tragic-comic what was known about system quarter millennium ago

Adam Smith:

Science and Human Nature

EMERITUS ADAM SMITH PROFESSOR

ANDREW SKINNER1

University of Glasgow

Glasgow, Scotland

Abstract: The paper opens with a quotation from Professor Muhammad

Yunus objecting to the one-dimensional representation of human

nature which is common in modern economics. The bulk of the paper

is concerned with Adam Smith and his system of social science which

consists of three major parts, mainly – ethics, history and economics.

Implications of Smith’s position on human nature are indeed multidimensional.

In conclusion, it is pointed out that Smith’s separation

of ethics, history and economics made it possible through later

generations to regard economics as a separate autonomous discipline.

This paved the way for the kind of development of which Prof Yunus

was the critic.

Keywords: system of social science, human nature, jurisprudence,

moral philosophy, economic liberalism, allocative mechanism

1 Prof Skinner is a Fellow of the British Academy. He has published a number of

articles, mainly concerned with 18th century topics. He has edited Sir James Steuart’s

Principles (1966, 1998) and Smith’s Wealth of Nations 1970, 1999 (Penguin Books).

He has co-edited the Wealth of Nations 1975 (with R H Campbell and W B Todd)

published by Oxford at the Clarendon Press. He is the author of A System of Social

Science: Papers Relating to Adam Smith (1979, 1996). The substance of Sections II

– VI in this paper has appeared in a number of locations, most recently in The Royal

Bank of Scotland Review Number 166, June 1990 Pp3-15 25

IN a notable passage, Nobel Peace Laureate Muhammad Yunus once

remarked that the economists’ view of ‘human nature’ was ‘one

dimensional’. Yunus contended that ‘People are not one-dimensional

entities; they are exceedingly multi-dimensional. Their emotions, beliefs,

priorities and behaviour patterns can best be compared to the millions

of shades we can produce from the three primary colours.’ (Yunus 2007,

p19; cf Pp21 and 290) This article is about Adam Smith, but it is hoped

that in expounding the elements of his system it will be possible to

illustrate the point that Smith would have had every sympathy with

Professor Yunus’s rejection.

In what follows, Smith’s system will be expounded in terms of the

order of argument which he is known to have employed as a lecturer;

namely, ethics, jurisprudence and economics. But it will be convenient

to begin with his treatment and knowledge of the literature of science.

Section I: The Literature of Science

It should be recalled that each separate component of Smith’s system

represents scientific work in the style of Newton, contributing to a greater

whole which was conceived in the same image. Smith’s scientific

aspirations were real, as was his consciousness of the methodological

tensions which may arise in the course of such work.

Smith’s interest in mathematics dates from his time as a student in

Glasgow (Stewart, 1.7). He also appears to have maintained a general

interest in the natural and biological sciences, facts which are attested

by his purchases for the University Library (Scott 1937, p182) and for his

own collection (Mizuta 2000). Smith’s ‘Letter to the Authors of Edinburgh

Review’(1756), where he warned against any undue preoccupation with

Scottish literature, affords evidence of wide reading in the physical

sciences, and also contains references to contemporary work in the

French Encyclopedie as well as to the productions of Buffon, Daubenton

and Reaumur. DD Raphael has argued that the Letter owes much to

Hume. (TMS, 10, 11)

The essay on astronomy, which dates from the same period (it is

known to have been written before 1758 and may well date from the

Oxford period) indicates that Smith was familiar with classical as well as

with more modern sources, such as Galileo, Kepler and Tycho Brahe, a

salutary reminder that an eighteenth century philosopher could work

close to the frontiers of knowledge in a number of fields.

But Smith was also interested in science as a form of communication,

arguing in the LRBL (see Abbreviations) that the way in which this type

of discourse is organised should reflect its purpose as well as a judgement

as to the psychological characteristics of the audience to be addressed.

In a Lecture delivered on 24 January 1763 Smith noted that didactic

or scientific writing could have one of two aims: either to ‘lay down a

proposition and prove this, by the different arguments that lead to that

conclusion’ or to deliver a system in any science. In the latter case Smith

advocated what he called the Newtonian method, whereby we ‘lay down

certain principles known or proved in the beginning, from whence we

account for the several phenomena, connecting all together by the same

Chain’. (LRBL, ii.133) Two points are to be noted. First, Smith makes it

clear that Descartes rather than Newton was the first to use this method

of exposition, even although the former was now perceived to be the

author of ‘one of the most entertaining Romances that have ever been

wrote’. (LRBL, ii.134; Letter 5) Secondly, his reference to the pleasure to

be derived from the ‘Newtonian method’ (LRBL, ii, 134) draws attention

to the problem of scientific motivation, a theme which was to be

developed in the ‘Astronomy’ where Smith considered those principles

‘which lead and direct philosophical enquiry’.

