Adam Smith and the Origins of American Enterprise: How the Founding Fathers Turned to a Great Economist's Writings and Created the American Economy

by Roy C. Smith

Overview

Adam Smith was a Scottish professor of moral philosophy. He published his classic The Wealth of Nations in 1776, the year the American Revolution began. Smith became widely known for his ideas of free markets, laissez-faire commerce, and the "invisible hand." Yet English politicians, landed gentry, and the nobility paid little attention and enacted none of Smith's suggested reforms.

The American colonies, however, began their existence as an independent nation in 1781 with no money, no industry, no banks, and deep in debt. The Founding Fathers—particularly Alexander Hamilton, James Madison, and Benjamin Franklin—turned to the ideas of Adam Smith to create and jump-start an economic system for America with both immediate and long-sustained results.

This little-known but vital part of U.S. history is now revealed in Roy C. Smith's highly readable new book.

Product Details

ISBN-13:	9780312325763
Publisher:	St. Martin's Publishing Group
Publication date:	02/21/2004
Edition description:	First Edition
Pages:	240
Product dimensions:	5.50(w) x 8.50(h) x 0.55(d)

About the Author

Roy C. Smith, an Annapolis graduate, was an investment banker at Goldman Sachs for twenty years and has been a professor of entrepreneurship and finance at New York University's Stern School for the past fourteen years. He is the author of several books, including The Global Bankers, The Money Wars, and The Wealth Creators. He lives in Montclair, New Jersey.

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Adam Smith and the Origins of American Enterprise

How the Founding Fathers Turned to a Great Economist's Writings and Created the American Economy

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By Roy C. Smith

St. Martin's Press

Copyright © 2002 Roy C. Smith
All rights reserved.
ISBN: 978-0-312-32576-3

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CHAPTER 1

ENLIGHTENMENT AND THE NEW ECONOMICS

In 1718, a twenty-four-year-old Frenchman named François Marie Arouet was released from the Bastille, where he had been imprisoned for a year because of satirical remarks critical of the French monarchy and its harsh system of social justice. The fact that someone else, not Arouet, had written the offending words did not matter much, since Arouet, though from a good family and well-introduced into society, was known as a stinging critic who could reliably be counted on to ridicule or satirize French society and its high officials. After the Bastille, he began to publish plays and sharp-tongued works of social criticism under the pen name "Voltaire." A few years later, in trouble again, he talked his prosecutors into permitting him to go into exile in England instead of returning to prison. As Voltaire, he then lived much of his life outside France, and his wit, insight, and penetrating critiques influenced many throughout Europe to question their society and their assumptions about it.

At his death, in 1778, Voltaire was known as the leading literary figure of his time. His works covered wide-ranging fields, topics, and problems. They were generally held to be brilliant and influential, though almost always his viewpoints were critical, cynical, and cutting. He believed in the powers of reason and the ability of the human mind to better understand the world and to deduce explanations and solutions to problems common to all. His ideas were controversial, and often they challenged the authority of authoritarian states. His great popularity was a protection to him, but he was frequently in trouble for his criticism of conventional wisdom and those in power.

The life of Voltaire became synonymous with the period — beginning in the early eighteenth century and lasting for a hundred years or so — that is known as "The Enlightenment." This was an extraordinary time of intellectual awakening and discovery, leading to a reexamination of all that was then known about man's role in civilized society. Since the movement had evolved from the scholarly debates surrounding the Protestant Reformation, it focused on religion and philosophy, but it soon spread beyond those precincts to the natural sciences. By the mid 1700s, the intellectual capital and curiosity needed to investigate and question previous conceptions about life had been assembled. Much of what was known about the world at that time — most of which had been rigidly handed down since the darker days of the Middle Ages — came under the new light of inquiry, and many long-held assumptions, after the usual amount of resistance to the destabilizing effect of new ideas, were forever afterward seen differently.

