Not many Americans are aware that as they celebrate the Bicentennial it is also exactly 200 years since the publication of a book whose revolutionary ideas were embodied for some years, as they never were elsewhere before or since, in the policy of the new nation. To familiarize our readers with that legacy, REASON presents in this special Bicentennial issue an interview with Dr. Adam Smith, the learned philosopher and author of that first book of modern economics, An Inquiry into the Nature and Causes of the Wealth of Nations. The interview, suggested to her by Professor George Stigler, was conducted and prepared for publication by REASON's Book Review Editor, Marty Zupan. She found Dr. Smith a very cooperative, as well as knowledgeable and witty, participant. They agreed to confine themselves to discussing the material covered in The Wealth of Nations, and in fact the reader familiar with that tome will find amazing parallels between Professor Smith's words there and in the interview. Unfortunately, small portions of the interview turned out not to be transcribable, and Professor Smith was unavailable for further clarification. To assure the reader, therefore, of the authenticity of Dr. Smith's comments, portions reconstructed from Ms. Zupan's recollection of the interview are printed in italics. We hope you will enjoy meeting Professor Smith through this conversation.
REASON: Dr. Smith, anyone with your views is today called a capitalist, which most people identify with being "on the side of" business. Would you agree with this characterization?
SMITH: Business doesn't need me on its side! The only encouragement industry requires is tolerable security that it shall enjoy the fruits of its own labor.
REASON: But you had some harsh words for business.
SMITH: What I objected to was, the sneaking arts of underling tradesmen being erected into political maxims. I warned people that the interest of those who live by profit is always in some respects different from and even opposite to that of the public. So the proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.
REASON: Many regulations of business are now advocated by consumer groups. Would you be opposed to these also?
SMITH: Yes. They are evident violations of natural liberty, and therefore unjust. And they are as impolitic as they are unjust. The law ought always to trust people with the care of their own interest, as in their local situations they must generally be able to judge better of it than the legislator can do.
REASON: You yourself have acknowledged that people do not always know what's in their own interest.
SMITH: Yes. The workman may no doubt buy too much of either the brewer or the retailer of fermented spirits, as he may of any other dealers in his neighborhood, of the butcher if he is a glutton, or of the draper if he affects to be a beau among his companions. It is advantageous to the great body of workmen, notwithstanding, that all these trades should be free, though this freedom may be abused in all of them.
REASON: It is often argued that society as a whole, or most of the people, will benefit by lower prices, safer products, more available services, and so on, and that these can only be achieved by regulation.
SMITH: Even if that were so, such regulations evidently sacrifice the ordinary laws of justice to an idea of public utility, to a sort of reasons of state, an act of legislative authority which ought to be exercised only, which can be pardoned only, in cases of the most urgent necessity. The persons entrusted with the great interests of the state may, even without any corrupt views, sometimes imagine it necessary to sacrifice to those interests the rights of a private man. But upon the impartial administration of justice depends the liberty of every individual.
REASON: You spoke often in your book of the necessity of a well-governed society for economic progress. Why?
SMITH: Men in a defenseless state naturally content themselves with their necessary subsistence, because to acquire more might only tempt the injustice of their oppressors. On the contrary, when they are secure of enjoying the fruits of their industry, they naturally exert it to better their condition and to acquire not only the necessaries, but the conveniences and elegancies of life.
REASON: What do you mean by well-governed?
SMITH: A society where things are left to follow their natural course, where there is perfect liberty. All systems either of preference or of restraint being completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. 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 and to bring both his industry and capital into competition with those of any other man, or order of men.
REASON: Wouldn't history suggest that it's too simple and obvious a system?
SMITH: Men are fond of paradoxes and of appearing to understand what surpasses the comprehension of ordinary people.
REASON: In any case, no societies even come close to that today. How would you explain the extent of economic progress that is still evident, at least in the freer countries?
SMITH: The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private, opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigor to the constitution in spite, not only of the disease, but of the absurd prescriptions of the doctor.
REASON: How would you respond to current complaints from the less developed countries and their Western spokesmen that the extension of Western interests to their countries has involved injustice?
SMITH: Gradually the inhabitants of all the different quarters of the world may arrive at that equality of courage and force which, by inspiring mutual fear, can alone overawe the injustice of independent nations into some sort of respect for the rights of one another. But nothing seems more likely to establish this equality of force than that mutual communication of knowledge and of all sorts of improvements which an extensive commerce from all countries to all countries naturally, or rather necessarily, carries along with it.
REASON: What do you think of the present state of England?
SMITH: Great Britain resembles one of those unwholesome bodies in which some of the vital parts are overgrown and which, upon that account, are liable to many dangerous disorders scarce incident to those in which all the parts are more properly proportioned. A small stop in that great blood vessel which has been artificially swelled beyond its natural dimensions is very likely to bring on the most dangerous disorders upon the whole body politic.
