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“Little else is required to carry a state to the highest degree of opulence but peace, easy taxes, and a tolerable administration of justice.”
– Adam Smith
“He that gets all he can honestly, and saves all he can, will certainly become rich.”
– Benjamin Franklin
Last week I organized an all-day conference at Princeton University honoring Adam Smith, the father of free-market economics who wrote The Wealth of Nations in 1776, the miracle year.
Even now, 250 years later, his message still resonates with us. Participants came from Harvard, Boston College, the University of Illinois Chicago, the University of Wisconsin, and Princeton.Front row: Benjamin Friedman (Harvard), Michelle Schwarze (U. of Wisconsin at Madison), Mark Skousen (Chapman), Sam Fleischacker (U. of Illinois Chicago). Back row: Glory Liu (Georgetown), Greg Conti (Princeton), and Ryan Hanley (Boston College).View larger image
In my opening lecture, I talked about two worldly philosophers who’ve made a profound difference in our lives: Adam Smith, who was a Scottish professor, and the American businessman and diplomat Benjamin Franklin.
The two were contemporaries in the 18th century. Franklin was the elder statesman, born in 1706; Smith was born in 1723. They died in the same year, 1790.
Both spent a good part of their careers on how wealth is created in a nation and by individuals. They sought the answer to the question, “What is the secret to a prosperous life as a country and as a citizen?”
Smith was a Scottish professor who revealed his formula on how a nation developed economically.
Franklin actually put Smith’s formula to work and was a self-made man, going from rags to riches to become one of the wealthiest men in America.
Revolutionary Partners: Adam Smith Meets Ben Franklin!
Smith and Franklin knew each other. They crossed paths when Franklin visited Scotland in 1759 and again in London in 1773-75, when Smith would bring chapter after chapter of his manuscript to members of the literati, including Franklin, and would revise and sometimes rewrite entire chapters based on their critiques and observations.
Smith published his two-volume tome in March 1776, and four months later, Benjamin Franklin signed (and helped write) the Declaration of Independence.
Franklin was convinced of Smith’s arguments for free trade and laissez-faire. In Chapter 29 of my new book The Greatest American, which is titled “Benjamin Franklin: Adam Smith’s Invisible Hand?” I quote Franklin on various issues:
- The optimal size of government: “A virtuous and laborious people may be cheaply governed. Laissez-nous faire: Let us alone… Pas trop gouverner: Not to govern too strictly.”
- American foreign policy: “The system of America is to have commerce with every nation; war with none.”
- Free trade: “In general the more free and unrestrained commerce is, the more it flourishes. No nation was ever ruined by trade, even, it seems, the most disadvantageous.”
Sounds a lot like Adam Smith!
In return, Smith wrote positively in large sections of The Wealth of Nations about America and even favored its independence. He predicted America would become “one of the greatest and most formidable [nations] that ever was in the world.”
Note: In this column, I’m going to talk about Adam Smith and his formula for national prosperity. In my column for Liberty Through Wealth to be published this Wednesday, I’ll discuss the model Franklin developed to become financially independent – and how you can do the same.
In many ways, the “way to wealth” advocated by these two geniuses was the same for both the individual and the nation. As Adam Smith wrote, “What is prudence in the conduct of every private family, can scarcely be folly in that of a great kingdom.”
Adam Smith’s Model for Universal Prosperity
We can thank a Scot for our 100-fold increase in America’s standard of living and the sharp reduction in poverty.
The Scottish professor proposed a simple formula for success: Nations should adopt free trade, limited government, the virtue of thrift, balanced budgets, and sound money.
Smith called his model “the system of natural liberty.” He made an outlandish prediction in The Wealth of Nations, declaring in 1776 that his model would result in “universal opulence which extends to the lowest ranks of the people.”
It was a tall order. Indeed, at that time, life was “nasty, brutish and short” for most people, to quote Thomas Hobbes. There was very little progress.
But as the world gradually adopted Adam Smith’s model of free trade, low taxes, deregulation, patent law, and sound money (supply-side economics), we witnessed the Industrial Revolution first in the West and then in the East, leading to a 100-fold increase in our standard of living.
Smith’s policies of free-enterprise capitalism also sharply reduced poverty around the world.
His incredible forecast had come true. The following graph proves it.View larger image
Why Was Smith’s Model So Successful?
Smith’s book was primarily focused on how nations could succeed.
First and foremost was his “very violent attack” upon state intervention in the economy in the 18th century, which he called mercantilism (what we might call today “economic fascism” and “cronyism”).
Most Western governments were engaged in “a detailed economic policy which requires active intervention in the affairs of the community in a thousand and one ways,” to quote one historian.
