How is Adam Smith still relevant 300 years after his birth?

The works of Adam Smith still hold influence. The man they call the “father of economics” is still discussed in classrooms and his concepts of things such as ‘the invisible hand’, ‘commercial society’ (which later became capitalism) and ‘free trade’ are still used today. With his two master works, The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776), Smith was the first to treat economics as a comprehensive system and an academic discipline.  

We turned to a handful of HSG academics to get a personal perspective into Adam Smith.  They responded with a kaleidoscope of different responses, opinions, and thoughts. Many of them wrote much more than was needed, making this text longer then planned… but one rarely celebrates 300 years of anything, so I guess in this case, a longer text is okay. We focused on four areas: What made Smith’s work approach exceptional? How has the invisible hand influenced their work? What are the details of his work that have been forgotten? And what were the failings or omissions of his work?  

Exceptional approach: The generalist 

Political Scientist Christoph Frei notes that: “Adam Smith’s holistic approach to social phenomena offers an inadvertent, but most valuable contribution to the ways of doing science. He is a generalist in the very best sense of the term, making use of insights from various fields that would today carry labels such as history, psychology, economics, political science and so forth.” 

Economic historian Florian Schui concurs, noting that unlike many of today’s economists, Smith considered psychology, history, politics and society when explaining economics – an approach that could help economics become more meaningful today. “Economists need to get out of their models and into the real world if they want to emulate the great founding father of economics.” 

Inspired by invisible hand 

Economist Beatrix Eugster comments that in The Wealth of Nations, Smith attributes growth and prosperity partly to the division of labour. In today’s world, with advancements in automation and digitization, she believes that Smith’s approach to these challenges can provide us with inspiration in handling them. As all economics students, Eugster was introduced to Smith’s principle ‘the invisible hand’, which describes the way wealth is created. Smith states that wealth does not live in a vacuum and that when individuals act in their own self-interest for gain in business, their actions are led by the invisible hand, which ultimately will promote the good of society. In her current work evaluating public policy, Eugster is reminded of this teaching and only later discovered that the invisible hand does not always steer society in the optimal direction.  

Eugster emphasizes that, “Well-intentioned policies can sometimes have unintended consequences… and similar to Smith’s observations, the underlying mechanisms often remain hidden and only become apparent after the policy has been implemented. Consequently, part of my research is dedicated to making these incentives more visible, enabling a better understanding of what’s driving the invisible hand.” 

Details forgotten 

Looking at parts of Smith’s work that deserve to be revisited, Florian Schui points out that in his ‘society of perfect liberty’, the author says that the government needs to take care of tasks that are useful for society and where private actors will not get involved because of expense or risk. Those in favor of a small government use Smith to point out that government should be in charge of defense, maintaining the rule of law, infrastructure and not much more.  

Florian Schui continues, “This category certainly includes major challenges such as climate change. Private individuals are discouraged from getting involved because of cost and uncertainty. A private company may prefer to make a safer profit with a conventional technology even if it means damaging the environment. Smith would certainly argue that there is nothing wrong with the government guiding innovation and investment to make sure that we have a future on this planet. Surprisingly this means that you can be a true disciple of Smith, a true liberal and still believe that the government has a major role to play in the green revolution that we need.” 

Failures and flaws found in his work 

Like most great minds, Smith did not get everything right. Taking into account that he wrote his two most influential works in 1759 and 1776, before the steam engine and other inventions transformed Europe, he believed that there would be no more further innovations beyond the division of labour. Florian Schui describes this as not an unusual mistake as most people see themselves at the ‘end of history’. Moreover, it is something that we can learn from, knowing that great change is always around the corner.  

Christoph Frei also considers that Smith is often misread and misunderstood. He illustrates that, “Scores of scholars, and very famous ones at that, hold that Smith’s magnum opus on The Wealth of Nations is grounded on the assumption that people inevitably act out of self-interest. In this light, liberalism is all too easily reduced to an ideology that nurtures and cultivates egotism. Nothing, however, could be farther from the truth. In fact, Adam Smith is a greater believer in the concern for others, more than even David Hume. But who will read his Theory of Moral Sentiments today?” 

Philosopher Federico Luisetti took Smith’s views on slavery into account. “Although Smith had no sympathy for slavery, which he defines as ‘the vilest of all states’, he minimized the destitution of enslaved Scottish coalminers (colliers) and salters, and he did not openly condemn the role of Scotland in the slave trade or acknowledge the economic gain of those profiting from slavery. For a man dedicated to a system of thought centered on free and individual labour, this is a shameful mark on his legacy.” 

The greatest damage deriving from Smith, argues Florian Schui has not been done by Smith himself but from the ways his ideas have been partially understood and used later. Schui asserts, “The majority of economists who talk about the invisible hand usually come from one of two groups: those who have not read him and those who do not understand him. As a result, many people know a caricature of Smith: a man who tells you that humans are selfish and greedy and that this is all for the best and that we need no state beyond the bare minimum. But when you take the time and go to the library and actually read Smith, you find that his views are so much more complex and intelligent.” 

Mostly seen as a forward-looking and inspired thinker who, at times, is a victim to his epoch, Adam Smith could not have accurately have forecast the development our society has undertaken. He would have fit in well at the University of St.Gallen, a place where such interdisciplinary thinking and research about the economy is cultivated. One thing however is abundantly clear: Reading and examining Smith’s work in The Theory of Moral Sentiments and The Wealth of Nations is worthy of our time, can help us to understand our past and can inspire us to tackle the challenges our society faces with inspiration and imagination.

Beatrix Eugster is an economist with a focus on labour economics and public economics with a focus on disability and integration. 

Christoph Frei is a political scientist with a special focus on international relations. 

Federico Luisetti is a philosopher and a professor of Italian culture and society. 

Florian Schui is a historian of economic and political thought. 

Image: Adobe Stock / Andras