Adam Smith’s guide to life, loveliness, and the modern economy

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Introduction: Going strong at 300

Ryan Young

This essay collection celebrates Adam Smith’s 300th birthday. He is best known for being the first modern economist, but his influence goes beyond any academic discipline. The Great Enrichment that has grown global living standards by about 30-fold since about 1800 owes much to Smith’s brand of liberalism. This is a grand claim, but it is no exaggeration.

Countries across the world have modeled their economic institutions on Smith’s ideas and prospered, as in America and Hong Kong. Other countries designed their systems against Smith’s ideas and remain poor and oppressive, as in Russia and China. Either way, Smith is part of the debate. His tercentenary deserves all the recognition it gets and more.

Most of the essays here originally appeared in places such as Forbes, the Foundation for Economic Education’s The Freeman magazine, Liberty Fund’s brilliant AdamSmithWorks website, and the Competitive Enterprise Institute’s (CEI) blog, OpenMarket. They cover nearly 35 years out of CEI’s 40-year history. The oldest essay here dates to 1989 and the newest are published here for the first time. Like Smith’s scholarship, they cover diverse topics. These include empathy, economics, philosophy, government, slavery, the American founding, Greek tragedy, and even science fiction.

Assembling those essays in one place, lightly edited, accomplishes several things. It highlights Adam Smith’s enduring influence on liberal thought in general and on CEI’s work in particular. It gives those pieces a longer shelf life, and helps them reach new audiences. And despite their distance from each other in time and topic, the essays all share Smith’s universal themes of empathy, cooperation, optimism, and progress.

Another reason to revisit Smith is more timely. The world is at an ideological crossroads. Populism and authoritarianism are on the rise around the globe. A worldwide political realignment has mostly tossed aside positive-sum economic issues in favor of zero-sum identity issues like nation and race.

In America, progressives on the left and national conservatives on the right are joining forces on issues as disparate as trade protectionism, industrial policy, and aggressive antitrust enforcement. At the same time, they grow more divided on cultural identity issues, sometimes violently.

Populists and nationalists have won elections in Mexico, Italy, Hungary, Turkey, and elsewhere. The United Kingdom, European Union, and other traditionally liberal places have seen their own nationalist and populist movements grow more disruptive. China under Xi Jinping has undone many post-Mao economic reforms, and India under Narendra Modi has taken a nationalist turn. These last two countries contain more than a third of the world’s population.

Russian dictator Vladimir Putin has adopted nationalist and anti-democratic rhetoric while attempting to justify his Ukraine invasion, which as of this writing is the largest European war since World War II. Hamas’ October 7, 2023 terrorist attack on Israel risks sparking a larger war in the Middle East.

Adam Smith offers a calming influence to a world that could use it. To the extent that this essay collection helps to promote Smith’s vision of liberalism, free markets, and empathy, it can help the political conversation mature from adolescent chest-thumping into an adult conversation about ideas. A revival of Smithian liberalism would make people’s lives longer, wealthier, and more fulfilling. Three centuries after his birth, Adam Smith is as important as ever for human progress.

Smith’s life in brief

Ryan Young

In his History of Economic Analysis, vaunted economist Joseph Schumpeter wrote of Adam Smith that “Few facts and no details are needed about the man and his sheltered and uneventful life.” Schumpeter could not have been more wrong. Adam Smith was born in just the right time and place in history, in June of 1723 in Kirkcaldy, Scotland, just outside Edinburgh. Those facts and details greatly matter for Smith’s thought, his place in history, and for the Great Enrichment that has improved billions of lives and is still in progress today.

Smith’s childhood was during the Industrial Revolution’s earliest beginnings, while Edinburgh was located near its English epicenter but most definitely not in it. This allowed Smith to take an outsider’s perspective on economic progress while still participating in it. Smith also had the good fortune of reaching adulthood just as the Enlightenment was reaching its peak, and when rising commerce and industrialization were noticeably starting to improve everyday lives.

Smith’s Scottish heritage also influenced his thought. The Industrial Revolution began in earnest in Britain, which Scotland joined in 1707. Their union was not seamless, however. The English tendency to treat their northern neighbors as a lesser people never went away. A combination of disparate political forces led to two Jacobite uprisings in Scotland, in 1715 and 1745. The ’45 ended in the Battle of Culloden, the worst military defeat in Scottish history. Smith was 23. The fractious rebel coalition splintered at the last minute, and the English put down this final Scottish uprising with special brutality. Culloden remains a sensitive topic in Scotland to this day.

Smith and many of his Scottish Enlightenment contemporaries, including David Hume, Adam Ferguson, and Francis Hutcheson, for all their accomplishments, all felt the sting of discrimination. This may help explain some of their relatively egalitarian beliefs, democratic sympathies, and skepticism of aristocracy. Smith even publicly supported American independence in The Wealth of Nations.

For all the noise he created, Smith led a quiet life. Schumpeter had that part correct. The most dramatic event in his life happened at age three when was briefly kidnapped by Romani and reunited with his family, with no harm done. Smith never married or had children, and had no romantic relationships that we know of. His father, also named Adam Smith, died shortly before he was born, and Smith remained close to his mother until her death in 1784, when Smith was 61. Smith wanted his papers burned upon his death, and his friends mostly honored his request, frustrating historians, economists, and philosophers ever since. While these likely did not contain anything scandalous, the world will never know.

He first left Kirkcaldy to attend Glasgow University. Glasgow was one of the world’s fastest-growing trading centers at this time, giving Smith a close-up view of early Industrial Age commerce he could not have gotten in Edinburgh. Further studies were funded by a scholarship intended to enable backward Scots to study at civilized Oxford, though that was not Smith’s experience. He was disappointed by Oxford’s drunken students, indifferent faculty, religious stifling of intellectual creativity, and the cronyism and corruption he saw all around him in England. Smith learned about civilized behavior in this period less by example than by counterexample.

Although Smith was neither wealthy nor of noble birth, he experienced a Grand Tour of Europe as tutor to the Duke of Buccleuch. On this tour Smith was able to meet in person the French physiocrat economists, such as Quesnay, Turgot, and Helvetius, whose economic ideas influenced The Wealth of Nations. He attended some of the famous Paris salons, where he met the liberal economist Turgot, who would later have a difficult tenure as Louis XVI’s finance minister; Diderot, who compiled the Encyclopedie, the world’s first encyclopedia; and Benjamin Franklin, the American printer, inventor, entrepreneur, and revolutionary. Smith and the young Duke also traveled to Geneva, Switzerland, where he met Voltaire more than once.

Between these travels and his frequent trips to London to participate in the many social clubs of which he was a member, Smith knew nearly every major figure in Enlightenment thought. In Edinburgh, through his membership of such groups as The Select Society and The Poker Club, he rubbed shoulders with distinguished men such as Lord Kames and “Jupiter” Carlyle. He was especially close with David Hume, and they considered each other best friends despite a 12-year age difference. He was also an active correspondent. Despite his personal papers being burned, enough of Smith’s correspondence survives to fill a 495-page volume.

Smith spent most of his career as an academic, teaching at both the University of Edinburgh and the University of Glasgow, where he was Chair of Logic and Rhetoric. In his later years he was given a patronage job as a customs inspector, which was somewhat ironic given his free trade beliefs. But Smith valued the hands-on experience, and surprised his superiors by actually working at what was supposed to be a mostly no-show job.

Smith wrote only two books. Theory of Moral Sentiments was published in 1759. It has always been overlooked in favor of 1776’s more famous The Wealth of Nations, but modern scholarship has revived the book’s reputation and rightfully put the two together as part of a unified system of thought. The Glasgow edition of Smith’s works contains eight volumes, also including his Lectures on Belles Rhetoric, Lectures on Jurisprudence, Essays on Philosophical Subjects, his surviving correspondence, plus an index.

Neither Theory of Moral Sentiments nor Wealth of Nations were ever truly finished works, and he continued to revise them and issue new editions until his death in 1790. Smith’s intellectual descendants around the world have continued his project to the present day.

The real Adam Smith

Ryan Young

Adam Smith is not who most people think he is. High school civics classes get the basic facts right: division of labor, free trade, the invisible hand, The Wealth of Nations in 1776 and all that. But they usually get the man’s spirit almost exactly wrong, and that is the most important part. Many teachers tell their students that Smith was a selfish calculator of a man who was obsessed with material gain. The real Adam Smith was a much better person.

Empathy is the core of Smith’s thought. He wasn’t obsessed with money, he was obsessed with exploring human nature. He was interested in how people get along with each other—and how they don’t. Smith’s two books are a masterclass on human interaction. There is a reason why economics and its offshoots are called social sciences, and Smithian empathy is a big part of it.

Smith wrote quite a bit on self-interest, and this is one reason he is often misunderstood. Many people have a hard time keeping apart facts from opinions. The technical term for this is low decoupling. It’s nothing to be ashamed of, since nearly everyone has it to some degree.

For Smith, it is a fact that self-interest is built into human nature. His opinion was that he did not like this fact. But from a low decoupler’s perspective (or a reader who has prejudged that they don’t like Smith or free markets), to explain something is to favor it. Smith wrote about self-interest, therefore he favored it.

This is wrong. Humans are imperfect creatures, and excessive self-interest is one of our most common imperfections. What fascinated Smith is that, under the right conditions, self-interest can make people more compassionate. And not only that: The interplay between empathy and self-interest can make people not just richer, but more virtuous.

That Smith thought this way shows in The Wealth of Nations’ full title: An Enquiry into the Nature and Causes of the Wealth of Nations. This wonky title is rarely written out in full, which is another source of misunderstanding. Each word does some work in explaining what Smith is trying to say.

Poverty has no cause. If someone wants to be poor, all they have to do is nothing. Wealth has causes. It takes action. It takes intent. Wealth has to come from somewhere, and that is Smith’s enquiry. If human nature is the same all around the world, why are some places rich and others poor? Smith has several answers, which all tie together. All of them are rooted in empathy.

People can create more wealth by cooperating with each other than they can alone. That idea is where the division of labor comes from. It is also where trade comes from.

If people agree to specialize in different things, they can become fabulously productive. If everyone trades their specialized surplus for things other productive specialists are making, well, then everyone is more productive. There is more of everything. That is where the wealth of nations comes from.

