Adam Smith's enduring legacy

In the tercentenary of the father of economics, it is worth exploring the impact and relevance of his ideas on economics in today's world

In her 2018 book, What Would the Great Economists Do? Linda Yueh explores how the ideas of 12 world-changing thinkers could solve the great economic problems of today. Her list undoubtedly includes the father of economics, Adam Smith, who ordered his work to be destroyed after his death because he didn’t deem it worthwhile. Yet they are. Smith will surely rank among the top five economists of all time. Thus, as the world celebrates Adam Smith’s tercentenary this June, it’s not just a reminiscence of a three-century-old stalwart, but also a chance to synthesise the modern world through his “Invisible Hand,” which is still a mystery.

Smith, a philosopher and a giant of Scottish enlightenment, launched his economic revolution as the American Revolution got underway. His The Wealth of Nations (1776) is among the most influential books on market economics ever written. Remember, it was also the beginning stages of industrialisation in Great Britain.

Smith provided the mechanisms for setting prices, which economists today call the “law of supply and demand.” He gave a radical definition of “national wealth,” which rejected the previous mercantilist notion of obtaining gold and silver. Smith famously wrote: “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.” His use of the enigmatic metaphor “Invisible Hand” is widely perceived as synonymous with a free market economy.

And, as a result, the field of economics has been obsessed with markets for the last two and a half centuries. Smith’s idea was adored by proponents of the free market economy, while despised by its detractors. And for the most part, it stayed in this binary. Some of the greatest economists of all time, including David Ricardo, Karl Marx, Joseph Stiglitz, and Thomas Piketty, have unapologetically criticised the Invisible Hand. Smith, however, never used the term “capitalism.” He used “commercial society” instead, a phrase that emphasises his conviction that economics is only one component of the human condition.

Smith is known as the father of laissez-faire (“to leave alone”) economics. He primarily considered the government giving special economic privileges to potent manufacturers and merchants, despite the fact that this is often taken as meaning that the government should not interfere with the “natural course” of free markets and free commerce. Importantly, Smith’s philosophy doesn’t describe humans solely as homo economicus. He believed that self-seeking individuals were “led by an invisible hand” and that the market was a mechanism of morality and social support.

No one could possibly have articulated the idea of “Invisible Hand” better than Leonard Read. In a similar vein as Smith’s own example of a labourer’s plain woollen coat, Read’s 1958 essay, I, Pencil, wonderfully emphasised how the most apparently simple objects are the result of an astounding amount of specialised, market-based cooperation. “Simple? Yet, not a single person on the face of this earth knows how to make me,” Leonard Read’s Pencil said.

Against the backdrop of the global financial crisis, in a 2009 paper in Business Economics, Michael Mussa examined Smith’s significant insights into the causes of financial crises that have happened regularly for centuries. Mussa stated, “Although by no means all that we know about such crises has been derived from Smith, it is interesting and important to reflect on what he did know and how ignoring his warnings about the creation of excess liquidity has contributed to the current crisis.” Amartya Sen also claimed in a 2010 paper published in the Erasmus Journal for Philosophy and Economics that Smith’s thoughts suggest ways and means of building a tolerably decent society in the world.

According to Dr Sen, “Adam Smith has had much smallness thrust upon him.” Modern welfare economists’ fresh interpretations of Smith undoubtedly shaped him into the welfare theorist of today.

The eminent economist Léon Walras realised in the 1880s that the mathematical description of individual choices and market interactions would enable us to understand how the dispersed choices of buyers and sellers produce a wide range of economic consequences. Thus, Walras established a goal for mathematical economics whose fulfilment had to wait until Kenneth Arrow’s work in the 1950s. Arrow advanced economic theory beyond tired dichotomies of whether markets are good or bad to understand what they can do collectively. In a model of a private ownership economy with the fewest restrictions conceivable, Arrow and Gérard Debreu thoroughly demonstrated the existence of general equilibrium. The well-known economic welfare theorems, which demonstrate that the equilibrium levels of supply and demand are optimal in the sense that no one can be made substantially better off by varying levels of output and consumption, were also demonstrated by Arrow. These made the “Invisible Hand” concept precise. Of course, knowing when a market economy is efficient helps us recognise when it is not.

What, then, is the main legacy Adam Smith left behind? In addition to a critical analysis of mercantilism, Smith certainly discussed a large number of still relevant topics, bound together by a common chord, which is nicely described by Smith’s phrase, “the obvious and simple system of natural liberty.” Well, Read’s Pencil concluded, “Have faith that free men and women will respond to the Invisible Hand.” Overall, and to be precise, that may be the essence of the enduring legacy of Smith’s open, realisation-focused, and comparative approach to evaluation.

The writer is professor of statistics, Indian Statistical Institute, Kolkata