Smith was especially taken with one François Quesnay, a fascinating character who deserves to be much better known than he is. Orphaned from working-class parents (some sources say farmers) at 13, Quesnay taught himself to read using a medical book, and so decided he might as well become a doctor. He established himself as a physician and became an early advocate for surgery as an important part of medical practice—not such a popular position among doctors of his day. Quesnay played a part, though, in getting the King of France to separate surgeons from barbers, surely a benefit for both professions. Quesnay's even stronger influence with King Louis XV was later secured when he attained an appointment as personal physician to Madame de Pampadour, the king's mistress.
Quesnay must have possessed an unusually fine mind; he impressed his patients dramatically, generating the word of mouth that led to such connections in high places. Once established among the aristocracy, Quesnay's brilliance attracted the other leading intellects of his age, so much so that he was invited to write articles on agriculture for the famous French Encyclopédie. Somewhere along the way his agricultural interest led to an interest in economic theory, and Quesnay founded the new school of economists whose practitioners came to be called the physiocrats, out of their affinity for the methods of physics.
In those days, conventional wisdom conceived of a nation's economic strength in terms of trade; favorable trade balances, therefore, supposedly brought wealth to a nation. But Quesnay argued that the true source of wealth was agriculture—the productivity of the land. He further argued that governments imposed a human-designed impairment to the "natural order" of economic and social interaction. A "laissez-faire" or "hands-off" policy should be preferred, he believed, to allow the natural flow to occur.
Encountering Quesnay while in Paris, Smith was also entranced and began to merge the physiocratic philosophy with his own. Upon his return to England in 1766, Smith embarked on the decade-long task of compiling his insights into human nature and the production of prosperity, ending with the famous tome titled An Inquiry into the Nature and Causes of the Wealth of Nations, mercifully shortened in casual usage to simply Wealth of Nations.
THE INVISIBLE HAND
Smith's views differed from Quesnay's in one major respect: The source of wealth, Smith argued, was not the land, but labor. "The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life," Smith declared in his book's Introduction. And the production of wealth was enhanced by dividing the labor into subtasks that could be performed more efficiently using specialized skills. "The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour," Smith pronounced at the beginning of Chapter 1.4
Modern caricatures of Wealth of Nations do not do it justice. It is usually summed up with a reference to the "invisible hand" that makes capitalism work just fine as long as government doesn't get involved. There is no need for any planning or external economic controls—if everyone simply pursues profits without restraint, the system as a whole will be most efficient at distributing goods and services. With his "invisible hand" analogy, Smith seems to assert that pure selfishness serves the world well: "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest," Smith wrote. "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."5
In fact, Smith's ideas about a free-market economy were subtle and sophisticated, much more thoughtful than the knee-jerk free-market-to-the-max mantra that people promote, invoking his name, today. (Among other things, he noted that the invisible hand worked effectively only if the people doing business weren't crooks cooking the books.) He did believe that government interference in business—either to assist or restrain—subverted the benefits of natural and free enterprise. By eliminating both preferences (or "encouragements") and restraints, "the obvious and simple system of natural liberty establishes itself of its own accord." But even then he restricted his concern to "extraordinary encouragements" or "extraordinary restraints." And he cited three specific roles that government ought to fulfill: defending the country from invasion, enforcing the laws so as to protect individuals from injustice, and providing for the public works and institutions that private individuals would not find profitable (like protecting New Orleans from hurricanes).
Modern economists have noted that Smith's devotion to the invisible hand was expressed in rather qualified language. "There can be little doubt that Smith's faith in the power of an invisible hand has been exaggerated by modern commentators," Princeton economist Alan Krueger wrote in an introduction to a recent reprinting of Wealth of Nations.6 Besides, Krueger added, "most of postwar economics can be thought of as an effort to determine theoretically and empirically when, and under what conditions, Adam Smith's invisible hand turns out to be all thumbs."7
All this is not to say that Smith's support for free enterprise is entirely a misreading. (Nor am I saying that free enterprise is exactly a bad idea.) But as economists who followed Smith often observed, his invisible hand does not always guarantee efficient markets or fairness. A critique by Thomas Edward Cliffe Leslie, an economic historian in Belfast, about a century after Wealth of Nations appeared, noted that Smith wrote in a preindustrial age. However deep his insights into the world he lived in, Smith was nevertheless incapable of escaping his own time.
Some of Smith's followers, Cliffe Leslie wrote, considered Wealth of Nations not just an "inquiry," as Smith's full title suggested, but "a final answer to the inquiry—a body of necessary and universal truth, founded on invariable laws of nature, and deduced from the constitution of the human mind." Cliffe Leslie demurred: "I venture to maintain, to the contrary, that political economy is not a body of natural laws in the true sense, but an assemblage of speculations and doctrines … colored even by the history and character of its chief writers."8
Cliff Leslie's account, published in 1870, dismissed the idea—promoted by many of Smith's disciples—that Smith had revealed "a natural order of things," an "offshoot of the ancient fiction of a Code of Nature."
