_ Dr. Ulrich van Suntum, honorary professor, University of Münster, former Secretary-General, German Expert Council for the Assessment of Overall Economic Development (SVR). 16. June 2023.*
Adam Smith’s teachings had a significant influence on the world’s economic order. He did away with mercantilism. But he was never only concerned with the economy. He also considered people and their weaknesses. A tribute to the 300th anniversary of his birth.
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Economic liberalism and the market economy have gone out of fashion today. “In theory, this might work quite well”, we hear everywhere. “But the real world is more complicated, and we also have to think about the environment and social issues. Prosperity cannot just be measured by gross domestic product.” This is why state intervention in the economy is booming again, and not just in Germany. The EU, which once started out as a liberal economic community, has now mutated into an interventionist juggernaut.
It is intervening ever more directly and rigorously in the economic decisions of citizens and entrepreneurs. Whether it is about saving energy, climate protection or “good work” – the state determines what is efficient and right. And hardly anyone seems to oppose this, not even among economists. Many criticize the trend back towards a planned economy and paternalism. But there is no big, rousing counter-proposal that could turn the tide of history. And that brings us to Adam Smith, whose 300th birthday is on June 16, 2023.
His main work, “The Wealth of Nations”, published in 1776, led to a complete rethink of economic issues. Until then, so-called mercantilism had prevailed, which was also referred to as the “princely theory of prosperity”. The focus was not on the welfare of the people, but on the wealth of the state. What increased public revenue from taxes and duties was good.
Smith did away with mercantilism
This led, for example, to high customs duties on imported goods, which were one of the state’s most important sources of revenue at the time. But the authorities also intervened within the country whenever they deemed it appropriate. For example, the trade regulations date from this period, as do a myriad of taxes on everything and anything, from salt to the number of windows in houses.
Smith’s main concern was to thoroughly clear up the mercantilist economic system and the errors on which it was based. Tariffs do not promote prosperity, but rather inhibit the international division of labour and thus one of its most important sources. The same applies to restrictions on competition within the domestic economy. Smith vividly describes the absurdity of regulations such as the fact that a coachbuilder was allowed to make a coach but not the wheels to go with it. Only the “wheel maker” was entitled to do this, as can still be seen today from the corresponding names.
Adam Smith would also have torn some of today’s green ideologies to shreds. For example, the idea that you should only buy food from “regional production” if possible and that everyone should ideally grow their own food in their own garden. For as idyllic as such ideas may seem, they tend to restrict competition and an efficient division of labour and thus lead to a loss of prosperity.
Smith thought about people
People do best when everyone concentrates on what they do best, says Smith. Using the example of a pin factory, he shows how infinitely more productive this is than doing everything laboriously by hand. And he also vehemently opposes state price and wage dictates. This is because things are produced whose benefits are far below their costs, while other, valuable production does not take place.
He shows how superficial seemingly plausible value attributions can be in his famous deer and beaver example. It is obvious, for example, to regard a deer as the more valuable animal for human needs because it provides more and tastier meat. Smith disagrees, however: if hunting the beaver, for example, takes twice as much time as killing the stag, then the beaver must also fetch a correspondingly higher price on the market.
This type of logical thinking instead of value judgments imposed by the state or church was completely new at the time. Smith thus became the founder of economics, which until then had not even existed as an independent science. He himself was a trained moral philosopher who also dealt with religion, mathematics and literature in his lectures at Glasgow University. It would be completely wrong to see him as a cold-hearted “market radical” who only thought in terms of money and costs.
On the contrary, he regarded people as social beings who felt a strong sympathy for one another. Unfortunately, this is generally not enough to really achieve the best for everyone. For one thing, our innate altruism is always countered by our inner bastard, who tempts us to be lazy, selfish or even criminal. And secondly, it is ultimately not just a matter of good will, but of the results that are achieved. Today, according to Max Weber, we call this ethics of responsibility instead of ethics of conviction. Smith had adopted this utilitarian approach from his teacher Francis Hutcheson, whom he later succeeded in his chair.
Economic and personal freedom are not contradictory
In his first book, “The Theory of Ethical Sentiments”, he had already elaborated on this idea in 1759. According to this, there are four barriers that can and should curb people’s self-interest. In addition to innate sympathy for one another, these are customs and traditions, state laws and – this was new – competition. According to Smith, we do not owe our fresh rolls to the baker’s concern for our breakfast table, but mainly to his self-interest in earning money from selling them to us. So self-interest is not a bad thing; on the contrary, it is an important driver of prosperity for all!
Obviously, this message is anything but the cynical glorification of selfish behaviour that enemies of liberalism like to make it out to be today. The environmental and climate problem in particular is a good example of how right Smith was. Nothing serves the preservation of nature more than when it costs money to pollute it. If, for example, a tax has to be paid for every ton of CO2 or an expensive emission right has to be purchased, millions of citizens and companies in Germany will think every day about how they can save CO2.
This works much better and more efficiently than any sophisticated government ban policy. Moreover, this threatens to lead to a police state worse than mercantilism, a path we have already come a long way down. According to Smith, economic and personal freedom are therefore not contradictory, but go hand in hand.
The state also has its tasks
With this ground-breaking message, he became a kind of “economic Luther”, as Friedrich Engels once called Smith. In fact, it was an immediate success not only in science, but also politically. Beginning in England, the “golden age” of liberalism replaced the rule of mercantilism, until the industrialization at the end of the 19th century led to another renaissance of interventionism. However, Smith did not live to see this; he died in 1790 without having seen the age of capitalism proper.
However, his fundamental ideas were by no means refuted by the social problems of the time, even though this is repeatedly claimed. The clear victory of the market economy over all socialist economies after the Second World War alone proves this. Smith also never advocated unbridled “laissez-faire”, but also assigned the state its tasks. In his view, this included, for example, a stable monetary system and – get this – adequate regulation of the banking sector. However, he would undoubtedly be appalled by the current level of state intervention and state debt.
* Original publication in the German newspaper “JUNGE FREIHEIT”.
The most important aspect of these economic theorists is how their philosophy interacts to our economy. I think what tax policy they advocate reveals their true intentions. You never mentioned it, nor the time he spent in France with the Physiocrats.