Although Voltaire was devoted principally to philosophy and religion, the Enlightenment released throughout Europe a torrent of intellectual activity in at least three other areas: science and medicine, geography and exploration, and politics and economics. There was an effort to apply methodology and specialization to mathematics, physics, navigation, chemistry, astronomy, geography, botany, zoology, psychology, anatomy and physiology, and the understanding of disease. The efforts resulted in a pace of discovery never before experienced. In philosophy and religion, where Voltaire had a lot of company, "unauthorized" (that is, by the church) investigations into theology in its broadest sense took place. Christian moral and ethical beliefs were examined closely. So were agnosticism, pantheism, and atheism. The ancient strictures, practices, and entitlements of the Christian church and its beliefs were attacked. And there were inquiries into human rights, justice, social order, law, education, and the causes and effects of economic activity. There were no sacred cows. Much of this sudden intellectual energy was also reflected onto the arts, music, and literature. The novel was born, and the theater reborn. Handel and Bach held sway, and Hogarth, a popular satirical engraver, depicted London scenes of daily life in all its sordid detail.

Most of the intellectual activity of this time was the product of talented amateurs who painstakingly learned methodology and specialization. Intellectual recognition was open to anyone bright enough to prepare an interesting piece about a new discovery and get it published. Benjamin Franklin, a Philadelphia printer of limited education, became a respected name in Europe by presenting his discoveries in electricity to the Royal Society in 1749. Further, the borders between scientific disciplines were not well defined, and scholars, academics, and curious amateurs seemed comfortable in shifting between subjects. Franklin made important discoveries in oceanography and physiology in addition to electrical science, and invented the iron stove, bifocals, and the lightning rod, among other useful things. He was also a best-selling author of homespun philosophy. Franklin's friend, the Scottish philosopher David Hume, was, in addition, a poet, a historian and a theologian. Such polymaths were not at all uncommon in learned circles.

Fresh ideas were what counted in the Enlightenment, notone's formal, i.e., old-fashioned, training. Anyone with a theory and a persuasive tongue could be listened to. Certainly a lot of nonsense was published and faddishly admired for a while, but there was a continuous supply of new material and more recent and accurate discoveries. Though the educated public was not large in the eighteenth century, it included the nobility (most of them landowners), government officials and rising politicians, the professional classes, intellectuals, and critics. This group of educated people could and did affect public attitudes and policies. Learned individuals bought a lot of books and kept up with what was going on in various fields. Franklin knew several of the leading European Enlightenment figures, including Voltaire and Hume. He and John Adams and Thomas Jefferson, who had also lived in London and Paris, had standing orders at booksellers in those cities for the latest works on government and economics.

One of the most far-reaching influences of the Enlightenment led to the American and French revolutions, each occurring as an expression of the fundamental "rights" of the people. Before the Enlightenment, people knew very little about rights; indeed, they didn't know they had any. Political power and all governing authority were vested in the ruler, and the people had to adapt and obey or suffer the consequences. The common citizen knew only that the system that controlled his daily social and economic life often seemed unsatisfactory, unfair, and after a certain point, intolerable. Beyond this, the American and French revolutions had little in common. The American event was really an act of secession, led by the indigenous wealthy and professional classes in response to the oppressive actions of their sovereign; the French Revolution, in which the mob overthrew and murdered its rulers, was different. But in both cases, economic issues, especially taxation unfairly applied and the allocation of wealth, rank, and privileges to favorites of the king, were among the basic causes of the popular discontent.

The European model for the political economy of the eighteenth century was essentially feudal. The king reigned supreme and could allocate properties and economic rights however he chose, as long as he maintained the power to enforce his actions and put down dissenters. The king relied upon a cohort of noblemen and officials to enforce his rules, and accordingly, he shared some of the land, largesse, and glory with them. The noblemen attempted to keep the system intact by extracting as much from those beneath them as they could short of causing insurrection and mutiny. These conditions had existed for a long time, and people had become accustomed to them and knew their "place," a measure of submission encouraged by the organized church.

What every learned person at the time knew of history was that all previous efforts to establish any other system — either through republics or independent city-states — had fallen inevitably to tyranny, revolt, or conquest, usually at great cost to the common people. The trouble was that kings and their governments were rarely good at governing. They got into countless scrapes with neighbors and waged expensive wars to resolve them. There were also expensive royal building projects (like Versailles) to be paid for that helped drain treasuries dry. And when the coffers dried up, they had to be replenished by applying pressure in the usual place — increased taxes levied on ordinary people.

