Adam Smith – “The Invisible Hand”

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Adam Smith’s work The Wealth of Nations, from which this Penguin edition is excerpted from, typifies the thought behind the American Constitution and of the contemporary intellectual climate. The Enlightenment held up the rights of an individual as an expedient to the greatest degree of liberty possible in human society. He discusses how different states have imposed economic institutions that belie the economically libertarian stance he took and how they have failed as a result. The extracts in Penguin’s “Great Ideas” text focus on Britain.

Smith first addresses the workplace and why the division of labour is key to both an efficient business and a productive economy. He argues that by allowing workers to focus on one task they will become more proficient than if they were to spread their efforts over multiple tasks. They will necessarily find the quickest way to do this task in order to reduce their work. This leads, he claims, to the innovations of the eighteenth century that propelled industrialisation and commercialisation. The following centuries testify to Smith’s accurate assumptions with Ford motors revolutionising car manufacturing with the production line that began soaring profits for the company and many like it that adopted the division of labour principle.

Much of the text focuses on the regulation of commerce which Smith analyses through his study of Britain and its relationship with mainland Europe. The effect of regulating international trade has been to increase the price of foreign goods, which consequently devalues the real value of domestic goods, and to protect domestic big business from the threat of outside competitors. Now, in many cases these are done with the intentions of protecting the state’s citizens and even today we hear very similar purposes espoused by the intellectual elites and politicians that appeal for our consensus. Yet in reality these policies harm the consumer. The average person suffers from protectionism due to the inflation of goods that would have been cheaper if imported from elsewhere. Even long-term it is the consumer who loses out because the big businesses, who are the principle benefactors of commercial restraints, are able to lobby the government for monopolies over their goods and in effect persuading government to change their policies in the interest of themselves rather than the citizens who they should be protecting. Smith sums this juxtaposition up neatly, “it is thus that every system which endeavours, either by extraordinary encouragements…or by extraordinary restraints…is in reality subversive of the great purpose which it means to promote.”

Smith saw as we may see today, that the road to hell is paved with good intentions and nowhere is this more noticeable in politics where the plausible is more highly regarded than the possible. It is plausible, for instance, that by imposing tariffs on trade from a richer nation, the recipient nation will economically benefit, but the reality that Smith deals with shows this is not the case. When Britain and France established restraints on each other’s trade of over 20% what they found was a depreciating incentive for sellers to sell and therefore goods for buyers to buy. It was the average person of each country that financially lost out. Smith neatly summarises this point: “As a rich man is likely to be a better customer to the industrious people in his neighbourhood than a poor, so is likewise a rich nation”. If neither country had enforced such high, arbitrary tariffs they would have prospered at a higher rate due to increased trade, enabling the people of their countries to access the highest quality goods at the cheapest prices.

Government often tends to take money from people and divert it into another cause in order to help the public, but such power “would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it”. If we are to reach this conclusion of a necessary but unintentionally malicious government it would be sensible to limit their power through the reduction of tax, taking into our own hands what government seek to do themselves. The interest of politicians is often far different from that of the people they seek to represent. In contrast to the intervening government of Britain, Smith poignantly proposes that in a free market;

“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, and to bring both his industry and capital into competition with those of any other man, or order of men”.

That an individual can pursue their private interest and, as if guided by an invisible hand, benefit the public interest is the foundation of Smith’s world view and the reason for his deserved popularity.

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