This idea of a "code of natural law" had been around since Roman times, with possible Greek antecedents. The Roman legal system recognized not only Roman civil law (Jus Civile), the specific legal codes of the Romans, but a more general law (Jus Gentium), consisting of laws arising "by natural reason" that are "common to all mankind," as described by Gaius, a Roman jurist of the second century A.D.
Apparently some Roman legal philosophers regarded Jus Gentium as the offspring of a forgotten "natural law" (Jus Naturale) or "Code of Nature"—an assumed primordial "government-free" legal code shared by all nations and peoples. Human political institutions, in this view, disturb "a beneficial and harmonious natural order of things." So as near as I can tell, "Code of Nature" is what people commonly refer to today as the law of the jungle.9 (Perhaps the FOX network will develop it as the next new reality-TV series.) "The belief gradually prevailed among the Roman lawyers that the old Jus Gentium was in fact the lost code of Nature," English legal scholar Henry Maine wrote in an 1861 treatise titled Ancient Law. "Framing … jurisprudence on the principles of the Jus Gentium was gradually restoring a type from which law had only departed to deteriorate."10
In any event, as Cliffe Leslie recounted, the "Code of Nature" idea was, in Smith's day, one of two approaches to grasping "the fundamental laws of human society." The Code of Nature method sought to reason out the laws of society by deducing the natural order of things from innate features of the human mind. The other approach "induced" societal laws by examining history and features of real life to find out how things actually are, rather than some ideal
ized notion of how human nature should be.
In fact, Smith's work did express sentiments favorable to the Code of Nature view; his statement that eliminating governmental preferences and restraints allows "the obvious and simple system of natural liberty" to establish itself clearly resonates with the concept of such a code. And Dugald Stewart, in a biographical memoir of Smith, asserted that Smith's "speculations" attempted "to illustrate the provisions made by Nature in the principles of the human mind" for gradual augmentation of national wealth and "to demonstrate that the most effectual means of advancing a people to greatness is to maintain that order of things which Nature has pointed out."11
Cliffe Leslie maintained, on the other hand, that Smith actually pursued both methods—some deductive reasoning, to be sure, but also thorough observations of actual economic conditions of his day. While Smith might have believed himself to be articulating the natural laws of human economic behavior—a Code of Nature—in fact he just developed another human-invented system colored by culture and history, Cliffe Leslie declared.
"What he did not see was, that his own system … was the product of a particular history; that what he regarded as the System of Nature was a descendant of the System of Nature as conceived by the ancients, in a form fashioned by the ideas and circumstances of his own time," Cliffe Leslie wrote of Smith. "Had he lived even two generations later, his general theory of the organization of the economic world … would have been cast in a very different mould."12
If Smith's Code of Nature was tainted by his times, it was nevertheless in tune with many similar efforts by others, before him and after. Various versions of such an idea—the existence of a "natural order" of human behavior and interaction—influenced all manner of philosophers and scientists and political revolutionaries seeking to understand society, everybody from the monarchist philosopher Thomas Hobbes to the science-fan and journalist Karl Marx. Smith's two great works, on moral philosophy and the laws of wealth, were really part of one grander intellectual enterprise that ultimately produced both economics and the "human sciences" of sociology and psychology. As science historian Roger Smith has pointed out, the 18th century—Adam Smith's century—was a time of profound intellectual mergers, with the physical sciences and the social world, economic interaction and human nature, all mutually inspiring new views of understanding and explaining life, the universe, and everything.
"In the eighteenth century," Roger Smith writes, "pleasure and confidence in the design of the created physical world played an important part in the search for the design of the human world." Just as Newton discovered the "natural order" of the physical universe, thinkers who followed pursued the principles behind the "natural order" of society. In fact, the forerunner of economics, political economy, emerged in the last half of the 18th century as "the study of the link between the natural order and material prosperity," investigating "the laws, physical and social, that underlie wealth."13
And of course, precisely the same sort of merger fever afflicts scientists today. The mix of math and physics with biology, sociology, and economics is (to use economic terminology) a growth industry, and game theory is becoming the catalyst accelerating the trend.
RATIONAL ISN'T NATURAL
There's an additional subtle point about all this that's essential for understanding the relationship between Smith's ideas and modern notions of human nature and game theory. The cartoon view of Smith's story is that human nature is selfish, and that economic behavior is rooted in that "truth." And game theory seems to incorporate that belief. In its original form, game theory math describes "rational" behavior in a way that essentially synonymizes "rational" with "selfish." But as it is interpreted today, game theory does not actually assume that people always behave selfishly—or rationally. Game theory tells you what will happen if people do behave selfishly and rationally.
