Global Economic Collapse and the Original Vision of Adam Smith (Part 2 of 3)

POSTED September 18, 12:25 PM
Judah Freed - Political Issues Examiner

Adam SmithTo place today's financial crisis into context, we need to look afresh at the ideas of Adam Smith, a leader of the 18th century Scottish Enlightenment movement. Adam Smith is credited with conceiving modern capitalism.

In 1759, Adam Smith published The Theory of Moral Sentiments. Morality, he wrote, requires an act of imagination. Put yourself in the shoes of another person to act as they would act. Promoting empathy, the Golden Rule, Smith called it “sympathy.” He said morality must be guided by sympathy, yet emotions must be ruled by reason.


In 1776, three months after Paine published Common Sense, Adam Smith published the first of his five volumes in The Wealth of Nations. Like a one-two punch, after Paine’s essay had turned politics on its head, Adam Smith’s essay turned economics on its head.

Since the 1500s, European mercantilism had defined national wealth as gold bullion in state treasuries. Mercantile states earned gold by manufacturing and exporting merchandise, taxing imports, and selling off the natural resources or agricultural products of their colonies. This is why Europeans invaded and plundered the Americas, Africa and Asia.

Adam Smith instead said national wealth lay in the commerce of its people. He figured national wealth as the total value of all the goods the people consume daily. The wealth of nations relies on buying and selling goods.

Therefore, Smith said, the consumption of goods and services is an economic necessity. Capitalism is consumerism. Indeed, consumer spending comprises two-thirds of the U.S. economy today and about the same in the European Union and Japan.

Smith also favored ending hereditary occupations, where a son did the same job as his father. To accelerate the shift, he proposed the division of labor in factories, a clever idea that gave rise to mass production and the assembly line. Sadly, Adam Smith unduly discounted the value of labor, which later would upset Karl Marx and other critics, helping them draw ardent followers.

If we have the freedom to earn our daily bread as we wish, as Adam Smith proposed, if no king or dictator commands the economy, how does the grain get to market?

In Smith’s laissez faire utopia, the “invisible hand” of enlightened self interest, guided by moral sympathy, directs all commercial affairs, so all prosper. “Every man [or woman], 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... 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.”

Now you know the basic theory. What is the practical reality? (Go to Part 3.)

NOTE: Portions of this column are from my book, Global Sense.