BY NEIL KAY

Adam Smith is a giant of the Scottish Enlightenment but in many respects he can be difficult for 21st-century readers to get to grips with. To begin with there are not many portraits of him, reflecting perhaps his own glum self-assessment. “I am a beau in nothing but my books,” he once remarked.

Adam Smith's Wealth Of Nations title pageAnd while the occasional purple passage in his works can grab attention, his prose can seem heavy and leaden at times to modern eyes. Even the insights for which he is lauded are squirreled away in the deeper reaches of his works. His famous reference to the “invisible hand” is almost, well, invisible in Wealth of Nations; it occurs just once, about halfway through the book. Blink and you miss it. Before that, he does start off enthusiastically promoting the economic gains to be made from the division of labour, but after the first few pages the references become less frequent and he seems more interested in other issues, such as the workings of the 18th-century banking system in Scotland.

To complicate matters, the Industrial Revolution had still to take off. Instead the pages of Wealth of Nations reveal a preoccupation with pins and potatoes that can be difficult to connect with a post-millennium digital world. Perhaps that is why some writers have taken to describing him as a “prophet”, as if it is up to the modern reader to decipher the gnomic messages encrypted in his more dense passages.

Poor Adam has been described variously as a prophet of the Industrial Revolution, of capitalism, of innovation, of free enterprise, of law and economics, and of private profit. To be frank, some of these labels smack of desperation. Calling him a prophet of free enterprise and of private profit is a bit like giving someone credit for predicting that it is raining now. He was not prophesying free enterprise and private profit, he was actually observing it happening all around him.

HE WAS AN OBSERVER

And that is the key to reading and understanding Adam Smith and his relevance today. To describe him as a prophet is to do him a disservice. He was no prophet. He was instead a great observer, an analyst and dissector of behaviour and relationships. His preface to the third edition of Wealth of Nations reads precisely (and perhaps a little pedantically), “the present state of things means always the state of which they were during the year 1783 and the beginning of the present year 1784” (his italics). By then he was living in Panmure House and the Edinburgh he observed was a rich stinking broth of philosophers and paupers, charity and corruption, affluence, and effluence.

INNOVATION IS HIS THEME

All that and more is reflected in Adam Smith. While his Theory of Moral Sentiments devotes its first five chapters to analysing human sympathy (what we today might call empathy), Wealth of Nations plays yang to its yin and focuses more onthe pursuit of individual self-interest.

A modern reader might grant all that, and still complain that today we tend to see actual wealth of nations as a consequence of new infant industries, invention and innovation, processes of development and diffusion. Where is all that in Wealth of Nations?

In fact, just as venture capital today provides fuel to nurture Silicon Valley start-ups, so Scotland in the 18th century was a hotbed of financial innovation in areas like overdraft facilities and insurance. These issues can seem mundane and commonplace today but they would later help grease the wheels of the modern industrial machine. Innovation runs through Wealth of Nations with narratives outlining such things as the replacement of metal money by banknotes, the developing role of the banks underpinning trade and industry, the first two public banks in Scotland in 1695 and 1727, and the spread and diffusion of retail banking.

Darien SchemeAlso, Adam Smith’s Scotland was a consequence of the historical turmoil and backwash that followed a disastrous speculative venture (the Darien Scheme) to set up a Scottish colony in the Isthmus of Panama in 1695. It had bankrupted many Scottish investors and businesses and was a major factor behind union with England in 1707. Appropriately, the pages of Wealth of Nations are awash with stories (and warnings) about speculation, risk, bank runs, bankruptcy, “foolishness” in trading relationships, the need for better regulation, “undertakers” (i.e. entrepreneurs), and the importance of trust – how to win it, and how to lose it. These are lessons that would have been good to heed before the 2008 financial crash.

Adam Smith’s accounts of innovation, invention, success and failure captured fleeting moments in time. But these same chronicles with their human qualities of virtue, vice, genius and frailty (and how to facilitate the good and mitigate the bad) also leave timeless lessons from history.

NEIL KAY is a Professorial Fellow at Edinburgh Business School, Heriot-Watt University, Edinburgh. His most recently published research paper is: Driving innovation through ambidextrous service provision - long cycle products in manufacturing contexts, with Nusa Fain and Beverly Wagner.