But division of labor only scratches the surface. How does that specialization-and-exchange process emerge? Smith’s answer is the invisible hand. That hodgepodge process of specialists trading with other specialists is chaotic and unplanned. It clearly works. Paris is fed every day even though there is no centralized food distribution plan, as Smith’s admirer Frédéric Bastiat later pointed out. But how does that order emerge from unplanned chaos?

To answer that, Smith digs down one more layer and discovers institutions. Readers familiar with CEI’s regulatory reform work know that one of our mantras is that institutions matter. A lot of that is Adam Smith’s influence. Think of institutions as the rules of the game, such as respecting property rights, keeping your word, and agreeing on ways to settle disputes.

The right institutional structures can give even the most flawed, self-interested people an incentive to cooperate with each other. “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 self-interest,” Smith wrote. Market institutions channel self-interest in such a way that everyone gets a dinner, even if they do not how to make their own food.

Smith was no purist about institutions. For Smith, a good set of institutions is what he described as the “obvious and simple system of natural liberty,” requiring little else than “peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.” Just as people are imperfect, so are the institutions that people improvise while trying to cooperate with each other. But they do not need to be perfect to work well.

There is one more layer. Where do institutions come from? At the bottom is empathy, holding up everything else. It’s always about empathy for Adam Smith. It takes empathy to understand other people’s needs, so you can specialize in making something they value, instead of wasting your time on something nobody wants. It takes empathy to offer trades at prices other people will accept. It takes empathy to respect another person’s dignity enough to trade with them rather than steal from them.

If we step back from Smith’s digging and take in a larger view, we’ll notice that the layers aren’t neatly separated. They are entangled. They shade into each other, receding here and protruding there, much like the ongoing duel between self-interest and empathy in Smith’s real subject, human nature.

High school civics teachers were right that Adam Smith liked free markets. But he didn’t like them because he was selfish. He liked them because empathy was so important to him. That is the real Adam Smith. He deserves to be better known than his classroom caricature.

– Published on CEI’s OpenMarket blog, June 13, 2023.

How to love and be lovely

Ryan Young

Happiness was more important to Adam Smith than anything in economics. In some ways, The Wealth of Nations was a side project. For Smith, wealth is not valuable for its own sake. Wealth is good because it enables people to pursue meaningful lives and make deep connections with other people. Contrary to Smith’s reputation, he believed one of the most important things in life is love.

Smith had little regard for the fleeting happiness that comes the instant gratification that many people wrongly associate with free markets. He was interested in longer-term Aristotelian happiness. For Smith, this has two main ingredients. Neither of them is money, and both are related to love.

As Smith put it in The Theory of Moral Sentiments, “Man naturally desires, not only to be loved, but to be lovely.” He uses those words differently than we do today, but the ideas are timeless.

To love, in Smithian terms, is to be the type of person who is able to feel love. To be lovely, in normal 18th century usage, means worthy of being loved. Loveliness in the sense of “you look lovely today” did not emerge until after Smith’s lifetime. A good person has the emotional capacity to feel love, and the character to deserve it in return. The two concepts are intertwined.

Feeling love takes empathy, which is Smith’s eternal theme. To love means being kind and giving to those you love. It means being a good listener. It means saying sorry and meaning it. It means forgiving human shortcomings, and having the grace to not take slights personally. It means helping people when they need it, and being able to ask for help when you need it. It means both giving and taking, without ulterior motives.

Deep friendships are not transactional. There must be genuine concern for the other person’s well-being. If people are selfish, is it really friendship?

There are many different types of love, not just romantic love. There is also love between friends, and between family, and between parents and children. Smith had a number of deep, lifelong friendships that he valued above all else. There is even a whole book about Smith’s friendship with David Hume. Most of Smith’s thought focuses on this type of love.

Smith was a lifelong bachelor, and may or may not have known romantic love. Smith also never experienced the love a parent has for their child, though as a doting son he experienced the flip side of that relationship. As Liberty Fund’s Christy Lynn Horpedahl has pointed out, that left a gap in Smith’s thought, not just his life. If he had known those loves too, it may have further deepened what he had to say about the love he shared with his family and friends.

Smith had this deep emotional capacity despite his well-known social awkwardness. He was an absent-minded professor type who would drift off into his own thoughts at odd times and get lost in conversation. His unique speech and gait were well-known around Edinburgh and Glasgow, and people often imitated his mannerisms. The historian Jim Powell shares that “Once, reportedly, he was giving a tour of a Glasgow tannery, and he absent-mindedly fell right into the tannery pit, from which his friends extricated him.”

Smith knew nearly every major Enlightenment thinker, often through their joint membership in The Select Society, The Poker Club, or the Oyster Club. Almost nobody had anything bad to say about him as a person, even when they disagreed with his ideas. In circles as catty as academia and intellectual salons, this is almost unheard of. Smith apparently practiced what he preached.

A life filled with Smithian love sounds nice, but it is incomplete. One must also be lovely. Again, that means worthy of being loved. A lovely person, for Smith, is a virtuous person. They keep their word, are quick to help, and are quick to forgive. They are honest and reliable. They lift people up when they are feeling down, and gently bring them back to Earth if they are a little too exuberant. A lovely person is fun when the occasion calls for it, and is serious when the occasion calls for that.

Part of loveliness is a skill for taking a room’s social temperature and keeping it from getting too hot or too cold, while still letting it fluctuate on its own. Creating this kind of dynamic social comfort for people takes tremendous empathy.

Loveliness cannot be faked, as my colleague Jeremy Lott and artist Douglas Curtis illustrated in a one-page comic at Liberty Fund’s AdamSmithWorks website. Adoration feels nice, but a person who lies about their accomplishments, or who befriends other people only to take advantage of them, knows he is a fraud. His friends don’t love him, they love a false idea of him. Even if nobody ever finds out, that secret knowledge is a blow to self-esteem severe enough to prevent someone from feeling the type of happiness Smith seeks.

Being lovely is a process, not an end result. It takes work, maintenance, and long-term self-improvement. Putting in all this effort is more than a life’s work. It is its own form of loveliness.

Smith had an adult’s view of materialism. He didn’t worship Mammon, nor did he condemn material wealth. He had a nuanced view that saw prosperity as giving people the means to pursue the important things in life: to love and be lovely.

– Published on OpenMarket, June 16, 2023.

Adam Smith’s ‘tolerable administration’ vs. America’s increasingly intolerable one

Iain Murray

In celebration of Adam Smith’s 300th birthday, it is interesting to note that one of the great man’s most thought-provoking sayings appeared not in either of his great works, the Theory of Moral Sentiments or The Wealth of Nations, but in notes from his 1755 lectures in the possession of his popularizer, Dugald Stewart. The saying went:

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical. (Emphasis added.)

Most commenters regard the emphasized words as a simple comment on the legal system. I suspect that more weight should be given to the words “tolerable administration.”

It is incumbent upon any legal or regulatory system (if we take that as synonymous with “justice”) that it not be burdensome. This is, indeed, the very etymology of “tolerable” – from the Latin tolerare, “to bear, endure, or support.” This suggests that every law or regulation be understandable to anyone who comes across it, and that every form that has to be filled and every box that has to be checked can be done so with an appropriate level of ease.

Now think about how long it takes to do your taxes. They are unlikely to be “easy,” especially if you are a small business person who has suddenly been saddled with issuing Form 1099s to every vendor or sub-contractor you have paid over $600 to, with a penalty of over $50 for each late form.

Then think about the 212,000 rules issued by the federal government since 1976, and the literally countless pages of guidance documents issued to support them. At some point the line separating tolerable form intolerable will have been crossed, and if it hasn’t been already, it surely will be soon. There are, however, ways in which we could measure these burdens, if Congress would make this a priority.

Then there is the administration aspect of justice. Recent Supreme Court decisions have cast doubt on whether the way we administer regulation is compatible with the requirements of the Constitution, including its insistence on due process. Meanwhile, the Federal Trade Commission has announced that it will do away with some of the pesky due process aspects of its administrative proceedings. The problem became so severe that a commissioner resigned over the Chair’s “disregard” for the rule of law.

The administration of justice requires procedural fairness – one might even say procedural justice. Yet for too many people caught up in the web of bureaucracy, the result is either costly (and therefore intolerable) or life-destroying (and therefore unjust.)

There is a human cost to intolerable administration. Indeed, if we wish for reform and a more humane government, perhaps “peace, easy taxes, and a tolerable administration of justice” would make for a good manifesto.

– Published on OpenMarket, June 14, 2023.

How trade makes us better people

Ryan Young

Economists love efficiency. That is why most of them love free trade. Countries with relatively free trade also tend to be wealthier than more protectionist countries. But there is more to life than maximizing utility. Today’s economists should take a cue from Adam Smith, the father of free trade. For him, trade is about more than efficiency. It is also about empathy.

Smith’s larger project was human cooperation. Trade is a key ingredient in Smithian cooperation, and many of the reasons why have little to do with efficiency.

First and foremost, trade respects individual dignity. If another person has something you want, there are two ways you can get it. One is to steal it: take it by force or deceit. The other is to trade them something they value in return. Actually, it’s better than that. You have to give them something they value even more than what they give up. But you will not persuade anyone to trade unless you have enough empathy and compassion to engage with them on equal terms.

To do this, you have to see things from their point of view. You have to make an effort to understand their values, even if they differ from yours. Then you have to persuade them in ways that appeal to them, and not necessarily yourself. You have to be able to have a two-way conversation with the other person, give and take. Not one or the other; both. You not only need to say what you want, you have to listen closely to what others want. Every transaction has two sides, and both count equally. Smith found these empathetic parts of trade far more interesting than the efficiency gains.

Trade doesn’t work without the idea of property, which is another staple of liberal (in the correct sense) economics. As the Smith-influenced scholar Bart Wilson points out, even property is more about empathy than efficiency. It is a cliché to point out that dogs know what property rights are. Just try and take away their stick and see what happens. That dog’s growl says, “This is my property.”

