Adam Smith Was Never the Cheerleader for Big Business Liberals Claim

Which page? That is the only question you need when somebody at the table, glass of wine in hand and deep satisfaction on his face, announces that conservatives worship Adam Smith because Smith was the patron saint of greed. Let him finish. Then ask him, politely, which page.

Because I will tell you something. The man who wrote the most famous book in the history of economics also wrote that when people of the same trade gather, even for fun, the conversation ends in a conspiracy against the public. He called the spirit of the merchants of his day mean and monopolizing. He treated the great trading companies of his age as a scandal. If Adam Smith walked into a modern lobbying firm, he would not ask for a seat at the table. He would ask where the exits were and then he would start taking notes for the next edition.

Now, I am not going to pretend that every conservative has always lived up to Smith. That would be dishonest, and the whole point of this piece is to be fair about both Smith and us. But the charge that "free-market" means "corporation-friendly" is a mistake about the man and a mistake about the idea. Let me take it apart.

The charge, at its strongest

First, the best version of the accusation, in terms its defenders would accept.

It goes like this. Conservatives say they believe in free markets. In practice, they cut taxes on companies, loosen rules on industries and defend the biggest firms against regulators. The donor class that funds the party includes many corporations. The phrase "invisible hand" gets trotted out whenever a company wants to be left alone, as if Smith had blessed any behavior that makes a profit. And the people who invoke him most loudly, the argument continues, have not read him closely, because Smith himself had harsh things to say about business owners. So the "free-market conservative" is either naive or a front for the powerful.

That is a sharp argument, and there is a good deal of truth in the middle of it. Notice that its second half actually agrees with my thesis. The critic says Smith distrusted merchants. I say yes, he did. The question is whether conservatives who cite Smith should be understood as pro-merchant. They should not, and the way to see it is to read what Smith said.

Who Adam Smith was

Adam Smith was born in 1723 in Kirkcaldy, Scotland, and died in 1790. He was a professor of moral philosophy at the University of Glasgow, not a businessman and not an economist in the modern sense, because that profession did not exist. His first book, The Theory of Moral Sentiments, appeared in 1759. His second, An Inquiry into the Nature and Causes of the Wealth of Nations, appeared in 1776, the year the American colonies declared their independence.

Hold onto that order. The book on morals came first. Smith did not think of himself as the author of a manual for getting rich. He thought of himself as a student of human nature who wanted to understand how a society of free people could live together decently and grow prosperous.

What Smith said about merchants

Let's read the record. These are passages from The Wealth of Nations, and you can find them in any edition.

On meetings of businessmen. In Book I, Chapter X, Smith wrote that people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. He added that it is impossible to prevent such meetings by any law consistent with liberty, but the law ought to do nothing to facilitate them, much less to make them necessary.

On employers and wages. In Book I, Chapter VIII, Smith observed that people rarely hear of combinations among masters, though frequently of combinations among workmen. But anyone who thinks so, he said, knows nothing of the world. Masters, he wrote, are always and everywhere in a sort of tacit but constant and uniform combination not to raise wages above their actual rate. Smith was not a friend of employer power. He also wrote in the same chapter that no society can surely be flourishing and happy of which the greater part of the members are poor and miserable.

On who writes the rules. At the end of Book I, Chapter XI, Smith warned that any proposal for a new law or regulation of commerce that comes from the merchants should always be listened to with great precaution, and should never be adopted until it has been long and carefully examined, because it comes from an order of men whose interest is never exactly the same as the public's, and who have generally an interest to deceive and even to oppress the public.

On the point of the whole system. In Book IV, Chapter VIII, he put it this way: consumption is the sole end and purpose of all production, and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. That is the sentence of a man who wanted markets to serve the buyer. It is not the sentence of a lobbyist.

Read those four together. A cheerleader for big business does not write them.

The target was privilege

So what was Smith actually for? He was against a particular system of his day, which he called the mercantile system, and which we now call mercantilism. Under that system, governments handed out favors to chosen merchants: monopolies, tariffs that kept out foreign competition, bounties, and charters that gave a company exclusive trading rights. In Smith's analysis, every such favor taxed the many to enrich the few. In Book IV, he wrote of the mean rapacity and the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind.

His most pointed criticism was reserved for the great chartered companies, and the East India Company in particular, which held a monopoly granted by government and used the machinery of the state to protect its profits. Smith distrusted joint-stock companies in general, and argued that directors who manage other people's money are unlikely to watch it with the same anxious care as partners watching their own. In other words, Smith's quarrel was with the cozy relationship between business and the state.

This is the point to hammer. A free market is not a market that favors business. It is a market where business has to win customers or go under. Competition is a firm's enemy. Entry by newcomers, exit by failures, prices that fall, and no guaranteed profit: those are the conditions that make a business owner sweat. Smith knew it, and wanted it that way.

The man who wrote about sympathy

Now add the first book. The Theory of Moral Sentiments opens with the observation that, however selfish man may be supposed, there are evidently some principles in his nature that interest him in the fortune of others and render their happiness necessary to him. The book builds a picture of a person who judges his own conduct by imagining how an impartial spectator would see it. It is a book about conscience.

