Look to Adam Smith For the Solutions to Our Stagnation
Shockingly weak May and June job reports have revived Americans' anxieties about a stagnant economy and vanishing opportunities.
What's more, the federal government's tally of the "workforce participation" rate came in at just under 63 percent. A record 95 million working-age Americans are not participating at all. In effect, they've walked away from the promise of upward mobility.
Yet the cure for what ails our economy is the very same prescription that enabled an astounding run of growth and top-to-bottom prosperity for much of our nation's history. Namely, the formula of "peace, easy taxes, and a tolerable administration of justice" authored by Adam Smith, a great Enlightenment thinker, whose birthday most recognize as June 16.
Widely regarded as the father of modern economics, Smith spent much of this early career in a deep study of study of ethics and philosophy, paying special attention to politics and social relations. Given his vast influence on the American Founders, a strong case could be made for making the Scotsman's birthday a national holiday.
His reputation rests on two great works: The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Numerous Smith biographers, such as E.G. West, have claimed that Smith's "treatise of 1776 struck a mighty blow at the trade walls which had been erected around the nation states of Europe by the traditional protectionist or mercantilist politicians. In particular, the belief of many of the latter that one nation could become richer only if a rival became poorer."
Clearly, not everyone has gotten the message. In the summer of 2016, we are once again debating the merits of free trade and disputing the benefits of globalized commerce. It is very simply a return to the policies of mercantilism, or economic nationalism, that Smith so convincingly refuted in his day.
One of Smith's key insights is that in foreign trade and in commercial society at all levels, both sides gain something in the exchange. These mutual gains from voluntary trade make everyone more prosperous. But to enjoy the full benefits, people must be allowed to trade freely within a framework of laws, but with minimal interference from government planners and overseers. Smith was also unequivocally opposed to special favors for politically connected enterprises, or what we would today call crony capitalism.
Instead, Smith placed his hopes on the genius of the individual-the craftsman, shopkeeper, and early innovators of the Industrial Revolution - who would spur growth and create wealth. To illustrate how these grassroots economic forces could affect such leaps in prosperity, he offered the powerful metaphor of the invisible hand. In this, Smith showed, a business proprietor operating in his or her own niche of the economy could "promote an end which was no part of his intention"-namely, "to promote the public interest."
We understand this concept now as the division of labor, which describes how, in a complex industrialized economy, myriad relationships and dependencies, to a surprising degree based on trust, are necessary for the production of the simplest of goods and services. In Smith's famous phrase, "it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."
Regrettably, the elegant invisible hand illustration has been too often poorly understood by those opposed to enlarging freedoms for trade. The invisible hand neither absolves us from building a better society nor provides a justification for a "greed is good" ethic of selfishness.
Smith would have been shocked at such a misinterpretation of his work, and appalled at the accusation that his life's work was a justification for callous greed and the exclusion of the poor. In the rigidly class-conscious society of 18th-century Great Britain, Smith was a tireless promoter of policies that would allow the shopkeepers and tradesman - not the privileged and wealthy aristocracy - a wider participation in the flourishing societies that free trade would bring.
Edmund S. Phelps, the 2006 Nobel laureate in economics, recently observed that "policymakers have no plausible idea about what can be done" about the long running stagnation gripping world economies. Phelps' proposal is to encourage innovation from startups and a "growing number of aspiring innovators toiling in home garages."
Sounds a lot like Smith's faith in the butcher, the brewer, and the baker of his day. Maybe it's time to put The Wealth of Nations back on policymakers' required reading lists.