Adam Smith: the symbol of laissez-faire economics?

You only have to turn over a British twenty pound note, to see arguably one of the most influential philosophers of all times, Adam Smith. Smith formulated one of the most crucial social sciences in understanding human interactions – economics – in his renowned book ‘The Wealth of Nations’. The book is considered his magnum opus and earned Smith a massive contemporary reputation as well as a legacy as ‘the father of modern economics’ and, importantly to this article, has often been labelled the first advocator of free-market capitalism.

Firstly, it would be helpful to define free-market economics and then to go onto how, in my opinion, Smith was not an advocate of such a system. The definition of the free-marker reads as follows; free-market economics is an economic system in which there is a competitive market economy where prices are determined by supply and demand. The economy is free of any government intervention in the strictest sense of the word – governments sole duty is to protect property rights. The market therefore is left to work off the principle of market forces to self regulate, and here I must consider that Smith is an influence.

Regarding to the idea of self regulating markets, Smith saw this as working via an Invisible Hand. For Smith, it was a social mechanism that channelled ambition toward meeting the needs of society, even if the ambitious had no benevolent intentions, but it is important to note that he only used the term three times in his writings. Many economists have however jumped on the bandwagon of over emphasizing Smith’s defence of the invisible hand and argue, incorrectly, this was the main idea within ‘The Wealth of Nations.’ It would therefore appear that the idea Smith supported such a laissez-faire economy (a term never actually used by Smith) has been overstated and people who appear to call upon the idea that Adam Smith should be a celebrated free- market hero misrepresent or exaggerate Smith’s ideas.

Most free-market economists will fight strongly against any sort of taxation, especially a progressive taxation which they often dismiss as at best ‘interventionist’, at worst ‘socialist’. It is therefore interesting to note of Smith’s support for citizens paying taxation: “The subjects of every state ought to contribute towards the support of the government.” Smith even proudly boasted that: “Every tax, however, is, to the person who pays it, a badge, not of slavery, but of liberty.” Which is rather odd for a man often labelled as the ‘father of the free-market’, when most modern free-market thinkers believer taxation to be a form of violence and theft!

Some free-market advocates may compromise at a flat rate of taxation yet, in two places in the ‘Wealth of Nation’s Smith vigorously defends a progressive system of income taxation:

  • “[taxation should be contributed] in proportion to the revenue which they respectively enjoy under the protection of the state.”
  • “The rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

Smith even specifically named taxes that he thought should be required by the state among them luxury goods taxes and tax on rent. He believed that tax laws should be as transparent as possible and that each individual should pay a “certain amount, and not arbitrary” in addition to paying this tax at the time “most likely to be convenient for the contributor to pay it.”

As a free-marketeer, we would assume Smith would be totally opposed to any sort of government intervention. Granted, Smith viewed government intervention in the market with great scepticism, yet he was prepared to accept intervention in the specific cases where he judged that it would beneficial and would not undermine the basically free character of the system. Smith, however, went even as far as to favour direction state intervention and direct state provision of certain services. He argued it was the role of the government to provide goods: “of such a nature that the profit could never repay the expense to any individual” this led Smith to support public education and religious institutions as providing general benefit to the society as well as believe that a government monopoly should subsidise newly formed industry, but he did fear that as new businesses grew they would be unwilling to surrender the government help, which he saw, ultimately, as anti-competitive and against his idea of a market economy. Additionally, Smith even outlined the proper expenses of the government including:

  • Enforce contracts and provide justice system
  • Grant patents and copy rights
  • Provide public goods such as infrastructure
  • Provide national defence
  • Regulate banking

In addition, he was in favour of retail tariffs and believed that they would eventually bring down the price of goods. He argued in ‘Wealth of Nations’: “The recovery of a great foreign market will generally more than compensate the transitory inconvenience of paying dearer during a short time for some sorts of goods.” Smith also supported tariffs on imported goods to counteract an internal tax on the same good but also saw tariffs as important for national defence, in both economic terms and an imperialist sense. There is then a strong case that rather than the free trade of free-market economics, Smith was in fact supportive of ‘fair trade’ which is generally an economic position occupied by the centre-left not the right-wing Smith is often associated with.

Finally, noted socialist Noam Chomsky has argued Smith’s reasons for supporting markets have been greatly overstated and often used as a propaganda tool by the economic right-wing. Chomsky, and others on both the right and left, believe Smith supported markets in the pursuit of greater social equality, and that Smith opposed wage labour and private properties exploitation of the working classes. We only have to look at the ‘Wealth of Nations’ to see that this is in fact true:

  • “Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate.
  • “As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed.”

Most people still fall victim to thinking that Smith was a free-market economist without exception – he was not. Even a contemporary of his, David Ricardo went on to argue that Adam Smith was not arguing for a free-market. I believe this is an overstatement and even a dishonour to the legacy of Smith. Undoubtedly he was an advocate of the market system; after all, he was the first to refer to the economy in market terms. However, his concern for social equality and greater personal liberty led him not to favour the market but to turn to the state to intervene appropriately, and he did, even in places show traits of disagreeing with the very philosophy he has been said to have ‘founded’. Adam Smith is still, and perhaps always will be, a highly influential figure but to jump to gun and label him as a free-marketeer appears to miss the point of what he was arguing altogether.

December 24, 2011 / Matthew Beebee

2 thoughts on “Adam Smith: the symbol of laissez-faire economics?

  1. I agree with some of your interpretations, however I think you’re reaching a bit by saying Smith was more center-left than right-wing. The fact is that during his time no ideology existed like we have today. Instead, I believe Smith was a responsible citizen who supported a competitive marketplace combined with goodwill towards society. However, good post. Enjoyed it.

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