Smith made extensive use of mechanistic analogies, sometimes

derived from Newton, seeing in the universe ‘a great machine’ wherein

we may observe ‘means adjusted with the nicest artifice to the ends which

they are intended to produce’. (TMS, II.ii.3.5) In the same way he noted

that ‘Human society, when we contemplate it in a certain abstract and

philosophical light, appears like a great, an immense machine’, (TMS,

VII.ii.1.2) a position which leads quite naturally to a distinction between

efficient and final causes, (TMS, II.ii.3.5) which is not inconsistent with

the form of Deism associated with Newton himself. It is also striking that

so sympathetic a thinker as Smith should have extended the mechanistic

analogy to systems of thought.

Systems in many respects resemble machines, a machine is a little

system created to perform, as well as to connect together, in reality,

those different movements and effects which the artist has occasion

for. A system is an Imaginary machine invented to connect together in

the fancy those different movements and effects which are already in

reality performed. (Astronomy, IV.19)

Each part of Smith’s contribution is in effect an ‘imaginary’ machine

which conforms closely to his own stated rules for the organisation of

scientific discourse. All disclose Smith’s perception of the ‘beauty of a

systematical arrangement of different observations connected by a few

common principles’. (WN, V.i.f.25) The whole reveals much as to Smith’s

drives as a thinker, and throws an important light on his own marked

(subjective) preference for system, coherence and order.

Section II: Ethics, Jurisprudence and Economics

Smith’s teaching from the Chair of Moral Philosophy (1752-64) was

divided into four parts. It is known that he lectured on natural theology,

ethics, jurisprudence, and economics in that order and in a style which

confirms his debt to his old teacher, Francis Hutcheson, under whom he

studied between 1737 and 1740. It is also clear that the lectures on ethics

formed the basis of The Theory of Moral Sentiments (TMS) and that the

subjects covered in the last part of the course were further to be developed

in The Wealth of Nations (WN).

Adam Smith had a very definite research programme in mind from

an early date; a point to which he made reference in the concluding

passages of the first edition of the Theory of Moral Sentiments (TMS). The point

was also repeated in the advertisement to the sixth and last edition of

the work (1790) where Smith indicated that his two great works were

two parts of a plan which he hoped to complete by giving ‘an account of

the general principles of law and government, and of the different

revolutions which they had undergone in the different ages and periods

of society.’

Smith did not live to complete his plan partly as a result of his

appointment, in 1778, as Commissioner of Customs. But the shape of

the study may well be reflected in the Lectures on Jurisprudence (1896,

1978).

The three parts of Smith’s great plan are highly systematic; each

discloses a debt to contemporary scientific work especially in the fields

of biology and Newtonian physics, all are interdependent.

The TMS, which builds upon the analyses of Hutcheson and David

Hume is primarily concerned with the way in which we form moral

judgements. It was also designed to explain the emergence, by natural

as district from artificial means, of those barriers which control our selfregarding

and un-social passions. The argument gives prominence to

the emergence of general rules of conduct, based upon experience, which

include the rules of law. The analysis also confirms that accepted standards

of behaviour are related to environment and that they may vary in different

societies at the same point in time and in a given society over time.

The lectures on jurisprudence on the other hand, help to explain

the emergence of government and its changing structure in terms of an

analysis which features the use of four distinct types of socio-economic

environment; the celebrated stages of hunting, pasture, agriculture and

commerce. Smith’s work on ethics was closely linked with the economic

analysis which was to follow. For example, if Smith gave prominence to

the role of self-interest in this context, auditors of his lecture course and

readers of the TMS would be aware that the basic drive to better our

condition was subject to a process of moral scrutiny. It would also be

appreciated that economic aspirations had a social reference in the sense

that it is chiefly from a regard ‘to the sentiments of mankind, that we

pursue riches and avoid poverty’. (TMS, I.iii.2.1) Later in the book the

position was further clarified when Smith noted that we tend to approve

the means as well as the ends of ambition: ‘Hence . . . that eminent

esteem with which all men naturally regard a steady perseverance in the

practice of frugality, industry, and application’. (TMS, IV.2.8)

The lectures on jurisprudence helped Smith to specify the nature of

the system of positive law which might be expected in the stage of

commerce and also threw some light on the form of government which

might conform to it together with the political pressures to which it may

be subject.

The treatment of jurisprudence is also important in that it helps to

explain the origins of the modern economy and the emergence of an

institutional structure where all goods and services command a price. It

is in this context that ‘Every man . . . Lives by exchanging, or becomes in

some measure a merchant’ (WN,’I.iv.1); a position which leads to Smith’s

famous judgement that:

‘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.

We address ourselves, not to their humanity but to their self-love, and

never talk to them of our own necessities but of their advantages.

Nobody but a beggar chooses to depend chiefly upon the benevolence

of his fellow Citizens. Even the beggar does not depend upon it

entirely.’ (WN, I.ii.2)

Economic Analysis and Economic Liberalism

As far as the purely economic analysis is concerned, it is sufficient to be

reminded that in The Wealth of Nations the theory of price and allocation

was developed in terms of a model which made due allowance for distinct

factors of production (land, labour, capital) and for the appropriate forms

of return (rent, wages, profit). This point, now so obvious, was an

innovation of genius by Smith and permitted him to develop an analysis

of the allocative mechanism which ran in terms of inter-related

adjustments in both factor and commodity markets. The resulting version

of general interdependence also allowed Smith to move from the

discussion of ‘micro’ to that of ‘macro’ economic issues, and to develop

a model of the ‘circular flow’ which relies heavily on the distinction,

already established by the contemporary French economists, between

fixed and circulating capital.

