Adam Smith’s 300th birthday: the market economy as the only effective tool to fight poverty (Part 4)
23 June 2023
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Society and Culture
Society and Culture
23 June 2023
Economic Theory
11 November 2024
…continued from Part 3
The invisible hand
Smith is often criticised today for highlighting the importance of self-interest. He emphasised the importance of selfishness, precisely because people need help from other people all the time. However, he thought that in doing so, people could not rely solely on the goodwill of others. It is in this context, that he also employed the term “invisible hand,” for which he became so famous, although this phrase only appears three times in Smith’s entire body of work (similar to Schumpeter and the phrase “creative destruction,” which he only used twice):
“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it …. 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.”[1]
The economist Ludwig von Mises emphasised that it is a mistake to contrast egoistic and altruistic actions. Fortunately, he explains, “The power to choose whether my actions and conduct shall serve myself or my fellow beings is not given to me . . . If it were, human society would not be possible.”[2] And Friedrich August von Hayek described as Adams Smith’s greatest contribution to scientific thought – pointing far beyond economics – “his notion of a spontaneous order that creates complex structures like an invisible hand.”[3]
Totalitarian ideologies seek to diminish the “I.” They want to subordinate it to the “we,” as demonstrated by two of the maxims of National Socialism: “Du bist nichts, dein Volk ist alles” (“You are nothing, your people are everything”) and “Gemeinwohl vor Eigenwohl” (“Public interest before self-interest.”) In a speech in November 1930, Adolf Hitler said: “In the entire sphere of economic life, in the whole of life itself, one will have to do away with the idea that the benefit of the individual is the essential thing and that the benefit of the whole is built on the benefit of the individual, i.e., that the benefit of the individual is what gives rise to the benefit of the whole in the first place. The reverse is true: the benefit of the totality determines the benefit of the individual . . . If this principle is not recognised, then a selfishness must inevitably set in and tear the community apart.”[4]
This conviction unites all totalitarian thinkers, revolutionaries and dictators, from Robespierre in the French Revolution to Lenin, Stalin, Hitler and Mao. Hannah Arendt, one of the greatest thinkers of the twentieth century, wrote in her work On Revolution: “It was not only in the French Revolution but in all revolutions which its example inspired that the common interest appeared in the guise of the common enemy, and the theory of terror from Robespierre to Lenin and Stalin presupposes that the interest of the whole must automatically, and indeed permanently, be hostile to the particular interest of the citizen.”[5] Yes, absurdly, Arendt claims that selflessness is the highest virtue, and the value of a man may be judged by the extent to which he acts against his own interest and his own will.[6]
Criticism of Adam Smith
Smith was a pioneer whose work provided a foundation for later liberal economists to build upon – Hayek and Mises held him in high esteem. But Smith’s work has also been subjected to sharp criticism from within the circle of free-market economists. The libertarian American economist Murray N. Rothbard, who in his monumental work Economic Thought Before Adam Smith. An Austrian Perspective on the History of Economic Thought, minces no words in his vilification of Smith, arguing that Smith was by no means the advocate of free-market economics he has commonly been portrayed as. In fact, Rothbard alleges that Smith’s erroneous labor theory of value makes him the forerunner of Karl Marx and claims that Marxists would certainly be justified in citing the Scottish philosopher and hailing him as the ultimate inspiration of their own founding father.[7] According to Rothbard, Smith failed to understand the economic function of the entrepreneur and even fell short of the insights provided by economists such as Richard Cantillon,[8] supported state-imposed caps on the rate of interest, heavy taxes on luxurious consumption and extensive government intervention in the economy.[9] On a personal level, Rothbard says Smith was also untrustworthy because he had previously campaigned for free trade but spent the last twelve years of his life as a commissioner of Scottish customs.[10]
Much of this criticism is certainly justified, and yet it would be wrong to call Adam Smith a left-winger. Even the American philosopher Samuel Fleischacker, who emphasises Smith’s leftist tendencies, concedes Smith would not necessarily identify with contemporary social democrats or defend the modern welfare state.[11]
Against this criticism stand Smith’s deep distrust of government intervention in the economy and his almost boundless faith in the “invisible hand” that steers markets in the right direction. When the economy is ruined, it is, according to Smith, never by entrepreneurs and merchants, but always by the state: “Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct,” he wrote in his major work The Wealth of Nations.[12] And he added optimistically: “The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor.”[13]
The metaphor says a great deal: private economic actors represent healthy, positive development, while politicians obstruct the economy with their nonsensical regulations. Adam Smith would have been very skeptical today if he could see governments in Europe and the United States increasingly intervening in the economy and politicians who believe they are smarter than the market.
