Adam Smith and the Birth of Classical Liberalism

“The mercantilists were the fetish-worshipers, the Catholics of political economy who treated money as the real incarnation of value. Adam Smith is like Luther in that he translates symbol into reality, money into labor.” So wrote Alasdair MacIntyre in his 1968 volume Marxism and Christianity. As Luther strove to pierce the fluttering veil of late medieval theology and find direct communion with God, so Smith strove to pierce the fluttering veil of mercantile thought and discover the true nature and causes of wealth. 

Luther and Smith were protesters. At the Diet of Worms in 1521, Luther planted himself against the joint might of the Roman Church and the Holy Roman Empire, refusing to recant his theological convictions. It was there that he proclaimed the most famous words he probably never said: “Here I stand, I can do no other.” Two hundred and fifty-five years later, Smith planted himself against another formidable set of powers with his publication of An Inquiry into the Nature and Causes of the Wealth of Nations (WN). Luther had fulminated against a late medieval papacy enriching itself on the backs of poor German peasants. Smith now fulminated, in what he later described as a “violent attack,” against an expansive British state that enriched a few merchants, politicians, and adventurers at the expense of ordinary citizens.

One might, of course, take the comparison in a different direction. Luther, it has sometimes been said, catalyzed the coming apart of Western civilization. He facilitated the incursion of an impoverished set of theological approaches that eroded classical Christian understandings. Perhaps Adam Smith merely walked down the paths trod by Luther but a little further. Who are Smith’s butcher, brewer, and baker but disconnected individuals set adrift in Luther’s priesthood of all believers? What is modern economics but Lutheran individualism in mathematical garb?

One thing is clear: The name Adam Smith, like Martin Luther, has come to represent both a widely contested complex of ideas and a historical inflection point in the public imagination. How should we understand Smith in the 250th year since the publication of his great work of political economy?

William Strahan published Smith’s Wealth of Nations in London on March 9, 1776. Smith’s friends responded to the work with great enthusiasm. The minister and rhetorician Hugh Blair wrote to Smith that the work “ought to be, and I am persuaded will in some degree become, the commercial code of Nations.” Adam Ferguson declared that Smith was “surely to reign alone on these subjects to form the opinions, and I hope to govern at least the coming generations.” Writing from his deathbed, David Hume told Smith he was “much pleas’d” with Smith’s “Performance.” The book had a “Depth and Solidity and Acuteness” that would recommend it to the public. 

Even Smith’s intellectual opponents praised his accomplishments. Thomas Pownall, former governor of Massachusetts, disputed Smith’s conclusions about the costs and benefits of Britain’s colonial trade. But he did not hesitate to compare Smith to Isaac Newton and WN to the Principia. WN “might become an institute, containing the principia of those laws of motion, by which the system of the human community is framed and doth act.” 

But notwithstanding the initial response of Smith’s friends and select critics, WN, as Richard F. Teichgraeber III has documented, did not at first make much of a public impression. The book was initially much less successful than Edward Gibbon’s Decline and Fall of the Roman Empire, which Strahan had printed two weeks prior. Smith’s “violent attack” on the British commercial system was not in fact the cause of much controversy. The book, as Smith remarked in his correspondence, was “much less abused than I had reason to expect.”

WN began to gain traction in Britain in the 1780s. Its rising reputation had much to do with agitations, beginning around 1778, for free trade with Ireland, and then more significantly with a British trade agreement with France in 1786 (the Eden Agreement). WN gradually became a tract for the times. By the end of the decade, references to the book could be found alongside references to Hume, Josiah Tucker, and Arthur Young in parliamentary speeches. By 1792, two years after Smith’s death, Prime Minister William Pitt illustrated the extent of Smith’s ascendance when he asserted that WNprovided “the best solution to every question connected with the history of commerce, or with systems of political economy.” 

