Adam Smith Reveals His Invisible Hand!
“Adam Smith was a radical and revolutionary in his time — just as those of us who preach laissez faire in our time.” — Milton Friedman
In honor of Adam Smith, the father of modern economics, and his 300th birthday (born in 1723), I have attended and spoken at several conferences in the United States and the United Kingdom.
At these conferences, I thought everyone would recognize Adam Smith as an advocate of limited government and laissez faire. (By “laissez faire,” I mean, “Stay out of our business. Leave us alone!”)
But no! At last month’s conference in Glasgow University, where Smith taught moral philosophy, the majority of speakers claimed that the founder of economics supported redistribution schemes and heavy regulation of business.
They saw him as a social democrat, an egalitarian and an interventionist, rather than an advocate of laissez faire.
As Jesse Norman, a member of Parliament who has written a biography of the father of economics, writes, “Adam Smith was no advocate of laissez faire. He was no revolutionary.” Norman highlights Smith’s criticism of businesspeople and his statement that they need to be constantly monitored and chastised. He largely ignores Smith’s favorable comments on commercial society in general.
Admittedly, Smith did not use the French term “laissez faire” because he wanted to create his own model.
What Did Adam Smith Call His Model of Prosperity?
But notice what he called his model, which he claimed would lead to “universal opulence which extends to the lowest ranks of the people.”
He did not call it the “system of natural equality.” He did not call it “the system of social justice.” Rather, he called it the “system of natural LIBERTY,” suggesting that economic freedom was his highest ideal. It’s easy to forget this in reading his magnum opus.
Adam Smith the ‘Laissez Faire’ Revolutionary
I found quite a few statements in “The Wealth of Nations” that suggest Smith’s laissez faire views:
Quote #1:
“To prohibit a great people from making all they can from every part of their own produce, or of employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind.” (p. 549).
Quote #2:
“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.” (p. 651).
Interestingly, he says this right before delineating his four limited legitimate purposes of government.
Quote #3:
Finally, we have this quote from 1759: “Little else is required to carry a state to the highest level of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice.”
I quote all these statements in my book “The Making of Modern Economics,” but they are often ignored by the social democrats who want to justify Smith as an interventionist. It clearly shows him as an advocate of laissez faire MOST of the time.
Do We Have ‘Easy’ Taxes Today?
Let’s take the phrase “easy taxes.” What did Adam Smith mean by this? It meant that the tax rate is so low that everybody pays it without complaint. So, they see no need to engage in elaborate tax shelters or tax evasion schemes. They just pay the tax.
Hong Kong is a perfect example of “easy taxes.” The income tax rate goes up to 16.5% and does not go higher. Who would engage in tax shelters or trusts to avoid it?
The same thing occurred in Russia after the collapse of the Soviet Union in the early 1990s. At first, the Russian government imposed high progressive taxation on Russians, and the wealthy Russians refused to pay. They engaged in all kinds of tax evasion schemes. So, the Russian government wisely replaced the progressive tax with a flat 13% rate, and it worked. Wealthy Russians started paying income taxes.
Smith also advocated “easy taxes” on import duties to solve the smuggling problem in Britain. In “The Wealth of Nations,” he urged Britain to sharply cut its tariffs on imported tea. In 1784, following Smith’s advice, William Pitt the Younger did exactly that, cutting the tea duty from 119% to 12.5%. Smuggling ended, and revenues from the tariff actually rose. The Laffer Curve worked!
Do we have easy taxes today? Definitely not. When marginal income tax rates exceed 50%, many wealthy Americans engage in all kinds of schemes to avoid taxes. Governments would collect more taxes if they just imposed an “easy” tax to pay (under 20%).
A Highly Respected Economist Confirms Adam Smith’s Laissez Faire Model
I recently discovered the lecture notes of Wesley Mitchell, the Columbia professor who was known as the man “with no theory.” He founded the National Bureau of Economic Research (NBER), the most respected economic research institution today. Professor Mitchell was determined to develop a non-biased approach to economics.
In 1934, during the Great Depression, he taught a course in the history of economic thought.
In his first class, he taught that Smith was a radical advocating laissez faire. I was so taken with his lecture notes that I had my assistant (Ned Piplovic) edit Mitchell’s 80 pages and then have them reprinted by the Adam Smith Institute in London. You can read them here.
Here’s a summary of what he said: “You see how bold and sweeping that argument is from Adam Smith’s eyes… it is evident, in his own local situation, [that man] is a better judge of where his economic interest lies than any statesman could be. Therefore, the individual will get on best if he is left alone by the government… This is the great argument for laissez faire.”
‘Adam Smith as Hero: The Single Best Book in Economics Today’
Adam Smith and his “system of natural liberty” are the heroes of my book, “The Making of Modern Economics,” the history of the great economic thinkers. It’s now in its fourth edition and published by Routledge.
Every economist is judged by whether they sought to improve upon the “House that Adam Smith Built” (French laissez-faire, Austrian, Chicago and Supply-Side schools) or wanted to tear it down and build their own new model (Marxists, Keynesians, socialists). I have chapters on each school of thought.
To find out what’s in each chapter, go here.
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Larry Elder on Minority Advances in USA
In 1963, Martin Luther King Jr. gave his famous “I Have a Dream” speech. In 1968, the night before he was assassinated in Memphis, Tennessee, he gave his second most famous speech, “I Have Been to the Mountain Top and Seen the Promised Land.”
At FreedomFest’s Saturday night banquet in Memphis on July 15, 2023, I asked Larry Elder to give a talk about racism today compared to MLK’s time in the 1960s.
Elder gave an eloquent speech on how race relations have vastly improved. The highlight of his talk was this statement:
“In 1966, in an interview with the BBC, Martin Luther King Jr. expressed astonishment at the pace of change for black Americans since the passage of the Civil Rights Act, and predicted that there may be a black president in 40 years. Right on cue, Barack Obama was elected in 2008. “
“MLK didn’t say that we’d have black mayors in the three largest cities in America (New York, Los Angeles, and Chicago) and we did. He didn’t say that one of the Confederate states would elect a black governor (Virginia), and they did. He didn’t say that we’d have a black CEO of McDonald’s or a black president of the American Medical Association and the American Bar Association. He didn’t say that the percentage of blacks in the U.S. House of Representatives would reflect the percentage of black Americans overall, and it does.
“MLK didn’t say any of that, he said ‘President,’ meaning that at such a peak of achievement his dream of a society where people are evaluated on content of character would be realized to the fullest extent possible.”
Despite all the talk of “systematic racism,” the fact is that the vast majority of Americans now live up to MLK’s ideal — that every person should be “judged not by the color of their skin, but by the content of their character.”
Larry Elder embodies that optimism. He is running for president of the United States. I’ve donated to his campaign and I recommend you do the same.
