30 June 2023

Happy 300th birthday to Adam Smith – his work is more relevant than ever

By Mimi Yates & Jack Twyman

This month marks the 300th birthday of one of Scotland’s most renowned sons and founding fathers, Adam Smith. Today, he evokes widespread respect from economic theorists and moral philosophers alike, and with good reason.

His 1776 magnum opus, The Wealth of Nations produced or developed many of the concepts we use today from gross domestic product (GDP), the mutual benefit of trade, specialisation and productivity. Smith first and foremost was and is, through his works, a champion of the importance of free trade and its benefits. It is no accident that a thinktank named in his honour, the Adam Smith Institute, continues to further that mission 233 years after his death.

Smith’s life began in Kirkcaldy, a small trading port on Scotland’s east coast, where he led a largely uneventful childhood, besides an alleged brief kidnapping by vagrants (thankfully for economists worldwide, he was rescued by his uncle). Smith followed his intellectual intrigue to Glasgow where, aged 14, he entered the University, learning from leading intellectuals who would be the shaping force in Smith’s development. After graduating, Smith won a scholarship to Balliol College, Oxford. Far from the centre of ‘Scottish Enlightenment,’ he complained that the professors had ‘given up even the pretence of teaching’. The fact they were paid irrespective of the effort they put in provided the future economist an early lesson in incentives.

At Oxford, a frustrated Smith resolved to teach himself and subsequently obtained a strong grasp of both classical and contemporary philosophy. After a brief stint giving well-received lectures in Edinburgh, Smith returned to Glasgow to take up a teaching post. Here, it was his philosophical knowledge that drove him to write and publish his first work, The Theory of Moral Sentiments (1759). The Scotland of Smith’s time was particularly famous for its clubs and societies that met in pubs for debates and discussion. These taverns of ‘Enlightenment’ and free inquiry were prolific of genius, housing communities of thinkers that have historically changed the way of the world.

Both The Wealth of Nations and The Theory of Moral Sentiments may have been published in the mid-18th century, but they are no dusty tomes. They systematised an economics wholly applicable to today’s globalised economy. Central to this is the notion of the ‘invisible hand’ first touted in Moral Sentiments. Following self-interest simultaneously benefits society as a whole, as self-betterment necessitates the efficient allocation of resources and prices, in achieving economic prosperity.

Smith challenged protectionist policies, advocating for the concept of ‘gross national product’ as a better measure of wealth than silver or gold – a claim that was bold for the time, but proved to be entirely accurate. He also emphasised the benefits of specialisation and voluntary exchange, arguing that free trade and commerce naturally allocate resources to where they are most needed. He warned against interventionist politicians, as their actions such as price caps and subsidies disrupt the market and diminish its advantages. He recognised the importance of the division of labour and capital accumulation for economic progress, highlighting the positive feedback cycle of investment and efficiency – something Jeremy Hunt emphasised recently.

However, Smith also cautioned against excessive government size, burdensome taxation, and mounting debts, which hinder the market economy and redirect capital from future production. His ideas remain as relevant as ever, particularly in the context of escalating national debt and the potential consequences of high interest rates used to combat inflation.

Interventionist politicians should take note of Smith’s point that free trade and commerce automatically guide resources to where they are most needed, benefiting the entire economy. The ‘invisible hand’ operates so effectively that politicians cannot outsmart it; their interventions like price caps, taxes, regulations, and subsidies distort the market and diminish its benefits.

Above all, Smith believed in a market system of free competition and exchange. Too big a government requires burdensome taxation that distorts the market economy, and excessive debts divert capital away from future production. Today Smith’s ideas are under threat from the monopolies that extract tax preferences, controls, and other privileges from governments to dampen competition. Smith’s argument that free markets and open competition benefit the poor most should be given a new hearing.

Ultimately, the contemporary relevance of Smith’s work is a testament to its ingenuity. But this can be taken further. The Tercentenary of his birth should be an opportunity to reimagine his work for the 21st century.

Writing on the cusp of the Industrial Revolution, Smith could hardly have foreseen the world we live in today. Now, with the rise of artificial intelligence, we may once again be on the brink of a technological transformation whose consequences we can’t predict. AI could certainly boost global productivity growth that has been slowing for more than a decade. By automating certain cognitive tasks, humans will have more time to carry out high-productivity roles that focus on innovation. Goldman Sachs forecast that AI could increase global output by $7tn (about 7% of global GDP) over a ten-year period.

He may not have envisaged the kind of technology that shapes today’s world, but Smith’s work can still provide effective solutions to the most challenging of economic, social, and even existential issues. So let’s wish him a Happy Birthday– and be grateful that even after 300 years, he continues to speak to us today.

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Mimi Yates is Director of Engagement and Operations at the Adam Smith Institute. Jack Twyman is an intern at the Adam Smith Institute.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.