By the early 19th century, as Glory M. Liu has cataloged in Adam Smith’s America (2022), political economists and statesmen on both sides of the Atlantic sought to claim Smith’s increasing authority for themselves. Some did so by directly advancing Smith’s arguments for what he called “the liberal system of free exportation and free importation,” which he contrasted with an “illiberal and oppressive” political superintendence of private life. Others emulated Smith by cleaving to his pragmatism. This latter strategy was adopted, for example, by Henry Clay as he made the case for his “American System” of tariffs and industrial subsidies. Even the great liberal Adam Smith, it was said, allowed for exceptions to the presumption of free trade to support certain fledgling domestic industries.

In practice, Smith’s ideas may have been more honored in the breach. But by the turn of the century, his moral authority as a free trader and a liberal was widely assumed.

As Smith slowly transformed after his death into a public icon, many of the subtleties of WN, and an understanding of the context of Smith’s political economy more generally, slipped away. The slippage was exacerbated by the increasing neglect of Smith’s other great book, The Theory of Moral Sentiments (TMS), which provided an account of his moral psychology and ethics. German scholars who still engaged with TMS found themselves unable to reconcile its treatment of human nature with that found in WN. The famous “Adam Smith Problem” was born. Others—including Smith’s first biographer, Dugald Stewart—viewed the ideas of TMS as incomplete, somewhat obscure, and if not in contradiction then at least irrelevant to Smith’s ideas about political economy. Scholars were increasingly content to let the work lie dormant.

The dwindling interest in Smith’s moral psychology and ethics coincided with a concerted effort made by some political economists to separate their discipline from normative concerns. John Neville Keynes wrote in 1891 that economics was to be preferred over political economy as “a designation for a positive science” separate from political, aesthetic, ethical, and theological considerations. Keynes’s preferred terminology of course caught on. Even as Keynes made his case in print, Alfred Marshall published his own flagship work in 1891: Principles of Economics, he called it, not Principles of Political Economy. 

Beyond terminology, Keynes’s methodology broadly obtained in the academic community. Many economists came to understand their discipline as an instrumental, value-free scientific enterprise. Committed to taking individuals as they are, rather than as we might like them to be, the discipline attempted to steer clear of ethical and political engagements toward what it took to be noncontroversial matters of fact. Economics in many quarters quite openly aspired to become a kind of social physics.

Throughout these developments, Smith remained the indisputable patron saint of the discipline he was increasingly said to have founded. The public perception of Smith shifted, however, along with the character of economists’ self-understanding. As mid-19th-century proponents of industrial policy, and even late-century progressive economists such as Richard Ely, had attempted to shape Smith in their own image, so now did 20th-century neoclassical economists. 

For the neoclassical school, Smith was a hardheaded social scientist. He did not hesitate to see us as we are: self-interested individuals principally committed to our own material betterment. The University of Chicago economist George Stigler famously proclaimed that “The Wealth of Nations is a stupendous palace erected upon the granite of self-interest.” Self-interest could be held in check, even channeled toward productive ends, if properly constrained and directed. This was, as Paul Samuelson wrote in the most influential economics textbook of the century, Foundations of Economic Analysis (1946), “the mystical principle of the invisible hand.” Economists such as Kenneth Arrow were eventually able to demystify the principle, so to speak, and present it in a rigorous mathematical form. But the essential insight, they suggested, remained that which was first presented by Smith in 1776: Under an appropriate set of starting conditions, individuals pursuing their self-interests would bring about an efficient allocation of resources.

In conjunction with his long-standing association with the cause of free trade, the 20th century “invention of the invisible hand” by economists, as some commentators have put the point, produced the caricature of Adam Smith that widely obtains today in the popular imagination: an advocate of rugged individualism and laissez-faire capitalism whose ethical theory builds from a moral authorization of greed.

Smith scholarship has flowered in the past 40 years, however. Great strides have been made to recover a more holistic understanding of Smith’s ideas and his context. These efforts have been energized by a recovery of TMS, which has inspired a host of interdisciplinary perspectives on the interrelations between the moral psychology, ethics, and social commentary of that work with the political economy of WN.

