When we think of Adam Smith, the great Scottish philosopher and economist, and his seminal book The Wealth of Nations, we are inclined to think of free markets, individual self-interest, and the invisible hand. However, reading another good book recently, How Markets Fail by John Cassidy, I was reminded there was a lot more to Smith and The Wealth of Nations than the elements of laissez faire capitalism.
Consider, for instance, Smith's example of the pin factory which he uses to illustrate the power of the division of labour. He compares the productivity of workers creating a pin on an assembly line to workers making pins individually: "One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for fitting the head ...." etc. "Whereas one workman ... could scarce ... make one pin a day," ten workers skilled in their individual tasks, "could make among them upwards of forty-eight thousand pins a day."
And what are these workers doing to complete this remarkable feat? They are co-operating. Smith has illustrated, perhaps unwittingly, the power of co-operation over individualism.
He goes on to discuss the making of the humble wool coats worn by pin makers. These too are efficiently created through the division of labour, by many hands creating a coat rather than one. Thus are the coat makers connected to the pin makers, one collective to another. And such it is for myriad products, and the resources for those products, and the transporting of resources and products, and so on ad infinitum. Smith is talking about interconnectedness. Each of us may pursue his or her individual self-interest, but we can only succeed with the help of many others.
Margaret Thatcher, former British prime minister and enthusiast of unfettered markets, once famously proclaimed, "There is no such thing as society." She was wrong. Society is real, and it is a collection of collectives.
Smith also saw multiple roles for government. In addition to defending the nation and administering justice, government had a duty "erecting and maintaining certain public works and public institutions, which it can never be for the interest of any individual or small number of individuals, to erect and maintain ... though it may frequently do much more than repay it to a great society."
Of particular interest to us in this the twenty-first century, Smith saw the need to regulate the financial industry. He had little trust in merchants of any kind, once observing, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public." But, no matter, free market competition would keep them in line.
Bankers, however, needed the tighter leash of government regulation. "The obligation to build party walls, in order to prevent the communication of fire, is a violation of natural liberty," he wrote, "exactly of the same kind with the regulations of the banking trade which are here proposed." How ironic that two centuries years after The Wealth of Nations was published, the U.S. government ignored Smith's advice and acting instead on the urging of his would-be ideological descendants, deregulated the financial industry allowing the bankers to wreck their companies, the industry and much of the economy.
Free market fundamentalists of the political kind often rely on Adam Smith to justify their policies and those of the economist kind to justify their advice on policy to politicians. But there are more things to Adam Smith and The Wealth of Nations than they dream of in their philosophy.