20 November 2018

Adam Smith: What He Thought and Why It Matters

Jesse Norman
2018, Allen Lane, 400 pages,
ISBN 9780241328491

Reviewer: Bridget Rosewell

Dr Norman is a practicing politician, and indeed currently the Minister for Roads.  Thus a book by him deserves particular attention for its potential implications for our politics and how decisions may be made.  And, indeed, there are such implications, but the book goes wider and has food for thought for any practicing economist.

I think there are two core themes which come out of this book.  One is that it is wrong to separate the thought of the Wealth of Nations from that of the Theory of Moral Sentiments. The other is that commercial society must be distinguished from capitalism and especially crony capitalism, and also from market society.  I find both of these arguments compelling and they emerge in turn from the different parts of the book.  The first half of the book looks at Smith’s life and thought while the second looks at its significance and implications.

In the first half, Norman lays out the route by which Smith’s thought develops.  In our current terminology, moral sentiments are seen as an emergent phenomenon, developing out of human interaction and natural sympathy.  Smith invokes our sense of sympathy for others and our ability to be an ‘impartial spectator’ of our actions to describe how civilized society can emerge and develop and indeed continue to evolve.

This combination of engagement with others and the ability to reflect upon it is the bedrock on which The Wealth of Nations is built.  An instinct to ‘truck, barter and exchange’ may be an element in human interaction, but Smith looks to see how it is or can be harnessed for a wider benefit in the same way that he does for morality.  This of course means that the context in which such exchange happens will be paramount and it is the evolution of this context which harks back to the Theory of Moral Sentiments.  I do remember, when reading the Wealth of Nations, being struck by the breadth of Smith’s examples and the attention to institutional detail.  It’s not just about pin factories and the division of labour but extends, for example, to the situation of curates in the church.

Possibly, it is this breadth and eclecticism that has enabled almost all students of the economy to start with Adam Smith, from neo-liberals to Marxists and everything in between.  Dr Norman draws our attention to Smith’s concerns about poverty, about the alienation of repetitive work, about education, and the inequity of power relations as much as to concerns about what we might mean by ‘free’ trade.  All of the first half is a reminder that reading the original should be a requirement – much as one should actually read Keynes’s General Theory, rather than just relying on what ‘Keynesians’ say it says!

The second half of the book finishes with a section on capitalism and its discontents.  This in turn builds on a view of Smith’s economics as seeing markets as a social construct.  Indeed, Smith also wrote about jurisprudence which too is a social construct buttressing –  or not – systems of exchange and production.  Forget about the Efficient Market Hypothesis or Rational Economic Man.  This is very salutary, as both of these concepts have been used to undermine ethical behaviour and long term considerations.  EMH has produced trading volumes which generate more commission charges, but less appropriate market exploration, while a narrow reading of rationality has undermined the role of human interaction and sympathy in decision making which has only recently come back into focus with behavioural and institutional economics.

Human interaction is of course both positive and negative and one of the strongest conclusions that Norman reaches is that there is an important distinction between commercial society, with strong balances of power, individual autonomy and ability to choose, and capitalism dominated by large corporations, and imbalances of power both within society and between states.  Worse still is crony capitalism where states and corporations conspire to buttress each other’s interests while convincing themselves this is in the interests of all.

It’s easy to see here a link to our current concern with so-called ‘populism’ which appears to be a term for political opinions held by those who are not members of the elite.  Capitalism that appears to be for benefit of the few not the many is not surprisingly under attack.  Norman sees the risk that large tech companies will increase the tendency to crony capitalism and further distance ordinary people from power and autonomy.

He doesn’t have a clear answer to this risk.  Economists, who have however unwittingly produced interpretations of Smith which have supported an interpretation of capitalism which has undermined public trust, have a duty to provide one.