Adam Smith and Economic Progress

Abstract

In “Introduction and Plan of the Work” of the Wealth of Nations, Smith (1776) points out that a nation’s annual supply of “necessaries and conveniences” of life is regulated by two factors: “first by the skill, dexterity, and judgment with which its labour is applied; and, secondly, by the proportion between the number of those who are employed in useful labour, and those who are not so employed” (ibid., I, p. 1).

In “Introduction and Plan of the Work” of the Wealth of Nations, Smith (1776) points out that a nation’s annual supply of “necessaries and conveniences” of life is regulated by two factors: “first by the skill, dexterity, and judgment with which its labour is applied; and, secondly, by the proportion between the number of those who are employed in useful labour, and those who are not so employed” (ibid., I, p. 1). Further: “The abundance or scantiness of this supply too seems to depend more upon the former of those two circumstances than upon the latter” (ibid., I, pp. 1–2). A nation of hunters, where almost everyone is employed in useful labour, still suffers from want, disease, and poverty. In the civilized nation, on the contrary, a great number of people do not labour at all, yet it is abundantly supplied with all the conveniences and necessaries of life, so much so that even the poorest worker is able to enjoy a standard of life higher than a savage king.

Thus Smith places the theme of the division of labour right upfront in his book. His main concern, as the title of his book rightly suggests, is with the “wealth of nations” and economic progress rather than with the equilibrium notions of value and distribution. Yet, some influential authors such as Marshall (1890), Robbins (1932), Stigler (1976), Buchanan and Yoon (2000), Arrow and Hahn (1971), and Hahn (1981), to name a few, have argued that Smith’s chief concern in the Wealth of Nations is his equilibrium theory (or value and distribution). It is true that Smith has been subjected to varying interpretations over the years depending on the nature of the prevailing paradigm as well as the mood of the times. The problem also arises because the Wealth of Nations contains a wealth of ideas and doctrines, and successive generations have been able to find something in it which supports their own theories (Viner 1927).

This chapter takes the position that Smith’s main contribution in the Wealth of Nations has to be understood in terms of his growth theory. It is true that Smith made many pronouncements which may resemble equilibrium economics in some loose sense. For example, he stated that the market price of a commodity has a tendency to gravitate towards its natural price in the long run. To take another example, the rate of profit tends towards equality in different employments. But Smith talked of them as tendencies and not as definite end results.¹ Smith’s analysis of the division of labour, his analysis of the motive power of self-interest, the role of saving, investment and capital accumulation in growth, institutions best suited to promote growth, and his evolutionary perspective, all point to the fact that he was attempting a dynamic rather than a static analysis. We, therefore, start with Smith’s growth theory in terms of these dynamic elements.²

Division of Labour

The division of labour is central to Smith’s explanation of growth. Smith stated that the division of labour arises in the process of exchange and therefore becomes limited by the power which gives rise to it. In other words, the division of labour is limited by the size of the market. Exchange, in turn, arises because of the propensity in human beings to truck, barter, and exchange, which is found in humans and not in animals. The full potential of the division of labour can be realized in an exchange economy. In a rude state of society or in a society of hunters, since the total exchange is quite limited, the division of labour also becomes circumscribed. On the other hand, in a commercial society in which Smith lived, the total exchange is quite large, so the division of labour is also extensive. The larger the market, the larger is the division of labour.

By division of labour, Smith largely meant specialization of jobs within a firm or the development of various arts and crafts in an economy as and when the opportunities for doing so arise. To explain the process, Smith gave an example of a pin factory. If each man performs all the tasks of pin-making, the total output as well as output per man (or productivity) would be limited. On the other hand, if each man specializes in a particular task, there is a dramatic increase in both total output as well as productivity.

For Smith the division of labour was not limited to manufacturing establishments (i.e., factories). There was a broader process of the social division of labour at work. For example, to manufacture even a simple product such as a woollen coat, a large number of arts and crafts had to join hands. “The shepherd, the sorter of the wool, the wool-comber or the carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production” (Smith 1776, I, p. 15). The development of these arts and crafts again depends on the market size (or the total exchange nexus).

Smith gives another example to illustrate his point. In the vicinity of a big city while many trades thrive, in remote countryside it is difficult to find any for miles. As Smith says: “In the lone houses and very small villages which are scattered about in so desert a country as the Highlands of Scotland, every farmer must be butcher, baker and brewer for his own family. In such situations we can scarce expect to find even a smith, a carpenter, or a mason, within less than twenty miles of another of the same trade” (ibid., I, p. 21).

Smith wanted man to live with dignity and make a living by working with his own hands. This can only happen if each man specializes in some trade and exchanges his surplus produce with the surplus produce of others. “Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend on it entirely” (ibid., p. 18). So, self-interest is ultimately about self-respect and dignity. To live a dignified life, man has no alternative but to pursue the path of self-interest at least in his market dealings: “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” (ibid., I, p. 18).³

The increase in the productivity arising from the division of labour, as Smith points out, is due to three circumstances: “first to the increase of dexterity in every particular workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and lastly, to the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many” (ibid., I, p. 11).⁴

Smith states that most improvements in machinery are inventions of workmen who had the occasion to use them. Each one involved in some simple operation turned his thoughts to find out easier and simpler ways of doing it. Smith then gives the example of a boy who brought about the greatest improvement in a machine because he wanted to divert himself to play with other companions. He had been employed to open and shut alternatively the communication between the boiler and the cylinder. He discovered that this could easily be done by tying a string between the valve and another part of the machine. Thus a great invention came about because of a boy who wanted to save his own labour.

Not all improvements are made by workmen. Some are made by men of philosophy and speculation:

Many improvements have been made by the ingenuity of the makers of machines, when to make them became the business of a peculiar trade; and some by those who are called philosophers or men of speculation, whose trade it is not to do any thing, but to observe every thing; and who, upon that account, are often capable of combining together the powers of the most distant and dissimilar objects. In the progress of society, philosophy and speculation becomes, like every other employment, the principal or the sole trade and occupation of a particular class of citizens. (ibid., I, p. 14)

Smith stated that as the size of the market expands, different trades get subdivided, for example, different types of smiths or carpenters come into being. Likewise, speculation and philosophy also get subdivided which, in turn, improves dexterity and saves time. “Each individual becomes more expert in his own peculiar branch, more work is done on the whole, and the quantity of science is considerably increased by it” (ibid., I, p. 14).

