Today, more than two hundred years later, three great myths still surround Adam Smith and his Wealth of Nations.

The first is that Smith believed that the wealth of capitalism was generated by some great, guiding “invisible hand.” In fact, the term, which appears in Wealth of Nations and The Theory of Moral Sentiments, is meant to be taken, once again, as irony. Smith did believe that capitalism produces its own kind of natural rational order, based on the market and its complex, interlocking system of self-interested exchange. To a superficial observer it might appear as if everyone were moving according to a single directing mind or “invisible hand.” But his real point was not that a market-based order was perfect or even perfectible. Rather, it was more beneficial, and ultimately more rational, than ones put together by politicians or rulers, who are themselves creatures of their own passions and whims.

Here Smith’s chief target was what he termed, and what has been known ever since, as “the mercantile system.” He found it exemplified in theory in a book by another Scot, Sir James Steuart, titled Inquiry into the Principles of Political Oeconomy, and in practice in the British government’s handling of its overseas empire. Steuart’s Inquiry appeared in 1767, and although Smith pronounced the book an “ingenious performance,” everything about it infuriated him. Steuart was a strong believer in state intervention to develop trade and expand economic growth. He even argued that without the government’s constant attention, its foreign trade might actually grind to a halt, leaving the nation vulnerable and destitute.

This was the sort of justification for punitive tariffs, export subsidies, and government-granted trade monopolies that Smith saw at work in Britain’s overseas empire, and which he was determined to fight. He wrote of Steuart’s work, “I flatter myself, that every false principle in it, will meet with a clear and distinct confutation in mine.” In fact, Books Three and Four of the Wealth of Nations are a devastating analysis of the attempts by successive governments to manipulate the powerful productive forces of overseas trade, foolishly believing they could increase wealth by government dictate, when in fact they usually did the opposite.

The centerpiece is Smith’s scathing critique of London’s policy toward the American colonies — which, by the time he was writing in 1775, had reached a critical point. Smith followed the American crisis, not only from recent news reports and Parliamentary debates, but also from his tobacco merchant friends such as Glassford and Ingram, who had lived in Virginia and Maryland and knew the situation firsthand. They understood, as Smith did, that Scotland was perfectly poised to benefit from a policy of free trade with America, and that London’s shortsighted efforts to bend the Americans to its will would not only cripple their own business there (which it did), but would cost Britain her empire as well. “There are no colonies of which the progress has been more rapid than that of the English in North America,” Smith wrote, and yet thanks to its monopolistic policies, “Great Britain derives nothing but loss from the dominion which she assumes over her colonies.”

Arthur Herman

How the Scots Invented the Modern World (2001)
Chapter Eight “A Select Society: Adam Smith and His Friends” pp. 183f