REASON: What is your reaction to recent suggestions that the cure of inflation is for citizens to tighten their belts?
SMITH: It is the highest impertinence and presumption in kings and ministers to pretend to watch over the-economy of private people and to restrain their expenses. They are themselves always and without any exception the greatest spendthrifts in the society. Let them look well after their own expense and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.
REASON: Perhaps your most famous idea, even though it occurs only once in your book, is that of the invisible hand. Could you explain the context in which you used the expression?
SMITH: Yes, I was objecting to the idea that regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can divert a part of it into a direction into which it might not otherwise have gone, but it is by no means certain that this artificial direction is likely to be more advantageous. So I pointed out that, for various reasons, upon equal or nearly equal profits, every wholesale merchant naturally prefers the home-trade to the foreign trade of consumption, and the latter to the carrying trade. As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry and so to direct that industry that its produce may be of the greatest value, every individual necessarily labors to render the annual revenue of the society as great as he can. But, I said, generally neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security, and by directing that industry in such a manner as its produce may be of the greatest value, he 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.
REASON: Would it be better if people paid more attention to others' interests?
SMITH: On the contrary, by pursuing his own interest a person frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.
REASON: From Plato to Marx, though, people have argued that we would be better off if there were more sharing and less acquisitiveness.
SMITH: But it is because in civilized society man stands at all times in need of the cooperation and assistance of great multitudes that he relies on others' self-interest. Man sometimes endeavors by every servile and fawning attention to engage his brethren to act according to his inclinations, but he doesn't have time to do this upon every occasion. His whole life is scarce sufficient to gain the friendship of a few persons. It is in vain for man to expect the help of his brethren from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favor and show them that it is for their own advantage to do for him what he requires of them. 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 their self-love, and never talk to them of our own necessities but of their advantages.
REASON: Is this a lamentable fact of the human condition?
SMITH: No. No. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow citizens.
REASON: Nevertheless, people have come to think of business dealings as therefore base and crass—you yourself contrast self-love and humanity.
SMITH: But I have also said that commerce ought naturally to be a bond of union and friendship.
REASON: Do you hold that it is good, or merely tolerable for its good effects on others, that people pursue their own interest?
SMITH: People might have taken a clue from a passage in my book where I said that ancient moral philosophy proposed to investigate wherein consisted the happiness and perfection of a man, considered not only as an individual, but as the member of a family, of a state, and of the great society of mankind. In that philosophy the duties of human life were treated of as subservient to the happiness and perfection of human life. But when moral, as well as natural philosophy, came to be taught only as subservient to theology, the duties of human life were treated of as chiefly subservient to the happiness of a life to come. In the ancient philosophy the perfection of virtue was represented as necessarily productive, to the person who possessed it, of the most perfect happiness in this life. In the modern philosophy it was frequently represented as almost always inconsistent with any degree of happiness in this life, and heaven was to be earned only by penance and mortification, not by the liberal, generous, and spirited conduct of a man. By far the most important of all the different branches of philosophy became in this manner by far the most corrupted.
REASON: Do you see it as an objection to capitalism that it gives rise to great fortunes and thus inequality of power?
SMITH: The authority of riches is perhaps greatest in the rudest age of society. A Tartar chief, the increase of whose herds and flocks is sufficient to maintain a thousand men, cannot well employ that increase in any other way. Since the thousand men whom he thus maintains depend entirely upon him for their subsistence, they must obey his orders in war and submit to his jurisdiction in peace. In an opulent and civilized society a man may possess a much greater fortune and yet not be able to command a dozen people. Though the produce of his estate may maintain more than a thousand people, yet as those people pay for everything which they get from him, as he gives scarce anything to anybody but in exchange for an equivalent, there is scarce anybody who considers himself as entirely dependent upon him, and his authority extends only over a few menial servants.
REASON: Many contemporary advocates of the free market believe that individual liberty requires that there be no government.…
SMITH: I do not agree. The liberty, reason, and happiness of mankind can flourish only where civil government is able to protect them. It is quite clear that commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice, in which the people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported by law, and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts.
REASON: What do you think are the proper functions of government?
SMITH: According to the system of natural liberty, the government has only three duties to attend to, three duties of great importance, indeed, but plain and intelligible to common understandings: the duty of protecting the society from the violence and invasion of other societies; the duty of protecting every member of the society from the injustice of oppression of every other member of it, or the duty of establishing an exact administration of justice; and the duty of erecting and maintaining certain public works and institutions.
REASON: That's more than some present-day laissez-fairists would have, but certainly a far cry from the mammoth governments of the 20th century. But why, for example, do you think defense requires a state?
