Economics and the Birth of Capitalism: Adam Smith and the Invisible Hand

Economics: What exactly is it? It’s defined as “the social science that studies how people interact with scarce resources, in particular the production, distribution, and consumption services.” It is alternatively known as “the dismal science.”

British historian Thomas Carlyle coined the phrase dismal science in his 1849 work Occasional Discourse on the Negro Question. In this piece, Carlyle argued that reintroducing (or continuing) slavery would be morally superior to relying on standard market forces, and he labeled the profession of economists who disagreed with him as the “dismal science,” since Carlyle believed that the emancipation of slaves would leave them worse off.

Just the idea, furthered by Carlyle, that economics could be used as a rationale for slavery, and racism, is pretty dismal. Further making it dismal is the obtuse language, with words such as valorization, valuation, dumping, backwardation, monetary neutrality, monopsony, disintermediation, hysteresis, frictional unemployment, peak pricing, Ricardian equivalence, sterilized intervention, and a whole lot more filling up the lexicon, all designed to keep it an insiders game, privy to the experts and too dense for the common folk like you and me.

But it didn’t have to be this way. The origin of the word economics is a Greek term, “Oikonomia,” which comprises two words: “oikos,” or household; and “nomoi,” which means laws, rules, constraints. Thus, the original meaning of economics literally means the “Laws of running, or managing, a household.”

Economics at its core was about the power of the purse emanating from the household. As the dismal science evolved, economics became an interplay of the household purse and the state, and as time went on, the free market joined the equation of what constituted economics; ultimately, the free market became synonymous with economics.

Adam Smith was the first to codify the free market as economic engine in his eponymous book, The Wealth of Nations, published in 1776. His talk of the “invisible hand of the market” became the framework for laissez-faire economics, a concept that believed that transactions between private parties should be absent any sort of state economic intervention, specifically government regulation and taxation.

The Scotsman Smith was first and foremost a philosopher, classically trained at the University of Glasgow and then in graduate studies at Oxford University. The thinking that framed his ideas on economics was grounded in his theoretical outlook as a moral philosopher, a branch of philosophy focused on ethics, morals of behavior, and value. Smith was aware of what it took to subsist in the world in which he lived, an agrarian society: working the land, feeding the family, paying the bills, and hopefully having a small surplus left over was paramount to living a moral life.

He also understood the importance of fertile soil and cooperative climate in building the wealth of a nation, and how the work of artisans—the butcher, brewer, and baker, as Smith referred to them—propelled a nation. There were no monolithic corporations ruling the world in Smith’s time, which made it easier to create a workable economic model that could readily explain how people and nations could thrive.

Smith was also a key figure of the Scottish Enlightenment, and it was this fertile period in human development that informed his work. There was one other aspect that played a key role in Smith’s conceptualizations: his eccentricity and quirkiness, traits he expressed that would have led some to call him a mystic. He had a highly imaginative, creative, and visionary mind, and saw or experienced things that weren’t always there: He talked to imaginary people, had imaginary illnesses, and could walk for miles in his nightgown lost in thought, wandering about with no sense of where he was.

It makes sense that as a mystic, Smith saw an imaginary, invisible hand guiding the free exchange of goods, aiming towards a moral code that led people to prosper and live their lives by a code of ethical behavior. His argument was that the wealth of a nation flourished when all people thrived, and that the invisible hand was guided by a sense of goodness, of ethical behavior, to make sure all did well. Smith felt he was giving guidance to “statesmen” on how to act to enrich both “the people and the sovereign.”

Thus, Smith felt the state played an important role in aiding the free market in its exchange of capital, which is a different portrayal than how free- market economics, nowadays known as neoliberalism, is seen today. The present-era credo is best summed up in Ronald Reagan’s 1981 inaugural address: !Government is not the solution to our problem, government is the problem.”

Many great and revolutionary thinkers, such as Smith, have had a touch of the mystic. Isaac Newton, the founder of classical physics, was another riding this boat. Known as a natural philosopher, Newton was also an occultist and alchemist. Newton’s scientific work may have been of secondary importance; his primary emphasis was on rediscovering the occult wisdom of the ancients.

The famed economist John Maynard Keynes believed that any reference to a “Newtonian Worldview” as being purely mechanical in nature is somewhat inaccurate, saying that “Newton was not the first of the age of reason, he was the last of the magicians.” Newton believed that metals vegetate, that the whole cosmos/matter is alive, and that gravity is caused by emissions of an alchemical principle he called salniter. He spent at least half his life looking for the holy grail of alchemy, the philosopher’s stone, a legendary alchemical substance capable of turning base metals such as mercury into gold or silver. Known also as the elixir of life, it was seen as the tool for rejuvenation and for achieving immortality. It was the most sought after goal in alchemy.

