The state is back, and it means business. From the Inflation Reduction Act and the Chips Act in the US to the Green Deal in Europe, government-directed industrial policy is no longer taboo.
As French president Emmanuel Macron recently argued, a coordinated European industrial policy is needed to address the challenges of what he called ecological and digital transitions. What he implied is that Europe needs to keep up with an obviously statist China and the unexpected turn to statism in America.
Some may shudder at the thought of the state mobilising markets through massive subsidies in what looks like a protectionist pivot. But the reality is we could be seeing the emergence of a new form of mercantilist competition — something that Adam Smith, the Scottish Enlightenment economist whose 300th anniversary falls this month, railed against in his landmark work The Wealth of Nations.
Smith saw mercantilism – that is, countries trying to increase their own prosperity and power through restrictive trade practices – as ‘mean and malignant’. He viewed it as depressing industry in all countries, ‘including that of the country whose favour it is established’. So rather than addressing the major challenges of our day, the world’s leading economies may be setting out on a path towards working against each other at the expense of the general good.
What is the alternative? It is too easy to say that allowing private capital and markets to lead should be the solution. It is not clear that the private sector anywhere has enough resolve to lead on its own where it matters, including in the existential challenge presented by climate change.
Besides, Smith was not altogether hostile to the state, notwithstanding his support for markets and free trade. He might not have seen the private sector as the panacea. Indeed, The Wealth of Nations, published in 1776, is replete with discussion of state intervention in addressing poverty, increasing access to education, building and maintaining infrastructure, providing for national defence, and ensuring the rule of law.
Where Smith does help us come up with a solution for solving our most pressing issues is in a concept contained in his less well-known work published 17 years earlier, The Theory of Moral Sentiments. In it, the father of modern economics advocates for ‘sympathy’ and the value of ‘fellow-feeling’ — essentially the idea that we depend on others for our wellbeing. In a 21st century context, this surely translates into recognising the reality of mutual dependency, and that collaboration is key to solving existential problems.
Yes, Smith cared about freeing the individual to be creative and to create wealth. He saw markets as a key component in this. But Smith’s thinking was also societal. He wanted society to prosper, from the poorest on up.
Moreover, his thinking wasn’t exclusive to just the national economy in 18th century Britain. Smith cared about the plight of others elsewhere, which can be seen in his critiques of imperialism, slavery, and ethnic and racial prejudices.
The lesson from Smith is that addressing challenges as existential as climate change and digital transformation is that this must be a shared endeavour, between states and the private sector, and in ‘fellow-feeling’ between peoples.
The anxiety felt in Europe and the US about China’s increasing economic and technological prowess should not limit cooperation and collaboration. Seeing China’s rise only as a threat to the liberal international order risks missing the opportunities that China may well bring to new environmental technologies and the energy transition, including for the billions of individuals around the world that also want a better standard of living and a clean environment.
Nor should this shared endeavour be limited to developed economies. Smith’s legacy requires us to ensure a bridge is built to the ‘global south’, whose increasingly economically powerful members are looking to build a new paradigm for solving problems of common interest.
Minouche Shafik, incoming president of New York’s Columbia University, said in a recent lecture here at Panmure House — Adam Smith’s home for the last 12 years of his life, and now a space for social and economic debate — that economic thinking had focused too much on Smith’s self-interest legacy, centred on the primacy of individual concerns in creating a better society, and not enough on his sympathy legacy.
The economic problems in the UK and many other countries “reflect the breakdown of the basic set of norms, rules, benefits and obligations that bind individuals, firms, and states together”, she said.
It is time for some Smithian sympathy.