But Wilson, in Smithian spirit, says that this is only half the story. Just as every transaction has two sides, so does the idea of property: “This is mine, and that is yours.” It is both of those things. Not one, but both. Dogs do not get that second part; humans do. Again, a Smithian concept of property rests on treating other people with dignity. Property is not selfishness. It is a social custom based on cooperation. The fact that property is economically efficient is just the cherry on top of the moral sundae.

Peace is human cooperation on a national scale. Trade between individuals in different countries not only helps to build peace among countries, it helps to sustain it. The very first thing McDonald’s teaches its teenage employees is to not kill the customer. It’s bad for business. Instead they are told to be helpful and polite.

The deeper two countries’ trade ties are, the less likely they are to go to war. Voltaire, the French philosopher who Smith met in the 1760s, made a similar point in one of his most famous quotes:

Go into the London Stock Exchange – a more respectable place than many a court – and you will see representatives from all nations gathered together for the utility of men. Here Jew, Mohammedan and Christian deal with each other as though they were all of the same faith, and only apply the word infidel to people who go bankrupt.

Smith might not have approved of the infidels valuing only money, but he would have enthusiastically endorsed trade as a way to promote tolerance and cooperation. Trade can turn enemies into friends, as Mises and Hayek would both point out in the 20th century.

Trade is not a guarantee against war, as we are finding out with Russia’s Ukraine invasion. Both countries until recently had McDonald’s. The larger point holds. War and violence have both been in long-term decline, with rising commerce playing an important role, as Steven Pinker has documented in The Better Angels of Our Nature, as has Michael Shermer in The Moral Arc.

Being nice to people is good for business. It also gives people moral practice, as Virgil Storr and Ginny Choi argue in their Smith-influenced book Do Markets Corrupt Our Morals? Successful traders are trustworthy, and can trust in others. They listen to what other people want, and try to provide it.

Cheating and stealing might work once, as in a dine-and-dash at a restaurant in a town you’ll never visit again. But most trade is not a single transaction. It is a repeat-play game. Getting a bad reputation can be death in the marketplace. Keeping your word, paying your bills, being trustworthy, and learning when to trust others—and when not to—are all learned skills. They take practice, and markets are moral playgrounds where people can do exactly that. Markets are an ongoing process, not an end result.

The late Steve Horwitz, who won CEI’s Julian Simon Memorial Award in 2020, loved to tell a story about the double thank you of the market, that little moment when customer and merchant both thank each other:

But in the market, the Double Thank You says something different. That turkey is not a gift, as the grocer gets my $9 per pound in return. It is instead a mutually beneficial exchange. We are genuinely thanking each other for having made us each better off. I am happier with the turkey than the $9 and the grocery store prefers the $9 to the pound of turkey. When we thank each other, we genuinely mean it. We are both grateful for the exchange.

Trade makes strangers cooperate every day. It also makes people richer. Those material gains are important. They let people live longer, more comfortable lives, and pursue their versions of lives well lived. But as Smith and his intellectual descendants point out, it is the moral goodness behind trade that makes all that efficient wealth creation possible.

– Published on OpenMarket, June 28, 2023.

Adam Smith slavery controversy can be settled by his writings

Iain Murray

According to Britain’s Independent, the grave of Adam Smith in his home city of Edinburgh has been included in a citywide review as being a site linked to “historic racial injustice.” The Independent summarizes:

“The inclusion was justified with a comment that said he ’argued that slavery was ubiquitous and inevitable but that it was not as profitable as free labour’”.

Smith’s gravestone and his statue on the Royal Mile will now be considered by the council’s “Slavery and Colonialism Legacy Review Group” led by activist Sir Geoff Palmer, which will report on how memorials linked to “oppression” can be “re-configured”.

The Edinburgh review must have been superficial. If they had read his works they must somehow have missed the many condemnations of the institution of slavery and the sympathy with which he viewed the enslaved.

The Adam Smith Institute in the UK pointed to passages from the Theory of Moral Sentiments or The Wealth of Nations. In his Lectures on Jurisprudence, Smith was even more explicit—slavery was economically inefficient and for that reason, slaves should at the very least be paid but economic reasoning itself led to the conclusion that the institution should be abolished, as had happened in Western Europe. There is no justification for Edinburgh’s linking of Smith’s grave to slavery.

However, let us accord Smith the title of “the father of modern capitalism.” Many believe that capitalism was based on slavery, particularly in America. Is this not enough to condemn Smith? Once again, Smith’s own writings refute that.

Smith’s brilliant insight about capitalism was that there is an invisible hand in free markets that guides economic interaction to promote the general welfare. Smith makes it clear in his writings that in societies dependent on slavery, the invisible hand does not work that way. Instead, it benefits the rich at the expense of the poor and enslaved—precisely what the anti-capitalists believe, yet Smith makes it clear that this is not the free market at work.

Indeed, it was the early free marketers’ insistence that pursuing prosperity required the abolition of slavery that led pro-slavery writer Thomas Carlyle to dub economics the “dismal science.” In a racist tract called (sic) “Occasional Discourse on the Negro Question,” Carlyle says:

And the Social Science—not a gay science but a rueful—which finds the secret of this Universe in ‘supply and demand,’ and reduces the duty of human governors to that of letting men alone—is also wonderful. Not a gay science, like some we have heard of; no, a dreary, desolate, and indeed quite abject and distressing one; what we may call, by way of eminence, the dismal science.

It takes quite some twisting of the ideas to equate Smith’s anti-slavery thoughts with those of the racist hacks who rejected his economic insights.

Another fine article on the subject by the Adam Smith Institute’s Matt Kilcoyne is available at The Spectator.

– Published on OpenMarket, March 9, 2021.

Adam Smith, George Washington, and the invisible hand in America

John Berlau

Although Adam Smith would have been 300 this year, his birth date is unknown, and his baptism date has shifted from different dates in June due to the 1750’s change in the English calendar. So many of his admirers – including those of us at CEI—are celebrating his birthday the entire month.

This means celebrations of Smith’s birthday will soon be followed by celebrations of the birth of the United States of America on the 4th of July. Recent scholarship – some of which has been conducted by me in my book George Washington, Entrepreneur – shows how fitting this is. Many of the founding fathers of the new American nation read Smith and took his teachings to heart. As Katherine Mangu-Ward notes in Reason, Thomas Jefferson wrote to a friend that “in political economy, I think Smith’s wealth of nations the best book extant.”

New scholarship also shows that George Washington almost certainly read Smith’s 1776 book The Wealth of Nations and may have also read Smith’s earlier tome, Theory of Moral Sentiments, published in 1759.

In 2001, a research assistant to Princeton economics professor Alan Krueger discovered Washington’s signature in the 5th edition of The Wealth of Nations, published in 1789, in Princeton’s Rare Book Library. Additional research confirmed Smith’s book was part of Washington’s library. Later, historian Kevin J. Hayes documented in George Washington: A Life in Books– an ambitious intellectual biography of Washington that traces the books he read – that Washington actively engaged with Smith’s facts and arguments by underlining passages in The Wealth of Nations.

Furthermore, letters of Washington published in the 1990s show Washington buying Smith’s earlier book Theory of Moral Sentiments. He purchased the book for his stepson Jack Custis when the young man was attending King’s College in 1773. Though it is unclear if, or how extensively, Washington read this book by Smith, the fact that he purchased it shows Washington had at least some familiarity with its content.

Princeton economist Krueger’s New York Times piece also quotes an Enlightenment scholar saying the discovery that Washington read Smith “is genuinely thrilling news for historians,” and notes that “some of Washington’s sentiments were clearly Smithian.”

Washington stated, for instance, in his farewell address as president, “Even our commercial policy should hold an equal and impartial hand: neither seeking nor granting exclusive favors or preferences.” This echoes Smith’s many statements against cronyism and the government favoring certain businesses over others.

As I write in George Washington, Entrepreneur, Smith’s critique of British mercantilism would likely have resonated with Washington, who chafed at the red tape that “Mother England” showered on him and other colonial entrepreneurs.

With limited trade routes and heavy shipping costs for goods from Britain, colonists began to make things as well as grow things, just as Washington did with his enterprises at Mount Vernon. The British Parliament saw colonial manufacturing upstarts like the enterprises at Mount Vernon, small as they were when compared to companies in Britain, as a threat to British manufacturers.

As I write in my book, seeing the arbitrary nature of new British taxes and regulations, “Washington increasingly perceived a threat to all he had built.” He expressed this fear in a 1769 letter to his neighbor George Mason, who would also become a significant Founding Father. In the letter, Washington worries that if Great Britain can “order me to buy Goods of them loaded with Duties,” they may also “forbid my manufacturing.”

A few years later, Washington would be appointed head of the Continental Army and lead the American colonies to independence. Then, a few years after setting an example for the world by voluntarily giving up power at the end of the Revolutionary War, Washington would be called to lead the new nation as president.

In his first inaugural address upon taking office in 1789, President Washington uttered a phrase very familiar to readers of Smith. Washington proclaimed in that speech, “No People can be bound to acknowledge and adore the invisible hand, which conducts the Affairs of men, more than the People of the United States.” (Emphasis added.)

As I note in my book, there were some slight difference in the context of Washington and Smith’s use of the phrase “invisible hand.” But there were also some definite commonalities. Both men focused on decentralization, and to some extent, on the higher power they each referred to as “Providence.” As I write:

Smith was writing in the context of trade and wealth distribution, whereas Washington was speaking of the several decisions of individuals that led to the transformation of the 13 colonies into an independent nation, which he believed was guided by “providential agency.” Yet … Both men believed that the best results are most often achieved by the individual decisions of several people uncoerced by a centralized political authority. [And] both argued that such individual human actions leading to a greater social good could indeed be coordinated by a higher power. Just as Washington spoke of a “providential agency” in the inaugural address, Smith expounded on a “Providence” that “neither forgot nor abandoned those who seemed to have been left out in the partition.”

Both men should be remembered and praised this 4th of July when we celebrate the underpinnings of our liberties.

– Published on OpenMarket, June 30, 2023.

The wealth of America

Stone Washington

Adam Smith’s magnum opus, The Wealth of Nations, was published during the same year that America gained its independence as a nation. Perhaps no other country in the world benefited more from harnessing the ideas on capitalism advanced in Smith’s work. America’s free-market system continues to flourish today as a testament to Smith’s ideas.