In Smith’s wages-fund theory, greater stock leads to higher employment. Greater employment, in turn, promotes the division of labour in two ways: first, by greater subdivision and distribution of tasks, and second, by encouraging the invention of better machinery. As Smith (ibid., I, pp. 96–97) says:

The owner of the stock which employs a great number of labourers, necessarily endeavours, for his own advantage, to make such a proper division and distribution of employment, that they may be enabled to produce the greatest quantity of work possible. For the same reason, he endeavours to supply them with the best machinery which either he or they can think of. What takes place among the labourers in a particular workhouse, takes place, for the same reason, among those of a great society. The greater their number, the more they naturally divide themselves into different classes and subdivisions of employment. More heads are occupied in inventing the most proper machinery for executing the work of each, and it is, therefore, more likely to be invented.

Smith was of the view that the division of labour is better carried out in manufacturing than in agriculture. As he (ibid., I, pp. 7–8) explains:

The nature of agriculture, indeed, does not admit of so many subdivisions of labour, nor of so complete a separation of one business from another, as manufactures. It is impossible to separate so entirely, the business of the grazier from that of the corn-farmer, as the trade of carpenter is commonly separated from that of the smith. The spinner is almost always a distinct person from the weaver; but the ploughman, the harrower, the sower of the seed, and the reaper of the corn, are often the same. The occasions for those different sorts of labour returning with the different seasons of the year, it is impossible that one man should constantly be employed in any one of them.

Smith stated that the impossibility of separating different kinds of labour in agriculture was responsible for it lagging behind in productivity in comparison with manufacturing. He also observed that most opulent nations excelled their neighbours in agriculture as well as manufacturing but their superiority in the latter was more than in the former. Comparing England with France and Poland, Smith further observed that there was not much variation in the price of corn (of the same quality) in the three countries. But manufactured goods like hardware and coarse woollens were cheaper and better in England than in France. In Poland there were hardly any manufactures of any kind except coarser household manufactures.

Smith’s theory of international trade is also based on the concept of the division of labour.⁵ International trade widens the market available to a nation and promotes the division of labour. It gives vent to surplus produce of a country and enables a country’s superfluities to be exchanged for something valuable. The principal benefit of foreign trade is not gold and silver but the enhancement of the productive powers of a country through the process of the division of labour. A country produces those products in which its absolute costs are the lowest and exchanges its surplus produce with the surplus produce of other countries.⁶ International trade is not only good for the consumer in terms of lower price and better quality of products, but also good for the country in terms of the most productive deployment of its capital. Any country which regulates its trade through tariffs and other import restrictions misdirects its capital from more productive employments to less. Thus in Smith, international trade and domestic growth can be viewed as two sides of the same coin as both are based on the concept of the division of labour. As Hla Myint (1977, p. 231) observes: “Smith’s theory of foreign trade is so closely intervowen with his theory of domestic economic development that the two have to be considered together”.

Capital Accumulation

The role of self-interest is central in the Smithian marketplace. Self-interest, which prompts an individual to specialize in a trade and exchange his surplus produce with those of others, also prompts him to save. Man has an inborn desire to save to better his condition.⁷ So self-interest in Smith takes the form of bettering one’s condition rather than some hedonistic (or utilitarian) principle such as utility maximization or profit maximization. Moreover, man does not pursue his self-interest in a single-minded way; it is confined to only those aspects of his behaviour which involve market exchange.⁸ Smith (1776, I, pp. 62–63) writes:

[T]he principle which prompts to save, is the desire for bettering our condition, a desire which, though calm and dispassionate, comes with us from the womb, and never leaves us till we go into the grave. In the whole interval which separates those two moments, there is scarce perhaps a single instant in which any man is so perfectly satisfied with his situation, as to be without any wish of alteration or improvement of any kind. An augmentation of fortune is the means by which the greater part of men propose and wish to better their condition. It is the means the most vulgar and the most obvious; and the most likely way of augmenting their fortune, is to save and accumulate some part of what they acquire, either regularly and annually, or upon some extraordinary occasions.

This leads us to the theory of capital accumulation, for “Capitals are increased by parsimony, and diminished by prodigality and misconduct” (ibid., I, p. 358). Smith stated that it is parsimony, and not industry, which is the immediate cause of the increase in capital. “Industry, indeed, provides the subject which parsimony accumulates. But whatever industry might acquire, if parsimony did not save and store up, the capital would never be the greater” (ibid., I, p. 359).

Smith maintained that what is annually saved is as regularly consumed as what is annually spent. This happens nearly in the same time but by different sets of people. A rich man may spend his revenue on menial servants or idle guests leaving nothing behind in return for their consumption. A frugal man, on the other hand, uses his saving to employ not only productive hands for the current year, but as an owner of a public workhouse, establishes a perpetual fund to employ them in all future years. Therefore, “every prodigal appears to be a public enemy, and every frugal man a public benefactor” (ibid., I, p. 62).

In Smith, capital accumulation serves two purposes: it helps employ more productive labourers, and it helps equip them with better machines and instruments. In both cases, it promotes the division of labour. Smith also draws a strong association between total capital and total produce of a country. Over two periods of time, if the total produce of a country has increased we can be sure that its capital has also increased. Smith further states that “the accumulation of stock must, in the nature of things, be previous to the division of labour” (ibid., I, p. 291). But this does not imply that capital accumulation is an independent engine of growth. Capital is important because of its link with the division of labour. Since the division of labour is limited by the size of the market, the use of capital in production also becomes limited. Moreover, Smith did not say that saving and investment rates should be increased through government interference or by subverting the market.

Smith also made a distinction between productive and unproductive labour. He stated: “There is one sort of labour which adds the value of the subject upon which it is bestowed: there is another which has no such effect. The former which produces a value, may be called productive; the latter, unproductive labour” (ibid., I, p. 351).⁹ The labour employed in manufacturing or agriculture adds value to the materials which are worked upon, and therefore can be regarded as productive; the labour of a menial servant, on the other hand, adds nothing to value, nor does it produce any vendible commodity, and is therefore unproductive. The services of a menial servant generally perish in the very act of their performance, and nothing of value is left behind.

