10 Enduring Lessons from Adam Smith

Adam Smith (1723-1790) is widely considered to be the father of modern economics. There were precursors, such as the School of Salamanca and the French Physiocrats, but Adam Smith’s 1776 magnum opus, An Inquiry Into the Nature and Causes of the Wealth of Nations, was the first comprehensive treatise.

In this 250th anniversary year, much ink will be spilled – and with good reason – celebrating the legacy of Adam Smith. My purpose here is as joyous as it is modest: to share ten quotations that are particularly relevant today, and demonstrate Adam Smith’s enduring influence. I like to weave them into my lectures – on markets, on political economy, on constitutional economics, or on the moral foundations of capitalism. Adam Smith, in the versatility of his writings, was indeed a man for all seasons.

1. The Invisible Hand Acts

[B]y directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention… By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

Perhaps the single best-known concept from Adam Smith, the invisible hand was famously picked up by the Austrian school of economics and its key lesson of spontaneous order. FA Hayek, especially, noted the importance of phenomena that were “the result of human action, but not of human design.” Alas, interventionists of all stripes still think they can supersede the invisible hand of the market.

2. People Are Not Pawns

The flip side of the invisible hand involves social and economic engineering. Adam Smith was prescient in describing the psychology of social engineers, those self-proclaimed experts who believe, in their hubris, that they can run an entire economy.

The man of system…is apt to be very wise in his own conceit; and is often so enamored with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.

3. Collective Action Can’t Be Imposed

The “man of system” quotation is long enough that it bears cutting in two. In the second part, Smith laments the unintended consequences of social engineering. If the policymaker is cautious and respects both human nature and local knowledge, the results can be a marginal improvement over the status quo (this is the basis of Buchanan and Tullock’s theory of collective action through the state).

“If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.”

4. Markets Coordinate Effort

Adam Smith’s key theoretical contribution is the division of labor. But this is not merely an economic model, to be calculated with production charts by eager students of microeconomics. For Smith, it is something more, an instrument of cooperation to overcome the limitations of human beings:

This division of labor, from which so many advantages are derived, is not originally the effect of any human wisdom… It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature…, the propensity to truck, barter, and exchange one thing for another.

The division of labor solves a social problem:

It is thus that man, who can subsist only in society, was fitted by nature to that situation for which he was made. All the members of human society stand in need of each others’ assistance, and are likewise exposed to mutual injuries. Where the necessary assistance is reciprocally afforded from love, from gratitude, from friendship, and esteem, the society flourishes and is happy. All the different members of it are bound together by the agreeable bands of love and affection, and are, as it were, drawn to one common centre of mutual good offices.

But though the necessary assistance should not be afforded from such generous and disinterested motives, though among the different members of the society there should be no mutual love and affection, the society, though less happy and agreeable, will not necessarily be dissolved. Society may subsist among different men, as among different merchants, from a sense of its utility, without any mutual love or affection; and though no man in it should owe any obligation, or be bound in gratitude to any other, it may still be upheld by a mercenary exchange of good offices according to an agreed valuation.

5.** Self-Interest Actually Helps Everyone**

Smith was excited about the potential for markets to align incentives. In another famous quip, he reminded us that markets transform private interest into public harmony:

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 own interest.

In more recent terms, we are reminded of Deirdre McCloskey and Art Carden (both fellows of AIER). The title of their book speaks for itself: Leave Me Alone, and I’ll Make You Rich: How the Bourgeois Deal Enriched the World.

6. Permissionless Societies Creates Prosperity

The bourgeois deal has alternately been described in Physiocrat ARJ Turgot’s plea: “laissez-faire, laissez-passer” (let us act, let us pass). Ever the professor of moral sentiments (and not just the founder of modern economics), Smith was quick to show that the bourgeois deal was instrumentally good, indeed – but it was also the grounding for a free society: “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest in his own way.”

7. Cooperation Connects Us

Smith’s first major work, The Theory of Moral Sentiments (1759), predated The Wealth of Nations by almost two decades. While demonstrating how markets advance the public good by appealing to and channeling private interests, Smith made it clear that human beings are fundamentally creatures of cooperation:

How selfish ‘soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.

8.** Individual Responsibility… With **Limits

While emphasizing the importance of individual responsibility, Smith was also realistic about the limitations of what human beings could do. He warned:

The administration of the great system of the universe… is the business of God and not of man. To man is allotted a much humbler department, but one much more suitable to the weakness of his powers, and to the narrowness of his comprehension; the care of his own happiness, of that of his family, his friends, his country: that he is occupied in contemplating the more sublime, can never be an excuse for his neglecting the more humble department.

In a similar spirit, Ludwig von Mises explained in his 1927 book, Liberalism: “[classical] liberalism limits its concern entirely and exclusively to earthly l