One of the great advantages of America’s free-market economy is illustrated by Adam Smith’s invisible hand metaphor. In Smith’s view, the spontaneous interactions of everyone in a market system tend toward the optimal use of available resources, producing benefits across society, despite those benefits not being the goal of any individual or supervising authority.

Also, while individuals are primarily guided by their own self-interest in making economic decisions, Smith did not necessarily view them as “selfish” or “greedy,” because they’re collaborating with other free individuals for mutual gain. In a voluntary market, both buyers and sellers are better off when they do business together.

This interdependence encourages producers to supply the market with products that are essential to consumer wellbeing, while simultaneously financing their own enterprise. A component of this is the nature of “arms-length transactions.” These are commercial engagements between two or more dissimilar parties which agree to do business. Their collaboration is driven purely by financial self-interest and an equal moral agency to accept or reject offered terms. To ground this in the human element, even though a producer may care first and foremost about his profit-margin, he also cares about how his products are being consumed and enjoyed by his customers.

Smith’s revolutionary notion of the division of labor—separating workers’ daily responsibilities based on their relative specialties—has multiplied productivity and thus overall economic growth in industrial societies more than any other factor. Less government involvement in the economic affairs of a country by central planners enables more leverage on production from dispersed private actors. Smith understood that a healthy combination of private competition, legal protection for property rights, and rational self-interest among market participants provides a roadmap toward economic prosperity.

Smith’s ideas were inspirational to succeeding generations of economic thinkers. Those who carried up his mantle were known as mainline economists, encompassing the fundamental tenets of economics research. Mainline economics as a body of scholarship actually predates Smith, going as far back as St. Thomas Aquinas in the 13th Century. Prominent disciples of Smith include Nobel laureates Friedrich Hayek, Ronald Coase, James Buchanan, Douglass North, Vernon Smith, and Elinor Ostrom.

These individuals were on the forefront of applying sound economic theories and empirical data toward resolving real-world problems. Such ideals have been championed by current-day research and advocacy organizations like the Mercatus Center and the Competitive Enterprise Institute, as well as many others.

In bridging the gap between theory and public policy, mainline economists seek to resolve a host of ongoing conundrums, such as “Why are some societies fabulously wealthy while others are miserably poor?” and “How can we as humans live together peacefully and prosperously?”

Nudged along by Smith’s ideas on wealth, these researchers have found that economic growth in society is largely dependent upon the standard of living for a majority of its citizens. Economic growth produces a diverse array of opportunities for working and middle classes, leading to a greater propensity for participation in the market and access to financial mobility. Smith argued that consistent human exchange of goods, services, and ideas is what drives the economy. Mainline economists focus their efforts on explaining the societal benefits of these exchange-based relationships, from both market and non-market collaborations.

Adam Smith’s invaluable contributions to the study of economics continue to ring loudly 300 years after his birth. He provided the theoretical framework for why a free, market-driven economy is able to produce both expanding prosperity and a flourishing civil society, all without a central planner. American economists today would be wise to remember and pay their respects to that legacy.

– Published on OpenMarket, June 27, 2023.

Classical liberals aren’t naive about big business

Iain Murray

Big business has become a point of friction between conservatives and classical liberals, especially social media and other internet companies that fall under the heading of Big Tech. Conservatives are increasingly likely to say that large companies need to be constrained by law, such as antitrust, to prevent them from threatening American values. Classical liberals disagree, which sometimes leads to accusations of naivety from our conservative friends. I respectfully dissent; classical liberals have always been wary of big business.

We can trace that skepticism all the way back to Adam Smith, who famously noted 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.” While this is often used to suggest that Smith would have endorsed economic regulation, the opposite is true. The rest of the passage notes that such conspiracies are normal reactions to regulatory restraints. We place burdens on businesses, so they raise prices, hurting consumers. Jen Psaki and Elizabeth Warren should take note.

Conservative business critics often make a similar mistake in reasoning. Businesses offshoring production hurting heartland towns? Clearly a conspiracy against the public inspired by love of Mammon! No, far more likely is the final breaking of the camel’s back after years of regulations and taxes piling on. Technology companies restricting speech? They obviously hate us and want to silence us. No, that’s far more likely a reaction to laws around the world that punish companies for “misinformation” and to threats of stricter regulation in the U.S. Companies going green or pandering to racial agitators? Look at the number of laws and regulations around the world pushing them in that direction.

We have seen the results of businesses attempting to stand up to government over the years. It rarely ends well for them. Lobbying is one of the few tools they possess, but their ability to do that is always under attack. And now they have vice presidents of environmental and diversity acting as government agents from within, often using the company’s lobbying power to call for more restrictions.

Nor do classical liberals naively think that all businesses are champions of freedom or doing God’s work. Again, Adam Smith is our guide. He noted 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.”

In other words, businesses are selfish, perhaps even greedy. However, the market turns those sins to virtuous results. We do get our dinner because of them, and market discipline prevents the sins from being too much of a problem. When regulation gets in the way, market discipline breaks down. For instance, that discipline gives us good customer service, but in a jurisdiction where tips are banned, the incentive for better service goes away.

This suspicion of business, combined with the recognition of the beneficial effects of the market economy, is why most classical liberals describe themselves as pro-market, not pro-business. We might celebrate some of the great advances Amazon has brought us in terms of bundled services, quick delivery, and lower transaction costs, but we would have no problem with Amazon being outcompeted into oblivion.

It is that relentless process of competition that leads classical liberals to celebrate what we call creative destruction. Old companies crumble as new ones arise, delivering greater value to consumers and new jobs for workers. Yet, that process can be short-circuited by regulation, which creates entry barriers against innovative newcomers and entrenches old businesses in place.

Curiously, that would be the effect of policies many conservatives now endorse. Notice how many streaming videos these days show an ad from Facebook touting the company’s support for “updated Internet regulations,” such as amending the law known as Section 230? Those “updates” would make it harder for an upstart social network to compete against Facebook.

Ah, say conservative critics, but what about monopolies? Adam Smith knew the source of monopoly power was government, and wrote that “monopolists, by keeping the market constantly understocked, by never fully supplying the effectual demand, sell their commodities much above the natural price.” But competition is relentless, so monopolists require a government charter or its regulatory equivalent to maintain their position.

All antitrust law does is to substitute government action for competition, with all that implies. Government regulates, companies achieve monopoly status, government breaks them up, and the extant regulations help to create new monopolies. It’s ever decreasing circles of bureaucracy.

– Published in The Dispatch on December 28, 2021.

We still struggle with Smith’s Man of System: Natural liberty is the antidote

Kent Lassman

Liberals have been debating the meaning of liberty for centuries. What are the proper boundaries for individual action and the scope of the state?

When understood properly, liberty offers an expansive private sphere of action where different talents can combine with ingenuity for an infinitely wondrous world. Liberty is often discussed as a normative value. What ought a person do? When does the liberty of one person affect the liberty of another? Where ought we draw the limits of state action?

Liberty is found throughout the work of Adam Smith. For him, it informs how individuals understand their own potential, as well as the dignity of everyone else. It creates limits to action by incorporating a sense of others’ value into the understanding of self. It is, as Smith wrote in The Wealth of Nations, “allowing every man to pursue his own interest his own way.”

The pursuit of the good life, including natural liberty, centers liberty in public, or social, discourse and informs how we govern ourselves. Securing liberty is found, for example, in America’s Declaration of Independence: “Life, liberty, and the pursuit of Happiness.” It is the stated reason for government.

Smith explains that by removing governmental restrictions and preferences on certain people, activities, or trades, we can rediscover natural liberty. The sovereign, he says, is “completely discharged” from the duty of overseeing “the industry of private people, and of directing it towards the employments most suitable to the interest of the society.”

It is not government’s proper role to tell people how to advance social goals. He grants that at this point, the sovereign has only three duties: defense, justice, and certain public works which ought to be locally managed and financed principally by the users of the works, as with toll roads. But in that same passage Smith says: “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way.” Here we find the essence of natural liberty and the strong presumption for it in society.

What liberals must do, as Smith did elsewhere, is to understand how state action and state institutions can become instruments of illiberality.

Two errors from the man of system

It is not enough for government to establish conditions under which natural liberty can flourish. It must also limit ambitious people from forcing their plans, their ambitions, and their wills on others. Smith, in a chess metaphor, diagnoses a common problem with many political leaders.

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess–board.

Smith’s man of system, and the conceit of having knowledge enough for effective planning, echoes in Friedrich Hayek’s 1988 book The Fatal Conceit. Both men had experience with political leaders who understood social and political change as a top-down command, rather than a bottom-up emergent order. Smith, like Hayek after him, understood and highlighted how natural liberty was the great catalyst for activity among individuals and the “great interests” alike.

The man of system becomes, in his arrogance, a danger to society and an obstacle to social change. He misunderstands the limits to planning and makes a fundamental error about human nature. The man of system, the government planner, sees himself in the role of a deus ex machina, “very wise in his own conceit.”

There is a second mistake of government planners. As Smith points out in the next few lines, they often forget that each individual has agency, which means we all have our own mind and motivations.

He does not consider that the pieces upon the chess–board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess–board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it.”

Adam Smith presents an alternative to high-handed politicians and rigid bureaucrats of system. This is the man of humanity and benevolence. This approach eschews violence and is willing to moderate abuses and injustices incrementally: “When he cannot establish the right, he will not disdain to ameliorate the wrong; but like Solon, when he cannot establish the best system of laws, he will endeavor to establish the best that the people can bear.”

Both types of men focus on the role of public administrators and how to govern. But only the second is premised on goodwill toward others, even those who pursue their interests in unconventional or imperfect ways.

In this way, Smithian liberalism includes recommendations on how to govern, a topic too often ignored by contemporary liberals of all stripes. Smithian liberalism is premised in a moral vitality inherent to each person. This is an idea that stands the test of time and is essential to understanding the Competitive Enterprise Institute’s guiding principles.

Prudence in political life involves compromises, but the Smithian liberal always maintains a sense of direction. Even after teaching moderation, Smith says: “Some general, and even systematical, idea of the perfection of policy and law, may no doubt be necessary for directing the views of the statesman.”