Smith offered a better formula for economic growth: Unleash the powers of enlightened self-interest! Rather than depend on top-down government decision-making, leaders should maximize economic freedom from the bottom up.
The wealth of nations could increase most rapidly if everybody were allowed the fullest opportunity to decide for themselves the best way to use their labor and capital. Government should interfere as little as possible with the occupations and enterprises of its citizens.
Smith himself put it this way: “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest in his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.”
He supported the dismantling of most of the tariffs, regulations, and controls by the U.K. government.
In doing so, he promised a new world prosperity – not just for the rich and the rulers, but for the common man.
Here was a program that could capture the imagination and hope of not only the English worker, but the French peasant, the German laborer, the Chinese day worker, and the American immigrant. The freedom to work could liberate everyone from the chains of daily chores.
The outcome was a hat trick: maximum liberty, individual improvement, and public benefit, all at the same time.
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The Adam Smith Model Is Threatened by Big Government
Today, 250 years later, how much of the Adam Smith model still exists? At the top of the list, free trade and globalization have been a big success. The Soviet central planning model has been abandoned.
Capitalism delivers the quantity, quality, and variety of goods and services that the centrally planned economy never could. Stock markets soared, led by Wall Street.
In the mid-1990s, economists such as Milton and Rose Friedman came up with the Economic Freedom Index to measure how well countries are doing in applying the Adam Smith model, based on the Smithian measures of laissez-faire, balanced budgets, sound money, free trade, and rule of law.
With the help of the supply-side policies of Margaret Thatcher in the U.K. and Ronald Reagan in the U.S., the index showed a marked increase from the mid-1980s to the early 2000s.View larger image
However, for most of the new century, the Economic Freedom Index has slowed down or been in decline (as shown above).
The Adam Smith model has come under attack by Keynesians, Marxists, and interventionists who want a return to top-down policies of authoritarian government, deficit spending, tax hikes, fair trade, and overregulation – all in the name of fairness, equity, and saving the planet.
If Adam Smith were alive today, he would be appalled by the never-ending federal deficits and out-of-control national debt. He would not approve of the monstrous welfare state or the military-industrial complex.
He would be shocked to see the U.S. tax code at over 7,000 pages and federal tax regulations exceeding 75,000 pages. The bloated bureaucracy would be a reminder of the mercantilist policies of his age.
As The Economist reported in its cover story of October 7, 2023:
“Governments have jettisoned the principles that made the world rich: free trade and a modest role for government. Today we face an overburdened government, rising taxes, rising debt and excessive regulations.”View larger image
Given the uncertainties of wars, inflation, and financial crises, gold has actually outperformed stocks in the 21st century.
It’s easy to become pessimistic. But perhaps we can learn something from Adam Smith, who was the ultimate optimist. He wrote 250 years ago, “The uniform, constant, and uninterrupted effort of every man to better his condition… is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration.”
We can only hope.
Two Books Highlight Adam Smith and Ben Franklin
What better way to celebrate the 250th anniversary of American exceptionalism than to study the lives of these two giants of the Enlightenment who declared both economic and financial independence in the same year, 1776.
My two books reveal how, together, they created American exceptionalism and global prosperity. Through the influence of Franklin and other founders, America embraced the Adam Smith model of free markets more than any other country.View larger image
The Making of Modern Economics is the only history that has a compelling plot, where a heroic figure, Adam Smith, comes under repeated attack by the Marxists, socialists, and Keynesians but is revived by the French, Austrian, Chicago, and supply-side free-market schools and ultimately triumphs. Now in its fourth edition, it has become a bestseller. It has five chapters on the Austrian and Chicago schools and a full critique of Marx and Keynes. Milton Friedman said, “All histories of economics are BS – Before Skousen!”
The Greatest American offers 80 chapters on how to apply Ben Franklin’s wisdom and experience to your personal life in business, investing, and personal relationships, including a controversial chapter on his “hard-to-govern passions.” Steve Forbes writes, “Mark Skousen lucidly, delightfully, and successfully lays out the life of one of the most extraordinary figures in American – and indeed world – history. Highly recommended!”
You can read about both books in more detail at my website.
Each book is available at a generous discount at Skousen Books at Discount: $37 for The Making of Modern Economics and $24 for The Greatest American. I autograph all copies and mail them at no extra charge inside the U.S.
If you order The Making of Modern Economics, you’ll also receive a copy of my monograph, “Economics of Life Made Simple,” which one lawyer said is “the best brief I’ve ever read on economics.”
If you order The Greatest American, the signed book will also include a rare Franklin stamp.
Long live Adam Smith and Benjamin Franklin!
Good investing, AEIOU,
Dr. Mark SkousenLeave a Comment
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