These were the realities of European economic life when Adam Smith, son of a minor public official, was born in a small village near Edinburgh in 1723. By the end of his life, in 1790, both the American and French revolutions had occurred, and another revolution — a powerful industrial one — had begun. These events changed economic life in Britain, France, and elsewhere in Europe, but the changes were forced by events — they were not planned — and all of them took place after the Enlightenment began.

Adam Smith was not the first person to write about economics, but he was the first to provide a comprehensive picture of a national economic system and how it operated. And (more important to his reputation) he was also the first to present his economic ideas at a time when practical menof affairs would be most likely to read them. His major work, An Inquiry into the Nature and Causes of The Wealth of Nations, was first published in the important year of 1776 and enjoyed five editions, the last appearing in 1789, the year of the French Revolution. The book explored many aspects of how people and countries earned their livelihood. In essence, it described the British economic system and ways in which it might be changed for the better, i.e., to make the country even wealthier. Thus, after a time, he came to be known as the father of modern political economics and the first of the four "classical" economists to form the profession that later emerged. The others were Thomas Malthus, who published Essays on Population in 1798; David Ricardo, author of Principles of Political Economy and Taxation (1817); and John Stuart Mill, author of Principles of Political Economy (1848), which first addressed the distribution of wealth.

The Wealth of Nations was widely read in Smith's own time, not only by scholarly colleagues, but also by the rich landowners of England and Scotland, who had great vested interests in the subject of wealth, and by many parliamentarians and rising, ambitious politicians. A lot of what Smith had to say was critical and probably radical, but it was presented in a way that made it acceptable to patriotic Englishmen of his time. Smith's goal was to describe why the British economic system had been so successful relative to other European nations, and how Britain's wealth and power could be further increased.

At the first treatise of its kind, and widely available, The Wealth of Nations was also read and discussed by those in America seeking to form a new government based on preserving "life, liberty, and the pursuit of happiness," and an economic system that could assure America of prosperity and self-sufficiency. The founders of the American republic were about to do something never done before, that is, to create a political and economic system that could operate successfully without placing all of its powers into the hands of a single governing ruler. The stakes were high for these founders, who had pledged their "lives, fortunes and their sacred honor" to the cause. They knew, intuitively perhaps, that establishing the ability of a new society to create significant wealth, both public and private, would be the ultimate test of their efforts. Without prosperity and opportunity, the society would likely give up the experiment and call back the king, or use the leverage of democracy to shake itself apart as the French did, thus ending its republican dream.

The American founding fathers, therefore, were more than eager to learn what they could about the new field of political economics. And because the country that seemed to have the most successful economy, despite its many faults, was Great Britain, Adam Smith's great work on the subject of the British economy appeared just when the Americans were most receptive to it.

WHO WAS ADAM SMITH?

Adam Smith was a reclusive, colorless Scottish academic who came to be well known for one great book, but for little else. He was born in Kirkcaldy, a town of twenty-three-hundred inhabitants, located just across the Firth of Forth from Edinburgh, where his father was the local customs collector and clerk. Less than a generation earlier, a much bullied-and-bloodied Scotland had agreed to union with Britain (in 1707), and most of its two million inhabitants were still looking for the benefits, if any.

Smith's father died just before his son's birth, so young Adam was raised solely by his mother, whose only child he was. She was a member of the landed family of Douglas, and he was well looked after as a child, though he attended the local schools, which later he declared to have been very good. He left home at fourteen (about the age of most students entering college then) to attend the University of Glasgow on a scholarship. He remained for three years, studying mathematics and natural sciences under strict but dedicated instructors. One of these was Francis Hutcheson, a humanist professor of moral philosophy and an influential mentor not only to Adam Smith, but also to many budding Scottish intellectuals of the time. In 1740, Smith received a coveted scholarship to Balliol College, Oxford, a great opportunity. The future of Scotsmen in the newly united Britain depended upon their ability to demonstrate intellectual acumen and to assimilate with the English. Both of these attributes were available at Oxford, but Smith didn't like the place, or perhaps it didn't like him. He claimed to have gained little at Oxford, where he believed that "the greater part of the public professors have ... given up altogether even the pretense of teaching." However, it is also possible that the attention given at Oxford to politics (including Scottish politics), religious dissent, and public licentiousness made him uncomfortable.