Contemporary Smith scholars now agree that there are vital connections between TMS and WN and perceive no fundamental discontinuity between the two works. Scholars agree that many have used Smith to promote ideas not present in his own works. Smith did not understand human beings as primarily self-interested, or as “rational” in the particular way that term is commonly used by contemporary decision theorists. Smith was by no means an apologist of greed. 

There is less agreement about the enduring significance of Smith’s ideas. Disputes about Smith’s legacy persist along ideological lines. Right-leaning Smith scholarship maintains that the conventional view of Smith presented by mainstream economists, although not without its problems, is essentially correct. Smith really was an outspoken advocate of free trade and economic liberalization. He was skeptical of government power and understood the importance in politics and economics of incentive alignment. It is anachronistic to call Smith a libertarian, but the label is not entirely misleading. 

Left-leaning scholars, on the other hand, fashion Smith in the image of modern progressivism. They maintain that Smithian ideas of liberty, equality, and justice, if we appreciate their specific logic in the original context of Smith’s texts, are consistent with the main tenets of the modern progressive agenda: sweeping economic regulations, progressive rates of taxation, and an expansive welfare state. Smith, it is said, was evidently concerned with issues of justice, fairness, inequality, and the corrupting social influence of large-scale, for-profit enterprise. It is not unreasonable to imagine that, were he alive today, he would identify as some sort of social democrat.

Left-leaning Smith scholarship today often builds on sound historiography. But its revisionary interpretations push too far. Because Smith’s philosophy was misconstrued and sometimes misrepresented, scholars conclude—or at least very strongly imply—that his ideas do not much support the causes he has historically been invoked to support. When we recognize that the political and ethical contexts of Smith’s trade arguments fell away in the late 18th century, we should reconsider the commonplace assumption that Smith was a strong free trader. When we see that Smith is much more sophisticated and nuanced than some economists—the Chicago School is a favorite target here—made him out to be, we should presume that Smith’s ideas are at odds with the main political cause they championed: the broadscale liberalization or de-governmentalization of society. 

Such arguments are non sequiturs. Context is of course important. But missing the full context of an argument does not necessarily mean that one has misapprehended its conclusions. One might even partially misapprehend the conclusion of, say, a political argument but still rightly perceive its tenor and the general direction in which it points. 

Recovering a more robust picture of Smith does not require one to reject completely all aspects of his popular image, as is sometimes suggested. Smith did not condone greed. He did not argue that markets are “perfect,” however one might take such a statement. He did not believe that economic and political life could be separated. He did not denigrate statesmanship. He affirmed the need for government action, including the provision of some public goods. But Smith really was a protester for free trade. He really did believe that each should be free to pursue his interest his own way within the rules of justice. He really did believe that many political interventions distort economic activity, serving the interest of a few at the expense of the many. “The invisible hand” metaphor, although it grew in popularity in the 20th century, really does capture an essential element of Smith’s thought. It does not mean quite what some economists have said it means; but neither is it completely orthogonal to classic 20th-century economic interpretations. 

What one finds through a deeper reading of Smith and his times is not something completely alien to common assumptions but something richer and more sophisticated that reformulates and sets those assumptions on stronger foundations. When we explore Smith’s great work of political economy within its ethical, philosophical, political, and even theological dimensions, we find something more compelling than, but not totally at odds with, popular readings of Smith as a committed advocate of liberty.

Smith’s political economy subsisted within a wider enterprise of moral philosophy. Moral philosophy, as it was taught in Scottish universities in the 18th century, and as Smith himself taught it during his tenure at the University of Glasgow, moved from considerations of natural theology to discussions of moral psychology, ethics, politics, jurisprudence, and finally political economy. 

The basic ordering of the curriculum of moral philosophy in Scotland brings out a commonly neglected point: Political economy was there conceived not as an independent study of commerce but as an outgrowth of an integrated study of social affairs, which was itself grounded in theological reflection on the nature and order of reality. Eighteenth-century political economy participated in what J.G.A. Pocock described as a “commercial humanism.” 

