Adam Smith’s America: How a Scottish Philosopher Became an Icon of American Capitalism

Published by EH.Net (September 2023).

Glory M. Liu. Adam Smith’s America: How a Scottish Philosopher Became an Icon of American Capitalism. Princeton: Princeton University Press, 2022. xxxii + 346 pp. $35 (hardback), ISBN 978-0691203812.

Reviewed for EH.Net by Lanny Ebenstein, University of California, Santa Barbara.

Glory Liu’s Adam Smith’s America has been decidedly praised, and appropriately so. It is a work of scholarly depth and wide scope. Notwithstanding that so much has been written on the Scottish savant for centuries, this is an invaluable book. Upon reading it, even longtime Smith scholars will have a much better idea of development of the interpretations of Smith’s work and thus of his work itself.

Like many, perhaps most, great thinkers and philosophers, Smith was a protean figure whose work is subject to diverse perspectives. Almost from the start, there has been a progressive as well as a conservative Smith. Liu’s work accurately situates him in the former camp. He was far from an advocate of the status quo. He did not live in a libertarian but a mercantilist era. Active government was the practice when he wrote An Inquiry into the Nature and Causes of the Wealth of Nations (1776), and, indeed, that book was directed against mercantilism.

But Smith was not thereby an advocate of very little or no government. Indeed, as his best recent biographer, Nicholas Phillipson, presents, Smith sought a science of humankind which would allow the maximization of human happiness through appropriate government laws and policies. Smith was no philosophical opponent of government. Rather, he saw the secular salvation of humankind through government. He was a humanist and utilitarian in the tradition of his close friend and fellow key figure in the Scottish Enlightenment, David Hume.

Liu’s work chronologically presents the reaction to Smith’s work. She correctly states the French Revolution had the “greatest immediate impact on Smith’s reception” (p. xxvi). Smith was considered a forerunner of the French Revolution: “After 1789, figures like the Marquis de Condorcet turned Smith’s ideas into the ‘voice of revolution’ … Smith’s association with French revolutionary zeal, sedition, and dissenting public opinion travelled back to England. After Smith’s death in 1790, obituaries noted that his ideas had drawn attention to ‘subjects that unfortunately have become too popular in most countries of Europe’” (pp. xxvi-xxvii). Samuel Fleischacker, among the leading modern Smith scholars, also emphasizes Smith’s influence on French revolutionary figures and their supporters in England and elsewhere.

In America, too, Smith was originally perceived as a progressive, largely because America’s founders were themselves progressive. Like Smith, America’s founders sought active but not all-encompassing government together with a broadly middle-class society without extremes of wealth and poverty. There is not a word in Smith, as there is not a word in the founders, about encouraging an elite of wealth-producers who will create prosperity for everyone else—not a word. This would have been inconsistent with the largely egalitarian view of the nature of at least European men that Smith and the founders had. For Smith, according to a student’s 1763 lecture notes in a remark that appeared in a slightly modified form in The Wealth of Nations: “No two persons can be more different in their genius as a philosopher and a porter, but there does not seem to have been original difference betwixt them. For the five or six first years of their lives there was hardly any apparent difference … Their manner of life began then to affect them, and without doubt had it not been for this they would have continued the same. The difference of employment occasions the difference of genius.” [1] This view of natural and intrinsic human equality is very different than that possessed by most present interpreters of Smith, yet it is basic to understanding and appreciating his thought.

Liu also correctly states that “[m]aking sense of Smith’s figurative arrival and reception in the decades leading up to and following American independence requires removing many of the contemporary blinders that often lead to overstatements of Smith’s importance—for instance, the idea that The Wealth of Nations was ‘an intellectual shot heard round the world in 1776’” (p. 15). Again, Smith’s influence has been protean and many-sided with different interpretations of him at different times and in different places. According to Liu: “For the American founders, the works of Adam Smith were guidebooks for enlightened statesmanship” (p. 17). James Madison, Alexander Hamilton, and John Adams read and were influenced practically and philosophically by Smith—Adams “used ideas from Smith’s The Theory of Moral Sentiments to grapple with what Adams saw as a troubling socio-psychological influence of wealth in society” (p. 17). In sum: “The eclecticism of … interpretations and uses evokes the embryonic state of political economic thinking during the late eighteenth century and reinforces the notion of political economy as a branch of statecraft” (p. 17). Showing the diversity of early views on Smith, Hamilton quoted extensively from The Wealth of Nations in arguing for government encouragement of manufacturing and high tariffs. Both George Washington and Thomas Jefferson owned copies of The Wealth of Nations, and Jefferson publicly praised it.

Only after the Civil War did the interpretation of Smith as an apostle, or the apostle, of capitalism really develop. Capitalism had to emerge before Smith could be identified as its initiator. Much like the incorrect interpretation of America’s founders as basically opposed to democracy and preeminently private property advocates put forward by progressive historians in the late nineteenth and early twentieth centuries, contemporaneous political economists incorrectly interpreted Smith as much more opposed to government in the abstract than he in fact had been. Smith was not an advocate of socialism (understood as direct state management of economic activity), of course. But there is a great difference between what may be termed “democratic capitalism”—basically free markets in the production and exchange of goods, combined with democratic governance and a significant but not all-encompassing role for government—and libertarianism as it is now practiced (extreme rhetorical opposition to government combined with little effective opposition to it and advocacy of the lowest top income and estate tax rates possible). Smith was in these senses a democratic capitalist, not a libertarian.

