The relevance of Adam Smith today

In his life's work (An Inquiry into the Nature and Causes of the Wealth of Nations), Smith systematically analyzed to show the factors that lead to national prosperity. During his time, Adam Smith's thought was like a bright torch illuminating the inadequacies of the economic and political foundation at that time. His work was not only well received in Europe but also carefully read by America's founding fathers.

But Adam Smith's thought was not only within the scope of political economy, he was also a moral philosopher. The first book that he published in 1759 and continued to edit for the sixth edition a few months before his death was a treatise on ethics (The Theory of Moral Sentiments/Theory of moral feelings). Therefore, to clearly understand Adam Smith's comprehensive ideology, it is impossible to ignore the doctrine of morality embedded in his political economic theory.

Smith lived in a context where the First Industrial Revolution was beginning to take place and the Enlightenment Movement in Europe (which emphasized building knowledge based on experiment and reason) was at its peak. Smith's most important teacher (Francis Hutcheson) and closest intellectual friend (David Hume) were both influential enlightenment philosophers. In such a context, Smith's overall thought is built on his empirical observations of what happens in the (economic/political/moral) relationships between people in society. .

Smith wanted a good society; and he sought to point out the factors that lead to that goal. “No society can be prosperous and happy,” Smith wrote, “when the majority of its members are poor and miserable.”[1] He was interested in how economic development would reduce poverty. for the majority of people; But he also believes that money cannot buy happiness, because people also have spiritual needs when living in a society. [2]

Adam Smith's thoughts survived time because he did not fall into extremes and framed it in all circumstances. To him, economic, political, and social life are inseparable elements. Therefore, his theories on the market economy, the role of the state, and social relations are still valid in today's world.

Increased productivity is the foundation of national prosperity

Writing while England was transforming in the industrial revolution, Smith had the opportunity to make empirical observations to point out the fundamental factors that led to national prosperity. For Smith, national wealth is not the increase in wealth of the ruling elite but the better material life of the vast majority of people. Through this, economic growth (increase in production of goods and services) is a key factor to improve life.

Smith analyzed and pointed out that economic growth depends on the economy's ability to increase productivity. And productivity depends on the division of labor. The higher the division of labor, the higher the specialization, leading to increased creativity and new technology, promoting increased productivity.

But the degree of division of labor depends on the size of the market. Smith writes: “Given the power of exchange that leads to the sharing of work, the scope of this sharing is always limited by the scope of that power, or, to put it another way, by the scope of market. When the market is very small, no one has an incentive to devote all his time to one job, because of the lack of ability to exchange the residual product of his labor, which is beyond his consumption needs, for the parts of the products of other people's labor that they need.”[3]

Thus, the key to the size of the market is "the power of exchange", meaning that the more freely people can buy and sell, the larger the market becomes. On a global scale, the freer trade is, the larger the market is, promoting division of labor, specialization, and increased productivity. In short, economic freedom is the foundation for improving material life. And reality has proven Smith's assertion. Today, the link between trade and productivity is clear. Increased trade is an important factor in improving productivity.[4] With increased globalization in recent decades, billions of people around the world have been lifted out of extreme poverty. The World Trade Organization (WTO) and the World Bank (WB) have pointed out that: “Trade has made an important contribution to poverty reduction [so far], and the further integration of developing countries. Growing into international markets will be essential to ending poverty and leaving no one behind.”[5]

Development model

Smith viewed economic freedom as a “system of natural freedom” consistent with human nature, capable of unleashing the creative potential of individuals in a society regulated by a limited state. limits to ensure a level playing field.

Smith argued that “not much is needed to raise a nation from a base and primitive state to the height of wealth except peace, easy taxes, and a tolerable administration of justice. Everything else will happen according to the natural order of things.”

For Smith, natural law is shaped by the interactions between individuals in a free market, leading to an overall good outcome for society as a whole. State intervention in the free market will upset this rule because state policies often make mistakes due to different subjective and objective reasons.