Smith is clear about his North Star: allowing every man to pursue his own interest his own way. Under liberty, action is limited by its effects on others within a society, as well as by external threats. For Smith, granting the sovereign, or the government, a few essential duties, such as defense and justice, is the best way to maximize natural liberty. No government program, and no politician or man of system, can move the interests or prejudices of society around like pieces on a chess board. For liberals, and anyone of goodwill who seeks effective government, governance begins with the premise that each individual has and maintains moral capacity, regardless of what the legislature might decree.

National ruin and human progress

Ryan Young

During the American Revolution, John Sinclair, a member of British Parliament, wrote a letter to Adam Smith. He was worried about how badly the war was turning out for Britain. “If we go on at this rate, the nation must be ruined,” he wrote, emphasis in the original. Smith’s response was one of the wisest things he ever said. “Be assured, my young friend, that there is a great deal of ruin in a nation.” This was his way of saying that things would be fine.

In this case, Britain lost the war and thirteen of its colonies. But things did turn out fine. British living standards continued to improve, and its population continued to grow. America also prospered and grew. Yet, most people continued to think more like Sinclair than Smith. In 1830, after a couple generations of rising living standards, the Smith-influenced thinker Thomas Babington Macaulay wrote:

On what principle is it that, when we see nothing but betterment behind us, we are to expect deterioration before us? If we were to prophesy that in the year 1930 a population of fifty million, better fed, clad, and lodged than the English of our time, will cover these islands,, that Sussex and Huntingdonshire will be wealthier than the wealthiest parts of the West Riding of Yorkshire now are, that machines constructed on principles yet undiscovered will be in every house, many people would think us insane.”

At the time, people thought Macaulay was nuts. But his crazy predictions were almost spot-on. In 1930, the UK’s population was just under 46 million.  Automobiles, radios, and electricity, undreamt of in Macaulay’s time, were within reach of ordinary people by 1930, even with the Great Depression setting in. Growth and prosperity in the US were even more dramatic. Over time, the two warring countries developed a special relationship as one the world’s closest alliances.

Today, by almost every measure, nearly every country in the world is more prosperous than ever before in terms of life expectancy and income, as well as the percentages of houses having appliances, air conditioning, and high speed Internet. Even places still struggling with extreme poverty are seeing growth in sanitation and literacy, and declines in disease rates and malnutrition.

This is wonderful news. But there is still a lot of ruin in the UK, the US, and in all countries. There always has been, and there always will be. There is not a place on Earth free from corruption, crime, addiction, rent-seeking, over-regulation, over-taxation, and every other form of ruin known to humankind. And yet, progress still happens. Generations of human have slowly been making make each other better off for more than two centuries, with no end in sight, despite all the problems we face.

Smith’s point to Sinclair—and to us—is that things do not need to be perfect to be good. Every age has its problems. We can’t ignore them, but we can make progress against them.

There is a lesson here for today’s liberal movement. Many libertarians insist on ideological purity tests, and will not work with anyone who doesn’t pass muster, no matter how much common ground they have. They put on performance displays for other free-marketers about how radical and principled they are in order to gain status in the movement. The libertarians who put on these displays are similar in this respect to the left’s campus radicals and environmentalist purists, and to the right’s social conservatives and right-populists. Left, right, and libertarian all routinely make fools of themselves trying to increase their status in their in-groups, while doing nothing to advance their agendas.

This need to preen was one of those quirks of human nature that amused Smith. But through the smile, he would counsel his free-market friends to calm down a bit, just as he did his young friend Sinclair. There has never been a free-market golden age, and there never will be. And that’s ok.

Stay committed to your principles, and work to advance them. At the same time, in a world like ours that is filled with democratic debate, differing good-faith opinions, and bad-faith special interests, the full liberal policy program will never happen. There is a lot of ruin in a nation.

Look at how much people have been able to improve each other’s lives despite all that ruin. The highly imperfect governments that Smith criticized were filled with mercantilists and rent-seekers, colonizers and imperialists. Smith pointed out as ably as anyone how these forces made people poorer. He also pointed out that the forces of everyday liberalism were stronger.

Even in Smith’s time, when the Great Enrichment was just beginning, the difference from previous generations was noticeable. Fewer people were tied to the farm, new industries were coming into being, port towns like Glasgow were alive with growing commerce, and living standards were improving for regular people, not just the aristocracy.

Smith thought that the better the government stuck to the simple system of natural liberty, the faster this progress would happen.

If Smith were alive today, he would likely encourage today’s liberals to push as best they can for peace, easy taxes, and a tolerable administration of justice. He would also likely warn against insisting on ideological purity for two reasons. One, there is no single correct regulatory policy, or trade policy, or any other policy. And two, as he reminded young Sinclair, there is a lot of ruin in a nation. Things do not have to be perfect to be good. And things do not have to be perfect to improve. The last two centuries are proof.

– Published on OpenMarket, February 12, 2024.

Das Adam Smith problem? Nein!

Ryan Young

Do Adam Smith’s two books contradict each other? It sure looks that way sometimes. His first book, 1759’s Theory of Moral Sentiments, is about the virtues of empathy. The Wealth of Nations, published in 1776, is about how self-interest can enrich societies. This disconnect has so puzzled scholars over the years that there is a German phrase for it: Das Adam Smith Problem. On closer examination, Smith’s two sides are not only consistent, but each makes the other stronger. They are part of a unified system. There is no Das Adam Smith Problem.

Part of this shows in the books’ publishing history. Theory of Moral Sentiments is Smith’s first book, published in 1759. It is also his last book. He issued revised editions every so often as he refined his thoughts. The sixth and final edition came out in 1790, the year Smith died, and 14 years after The Wealth of Nations was published. Similarly, The Wealth of Nations went through five editions in Smith’s lifetime, the last appearing in 1789. Both works evolved together and influenced each other.

A more subtle key to resolving Das Adam Smith Problem is in his prose style. Smith’s 18th century prose can seem formal and stilted to 21st century readers. But as with any writer, if you invest an hour or two in reading him, you will develop an ear for his style. It is much easier going once that happens. You will also discover repeated phrases in Smith, such as frequent use of the word “approbation,” and the phrase “or, what comes to the same thing,” along with other little stylistic quirks that may be hard to verbalize.

Another of Smith’s prose hallmarks is that he tends to explore all aspects of an argument in order. This is one reason why his books are so long. This systematic nature is also in part because Smith’s books began as his notes for lectures he delivered at the University of Edinburgh, where he taught for many years. Smith’s third-best-known work, Lectures on Jurisprudence, has similar roots, but consists mostly of Smith’s students’ class notes, and not Smith’s own prose.

Just as Smith’s paragraphs will treat one part of an argument and then the next, his books do the same thing on a larger scale. For Smith, the interplay between empathy and self-interest was fascinating enough to merit a whole book about each. While both books each contain plenty of material on both empathy and self-interest, in general Moral Sentiments focuses more on empathy, while Wealth of Nations focuses more on self-interest. That may be one reason Das Adam Smith Problem arose in the first place. Scholars weren’t seeing the big picture.

Admittedly, the books have other differences. Theory of Moral Sentiments is more inward-focused, and Wealth of Nations is more outward-focused. Both look through the lens of empathy, but point it in different directions; one at the mirror, the other at the world.

The impartial spectator theory from Theory of Moral Sentiments is a way for people to judge if their own actions are just: Would an imaginary impartial third-party observer reasonably believe that I am treating other people fairly? This takes a keen enough sense of empathy to see things from other people’s perspectives. But even though the impartial spectator’s judgments all occur in one person’s imagination, it is still a social concept. The point is to gauge how well one is treating other people. Even this inward-looking book sees more than the person in mirror.

Economic concepts from Wealth of Nations are about dealing with other people. Trade, division of labor, and human progress are also the result of people using empathy to find ways to cooperate with other people. Yet they also involve the self. People won’t trade or specialize in a job unless they think they will benefit. Civil and political institutions are important because they can guide people’s self-interest in different directions, some more desirable than others. Incentives matter because people are self-interested, as well as empathetic. Seen that way, the two books are not that different. Even if they differ in degree, they both involve self-analysis and taking others into account. Not one or the other, but both.

A second difference is that Theory of Moral Sentiments is about empathy itself, while Wealth of Nations is more about applied empathy. Moral Sentiments ideas like the impartial spectator, and Smith’s ideal of to love and be lovely are all about empathy. Wealth of Nations takes those ideas and shows how empathy is the engine that drives successful political and civil institutions, trade, money, and other parts of economic life. It is in one’s self-interest to have a keen sense of empathy.

Das Adam Smith Problem itself has a problem. Human beings have a natural tendency to think in binaries; things must be black or white, on or off, left or right. The real world is more like a spectrum, full of gray areas and in-betweens. Empathy and self-interest are not opposites set apart from each other, as Das Adam Smith Problem assumes.

Empathy and self-interest interact, advance, retreat, and bleed into each other. While Moral Sentiments and Wealth of Nations focus on different parts of that spectrum, it is still the same spectrum. They have the common themes of human nature and human betterment. In that sense, a better way to read Smith’s unified project is as Das Adam Smith Solution.

– Published on OpenMarket, June 20, 2023.

Happy birthday, Adam Smith!

Fred L. Smith, Jr.

June 16, 1723, is the birth date of Adam Smith, a Scottish intellectual greatly admired for clarifying the virtuous, self-organizing nature of free markets. Smith noted that humans’ evolved self-interest trait encouraged people to seek wealth-creating exchanges. That was the key element of his famous work, The Wealth of Nations. But Smith also realized that such exchanges require that each party have some knowledge of what the other party seeks, and what it would view as a fair deal. And that realization led Smith, in his book The Theory of Moral Sentiments, to focus on another human trait, empathy. This is the social skill that we all possess to varying degrees to get inside the mind of the other, to understand what they value. This trait is equally critical if markets are to exist and wealth creation is to occur.

Empathy deals with our awareness of how others will react to our actions and our choices. It permits us to get into the skin of another person and understand, to some extent, their motives and values. These dual traits distinguish mankind from other social animals. Animals, too, are self-interested and sometimes cooperate. But, as Smith notes, they don’t bargain—they lack the empathetic traits that would allow them to know what the other wants and reach a mutual win/win agreement. Smith notes humanity’s innate “propensity to truck, barter, and exchange one thing for another.” This is unique to humans: “Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.”

