We are deep within times of economic and psychological stress due to the COVID 19 pandemic and governmental reactions to it. Globalisation and development have progressed rapidly throughout the 20th and 21st centuries without any measured response to deal with the risks, at a worldwide level. Individual governments have introduced their own ‘lockdowns’ in an attempt to reduce the spread of the virus, with massive negative effects on economies and their human participants’ ways of living. It’s been a crushing blunt hammer blow, carried out nation by nation, in absence of any intelligent plan and medical strategy, prepared in advance. And it’s not as if warnings weren’t given!…warnings that should have kickstarted some desperately needed funding into our own NHS, suffering through years of neglect.
Smith Out of Favour?
At this time, the thinking of a guy like Adam Smith is not particularly prominent or in favour. With governments around the world shutting whole economic sectors down and paying the wages of millions through central banks, these times are more aligned to the thinking of John Maynard Keynes. Keynesian economics is all about the ability of central governments to spend money in various ways, therefore, boosting and stimulating the economy when it is required. That’s exactly what is happening now. Fiscal policy is triumphant in providing a solution to this crisis. Where would we be without it? In America, we have a movement which is based on simply ‘printing money’. Stephanie Kelton, who has advised Bernie Sanders, presents this approach as Modern Monetary Theory. Why take on governmental debt through a central bank when you can set the printing presses running and pay for everything that way? What would Smith have thought of that?
Wealth of Nations
In fact, Adam Smith was very aware of the benefits of the state and central government. His theory, detailed in the Wealth of Nations, published in March 1776, was that society would benefit and progress if individuals were free to pursue their own interests. Individuals would always aim to maximise their own economic benefit and in doing so this would underpin a progressive society. Therefore modern market economics was born. Smith was not a Social Darwinist, however…he did not believe that the biological ‘survival of the fittest theory’ on which Darwin’s ‘On the Origin of Species’ is based should be extended and should justify market economics.
There is the elasticity of Smith’s thinking, at the time. He was right about free markets and the operation of the price mechanism, the ‘invisible hand’ to allow a good outcome. BUT he also considered the role of government and of society to provide a playing field on which commerce could stand.
Wisdom of Nature
Smith’s ideas were often classed as ‘ laissez-faire’ but this did not originate in eighteenth-century economics. Laissez-faire is derived from the Stoicism of ancient Greece and Rome, and then further back to Daoism in the sixth century BC. He believed as the Stoic’s did in the ‘wisdom of nature’. He agreed with John Locke that individuals are naturally competitive and cooperative. Smith understood that the ‘invisible hand’ might feature the occasional ‘backhand’ or more negative outcome but believed strongly that the positive ‘forehands’ would win out.
“Every animal was by nature recommended to its own care, and was endowed with the principle of self-love .” Everyone is “more deeply interested in whatever immediately concerns himself ”, Smith wrote. Self-preservation is the determining factor, within nature. He thought that after the self, came a concern for family, friends, neighbourhood, nation, and finally the world at large, in decreasing order.
“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.” Self-preservation is ‘the uniform, constant, and uninterrupted effort of every man to better his condition.” Self-interest is “the principle from which public and national, as well as private opulence is originally derived”
Free Markets But With Protection
He doesn’t think that self-interest and the invisible hand are all you need, however, and this is key. Smith states in the ‘Wealth of Nations’ that self-preservation and the invisible hand be “protected by law and allowed by liberty to exert itself in the manner that is most advantageous, which has maintained the progress of England towards opulence and improvement.”
Smith is clear about the role of law in setting up a level playing field and in blocking some of those ‘backhands’. He realised that markets could not be ‘freely corrupt’ and also believed in public education and public works to build bridges and roads, where private investment doesn’t make sense. He believed in public tolls to use roads and bridges so that the “vanity of the rich is made to contribute in a very easy manner to the relief of the poor”.
Elastic Thinker
Financial safety and security was also part of this thinking. He wrote about restricting the freedom of bankers to issue promissory notes to customers where that activity “might endanger the security of the whole society.” He believed that poor financial regulation was a “violation of natural liberty”. Adam Smith was an elastic thinker very much ahead of his time, not only with his ideas around free markets and self-preservation but also due to his realisation that none of this could ever work without the existence of the state and a legal framework. Smith was a man with a strong social conscience who would recognise the need for a government’s fiscal spending to protect against the effects of another, completely different, invisible hand, the current coronavirus pandemic.