Friday, May 7, 2010

Adam Smith and the Founders

by Ben Abbott
Guest Blogger

On occasion, commenters have asked to what degree the Founders were influenced by the Scotsman Adam Smith, the moral philosopher and father of modern economics. In 2004, David Prindle authored an essay on Smith's influence on James Madison, colorfully titled The Invisible Hand of James Madison. From the abstract:

"Scholars have disagreed about how to interpret James Madison's Federalist essays 10 and 51, in which he explains and justifies the underlying principles of the new Constitution. Was Madison the architect of a structure of counterpoise, which would force individuals, interests, and institutions to obstruct one another so as to avoid tyranny, or was he a republican statesman, designing a system that would recruit virtuous citizens to public office."

Prindle dismisses the dichotomy "Was Madison arguing that the Constitutional system designed to thwart bad people, or to recruit good ones?," and asserts that Madison likely intended both. Prindle's Madison encompasses both republican virtue and restraint of tyranny. To substantiate his position, Prindle examines Adam Smith's mixed motives in writing The Wealth of Nations:
"[Smith] wanted to combat the prejudice, derived from the natural law tradition, that individual interests were necessarily anti-social, and therefore furnished an excuse for government economic regulation [...] Smith wanted to show that there was a way that economies could be designed so that nations could become richer [...] he wished to demonstrate that an economy was not necessarily a zero-sum game, but could be structured so as to grow at a rate considerably faster than population increase. Morally, he wanted to refute the notion that self-seeking must always be contrary to the public interest. To help him accomplish these twin goals, he invented modern economic reasoning."

Smith summarized his idea as
"As every individual [...] by directing that industry in such a manner as its produce may be of greatest value, intends only his own gain, 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...By pursuing his own interest he frequently promotes that of society more effectively than when he really intends to promote it."

Above, Smith is not saying that the participants in free enterprise have virtuous intents, but that their actions become virtuous due to market forces. Similarly, in Federalist 51, Madison argues "Ambition must be made to counteract ambition," because when it does, government officials must compete in a contest of virtue. Even if their intentions are not virtuous, their actions become virtuous due to competition.

Thus, there are strong parallels in Smith's approach to commerce and that of Madison's approach to politics. Given Madison's familiarity with Smith's work, it is likely that Madison's perspective was influenced by the Scotsman.

Prindle's essay is reasonably short, but more thorough than what has been posted above. It is a worthy read.


Tom Van Dyke said...

Thx for the piece, Mr. Abbott. Adam Smith's arrival here at American Creation has been long overdue.

I'm curious about Prindle's intimation that Adam Smith's dynamic of the creation of wealth is somehow at odds with natural law. Perhaps he explains elsewhere, but this doesn't jibe with my understanding of natural law, not with the medieval granddaddy of natural law, Thomas Aquinas', nor his mentor Albertus Magnus'.

From a review of Rodney Stark's

"The Victory of Reason":

Christian theology, which Mr. Stark praises as constantly evolving, kept pace with economic developments. Thinkers like Augustine and Thomas Aquinas gave their sanction to private property, profit and interest. In the 13th century, Albertus Magnus wrote that a just price was simply what “goods are worth according to the estimation of the market at the time of sale.”

Aquinas imagined the case of a grain merchant arriving in a country beset by famine, who knows that a convoy of other grain merchants will shortly arrive. Is he morally obliged to reveal that fact, and thereby put downward pressure on the price of his own grain? In a conclusion worthy of Adam Smith, Aquinas decided that he was not.

Huh. Some economists today still haven't caught up with Albertus Magnus [c.1208-1280], that the "fair" price is what somebody's willing to pay.

bpabbott said...

I've had some correspondence with Gavin Kennedy on the topic of Adam Smith and the founding. Prof. Kennedy had little comment on the founding, but his comments on Adam Smith provides some good context for the times.

bpabbott said...

Re: "the "fair" price is what somebody's willing to pay."

This is what Adam Smith often referred to as the Invisible Hand.

My understanding is that some viewed the metaphor as "the hand of God" and others viewed the hand as some providenc of truth or optimal value. I think each of these position miss the point.