Yesterday marked the 250th anniversary of Adam Smith’s ‘An Inquiry into the Nature and Causes of the Wealth of Nations’. The book is an exploration of why some countries grow faster in the long term than others, with a particular focus on what was happening in Britain at the time, i.e. its early industrial development. It is widely considered the first systematic treatment of the issue of long-run development.
As a result of his authorship of The Wealth of Nations, Smith is honoured by many as the father of free-market thinking. But even for those who do not consider themselves free-marketeers, the work is still worth reading.
The truth is, Smith’s magnum opus is not simply a paean for laissez-faire economics. It is more complex and nuanced than that. His attempt to understand the root causes of long-term growth and stagnation in the context of a period of technological transformation is still highly relevant. Especially in a country like the UK, where GDP per capita growth has slowed noticeably since the 2008 financial crisis, and there is little evidence of a strong and lasting recovery, all the while the AI ‘industrial revolution’ is building momentum.
Central to Smith’s explanation in the Wealth of Nations of why some economies develop more than others is his comparative-historical methodology. This approach to analysis stands in stark contrast to modern policymakers who frequently rely on unrealistic models reliant on theoretical abstractions and assumptions. The result is that any modern comparative debate is frequently superficial and focused on ‘big macro’ data points.
The current approach has failed to make much positive difference to our economy’s performance so far. Therefore, adopting a more varied set of methods would add a slew of robust analytical tools to policymakers’ toolbox that could help politicians and policymakers better understand why the UK is experiencing relative economic stagnation and what might be done about it.
Smith’s continued relevance also derives from his understanding that economies are not discrete domains of human endeavour. The ‘commercial society’ he believed would deliver prosperity for all is dependent on social trust, and this is achieved by having in place the appropriate social and cultural infrastructure – the right ethics, values, behaviours and institutions.
For Smith, those key virtues included ‘courage, temperance, justice, prudence and benevolence’ and were essential to avoid a drift towards a low-trust, beggar-thy-neighbour community – the antithesis of his ‘commercial society’. The lesson for modern policymakers is that there is a need for constant reproduction of the conditions for maintaining high levels of social capital and vigilance against the emergence of detrimental conditions.
The most important institution for Smith was an effective state that provides essential public goods such as security, property rights, and justice. These are vital for the development of a society with high levels of social capital. As Roger Backhouse has argued, Smith also saw a role for the state in delivering merit goods, such as education and physical infrastructure, which are unlikely to be provided otherwise.
However, the UK’s current stagnation is rarely discussed as a consequence of the inadequacy of state capacity in these vital areas. If anything, any discussion today is premised on the causality being the other way around: lower growth means it is difficult to invest in essential social and physical infrastructure. The Smithian lesson for politicians and policymakers here is that perhaps public investment is one of the key drivers of long-run development, not something to do as a consequence of growth.
Taken in its totality, it could be argued that Smith was an early advocate for a social market economy, as defined Britain after the Second World War. This timeless wisdom from two and a half centuries ago is perhaps the biggest lesson from Adam Smith and The Wealth of Nations that politicians and policymakers of today should take on board.