SMITH: Protecting the society from the violence of other societies can be performed only by means of a military force. The division of labor is as necessary for the improvement of the art of war as of every other art. Into other arts the division of labor is naturally introduced by the prudence of individuals. But it is the wisdom of the state only which can render the trade of a soldier separate and distinct from all others. A private citizen who, in time of profound peace and without any particular encouragement from the public, should spend the greater part of his time in military exercises might, no doubt, both improve himself very much in them and amuse himself very well, but he certainly would not promote his own interest. It is the wisdom of the state only which can render it for his interest to give up the greater part of his time to this occupation.
REASON: Isn't a military perhaps the most dangerous arm of the state to its own citizens?
SMITH: Men of republican principles have always been jealous of a standing army as dangerous to liberty. It certainly is so wherever the interest of the general and that of the principal officers are not necessarily connected with the support of the constitution of the state. But where the military force is placed under the command of those who have the greatest interest in the support of the civil authority, because they have themselves the greatest share of that authority, a standing army can never be dangerous to liberty.
REASON: Why do you maintain that the government must provide other services besides protection of individuals?
SMITH: Because there are certain works 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 expense to any individual, or small number of individuals, though it may infrequently do much more than repay it to a great society.
REASON: That's a fairly standard argument in economics by now. But what would you include in this category?
SMITH: The works and institutions required are chiefly those for facilitating the commerce of the society—good roads, bridges, navigable canals, harbors, etc.—and those for promoting the instruction of the people.
REASON: You are in favor of public education?
SMITH: Yes, although those parts of education for the teaching of which there are no public institutions are generally the best taught.
REASON: If it is better accomplished privately, why do you include education among the functions of government?
SMITH: Because in the progress of the division of labor the employment of most people comes to be confined to a few very simple operations. The man whose whole life is spent that way generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the interests of his country he is altogether incapable of judging. In free countries, where the safety of government depends very much upon the favorable judgment which the people may form of its conduct, it must surely be of the highest importance that they should not be disposed to judge rashly or capriciously concerning it.
REASON: Yet you do not deny that this is offset by some of the consequences of having public education?
SMITH: No. In particular, the diligence of public teachers is more or less corrupted by the circumstances which render them more or less independent of their success and reputation in their particular professions. That is why I propose that the public facilitate the acquisition of the most essential parts of education by establishing in every district a little school where children may be taught for a reward so moderate that even a common laborer may afford it, the master being partly, but not wholly paid by the public.
REASON: Should such education be compulsory?
SMITH: No, but the public can impose upon people the necessity of acquiring those most essential parts of education by obliging every man to undergo an examination or probation in them before he can vote or be allowed to set up any trade.
REASON: How would you propose that the other functions of government be financed?
SMITH: Well, the judicial authority of a sovereign, for example, far from being a cause of expense, was for a long time a source of revenue to him. The persons who applied to him for justice were always willing to pay for it. But this scheme could scarce fail to be productive of several very gross abuses. The person who applied for justice with a large present in his hand was likely to get something more than justice, and vice versa. Justice too might frequently be delayed, in order that this present might be repeated. So, this expense came to be covered, by taxes of different kinds, and it was very commonly stipulated that no present for the administration of justice should be accepted. Justice was then said to be administered gratis, although it never was in reality administered gratis. But it was not so much to diminish the expense as to prevent the corruption of justice that the judges were prohibited from receiving any present or fee.
REASON: Is taxation the alternative, then?
SMITH: No. The whole expense of justice might easily be defrayed by the fees of court. Where they are paid into the hands of a cashier, to be distributed in certain known proportions among the different judges after the process is decided, and not till it is decided, there seems to be no more danger of corruption than where such fees are prohibited altogether.
REASON: What is the advantage of this system?
SMITH: Public services are never better performed than when their reward comes only in consequence of their being performed and is proportioned to the diligence employed in performing them.
REASON: What about financing public works?
SMITH: It does not seem necessary that their expense should be defrayed from that public revenue, as it is commonly called. A highway, a bridge, a canal, for example, may in most cases be both made and maintained by a small toll upon the carriages which make use of them. The coinage, another institution for facilitating commerce, in many countries defrays its own expense. The post office, another institution for the same purpose, over and above defraying its own expense, affords in almost all countries a very considerable revenue.
REASON: Well, you're a little out of date there. But do you think such public works should be run so as to raise extra revenue for the state?
SMITH: If the tolls which are levied at the turnpikes, for example, should ever be considered as one of the resources for supplying the exigencies of the state, they would certainly be augmented as those exigencies were supposed to require. According to current policies, therefore, they would probably be augmented very fast. But then the tolls, instead of facilitating the inland commerce of the country, would soon become a very great encumbrance upon it.
REASON: What recommends that public works be financed by their particular users?