But these terms, which were applied to the activities of individual

undertakers, were transformed in their meaning by their application to

society at large. Working in terms of period analysis where all magnitudes

are dated, Smith in effect represented the working of the economic

process as series of activities and transactions which linked the main

socio-economic groups (proprietors, capitalists, and wage-labour) and

productive sectors. In Smith’s terms, current purchases in effect withdrew

consumption and investment goods from the circulating capital of society;

goods which were in turn replaced by virtue of productive activity in the

same time period.

We should note in this context that Smith was greatly influenced by

a specific model of the economy which he came across during a visit to

Paris in 1766. The model was designed to explain the operation of an

economic system treated as an organism. It was first produced by Francois

Quesnay, a medical doctor, and developed by A R J Turgot. (Meek 1962,

1973) The significance of the analogy of the circulation of the blood

would not be lost on Smith – and nor would be the link with William

Harvey, a distinguished member of the medical school of Padua and a

notable exponent of a methodological approach which held that ‘the

way to understand something is to take it apart, in deed or in thought,

ascertain the nature of its parts and then re-assemble it – resolve and

recompose it.’ (Watkins 1965, p52)

Looked at from one point of view, the analysis taken as a whole

provides one of the most dramatic examples of the doctrine of

‘unintended social outcomes’, or the working of the ‘invisible hand’.

Adam Smith: Science and Human Nature – EMERITUS PROF ANDREW SKINNER

The individual entrepreneur, seeking the most efficient allocation of

resources, contributes to overall economic efficiency; the merchant’s

reaction to price signals helps to ensure that the allocation of resources

accurately reflects the structure of consumer preferences; the drive to

better our condition contributes to economic growth. Looked at from

another perspective, the work can be seen to have resulted in a great

conceptual system linking together logically separate, yet inter-related,

problems such as price, allocation, distribution, macro-statics and macrodynamics.

If such a theory enabled Smith to isolate the causes of economic

growth with the emphasis now on the supply side, it was also informed

throughout by what Terence Hutchison has described as the ‘powerfully

fascinating idea and assumption of beneficent self-adjustments and selfequilibration’.

(Hutchison 1988, p68)

Smith’s prescriptions, with regard to economic policy, followed

directly on this analysis. In a system which depended on the efforts of

individuals, if it was to function efficiently, Smith argued that the sovereign

should discharge himself from a duty:

‘in the attempting to perform which he must always be exposed to

innumerable delusions, and for the proper performance of which

no‘human wisdom or knowledge could ever be sufficient, the duty of

superintending the industry of private people, and of directing it

towards the employments most suitable to the interest of the society.’

(WN, IV.ix.51)

In a further passage Smith drew attention to that ‘security which the

laws in Great Britain give to every man that he shall enjoy the fruits of

his own labour’ and attributed the country’s contemporary performance

to the fact that the ‘natural effort to every individual to better his own

condition, when suffered to exert itself with freedom and security, is so

powerful a principle, that it is alone, and without any assistance, not

only capable of carrying on the society to wealth and prosperity, but of

surmounting a hundred impertinent obstructions with which the folly

of human laws too often encumbers its operations’. (WN,’IV.v.b.43) But

within this general frame, Smith’s views on economic and social policy

were often subtle, surprising and illuminating.

Section III: Mercantilism and America

It will come as no surprise to find so much of The Wealth of Nations

devoted to a very violent attack on what Smith called the mercantile

system, ‘a system which was best understood in our own country and in

our own times.’ (WN, IV.2) As Smith describes it, the system was based

upon regulation in the interests of a positive balance of trade. In intention

such a policy was restrictive and therefore liable to that ‘general objection

which may be made to all the different expedients of the mercantile

system; the objection of forcing some part of the industry of the country

into a channel less advantageous than that in which it would run of its

own accord.’ (WN, IV,v.a.24)

Smith’s treatment of the Colonial relationship with America, the

centrepiece of British policy, provides an interesting and often topical

example.

On Smith’s account, the Regulating Acts of Trade and Navigation in

effect confined the American Colonies to primary products while Great

Britain concentrated on more refined manufactures – with trade carried

on in British ships. The net result was a subtle system of complementary

markets which benefited both parties. Smith perceived, however, that

the policy was fundamentally flawed in the sense that the relationship

could not in the long-run be sustained.

The problem as Smith saw it lay in the fact that the rates of growth in

the two countries would be different. Such differences could be explained

in a number of ways. As Smith argued, there were differences in

institutional arrangements, factor endowments and in the degree of

maturity of the two economies. But in practice he placed most emphasis

on the fact that the Regulating Acts would themselves cause significant

variations in performance.

In the case of America, Smith contended that the fact that the country

was confined to primary products created the optimal conditions for

growth in an undeveloped economy. While he believed that these

restrictions were a ‘manifest violation of one of the most sacred rights of

mankind’ he also pointed out that the restrictions were unlikely to be

burdensome in the ‘present state of improvement’ of the colonies. (WN,

IV.vii.b.44) But in the longer run, the potential for economic growth in

America must come into conflict with current policy and require or force

a change.