Furthermore, because Newton’s interests in alchemy and the occult had informed his conceptual thinking, he had basically made a visionary leap of faith with his theory of gravity. He surmised that an invisible force (there again was a reliance on the invisible, like Adam Smith’s invisible hand), or an invisible mechanism, existed in nature and operated across great distances. He envisioned the entire universe as a system interconnected by the force of gravity. His vision of gravity fit his mystical vision of God: gravity was an expression of an invisible force that connected the universe as a whole.

Newton understood this conundrum of intertwining the mystical with the scientific in his theories of gravity, and had this to say:

It is inconceivable that inanimate brute matter should, without the mediation of something else, which is not material, operate upon and affect matter without mutual contact. That Gravity should be innate, inherent and essential to matter so that one body may act upon another at a distance thro’ a vacuum without the mediation of anything else, by and through which their action and force may be conveyed, from one to another, is to me so great an absurdity that I believe no Man who has in philosophical matters competent faculty of thinking can ever fall into it. Gravity must be caused by an agent acting constantly according to certain laws; but whether this agent be material or immaterial, I leave to consideration of my readers.

While Newton lived before Adam Smith—Newton died when Smith was three years old—Newton did try his hand at free market economics. Unfortunately, the invisible hand wasn’t on his side and in the year 1720 he— along with many others—lost his fairly substantial life savings in an investment scam known as the South Sea Bubble, an early example of investment mania, bubbles, and crashes. Newton’s Theory of Gravity, which stated what goes up must come down, didn’t save him from this bubble.

Financial bubbles are predicated on assets or goods always going up, contrary to the laws of physics. Newton should have known this, since he wrote the book on the laws of physics. After learning his lesson the hard way and losing his shirt, Sir Isaac said, “I can calculate the movement of stars, but not the madness of men.”

Adam Smith and Isaac Newton aren’t the only examples of rationalists/ philosophers who possessed a touch of the mystic. Most of the 20th century’s early quantum physicists, as they unwrapped the mysteries of natural laws and the universe—discoveries that for many of them led to Nobel Prizes— also were touched by the mystic. In unraveling the secrets of the cosmos, they came to perceive the universe as a far different place than what they had been trained to see. They uncovered the primordial secret of life: Life originates as matter-waves emanating from a quantum field, and once birthed, these matter-waves spread out infinitely across the universe in all directions.

The early quantum physicists had to adapt their lenses to meet this new paradigm. James Jeans said, “The concepts which now prove to be fundamental to our understanding of nature…seem to my mind to be structures of pure thought…the universe begins to look more like a great thought than a great machine.” Neils Bohr commented that, “The impossibility of distinguishing in our customary way between physical phenomena and their observations place us in a position quite similar to that which is so familiar in psychology where we are continually reminded of the difficulty of distinguishing between subject and object.”

Arthur Eddington said, “The stuff of the world is mind-stuff…The mind-stuff is not spread in space and time….Recognizing that the physical world is entirely abstract and without ‘actuality’ apart from its linkage to consciousness, we restore consciousness to the fundamental position.” And Stephen Hawking posited that a system doesn’t have just a single history in space-time but instead has every possible history.

It was left to that most iconic of physicists, Richard Feynman, to sum it up. Feynman, while working at the Los Alamos lab in New Mexico, would go out in the wide open spaces of the desert at night to drum his bongos, perhaps to pay homage to the animistic spirits that he felt roamed the desert in the wee hours. He once said, “I think I can safely say that nobody really understands quantum mechanics.” That’s what happens to ideas that come out of the minds of mystics—it takes years for mere mortals to fully grasp them.

The same can be said about Adam Smith’s ideas about economics. From his quasi-mystical ideas of an invisible hand, economics, over time, has distilled it down to the idea of Homo economicus, rational economic man. Rational economic man, as economists see it, acts in a rational and narrowly self- interested way that maximizes his or her satisfaction; he is a person who acts rationally on complete knowledge, out of self-interest and the desire for wealth. This theory of Homo economicus has continued through the 20th and 21st centuries.