The Christian theological framework contributed to a basic set of presumptions in Scottish social thought. Social orders are a providential outflow of the ordinary sentiments and activities of individuals. They do not need to be designed and maintained in any centralized manner. Rather, they bloom and flourish as individuals discover and abide by a basic set of universal moral principles, the most important of which correspond to three of the duties elaborated in the second table of the decalogue: thou shalt not murder, thou shalt not steal, thou shalt not bear false witness against thy neighbor. Smith described these in TMS as the duties of “commutative justice.” We are commutatively just to another “when we abstain from doing him any positive harm, and do not directly hurt him, either in his person, or in his estate, or in his reputation.” When we obey the dictates of commutative justice—and the call of conscience generally—we may, Smith wrote, be said to “co-operate with the Deity” and advance “the plan of Providence.”

TMS is a work about the social and psychological processes through which we discover the principles of morality. WN, on the other hand, is partly an exploration of the extended social order that emerges when individuals subject themselves to the rules of commutative justice. WN is commonly said to work from the assumption that humans pursue their interests. That is true. It is important, however, to recognize that, for Smith, “interest” or “self-love” is not to be equated with egoism. As Smith’s teacher Francis Hutcheson remarked, “When men are said to be seeking profit or their own advantage, they are surely quite often serving their offspring and family.” Smith surely agreed. 

But it is also true that, as Jeffrey Young has argued, “if self-interest is a bedrock [of WN], justice is a substratum.” Much of the famous economic analysis of WN, especially in Books I and II of the work, presupposes a basic ethical framework of commutative justice. When we tend to those presuppositions, we see clearly that WN is not simply a descriptive analysis that takes individuals as they are; it is also an effort to influence the ethical dimensions of our interests by elaborating the beneficial outcomes that can be realized, without political mediation, if we treat one another with justice.

To rehearse the basic arc of Smith’s analysis, Smith points out that abiding by the rules of commutative justice fosters exchange. Patterns of exchange give rise to the division of labor. As exchange networks grow, the division of labor extends, which spurs innovation and capital accumulation. Innovation and capital accumulation improve labor productivity, increase wages, and drive down prices. The whole process can be described as a cooperative enterprise. In pursuing the material betterment of ourselves and our familiars within the bounds of justice, we may be said to cooperate with one another. But more importantly, we may be said to cooperate with the Author of Nature in advancing the size and average living standard of the human population. The economist Jacob Viner wrote to Alec Macfie, coeditor of the Oxford variorum edition of TMS, “The question for Smith, I think, is what does God want? And his answer, an adequate living standard for as many persons as possible.”

Through Smith’s analysis we see the enforcement of commutative justice as a mode—in fact, one of the most effective modes, at least as far as politics is concerned—of promoting the common good. When individuals behave justly toward one another, they indirectly promote an extensive commercial order that furthers their own interests and that of humanity generally. This is the essence of the invisible hand. 

Invisible-hand-like sensibilities find further elaboration in Smith’s discussion of price formation. His treatment of prices, from a contemporary perspective, is somewhat muddled. But he correctly explains that actual market prices (as opposed to “natural prices”) are a function of a “higgling and bargaining” process. The market price of a good comes to reflect, at least in a metaphorical sense, its relative scarcity and utility or, in contemporary language, its supply and demand. Factors of production—labor, land, and capital—will be repurposed, if they are legally permitted to do so, in response to market prices as workers, landholders, and merchants compete for higher returns. The universal search for higher returns will, through the tendencies of competition, encourage innovation and cost savings, ultimately to the benefit of consumers and the “good cheer of private families.”

While there is nothing mystical about market exchange in Smith, the macro-outcomes are truly remarkable. Hence, when Smith treats them in his famous discussion at the end of the first chapter of WN, he can’t help but resort to exclamatory statements of awe and wonder. One also can’t help but perceive something providential and reverential in the language Smith uses to describe, for several pages, the miraculous conjunction of processes required to produce even the most “coarse and rough” garment worn by the common “day-labourer,” the woolen coat. 