In the case of Great Britain, Smith emphasised that the rate of growth

was attributable to Britain’s concentration on manufactured products

and on the fact that she had become increasingly dependent on the distant

trade with America as distinct from developing European links. But above

all else he emphasised the point that the whole burden of the costs of

maintaining the Empire fell upon the British economy with consequent

effects on public debt and on the level of taxation.

Smith’s solution was dramatic but entirely consistent with the general

tenor of his critique of the mercantile system. He recommended that

Britain should dismantle the Regulating Acts of Trade and Navigation

and create a single, gigantic, free trade area – an Atlantic Economic

Community. Smith advocated the creation of a single state with a

harmonised system of taxation possessing all the advantages, as he saw

them, of a common language and culture.

In passages which remind us of Smith’s interest in constitutional

and political issues, he pointed out that such a solution would require

Great Britain to admit American deputies to the House of Commons,

prompting the thought that:

‘in the course of little or more than a century, perhaps, the produce of

American might exceed that of British taxation. The seat of empire

would then naturally remove itself to that part of the empire which

contributed most to the general defence and support of the whole’

(WN, IV.vii.c.70): Philadelphia rather than London.’

By 1776 the opportunity, as he saw it, had been lost and military

defeat was the most likely outcome:

‘The plan which, if it would be executed, would certainly tend most to

the prosperity, to the splendour, and to the duration of the empire, if

you except here and there a solitary philosopher like myself, seem

scarce to have a single advocate.’ (Corr, 382.)

But even here Smith contemplated the loss of America with

equanimity, believing as he did that Great Britain had opportunities to

exploit in Europe – and that trade with America would resume in due

course, provided always that a more liberal policy was adopted.

Domestic Policy

Smith’s treatment of domestic policy shows evidence of the same preoccupation

with an environment which would best release individual

effort and maximise both incentive and efficiency. For example, he

recommended that the statutes of apprenticeship and the privileges of

corporations be repealed on the ground that they adversely affect the

working of the allocative mechanism. In the same chapter Smith pointed

to barriers to the movement of labour represented by the Poor Laws and

Laws of Settlement. (cf WN, I.x.c; IV.ii.42)

Smith’s basic objection was to positions of privilege, such as

monopoly powers, as being both unjust and impolitic; unjust in that a

position of monopoly is a position of unfair advantage and impolitic in

that the prices of goods so controlled are ‘upon every occasion the highest

that can be got’. But at the same time Smith advocated a series of policies

– all catalogued by Jacob Viner (1927) – which range from government

control of the coinage to regulation of mortgages and the legal

enforcement of contracts.

Four broad areas of intervention recommended by Smith are of

particular interest, in the sense that they involve issues of general

principle. First, he advised governments that, where they were faced

with taxes imposed by their competitors in trade, retaliation could be in

order especially if such an action had the effect of ensuring the ‘repeal

of the high duties or prohibitions complained of ’. (cf Winch 1983, p509)

Secondly, Smith advocated the use of taxation, not simply as a means of

raising revenue, but as a means of controlling certain activities, and of

compensating for what would now be known as a defective telescopic

faculty, i.e. a failure to perceive our long-run interest, (cf WN, V.ii.g.4;

V.ii.k.50; V/ii.g.12) commonly now referred to as ‘short-termism’.

Smith was also well aware that the modern version of the ‘circular

flow’ depended on paper money and on credit; in effect a system of

‘dual circulation’ involving a complex of transactions linking producers

and merchants, dealers and consumers; (WN, II.ii.88) transactions that

would involve cash (at the level of the household) and credit (at the

level of the firm). It is in this context that Smith advocated control over

the rate of interest, set in such a way as to ensure that ‘sober people are

universally preferred, as borrowers, to prodigals and projectors’. (WN,

II.iv.15) He was also willing to regulate the small note issue in the interests

of a stable banking system.

Although Smith’s monetary analysis is not regarded as amongst the

Adam Smith: Science and Human Nature – EMERITUS PROF ANDREW SKINNER

strongest of his contributions, it should be remembered that he witnessed

the collapse of major banks in the 1770s (may even have been personally

a victim of one such) and was acutely aware of the problems generated

by a sophisticated credit structure. It was in this context that he articulated

a very general principle, namely, that ‘those exertions of the natural liberty

of a few individuals, which might endanger the security of the whole

society, are, and ought to be restrained by the laws of all governments;

of the most free, as well as of the most despotical’. (WN, II.ii.94)

Emphasis should be given, finally, to Smith’s contention that a major

responsibility of government must be the provision of certain public

works and institutions for facilitating the commerce of the society which

were ‘of such a nature, that the profit could never repay the expence to

any individual or small number of individuals, and which it, therefore,

cannot be expected that any individual or small number of individuals

should erect or maintain’ (WN,’V,i.c.1). In short, he was concerned to

point out that the state would have to organise services or public works

which the profit motive alone could not guarantee.