Besides, Adam Smith did not believe that humans are universally selfish (and he was right, as game theory experiments have recently rediscovered). In fact, Smith glimpsed many findings of today's experimental economic science. Modern commentators often don't realize that, though, because they neglect to consider that Wealth of Nations was not Smith's only book.
When writing Wealth of Nations, Smith assumed (as do all authors) that its readers would have also read his first book: the Theory of Moral Sentiments, published in 1759. So he did not think it necessary to revisit the much different picture of human nature he had previously presented. Read together, Smith's two books show that he had a kinder and gentler view of human nature than today's economics textbooks indicate.
This point was made to me by Colin Camerer, whose research is at the forefront of understanding the connections between game theory and human behavior. Camerer's specialty, "behavioral game theory," is a subdivision of the field generally described as "behavioral economics." By the 1980s, when game theory began to infiltrate the economics mainstream, various economists had become disenchanted with the old notion, descended with mutations from Adam Smith, that humans were merely rational actors pursuing profits. Some even hit on the bright idea of testing economic theory by doing experiments, with actual people (and sometimes even real money). Not surprisingly, experiments showed that people often act "irrationally"—that is, their choices do not always maximize their profits. Pursuing such experiments led to some Nobel prizes and some new insights into the mathematics underlying economic activity.
Game theory played a central role in those developments, as it quantified the profit maximization, or "utility," that people in experiments were supposed to be pursuing. In a complicated experiment, it's not always obvious what the utility-maximizing strategy really is. Game theory can tell you. In any event, Camerer finds it fascinating that game theory shows, in so many ways, that humans defy traditional economic ideas. But those experimental results, he told me, don't really defy Adam Smith.
During one of our conversations, at a coffee shop on the Caltech campus, Camerer stressed that Smith never contended that all people are inherently selfish, out for themselves with no concern for anyone else. Smith merely pointed out that even if people operated totally out of selfishness, the economic system could still function efficiently for the good of all. "The idea was, if people want to make a lot of dough, the way to do it is by giving you what you want, and they don't care about you per se. And that doesn't logically imply that people don't care about others; it just means that even if they didn't, you could have an effective capitalist economy and produce what people most want," Camerer said. "I think Adam Smith has been kind of misread. People say, ‘Gee, Adam Smith proved that people don't care about each other.' What he conjectured, and later was proved mathematically, was that even if people didn't care about each other, markets could do a pretty good job of producing the right goods. But logically that doesn't imply that people don't care."14 So human nature is not necessarily as adamantly self-serving as some people would like to believe. Some people are selfish, of course, but others are not.
In fact, in Smith's treatise on moral sentiments, he identified sympathy as one of the most important of human feelings. And he described the conflict between the person's "impartial spectator"—a sort of long-term planner or "conscience"—and the passions, including hunger, fear, anger, and other drives and emotions. The brain's impartial spectator weighs the costs and consequences of actions, encouraging rational choices that should control the reactions of the passions. While economists have traditionally assumed that people make rational economic choices, Smith knew that in real life the passions often prevailed. "Smith recognized … that the impartial spectator could be led astray or rendered impotent by sufficiently intense passions," Camerer and two colleagues wrote in a 2005 paper.15
Nevertheless, the notion of self-interest and utility was dramatized by Smith in such a way that it formed a central core of subsequent economic philosophy. And not only economics was shaped by Smith's ideas. His books also contributed in a significant way to the birth of modern biology.
ORIGIN OF DARWINISM
I'm not sure whether Charles Darwin ever read Wealth of Nations. But he certainly read accounts of it, including Dugald Stewart's eulogy-biography of Adam Smith. And Darwin was familiar with Smith's Moral Sentiments, citing its "striking" first chapter in a passage in Descent of Man. And while Darwin's Origin of Species does not mention Smith, its notion of natural selection and survival of the fittest appears to be intellectually descended from Smith's ideas of economic competition.
Smith's influence on Darwin was pointed out more than two decades ago by the science historian Silvan Schweber. I first encountered the connection, though, in the late Stephen Jay Gould's massive tome on evolutionary biology. Gould examined Darwin's writings inside and out and traced all sorts of historical, philosophical, scientific, and literary influences on the origin of Darwin's views on origins. Among the most intriguing of those influences was the work of William Paley, the theologian often cited today by supporters of creationism and intelligent (sic) design.
Paley is most famous for his watchmaker analogy. If you find a watch on the ground, Paley wrote in 1802, you can see that it's nothing like a rock. The watch's parts are clearly "put together for a purpose," adjusted to produce "motion so regulated as to point out the hour of the day." The inevitable inference, Paley concluded, was "the watch must have a maker … who comprehended its construction, and designed its use." Paley's point was that the biological world was so full of orderly complexity, exquisite adaptation to the needs of efficient living, that it must have been the product of an exquisite design, and hence, a designer. To arrive at his own evolutionary theory, Darwin required an alternative logic to explain the efficiency of life. Adam Smith, Gould concluded, supplied that logic.
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