6. Smith’s approved virtues required the rule of “prudence, of strict justice, and of proper benevolence.” Plus self-command of passions. (Note: self-command—>deeply adaptive in human evolution.)

7. Smith’s now more famous book, The Wealth of Nations (WoN, 1776), is a founding document of economics. But it is no “greed is good” free-market “Bible of Capitalism.” Consider a few “surprising” quotes:

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8. Because businesses “have generally an interest to deceive and even oppress the public,” they often “conspire” accordingly.

9. Because of their “mean rapacity… merchants and manufacturers.. neither are nor ought to be the rulers of mankind.” Smith feared greed in unfettered markets.

10. “When… regulation… is in favor of the workmen, it is always just.”

11. “Every tax… is to the person who pays it a badge… of liberty. It denotes that he is subject to government.” (Liberty requires government—>can’t be secured privately.)

12.  Smith’s “public good” republicanism is baked into America’s founding documents (e.g. Jefferson held to Smith’s Scottish Enlightenmentsensibility).

13. The “Declaration’s” first listed justification for Independence, is America’s need to enact “Laws… necessary for the public good.” The Constitution specifies government’s duty to “promote the general Welfare” (listed right after “provide for the common defense”).

14. Smith would likely be horrified by any republic ruled for rapacious free-market interests (today seemingly lacking the sympathies of Smith’s “greatest ruffians”).

15. Thaler says all economics was behavioural until the 1940s. After that all human behaviours were filtered, fitted, and squeezed into the formulation Economics = Optimization + Equilibrium.

16. But such cartoon selfish optimizing behaviours are neither “natural movements of the mind” nor evident in “common Life.” Economics must return to its behavioural roots.

17. Smith got the “invisible hand’ from Shakespeare. Sentiments long outsold WoN.)

Illustration by Julia Suits, The New Yorker Cartoonist & author of The Extraordinary Catalog of Peculiar Inventions.

2016 March 21


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  • Curious Wavefunction

    Adam Smith wouldn’t have recognized Milton Friedman, and not just because he was from a different age.

  • Aparicio Caicedo

    You are confusing neoclassic school (and its dumb assumption of homo economicus) with the defenders of Laissez-Faire as a whole. You are using a classic straw man. Are you aware, for example, of the big epistemic difference within the neoclassic school and the Austrian school? Austrians would never assume a greedy nature in human beings…

    • Patrick T. Hendrick

      You miss the point. Smith was a behavioral psychologist and wove human behavior into economic theory. Individual human behavior is inherently self serving and based on survival. This isn’t cynical, it is reality. Families, tribes, nations survive on understanding self interest in being part of the whole. When we carry the rights of the individual to extremes, as supreme, the whole will self destruct. The US constitution was predicated on this behavior and is based on mutual respect for individual rights and the common good. It is a very delicate balance that we are failing.

  • Aajaxx

    We are so far from both laissez-faire and Adam Smith, that any differences, if any there be, are trivial.

  • Swami

    Jag,

    What exactly is your point?

    You throw out the term Laissez-faire in your title, but never define it. This allows both you and your readers to fill in whatever they want….
    Absolute rule-less anarchy….
    Conspiratorial cartels…
    Rent seeking cronyism (“ruled by rapacious free market interests”)…
    Tax-is-theft libertarian extremists.

    This is just extremely sloppy rhetoric. You are not trying to enlighten anyone to anything. You are just trying to score political points against some tribe of people, real or imagined, who offend you.

    I am sure you are a bright guy, so how about giving us some serious suggestions on regulation. What makes up good regulation? When is it excessive? What would Adam Smith suggest to control conspiracies among producers — more competition or more rules? And how would you or Smith respond to the Public Choice literature or the issue of regulatory capture.

    Stand up and make a difference, and stop shooting imaginary fish in imaginary barrels and write real articles aimed at real positions which real (reasonable) people hold.

    • John M Legge

      For a good account of how Smith’s work has been distorted into an apparent support of neoliberalism read: Kennedy, Gavin (2010), Adam Smith (2nd ed.), Basingstoke: Palgrave Macmillan. Public Choice and Regulatory Capture theories are tools to justify the plundering of the commons by the financial elite; they have no empirical foundation outside the “tight prior” assumptions of the Chicago School.

      • Swami

        Thanks for the referral, John. Unfortunately I am not in need of evidence that the works of important intellectuals’ ideas are captured and/or perverted for political or ideological reasons. It is pretty rampant. My pushback on this article still stands, as it is just a grab bag of rhetorical sleights aimed at those not belonging to the author’s tribe (aka the hated “neoliberals” to use your preferred tribal marker).

