Part I yesterday explained Adam Smith’s notion that general human betterment was the unintended result of each individual following his own self-interest in the market arena of voluntary and competitive exchange. Adam Smith considered such natural order far superior to attempts by government, by those in political power, to design and impose an order and coordination in the actions of the members of society.
Echoing his earlier warnings about the social engineer, that “man of system,” Smith stated:
By pursuing his own interest [the individual] frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good . . .
What is the specie of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his own situation, judge much better than any statesman or lawgiver can do for him.
The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which can safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.
It is not that Adam Smith believed that people always knew enough to never make a mistake, or that their speculative judgments about an uncertain future would always be correct so disappoints or losses would never be suffered.
He reasoned that each man, in his own corner of society, has a better understanding of his own circumstances and opportunities in the context of his own wants, desires and goals. And that each individual has the strongest motive and incentive to try to make his decisions wisely since failures experienced fell upon him. He who bears the costs and reaps the potential benefits has the greatest incentive to minimize the former and maximize the latter.
The same does not apply, Smith argued, when those in political power make the decisions. The “statesman” in a faraway capital can never know and understand things the way each individual can evaluate and judge them in their own unique surroundings. No legislator bears the cost of the wrong decisions he imposes on others; after all, he continues to live off compulsory taxes collected from those upon whom he has imposed harm.
Freedom of Trade at Home and Abroad
Adam Smith believed that international trade should be left to the free market as much as domestic economic activity.
For the same self-interested reasons, Adam Smith argued that it was superfluous and counter-productive for government to attempt to manage and direct the importing or exporting of goods and services to maintain a presumed “favorable” balance of trade, or to prevent a feared balance of trade “deficit.”
Each individual tries to minimize the costs that must be incurred in achieving his goals and ends. He only makes at home what is less expensive to make than to buy from others. And he buys desired goods from others only when those others can provide them at a lower cost in resources and labor and time, than if the individual attempted to produce that good through his own self-sufficient efforts.
Thus, goods are purchased from producers in other countries only when they can offer them at a lower cost than manufacturing them in one’s own country. And, in turn, one purchases those foreign produced goods by supplying the foreign seller with some good or service at a lower cost than if he tried to produce it in his own country.
When governments, through regulations and controls, force a product to be produced at home that could be less expensively purchased from abroad, it is misdirecting scarce resources and labor into wasteful and inefficient uses.
The result must be that the wealth of that nation – and the material wellbeing of its citizens — is reduced by the amount by which more resources and labor must be devoted to making wanted goods than could be obtained through a free system of international division of labor and peaceful, mutually beneficial exchange.
Hence, it is more prudent for the prosperity of one’s own nation to leave production and trade to the self-interested actions of the citizenry.
Commerce Fosters a Good and Civil Society
Finally, Adam Smith argued that the benefits from free and competitive commerce and trade were not only the material improvements in man’s condition. It also served as a method for civilizing men, if by civilization is meant, at least partly, courtesy, and respect for others, and an allegiance to honesty and fulfillment of promises.
When men deal with each other on a daily and regular basis, they soon learn that their own wellbeing requires of them sensitivity for those with whom they trade. Losing the confidence or the trust of one’s trading partners can result in social and economic injury to oneself.
The self-interest that guides a man to demonstrate courtesy and thoughtfulness for his customers, under the fear of losing their business to some rival with superior manners or etiquette to his own, tends over time to be internalized as habituated “proper behavior” to others in general and in most circumstances.
And through this social process, the other-orientedness that voluntary exchange requires of each individual in his own self-interest if he is to attain his own personal ends, fosters the institutionalization of interpersonal conduct that is usually considered essential to a well-mannered society and cultured civilization.
Again, in Adam Smith’s own words, from his Lectures on Jurisprudence:
Whenever commerce is introduced into any country, probity and punctuality always accompany it . . .
It is far more reducible to self-interest, that general principle which regulates the actions of every man, and which leads men to act in a certain manner from views of advantage, and is as deeply implanted in an Englishman as a Dutchman.
A dealer is afraid of losing his character, and is scrupulous in observing every engagement. When a person makes perhaps 20 contracts in a day, he cannot gain so much by endeavoring to impose on his neighbors, as the very appearance of a cheat would make him lose.
When people seldom deal with one another, we find that they are somewhat disposed to cheat, because they can gain more by a smart trick than they can lose by the injury that it does to their character . . .
Wherever dealing are frequent, a man does not expect to gain so much by any one contract as by probity and punctuality in the whole, and a prudent dealer, who is sensible of his real interest, would rather choose to lose what he has a right to than give any ground for suspicion . . .
When the greater part of people are merchants they always bring probity and punctuality into fashion, and these therefore are the principle virtues of a commercial nation.
Difficulties in Establishing a System of Natural Liberty
Adam Smith was well aware that deregulating commerce and industry, and freeing domestic and foreign trade from government control was not an easy matter. In “The Wealth of Nations” he referred to two obstacles in the way of establishing that “system of natural liberty.”
First, what he called “the prejudices of the public,” by which he meant the often-difficult task of getting ordinary citizens to see and understand the beneficial workings of and the logic behind a free competitive market.
And, second, what he referred to as the “power of the interests,” that is, those special interest groups that lobby and pressure government to provide them with anti-competitive regulations and restrictions, protections for foreign rivals, and subsidies and tax-funded redistributions to the harm of and the cost to consumers, taxpayers, and potential competitors locked out of the marketplace.
Indeed, when Adam Smith died in 1790 at the age of 67, it seemed highly unlikely that his idea and ideal of individual freedom and economic liberty would ever triumph. He believed it was utopian to ever expect the achievement of a regime of freedom of trade and enterprise.
The Power of Ideas for Freedom
Yet, in the equivalent of one lifetime after his death, by the middle of the nineteenth century, freedom of enterprise prevailed not only in the United States, but had been established in his own country of Great Britain, and soon was spreading in varying degrees to other parts of Europe and then other areas of the world.
The threats to economic freedom today are no greater than during Adam Smith’s own time about 250 years ago. And the same “prejudices of the public” and “power of the interests” stand in the way.
In spite of Adam Smith’s own pessimism, his arguments and their eventual triumph for a good part of the nineteenth and early twentieth centuries demonstrates the power of ideas.
If we take to heart and apply the logic of Adam Smith’s own explanation of the workings of a free market system to our own times, we, too, can triumph and establish a even better and more consistent “system of natural liberty” for ourselves and for the world that we will leave to our children and grandchildren.
Professor Richard Ebeling is a leading authority on Austrian School economics and the freedom philosophy. He currently teaches at Northwood University in Midland, Michigan. This essay was originally published at EpicTimes.