Long after Adam Smith’s time, another great economist, Ronald Coase, expanded on some of these observations. He noted that any bargain—any exchange—requires overcoming a number of challenges: how do I know what others have to offer? How do I estimate what (and how much) they want in exchange? How should I handle the bargaining process? Self-interest drives people to seek deals; empathy allows one to surmount the challenges, reducing transaction costs.

Most people know Smith as the defender of free markets, free enterprise, and capitalism—and, indeed, he was that. But most focus only on The Wealth of Nations, the book that explains the wealth creation potential of voluntary exchange. There he explains the market’s self-organizing potential (spontaneous order) by the example of a pin factory. Someone organizes a set of tasks, acquires specialized equipment for these tasks, and then employs people to perform the tasks. Smith demonstrated how rational capitalism (the self-interest trait) achieved greater wealth creation via specialization and division of labor. He noted that one individual seeking to do all the tasks himself might make a few hundred pins a day, but a team each performing one task could produce tens of thousands.

Smith was writing at the dawn of the Industrial Revolution, before modern corporations. The pin factory he discussed was a transitional institution, in which the loyalty of the workers reflected the earlier feudal duties that a peasant owed to the lord or the monastery.

But as capitalism’s rational nature weakened such feudal loyalties, managers had to become more than mere taskmasters. Capitalists had to find ways of ensuring a positive working environment. Employees, after all, are not serfs. They can and may well quit, moving onto to jobs offering greater satisfaction. Thus, successful managers must seek a win/win cooperative relationship with their employees (and their customers, suppliers, and investors). That challenge requires attention to self-interest, like encouraging greater productivity and efficiency, but also to empathy, ensuring that the concerns of these cooperators are met as well. The firm itself also operates in a competitive environment. Failure to achieve these cooperative results is indicated by losses of customers, higher turnover of employees, less responsive suppliers, and fewer investors.

Smith may well not have foreseen how the firm would become a training ground for inculcating both the efficiency-enhancing traits of self-interest and empathetic outreach traits. Nor did he likely realize fully how the benefits of such cooperative win/win arrangements would carry over into non-economic aspects of life, strengthening civil society. But Smith did point the way to that glorious future, the virtues and values of what economist Deirdre McCloskey and others have labeled “doux” (meaning gentle or sweet) commerce.

Capitalism is a moral order. Its defenders must realize that fact and become more effective at communicating it to others. Re-reading Adam Smith and recognizing the critical duality of self-interest and empathy is a good starting point and a great way to celebrate his birthday.

– Published in Forbes on June 15, 2017.

Speculators: Adam Smith revisited

Christopher Culp and Fred L. Smith, Jr.,

Financial middlemen are in disfavor everywhere. From the movie Wall Street to the pages of The Wall Street Journal, they have become the villains of our age. Our modern media and intellectual leaders recognize a range of legitimate economic activities such as farming, distribution, storage, and manufacturing, but see little value in such unfamiliar, “immoral,” and “unproductive” activities as corporate takeovers, insider trading, and junk bond financing. These activities involve too much mental acumen and too little honest sweat.

To reinforce these biases, journalists quickly assign pejorative labels to those things they don’t understand: “insider” trading, “junk” bonds, “leveraged buy-outs,” “hostile” takeovers, “poison pill” defenses, “greenmail,” and those old favorites, “speculation” and “profiteering.” The plot outline of the media story varies, but when the story ends, the middleman always winds up wearing the black hat.

Those in the media are not alone in their condemnation. Politicians and other social commentators find it useful to chastise such middlemen as serving no useful purpose. In fact, these entrepreneurs are typically portrayed as being mere paper-pushing, tape-watching profit maximizers who exist only to skew the distribution of wealth. But if middlemen are so non-productive, we might well ask why competitive capitalist societies have created so many types of them. Some insight into this question is gained when one realizes that today’s respected service and distribution workers were once also condemned as parasitic middlemen.

We should not be surprised that the Michael Milkens of today are caricatured and pilloried. What is not understood is often condemned, and few people understand the value of entrepreneurial activities. Mankind is reactionary—the new, the novel, and the unusual may be essential, but such activities rarely receive honor in their own day. Today’s insider traders and junk bond salesmen were yesterday’s draymen and warehousemen. In their day, transportation and storage were viewed as suspiciously as innovative financial vehicles are today.

The story is told well in Adam Smith’s discussion of the Corn Laws in The Wealth of Nations. Smith reviewed 18th-century public attitudes toward two new forms of wealth creation: “forestalling” and “engrossing” (terms picked for the same connotative reasons that “junk” and “hostile” are the adjectives of choice for high risk, high yield bond financing and changes in corporate control today). “Forestalling” was a new economic activity involving corn purchases during times of plenty in the hope that the corn could later be resold at a profit. “Engrossing” described a similar arbitrage activity focusing on price differentials among different locales within England. Engrossers, for example, bought low in Birmingham and sold high in London—or rather they hoped to do so. Both activities had become possible only as storage and transportation costs dropped.

The role of the middleman

Forestalling and engrossing were soundly criticized as sterile middlemen activities that produced no new corn but only raised prices. Such speculation, the conventional wisdom held, could only hurt the general public.

However, Smith explained clearly that such middlemen played an essential role. If speculators predicted scarcity and it failed to materialize, they lost money. They not only had to sell the corn at a loss, but also pay its storage and/or transportation costs. When the scarcity was real, however, Smith explained that “the best thing that can be done for the people is to divide the inconveniences of [that scarcity] as equally as possible through all the different months, and weeks, and days of the year” and, of course, across the nation. Smith noted that the corn merchant—the specialist in this commodity—was the most appropriate party to carry out this “most important operation of commerce.”

Moreover, Smith noted, the risks were clearly shifted from the consumers to these specialists. When engrossers and forestallers were wrong (a situation all too likely in commodity markets) and prices fell rather than rose, they bore the consequences of their follies. On the other hand, when these speculators were correct and shortages did occur, both they and the citizenry benefited. As Smith explained, “By making [the people] feel the inconveniences of a dearth somewhat earlier than they might otherwise do, he prevents their feeling them afterwards so severely as they certainly would do, if the cheapness of price encouraged them to consume faster than suited the real scarcity of the season.”

Smith detailed the consumer advantages of making uniform the supply of foodstuffs over time and avoiding the feast or famine problems that existed before there were middlemen. In modern terms, forestalling and engrossing were creative forms of voluntary risk-shifting, in which risks were transferred from risk-averse consumers and growers to risk-taking speculators.

Smith stated that “after the trade of the farmer, [there is] no trade contributing so much to the growing of corn as that of the corn merchant.” He continued, “The popular fear of engrossing and forestalling may be compared to the popular terrors and suspicions of witchcraft. The unfortunate wretches accused of this latter crime were not more innocent of the misfortunes imputed to them, than those who have been accused of the former.” To Smith, “the corn trade, so far at least as concerns the supply of the home-market, ought to be left perfectly free.”

Moreover, Smith explained that entrepreneurs seek profits not necessarily because their actions will benefit consumers; clearly, entrepreneurs have profit-maximization in mind. Yet, speculative entrepreneurship carries positive external benefits for society a priori. It is ironic that the profit-seeking activities of forestallers and engrossers yield such residual benefits, while the actions of politicians, who are generally viewed as those responsible for promoting the welfare of society, often do more harm than good.

The reader will notice the clear similarity between the speculators and arbitragers of today and Smith’s corn merchants. Indeed, the forestallers and engrossers were simply pioneers specializing in the fields of risk management, information provision, and information processing. As in Smith’s time, such middlemen provide society with services that are no less valuable bemuse they are intangible; speculators are willing to take risks that consumers would prefer to avoid.

The benefits of speculation

Speculation comes in many forms and has many benefits. Speculators, for example, constantly question the validity of conventional market wisdom by taking risks which others view as foolish. Even when conventional wisdom is correct, speculators provide a de facto cushion of insurance that improves the resiliency of society against economic risks. Speculators also serve a moral purpose by making entrepreneurial activity, and resulting economic growth and prosperity, possible.

Additionally, speculators enhance the efficiency of firms and the deployment of capital in the economy at large. If inefficient management of a corporation, for example, is detected by speculators, capital can be redistributed through the takeover process, with substantive residual benefits arising in society through better allocation of resources. Furthermore, the threat of takeovers serves as an implicit economic regulator of corporate management. Publicly held corporations typically become takeover targets when their stock becomes undervalued. This is generally the result of mismanagement or the inefficient use of capital resources. To avoid becoming takeover targets, then, firms have the incentive to operate efficiently.

Forestallers and engrossers in Smith’s day—and corporate raiders and junk bond specialists today—are merely entrepreneurs, and thus inseparable from capitalism. Unfortunately, unlike 18th-century England, we have no Adam Smith to explain their role to the American public. Our society finds it all too easy to shift the blame for declining moral standards and failing projects to today’s forestallers and engrossers.

Rudolph Giuliani, Anton R. Valukas, and Oliver Stone play before the masses on their respective theatrical stages when they portray and prosecute the evil speculators. Adam Smith did not have to contend with television and Hollywood or crusading prosecutors; he was able to argue directly to policy makers. He did not need to simplify his message for the 30-second soundbite. Nonetheless, Smith did make a strong case and his viewpoint eventually prevailed. The pejorative terms gradually lost their evocative power as people began to understand what these activities entailed.

Our challenge is to teach the American public about the value of the modern counterparts of Adam Smith’s forestallers and engrossers. This task is made even more difficult by the absence of any great Corn Law debate today. Accusations of embezzlement and corruption on the financial markets pale in comparison to the melodrama of impending starvation in 18th-century England. Despite the absence of a life-threatening crisis, though, this issue is as important today as it was in the days of Smith. Failure to consider the necessity of speculation for a growing economy will lead to the decline of entrepreneurial activity.

Attacking speculators deprives society of the vital economic and moral functions they serve. Morality cannot be restored to society by regulating and censuring the speculative class; this action would only sell our future short.

– Published in the The Freeman: Ideas on Liberty, October 1989.