        Denial of regulatory capture and Public choice is of course just a tool to justify the plundering of the masses by regulatory elites and Politicians who wish to expand their power, and has no empirical foundation outside of the narrow, top down “problem-solving” paradigms of progressives.

        If you want to have a serious discussion, just let me know….

        • robertmkadar

          John’s comments are serious and important. He’s also an important member of our community. You can learn a lot from his blog.

        • John M Legge

          If you choose to assume that all persons in positions of authority are psychopathologically selfish, then you will prove public choice theory. Since the assumption is wrong, so is the conclusion.
          If you choose to assume that market competition naturally trends to “perfection” and that there are no economies of scale, then you will prove that any regulatory action that assists a firm or an industry must reduce general welfare, i.e., that regulatory capture is an automatic and inevitable consequence of regulation. Again, since the assumption is wrong the conclusion is false.
          If you chose to avoid ad hominem arguments you would be taken more seriously.

          • Swami

            John and Robert,

            My sarcasm seems to have been lost in translation… Let me be clear for both of you.

            The unserious remark was not about John in general, it was specifically in response to his flippant dismissal of regulatory capture as “tools to justify the plundering of the commons by the financial elite.” I attempted to illustrate the vacuousness of the remark by mimicking it in a reformed manner directed at deniers of regulatory capture. John then notes that the argument is absurd and ad hominem, clearly missing the point that he is driving home my point.

            Capeesh?

          • John M Legge

            Sarcasm and irony do not travel across international borders well. On forums like these you should assume that your words will be taken at face value.

          • Swami

            Anyone reading this stream will now probably assume you are right, not knowing that my sarcasm got you inadvertently to admit YOU were making an absurd and ad hominem argument, which was then subsequently moved up to the feature comment. Don’t preach to me.

            Who’s on first?

          • Swami

            John,

            I wanted to separate my response from my clarification. Please read my clarification first.

            “If you choose to assume that market competition naturally trends to “perfection” and that there are no economies of scale…”

            Huh? When did I ever make these assumptions? Or are you suggesting these are foundational principles of Public Choice and Regulatory Capture?

            I do not assume anything like this. I also do not assume regulatory capture is an inevitable consequence of regulation. I do not assume regulation which helps firms inevitably hurts general welfare. I also do not assume elephants can fly, or that heat is cold.

            May I make a suggestion? If you want to have a discussion, yes, a serious discussion with a real person, then please respond to me and what I am actually saying. You may want to start by quoting my second to the last paragraph in my initial comment, and then responding to it. I would love to hear your serious feedback on the issues and questions.

          • John M Legge

            If you use the term “regulatory capture” I reasonably assume that you are using it in the sense that it is used in the relevant economics literature, where it is certainly described as inevitable. The Chicago “tight prior” assumptions are certainly foundational to regulatory capture, as they are for public choice.
            If you want a reasoned comment on your second paragraph please restate it in plain, dispassionate English.

          • Swami

            What part of this is not plain, dispassionate English?

            “What makes up good regulation? When is it excessive? What would Adam Smith suggest to control conspiracies among producers — more competition or more rules? And how would you or Smith respond to the Public Choice literature or the issue of regulatory capture.”

            Our discussion is starting to resemble a bad Abbott and Costello sketch.

          • John M Legge
          • Swami

            Thanks, John, I like the title.

    • Proof of work

      You seem tense. I got his point just fine. It’s pretty clear to me why he would keep it short and sweet with direct quotes after the way Friedman tried turning Mr Smith into an anarcho libertarian. Can hardly wait for what you do to me.

      Here’s a little a tidbit on regulation. It’s often in reaction to monopoly and the like. The bigger and fewer the corporations the greater and more bureaucratic the regulatory apparatus.

      If you don’t understand the meaning of laissez- faire why would you be reading an article on economics?

      Hope that makes a difference.

      What an ass

      • Swami

        Tony,

        Please don’t call me an ass.

        My point, to simplify the issue, is that by using a broad, nebulous term which allows people to fill in the blanks with their own mental riffraff that he can bunch rent seeking, cronyism, anarchism and so on into one sweeping, poorly argued dismissive. Get it? I am well aware that anyone can Google the term. Indeed I wish the author HAD Googled it.

        I have no issue with well designed, impartial, efficient and parsimonious regulation.

  • Pingback: Modern misuses of Adam Smith with Laissez-Faire economics | Mostly Economics()

  • Duncan Cairncross

    Excellent article
    The Wealth of Nations and The Theory of Moral Sentiments should be required reading for every economics course

  • ronaldusmax

    I have to agree with Swami Cat. This article is full of errors and assumptions. I would rate it an F if I were running an econ 101 class. Even the very first paragraph has several errors in it.