What would Adam Smith think of our handling of his economics?

People seem to like to claim that important historical figures are on their side. One example is the way people will argue about whether Charles Darwin believed in God. The example I want to explore here is the “father of modern economics” Adam Smith.

I believe in business, in the sense that I see that trading is a way of creating wealth. This is one of Scotsman Adam Smith’s precepts. In his famous 1776 treatise, The Wealth of Nations, he wrote of his faith in self-interest. In using that language today, some of us may feel that self-interest is wise or inevitable: others may feel that the word is immoral. Adam Smith meant that he believed that, if a number of people were acting out of self-interest in developing their businesses, then society as a whole would become more wealthy and all would benefit. This is his concept of the invisible hand: he did not advocate self-interest, but he observed that it was commonplace and that more benefit seemed to come to society as a whole when people traded out of self-interest than when they sought instead to be philanthropic (there's a challenging thought). (By pursuing his own self interest he frequently promotes that of 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 – WoN, 456).

It has been stated that the proof that wealth came through labour, through trade and not through hoarding gold, was seen in the growing wealth of countries such as the UK and America because at that time they saw growth through trade, whereas countries such as Spain which saw wealth as being about holding onto gold bullion languished.

I have been fascinated by the life of John Forbes Nash, Jr, Nobel laureate, whose work is depicted in the 2001 film A Beautiful Mind. In a captivating moment in the film, he watches some of his friends eyeing up women in a bar and suddenly declares, “Adam Smith is wrong!” His theory – the Nash Equilibrium – says that if people just work out of self-interest based on what other individual “players” are doing they will not produce nearly as good an outcome as if they collaborate with one another. In other words, trade may be good, but acting just as an individual player will not produce the best results.

Modern advocates of free trade derive their doctrine from Adam Smith. But will everyone benefit in a society that is just driven by free trade, by “the market,” whether they are totally self-interested or collaborate? There seems to be much disbelief today that free trade on its own is sufficient; there is a belief that certain groups of people need special care or protection.

So I was interested to read a speech given by Traidcraft founder Richard Adams to Durham University students. As an alumnus I read it in the Spring edition of the magazine Durham First that I was sent. Here is some of what he said.

The market is quite good at a number of things, as Adam Smith pointed out. It creates efficiency, it's good at encouraging profit-seeking behaviour, it delivers goods and services effectively to those who can afford to pay, and it created jobs for many, and wealth for some, in the process. But as we are finding out with a vengeance, it's not so good at recognising external costs like environmental damage and the exploitation of people and, given it's head, it will pursue profit to the wilder shores of greed and criminality. Smith recognised this and, being an Enlightenment professor of moral philosophy, assumed his market economics would be set within a moral framework.

So, 233 years on, how do we change the market? We make it grow up, give it values, a sense of responsibility, a conscience, a theology, a heart. This is what fair trade, sustainable development, ethical business is about.

This leads me back to my starting point, the significance of the context in which people set their theories, and the competing claims of modern commentators. Did Smith see market economics as set in a moral framework? And, whether he did or not, should we and how should we?