That part of the total produce which replaces capital employs only productive hands. Part of the produce which constitutes rent and profit is called revenue, and unproductive hands (or those who do not labour at all) are maintained by this fund. In rich countries there is a greater proportion of funds for replacing capital; in poor countries a greater proportion consists of revenue. It is this proportion which determines the character of its people in terms of industry or idleness. Smith writes: “The proportion between capital and revenue, therefore, seems every-where to regulate the proportion between industry and idleness. Wherever capital predominates, industry prevails; wherever revenue, idleness. Every increase or diminution of capital, therefore naturally tends to increase or diminish the real quantity of industry, the number of productive hands, and consequently the exchangeable value of the annual produce of the land and labour of the country, the real wealth and revenue of all its inhabitants” (ibid., I, p. 358).

Smith observed that generally the misconduct of some private individuals was more than counterbalanced by the good conduct of others, particularly in a society where the annual produce has grown over time. While the principle of private frugality generally predominated, the same could not be said for public frugality. “Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct” (ibid., I, p. 363). Smith regarded sovereigns as unproductive spenders par excellence, who maintained splendid courts, great ecclesiastical establishments, and great fleets and armies, and advised them to look after their own economy rather than watching over the economy of the private people. While the frugality and good conduct of private people had taken England to opulence and improvement, the conduct of the rulers had the potential to ruin the countries they ruled:

England, however, as it has never been blessed with a very parsimonious government, so parsimony has at no time been the characteristical virtue of its inhabitants. It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of the private people, and to restrain their expence, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in society. Let them look well after their own expence, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will”. (ibid., I, p. 367)

Smith also stated that if left free to find its own natural employments, a society’s capital augments faster than when the government intervenes. The total industry of a country can never be out of proportion to its total capital, so any artificial direction to economic activity through regulations of commerce will make things worse. As Smith (ibid., I, p. 479) writes:

The industry of a society can augment only in proportion as its capital augments, and its capital can augment only in proportion to what can be gradually saved out of its revenue. But the immediate effect of every such regulation is to diminish its revenue, and what diminishes its revenue is certainly not very likely to augment its capital faster than it would have augmented of its own accord, had both capital and industry been left to find out their natural employments.

Finally, self-interest, which prompts man to better his condition, to save and accumulate, also leads to the promotion of public welfare. Through specialization and exchange man is able to consume a great variety of goods which otherwise he will not be able to consume. In other words, the pursuit of self-interest leads to social cooperation through specialization and market exchange. The pursuit of self-interest also ensures growth, and brings prosperity and wealth to the society as a whole. “The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations…” (ibid., II, p. 49–50).

But Smith did not favour unbridled pursuit of self-interest. He thought that businessmen suffered from monopoly spirit and therefore should be made to compete with each other. Domestic monopolies could be checked not only by more internal competition but also by subjecting them to international competition. He also thought that given a chance businessmen always conspired to subvert the public interest by raising prices.¹⁰ So any proposal coming from this class should be examined with the greatest scepticism before being adopted as this class was too aware of its own interest.¹¹ While in the Wealth of Nations self-interest of man is kept in check by competition, in the Theory of Moral Sentiments, it is kept in check by the opposed motive of sympathy.

Institutional Arrangements

Smith devoted much energy and space in the Wealth of Nations for anlaysing and evaluating various systems of political economy from the point of view of growth.¹² According to Smith, institutional arrangements have to ensure two things. First, they have to provide liberty to each individual to pursue his own interest in his own way subject only to the laws of justice. Second, they have to provide a secure climate for the accumulation of private property. Once these are provided then the natural effort of each individual to better his condition is capable of taking not only him but the whole society to wealth and riches. Smith’s conclusion was that the system of natural liberty, which ensured both liberty as well as security, was the best for growth.

The total industry of a country can never be out of proportion to its total capital. Thus, Smith (ibid., II, p. 208) argued that all systems based on preferences or restraints retarded the progress of society. “[E]very system which endeavours, either, by extraordinary encouragements, to draw towards a particular species of industry a greater share of the capital of the society than that would naturally go it; or, by extraordinary restraints, to force from a particular species of industry some share of the capital which would otherwise be employed in it; is in reality subversive of the great purpose which it means to promote. It retards, instead of accelerating, the progress of society towards real wealth and greatness; and diminishes, instead of increasing, the real value of the annual produce of its labour”.

Smith regarded the system of slave labour to be very expensive. Ancient Greece and Rome, while emphasizing agriculture, tended to discourage manufactures and foreign trade. Employments of artificers and manufacturers were considered to make the human body unsuitable for rigours of war. Such occupations were considered fit only for slaves, who worked there for the benefit of their masters. The wealth, power, and protection of the rich made it almost impossible for the poor ranks of society to offer their labour as freemen while competing with the slaves of the rich. The slaves, apart from being expensive, also tended to be uninventive:

Slaves, however, are very seldom inventive; and all the most important improvements, either in machinery, or in the arrangement and distribution of work, which facilitate and abridge labour, have been the discoveries of freemen. Should a slave propose any improvement of this kind, his master would be very apt to consider the proposal as the suggestion of laziness, and of a desire to save his own labour at the master’s expence. The poor slave, instead of reward, would probably meet with much abuse, perhaps with some punishment. In the manufactures carried on by slaves, therefore, more labour must generally have been employed to execute the same quantity of work, than in those carried on by freemen. The work of the former must, upon that account, generally have been dearer than that of the latter. (ibid., II, p. 205)¹³

Finer products such as silk, which were generally very expensive in European countries such as Greece and Rome, were brought in from distant lands such as the East Indies. Fine linen was a European product but still tended to be extravagant because of the costly slave labour used. The same was the case for fine woollens, although the price was not as extravagant as linen. Comparing the use of slave labour in Turkish mines with free labour in Hungarian mines, Smith remarked that while the Hungarian mines made use of machinery to facilitate and abridge labour, Turkish mines only relied on the manual work of their slaves to work their mines.

