Adam Smith

Adam Smith, though deeply influenced by the physiocrats, however, could not accept that labour can only produce on land and in nature. Labour being the source of ‘value’ could produce wherever it performed.¹⁰ Commerce, industry and agriculture, all became source of wealth for Smith. And how to maximize this wealth became the main objective of Smith’s inquiry in Nature and Causes of the Wealth of Nations (1776). In 1759, before he discussed the wealth of nations, Smith had dwelt upon the Theory of Moral Sentiments. The discussed the dilemma of how man, a creature of self-interest, can form moral judgements by suspending self-interest. Smith contented that ‘the answer lay in our ability to put ourselves in the position of a third person, an impartial observer …’¹¹ If we contend that liberalism is the philosophy of the individual and Smith is a philosopher within the liberal fold, we must start with his views of man to understand why he needs non-interference of the State to argue for the wealth of nations. If Smith’s inquiry into man as a creature of self-interest is any indication, like all liberals, he was making his arguments for a self-regulated market through the ‘invisible hand’.

Smith views self-interest as the moving force in an individual for doing and acting in society. It is a driving power to guide men to whatever work society is willing to pay for. Smith asserted that everyone has a natural inclination to trade and do business. In his words:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities, but of their advantages.¹²

This basic instinct to do business to our best advantage needs a self-regulated mechanism, if it has to emerge in the form of a market leading to general prosperity. This regulator, Smith identifies as ‘competition’—the conflict of the self-interested actors in the marketplace. In short, Smith deducing from the nature of individual as self-interested and having a natural propensity to trade and do business, concludes that it will result in competition in a situation of similarly self-interested individuals. Thus, Smith’s view of man is that of a rational calculator in competition with similar individuals.

But how does this help the society? Smith’s answer is that this will result in provision of those goods, which society wants, in the quantity that society desires and at the price it is ready to pay; demand and supply, and competition. This is the law of the market, the ‘invisible hand, which is self-regulating. Thus Smith’s market is both a pinnacle of economic freedom and strictest taskmaster. The following conclusions emerge from Smith’s views:

• Individual is a self-interested, rational calculator and has the propensity to trade and do business. This view has been termed as a view of ’economic man’ by his critics. The concept of economic man assumes that everyone acts only in self-interest and in a capitalist system only selfish consideration prevails. How would then any welfare be possible? Smith would answer that self-regulating demand and supply would provide general stability and prosperity. In fact, Utilitarian philosophy based on hedonistic calculus is somewhat built upon Smith’s understanding.
• An environment of self-interested individuals results in competition, which provides a self-regulating mechanism to the market. This can be termed as a situation of ’atomistic competition. But competition along with resultant demand and supply is the basis for Smith’s ‘invisible hand’ regulated market. It is this assurance that leads Smith to argue for non-interference by the State or external agency in the affairs of the market—a condition of laissez-faire.

Smith was explaining as well arguing for freedom of an economic man and liberty for commerce and industry. In his Wealth of Nations, Smith has explained how commercial capitalism emerged and has referred to this, as ‘the system of perfect liberty’. This is also called the system of natural liberty.¹³ Commercial capitalism, representing a condition of natural liberty, is the basis for achieving general prosperity and the government should not interfere to achieve general prosperity away from this principle. In defining his system of natural liberty, Smith says:

Everyman, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest in his own way, and to bring both his industry and capital into competition with those of any other man or order of men. The sovereign is completely discharged from … the duty of superintending the industry of the private people, and of directing it toward the employments most suitable to the interests of the society.¹⁴

Through his concept of natural liberty, Smith favours liberation of business and free market from the regulation and restriction of government. He would argue that governments are spendthrift, irresponsible, and unproductive. He is against government’s interference with market mechanism and restraints on imports and bounties of exports, against government laws that shelter industry from competition, and against government spending for unproductive ends.’¹⁵ However, despite his reservations against the government promoting welfare activities, Smith did not oppose all government actions that could promote general welfare. He favours government action to mitigate the stultifying effect of mass production where a man whose whole life is spent in performing simple operations becomes ignorant.¹⁶ He also favours public education to raise citizenry besides defence, protection and public works.

Smith was an advocate of a self-interested economic man, commercial capitalism as condition of natural liberty, self-regulated market, minimal state and laissez-faire individualism. It can be said that what Locke sought to achieve through the doctrine of natural rights and a night-watchman government, Smith sought through the doctrine of natural liberty and the ‘invisible hand’ of market. It seems, argument for laissez-faire individualism was aimed at backing the industrial and commercial class. During Smith’s time, there was hardly any function that would qualify as welfare function performed by the state. Further, the state at that time was still under the control of landlords and nobles and posed a hurdle to the rising commercial and industrial class. Smith’s contribution, with respect to self-regulating economic activity through ‘invisible hand’, competition and demand-supply factor provides important theoretical ground for operation of capitalist economy along with limited government.