The Godfather of neo-classical economics, and especially of finance, is no doubt Adam Smith (1723-1790). In 1776 this Scottish economist and philosopher wrote the Wealth of Nations, which is widely seen as the birth of modern economics. The other way round, when an economist wants a historical quote, Smith can always supply one, as economics was essayistic in the eighteenth century and not yet mathematized.
The problem with the latter is not so much that Smith is now more quoted than read, but that he is quoted selectively. For though he can certainly be seen as a godfather of orthodox neo-classical economics, he also was a heterodox, critical economist in several respects; he certainly did not embrace markets to the extent that his best-known quotes suggest.
Probably his best known quote is the following: “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 self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.” This quotation is used to illustrate the self-centeredness of men and thereby to motivate the market as the best allocation mechanism.
Smith however recognized that markets can be quickly monopolised: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. (..) But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary”. This lesson is not practiced nowadays with big banks teaming up in lobbying organizations which are more than welcomed by politicians and supervisors to speak on behalf of the entire sector.
The latter suggests that the state is not a neutral arbiter servicing the common good but instead caters to special interests. Smith indeed stated that: “Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.”
And inequality in turn is deeply intertwined with private property, or so Smith postulated: “Wherever there is great property there is great inequality. For one very rich man there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many.”
Although Smith first and foremost had probably property of the feudal nobility in mind, this foreshadows the finding of Piketty that capitalism increases inequality. All of this does not make Smith a left-wing progressive (a term that had another meaning then than now anyway), but it does show that he was no neoliberal economist avant la lettre either. In fact Smith hadn’t even always been sure about the self-centredness of men. In 1759 he wrote in the Theory of Moral Sentiments: “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.”