In analysing the agricultural systems, Smith points out that the trade between the country and the townsmen consists of rude produce in exchange for manufactured produce. Whatever raises the price of manufactured produce tends to lower that of rude produce of land. This tends to discourage agriculture as it is sought to be promoted by restraining manufactures and foreign trade. Such systems, although meaning to promote agriculture, end up turning the internal terms of trade against agriculture. As Smith (ibid., II, pp. 207–8) writes:

Those systems, therefore, which preferring agriculture to all other employments, in order to promote it, impose restraints upon manufactures and foreign trade, act contrary to the very end which they propose, and indirectly discourage the very species of industry which they mean to promote. They are so far, perhaps, more inconsistent than even the mercantile system. That system, by encouraging manufactures and foreign trade more than agriculture, turns a certain portion of the capital of society from supporting a more advantageous, to support a less advantageous species of industry. But still it really in the end encourages that species of industry which it means to promote. Those agricultural systems, on the contrary, really and in the end discourage their own favourite species of industry.

This brings us to the so-called mercantile system. Smith stated that the two principles of the mercantile system were: (1) wealth consisted of precious metals like gold and silver, and (2) the stock of precious metals could be enlarged through exporting more value than importing (ibid., I, p. 472).¹⁴ Thus, the two engines of enriching a country were putting restraints on imports and giving encouragements to exports. The export of precious metals was discouraged as it amounted to drain of wealth. At the same time, consumption of luxuries was generally discouraged as they were thought to be largely imported. In the foreign trade sector, trading companies were granted monopolies and exclusive rights to trade in colonies. This system was based on a network of restrictions, patronage, and favouritism which was debilitating to growth.

In this system the interest of the producer predominated that of the consumer. The system considered production, and not consumption, as the ultimate objective:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end of all industry and commerce.

In the restraints upon the importation of all foreign commodities which can come into competition with those of our own growth, or manufacture, the interest of the home-consumer is evidently sacrificed to that of the producer. It is altogether for the benefit of the latter, that the former is obliged to pay that enhancement of price which this monopoly almost always occasions.

It is altogether to the benefit of the producer that bounties are granted upon the exportation of some of his productions. The home consumer is obliged to pay, first, the tax which is necessary for paying the bounty, and secondly, a still greater tax which necessarily arises from the enhancement of the price of the commodity in the home market. (ibid., II, p. 179)

Smith pointed out that the principal benefit of foreign trade was not the importation of gold and silver. A country without gold and silver mines is justified in importing them through foreign commerce but it constitutes an insignificant part. Two distinct benefits of foreign trade were (1) it enables the surplus produce of a country to be exchanged for something more valuable, i.e., gives value to its superfluities, and (2) by overcoming the narrowness of the domestic market it promotes the division of labour to the highest perfection (ibid., I, p. 469). It was not by cheapening of gold and silver that the discovery of America had enriched Europe but by opening up a new market which improved the productive powers of labour.

Smith, as we noted before, stated that the general industry of a country can never be out of proportion to its total capital (ibid., I, p. 475). Therefore any regulation of commerce is likely to divert a country’s capital from more advantageous employments to less. As Smith (ibid., I, p. 475) points out: “No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can only divert a part of it into a direction into which it might not otherwise have gone; and it is by no means certain that this artificial direction is likely to be more advantageous to the society than that into which it would have gone of its own accord”.

Further, each individual is the best judge of his own interest and therefore should be left free to pursue it. “Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society” (ibid., I, p. 475). This happens in two ways: first, he employs his capital as nearer home as possible so that it is constantly under his own “view and command”. Secondly, an individual aims to produce the greatest possible value. In so doing the individual is led by an “invisible hand” to unintentionally promote the society’s advantage. Further, the society is not worse off due to the lack of public mindedness of the self-seeking individuals. “I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it” (ibid., I, p. 478).

After analysing various systems of political economy based on restraints and preferences, Smith came to the conclusion that such systems retarded, instead of accelerating, the progress of society towards real wealth and greatness, and diminished, instead of increasing, the real value of its annual produce (ibid., II, p. 208). The “simple” system of natural liberty is the best from the point of view of growth. It naturally establishes itself on its own accord once all restraints and preferences are removed. Every man, provided he does not violate the laws of justice, is “perfectly free to pursue his own interest his own way” and bring his capital in competition with anyone else. The sovereign is completely discharged from the duty of superintending the industry of private people for the performance of which no human wisdom or knowledge can suffice. Outlining the role of the government in such a system Smith (ibid., II, pp. 208–9) writes:

According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from injustice or oppression of every other member of it, or the duty of establishing the exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.

As the society evolves, accumulation of private property takes place, and the need to defend that property arises. In the society of hunters, there is hardly any private property, or at least none exceeding two or three days’ labour, so there is no need felt for a civil magistrate or regular administration of justice. It is in the age of shepherds, when the inequality of fortune first begins to take place, a need arises for a civil government. “Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all” (ibid., II, p. 236).

The accumulation of private property reaches its culmination in the system of natural liberty, but a great inequality arises. “Wherever there is great property, there is great inequality. For one very rich man, there must be at least five hundred poor, and the affluence of the few supposes indigence of the many… It is only under the shelter of the civil magistrate that the owner of that valuable property, which is acquired by the labour of many years, or perhaps of many successive generations, can sleep a single night in security” (ibid., II, p. 231). The importance of security is clear from the fact that Smith regarded this, and not the bounty on corn, as the chief cause of Britain’s prosperity. On the other hand, Spain and Portugal’s relative poverty is accounted for by the fact that “Industry is there neither free nor secure” (ibid., II, pp. 49–50).

Despite the inequalities inherent in the system of natural liberty, Smith preferred this to any other system. First, it was the best from the point of view of growth. Second, the condition of the labouring poor is the best in a growing society where the real wages tend to rise. Third, this system ensured that even an ordinary worker enjoyed a standard of living higher than an African king.¹⁵ Finally, although rents rose and profits fell with the progress of society, the stationary state was far away and profits were still positive. So Smith was optimistic that the system would promote “harmony of interests” instead of class conflict.