Still, after six years he completed his scholarship and returned to Scotland. Two years later, he appeared as a twenty-five-year-old public lecturer in rhetoric in Edinburgh. This was something of an entrepreneurial venture — he advertised his courses publicly and people paid to come to them — as he was not associated with the University of Edinburgh. Even so, he lectured on natural jurisprudence and politics and began to form a theme central to all his subsequent work. He advanced the theory that:

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice; all the rest being brought by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavor to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.

These lectures, reflecting some of the sentiments picked up from the lectures of his mentor Francis Hutcheson, helped to make his reputation. In 1751, still in his twenties, Smith was appointed to the faculty of the University of Glasgow, first to the Chair of Logic; then soon afterward, on the unexpected death of Professor Hutcheson, he assumed the chair of Moral Philosophy. He threw himself into academic life, which, though demanding, seemed to suit him well. He taught a large "public" class every weekday morning from 7:30 to 8:30, and met this class again at noon to examine it on what he had lectured earlier. Also, from 11:00 A.M. until noon, three days a week, he lectured to a smaller, more advanced "private" class. (Even the most junior American academic today rarely teaches more than eight hours a week.) Moral philosophy was a wide-open subject at the time, and Smith used it to discuss his ideas about the formation of language, jurisprudence, and "natural" laws (i.e., forms of human rights).

In 1759, he published his first major work, Theory of Moral Sentiments, in which some of his favorite themes first made their appearance. Among these were the "invisible hand," the motivational power of ambition and self-interest in determining economic outcomes, and the importance of a fair system of justice in order to preserve social order, a condition necessary to optimize opulence. (For "opulence," a word common to Smith's writings, one should substitute "national wealth" to make the meaning clearer.) These ideas became building blocks for his theory of the British economy that later appeared in The Wealth of Nations.

(Continues...)

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Excerpted from Adam Smith and the Origins of American Enterprise by Roy C. Smith. Copyright © 2002 Roy C. Smith. Excerpted by permission of St. Martin's Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Contents

Title Page,
INTRODUCTION,
CHAPTER 1 - ENLIGHTENMENT AND THE NEW ECONOMICS,
WHO WAS ADAM SMITH?,
THE BRITISH ECONOMIC SYSTEM,
THE AMERICAN QUESTION,
THE ENLIGHTENMENT COMES TO AMERICA,
CHAPTER 2 - COLONIAL ENTERPRISE,
FOUR SEPARATE ECONOMIES,
ECONOMIC GROWTH IN THE COLONIES,
SOCIOLOGIES,
COLONIAL WEALTH,
CHAPTER 3 - WAR AND INDEPENDENCE,
WAR AND TRANSITION,
CREATING A NEW GOVERNMENT,
IMPLEMENTING A CONSTITUTION,
EARLY AMERICAN ENTERPRISE,
CHAPTER 4 - HARDENING THE TEMPLATE,
AMERICAN ECONOMIC STRATEGIES,
FOUR PILLARS OF AMERICAN ENTERPRISE,
MID-CENTURY OPULENCE,
CHAPTER 5 - NOTHING LIKE IT IN THE WORLD,
EPILOGUE,
Also by Roy C. Smith,
NOTES,
INDEX,
Copyright Page,

Editorial Reviews

"Roy C. Smith shows, clearly and informatively, how Smithian economics and American politics and entrepreneurship intertwined to produce that wonder called the American economy. - John Steele Gordon, author, The Great Game and The Business of America: Tales from the Marketplace

"This is the most readable, informative, and genuinely exciting adventure in economic history that I have recently encountered." - James M. Hester, former president of New York University

From the Publisher