The recent July 4 holiday marked 241 years since the 13 American colonies separated from England and did so with Mr. Jefferson’s powerful and lyrical prose that made the Declaration of Independence one of the most memorable documents in human history. We often forget, however, that the year 1776 was also marked by another publication that, while anything but inspiring for its tone and resonance, was integral to the development of the United States, Adam Smith’s “An Inquiry into the Nature and Causes of the Wealth of Nations.”
Smith was a Scottish philosopher who lived from 1723 to 1790. He was a brilliant thinker whose timeless ideas are as relevant today as they were in the 1700s and whose distracted nature is likely the origin of the notion of “the absent-minded professor.” Some people have portrayed Smith’s ideas as all about greed, but nothing could be further from the truth. Instead, they are more about the proper functioning of markets and how a market-driven economy can increase opportunities and resources for all. In fact, as I wrote about at some length back in my young academic days, he also saw the limits of markets and suggested many situations where government involvement was necessary. Nonetheless, the treatise sounds a clarion call for the power of capitalism.
At the time that “Wealth of Nations” was written, most nations tended to think that their prosperity was linked to gold and silver and the accumulation of such resources. This stance contributed to a tendency to try to export as much as possible, but import as little as possible in order to bring in more wealth. Also, such a definition of wealth would discourage investing in things like infrastructure. Governments tended to micromanage, protecting industries through tariffs and offering preferential treatment for certain individuals. Such a mindset curtailed productivity, stifled economic growth, and offered few opportunities (particularly for disadvantaged people).
Key themes in “Wealth of Nations” include the idea that a nation’s wealth is actually the goods and services it creates (what we would call gross product), not the amount of gold and silver it hoards. To maximize wealth, production should be encouraged in a variety of ways ranging from increasing efficiency to decreasing superfluous government regulation to enhancing capital investment.
Smith’s well-known idea of the “invisible hand,” the unobservable market force that leads to the optimal allocation of resources to the benefit of society, is also a signal feature of “Wealth of Nations,” building on earlier thoughts by Smith regarding how self-interest is beneficial to society as well as the notions of “Natural Law” which were then prevalent and foundational to the enlightenment. He also sets forth the groundwork for the benefits of international trade and the damage which can be done by trade restrictions. While our thinking has certainly been refined and the specifics modified in the ensuing centuries, these core ideas continue to resonate.
Many people of the day were influenced by Smith’s ideas, including Thomas Jefferson and others involved in the process of establishing the US government independent of England. Mr. Jefferson bought an early edition of the book while in France in the 1780s. Like the millions of us who have read it since (definitely including me), he found the ponderous prose and seemingly interminable excursions into inconsequential details to be tedious and boring. He also fully grasped the significance of its basic tenets and often recommended it as the “best book extant” on political economy. Mr. Jefferson sold his copy as part of the collection that became the original Library of Congress in the early 1800s (I have had the privilege of holding and turning the pages of his copy on a couple of occasions), but he quickly acquired another. James Madison, who was a primary architect of the US Constitution, was also a disciple of Smith, as can be seen prominently in his Federalist Paper #10 in 1788, as was James Wilson, who also was a leading figure in shaping the Constitution. Our market economy encourages innovation and results in opportunities, and without the philosophical writings of the time and their adoption by the Founding Fathers, it could well have evolved quite differently. Even centuries later, key American economic and political institutions continue to hold up well against major challenges.
Politics and the economy are intertwined, with each affecting the other. Without strong political institutions, prosperity is impossible. Without some degree of economic development providing means for citizens to earn a living, governments have fewer resources and, in the worst cases, may even become unsustainable. The creation of our market economy and the prosperity it has generated was profoundly influenced by the fact that political independence was occurring at a time when ideas about what drove prosperity were changing dramatically thanks to musings of Smith and his followers.
July 4 is a day many Americans celebrate with backyard cookouts, trips to the lake, fireworks shows, or sporting events. We may pause to consider the historical importance of the day, and how the signing of the Declaration of Independence in 1776 changed everything. As an economist, I am reminded of how the brilliance of Adam Smith and how the timely release of “Wealth of Nations” was instrumental in setting the United States on a path to becoming the global powerhouse it is today. Our strong institutional framework is the envy of the world. It is worthy of note that our grand experiment (both its remarkable past and its promise for the future) is rooted not only in the political freedom that we traditionally honor, but also the economic freedom that has been there from the beginning. Sometimes, timing is everything.