Theory of Evolution

The concept of equilibrium in Smith, although he did not use the term, is posed as a tendency and not as a definite end result. For example, Smith postulated that the market price of a commodity has a tendency to gravitate towards its natural price. He regarded the natural price as a “centre of repose” or the “central price” towards which all actual prices are tending.¹⁶ Smith (1776, I, p. 65) wrote:

The natural price…is, as it were, the central price, to which all commodities are continually gravitating. Different accidents may sometimes keep them suspended a good deal above it, and sometimes force them somewhat below it. But whatever may be the obstacles which hinder them from settling in this center of repose and continuance, they are constantly tending towards it.

But the centre of gravity of an economic system has a tendency to shift in the long run.¹⁷ Because of the productivity gains arising from the division of labour, the natural price of a commodity tends to fall. So an economic system can be seen as continuously adjusting to its shifting centre of gravity. Allyn Young (1928) used the term “moving equilibrium” to describe this phenomenon of endogenous change. In an evolutionary system endogenous change propels a system forward to its shifting centre of gravity, but the equilibrium outcome in a static sense is elusive.¹⁸

Smith had a process view of competition rather than a static view.¹⁹ He viewed competition as a race in which the rules of the game and their enforcement cannot be left to the participants. A referee is required which can conduct the race in a free and fair manner. In the Theory of Moral Sentiments, he noted: “In a race for wealth, honours and preferments, [each participant] may run as hard as he can, and strain every nerve and muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit of” (Smith 1759, p. 83).²⁰

Young, who built on Smith, interpreted him as a champion of competition rather than a champion of laissez faire. But competition which produces a tendency towards “equilibrium”, also brings about endogenous change. Now whether competition leads to equilibrium or cumulative change depends on the relative strength of both forces. Young stated that countertendencies are so powerful that an economic system is dominated by disequilibrium rather than equilibrium. Thus, change becomes progressive and propagates itself in a cumulative way.

Smith had an evolutionary perspective to society and viewed the system in a state of continuous dynamic motion. Unlike Marx, Smith thought that the system contained the seeds of its own growth. That is, growth is possible endogenously, by the very forces engendered within the system. For this to happen the system of natural liberty is the best where each individual unintentionally promotes public interest by pursuing his own interest through specialization and exchange. He was aware that with economic progress, the rate of profit has a tendency to fall, and a stationary state, where all growth and accumulation comes to a halt, was a possibility.²¹ But for him a stationary state was far away as no European country, till Smith’s time, had acquired its full complement of riches in accordance with its potential. The only exception was China, which had long become stationary before reaching its full potential, because its laws and institutions despised foreign commerce.²²

Again unlike Marx, Smith was aware that with economic progress, the share of profits declines and that of rents increases. So social conflict was a possibility, but he was not interested in developing a theory of class conflict or class struggle. He was confident that harmony of interests would prevail rather than any sharp social conflict. He was also confident that economic progress will benefit all classes. He was sympathetic to the cause of the poor and stated that real wages have a tendency to rise during periods of prosperity.²³ He also advocated education to the working classes to overcome the ill effects of the division of labour (or of repetitive tasks). He favoured publicly funded public health measures to eradicate offensive diseases like leprosy. He also advocated military training to inculcate martial spirit among the labouring classes. In his system of natural liberty owners of small as well as large capitals receive equal protection, and the system does not discriminate against small businesses.

In Smith the development process has been described in terms of different stages. There are elements of continuity from one stage to another but each stage also has its own distinct features. Change from one stage to another is both quantitative as well as qualitative. These different stages are hunting, pasturage, farming, and commercial society. Since the concept of private property first arises in the age of shepherds, so a civil government to protect private property is then needed. According to Raphael (1985), this historical picture is needed to explain the evolution of law and government.

The forward motion in an evolving society is given by the division of labour. As Richardson (1975, pp. 351–52) observes, it results from the fact that the division of labour has a two-way relationship with economic progress:

Perpetual motion results from the fact the division of labour is at once a cause and an effect of economic progress. In Chapter I [of the Wealth of Nations] we are told how the division of labour increases wealth and in Chapter III how a widening of the market, which increased wealth would bring about, enables the division of labour to be carried further forward… [W]hat we have here are the essentials of a theory of self sustaining growth, essentials that were to be more fully developed much later in Allyn Young’s justly celebrated article entitled ‘Increasing Returns and Economic Progress’.

Critical Assessment

We noted that Smith has been subjected to different interpretations. In this context four questions are briefly examined: (1) Was Smith an equilibrium theorist? (2) What is the relative role of capital accumulation vis-à-vis the division of labour in explaining growth? (3) Was he a laissez faire economist? (4) Does the motive of self-interest as portrayed in the Wealth of Nations conflict with the motive of sympathy in the Theory of Moral Sentiments?

Was Smith an Equilibrium Theorist?

Marshall (1890, p. 758) opined that Smith’s main contribution was his value theory. “His highest claim to have made an epoch in thought is that he was the first to make a careful and scientific inquiry into the manner in which value measures human motive, on the one side measuring the desire of purchasers to obtain wealth, and on the other the efforts and sacrifices (or ‘Real Cost of Production’) undergone by its producers” (ibid., 758–59). Moreover: “[T]he best economic work which came after the Wealth of Nations is distinguished from that which went before, by a clearer insight into the balancing and weighting, by means of money, of the desire for the possession of a thing on the one hand, and on the other of all the various efforts and self-denials which directly and indirectly contribute towards making it. Important as had been the steps that others had taken in this direction, the advance made by [Smith] was so great that he really opened out this new point of view, and by so doing made an epoch” (ibid., p. 759).

Then came Schumpeter’s (1954, p. 189) patronizing judgement on Smith: “The rudimentary equilibrium theory of Chapter 7, by far the best piece economic theory turned out by A. Smith, in fact points toward Say and, through the latter’s work, to Walras. The purely theoretical developments of the nineteenth century consist to a considerable degree in improvements upon it”. As against this view, Kaldor (1972) stated that economic theory went astray from the middle of Chapter 4 of the Wealth of Nations, the first three being devoted to the concept of the division of labour. However, as Winch (1997) notes, Schumpeter’s judgement was more influential than that of Kaldor. “Thus began the business of assessing just how good a general equilibrium theorist Smith really was… Clearly, the underlying assumption is that the apparatus constructed upon the foundations laid by Walras and Pareto over the years provides the only language according to which Smith can be deemed to be speaking sense” (ibid., pp. 5–6).