One of Smith’s shortcomings was that he did not understand the economic function of the entrepreneur, which was later so brilliantly elaborated by thinkers such as Joseph Schumpeter. Erroneously, he saw the entrepreneur primarily as a manager and business leader rather than as an innovator. Smith recognised the importance of “empathy,” but he did not equate it with entrepreneurship at any point in his work. Today, we see in Steve Jobs and other entrepreneurs who understand the needs and feelings of their customers better and earlier than the customers themselves, that empathy – and not “greed” – is indeed the basis of entrepreneurial success and the foundation of capitalism.
Smith’s failure to understand the role of the entrepreneur and his evident resentment of the rich are indeed characteristics that Smith shares with those on the Left of the political spectrum. However, this does not at all apply to his advocacy of improved conditions for workers. For, according to Smith, improving the situation of ordinary people would not come about through redistribution and excessive state intervention, it would be the natural result of economic growth, which in turn needed one thing above all: economic freedom. To the extent that economic freedom prevails and markets expand, people’s standard of living will also rise. Three hundred years after Smith’s birth and some 250 years after the publication of his magnum opus, we know that the moral philosopher and economist was right: private property and the market economy are the foundations of growth, and if the state does not interfere too much in the economy, everybody’s lives will improve, especially those of the poor.
Proponents of capitalism have failed to place precisely these correlations at the heart of their defence of the market economy: It is not primarily the strong who need the market economy, because they will somehow manage in any system, it is the weak and the poor, whose only chance to improve their living conditions is in a free market economy.
Dr Rainer Zitelmann is the author of The Power of Capitalism.
_________
[1] Smith, Wealth, 399.
[2] Mises, Socialism, 357.
[3] Hayek, “Die überschätzte Vernunft,” 117.
[4] Hitler, speech given on November 13, 1930, quoted in Zitelmann, Hitler’s National Socialism, 301.
[5] Arendt, 79.
[6] Arendt, 79.
[7] Rothbard, 435.
[8] Rothbard, 451.
[9] Rothbard, 466.
[10] Rothbard, 468.
[11] Fleischacker, 287.
[12] Smith, Wealth, 305.
[13] Smith, Wealth, 306.
The invisible hand
Smith is often criticised today for highlighting the importance of self-interest. He emphasised the importance of selfishness, precisely because people need help from other people all the time. However, he thought that in doing so, people could not rely solely on the goodwill of others. It is in this context, that he also employed the term “invisible hand,” for which he became so famous, although this phrase only appears three times in Smith’s entire body of work (similar to Schumpeter and the phrase “creative destruction,” which he only used twice):
“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it …. 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.”[1]
The economist Ludwig von Mises emphasised that it is a mistake to contrast egoistic and altruistic actions. Fortunately, he explains, “The power to choose whether my actions and conduct shall serve myself or my fellow beings is not given to me . . . If it were, human society would not be possible.”[2] And Friedrich August von Hayek described as Adams Smith’s greatest contribution to scientific thought – pointing far beyond economics – “his notion of a spontaneous order that creates complex structures like an invisible hand.”[3]
Totalitarian ideologies seek to diminish the “I.” They want to subordinate it to the “we,” as demonstrated by two of the maxims of National Socialism: “Du bist nichts, dein Volk ist alles” (“You are nothing, your people are everything”) and “Gemeinwohl vor Eigenwohl” (“Public interest before self-interest.”) In a speech in November 1930, Adolf Hitler said: “In the entire sphere of economic life, in the whole of life itself, one will have to do away with the idea that the benefit of the individual is the essential thing and that the benefit of the whole is built on the benefit of the individual, i.e., that the benefit of the individual is what gives rise to the benefit of the whole in the first place. The reverse is true: the benefit of the totality determines the benefit of the individual . . . If this principle is not recognised, then a selfishness must inevitably set in and tear the community apart.”[4]
This conviction unites all totalitarian thinkers, revolutionaries and dictators, from Robespierre in the French Revolution to Lenin, Stalin, Hitler and Mao. Hannah Arendt, one of the greatest thinkers of the twentieth century, wrote in her work On Revolution: “It was not only in the French Revolution but in all revolutions which its example inspired that the common interest appeared in the guise of the common enemy, and the theory of terror from Robespierre to Lenin and Stalin presupposes that the interest of the whole must automatically, and indeed permanently, be hostile to the particular interest of the citizen.”[5] Yes, absurdly, Arendt claims that selflessness is the highest virtue, and the value of a man may be judged by the extent to which he acts against his own interest and his own will.[6]