The examples of public works which Smith provided include such

items as roads, bridges, canals and harbours – all thoroughly in keeping

with the conditions of the time and with Smith’s emphasis on the

importance of transport as a contribution to the effective operation of

the market and to the process of economic growth.

The theme is continued in his treatment of another important service,

namely education; a subject which is developed in the course of Smith’s

discussion of the social and psychological costs of economic growth.

Section IV: Education – The Costs of Economic Growth

It will be recalled that for Smith moral judgement depends on our capacity

for acts of imaginative sympathy and that such acts can only take place

within the context of some social group. (TMS, III.i.3) However, Smith

also observed that these mechanisms might break down in the context

of the modern economy, due in part to the size of some manufacturing

units and of the cities which housed them.

If the problems of solitude and isolation consequent on the growth

of cities explain Smith’s first group of points, a related trend in the shape

of the division of labour helps to account for the second. In discussing

this important source of economic benefit (which is emphasised to an

extraordinary degree in The Wealth of Nations) Smith noticed that it

could involve costs. Or, as Smith put it in one of the most famous passages

in his major work:

‘In the progress of the division of labour, the employment of the far

greater part of those who live by labour, that is, of the great body of the

people, comes to be confined to a few very simple operations; frequently

to one or two. But the understandings of the greater part of men are

necessarily formed by their ordinary employments. The man whose whole

life is spent in performing a few simple operations, of which the effects

too are, perhaps, always the same or very nearly the same, has no occasion

to exert his understanding, or to exercise his invention in finding out

expedients for removing difficulties which never occur. He naturally loses,

therefore, the habit of such exertion, and generally becomes as stupid

and ignorant as it is possible for a human creature to become.’ (WN,

V.i.f.50)

It is the fact that the ‘labouring poor, that is the great body of the

people’ must necessarily fall into the state outlined that makes it necessary

for government to intervene.

Smith’s justification for intervention is, as before, market failure, in

that the labouring poor, unlike those of rank and fortune, lack the leisure,

means, or (by virtue of their occupations) the inclination to provide

education for their children. (WN, V.i.f.53) In view of the nature and

scale of the problem, Smith’s programme seems rather limited, but he

did argue that the poor could be taught ‘the most essential parts of

education. . . to read, write, and account’ together with the ‘elementary

parts of geometry and mechanics’. (WN, V.i.f.54,55)

It is interesting to observe in this context that Smith was prepared to

go so far as to infringe the natural liberty of the subject, at least where

the latter is narrowly defined, in recommending that the ‘public can

impose upon almost the whole body of the people the necessity of

acquiring those most essential parts of education, by obliging every man

to undergo an examination or probation in them before he can obtain

the freedom in any corporation, or be allowed to set up any trade either

in a village or town corporate.’ (WN,V.i.f.57)

Distinct from the above, although connected with it, is Smith’s

concern with the decline of martial spirit which is the consequence of

the nature of the fourth, or commercial stage. In The Wealth of Nations

Smith seems to have had in mind the provision of some kind of military

education which he supported as a contribution to the well-being of the

individual. (WN, V,i.f.60)

Smith also sought to encourage an informed ‘middling rank’ and

suggested that government should act ‘by instituting some sort of

probation, even in the higher and more difficult sciences, to be undergone

by every person before he was permitted to exercise any liberal

profession, or before he could be received as a candidate for any

honourable office of trust or profit.’ (WN, V.i.g.14)

The Organisation of Public Services

Smith not only identified the various services which the state was expected

to provide; he also gave a great deal of attention to the forms of

organisation which would be needed to ensure and to induce efficient

delivery.

In the discussion of defence, for example, he expressed a preference

for a standing army to a militia because the former would be more

specialised and therefore more efficient. (WN, V.i.a.14)

In the case of justice, Smith contended that the sovereign has the

duty ‘of protecting, as far as possible, every member of the society from

the injustice or oppression of every other member of it’. (WN,V.i.b.1)

Here he argued that effective provision of so central a service depended

crucially on a clear separation of the judicial from the executive power.

(WN, V.i.b.23)

As Alan Peacock (1975) has pointed out, Smith’s efficiency criteria

are distinguished from this basic issue of organisation, the argument

being, in effect, that the services provided by attorneys, clerks, or judges

should be paid for in such a way as to encourage productivity. Smith also

ascribed the ‘present admirable constitution of the courts of justice in

England’ to the use of a system of court fees which had served to

encourage competition between the courts of King’s of King’s Bench,

Chancery and Exchequer. (WN, V.i.b.20.21)

The theme was continued in the discussion of public works where

he suggested that the main problems to be addressed were those of

equity and efficiency.

With regard to equity, Smith argued that public works such as

highways, bridges, and canals should be paid for by those who use them

and in proportion to the wear and tear occasioned. He also defended

the principle of direct payment on the ground of efficiency. Only by this

means, he argued in a section of powerful present relevance, would it

be possible to ensure that services are provided where there is a

recognisable need; only in this way would it be possible to avoid building

roads through a desert for the sake of some private interest; or a great

bridge ‘thrown over a river at a place where nobody passes, or merely to

embellish the view from the windows of a neighbouring palace: things

which sometimes happen, in countries where works of this kind are

carried on by any other revenue than that which they themselves are

capable of affording.’ (WN, V.i.d.6)

Smith also tirelessly emphasised the point, already noticed in the

discussion of justice, namely, that in every trade and profession ‘the

exertion of the greater part of those who exercise it, is always in proportion

to the necessity they are under of making that exertion.’ (WN, V.i.f.4)

On this ground, for example, he approved of the expedient used in

France, whereby a construction engineer was made a present of tolls on

a canal for which he had been responsible, thus ensuring that it was in

his interest to keep the canal in good repair.

