What we all assume about Adam Smith’s seminal contributions to economics is wrong. The Wealth of Nations was a “very violent attack … upon the whole commercial system of Great Britain.” That system was the mercantile system. A handful of merchants controlled all business endeavors in Great Britain in the late 18th century when Smith was writing. There was great concentration of power in each sector, much like there is today. Sagar writes in this piece for Aeon, “According to Smith, the most pressing dangers came not from the state acting alone, but the state when captured by merchant elites.”
That passage about the “invisible hand” that we hear touted by neoliberalists? Sagar writes, “in the passage of The Wealth of Nations where he invoked the idea of the invisible hand, the immediate context was not simply that of state intervention in general, but of state intervention undertaken at the behest of merchant elites who were furthering their own interests at the expense of the public.” He continues:
It is an irony of history that Smith’s most famous idea is now usually invoked as a defence of unregulated markets in the face of state interference, so as to protect the interests of private capitalists. For this is roughly the opposite of Smith’s original intention, which was to advocate for restrictions on what groups of merchants could do. When he argued that markets worked remarkably efficiently – because, although each individual ‘intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention’ – this was an appeal to free individuals from the constraints imposed upon them by the monopolies that the merchants had established, and were using state power to uphold. The invisible hand was originally invoked not to draw attention to the problem of state intervention, but of state capture.
How did Smith feel about regulation? He thought it was absolutely necessary:
The true ‘science of a statesman or legislator’ consisted in deciding how best to govern the merchants’ nefarious activities. Effective politicians had to strike a balance between granting economic elites the liberty to pursue legitimate commercial activities, while also applying control when such activities became vehicles for exploitation.
Sagar shrewdly warns the reader to beg off any idea that Smith was sympathetic to socialist or communist ideas. He was not. But, he was not a Reagan/Thatcher neoliberal either. No preconceived plan – no theories for structuring economies, whether well-regulated or completely unregulated – could work. Sagar clarifies:
What Smith is saying is that in politics any preconceived plan – especially one that assumes that the millions of individuals composing a society will just automatically go along with it – is potentially dangerous. This is because the ‘spirit of system’ infects politicians with a messianic moral certainty that their reforms are so necessary and justified that almost any price is worth paying to achieve them. … Thatcher’s violent restructuring of the British economy during the 1980s was as much a product of the ‘spirit of system’ as any piece of top-down Soviet industrial strategy.
In short, Smith believed that politicians must spend their time limiting the exploitation of the masses by economic elites, and leave any notion of knowing how best to structure the economy at home.