How the Scots Invented the Modern World (33 page)

Division of labor is one universal condition for the making of civil society. The other, even more essential and universal, is self-interest. Smith describes it in Hume’s terms: as a passion or emotional impulse rather than a cold rational calculation, or what other philosophers liked to call “self-interest rightly understood.” Self-interest acts like an emotional spur. It is an inner compulsion to better ourselves and our circumstances, which forces us to take action even when we do not particularly want to. It is in fact the drive behind the division of labor.

Contrary to popular misunderstanding, Adam Smith never supposed that everyone is driven solely by self-interest in a material sense. He knew that many of us, perhaps most, are not. Certainly very few people are so driven that they make great sacrifices and efforts in order to gratify its demands. But enough do to make a difference. They force the pace of progress forward, prodded along by their imaginings of wealth and fortune, just as
The Theory of Moral Sentiments
foresaw. The surplus they produce, in a world governed by scarcity, spills over to the rest of us. “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner,” Smith wrote in one of the most famous passages of the
Wealth of Nations,
“but from their regard to their own interest.”

Of course, Smith was not the first to propose this paradox, that self-interest, even greed, is actually beneficial to society and to the human species. The Dutch moralist Bernard Mandeville had said the same thing almost a century earlier, arguing that what most moralists condemned as vices were actually virtues, in their beneficial effect on the economy:

Luxury employ’d a million of the poor,
and odious pride a million more;
Envy itself and vanity
were ministers of industry;
Their darling folly, fickleness
In diet, furniture, and dress,
That strange ridic’lous vice, was made
The very wheel that turn’d the trade.

Smith carried Mandeville one step further, however, revealing an even deeper paradox and a greater irony: the pursuit of our own self-interest actually causes us to reach out to others. This is true of all societies, as Hume and Kames had realized; the Bushman soon realizes that the hunt goes easier when he has help, instead of having to do it all himself. But Smith’s bold insight was to realize that it was the genius of capitalism to carry both of these characteristics, the pursuit of self-interest
and
the need for cooperation, to their highest pitch. On the one hand, it multiplies the opportunities, and lessens the amount of direct physical labor, necessary to pursue that interest. On the other, the relentless search for customers to buy, and for suppliers to sell, results in a vast network of interdependence, binding people together in far more complex ways than is possible in more primitive conditions. “In civilized society [a person] stands at all times in need of the cooperation and assistance of great multitudes,” Smith wrote, “while his whole life is scarce sufficient to gain the friendship of a few persons.”

Then still another paradox, and a further irony: the interdependence of the market begets independence of the mind, meaning the freedom to see one’s own self-interest and the opportunity to pursue it. We recall that for Hutcheson, human happiness had been about personal liberty, the capacity to live one’s life as one saw fit without harming others. For Kames, it had been about owning property, which gave us our sense of “propriety” and identity as human beings. Now Smith put the two together. By entering and competing in the great interactive dynamic network of modern society, at once impersonal but also indispensable to happiness, we become fully free and human. Independence in this sense becomes the hallmark of modern society, just as dependence on others or “servility” becomes the hallmark of primitive societies and institutions. “Nobody but a beggar,” Smith admonished, “chuses to depend chiefly upon the benevolence of his fellow-citizens.” Yet this has been the essential fate of the vast majority of humankind through most of history, as slaves toiling for their masters, as peasants handing over the harvest to their feudal lords, or as members of the tribe or clan dependent on their chieftains’ command for life or death—hapless creatures whose quality of life rests entirely on whether their chief is “gentle Lochiel” or a brute like Coll MacDonnell. Capitalism breaks that cycle, and offers the conditions under which we forge our own happiness: independence, material affluence, and cooperation with others.

Today, more than two hundred years later, three great myths still surround Adam Smith and his
Wealth of Nations.

The first is that Smith believed that the wealth of capitalism was generated by some great, guiding “invisible hand.” In fact, the term
,
which appears in
Wealth of Nations
and
The Theory of Moral Sentiments,
is meant to be taken, once again, as irony. Smith did believe that capitalism produces its own kind of natural rational order, based on the market and its complex, interlocking system of self-interested exchange. To a superficial observer it might appear as if everyone were moving according to a single directing mind or “invisible hand.” But his real point was not that a market-based order was perfect or even perfectible. Rather, it was more beneficial, and ultimately more rational, than ones put together by politicians or rulers, who are themselves creatures of their own passions and whims.

Here Smith’s chief target was what he termed, and what has been known ever since, as “the mercantile system.” He found it exemplified in theory in a book by another Scot, Sir James Steuart, titled
Inquiry into
the Principles of Political Oeconomy,
and in practice in the British government’s handling of its overseas empire.
²⁰
Steuart’s
Inquiry
appeared in 1767, and although Smith pronounced the book an “ingenious performance,” everything about it infuriated him. Steuart was a strong believer in state intervention to develop trade and expand economic growth. He even argued that without the government’s constant attention, its foreign trade might actually grind to a halt, leaving the nation vulnerable and destitute.