The ‘incentive’ argument is also eloquently developed in Smith’s

treatment of universities where he argued, notably in correspondence

with his old friend and colleague William Cullen, that degrees can be

likened to the statutes of apprenticeship (Corr, 177) and protested against

the idea of universities having a monopoly of higher education (Corr,

174) on the ground that this would inhibit private teachers (eg of

medicine) such as the Hunters, William Hewson and Sir William Fordyce.

In particular Smith objected to a situation where professors enjoyed

high incomes irrespective of competence or industry (WN, V.i.f.7): the

Oxford, rather than the Glasgow model. In the same context he argued

in favour of free movement of students between teachers and institutions

(WN, V.i.f.12,13) as a means of inducing teachers to provide appropriate

services.

While it is impossible adequately to do justice to Smith’s treatment

of public finance in these few pages, some general principles do emerge

which may be of interest to the modern reader. In general, Smith believed

that the state should ensure that services are provided indirectly, rather

than centrally, that such services should be self-financing wherever

possible and especially that they should be so ‘structured as to engage

the motives and interests of those concerned’. (Rosenberg 1960, 68; cf

Ricketts 1978) Once again, the fundamental appeal is to self-love, even if

Smith did recognise that many services would be adequately performed

as much from a sense of moral obligation as monetary reward.

Section V: Liberty, Citizen and State

Lord Robbins once remarked that Smith bequeathed to his successors in

the classical school an opposition to conscious paternalism; a belief that

‘central authority was incompetent to decide on a proper distribution of

resources’. Above all Smith developed an important argument to the

effect that economic freedom ‘rested on a two-fold basis: belief in the

desirability of freedom of choice for the consumer and belief in the

effectiveness, in meeting this choice, of freedom on the part of producers’.

(1953, p12) If we add a dynamic dimension to this theme we have a true

reflection of Smith’s position; a position which helps to explain the

world’s continuing interest in his work.

Yet even given this, the list of government functions is, as we have

seen, quite impressive. It is also important to recall the need to distinguish

between the principles which justify intervention (which may be of

universal validity) and the specific agenda which Smith offered (and

which may reflect his understanding of the situation which he actually

confronted at the time of writing).

The principles which justify intervention are, after all, wide-ranging

in their implications. On Smith’s argument, the state should regulate

activity to compensate for the imperfect knowledge of individuals; it is

the state which must continuously scrutinise the relevance of particular

laws and institutions; the state which has a duty to regulate and control

the activities of individuals which might otherwise prove damaging to

the interests of society at large; it is the state which must make adequate

provision for public works and services (including education) in cases

where the profit motive is likely to prove inadequate. Such basic principles

are open to wide application notably in the circumstances of a modern

society.

It is not difficult to find in Smith a liberal thinker: what is much more

difficult is to determine where a man of his principles would be found

today in the broad spectrum of opinion which the term embraces. On

the other hand it is ironically true that those modern authorities who

make use of his work in the context of policy may find themselves on

stronger ground. Smith did after all insist that where possible public

services should be responsive to need and that they should be so

structured as to induce people to deliver them efficiently. What is

unambiguously true is that Smith sought to establish an economic

environment or environments within which individual initiative would

flourish and by which it would be harnessed.

The last reference serves to remind us that there is a further dimension

to his work which is essentially moral and which is illustrated by his

concern with the social costs of economic growth. As we have seen, Smith

made much of the point that the division of labour could induce a form

of mental mutilation; a degree of ‘torpor’ which could render the

individual ‘incapable of bearing a part in any rational conversation’ or of

conceiving ‘any just judgement concerning many even of the ordinary

duties of private life.’ (WN, V.i.f.50)

Smith identified the possibility that measurable increases in economic

welfare might be offset by the psychological damage which they entail –

unless steps are taken to avoid this outcome through a programme of

compulsory education and the cultivation of the arts. (WN, V.i.g.15)

The implicit distinction is between negative and positive freedom

where the former may be described as freedom from restraint and the

latter as a ‘power of capacity of doing or enjoying something‘worth doing

or enjoying.’ (Green 1906, iii.370-71)

In passages which also recall his wider interests Smith drew attention

to the issue of education in a context which was essentially political. As

he put it, an ‘instructed and intelligent people‘. . . are always more decent

and orderly than an ignorant and stupid one. . . They are more disposed

to examine, and more capable of seeing through, the interested

complaints of faction and sedition.’ (WN, V.i.f.61)

This is not idle rhetoric. Smith’s historical analysis made him well

aware of the significance of the form of Government which had emerged

in Great Britain and sensitive to the fact that such a Government gave

scope to political ambition’– another competitive game with, as its object,

the ‘prizes which sometimes come from the wheel of the great state

lottery of British politics’. (WN,’IV.vii.c.75) He also recognised that the

same economic forces which had raised the House of Commons to what

he called a superior degree of influence (as compared to the House of

Lords) also made it a focal point for business and commercial interests.