SMITH: It seems scarce possible to invent a more equitable way of maintaining such works. Besides, when high roads, bridges, canals, etc., are in this manner made and supported by the commerce which is carried on by means of them, they can be made only where that commerce requires them and consequently where it is proper to make them. A magnificent high road cannot be made through a desert country where there is little or no commerce, or merely because it happens to lead to the country villa of the intendant of the province. A great bridge cannot be thrown over a river at a place where nobody passes, or merely to embellish the view from the windows of a neighboring palace. These things sometimes happen in countries where works of this kind are carried on by any other revenue than that which they themselves are capable of affording.
REASON: For the financing of those governmental functions that benefit all members of society, you concluded, for economic reasons, that taxation is the best method. Yet you said repeatedly throughout your book that people ought to enjoy the fruits of their own work. So how do you justify taxation?
SMITH: The subjects of every state enjoy their revenue under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. Taxes of all kinds have often been represented as badges of slavery. Every tax, however, is to the person who pays it a badge, not of slavery, but of liberty. It denotes that he is subject to government, indeed, but that, as he has some property, he cannot himself be the property of a master.
REASON: What is your opinion of raising government revenue by borrowing?
SMITH: The practice of funding has gradually enfeebled every state which has adopted it. Like an improvident spendthrift, whose pressing occasions will not allow him to wait for the regular payment of his revenue, the state is in the constant practice of borrowing of its own factors and agents and of paying interest for the use of its own money. The enormous debts which at present oppress will in the long run probably ruin all the great nations.
REASON: When you wrote, government debt was a means of financing wars.…
SMITH: Yes, but one could say about other programs exactly what I said about borrowing on that occasion. The facility of borrowing delivers governments from embarrassment. When war comes governments are unwilling to increase their revenue in proportion to the increase of their expense for fear of offending the people, who by so great and so sudden an increase of taxes, would soon be disgusted with the war. Were the expense of war to be defrayed always by revenue raised within the year, wars would in general be more speedily concluded and less wantonly undertaken. The foresight of the heavy and unavoidable expenses of war would hinder the people from wantonly calling for it when there was no real or solid interest to fight for.
REASON: Do you think New York will be able to extricate itself from its present difficulties?
SMITH: When government debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy, sometimes by an avowed one, but always by a real one, though frequently by a pretended payment. Although such is not available to New York, the raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment. When it becomes necessary for a government to declare itself bankrupt, a fair, open, and avowed bankruptcy is always the measure which is both least dishonorable to the debtor and least hurtful to the creditor. The honor of a state is surely very poorly provided for when, in order to cover the disgrace of a real bankruptcy, it has recourse to juggling tricks so easily seen through and at the same time so extremely pernicious.
REASON: You were quite outspoken at the time about the North American colonies. Why did you suggest that England give them up?
SMITH: The English colonists never contributed anything towards the defense of the mother country or towards the support of its civil government. They themselves, on the contrary, were defended almost entirely at the expense of the mother country. But no nation ever voluntarily gave up the dominion of any province, however the troublesome to govern, however small the revenue which it afforded. Such sacrifices, though they might frequently be agreeable to the interest, are always mortifying to the pride.
REASON: Why do you think England persisted?
SMITH: At first sight the monopoly of the great commerce of America naturally seemed to be an acquisition of the highest value. To the undiscerning eye of giddy ambition, it naturally presented itself amidst the confused scramble of politics and war as a very dazzling object to fight for. The dazzling splendor of the object, however, the immense greatness of the commerce, is the very quality which renders the monopoly of it hurtful. And to prohibit a great people from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind. Such prohibitions were impertinent badges of slavery imposed upon them.
REASON: Would you agree with the assessment that colonial or imperial ventures are inspired by business interests?
SMITH: Well, yes and no. To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers, but extremely fit for a nation whose government is influenced by shopkeepers. Such statesmen, and such statesmen only, are capable of fancying that they will find some advantage in employing the blood and treasure of their fellow citizens to found and maintain such an empire.
REASON: As you wrote your book, events were leading rapidly into the American Revolution. Upon the occasion of our Bicentennial, could you take yourself back two centuries and give us your view from there?
SMITH: Unless some method is fallen upon of preserving the importance and of gratifying the ambition of the leading men of America, it is not very probable that they will ever voluntarily submit to us. They are very weak who flatter themselves that, in the state to which things have come, our colonies will be easily conquered by force alone. The persons who now govern the resolutions of what they call their continental congress felt in themselves at this moment a degree of importance which perhaps the greatest subjects in Europe scarce feel. From shopkeepers, tradesmen, and attorneys they are become statesmen and legislators and are employed in contriving a new form of government for an extensive empire, which, they flatter themselves, will become, and which, indeed, seems very likely to become, one of the greatest and most formidable that ever was in the world.
REASON: And on that note I think we will close. Thank you, Dr. Smith. You've been a most delightful guest.