- The Washington Times - Tuesday, November 23, 2010

ANALYSIS/OPINION:

Any understanding of liberty in the context of our commercial society under the U.S. Constitution has to include a review of Adam Smith and the Scottish Enlightenment, where many of the ideas that pervade the Constitution and the related U.S. economic model were developed. 1776 was an important year because it gave us both the Declaration of Independence and Smith’s “Wealth of Nations.”

The work of Adam Smith is as relevant today as it was in 1776, especially given the questions raised about capitalism as a result of the recent economic crisis. His great insights included anchoring the theory of free markets in human nature and explaining them by use of examples from the American Colonies (not once feudal Europe). It is difficult, therefore, to understand either free markets or many of the key building blocks of our Constitution without some understanding of Smith.

Contrary to popular belief, Smith was by training a moralist who always thought his first book, “The Theory of Moral Sentiments,” was more important than “Wealth of Nations” (as observed by P.J. O’Rourke and Nicholas Phillipson, Smith’s most recent and insightful biographer). The question he addressed in the former was how human beings developed moral sensibility, as he rejected the prevailing notions at the time that it was either innate or religiously based.

He found his answer in his psychological insights into the workings of human imagination and sympathy, which then meant trying to understand others and how they might see us. What concluded was that as man persisted in trying to improve his own economic condition he had to learn to cooperate — to use a very modern term — with his potential counterparties in order to expand his and their opportunity. Oversimplified, Smith understood the need to internalize the Golden Rule, “Do unto others as you would have them do unto you,” or “What goes around comes around.” The bigger the marketplace for cooperation, the bigger the opportunity for self-improvement and need for development of traits or prudence, self-discipline and moral behavior.

Thus, engagement in free markets enabled self-improvement and at the same time refined the moral sentiments that made the market work even better. The result was an almost revolutionary focus on individual freedom where “the obvious and simple system of natural liberty establishes itself of its own accord.” Smith continued that under such a system, “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,” as a process by which “the sovereign is completely discharged from a duty … of superintending the industry of private people.” And, the need for private individuals to work cooperatively with others to allow expanding commerce to flourish would in a civilizing way produce the prudent and virtuous citizenry essential to an ordered society.

Critical to Smith’s vision and elimination of all artificial “systems of preference or restraint” that interfered with free men pursuing their own interests. What he feared was government-supported monopolies of merchants or suppliers of money capable of seeding credit bubbles of the kind recently experienced in the global trading system. Exploitation of government power by businessmen for private gain — “rent-seeking,” “agency capture” or “crony capitalism” in modern parlance — was perhaps his worst nightmare. If Smith were alive to see the interwoven aspects of the government-supported and -financed subprime mortgage securitization on Wall Street, he might repeat his observation that “the government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatever.”

The Enlightenment’s first contribution to our Constitution was to support the separation of powers with its emphasis on self-improvement — setting “ambition against ambition” in the Federalist Papers phrase — to match Smith’s vision that liberty would allow every man “to bring his industry and capital into competition with those of any other man, or order of men.” But Smith’s second contribution — to support the creation of an internal market free of the constraints of monopolies and other preferences supported by state interference was just as important, if indeed not the flip side of the same thing. It is perhaps appropriate that a British historian, Paul Johnson, would remark that Chief Justice Marshall’s constitutional rulings that established the basis for entrepreneurial capitalism to flourish in an unfettered internal market were unrivaled in the entire history of jurisprudence.

Smith probably would be appalled, but not surprised, by current events if he were alive today. He and his colleagues gave great advice to the founders about the danger of big government and crony capitalism and the benefits of liberty and free markets (based critically on the experience of the American Colonies). Smith’s advice is still good today, and we could do worse than to take a look at what inspired the whole modern world economic model.

C. Boyden Gray served as White House counsel in administration of President George H.W. Bush.

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