Virtuous capitalism in theory and practice

Fred Smith and Ryan Young

Capitalism has a bad reputation. Many people see it as corrupt, uncaring, and in bed with politicians. And popular wisdom isn’t always wrong. For example, take the Export-Import Bank’s pending renewal. How dare large, healthy businesses such as Boeing and General Electric receive billions of dollars’ worth of special privileges?

Has Big Business thought through the political and social costs of such self-aggrandizement? Is sacrificing long-term moral standing for short-term dollars really wise?

Most businesses, after all, rarely lobby. Lobbying at the national level is largely a phenomena of the largest corporations. Why don’t more business leaders recognize the strategic value of asserting their superiority in creating wealth rather than having funds transferred to them via politics?

Fortunately, it turns out, most businesses do at least implicitly recognize these tradeoffs. As the late, great academic Gordon Tullock noted, lobbying’s apparent payoff is far lower than generally believed. Measuring the full extent of lobbying “investments” is difficult, but a simple analysis find less than $10 billion being spent annually on lobbying to gain perhaps $100 billion of government largess. Tullock outlined four factors which suggest that the costs of lobbying are greater than generally presumed, while its benefits are less.

First, when multiple companies are competing for a single government grant, a lottery situation emerges in which one company might win big, but the losing companies still incur lobbying expenses which bring down the overall corporate returns.

Second, if a company purchases the support of one politician, the firm and the politicians must generally still negotiate with a requisite number of others and that requires additional political investment.

Third, since most people view special political favors as unseemly, companies and politicians have to spend time and money building cover stories. GM’s bailout was purchased in part with a multi-million dollar national advertising campaign in which the company draped itself in patriotic nostalgia. GM also gave up significant decision authority to the government, even allowing President Obama to fire the CEO.

Finally, as markets adjust over time and eat away at the returns on government privilege, the beneficiaries must still invest to retain their eroding benefits. Think of the struggle between New York City’s taxi medallion owners and upstart ridesharing services such as Uber and Lyft.

Even with these considerations, the level of lobbying seems lower than one would expect. This suggests that many businessmen also have some sense of propriety, believing that earned income is morally superior to granted income. This does much to inoculate them against Washington’s temptations. As the economist Joseph Schumpeter noted of the average businessman long ago: “He wants to be left alone and to leave politics alone.”

The Adam Smith problem sheds further light on why lobbying efforts may be low. Scholars have long noted a tension between The Wealth of Nations’ focus on self-interest and the other-regarding, empathetic message of his earlier book, Theory of Moral Sentiments. As Smith observed, most people simultaneously hold both values – other-regarding values encourage people to get along with each other peacefully and escape the Hobbesian war of each against all, and self-interest encourages people to seek the win/win arrangements that make trade, the free market, and wealth creation so viable.

To the populace and perhaps many business leaders, cronyism seems a form of political sharp dealing that threatens voluntary win/win arrangements and capitalism itself. This may well dissuade many business leaders to focus on the world they know best – a world characterized by a creative mix of cooperation and market, rather than political, competition – to produce a close approximation of moral (rather than crony) capitalism.

Nonetheless, cronyism remains a serious challenge to capitalism. It must be condemned and corrected. This will require creative alliance-building by both free-market intellectuals and true capitalists who reject rent-seeking. Capitalism, after all, is unlikely to be defended adequately if capitalists fail to engage. Such a coalition of moral, intellectual, and economic forces could be a powerful force for economic liberalization, ensuring a positive future for capitalism – and for America.

– Published in Forbes, November 17, 2017.

Empathy, Adam Smith, and Greek tragedy

Ryan Young

Adam Smith has a way of popping up in unexpected places. One of those is Ancient Greece, as a recent Liberty Fund Virtual Reading Group discussed. One reason people still read Sophocles and Aeschylus after nearly 2,500 years is because their tragedies are a way to practice empathy—a subject dear to Adam Smith’s heart. 

Khalifa University’s Arby Ted Siraki argues in “Adam Smith’s Solution to the Paradox of Tragedy” that Greek drama was a major influence on Smith’s thought (Thanks to Smith scholar and VRG participant Thaís Alves Costa for sharing this essay with the group):

Dramatic theory and the theatre in general were, however, never far from his thoughts. In his biographical memoir of Smith, Dugald Stewart mentions that Smith was especially interested in ‘the history of the theatre, both in ancient and modern times’, and that drama and the theatre ‘were a favourite topic of his conversation, and were intimately connected with his general principles of criticism’
(Stewart 1980, ‘Account’ III.15)

It wasn’t just in conversation. Greek tragedies and other dramas come up throughout The Theory of Moral SentimentsLectures on Rhetoric and Belles Lettres and Essays on Philosophical Subjects. If they are mostly absent from The Wealth of Nations, it is perhaps because that book is more about applied empathy than the thing itself. 

Why were the Greek tragedies so important for Smith? One likely reason is their moral ambiguity, which requires empathy to navigate.

In Sophocles’ Oedipus the King, Oedipus claims self-defense in murdering his father, King Laius. Years before the events of the play, Laius’ chariot nearly runs Oedipus off the road, which starts a brawl. The lone surviving member of Laius’ party claims instead it was an attempted robbery. There is no way to know who is telling the truth. That is one source of ambiguity.

Another is that Oedipus and Laius did not recognize each other. Oracles foretold their fates before Oedipus’ birth, which led his parents to abandon him as an infant, though Oedipus survives. Laius and Oedipus never see each other again until the murder. When Oedipus later marries his mother Jocasta and becomes king of Thebes, he again has no way of recognizing her.

Do these mitigating circumstances matter? If so, how much? Sophocles does not answer these questions. He leaves them for the audience to ponder. 

That pondering requires empathy, which likely fascinated Adam Smith. Oedipus is as horrified by his fate as everyone else. Would you try to avoid that fate if you were him? Can you blame him or his parents for trying to outrun it? How at fault is Oedipus?

Antigone, which takes place later, follows Oedipus and Jocasta’s daughter Antigone, and her quest for revenge against her uncle Creon, who took over Thebes’ throne. Antigone’s brothers both die in battle at each other’s hands, yet Creon refuses to give a proper burial to one of them, Polynices. 

Antigone does the job herself in defiance of both king and custom. Creon imprisons her for it, and she hangs herself. This sets off a chain of events where Creon loses his wife and son (Antigone’s betrothed.)

Who is in the right, Antigone or Creon? As with Oedipus, it isn’t clear. Both were too stubborn to listen to calmer voices around them. But both were also committed to doing what they thought was right, even at great personal cost. Antigone wanted to do her duty to her family, while Creon wanted to do his duty to the state and to the gods. How much do their good intentions matter? How much does it matter that Creon repents, though too late to change events? 

Tough questions like these are a hallmark of Greek drama, and may have helped Adam Smith come up with the impartial spectator as a moral guide—what would an objective outside observer think of these actions? Or about my actions in real life?

Sophocles’ characters often mean well, but they lack balance and empathy. We can learn from their mistakes and embrace empathy, try on other points of view, and maybe avoid the flaws that took down Oedipus, Creon, and Antigone. 

Nobody is perfect, but everyone can improve. Part of that process is using empathy to see things from other perspectives. The Greek tragedies teach us that morality is not a conclusion. It is a never-ending process, similar to the way Israel Kirzner views markets, or how James Buchanan or Elinor Ostrom view institutions. 

Adam Smith’s impartial spectator is a fantastic tool for working through the moral process. And maybe, just maybe, he was inspired in part by the Greek tragedians and the spark they gave to his sense of empathy.

– Published at AdamSmithWorks, January 2023.

H.L. Mencken as impartial spectator?

Ryan Young

H.L. Mencken is one of the sharpest-tongued satirists America has ever produced. But did he also offer a guide to life? It turns out that Mencken offered his own curmudgeonly version of Adam Smith’s impartial spectator, even if it was hidden beneath mockery and negativity. A recent Liberty Fund Virtual Reading Group explored this question in Mencken’s self-curated collection, A Mencken Chrestomathy.

The impartial spectator is a key concept in Smith’s Theory of Moral Sentiments. It is a way for people to judge their own behavior. If a complete stranger were observing how I treated people, would that person say that I was treating them well? If I were having a disagreement with someone, who would this unbiased stranger side with?

Mencken, in his own way, is also an impartial spectator. He made fun of almost everybody, but his lampooning had a few common themes. These include status-seeking, greed, gullibility, and, above all, being a killjoy. One way to judge your own conduct is to ask yourself, would H.L. Mencken make fun of me for this? If the answer is yes, you might need to make some changes.

Mencken does not provide as wholesome a guide to life as Adam Smith. Some of his jabs were mostly for entertainment purposes. He punched down at opponents who couldn’t fight back. Mencken also shared many of the common prejudices of his day about race and gender; these should not be a part of anyone’s guide to life. But compared to some other figures who have become popular in recent years, especially on the populist right, one could do worse than the Sage of Baltimore.

Like Smith’s impartial spectator, the Mencken mockery test can be a useful check against our own excesses. It can also be a way to make sure we are enjoying life as we should. One of Mencken’s few positive recommendations is that happiness is ok.

Mencken wrote that “There is only one honest impulse at the bottom of Puritanism, and that is the impulse to punish the man with a superior capacity for happiness.” He goes on: “What I admire most in any man is a serene spirit, a steady freedom for moral indignation, and all-embracing tolerance—in brief, what is commonly called good sportsmanship.” That sounds like a version of Aristotle’s Golden Mean.

A less temperate impulse may have animated Mencken’s vocal opposition to Prohibition, but underneath it all was a belief in the right to happy, and the moral duty to put unsportsmanlike busybodies in their place. Not only that, but Prohibition didn’t even work. “The instant they realized what was upon them they applied the national ingenuity and the national talent for corruption to the problem, and in six months it was solved.” Bootleggers, Baptists, and drinkers all reached an uneasy détente.

Mencken also lampooned businessmen who bought and sold politicians as readily as they did their other products. He went after charities when he felt the people running them cared less about doing good and more about donations, social status, and virtue signaling. While Mencken admired great men and great accomplishments, he mocked rent-seekers and social climbers as mediocrities.

