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Understanding Adam Smith - The Fallacy of Laissez-Faire

This is the 7th of an eight-part series designed to explain several important aspects of Adam Smith’s writing, or at least correct widespread misconceptions regarding those writings. You can pick up the start of this series here.

In the previous post Government + Pursuit of Happiness we quoted what Adam Smith wrote regarding the role of government. Here’s that quote again:

The perfection of police, the extension of trade and manufacturers, are noble and magnificent objects. The contemplation of them pleases us, and we are interested in whatever can tend to advance them. They make part of the great system of government, and the wheels of the political machine seem to move with more harmony and ease by means of them. We take pleasure in beholding the perfection of so beautiful and grand a system, and we are uneasy till we remove any obstruction that can in the least disturb or encumber the regularity of its motions. All constitutions of government, however, are valued only in proportion as they tend to promote the happiness of those who live under them. This is their sole use and end. (Emphasis ours.) (Theory of Moral Sentiments, Part IV, Chapter I, Paragraph 11.)

Smith did not advocate for laissez-faire government. Indeed, he never used that phrase in Moral Sentiments or the almost thousand pages of Wealth of Nations. (We encourage you to read for yourself and see. Really!) Rather, and in his own words, Smith saw the need and benefit of well-formed, functioning, and active governments. Notice that Smith refers to government functions as “noble” and “magnificent” and government as a “great system” that supports harmony and ease in politics. Smith’s vision of government is of one that runs without obstruction; not a government that supports markets to run without obstruction, as so many of us are foolishly led to believe. Yes. Please read that again.

No matter the exact form of government, Smith provides the yardstick by which to measure a government’s value: “in proportion as they tend to promote the happiness of those who live under them.” Should we be surprised that the United States Declaration of Independence, ratified a few years after Smith first published Moral Sentiments, opens with the pursuit of happiness as an unalienable right? No, we shouldn't. Remember that line, “That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed . . . to effect their safety and happiness”?

We in America, like many other countries, live with a government originally founded as a democracy. The notion that a laissez-faire approach by government is de facto best for America, particularly America’s economy, simply finds no support in Adam Smith or America’s Founders. Yet it has for too long been a damaging ideology that works to dismantle the beneficial guardrails and circuit breakers meant to promote the happiness of “we the people.”

How did our nation stray from the vision and words of the father of capitalism and America’s Founders? How did our society come to believe the lie that laissez-faire government is best for its people and marketplace? How did we as a society fall into our current construct of economic Darwinism? We offer a two-part answer.

First, after influential voices recklessly repeat damaging ideologies, a critical mass of people often come to believe and embrace those damaging ideologies. Second, once the critical mass is aboard then it’s easier for those in elected positions, who are influenced by special interests and are willing to abandon their public gatekeeper roles, to create policies and laws that support those damaging ideologies.

How does our nation return to the vision and words of the father of capitalism and America’s Founders? How does our society start shedding lies, such as laissez-faire government is best for its marketplace and people? We offer the same approach we had to apply to ourselves as we researched Adam Smith and what he actually said about the need and role of government, namely, we each constantly confess to ourselves that we don’t know everything and there is always something to learn, particularly when going to the original source is an option. This approach works to foster wisdom and humility, instead of arrogance and bravado.

From positions of wisdom and humility we’re all better equipped to see the vision and return to the words of the father of capitalism as well as America’s Founders. Imagine moving away from our current construct of economic Darwinism and toward a construct of Partnership Economics. That’s a solid position from which to start, and a solid image by which to start shaping a better capitalism.

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