Was Adam Smith Really a Right-Winger? (Update) | Freakonomics Radio

This episode of Freconomics Radio revisits a previous discussion about Adam Smith, exploring his legacy and how his ideas have been interpreted and applied, often controversially, throughout history. The central question is whether Adam Smith, an 18th-century Scottish philosopher and economist, truly aligns with the modern perception of him as the patron saint of free-market capitalism. The discussion begins by considering what Smith might think of the contemporary UK economy. Aean Butler, director of the Adam Smith Institute, suggests Smith would find it tyrannical due to high taxation, which he would see as oppressive. Smith, a moral philosopher, is often thought of as the first modern economist, with his seminal work, "The Wealth of Nations," published in 1776. The episode delves into Smith's early work, "The Theory of Moral Sentiments" (1759), which established his reputation for humanity and sympathy. In this book, Smith argued that wealth doesn't equate to moral virtue and poverty doesn't preclude it, criticizing the societal tendency to admire the rich and powerful. His travels in Europe, while tutelage to a young duke, exposed him to different economic systems and the burgeoning Industrial Revolution. He observed a tendency for governments to be protectionist, a view he believed was detrimental to free trade. This experience, along with observations of the American colonies, informed his magnum opus, "The Wealth of Nations." "The Wealth of Nations," published in 1776, the same year Britain lost control of its American colonies, is described as a polemic against economic centralism and trade restrictions. Smith intended it for politicians of his day, who were entrenched in protectionist policies and the mercantilist idea of accumulating gold. The book resonated in America, with figures like James Madison and Alexander Hamilton referencing it. Glory Lou, author of "Adam Smith's America," notes that Smith was initially seen as a technical resource rather than an icon. His ideas were used as a blueprint, with founders studying "The Wealth of Nations" to understand national wealth. As political economy developed into an academic discipline, Smith became its recognized founder. However, his authority was later wielded as a "wedge" in political debates, with both free traders and protectionists citing him. This shift indicates that his intellectual authority became more important than the nuances of his actual ideas. The perception of Smith shifted significantly in the mid-20th century, largely due to the University of Chicago's economics department. Scholars like Jacob Viner and Frank Knight initially taught Smith as an early theorist of price, contributing to the department's academic credibility. However, a subsequent generation, including Friedrich Hayek, George Stigler, and Milton Friedman, reinterpreted Smith's concepts like individualism, self-interest, and the "invisible hand." This "Chicago school" interpretation streamlined Smith's thought, emphasizing self-interest as the primary economic motivator and presenting the invisible hand as a self-regulating market mechanism that inherently promotes the public good. This view, while powerful, obscured the complexities and potential drawbacks of commercial society that Smith himself acknowledged. For instance, the phrase "invisible hand," used sparingly by Smith to describe unintended consequences, became shorthand for a belief in market perfection, often overlooking negative externalities or Smith's concerns about inequality and the corrosive pursuit of wealth. Dennis Rasmusen, another Smith scholar, argues that the Chicago school's focus on the invisible hand, a concept Smith used only a few times, misrepresented his broader thought. Smith recognized the potential dangers of commercial society, including inequality and the tendency for people to engage in endless toil for fleeting material goods. While he ultimately defended commercial society as superior to alternatives, he was not a simple apologist for it. Milton Friedman, in particular, was a masterful communicator who popularized the "invisible hand" as a mechanism for efficient resource allocation, arguing against government intervention. This interpretation resonated widely, influencing politicians like Margaret Thatcher in the UK. The episode then shifts to the UK context, highlighting the influence of Adam Smith on Thatcher's economic policies. Aean Butler, whose Adam Smith Institute was founded in 1977, saw Thatcher's election in 1979 as an "open goal" for promoting free-market theories. Thatcher's agenda of tax cuts, reduced government spending, and privatization of state-owned industries was seen as embodying the conservative interpretation of Smith. Butler recounts the institute's early work on curbing bureaucracy and promoting contracting out local government services, which directly influenced Thatcher's policies. Privatization, from utilities to housing, was presented as a move towards a "capital-owning democracy." However, Mariana Matsicado, an economist at University College London, challenges this view. She argues that privatization in the UK, particularly the sale of public assets to foreign governments and corporations, often lacked necessary conditions to ensure public benefit. She contends that Smith's concept of a "free market" was not about being free from the state, but free from rent-seeking and value extraction. She believes Smith would have criticized modern financial practices like share buybacks and excessive executive pay, which he would have seen as forms of modern-day feudalism. Matsicado points out that a majority of the British public now favors public ownership of essential services like gas, water, and electricity, suggesting a divergence between the "laissez-faire" interpretation of Smith and public sentiment. The discussion also touches upon Smith's views on education and infrastructure, as outlined in Book Five of "The Wealth of Nations." While Smith advocated for public provision of these services, some, like Butler, suggest this part of the book might have been "rushed" and not central to his main arguments, which focused on the benefits of free trade. This raises the question of how consistently Smith's ideas align with minimal government intervention. The concept of "the Adam Smith problem," first explored by German scholars in the 19th century, is revisited. This problem posited a contradiction between Smith's humanistic "Theory of Moral Sentiments" and his economic treatise "The Wealth of Nations." While some scholars dismissed it as a pseudo-problem, others, like Glory Lou, argue that many modern interpreters, particularly economists, have not read "The Theory of Moral Sentiments" and thus fail to grasp the full scope of Smith's thought. Russ Roberts, president of Shalem College and host of the Econ Talk podcast, shares his personal journey of discovering "The Theory of Moral Sentiments." Initially dismissing it as non-economic, he found it to be a profound exploration of human nature, emphasizing our desire to be loved and to be "lovely"—to be worthy of love and respect. Roberts argues that Smith's emphasis on virtue and wisdom as paths to fulfillment, rather than solely the pursuit of wealth, is often overlooked. He suggests that economists, by focusing on measurable utility, often neglect the deeper aspects of a life well-lived that Smith explored. Roberts, a former University of Chicago student, acknowledges the influence of Friedman and Stigler but believes their interpretation, while not entirely invalidating Smith's economic principles, did not fully capture his philosophical depth. He argues that Smith's emphasis on the "invisible hand" should not be overappreciated, as it doesn't solve all problems and requires legislative and regulatory oversight. The episode concludes by suggesting that the "real Adam Smith problem" today is not a contradiction within his work, but the failure of many to read his philosophical writings, particularly "The Theory of Moral Sentiments." This neglect leads to a one-dimensional understanding of Smith, often reducing him to a proponent of unfettered markets. The episode advocates for a more nuanced appreciation of Smith, recognizing his concern for the poor, his distrust of government overreach, and his understanding of human motivation beyond pure self-interest, suggesting that a comprehensive reading of his work offers insights valuable to a broad spectrum of political thought.