What can be added to the happiness of someone in good health, out of debt, and with a clear conscience? pondered Adam Smith

Our world has been transformed in the 244 years since the publication of The Wealth of Nations! Or has it? Yes, much of Adam Smith’s writing examined Scotland’s progress from mercantilism towards the dizzy heights of 19th century industrial capitalism. Nevertheless, the 18^th, 19^th, 20^th and 21^st centuries have sadly seen a myriad of crises, and human responses to these do not alter.

Smith’s careful analysis of some eternal truths — an example is in the title of this article — still repay careful attention.

Today the world is experiencing a pandemic with, at the time of writing, more than 2 million reported deaths. Such a shock has been witnessed many times before. Adam Smith was very aware of the importance of public health. After all, smallpox caused the deaths of about 400,000 people a year in Europe in the middle of the 18th century. Just six years after Smith’s death, scientific advances meant Edward Jenner was able to introduce the first vaccine against this horrible disease.

The economic, social, and health crisis which is Covid-19 has led to one of the largest transformations of the relationship between government and commercial activity since the Second World War. At first sight this might seem contrary to the views of a man who stressed the importance of the ‘Invisible Hand’. Yet his work amply demonstrates that he valued certain roles for government. These included protecting its citizens and meeting certain needs which the private sector could or would not supply. Alongside education, defence of the realm, enforcing civil law and engaging in public works stands health care. To quote the great man, education deserved “the most serious attention of government, in the same way as it would deserve its most serious attention to prevent a leprosy or any other loathsome and offensive disease.” [1]

Another aspect of Smith’s era resonates today. Talk of a war against the coronavirus has been matched by massive government spending — the statisticians calculate that the UK’s national debt had reached £2.1 trillion at the end of last year, and is currently growing by £30-40 billion a month. The Institute for International Finance has estimated that global debt hit $277 trillion or 365% of global GDP at the end of 2020.

It is often forgotten that the UK’s National Debt rose steadily during the 18th century; it was about 100% of GDP at the time of Smith’s birth, about 150% when the Wealth of Nations was published, on its way towards 250% at the end of the Napoleonic wars. So, debt servicing costs have long been an issue for the Chancellor of the Exchequer to worry about! How to pay down such debt will soon become a major issue. As Smith remarked, “There is no art which one government sooner learns of another than that of draining money from the pockets of the people”. The political conundrum is which people and how; then stamp duties and window taxes, today capital gains and wealth taxes are being discussed by the Treasury, tomorrow digital and carbon taxes?

A far-sighted thinker such as Smith would look ahead to the inflationary implications of the massive monetary and fiscal response from governments around the world, already an order of magnitude larger than in 2008-09. This was a man who was in favour of hard currency, backed by gold. He would have been fully aware of the dangerous inflation which governments can create. Around 1720, fellow Scot John Law managed to bring together in France a monopoly of note issue, government finances, and international trade resulting in one of the most infamous bubbles and busts in all financial history.

Creating a feeling of well-being through asset price inflation was an intentional policy of the French government of the day — and one copied globally in recent decades. Since 2000, central banks have feared that the wealth effect from allowing a sharp fall in share prices would aggravate already weak economies. It may be a slippery slope from worrying about technical changes in monetary conditions indices through adopting yield curve control of bond markets towards governments accepting that a green new deal and modern monetary theory have a valued place in their armoury — with potential implications for a bout of inflation to help the recovery along.

Smith well knew about today’s buzz words of geopolitics, supply chain pressures and changes in consumer behaviour. He lived through the Jacobite ‘45’ and the American War of Independence; he died shortly before one of the first global wars in history, in the aftermath of the French Revolution. Out of every crisis comes change and innovation. This may relate to creative destruction, or new ideas and tools, re-engineering to meet different needs. The famous pin factory showed how organisational changes added to productivity. On this occasion, we are moving from a centralised to a de-centralised mode of production and consumption, using Zoom and Skype to communicate — hopefully productively — with workers at Marks & Spencer, John Lewis and Ted Baker wondering about working for Hermes and Amazon.

Morality also matters in times of crisis. Many of our Thursday evenings last year were punctuated by public applause in the streets to thank the NHS. Let me end with just one reference to Adam Smith’s philosophical thinking: “Kindness is the parent to kindness … the surest way of obtaining it is by our conduct to show that we really love them [our brethren].”

Morality and money were together the focus of Adam Smith’s thinking. As the world economy and society emerge from the lockdown, firms decide how many workers they need for the ‘new normal’, governments debate how far to interfere or support the private sector, and threats of a second wave remain on the horizon, so an understanding of both of Adam Smith’s major works would be advocated.

[1] The Wealth of Nations, Book 5, chapter 1, section 3.