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June marks the three hundredth birth anniversary of Adam Smith, the Scottish philosopher considered to be the father of modern economic thinking. His most famous book entitled “An Inquiry into the Nature and Causes of the Wealth of Nations” was published in 1776, the same year that America declared independence from the United Kingdom. This coincidence is of great significance since the United States of America is the first and most enduring bastion of free enterprise in the modern world. It is the biggest and most prosperous economy, not least because it is based on the principle and functioning of free markets. Economic growth in a market economy happens due to individual enterprise and the pursuit of self-interest. This was Smith’s basic insight. He wrote famously in the Wealth of Nations, “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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”
Economic growth in a market economy happens due to individual enterprise and pursuit of self-interest. This was Smith’s basic insight
Pursuit of self-interest promotes social good and prosperity, so long as it is pursued under well-defined rules (for instance, property rights). That basic insight remains valid to this day. When entrepreneurs or investors pursue profit, the generation of that profit signals improvement in the lives of others. Smith also warned in the same book, that economic growth is best achieved by letting individuals manage their assets (i.e. capital) and not by governments interfering, or worse doing “central planning”. No government can do better than what markets can achieve, and to hand over to governments the power to determine capital allocation is unwise and possibly ruinous.
Indian agriculture is a classic example of a spaghetti of often contradictory State interventions, resulting in the shackling of the Indian farmer, trapped in penury
Friedrich Von Hayek’s “Road to Serfdom” was a warning, surely inspired by Smith and later liberal philosophers, about the dangers of too much market intervention by the State. One intervention leads to another, and soon you are totally shackled. Indian agriculture put price caps to keep wage good low, and then subsidised inputs to farmers to undo the impact of price caps, and topped it with massive government procurement. Indian agriculture is a classic example of a spaghetti of often contradictory State interventions, resulting in the shackling of the Indian farmer, trapped in penury. The recent thinking on interventionist industrial policy, will also undoubtedly have side effects, which will call for more intervention. If you don’t let markets work you get bad outcomes. Karl Marx, writing four decades later than the Wealth of Nations was following in the footsteps of Smith, and saw capitalism as necessary. Of course, unlike Smith who believed that capitalism led to prosperity, Marx predicted that capitalism would be doomed by its internal contradictions.
America does not grow a gram of coffee or sugarcane and yet is the highest consumer of both. Singapore imports food, energy and even drinking water. How then is “Atmanirbhar” to be understood in the context of Smith’s philosophy?
Incidentally Smith was aware of the dangers of cartels and monopolistic practices in the context of markets. He wrote, “people of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in conspiracy against the public, or in some contrivance to raise prices”. This dictum applies to this day, as watchdogs like the Competition Commission of India keep a vigil against cartels.
Smith would be the first one to argue that too much inequality is unjust and unfair. But he believed that the betterment of the lives of others would come through beneficence, and through philanthropy, not government’s coercion
Smith was against mercantilism which might have made him unpopular in his time. But he had a gentle way of making this point. He said if you tried to grow grapes and make wine in Scotland it would be thirty times more expensive, and equally good if brought from abroad (i.e. imported). “Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?”. Can we be self-sufficient in everything? America does not grow a gram of coffee or sugarcane and yet is the highest consumer of both. Singapore imports food, energy and even drinking water. How then is “Atmanirbhar” to be understood in the context of Smith’s philosophy?
Smith wanted societies to evolve toward more freedom in an organic, consensual, conversational way
However our understanding Smith only from the lens of his Wealth of Nations book is incomplete and misleading. He wrote another book, “The Theory of Moral Sentiments” seventeen years earlier in 1759. This is the book that he considered his most important contribution. In this book his stature as a leading light of Scottish enlightenment shines brightly. He was acutely concerned about justice and fairness. He also believed that people do not want to do better for themselves by hurting others. We have a “spectator self”, which one can interpret as an inner conscience, which guides us. He wrote, “The chief part of human happiness arises from the consciousness of being beloved.” Here being loved, is not about pleasing people, but about being admired and respected. Man wants not only to be loved, but to love. That is be worthy of love, and live that high moral standard.
Indirectly echoing this, the founder of Infosys, Narayan Murthy, once said, that he wanted his company, not to be the biggest, or most profitable or with the highest market value, but to be the most respected. Smith wrote, that we may not understand the predicament of others because we have never experienced it. Nevertheless, we can imagine it, or put ourselves in the shoes of others. This is the essence of empathy, which he championed. Smith would be the first one to argue that too much inequality is unjust and unfair. But he believed that the betterment of the lives of others would come through beneficence, and through philanthropy, not government’s coercion. Of course this can be debated, but his concern for fairness and justice cannot. Smith held the Chair of Logic and Rhetoric at the University of Glasgow. Naturally the art of persuasion was central to his thesis.
Markets are conversations, and we are constantly trying to persuade others about our ideas. “The offering of a shilling”, or rather offering to buy something from the seller is also an act of persuasion. Markets can function well when there is free speech, free expression, free debate, dissent, and even freedom to offend. Smith wanted societies to evolve toward more freedom in an organic, consensual, conversational way. His thoughts are as valid and compelling today, as they were three centuries ago.
(The writer is a noted economist)