I have always wondered about this. Adam Smith is by far one of the most popular economists in history. But who has actually read Smith?
We are told that Smith was the first, or at least the one that popularized, the view that self interest, sometimes interpreted as selfishness leads to benefiting the common good. This is shown usually by referring to this passage:
…every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.
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.
This, of course, has some truth… Entrepreneurs seeking for profit, and does this by producing goods and employment does indeed benefit society, but should we really take what Smith states about self interest as absolute? Gavin Kennedy, a person who takes great interest in understanding Smith, thinks not, and he is right to take such a claim. Smith, for example, thought that some merchants shouted for protectionist polices only to benefit themselves, this is to say, they wanted to reduce competition and also increase their prices . Kennedy goes on in another post to defend what self interest actually means to Smith. Unlike the standard interpretation that self interest = greed or selfishness, Kennedy points out that Smith’s notion of self interest has a very moral substance to it. Self interest is obviously important, and quite obvious to see in everyday life, but if we wish to cooperate in society, we must also keep in mind the interests of others. Or as Kennedy states, ” [T]he nature of each bargain is summed by the expression “Give me this that I want and you shall have that which you want”. (In modern negotiating, I express this as “IF you do this for me, THEN I shall do that for you”).” This is quite a radical view. We are given the invisible hand metaphor and self interest examples of Smith as proof that Smith was this liberal fighting for hands free government markets! Kennedy blames the standard invisible hand metaphor as something that Paul Samuelson popularized.
The blame shouldn’t all be going to Samuelson though. Carl Menger, the founder of the Austrian School, also fought in favor for Smith against the standard government free interpretation of Smith that was popular in Germany at the time. The German Historical School, with the exception of Karl Knies, did not particularly like Smith, for they held that Smith was an economist fighting for laissez faire economics, an economist fighting for the interest of the rich over the worker, etc. So the German Historical School, like Samuelson, also misinterprets Smith. Menger wrote an article with a purpose to clear up misconceptions that the historical school had about Smith*. Here is Menger:
In all cases of conflict of interest between the rich and the poor, A. Smith stands without exception on the side of the latter. I use the phrase ‘ without exception’ very carefully. There are no places in The Wealth of Nations where A. Smith represents the interest of the rich and powerful against the poor and weak. While A. Smith quite positively recognizes the free initiative of individualism in economic matters, he supports in all the cases state intervention where the matter relates to the abolition of laws, and the application thereof, that suppress the poor and weak for the sake of the rich and powerful.
It is not true, indeed it is a forgery of history, to say that A. Smith was a dogmatic advocate of the ‘ laisser faire, laisser aller’ principle and that he believed that the completely free play of individual interests would lead to the economic cure of society. In various parts of his work, he admits that the efforts and interests of individuals and entire social classes stand in direct opposition to public interests. Not only did he accept state intervention in most cases, but he believed it to be an order of humanity considering the public welfare.
One can find the similarities between Kennedy’s and Menger’s interpretation of Smith. the biggest one being that Smith’s concept of self interest is incompatible with interpretations of greed or selfishness.
This, once again, raises questions on how radical of a liberal Menger was. People that study Menger’s life realize that he sees Smith has a big influence, probably his biggest influence. His concept of spontaneous order (which is also misinterpreted by a lot of Austrians) is arguably the same as Smith’s concept of the invisible hand.
Personally, I have always been skeptical of the standard interpretation of what the invisible hand implies, especially after reading Vaughn’s book Austrian economics in America
Nevertheless, classical liberalism, at least back then, saw an active state indeed. Modern libertarians need to realize this. They seem to only be concerned about what things classical liberals criticized the State for, and yet forget to look at the other side of the coin. In other words, classical liberals went far beyond just looking at a state to provide basic public needs (roads, security, law) and advocated interventions, which modern libertarians would look at as being anti market.
* I use this paper for passages