According to Robbins (1932, p. 15), “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. From this viewpoint, Smith’s main contribution to economic theory is seen as value and distribution despite what the title of Smith’s book Wealth of Nations suggests:

Although Adam Smith’s great work professed to deal with the wealth of nations, and did in fact make many remarks on the general question of the conditions of opulence which are of great importance in any history of applied Economics, yet, from the point of the history of theoretical Economics, the central achievement of his book was his demonstration of the mode in which the division of labour tended to be kept in equilibrium by the mechanism of relative prices – a demonstration which, as Allyn Young has shown, is in harmony with the most refined apparatus of the modern school of Lausanne. The theory of value and distribution was really the central core of the analysis of the Classics, try as they might to conceal their objects under other names… Thus, though the appearance of modern theory may be new, its substance is continuous with what was most essential in the old. (ibid., p. 68)

Similarly, Stigler (1976, p. 201) regarded the Smithian proposition—resources seek their most profitable uses so that in equilibrium rates of returns in various uses are equal—as the most substantive proposition in all of economics. In fact, Stigler considered this as the crown jewel of the Wealth of Nations and the foundation of the resource allocation theory. It is the logical outcome of individuals seeking self-interest under competition. More recently, Buchanan and Yoon (2000, p. 45) regard Smithian proposition with respect to generalized increasing returns as compatible with competitive equilibrium, which is also Pareto optimal, as an end-state adjustment. Romer (1986, p. 1004) also thought that the Smith–Young theory of increasing returns “could be given a consistent, general equilibrium interpretation”.

As we have seen, Smith’s emphasis on the theme of the division of labour, capital accumulation, institutional arrangements best suited to promoting growth, and his evolutionary perspective all point to the fact that he was dealing with dynamic change rather than the static problem of resource allocation or value theory. It is true that Smith ventured into value theory but, as Barber (1967) observes, that was because he was searching for an invariant standard of value to measure aggregate economic change over time. Also, his foray into value was subordinate to his main programme of growth. Doubts were cast by Schumpeter and others as to how good an equilibrium theorist Smith was. But the simple answer is that Smith was not trying to be a general equilibrium theorist.²⁴ As Douglas (1928, p. 77), in a commemorative volume of the Wealth of Nations, suggested:

The contributions of Adam Smith to the theory of value and distribution were not great, and in commemorating the publication of the Wealth of Nations it might seem the path of wisdom to pass these topics by in discrete silence and to reserve discussion instead for those subjects, such as the division of labour, where his realistic talents enabled him to appear at a better advantage.

Capital Accumulation vs the Division of Labour

Adam Smith (1776, I, p. 364) stated:

The annual produce of the land and labour of any nation can be increased in its value by no other means, but by increasing either the number of productive labourers, or the productive power of those labourers, or the productive powers of those labourers who had before been employed. The number of its productive labourers, it is evident, can never be much increased, but in consequence of an increase of capital, or of the funds destined for maintaining them. The productive powers of the same number of labourers cannot be increased, but in consequence either of some addition and improvement of those machines and instruments which facilitate and abridge labour; or of a more proper division and distribution of employment. In either case an additional capital is almost always required.

Does the forgoing quote imply that capital accumulation is the chief factor in growth? There is a difference of opinion among scholars as to the exact role of capital accumulation vis-à-vis the division of labour in economic progress. While some authors such as Lewis (1954) and Winch (1997) emphasize the role of capital accumulation as being dominant in growth, others such as Cannan (1976), Young (1928), Richardson (1975), Currie (1997), and Kaldor (1972, 1975) emphasize the role of the division of labour.²⁵

Lewis (1954, p. 155) in his famous “classical” model of growth with unlimited supplies of labour posed the central problem of development as a process by which a community previously saving and investing 4–5% of national income is transformed into one that could save and invest 12–15% or more. He emphasized the key role played by the capitalist surplus. “In so far as it is reinvested in creating new capital, the capitalist sector expands, taking more people into capitalist employment out of the subsistence sector. The surplus is then larger still, capital formation is still greater, and so the process continues until the labour surplus disappears” (ibid., pp. 151–52).

Winch (1997), similarly emphasized the role of capital accumulation, along with the proportion of productive workers in the total workforce, as central to Smith’s explanation of growth. Later, in a letter (of September 2004) to the present author, he admitted that it depended on the stage of society. In some historical circumstances capital accumulation could be the dominant factor in growth, at others it could be the division of labour. In a cumulative process one can begin with one factor or another. So his stress on capital accumulation in the 1997 paper should not be seen as categorical.

Also, Walter Eltis (2000) in The Classical Theory of Economic Growth, emphasizes the positive association between capital accumulation and productivity growth in Smith’s theory. Pointing out that while in the neoclassical theory (as well as in much of the twentieth-century growth theory), the rate of investment is predicted to have no effect on the long-term rate of growth and living standards, in Smith capital accumulation leads to increased population and employment. “In modern growth theory, Arrow comes nearest to Smith’s results with his ‘learning by doing’ model, where the rate of growth of labour productivity and wages per head depend on the rate of growth of employment opportunities provided by new machines. Very few modern theorists have arrived at Smith’s results. Thus, if a strong interconnection between investment and growth is central to the development process, Smith’s theory of growth must stand high, for it is one of the very few where investment has highly favourable long-term effects” (ibid., p. 69).

