Natural Liberty

Most of those who have heard of Adam Smith probably think of him as an advocate of free markets. There is a great deal to be said for this reading of the Wealth of Nations. Smith did not use the French phrase laisser faire and he only mentioned a free market once, in a specific case, not as a general principle.

All systems either of preference or of restraint, therefore, being thus 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... According to the system of natural liberty, the sovereign has only three duties to attend to... first, the duty of protecting the society from violence and invasion of other independent societies; secondly,... the duty of establishing an 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 expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society. (Smith 1776 [1976]: 687)

That seems pretty clear. On the other hand, many scholars have pointed out that Smith advocated or at least accepted quite a few violations of this principle. Typical examples are his acceptance of the Act of Navigation, which restricted foreign shipping, on the grounds that protecting English shipping would be good for the navy, and that defence is more important than opulence (Smith 1776 [1976]: 464-5), and his support for restric­tions on the issue of small notes by Scottish banks, which were designed to reduce the risks of collapse of the banking system (ibid.: 324). The latter restriction is, according to Smith, similar in principle to requiring builders to build party walls between houses to prevent fire from spreading.

It would be inappropriate here to follow the convoluted debates about Smith’s invis­ible hand in any detail, but some simple points may be worth making. First, it is clear that Smith thought that natural liberty was good in itself, quite apart from the economic arguments for or against. Thus, for example, Smith considered two laws which restricted trade in opposite ways and rejected both. “Both laws were evident violations of natural liberty, and therefore unjust” (1776 [1976]: 530), although he also argued that both would be impolitic as well. Second, the claim that Smith is in some simple sense the ancestor of modern mathematical welfare economics needs to be very heavily qualified, on several grounds. One such ground would be that it is fundamental to modern welfare economics that, of two alternatives, it is better for an individual to have the one that he or she chooses or prefers. That is the significance of market demands - they show what people prefer. This is quite incompatible with Smith’s account of the deceptive attraction of wealth (mostly, admittedly, in the Theory of Moral Sentiments).