Adam Smith: Economic Philosopher for the 21st Century

Three hundred years after Adam Smith’s birth on June 16, 1723, it is high time to understand the Scottish philosopher of the Enlightenment in a properly balanced manner.

Adam Smith, the neoliberal?

As it turns out, Smith – who is regarded as the father of modern economics – is by no means the forerunner of the ruthless brand of capitalism or neoliberalism, which he is regularly made out to be. This widespread, but false assessment is based on a single, misunderstood formulation of his about the “invisible hand” of the market.

Anyone who takes a closer look at the work of this moral philosopher and economist will see that Adam Smith deliberately used his two scientific disciplines dialectically in his thinking. On the one hand, he is concerned with the liberation of market forces.

Remember the contemporary context

Advocating for that at a time when feudal strictures still dominated daily life is only sensible. At the same time, however, he believed strongly that economic exchange and fair competition ultimately serve a higher good – the common good.

Understood in this way, Smith could prove to be a central economic and philosophical driving force to address many of the challenges of the 21st century.

All those who want to ascribe to Smith, due to the remark about the “invisible hand of the market,” an anti-regulatory and even anti-governmental impulse, fail to recognize that one needs to integrate his ethical and economic works to arrive at a properly balanced – and truthful – assessment.

Such an inspection reveals that Smith’s thinking is rooted in a differentiated system of moral values, moral rules and laws. The goal is to effectively limit the pursuit of self-interest, prestige, and power, or to steer it in a direction compatible with the common good.

What the state must deliver

In The Wealth of Nations, published in 1776, Smith describes in detail the far-reaching responsibility of the state to provide and protect public goods. In particular, he refers to public infrastructure and a comprehensive system of education.

He combines this with a reference to the importance of “civic virtues” so that in societies based on the division of labor, not only the “commercial spirit” dominates.

Addressing the consequences of the division of labor

This 18th century dialectician already foresaw the growing social dependencies that would result from a deepening of the division of labor. The vulnerability of supply chains has only recently reminded many of this highly topical challenge.

Smith sees two ways of responding to the interdependencies that result from the division of labor. Making oneself dependent on the goodwill of others is out of the question for him. He sees that as neither compatible with human dignity nor as efficient for a society based on the division of labor.

In contrast, he advocates exchange as a form of mutual agreement between supply and demand. For Smith, however, this must safeguard the legitimate interests of all participants and withstand the judgment of what he calls the impartial observer.

Adam Smith, a modern social democrat – or even a Green?

Applied to the present day, Adam Smith’s reference to the legitimate interests of all participants can be understood as an early formulation of democratic capitalism that informs the thinking of modern European social democracy.

Similarly, Smith could also be understood as an early proponent of green economic philosophy in terms of the rights of citizens to be consulted and to participate in economic decision-making.

In other words, the contrast with the stereotypical understanding of Adam Smith quoted at the beginning could not be greater. Adam Smith is not an advocate of the rich, but takes them to task. He is therefore not the opponent of participation rights for the broader public, but their advocate.

A forerunner of Elinor Ostrom

The importance of these connections can also be seen in the fact that the moral philosopher continued to develop his theory of moral sentiments from 1759 until the end of his life.
Smith’s integration of economic and moral thought linked economic efficiency and personal responsibility with social and environmental responsibility.

His economic and moral concepts provide crucial guidance for both production and the protection of the commons, both of which are essential for sustainable development.

In this respect, Adam Smith can be seen as a forerunner of Elinor Ostrom, winner of the 2009 Nobel Prize in Economics. His reference to the need for reciprocal changes in roles and perspectives provided an early empirical and normative key to the “tragedy of the commons.”

The mitigation of conflicts over the use of scarce resources was the focus of Ostrom’s work. This core issue of (economic) life is more relevant today than ever before, especially with regard to species, soil and climate protection.

Conclusion

These considerations make one thing clear above all: At the core of Adam Smith’s thinking is both an economic-strategic dimension and a democratic-practical one. That makes him equally compatible with Christian Democrats, Social Democrats, Liberals and Greens across party lines in Europe.

Freed from the corset of a compulsively truncated interpretation, the 18th century Scottish philosopher of the Enlightenment can provide us with important impulses for central economic policy issues of the future.

These range from the design of trade relations and supply chains to competition for the common good and the economics of social and ecological commons.