This was the sort of justification for punitive tariffs, export subsidies, and government-granted trade monopolies that Smith saw at work in Britain’s overseas empire, and which he was determined to fight. He wrote of Steuart’s work, “I flatter myself, that every false principle in it, will meet with a clear and distinct confutation in mine.” In fact, Books Three and Four of the
Wealth of Nations
are a devastating analysis of the attempts by successive governments to manipulate the powerful productive forces of overseas trade, foolishly believing they could increase wealth by government dictate, when in fact they usually did the opposite.

The centerpiece is Smith’s scathing critique of London’s policy toward the American colonies—which, by the time he was writing in 1775, had reached a critical point. Smith followed the American crisis, not only from recent news reports and Parliamentary debates, but also from his tobacco merchant friends such as Glassford and Ingram, who had lived in Virginia and Maryland and knew the situation firsthand. They understood, as Smith did, that Scotland was perfectly poised to benefit from a policy of free trade with America, and that London’s shortsighted efforts to bend the Americans to its will would not only cripple their own business there (which it did), but would cost Britain her empire as well. “There are no colonies of which the progress has been more rapid than that of the English in North America,” Smith wrote, and yet thanks to its monopolistic policies, “Great Britain derives nothing but loss from the dominion which she assumes over her colonies.”

Smith’s critique reached out beyond colonial monopolies to all kinds of unwanted government meddling in economic affairs. This is the second myth about
Wealth of Nations,
that in it Smith invented the notion of laissez-faire capitalism, in which the government has little or no role to play. In fact, the phrase
laissez-faire
comes from French economists, not Smith, who does not use the term at all. And contrary to the myth, Smith did see an important role for a strong national government. He saw it as necessary for providing a system of national defense, to protect the society and its commerce with its neighbors. It also must provide a system of justice and protection of individual rights, particularly the right to property: “[I]t is only under the shelter of the civil magistrate that the owner of that valuable property, which is acquired by the labor of many years, or perhaps of many successive generations, can sleep a single night in security.” And it is needed to help defray the expenses of essential public works, such as roads, bridges, canals, and harbors.

Beyond that, however, Smith saw any other form of government interference as having all kinds of unintended consequences. History offered innumerable examples of governments and rulers, often with the best intentions, trying to change or adjust their nation’s economic life, with disastrous results. Roman emperors had attempted to regulate the sagging economy of the Late Empire, and had destroyed it instead. Spain had tried to maintain a monopoly on the flow of bullion from the New World, only to bankrupt itself. Smith worried that Britain and its policy in America was headed down the same road.

To Adam Smith, belief in a free market was not an intellectual dogma, but a basic lesson of history. It was time for rulers to learn from their mistakes, and let commercial society follow its own course:

All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way. . . . The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of society.

This is the Adam Smith with whom we are all familiar: the great prophet of free-market capitalism as a system of “natural liberty,” and the great enemy of any and all attempts to tinker with that system, whether for the sake of political power or social justice.

But there is another, less obvious Adam Smith who is also appears in the pages of
Wealth of Nations.
He, too, was a player in a contemporary debate raging in Edinburgh, about the new “commercial spirit” sweeping across Scotland and what it might mean for the future. This Adam Smith also flies in the face of the third myth about him and his greatest work, that it is basically an apologia for big business and the merchant class.

In fact, while
Wealth of Nations
speaks highly of free markets, it treats businessmen themselves in a very different light. To begin with, Smith saw the important beneficiaries of the free market not as businessmen but as consumers. “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” This was precisely what the existing British system failed to do. It put the interest of the producers and merchants ahead of that of consumers, who only want low prices and a ready supply of goods. Merchants often prefer the opposite. In fact, Smith understood that much of the British government’s disastrous trade policies came at the instigation of the London merchants themselves, who wanted to protect their livelihood. “It is the interest of every man to live as much at his ease as he can,” Smith notes in Book Five, and that rule applies as much to the businessman as it does to the landed aristocrat or university professor.

His overall picture of the typical businessman is certainly unflattering, and reading it must have made some of his Tobacco Lord friends slightly uncomfortable. He notes that while they often complained about high prices, “they say nothing concerning the bad effects of high profits.” He speaks of their “mean rapacity” and “monopolizing spirit” and suggests that “the government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatsoever.” Most of this was aimed at the business community in London, which had instigated and benefited from the corrupt old imperial system, rather than Glasgow. Smith’s point was that the free market was as much a check upon the greed and power of the merchant as it was on an interfering king or government bureaucrat.

But Smith saw another, more systematic corruption flowing from commercial society, one that was more pernicious and worried him deeply. Even as capitalism increases specialization, and more sophistication in the overall output of goods and services, the individuals caught up in the process become narrower in their interests and less concerned with what happens outside their shop, office, or showroom. They come to weigh everything in terms of their job, of profit and loss, and lose sight of the larger picture. This worry appeared years before in one of Smith’s lectures, and is worth quoting in full:

Another bad effect of commerce is that it sinks the courage of mankind, and tends to extinguish martial spirit. In all commercial countries the division of labor is infinite, and every one’s thoughts are employed about one particular thing. . . . The minds of men are contracted, and rendered incapable of elevation. Education is despised, or at least neglected, and heroic spirit is utterly extinguished.