When it comes to a guide to a life well lived, Theory of Moral Sentiments has more to offer than does A Mencken Chrestomathy or Happy Days, and the competition is not close. Smith’s impartial spectator theory is a foundational idea in moral philosophy that is also easy to use in everyday life.

But there is value in Mencken, too. A good life needs humor, and Mencken could find a laugh on nearly any subject; this is its own life lesson.

Mencken also gives a guide in pitfalls to avoid. For example, don’t believe everything you read. Some people took as true Mencken’s satirical article on the invention of the bathtub, which then went viral, and led to a fresh round of mocking from Mencken. How many thousands of people failed this impartial spectator test?

One of the few people Mencken admired was Voltaire, the French satirist, philosopher, playwright, and activist, who in some ways was the Enlightenment’s version of Mencken. Voltaire once said that “I have only made but one prayer to God, and it is very short. Dear God, please make my enemies ridiculous. God has granted my wish.”

If your impartial spectator tells you that you are not Voltaire’s enemy, and that you are not acting like a target for one of Mencken’s broadsides, then you’re probably on the right track.

– Published at AdamSmithWorks, October 31, 2023.

Can the invisible hand solve a murder?

Jeremy Lott

Protagonists of detective fiction are drawn from a long list of occupations: police, of course, but also private investigators, aristocrats, housewives, philosophers, priests, precocious children. Economists, however, have not been well represented among the gumshoe set. The Henry Spearman mystery series aims to remedy that market failure. The series is authored by “Marshall Jevons,” a recognized pen name used by Kenneth Elzinga, a professor of economics at the University of Virginia, and the late economist William Breit. The authors chose the pen name as a nod to economists Alfred Marshall and William Stanley Jevons.

The Mystery of the Invisible Hand begins with a tease for what is to come – the anonymous outline of a murder by strangulation – and then with a Nobel Prize presentation in Sweden. Henry Spearman, a professor at Harvard in his early fifties, finally receives top honors for his contributions to the field of economics. That award brings him to the attention of Annelle Cubbage, a moneyed up trustee of Monte Vista University in San Antonio, Texas, who wants a Nobel laureate to help put the school on the map. She is persuaded to give that idea a trial run by bringing in a visiting Nobelist for one semester. Spearman and wife Pidge are in turn persuaded to trade the cold of a Cambridge, Massachusetts winter for a Lone Star lark.

“Many people…claim that one book brought them to an inflection point in their lives,” Spearman says in his first public lecture to students, faculty, and the public as a visiting Nobelist. “I have met people who claim it was for them the Bible.” For this economist, the literary inflection point was The Wealth of Nations. In fact, he could “scarcely sleep for excitement the night after I read Adam Smith for the first time,” because it seemed to have “brought the whole, vast, and seemingly chaotic universe of economic activity to an all-embracing order” with its metaphor of the invisible hand to describe the decentralized coordination of markets that make so many things possible.

Spearman thought Smith’s book had “a quality of the miraculous” and “of genius about it.” Because of The Wealth of Nations, Spearman realized that “economic theory might be equipped to decipher the deepest secrets of human behavior,” up to and including the who, what, and why of murder. Which is fortuitous, because one of his new neighbors, another project that Cubbage is deeply invested in, turns up dead. The death of artist-in-residence Tristan Wheeler appears at first blush to be a suicide, but SAPD Homicide Detective Cherry Fuller suspects foul play.

Because of Wheeler’s constant womanizing, Monte Vista turns out to be a target rich environment for suspects. The mystery that Spearman and Fuller have to untangle is this: Was the artist’s death truly a suicide, a crime of passion, or are deeper market forces at work?

Spearman’s conjectures along the way are exactly the sort of counterintuitive proposals we have come to expect from economists. For instance, an economist once proposed installing spikes protruding from all steering wheels to cut down on tailgating as a way of illustrating how people respond to incentives. Drivers would certainly give more room to fellow motorists if the alternative was to end up like Dracula on a bad day.

Spearman never says anything quite that far over the top, but he does at one point recommend wearing a tie that costs a small fortune to a colleague worried about getting food on it. That way, the economist posits, he will be extra careful about how and what he eats. All told, The Mystery of the Invisible Hand is a decent whodunit with prose to match. Some might complain that the resolution is a little obvious, yet there are many red herrings for the reader to slip up on along the way to the big reveal.

– Published at AdamSmithworks, May 9, 2022.

Sci-fi circle of concern: A review of Children of Ruin by Adrian Tchaikovsky

Ryan Young

The circle of concern is one of Adam Smith’s most important insights into human nature. The general idea is that people care most for those closest to them, and those feelings tail off with social distance.

Imagine a person standing at the center of a circle. People tend to care most about themselves, which is why they are at the center. Those closest to them, such as their children, spouses, and closest friends, are right next to them inside that circle. Grandparents and grandchildren, cousins, colleagues, acquaintances, and second cousins are all progressively farther out. Their exact arrangement varies from person to person, but the general idea holds. The closer to the self, the more the person cares about them.

Once most people get beyond second cousins or so, the circle of concern tends to fade away. The rest of humanity, emotionally speaking, are a bunch of nearly invisible distant objects, a bit like the Kuiper Belt that surrounds our solar system. Most people wish strangers well in a general sense, but without much depth of feeling.

This circle of concern is behind Smith’s most famous quotes, about how a European man of compassion would respond to an earthquake in China, compared to a minor tragedy that affects him directly:

If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own.

Smith disapproved of this fact of human nature. But he also knew that caring less about more distant people is part of who we are as a species. This is why for Smith and many others, expanding people’s circles of concern is an important part of the liberal project. This can lead to more open trade and immigration; more peaceful foreign relations; lower crime rates; and can calm social tensions over race, gender, sexual preferences, nationality, and religion. Animal rights activists even argue for expanding the circle of concern to include other species to varying degrees.

What does all this have to do with a science fiction novel? For Adrian Tchaikovsky’s 2019 book Children of Ruin, the answer is quite lot. I do not know if Tchaikovsky has read Adam Smith, and I know nothing about his political or economic beliefs. About the only thing I do know about him is that I like his books. But intentionally or not, Children of Ruin explores Smith’s circle of concern in great detail, and shows the good that can happen when people expand their circles.

Children of Ruin is the second book in a trilogy, each with a different overarching theme. All three books take place thousands of years in the future on various partially-terraformed planets, after humanity has nearly gone extinct, twice. The first book, 2015’s Children of Time, is evolution-themed. The third book, 2022’s Children of Memory, is about the nature of reality. Children of Ruin, the middle volume, is about different forms of consciousness and empathy—and the circle of concern.

In Children of Time, the first book, a botched attempt at seeding an alien planet with Earth life leads to an advanced civilization of spiders and ants, instead of the intended apes (a literal barrel of monkeys accidentally burns up while entering the atmosphere, in a deft comedic touch). All of these species were enhanced with a nanovirus that speeds up evolution by orders of magnitude, in order to make the planets habitable more quickly.

Over thousands of years, the nanovirus-enhanced spiders build their own civilization and develop spacefaring technology. Around this time, humans on an ark ship which escaped a dying Earth thousands of years before reach the planet and meet the spiders. After a tense battle, the two species become allies, widening their circles of concern to include two very different sentient species.

Where the first volume was evolution-themed, Children of Ruin is about psychology and consciousness. It explores how different species think, feel, and communicate. Doing this takes a great deal of empathy. It as though Tchaikovsky is expanding Adam Smith’s circle of concern as broadly as he possibly can, and seeing what comes of it.

In addition to the humans, there is the uploaded consciousness of Dr. Avrana Kern, one of the original terraformers. She died thousands of years before the ark ship’s arrival, but lives on as an artificial intelligence in her still-orbiting ship’s computer. The AI Kern retains the original’s humorously arrogant personality, but is an imperfect copy of the original that is just a bit off. She is vaguely aware of this, and has complex emotions about it.

Tchaikovsky’s nanovirus-enhanced spiders are called Portiids; the female protagonists of each generation are named Portia. Like real spiders, Portiids are unable to hear human speech. They communicate instead through sensing vibration and touch. Both the spiders and the humans come up with all kinds of translators and ways to understand each other, and though their friendships are sincere, some differences are too vast for them to overcome; some feelings and experiences are unique to certain species and defy communication.

A nice touch is the spiders’ own gender disparity, in which males are discriminated against and discounted as inferior, reversing our own species’ issues. Like us, the spiders have even been making progress in recent generations, with male spiders advancing to prominent scientific research positions, though workplace politics are touchy, and there is still discrimination.

The stars of Children of Ruin are nanovirus-enhanced octopuses, who are the product of another botched terraforming on a planet in a different star system. Tchaikovsky based these on his research on real octopuses (he includes a short bibliography). The nanovirus-enhanced octopuses are curious, impulsive, emotional, factional, and quick to change their minds as their emotions explore different sides of an issue. Their civilization builds its own water-filled spaceships and encounters the human/Kern AI/Portiid spider alliance.

Not being able to use speech like humans or vibrations like spiders, octopuses instead communicate by changing colors. Different feelings are involuntarily expressed in different colorations, which they are unable to hide, making them unable to lie. They almost literally wear their emotions on their sleeves, and their real-time intellectual deliberations are plainly visible. This makes first contact very difficult and not entirely peaceful, even after the different species are able to figure out how to communicate with each other, however awkwardly.

Also putting in a turn is an alien life form with a collective consciousness, something like an intelligent slime mold with a long collective memory. It has the ability to interface with other organisms and assimilate their emotions and memories. Their first encounters with Earth life go horribly wrong, setting the stage for the book’s other major conflict. This species lets Tchaikovsky explore a whole other form of consciousness, one with no known parallels on Earth.

The plot throws all these very different consciousnesses together—human, AI, spider, octopus, and alien collective consciousness—and has them try to sort out who is on whose side, improvise ways to overcome communication barriers, understand what each side wants and how they think, and try to come to some kind of peaceful understanding. The extent to which they succeed requires a circle of concern rather greater than most people on Earth have today.

If Adam Smith were a fan of modern science fiction, he likely would have had good things to say about this book. As it is, it is a fantastic illustration of how Smith’s circle of concern works, and shows how growing it is essential for peace and progress. This is just as true of real life as it is of science fiction.