Adam Smith's Legacy: Overcoming Poverty Through Economic Growth and Freedom
By Rainer Zitelmann
Adam Smith's will disappointed his nephew David Douglas. He received much less money than he had hoped for. In fact, the will confirmed what Smith's friends had suspected for some time: the Scottish economist, who consistently earned above-average income, had almost entirely donated his wealth to the poor and had done so mostly in secret.
Smith, baptized on June 16, 1723 (the exact date of his birth is unknown), is mostly known as a champion of capitalism. However, he was not immune to the intellectual resentment towards the wealthy. In his two main works, "The Theory of Moral Sentiments" (1759) and "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776), it is difficult to find a passage where he speaks positively about the rich and powerful.
Merchants and landlords are described as people who only seek to protect their selfish interests and create monopolies. You will find clearer praises for capitalists more in Marx's "Communist Manifesto" than in Smith's works.
Many passages show sympathy for the condition of the "poor," which he understood not only as those living in poverty but also as the "not wealthy," the majority of the population who have to exchange their labor for wages to make a living. "Sympathy" - what we would call empathy today - was the central pillar of Smith's moral philosophy.
And his sympathy was primarily for the working poor. Here is a famous passage from the book "The Wealth of Nations": "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable."
Today, these words are sometimes misinterpreted to claim that Smith advocated for government-led wealth redistribution. But that was not his intention, and he certainly did not call for a social revolution. According to Smith, poverty was not predetermined, and above all, he did not trust the government.
He emphasized that only economic growth can increase the standard of living. Continuous economic growth is the only way to raise wages, and a stagnant economy leads to a decline in wages. Elsewhere, he wrote that bread prices are a result of price controls imposed by governments.
While Karl Marx claimed nearly a century later that capitalism would lead to an increasing impoverishment of workers, Smith predicted that economic growth would lead to an improvement in living standards. When "The Wealth of Nations" was published, capitalism was in its early stages.
At that time, 90 percent of the global population lived in extreme poverty. And poverty at that time meant something different: It is estimated that about 20 percent of the population of England and France were unable to work at all due to malnutrition.
Most of them had enough energy for a few hours of slow walking per day, which condemned the majority of them to a life of beggars. Smith was right about the effects of economic growth, and this has been confirmed in recent decades.
In recent years, the decline of poverty has accelerated at an unprecedented rate compared to any previous period in human history. In 1981, the rate of absolute poverty, currently defined by the World Bank as living on less than $1.90 per day, was 42.7 percent.
In 2000, it fell to 27.8 percent, and today it is less than 9 percent. Smith predicted that only market expansion could lead to prosperity. And this is exactly what has happened since the decline of planned socialist economies. In China, the reform of private property and the market reduced the proportion of people living in extreme poverty from 88 percent in 1981 to less than 1 percent today.
Free-market economist Zhang Ueijing from Peking University says, "China's rapid economic development over the past four decades is a victory for Adam Smith's market concept." Unlike dominant interpretations in the West, Zhang says that economic growth and the reduction of poverty in China did not happen "because of the state, but despite the state," thanks to the introduction of private property.
Smith's plan to lift people out of poverty did not involve the abolition of private property or its redistribution by the state. He did not advocate for any libertarian utopia. He believed that governments played an important role. However, in 1755, two decades before the publication of his famous book "The Wealth of Nations," he warned in a lecture: "In general, man is considered by statesmen and projectors as a material of a sort of political mechanics. Projectors disturb nature during its operations on human affairs; and it requires nothing more than to let it alone, and give it fair play according to its own designs... 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 were very prophetic words. Smith showed the world how to overcome poverty. He didn't leave much money to his nephew as an inheritance. But his great legacy shows the world that only economic growth can lift people out of poverty, and the most important condition for this is economic freedom.
Note: Rainer Zitelman, historian and sociologist. His latest book is titled "In Defense of Capitalism." / "Wall Street Journal"