By Chet Yarbrough
By Adam Smith
Narrated by Gildart Jackson
“The Wealth of Nations” is often referred to but rarely read or listened to in the 21st century. Thirty Six hours of an audio book is punishing. However, one is surprised by Adam Smith’s prescient understanding of the value of freedom and his appreciation of American and British conflict over American’ colonization. “The Wealth of Nations” is not only about economics. It is about politics as an essential ingredient of economics.
Britain was among the mercantile leaders of the world when his book was published in 1776, the year of American Independence. Dutch dominance had receded; Spain and France were vying for monarchical rule of Western Europe while Napoleon was soon to dominate the east and west European continent. British imperialism was on the rise. Britain became the dominant moral and economic power of the 19th century.
Adam Smith’s publication defined and codified economics while recognizing the economic limitation of imperialist expansion. He recognized that division of labor increased productivity. He outlined what creates value. He recognized the importance of education and apprenticeship. Smith lauded technological improvements that increased productivity. He understood that profit is needed to expand productivity. What is surprising is, long before Britain’s ascension to the moral and economic leadership of the world, Smith noted the error of denying self-determination to distant colonies. (One wonders how Smith’s observations predict the future of American moral and economic leadership.)
Smith believed that whatever is produced at the cheapest price and best quality for the consumer is the guiding principle of “The Wealth of Nations”. Smith argued that business regulation should begin with the best interest of the consumer at the forefront of business decisions and government legislation. In general, Smith argues that trade monopolies are bad and competition is good. Governments that restrict trade hurt the consumer; therefore, tariffs on foreign goods should be abolished. Anything that restricts free trade is bad. He believed that “The Wealth of Nations” is created by “the invisible hand” that allows free-trade to run its course.
This narrow interpretation of economic success in “The Wealth of Nations” suffers from the same nearsightedness of a more contemporary author, Ayn Rand. Rand argues that competition, without government interference, is essential to progress. Both authors ignore weaknesses inherent in human nature that demand some level of government regulation.
On the other hand, government regulation is subject to the same human frailties as business. The law of “unintended consequence” plays out in both political and business decisions. Both employee and employer are consumers. The economic consequences of wages that do not meet the basic needs of family survival because of foreign competition, technology, industrial obsolescence, etc. have real consequence to employers as well as employees. Bankruptcies occur, unemployment rises, the rich become less rich and the poor starve. Just as Smith reviled the negative consequence of monopolies, free markets and human nature accelerate the gap between rich and poor.
Smith is right. Rand is right. But, both are idealistic rather than realistic because of the nature of humankind. Without regulation, unfettered free markets destroy the best that capitalism has to offer. They both infer everything works out in the long run when humankind is left alone. Of course, as John Maynard Keynes noted, we are all dead in the long run. (In fairness, Smith does acknowledge limited circumstances in which government regulation is justified.)
What is fascinating about Smith’s work is its historical context. He infers that American colonies have reason for discontent because of British taxation without representation. He also suggests Britain’s imperialist decisions and actions should be tempered by a cost benefit analysis of what British subjects receive in respect to costs of managing economies thousands of miles away. Smith effectively introduced rationality to economics. Capitalism was born.
One can argue that Britain followed Smith’s advice about imperialism through the 18th and 19th centuries to become the most powerful nation in the world. But Britain’s grasp of the cost of imperialism began to slip in the 20th century and a steady decline in economic strength began. The cost of imperialist policy exceeded the benefit; not to mention, the inherent immorality and unfairness of cultural subjugation.
Visiting “The Wealth of Nations” is a worthwhile journey into history. One wonders–Is there a 21st century Adam Smith in America’s future or is he/she pottering around Asia, Europe, the Middle East, or Africa and not yet recognized? Is there an alternative to free market capitalism that insures freedom and offers prosperity?