He noted that such power could be used to disadvantage particular

groups (cf WN, I.x.c.61) and made the general point that the legislative

proposals emanating from commercial interests. . .

‘Ought always to be listened to with great precaution, and ought never

to be adopted till after having been long and carefully examined, not

only with the most scrupulous, but with the most suspicious attention.

It comes from the order of men, whose interest is never exactly the

same with that of the public, who have generally an interest to deceive

and even to oppress the public, and who accordingly have, upon many

occasions, both deceived and oppressed it.’ (WN, I.xi.10)

As Donald Winch has recently pointed out in an unpublished paper,

if Smith emphasised the importance of the pursuit of self interest within

the law, he was acutely aware of the problems presented by the pursuit

of collective self-interest and less confident of the result.

In this context he complained that Britain’s policy towards America

had been dictated by the ‘sneaking arts of underling tradesmen’ (Section

III) and noted, in a passage which may have caught the attention of

Napoleon, that:

‘To found a great empire for the sole purpose of raising up a people of

customers, may at first sight appear a project fit only for a nation of

shopkeepers. It is, however, a project altogether unfit for a nation of

shopkeepers; but extremely fit for a nation whose government is

influenced by shopkeepers.’ (WN, IV.vii.c.63)

In Smith’s view, the tragic (but sustainable) loss of opportunity in

America was to be explained in terms of the combination of collective

self-interest on the part of mercantile groups and political prejudice on

the part of the state and its citizens. Smith thus identified yet another

problem of modern relevance: that of government (as distinct from

market) failure.

Section VI: Some Observations

J S Mill, the archetypal economist, of a later period, is known to have

remarked that The Wealth of Nations is in many parts obsolete and in

all, imperfect’. Writing in 1926, Edwin Cannan observed:

Very little of Adam Smith’s scheme of economics has been left standing

by subsequent enquirers. No one now holds his theory of value, his

account of capital is seen to be hopelessly confused, and his theory of

distribution is explained as an ill-assorted union between his own

theory of prices and the Physiocratic fanciful Economic Table’. (1926,

123)

In view of authoritative judgements such as these, it is perhaps

appropriate to ask what elements in his story should command the

attention of the modern historian or economist. A number of points

might be suggested.

First, there is the issue of scope. As we have seen, Smith’s approach

to the study of political economy was through the examination of history

and ethics. The historical analysis is important in that he set out to explain

the origins of the commercial stage. The ethical analysis is important to

the economist because it is here that Smith identifies the human values

which are appropriate to the modern situation. It is here that we confront

the emphasis on the desire for status (which is essentially Veblenesque)

and the qualities of mind which are necessary to attain this end: industry,

frugality, prudence.

But the TMS also reminds us that the pursuit of economic ends takes

place with a social context, and that men maximise their chances of

success by respecting the rights of others. In Smith’s sense of the term,

‘prudence’ is essentially rational self-love. In a famous passage from the

TMS (II.ii.2.1) Smith noted, with regard to the competitive individual,

that:

‘In the race for wealth, and honours, and preferments, he may run as

hard as he can, and strain every nerve and muscle, in order to outstrip

all his competitors. But if he should justle, or throw down any of them,

the indulgence of the spectators is entirely at an end. It is a violation

of fair play, which they cannot admit of.’

Smith’s emphasis upon the fact that self-interested actions take place

within a social setting and that men are motivated (generally) by a desire

to be approved of by their fellows, raises some interesting questions of

continuing relevance. For example, in an argument which bears upon

the analysis of the TMS, Smith noted in effect that the rational individual

may be constrained in respect of economic activity or choices by the

reaction of the spectator of his conduct – a much more complex case

than that which more modern approaches may suggest. Smith made much

of the point in his discussion of Mandeville’s ‘licentious system’ which

supported the view that private vices were public benefits, in suggesting

that the gratification of desire should be consistent with observance of

the rules of propriety – as defined by the spectator, i.e. by an external

agency. In an interesting variant on this theme, Etzioni has recently noted

that we need to recognise ‘at least two irreducible sources of valuation

or utility: pleasure and morality’. (1988, 21-4; cf Oakley 2002)

Secondly, there is a series of issues which arise from Smith’s interest

in political economy as a system. The idea of a single all-embracing

conceptual system, whose parts should be mutually consistent, is not

easily attainable in an age where the division of labour has increased the

quantity of science through specialisation. Smith was aware of the division

of labour in different areas of sciences, and of the fact that specialisation

often led to systems of thought which were inconsistent with each other.

(Astronomy, IV, 35, 52, 67) But the division of labour within a branch of

science, eg economics, has led to a situation where sub-branches of a

single subject may be inconsistent with one another.