Economists will point to Adam Smith as the architect of this idea, because Smith in his writings discussed the role of self-interest in making markets work. But Smith, ever the moral philosopher, didn’t see self-interest as the motivational force (or invisible hand) guiding people. Instead he found that the qualities most useful to people were their “humanity, justice, generosity, and public spirit.” He further went on to state, “How selfish soever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.”

Smith knew from first-hand experience how people acted out of generosity and public spirit to help others. It was because of the selfless acts of his mother, Margaret Douglas, that Smith, who was never married, was able to write The Wealth of Nations. Smith lived with her from 1767 to 1776, ages 44 to 53, and did no other work than his writing, while his mother took care of Smith”s needs, cooking his meals, cleaning up after him, and doing his laundry. When The Wealth of Nations was published in 1776, Smith moved out from his mother’s house, but he moved back in with her in 1778, when he was appointed Commissioner of Customs. After his mother’s death in 1784, his cousin Janet then took over the role of looking after her cousin Adam.

Smith never gave credit to these women, because to him their work was intangible and had no bearing on the free market. Yet without them and their sacrifice, Smith would never have had the freedom to write his book. And since the origin of the word economics is, as I mentioned earlier, from the Greek “oikonomia,” which literally means laws of running or managing a household, if Smith had realized the value of his mother’s and cousin’s work in aiding him, his ideas regarding economics may have been taken a different path.

It was John Stuart Mills, a next-generation (after Smith) economist who ran with Smith’s ideas and promoted the idea of rational economic man operating solely from self-interest. It was probably because of this idea that Mills, who lived from 1806 to 1873, helped put the word capitalism on the map.

Although the ideas of capitalism predate Adam Smith and go as far back as the early Renaissance and the emergence of agrarian style market exchange and mercantilism, it wasn’t until the mid-19th century that the word first appeared in the English language. In the novel The Newcomes by novelist William Makepeace Thackeray, the word meant “having ownership of capital.” But even before Thackeray’s novel, the word capitalist, signifying someone who owned capital, was showing up in the writings of British, French, German, and Dutch writers. Even the English poet Samuel Taylor Coleridge used “capitalist” in his early 19th century work Table Talk.

The definition and theory of capitalism as an economic system based on the private ownership of the means of production and their operation for profit has evolved over the centuries, from its origins in Adam Smith’s ideas to his 19th, 20th and 21st century successors—including David Ricardo, Karl Marx, John Stuart Mill, William Stanley Jevons, Leon Walras, Alfred Marshall, Simon Kuznets, John Maynard Keynes, John Kenneth Galbraith, Joseph Schumpeter, Elinor Ostrom, Hyman Minsky, Karl Polanyi, Friedrich Hayek, Milton Friedman, Carmen Reinhart, Joseph Stiglitz, Paul Krugman, Thomas Picketty, Stephanie Kelton, and many others. Over time, these theorists have dissected, argued, split hairs, debated, and disputed what capitalism truly signifies and who is supposed to benefit from its spoils.

At the core of economic theory is value, and the production of new goods and services. Value looks at how things are produced, how they are shared and distributed, and what happens to the earnings created from production. These have been the age-old questions surrounding value, as long as people have made exchanges in the marketplace, whether through barter, traded goods, or money: to whom should the benefits accrue?

Through booms and busts, periods of stability and instability, more and less government intervention, gilded ages, asset bubbles, industrial and information revolutions, trust busting, gold rush mentalities, labor laws and union protection, and more, there was always one thing that was supposed to be the great moral equalizer in the capitalist system: a sense of fairness, that there should be a healthy balance of the wealth class, middle class, working class, and poor. And that was the lever that aimed to keep the economic system more equitable.

Granted, there have been hard lessons on the unsteady path to a more equitable society. It took the Gilded Age of the late 19th century to enact a first wave of reforms, and the Great Depression to enact a safety net to protect the most vulnerable citizens. Along with that, there was genocide and slavery that helped lay the foundation for America’s prosperity; after slavery ended, systemic racism excluded a significant portion of the American population from sharing that prosperity.

And now, value has taken on a different meaning and approach. A new economic system took root in the 1970s, gained momentum in the 1980s, and has not looked back since, morphing into an out of control monster that threatens to devour all in its path. This current approach to value is oriented towards extraction: value comes from the amount of wealth that can be extracted from the earth and people’s pockets. This approach is called neoliberalism: Derided by its critics as trickle-down economics, it’s actually a trickle-up economics—extracted from my pockets and into the wallets of the wealthiest sliver of society. It’s a sad reflection of where priorities have gone.