Other authors such as Cannan emphasize the importance of the division of labour in Smith’s theory of growth. Cannan (1976, p. xxxii) wrote that “Book I begins by showing that the greatest improvement in the productive powers of industry is due to the division of labour”. It can further be inferred that the theme of capital accumulation contained in Book II was not essential to Smith’s theory of growth. “[I]f Book II were altogether omitted the other Books could stand perfectly well by themselves” (ibid., p. xxxv). So dominant is the role of the division of labour in Smith’s explanation of growth that Schumpeter (1954, p. 187) commented:

[N]obody, either before or after A. Smith, thought of putting such a burden on the division of labor. With A. Smith it is practically the only factor in economic progress. Alone it accounts ‘for the superior affluence and abundance commonly possessed by lowest and most despised member of the Civilized society, compared with what the most respected and active savage can attain to’ in spite of so much ‘oppressive inequality’… Technological progress, ‘invention of all those machines’ – and even investments – is induced by it and is, in fact, just an incident of it.²⁶

Smith gave central importance to enlarging the size of the market to further the division of labour. He advocated several measures such as investment in transport and communication to integrate the market internally and free trade to open it up externally. Foreign trade opens up the narrow domestic market to the world market, and provides an opportunity for the division of labour to be carried to the highest perfection. As Myint (1977) pointed out, Smith’s theory of international trade is closely tied up with his theory of growth. “The essential virtue of Smith’s approach is that it attempts a unified analysis of foreign trade and the domestic economy, oriented towards the problem of long-run growth” (ibid., p. 246).

Currie (1997), who built on the Smith–Young framework, stated that if growth begets growth, it even begets the financing of growth. Growth in the market system is largely self-financing, financed by retained earnings and business profits of the firms themselves. “The higher the rate of growth, the larger the saving and investment… The dynamic element is not saving, but the increase in real demand, which in the longer term is dependent on improvements that reduce real cost and improve quality” (Currie 1997, p. 435).

Some authors such as Romer (1986, 1989) and Krugman (1993) have highlighted the role of fixed costs (or fixed capital) in growth and imperfect competition as its natural concomitant. For example, Smith’s pin-factory example is misinterpreted to suggest that increasing returns are confined to industry, and that they depend on the reaping of economies of scale. Smith had used the pin-factory example for illustration purposes only as all aspects of pin-making can be observed under one roof. It was an example to illustrate specialization within a firm. As already noted, he was aware of the broader social division of labour which leads to emergence of specialized arts and crafts as the market expands. He also talked about the splitting up of trades even within the same specialism if the market size was large enough to support it. It is this idea which Young applied to firm and industry level specialization as the economy advances. In Young it is industrial differentiation, not industrial integration, which is more dominant. Pin manufacture, or emergence of new specialisms within the same trade, were small scale operations rather than examples of economies of scale (or economies of consolidation). Thus economies of specialization (or the division of labour) should not be confused with the economies of scale at the level of a firm.²⁷ Moreover, Smith favoured competition—both internal as well as external—as the surest way to keep the excessive greed of businessmen in check. Also, for Smith competition and growth were mutually reinforcing.

To sum up, had capital accumulation been the chief factor in growth there was no need for Smith to attack mercantilism which interfered in the efficient functioning of the competitive market; or to discuss the various systems of political economy to see which best promotes growth; or to portray the division of labour (as constrained by the size of the market) as the chief cause of opulence; or to discuss measures to expand the market such as transport and communication for internal market expansion and international trade for external expansion; or to expound the proper duties of the state in a system of natural liberty. Indeed, capital accumulation in Smith is important in so far as it promotes the division of labour. Since the division of labour is constrained by the size of the market, use of capital in production also becomes constrained by the same market.

Was Smith a Laissez Faire Economist?

Smith stated that since the individual was the best judge of his own interest he should be left free to pursue it. He also posited that the motive to better one’s condition was such a powerful principle that it alone was capable of taking not only an individual but the whole society to opulence. He further observed that the “obvious and simple” system of natural liberty establishes itself once all preferences and restraints are removed. Smith not only criticized mercantilist restrictions but also all systems of political economy based on preferences and restraints. He generally disliked interference in economic activity, as it would make the economy worse off. He favoured competition as the best tonic for growth, and argued for free trade. Does all this make Smith a laissez faire economist?

Laissez faire is a French term not coined by Smith. The favourite phrase used by Physiocrats, as Marshall (1890, p. 757, f.n. 1) notes was “laissez faire, laissez alter”: “Laissez faire means that anyone should be allowed to make what things he likes, and as he likes; that all trades should be open to everybody; that Government should not, as the Colbertists insisted, prescribe to manufacturers the fashions of their cloth. Laissez alter (or passer) means that persons and goods should be allowed to travel freely from one place to another, and especially from one district of France to another, without being subject to tolls and taxes and vexatious regulations”. Marshall also noted that the phrase was commonly misapplied in his time.

Smith was however critical of the Physiocratic system, as noted by Cannan (1976): “The proper system is that of natural liberty, which discharges the sovereign from ‘the duty of superintending the industry of private people and directing it towards the employments most suitable for the interest of society’” (ibid., p. xxxiii). As we noted earlier, Physiocrats regarded agriculture as the only productive sector whereas Smith regarded both agriculture and industry as productive. Smith believed in the natural progress of opulence, which is first to agriculture, then to manufactures, and lastly to foreign commerce.²⁸ But, as Cannan (ibid., p. xxxii) again points out, this order had been inverted by the modern European states.

Smith favoured natural liberty, which is not exactly laissez faire, because it provided two things. It provided liberty to individuals to pursue their self-interest in their own manner within the framework of justice. The system also provided security without which private property cannot accumulate. As Cannan (1976, pp. xxix–xxx) notes: “At first the governments were so feeble that they could not offer their subjects that security without which no man has any motive to be industrious… This led at first to cultivation by slaves, who had no motive to industry… Progress in arts and commerce was also hindered by slavery, as well as by the ancient contempt for industry and commerce, by want of enforcement of contracts, by the various difficulties and dangers of transport, by the establishment of fairs, markets and staple towns, by duties on imports and exports, and by monopolies, corporation privileges, the statutes of apprenticeship and bounties”. Natural liberty also delineated the role of the government as justice, defence, and public works.²⁹ Public works included roads, bridges, canals, and other infrastructure which are in the nature of public goods, and where private investment is likely to be deficient.³⁰

Allyn Young stated that the main lesson from Smith is not laissez faire but competition. “Despite some sweeping phrases which invite a different interpretation, Smith’s real concern was for the establishing and maintaining of competitive conditions rather than for a vigorous observance by governments of a hands-off policy in respect of economic matters… What his attitude would have been under the later conditions of the nineteenth and twentieth centuries towards the factory acts, social insurance, and measures intended to help onward equality of competitive opportunity, we cannot tell. But there is very little in these newer types of legislation which runs counter to his principal contentions or is inconsistent with his general economic philosophy” (Young 1929; Mehrling and Sandilands 1999, p. 119).

