Adam Smith’s Vision.

Smith did not write in a vacuum, but rather was associated with a group of thinkers which have been called the "Scottish Historians" by some commentators. This group drew a large part of its inspiration from the Baron de Montesquieu whose liberal ideas would variously inspire the radicals of the French revolution, and men, like Smith, who sought to unleash the engine of capital from the fetters of mercantilism. Among this same group of economic liberals was David Hume who, along with his work in philosophy, wrote seminal pieces advocating the efficiency and rationality of free international trade and a flexible monetary and exchange rate regime.

Smith, however, was the first to separate society and economy into distinct epistemological domains; he was perhaps the last great thinker to clearly see the interpenetration of one within the other. Marx would later write about the relationship of the state to civil society, but Marx did not acknowledge an organic separation between society, state, and economy. By then, the embryonic division between economics proper and political economy had already taken place. For Marx and his followers down to the present day, the state is simply a servant of capital, a subsidiary of the conglomerate.

Adam Smith, however, stood at the crest of a great intellectual divide. He was able to look backwards and survey the development of human society from the beginnings as a crude struggle to organize both its productive and its ruling faculties, and not doing a very good job of either. He was also able to look ahead and foresee the awesome power of capital, freed from national boundaries, which would transform the earth. In one magnificent passage, written from the vantage point of this great divide, Smith retires the old era and inaugurates the new:

In announcing the advent of a new era where land is no longer the locus of value, where labor, embodied in manufactured goods, is the awesome new store of wealth, wealth which can be bought and sold on the open market, Smith is not only announcing the historical transition from the feudal age to the capitalist, he is announcing the birth of a new science as well. This portability of value, this universality of exchange has created, sui generis, the condition of possibility of value as an abstraction; the semiotic elements rent, wages, and interest, have now become the symbolic proxies for land, labor, and capital.

Just as the periodic table of the elements liberated all the disparate chemistries and alchemies of medieval Europe from their cultural and spiritual ground, the language of labor and exchange value liberated assets from their local political substrate. The power of abstract mathematics could now be combined with improved accounting and harnessed to give the study of economy a power and precision lacking in the descriptive art which had gone before. I do not assert that Smith planned the development of a new science, nor did this happen overnight. It would take another century for the science of economics to approach maturity with the publication of Marshall's Principles of Economics, but the decisive evolutionary mutation had taken place.

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With these words, Adam Smith has given inspiration to all subsequent generations of those who believe that free trade, regulated by nothing but the market itself, produces the greatest good for mankind. To those who believe in the market, this is a truth as simple, as elegant, as self evident as Newton's laws of motion. Indeed, it is futile to even think outside of the paradigm, because, since it is evident that the market always clears at the right price, any deviation is an imperfection in the market or a disequilibrium which will come into balance in the long run. The paradigm is irresistable because of its universal applicability. Market economics has shown its utility in explaining, in a common conceptual currency, phenomena as disparate as interest rate parity across national boundaries and the Fisher effect relating real and nominal rates of inflation. If the validity of a science is certified by its explanatory power, modem economics has earned its place in the academy.

The modem artifact of rational expectations theory is the natural extension of the twin postulates of frictionless markets and individuals who maximize their utility with the benefit of perfect information. Economics has now been completely divorced from the ground of what the Marxists call the relations of production. It is this epistemological tunnel vision, I assert, which distorts the description of real world events where relations between the actors are mediated by factors beyond a market price. Life is not a fair auction and a description of all events in economic society in terms of bid and ask leads to policy decisions being formulated without regard to the real human cost.