Smith favored some progressive taxation and nascent government welfare state activities. The great historian of economic thought Jacob Viner remarked Smith was “not a doctrinaire advocate of laissez-faire. He saw a wide and elastic range of activity for government, and he was prepared to extend it even farther.” [2] According to Thomas Sowell: “Egalitarianism is pervasive in Smith.” [3] James Buchanan said a “returned Adam Smith would be a long distance from the modern libertarian anarchists.” [4] John Maynard Keynes observed the “phrase laissez-faire is not to be found in the works of Adam Smith … Even the idea is not present in a dogmatic form.” [5]

As industrial capitalism unprecedentedly expanded in the final decades of the nineteenth century, the progressive Smith was lost. From the standpoint of technical and popular economics, he had, to some extent, already been supplanted in the United States, first by Jean-Baptiste Say and then by John Stuart Mill. However, especially with the hundredth anniversary of The Wealth of Nations in 1876, he experienced a revitalization, ably furthered by the great British Smith scholar Edwin Cannan, who emphasized Smith’s support for distributive economic justice.

The great issue of the day for England was to promote free trade, and Smith’s work admirably fit the bill. As Friedrich Hayek recognized, Smith’s most significant contribution was to emphasize the importance and benefits of free trade, not of very little or no government. There is a considerable difference between the doctrines of free trade (economic exchange, particularly of imports and exports, should be unrestricted)—which Smith enthusiastically endorsed—and laissez-faire (government should play a very small role)—which he did not favor with nearly the same enthusiasm. Hayek clarified this in The Road to Serfdom (1944): “The question whether the state should or should not ‘act’ or ‘interfere’ poses an altogether false alternative, and the term laissez-faire is a highly ambiguous and misleading description of the principles on which a liberal policy is based”; “To create conditions in which competition will be as effective as possible, to supplement it where it cannot be made effective, to provide the services which, in the words of Adam Smith, ‘though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expense to any individual or small number of individuals,’ these tasks provide a wide and unquestioned field for state activity. In no system that could be rationally defended would the state just do nothing.” [6] Smith’s crucial commitment was to free trade abroad and at home, not to laissez-faire in the sense of very little or no government.

During the Great Depression, Smith’s work was downgraded and disparaged as simplistic and irrelevant. Keynes’s ideas calling for more discretionary government economic activity were dominant. Liu appropriately calls attention to the fact that, surprising as it may be, the “invisible hand” metaphor was little used to characterize Smith’s work before the twentieth century: “The image [of the ‘invisible hand’] was hardly noticed by his [Smith’s] immediate successors … and virtually absent in debates on free trade in the nineteenth century … By the mid-twentieth century though, economists had begun assigning a level of significance to this idea of Smith’s that exceeded past interpretations” (p. 241).

Liu gives a central role to Paul Samuelson’s hugely influential Economics textbook in initiating greater use of the phrase “invisible hand” when discussing Smith. Samuelson depicted the “invisible hand as a precursor of foundational theories in modern economics such as perfect competition and general equilibrium” (p. 242). She also emphasizes Milton Friedman and George Stigler in propagating this view: Friedman and Stigler “streamlined their image of Smith to be more in line with the ascendancy of rational choice theory and strident market advocacy” (pp. 192-193). Actually, Smith meant the hand of God by “invisible hand,” not a hand of the market. He believed that when individuals pursue their own self-interest within a broad and enlightened concept of self-good, they are led by a utility-maximizing deity to promote the general happiness. Adam Smith certainly did not recommend greed or selfishness, that markets require no regulation or organization, that there should be little to no role for government, and that government should be unconcerned with preventing economic gaps in a society from becoming or remaining too large.

As Hayek held, Smith’s greatest contribution was to explain that economic activity is generally most effective when government allows individuals to transact freely, plays little role in managing details of economic decision-making, and limits its economic role to for the most part establishing a larger institutional framework. Glory Liu reminds us that past generations have considered Smith differently than our own and that for this reason future generations are likely to do so as well. In tracing the evolution of interpretations of his thought, she has made a substantial and lasting contribution to the Smith literature.

References

[1] Adam Smith (R. L. Meek, D. D. Raphael, and P. G. Stein, eds.), Lectures on Jurisprudence (Oxford: Oxford University Press, 1976), p. 348.

[2] Jacob Viner, The Long View and the Short: Studies in Economic Theory and Practice (Glencoe, IL: Free Press, 1958), p. 244.

[3] Thomas Sowell in Gerald P. O’Driscoll (ed.), Adam Smith and Modern Political Economy (Ames, IA: Iowa State University Press, 1979), p. 5.

[4] James Buchanan in ibid., p. 117.

[5] John Maynard Keynes in William Ebenstein, Great Political Thinkers: Plato to the Present, 4th ed. (New York: Holt, Rinehart and Winston, 1969), p. 674.

[6] Friedrich Hayek, The Road to Serfdom (London: Routledge & Kegan Paul, 1986 [1944]), pp. 29, 60.

Lanny Ebenstein is a Continuing Lecturer in the Department of Economics at the University of California, Santa Barbara. He is the author of many books and articles, including the first biographies of Milton Friedman and Friedrich Hayek, and is currently at work on books on taxation and “The Progressive Adam Smith.”

Copyright (c) 2023 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (September 2023). All EH.Net reviews are archived at http://www.eh.net/book-reviews.