In a letter (dated 9 September 1926) to his friend Frank Knight, Young stated that the economist of the second half of the eighteenth century got two kinds of natural orders—Newtonian which would prevail despite what men might do, and “natural law” order which had to be discovered and attained—badly mixed up.³¹ He also stated that Quesnay or Smith did not base their case for laissez faire because it was natural, but that is how they dressed it up. Smith did not like favours to businessmen, thought that they were monopolists in spirit, and so should be made to compete. “[I]f Smith had been writing in the middle of nineteenth century, I am pretty sure he would not have advocated laissez-faire… Ricardo, Mill and the rest argued for laissez faire in respect of international trade and in some other specific fields, but here they based their conclusions on what they thought were the positive advantages laissez-faire gave. Practically all of these so-called laissez faire economists were, as you know, favorable to labor legislation”.³²

Smith was a complex economist who favoured self-interest as long as it promoted public interest. When self-interest ceased to be the vehicle for the promotion of public interest, or when public interest was not adequately promoted, he favoured intervention. Apart from public spending on market-enhancing infrastructure, Smith favoured public spending on education and public health measures, which Amartya Sen (1983) has more recently called “entitlements’.³³ In fact, Viner (1927) has compiled a long list of functions which a state can legitimately perform in the Smithian system.

Das Adam Smith Problem

In the Theory of Moral Sentiments Smith emphasized the motive of sympathy, and in the Wealth of Nations he was focused on self-interest. Thus the German critics in the second half of the nineteenth century saw a contradiction in Smith’s two works and characterized it as “Das Adam Smith Problem”.

In a survey of German writing on Smith, August Oncken (1897) asked: “Are the two principal works of Adam Smith, the Theory of Moral Sentiments (1759) on the one hand, and the Inquiry into the Nature and Causes of the Wealth of Nations (1776) on the other, two entirely independent works, contradicting each other in their fundamental principles, or are we to regard the latter simply as a continuation of the former, though published at a later date, and both as presenting, when taken together, a comprehensive exposition of his moral philosophy?” (ibid., p. 444).

The so-called “Das Adam Smith problem” is however more apparent than real. As Keith Tribe (2008) points out the consensus now is that there is no incompatibility between the Wealth of Nations and the Theory of Moral Sentiments. Tribe suggests that the effort of the German critics was to understand the importance of Smith’s work, an effort which lacked any parallel in England. Thus it contributed to the scholarship on Smith. This international attention on Smith played a major role in Smith emerging “from a simple partisan of free trade to a theorist of commercial society and human action” (ibid., p. 514).

Leondas Montes (2003) notes that the “problem” arises because of the misunderstanding of the term “sympathy”. Sympathy does not “entail a simple means to end perspective…but also a sense of moral autonomy” (ibid., p. 64). It can be argued that sympathy of TMS does not imply charity or benevolence. As an individual virtue charity and benevolence may be commendable but it cannot be the organising principle of society in pursuit of wealth or economic progress. Indeed, self-interest at the individual level is converted into cooperation at the social level through the process of specialization and exchange. In Smith the process of exchange is not seen as a zero-sum game but as mutually beneficial which leads to a “win–win” situation for the concerned parties.³⁴ Thus self-interest leads to “mutual sympathy” at the societal level. Secondly, while in the TMS self-love of man is balanced by sympathy, in the Wealth of Nations self-interest is balanced by competition conducted in a free and fair manner in accordance with the laws of justice. Moreover, Smith favoured not only domestic competition but also international competition so that domestic monopolies do not emerge.

Smith (1776, I, p. 18) observed that man can gain cooperation from others by appealing not to their humanity but to their own advantages. “In a civilized society [man] stands at all times in need of co-operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons… [M]an has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them… 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”.

Therefore, as Ronald Coase (1976) points out, the cooperation of multitudes scattered all over the world cannot be secured by the exercise of benevolence. “Benevolence, or love, may be the dominant or, at any rate, an important factor within the family or in our relations with colleagues or friends, but as Adam Smith indicates, it operates weakly or not at all when we deal with strangers. Benevolence is highly personal and most of those who benefit from the economic activities in which we engage are unknown to us. Even if they were, they would not necessarily in our eyes be lovable. For strangers to have to rely on our benevolence for what they received from us would mean, in most cases, that they would not be supplied” (ibid., p. 544).

Coase notes that although the market exchange based on self-interest supplies everyone, the role of benevolence in the market system is still important. For example, if the young are cared and trained not by their families but by institutions run by people with their own self-interest, the task would be worse performed. Secondly, the observance of moral codes facilitates business and reduces transaction costs. Society cannot subsist if all members are at all times ready to hurt and injure each other.³⁵ Thus a minimum moral code is a prerequisite for the market system to function.

In the Theory of Moral Sentiments, Smith stated that any man showing the virtues of prudence, justice and benevolence is perfectly virtuous. According to Campbell (1967), the two major restraints of prudence and justice are also important in the Wealth of Nations. Prudence in the Wealth of Nations takes the form of bettering one’s condition, and becomes the engine of saving, capital accumulation, and growth. Justice takes the narrow form of abstaining from doing harm to our neighbours or their right to “life, liberty and property”. “Justice is the limit or boundary beyond which no individual’s pursuit of self-interest can extend” (ibid., pp. 573–74). It implies impartial treatment and equality before the law so that “no individual or group is to be awarded special privileges or forced to endure special restraints” (ibid., p. 576). The third characteristic, namely beneficence, figures only marginally in the Wealth of Nations. This is because “beneficence for Smith is the result rather than the cause of economic growth and development” (ibid., p. 571). In the Theory of Moral Sentiments, Smith had made it clear that before we feel for others, we must be at ease ourselves.