You will hear it said that the two books contradict each other: the moral Smith of 1759 and the selfish Smith of 1776. They do not, and the evidence is in the most famous line of the second book. "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." Look at what that line is saying. Self-interest, working in a system of fair exchange, serves the customer. It does not say that self-interest is noble. It says that a well-built system channels it. The key phrase is "well-built." The butcher serves you because he must win your custom against the butcher down the street. Remove the competitor, give him a monopoly, and the system stops working.

As for the "invisible hand," the phrase appears just once in The Wealth of Nations, in a passage about why a merchant prefers to invest at home, and once in the earlier book. It was a passing image, not a doctrine. The people who treat it as a blank check for corporations have given a throwaway phrase far more weight than Smith did.

Smith was not a purist, and neither are we

An honest account has to include the places where Smith did not say what a modern libertarian might wish. He thought government had duties: defense, a system of justice, and certain public works and institutions that private parties would not supply. He defended the Navigation Acts, the English laws that favored British shipping, on the ground that defense is of much more importance than opulence. And he supported regulation of the banking trade, comparing it to the rule that requires party walls between houses to stop the spread of fire. He admitted that such rules are in a sense a violation of natural liberty, but argued that the liberty of a few individuals to endanger the security of the whole society ought to be restrained.

So the picture is of a man who was neither a statist nor an anarchist, who wanted competition and wanted government kept at a distance from the interests that would capture it. That is closer to the conservative tradition than the caricature on either side.

The answer, point by point

Let me put the reply in order.

1. Smith's own text contradicts the charge. The passages about conspiracies, tacit combinations, monopolizing merchants and the danger of laws proposed by business interests are in the book itself. Anyone who says Smith was a cheerleader for big business has not read the passages.
2. The pro-market position and the pro-business position often conflict. A pro-market conservative wants new firms to be able to enter, failing firms to be allowed to fail, and no company to receive a special deal from government. A pro-business politician wants the opposite when his donors are involved. These are different programs.
3. Competition is the discipline. Antitrust law is an old example. The Sherman Act, passed by a Republican Congress and signed by President Benjamin Harrison in 1890, was aimed at combinations that restrained trade. Conservatives argue among themselves about how far antitrust should go, but the principle that monopoly is a problem is common ground.
4. Smith would recognize many modern privileges. Licensing rules that keep newcomers out, tariffs that protect one company's profit at the expense of its customers, subsidies that pay a favored firm, and zoning rules that protect incumbents are all modern cousins of the charters Smith attacked. See our piece on Republicans were the tariff party first, from Lincoln to McKinley for a fair look at where our own party has a mixed record on this.

Where conservatives have fallen short

I promised honesty, so here it is. Conservatives have not always been faithful to Smith. In October 2008, the Troubled Asset Relief Program, a bailout of the financial sector, was signed by a Republican president. Fights over renewing the charter of the Export-Import Bank, which subsidizes financing for foreign buyers of American goods, split Republicans, and the conservatives who opposed it called it corporate welfare for exactly the reasons Smith would have given. Tariff protection has been a Republican habit since the nineteenth century. And plenty of lobbyists wear Republican lapel pins.

A conservative who is serious about Smith should say plainly that these things are failures of the philosophy. They are not part of it. The test of a free-market conservative is whether he is willing to take on a friendly company. Cutting taxes on everyone is a pro-growth position. Writing a special exemption into the code for one industry is a pro-business favor. They are different acts and they should be judged differently.

Four questions that separate the two

Next time you hear about a policy, ask these four questions.

1. Does it apply to every firm in the industry, or only to some?
2. Does it make it easier or harder for a newcomer to compete?
3. Does it let a firm that makes a mistake lose its money, or does the taxpayer cover the loss?
4. Who benefits if the rule stays in place for twenty years: the customer or the incumbent?

If the answers are "only some," "harder," "taxpayer" and "incumbent," you are looking at a pro-business policy, and you should be suspicious whether it is labeled "free market" or not. If you want to go deeper on the argument for markets as a system of knowledge, read Hayek Explained Why the Smartest Planner in the Room Always Loses, and for the difficult question of when markets fail, Yes, Markets Sometimes Fail, and Governments Fail Right Alongside Them.

For the ideas that hold the right together, see Five Strands of the American Right Compared in One Table. And if you would like the argument for markets in the voice of a man who spent a career making it at the kitchen-table level, there is Milton Friedman Took Free Markets Out of the Classroom and Into the Kitchen.

The bottom line

• Adam Smith's Wealth of Nations (1776) warned about merchants who conspire against the public and about laws written to suit them. The charge that he was a cheerleader for big business does not survive a reading of the book.
• Pro-market means competition, free entry and the freedom to fail. Pro-business means helping particular firms. The two often pull in opposite directions, and conservatives ought to choose the first.
• Judge any policy with four questions: who is covered, can newcomers compete, who pays for failure, and who benefits in twenty years.
• Hold your own side to the standard. Bailouts, subsidies and tariffs that favor one industry deserve a skeptical look when a Republican proposes them.
• The next time someone calls you a corporate shill, pick up The Wealth of Nations and ask for the page.