Smith writes: “People who believe in the system […] often appear very intelligent in their own eyes; and they are often so engrossed in the imaginary beauty of the ideal plan of the state that they cannot tolerate the slightest deviation from any part of it… They seem to imagine that they can Arranging the different members of a large society is like the hand arranging the pieces on a chess board. They do not consider that… on the great chess board of human society, each piece has a distinct principle of movement, completely different from what the state may choose to impose on it.”[6] This comment does not come from someone with no experience in government. Interestingly, Smith himself was a man in the state system for more than a decade (Scottish customs official) until his death in 1790.[7]

In more detail, Smith's above comment is based on three closely related points. First, the natural tendency of each individual is to always find the best way to improve life with their limited resources. Second, only individuals (not the state) know themselves best (in terms of abilities and resources) to be able to make the best choices (decisions). Third, when individuals are free to pursue their interests in a society where justice is protected, it will lead to good results for the whole society, because to be successful, individuals must try our best and voluntarily cooperate with each other.[8] This is the operation of the “invisible hand” as Smith calls it.

But Smith was also careful to point out the state's role in supporting the market and building a good society. Maintaining peace and security is the function of the state. Providing public services to serve economic development (such as transportation infrastructure) is also an important role of the state. When the state performs its duties effectively, tax money is used properly and will not "fall on the heads" of the people. Smith advocates a tax system that is simple, transparent, and proportional to each person's income.

And a free market that operates effectively, leading to good results for the entire society, must be based on a foundation of justice protected by the state. For Smith, justice is protected when the state has clear laws to protect (1) life (2) property, and (3) people's contracts. Smith carefully limits the definition of justice so that the state does not interfere excessively in the market and society in general in the name of justice.[9]

Smith pointed out that there is always the possibility of powerful businesses colluding with state officials (crony capitalism) to profit through policies that give out grants (subsidies) or help limit competition. He advises that any proposals from this circle need to be carefully considered and skeptical about their intentions. Policy rent-seeking is not only unjust (because it benefits a small group at the expense of the public) but it hinders economic growth (because it distorts the allocation of resources).[10]

In a “system of natural liberty,” the individual is not only regulated by competition and the administration of justice, but also moral behavior is indispensable in a prosperous and happy society. “Happiness lies in peace and enjoyment,” Smith wrote. Without peace there can be no enjoyment; and where there is perfect peace there is scarcely anything that cannot make one happy.” Smith points out that to have peace, it is necessary to live with three fundamental moral values: justice, prudence, and knowing how to benefit others. Only then will each individual be truly happy and society will be truly good.[11]

When the above three values ​​are spread in society, they also contribute to building trust and promoting cooperation to lead to a better society. Trust here means confidence in individuals and public institutions that they will behave reliably, in accordance with common expectations. On a personal level, economic transactions will be convenient and increase when individuals trust each other. And when the state enforces laws transparently and effectively to protect justice, it will increase people's trust in the active role of the state, creating conditions for policy success.

Scholar Fransis Fukuyama, through his empirical research, has shown that “a nation's prosperity, as well as its competitiveness, depends on a single, far-reaching cultural characteristic: the degree of trust that exists in society.” In societies with high levels of trust, “transaction costs” will decrease, facilitating increased economic activity to promote growth.[12]

Throughout Adam Smith's "system of natural freedom" is human motivation. Pursuing personal interests to pursue life is a motive, moral action to gain trust is also a motive. When individuals are free to interact in a free market with fair "rules of the game", individual motivation will be consistent with social interests.

Economic freedom has been improving the lives of billions of people around the world. But economic freedom does not come naturally; it is a deliberate choice of a society (nation). In societies that respect freedom, Adam Smith's "system of natural freedom" will have the opportunity to display all its positive features originating from the individual. As social animals, to survive and develop, free humans will find ways to cooperate no matter how society changes. A free society is a flexible, creative society, always evolving to suit the needs of the times.

[1] Adam Smith, An Inquiry into the Nature and Causes of The Wealth of Nations (Chicago: The University of Chicago Press, 1976).

[2] Dennis Rasmussen, “The Problem with Inequality According to Adam Smith,” The Atlantic, June 9, 2016.

[3] Smith, The wealth of nations.

[4] Gary Hufbauer and Zhizao Lu, “Increased Trade: A Key to Improving Productivity,” Peterson Institute for International Economics, October 2016.

[5] “Trade and Poverty Reduction: New Evidence of Impacts in Developing Countries,” The World Bank Group and The World Trade Organization, December 11, 2018.

[6] Adam Smith, The Theory of Moral Sentiments (Overland Park: Digireads.com Publishing, 2018).

[7] Gary Anderson, William Shughart and Robert Tollison, “Adam Smith in the Customhouse,” Journal of Political Economy 93, no. 4 (1985): pp. 740-759.