To take a third point, it may be noted that one of the most significant

features of Smith’s vision of the economic process lies in the fact that it

has a significant time dimension. For example, in dealing with the

problem of value in exchange, Smith made due allowance for the fact

that the process involves judgements with regard to the utility of the

commodities to be acquired, and the disutility involved in creasing the

goods to be exchanged. In the manner of his predecessors – Hutcheson,

Carmichael and Pufendorf – Smith was aware of the distinction between

utility (and disutility) anticipated and realised, and, therefore, of the

process of adjustment which would inevitably take place through time.

Smith’s theory of price, which allows for a wide range of changes in

taste, is also distinctive in that it allows for competition among and

between buyers and sellers, while presenting the allocative mechanism

as one which involves simultaneous and inter-related adjustments in both

factor and commodity markets.

As befits a writer who was concerned to address the problems of

change, and adjustment to change, Smith’s position was also distinctive

in that he was not directly concerned with the phenomenon of

equilibrium. For Smith the (supply) price was, as it were:

‘The central price, to which the prices of all commodities are

continually gravitating whatever may be the obstacles which hinder

them from settling in this centre of response and continuance, they

are constantly tending towards it.’ (WN, I.viii.15)

But perhaps the most intriguing feature of the macro model is to be

found in the way in which it was linked to the analytics of Book 1 and in

the way in which it was specified. As noted earlier, Smith argued that

incomes were generated as a result of productive activity, thus making it

possible for commodities to be withdrawn from the ‘circulating’ capital

of society. As he pointed out, the consumption goods withdrawn from

the existing stock may be used up in the present period, or added to the

stock reserved for immediate consumption; or used to replace more

durable goods which had reached the end of their lives in the current

period. In a similar manner, entrepreneurs and merchants may also add

to their stocks of materials, or to their holding of fixed capital, while

replacing the plant which had reached the end of its operational life. It

is equally obvious that entrepreneurs and merchants may add to, or

reduce their inventories in ways which will reflect the changed patterns

of demand for consumption and investment goods, and their past and

current levels of production. Variation in the level of inventories has

profound implications for the conventional theory of the allocative

mechanism.

Smith’s emphasis upon the point that different ‘goods’ have different

life-cycles also means that the pattern of purchase and replacement may

vary continuously as the economy moves through different time periods,

and in ways which reflect the various age profiles of particular products

as well as the pattern of demand for them. If Smith’s model of the circular

flow is to be seen as a spiral, rather than a circle, it soon becomes evident

that this spiral is likely to expand (and possibly contract) through time

at variable rates. This point does not seem to have attracted much

attention.

Conclusions

Mark Blaug has commented on Smith’s distinctive and sophisticated grasp

of the economic process and the need to distinguish this from his

contribution to particular areas of economic analysis. It has been argued

above that Smith’s approach to the study of political economy has some

distinctive features which deserve the attention of the modern student

of the discipline, but which do not seem to loom large in modern

teaching. But nor can it be said that the classical system which was to

follow Smith, adequately addressed his wider concerns. Indeed, it has

been pointed out that the early part of the nineteenth century saw the

emergence of political economy as a separate, autonomous discipline,

free of the earlier association with ethics and history. As Terence Hutchison

once remarked, Smith was led as if by an invisible hand to promote a

result which was no part of the original intention, thus paving the way

for the development which Professor Muhammad Yunus deplored.

Finally, Adam Smith would have had every happy feeling over Prof

Yunus’s untiring engagement in practically addressing the welfare of the

Adam Smith: Science and Human Nature – EMERITUS PROF ANDREW SKINNER

poorest. As Adam Smith said, ‘What improves the circumstances of the

greater part can never be regarded as an inconveniency to the whole.

No society can surely be flourishing and happy, of which by far the greater

part of the numbers are poor and miserable.’ (The Wealth of Nations

1776) 􀀀

Abbreviations

References to Smith’s works employ the usages of the Glasgow

edition:’WN =’The Wealth of Nations; TMS = Theory of Moral

Sentiments; Astronomy = ‘The History of Astronomy’;’Essays on

Philosophical Subjects (EPS); Stewart = Dugald Stewart, ‘Account of

the Life and Writings of Adam Smith’; LJ (A) = Lectures on

Jurisprudence, Report dated 1762-63; LRBL = Lectures on Rhetoric

and Belles Letters; Corr = Correspondence of Adam Smith; EAS =

Essays on Adam Smith, ed A S Skinner and T Wilson (1975).

In the Glasgow edition, WN was edited by R H Campbell, A S Skinner

and W B Todd (1976); TMS by D D Raphael and A L Macfie (1976);

Corr, by E C Mossner and I S Ross (1977); EPS, by W P D Wightman

(1980); LJ (A) and LJ (B) by R L Meek, D D Raphael and P G Stein

(1978), and LRBL by J C Bryce (1983), Oxford University Press.

References to LJ and LRBL give volume and page number from the

MS. All other references provide section, chapter, and paragraph

number in order to facilitate the use of different editions. For example:

Stewart, I.12 = Dugald Stewart ‘Account’, Section I, Para 12.

TMS, I.i.5.5 = TMS, Part I, Section I, Chapter 5, Para 5.

WN, V. i.f.26 = WN, Book V, Chapter I, Section 6, Para 26.

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