What Can Economists Do?
Finding Inspiration in ‘The Wealth of Nations’
In his discussion of grain policy in Book IV of The Wealth of Nations, Adam Smith elaborates the workings of price speculation. In attempting to take advantage of discrepancies between present and anticipated future prices, speculators smooth the distribution of goods across time. When speculators foresee future scarcity, they purchase goods in the present and hold them for the sale in the future. Speculators intend only their own gain. But they inadvertently help alleviate shortages. The successful speculator in a grain market effectively acts, according to Smith, in the same manner “as the prudent master of a vessel” who “puts [his crew] on short allowance” when he anticipates coming supply shortages.
Despite their positive social function, speculators are generally viewed with a combination of fear and loathing. The medieval church for many centuries maintained that profits earned through various modes of speculation—including engrossment (the buying up of a stock of goods with the intent of reselling at a higher price) and forestalling (holding back goods from the market in anticipation of a future price increase)—were instances of turpe lucrum: base, ugly, and unjust gains. Similar sensibilities continue to motivate popular clamor today against “price gouging” and “greedflation.”
Smith diagnoses such sentiments as superstitious: “The popular fear of engrossing and forestalling,” he writes, “may be compared to the popular terrors and suspicions of witchcraft.” Like many of those accused of witchcraft, those prevented from buying and reselling goods for profit are often innocent victims of popular superstition. Speculators in grain markets—and many entrepreneurs more broadly—are erroneously condemned as causes of scarcity by their association with shortages in the public imagination. But the condemnation is predicated on a conflation of cause and effect. Price speculators earn profits not by causing shortages, but by successfully alleviating shortages by bringing goods to market in times of dearth.
If markets were liberalized, Smith hypothesizes, clamor against speculators might diminish. Liberalization—allowing people to pursue their interests their own way—would lead to abundance. And abundance would probably “prove effectual to put an end to the popular fear of engrossing and forestalling.” Smith’s hypothesis here might seem overly optimistic, for superstitions are not easily banished. Most of us today enjoy what, for Smith, would have been unimaginable levels of material abundance; yet unwarranted economic prejudices persist. Smith’s optimism here must, however, be tempered by his famous assertion elsewhere in The Wealth of Nations that the expectation of liberalization is as “absurd as [the expectation of the establishment of] an Oceana or Utopia.”
To expect economic liberalization in any polity at any time, not just 18th-century Britain, is absurd for reasons including entrenched political interests, political capture, and status quo bias. It is also absurd given how people generally form their economic opinions. Most of our economic opinions are not formed through careful deliberation and reasonings about cause and effect. They are adopted dogmatically, with the occasional support of spurious correlations, according to their general fitness with our broader worldviews. This observation dovetails with Smith’s diagnosis of the “superstitious” nature of our prejudice against speculation.
Working from a Christian view that God created an abundant world of potential for humankind to enjoy in common, one might assume that the economic problems we observe are a simple function of entrenched and repeated individual moral failings. Poverty is caused by the accumulation by select groups of individuals of wealth. These individuals advance their interests at the expense of the masses through deceptive dealings and various modes of exploitation. If we confiscate the wealth and put a stop to the deceptive dealings—engrossing, forestalling, usury and the like—the problem of poverty will take care of itself. An anonymous 5th-century Pelagian tract called De Divitiis (On Riches) expressed such a conviction in these terms: “Get rid of the rich man, and you will not be able to find a poor one. Let no man have more than he really needs, and everyone will have as much as they need, since the few who are rich are the reason for the many who are poor.” To put the point in Rousseauian language: solving our economic problems requires simply that we “eat the rich.”
Such sentiments are exceedingly common, exceedingly natural, and exceedingly misguided.
Smith recognized the serious challenges posed by wayward public opinion for political reform. The Wealth of Nations contains numerous discussions of groupthink in economic policy. It describes landlords and laborers as adopting the preferred protectionist policies of merchants not because they understand protection to be in their interest, but because merchants have made such opinions fashionable. In addition to his discussion of the superstitious view of speculation, Smith diagnoses opinions concerning grain laws generally as quasi-religious: “The laws concerning corn may every where be compared to the laws concerning religion.” People, he reasons, are especially unreflective in matters pertaining to their stomachs and their understandings of their eternal destinations. Politicians therefore must tread carefully around citizens’ prejudices in these areas, or else risk unraveling the social order. The dynamic between dogmatic popular conviction and political feasibility motivates Smith’s conclusion that “we so seldom find a reasonable system established with regard to either of those two capital objects [grain and religion].”
Recognizing the tangled, quasi-religious sources of economic opinions checks the prospects of political reform, especially as we observe the interaction between popular opinion and political incentives. We should not expect that theoretical deductions and statistical evidence, however robust, will shape public opinion. The answer to the question “What can economists do to sway public opinion?” is “Not much.” Economists hoping for reforms would do well to shift some of their efforts away from traditional theoretical and empirical discussions towards broader engagement with issues of worldview. It is here that Adam Smith’s real genius and inspiration lie.
The Wealth of Nations is a formidable work of economic theory. But it is, at its heart, a work of vision. Smith communicates a vision of human life that speaks not simply to our wallets but to our ethical intuitions. He communicates a vision, as Jeremy Bentham described it, of “universal benevolence” in which individuals, communities, and nations are “associates and not rivals in the grand social enterprise.” It is in communicating and depicting this vision, partly but not entirely through economic reasoning, that Smith has inspired theorists and laymen alike for centuries to undertake efforts towards liberalization. It is from Smith’s persuasive engagement with perennial visions of human life that contemporary classical liberal economists ought to take our cues.
Erik W. Matson is the Gibbons Fellow in Economics at the Catholic University of America and Co-Director of the Adam Smith Program at George Mason University.