Smith well knew that the potentialities he presented in his economic analysis were far from being realized in his own society. British politics in the late 18th century had been captured by various factions that promoted policies that served their own interests at the expense of the general public’s. These factions peddled a set of wrongheaded economic theories that are today glossed as “mercantilism.” The mercantilism of Smith’s day, in short, was a philosophy of power and plenty. It proposed that the wealth of a nation grows as it increases its exports of manufactured goods in exchange for precious metals, which it could use to fund military and colonial expeditions that would at once establish its geopolitical dominance and uncover new supplies of precious metals. 

In Book IV of WN, for which he is most famous, Smith attacked mercantilist theory, beginning with its understanding of wealth. Wealth is not money, but what money can buy: real goods and services available to citizens. But what really drew Smith’s ire was not mercantilist misconceptions of wealth per se but the measures those misconceptions were used to support. 

Mercantilists proposed a combination of tariffs, tax breaks (drawbacks), and production subsidies to encourage exports and limit imports to facilitate a healthy “balance of trade.” Smith took issue with such policies on economic grounds, drawing from the analysis developed in the earlier parts of the book. He lambasted the “absurd speculations that have been propagated concerning the balance of trade.” He took issue with mercantilist industrial policy, moreover, on epistemic grounds. Individuals in their local situations can “judge better than any statesman who should attempt to direct private people in what manner they ought to employ their capitals.” Mercantilist speculations—and economic regulations generally—are akin to “absurd prescriptions of the doctor.” But perhaps most fundamentally, Smith took issue with mercantilist practice on ethical grounds.

Government by nature involves certain violations of liberty. The British state of Smith’s day had gone further. Not only did it violate liberties, but it used its authority to elevate the interests of a small group of citizens—merchants and politicians who offered one another mutual support—over the interest of the great body of people. Import taxes and subsidies raised prices and distorted resource allocation, reducing living standards for ordinary citizens; colonial ventures burdened the people with present taxes and future debt obligations for commercial benefits that could be easily realized through a simple and less costly policy of free trade. For Smith, such elevation was not only counterproductive in economic terms, but deeply immoral: “To hurt in any degree the interest of one order of citizens for no other purpose but to promote that of some other, is evidently contrary to that justice and equality of treatment which the sovereign owes to all the different orders of his subjects.” 

Underneath this proclamation rests Smith’s animating conviction that individuals are moral equals, whether street porters, philosophers, politicians or even the enslaved. (It is no coincidence that William Wilberforce was an admirer of Smith’s writings. WN treats of the economic inefficiencies of slavery, and TMS comments on the brutalities of the slave trade.) That conviction—which worked itself into the lifeblood of classical economic theory through the much-maligned assumption that all are to be analyzed equally as self-interested agents—is central to understanding Smith’s entire humanistic project. 

Amid his polemical engagement with mercantilism, Smith articulates his own ethical vision, which is implicit from the outset of WN and finds final expression as “the liberal plan of equality, liberty, and justice.” It is this formulation in WN, more than any other, that gave the word liberal its classical political meaning. 

Smith’s liberal plan is, in some sense, not a plan, as it underdetermines the precise path of desirable political action in time and place. Smith appreciated gaps between the real and the ideal, and he understood that imprudent efforts to realize the ideal could easily end up making things worse—hence the conservative shades of his liberalism. But his liberal plan nonetheless points out the general direction of desirable reform. It casts a vision of faith, as relevant in 2026 as in 1776: When freed from political depredations and protected in their lives, liberties, and property, ordinary individuals, doing ordinary things in pursuit of material betterment, can discover and promote social improvement through voluntary association and the remarkable properties of market exchange. 

(Master image: Composite image incorporating the “Muir” portrait of Adam Smith by an unknown artist / Wikimedia Commons, Abraham Storck’s Southern Harbour Scene with Merchants (c. 1690–1700) / Wikimedia Commons, and a page from the first edition of Adam Smith’s Wealth of Nations / Courtesy of University of Glasgow Archives & Special Collections, RQ 3114-3115)