Criticism of Adam Smith
Smith was a pioneer whose work provided a foundation for later liberal economists to build upon – Hayek and Mises held him in high esteem. But Smith’s work has also been subjected to sharp criticism from within the circle of free-market economists. The libertarian American economist Murray N. Rothbard, who in his monumental work Economic Thought Before Adam Smith. An Austrian Perspective on the History of Economic Thought, minces no words in his vilification of Smith, arguing that Smith was by no means the advocate of free-market economics he has commonly been portrayed as. In fact, Rothbard alleges that Smith’s erroneous labor theory of value makes him the forerunner of Karl Marx and claims that Marxists would certainly be justified in citing the Scottish philosopher and hailing him as the ultimate inspiration of their own founding father.[7] According to Rothbard, Smith failed to understand the economic function of the entrepreneur and even fell short of the insights provided by economists such as Richard Cantillon,[8] supported state-imposed caps on the rate of interest, heavy taxes on luxurious consumption and extensive government intervention in the economy.[9] On a personal level, Rothbard says Smith was also untrustworthy because he had previously campaigned for free trade but spent the last twelve years of his life as a commissioner of Scottish customs.[10]
Much of this criticism is certainly justified, and yet it would be wrong to call Adam Smith a left-winger. Even the American philosopher Samuel Fleischacker, who emphasises Smith’s leftist tendencies, concedes Smith would not necessarily identify with contemporary social democrats or defend the modern welfare state.[11]
Against this criticism stand Smith’s deep distrust of government intervention in the economy and his almost boundless faith in the “invisible hand” that steers markets in the right direction. When the economy is ruined, it is, according to Smith, never by entrepreneurs and merchants, but always by the state: “Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct,” he wrote in his major work The Wealth of Nations.[12] And he added optimistically: “The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor.”[13]
The metaphor says a great deal: private economic actors represent healthy, positive development, while politicians obstruct the economy with their nonsensical regulations. Adam Smith would have been very skeptical today if he could see governments in Europe and the United States increasingly intervening in the economy and politicians who believe they are smarter than the market.
One of Smith’s shortcomings was that he did not understand the economic function of the entrepreneur, which was later so brilliantly elaborated by thinkers such as Joseph Schumpeter. Erroneously, he saw the entrepreneur primarily as a manager and business leader rather than as an innovator. Smith recognised the importance of “empathy,” but he did not equate it with entrepreneurship at any point in his work. Today, we see in Steve Jobs and other entrepreneurs who understand the needs and feelings of their customers better and earlier than the customers themselves, that empathy – and not “greed” – is indeed the basis of entrepreneurial success and the foundation of capitalism.
Smith’s failure to understand the role of the entrepreneur and his evident resentment of the rich are indeed characteristics that Smith shares with those on the Left of the political spectrum. However, this does not at all apply to his advocacy of improved conditions for workers. For, according to Smith, improving the situation of ordinary people would not come about through redistribution and excessive state intervention, it would be the natural result of economic growth, which in turn needed one thing above all: economic freedom. To the extent that economic freedom prevails and markets expand, people’s standard of living will also rise. Three hundred years after Smith’s birth and some 250 years after the publication of his magnum opus, we know that the moral philosopher and economist was right: private property and the market economy are the foundations of growth, and if the state does not interfere too much in the economy, everybody’s lives will improve, especially those of the poor.
Proponents of capitalism have failed to place precisely these correlations at the heart of their defence of the market economy: It is not primarily the strong who need the market economy, because they will somehow manage in any system, it is the weak and the poor, whose only chance to improve their living conditions is in a free market economy.
Dr Rainer Zitelmann is the author of The Power of Capitalism.
_________
[1] Smith, Wealth, 399.
[2] Mises, Socialism, 357.
[3] Hayek, “Die überschätzte Vernunft,” 117.
[4] Hitler, speech given on November 13, 1930, quoted in Zitelmann, Hitler’s National Socialism, 301.
[5] Arendt, 79.
[6] Arendt, 79.
[7] Rothbard, 435.
[8] Rothbard, 451.
[9] Rothbard, 466.
[10] Rothbard, 468.
[11] Fleischacker, 287.
[12] Smith, Wealth, 305.
[13] Smith, Wealth, 306.
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