Home Economic History Series Adam Smith on Self-Betterment and Policy Impacts

Adam Smith on Self-Betterment and Policy Impacts

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In this celebration of Adam Smith’s contributions to the field of political economy, Peter J. Boettke and Alain Marciano take a passage from The Wealth of Nations and discuss its implications for judging policy processes and outcomes. Smith emphasizes the roles of individual behavior and self-improvement as central to the policy process and society’s betterment as a whole. The connections between Smith’s seminal contributions to political economy and modern schools of thought within the field are also discussed.

The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations.” (Adam Smith, 1776)

It would probably not be difficult to find quotes from Adam Smith’s work that summarize his system of thought. Yet, this quote from The Wealth of Nations is remarkable for its brevity, clarity, and richness. It introduces themes that, in the twentieth century, would help lay the foundations of what is now central in modern economics.

The quote is found at the end of the discussion “Of Bounties,” which Smith concludes with a “Digression concerning the Corn Trade and Corn Laws.” It was more than a digression. Smith went on for about 20 pages to explain a point made in the very first sentence: “The praises which have been bestowed upon the law which establishes the bounty upon the exportation of corn, and upon that system of regulations which is connected with it, are altogether unmerited” (IV, V, p. 523; italics added). Neither the “bounties” nor the “laws” used to establish them resulted in the “improvement and prosperity of Great Britain” (IV, V, p. 540). Rather, this prosperity was a result of “[t]he natural effort of every individual to better his own condition.”

Smith had thus claimed not only that economic activities take place in a legal system, the study of which is crucial to understand the impact of bounties on the economy. Economists will soon—probably the first to do that was David Ricardo, just a few decades after Smith—forget how legal rules and institutions matter for the economy and therefore for economists. That was not all, however. The other crucial point that Smith emphasized was that the effect of policy measures and legal rules came from how individuals behave. This is of great importance. It is the behavior of individuals that will determine whether a society will be wealthy and prosperous. This is very typical of Smith’s views and echoes what he wrote on the butcher, the brewer, and the baker, as well as his writings on the invisible hand. One might even say that this focus on human beings, at least as much as his insistence on institutions, is typical of Smith’s political economy.

Of particular interest in this quotation is Smith’s optimism. He believed that individuals would exert efforts that would eventually benefit their whole country. By contrast with what most economists now assume, Smith did not assume that individuals would try to benefit privately from the regulation. Then, also relevant here is the proposed motivation for such efforts: individuals want to improve their condition. It is easy to see a possible connection between Smith’s views and those of Chicago economist Frank Knight—for instance in his 1922 article “Ethics and the Economic Interpretation”—or Virginia political economist James Buchanan in “Natural and Artifactual Man” (1979). To these later thinkers, one of the main behavioral assumptions is that individuals will always want to improve their condition and become “better” individuals. These efforts are supposed to be natural. One could try to understand what Smith means, anticipating Buchanan’s difference between a “natural” and “artifactual” man. Does Smith believe that the propensity to improve one’s condition has biological roots and is shared by men, women, and animals? Or rather does he mean that a human being is between Buchanan’s natural and artifactual man? This remains open to discussion.

What does not seem open to discussion is how different is Smith’s—and for that matter Knight’s or Buchanan’s—perspective from the one adopted by most most standard or mainstream economists. Let us refer to Arthur Pigou, who stressed the individual’s defective telescopic faculty, or Richard Musgrave and Paul Samuelson, who insisted on the individuals’s tendency to free ride. Here, Smith suggested, we should trust individuals; we should believe in their capacity to invent and create because it is part of their desire to become better persons. This also echoes what Julian Simon wrote in his fundamental book, The Ultimate Resource (1983)—the ultimate resource is the human imagination and that the great diversity of humaningenuity and creativity.

One sees that, in adopting such a starting point, Smith immediately gives a dynamic perspective to his purpose. His words—“to better his own condition” and “carrying on the society”—clearly characterize a political economy approach. Indeed, Smith explains that the impact of a bounty, and of a system of laws upon which the bounty is based, cannot be evaluated once and for all. It is not possible to say, for example, that this or any other measure of public policy has reached a Pareto situation, to use an anachronistic concept. Once a policy measure is taken, Smith tells us, we have to remember that its effects will take place as the result of a process. This means that policy does not simply consist in moving from one (possibly inefficient) situation to another (possibly efficient) situation. Policy changes the rules, and this new situation affects how individuals behave. In the end, Smith’s optimism insists that individual efforts will pay off. But this payoff will only be known after a process through which individuals adapt to the new rules.

The lessons this quotation teaches us are rather straightforward and obvious. Human beings have to be trusted. Policymakers should not try to tell individuals what to do because individuals always do what is best for them. This is the reverse of what most policies aim at—nudging or obliging individuals to be what some think they should be. Instead, politics and policymaking should consist in making room for the creative forces of the human imagination, to allow individuals to become better persons. Otherwise, it becomes tyrannical.

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