THE FALL OF ADAM

Murray Sayle names the guilty Scot

TWO hundred years ago, on July 17, 1790, Professor Adam Smith of the University of Glasgow, founder of the dubious science of economics and good friend of many of the tobacco merchants of that gritty city, went to join the only perfect market. His last words here below were, 'I meant to do so much.'

As it was, Smith managed quite a bit. On the anniversary of his death this week the Rt Hon Nicholas Ridley, the former Secretary of State for Trade and Industry was booked to address the Adam Smith Institute in London, eulogising the master and reminding his audience, as if they needed it, how much Adam Smith Thought has shaped the policies of the government to which he belonged as lately as last weekend. Was there, we may wonder, anything of the old Adam in the remarks about Germany's role in the European Economic Community, published in this magazine, which led to Ridley parting company from his Prime Minister, another fervent Smith disciple?

In the event, Ridley's address was can- celled but we may still wonder what possessed the Cabinet's second staunchest advocate of unsentimental economic rationality to badmouth the Germans who, as everyone knows, have plenty of money. Was it the wine talking (one small glass, according to Ridley's lunchtime interview- er) or is there some deep division in the Government, as there undoubtedly is among the British people, on future econo- mic relations with our hardworking Teuto- nic cousins? If so, which side would Smith have been on?

'I'm just looking.' It happens that I have been reading An Inquiry into the Nature and Causes of the Wealth of Nations in preparation for the same anniversary. There is indeed much illumination about the present shape of the world in its 982 pages, mostly negative. Neither the Germans nor their Japanese apprentices, it seems, steered their econo- mic miracles by the star of Smith, and yet they are now the wealthy nations we have to be specially nice to. A paradox, but before we go exploring it, a wee word on the man and his times.

SMITH, arguably the most influential, was certainly not the first writer on economic matters. He was, however, the first to think about the subject in a modern way, i.e. the way we do. This came about largely by intellectual accident. Smith held the Glasgow chair of Moral Philosophy, and like many an academic before and since, he opened his publishing innings with a tidied- up version of his lecture notes, The Theory of Moral Sentiments (1759). This forgotten work was supposed to be followed by an explanation of everything, an encyclo- paedic account of the ethical springs of human society such as still seemed possible at the end of the 18th century.

Smith had to start his enormous tour d'horizon somewhere, and a logical place seemed to be how people got their livings, or, as he put it, 'whatever is the subject of law'. People can and will be selfish, mean and greedy — deplorable conduct which Smith intended to castigate in subsequent stout volumes — but these are personal failings, not crimes. If we have to wait for human nature to improve, said Smith, we'll wait forever, and in the meantime society has to get along with members who do no more than obey the laws and look out for number one.

We can rely on the latter, Smith argues, with a fair degree of confidence. In the universal pursuit of 'enlightened', cash-in- the-bank self-interest — the moral uni- verse of, say, a Glasgow tobacco trader Smith believed he saw the possibility of a prosperous and reasonably fair society which would be more or less proof against the follies of human interference. Econo- mic man, in Smith's simplifications is not the sort of person you would want Mother to meet, but there are a lot of them about.

Smith would have been horrified by our fashionable doctrine that anything goes as long as there's money in it, but he warmed to the ideal of a self-regulating economic system, disciplined by competition, which would deliver the goods no matter how little its members cared about each other's welfare.

In a free, unregulated market, said Smith, the capitalist who Intends only his own gain' is still led by an invisible hand to promote an end which was no part of his intention'. Smith had a low opinion of the morals of merchants, `who have upon many occasions both deceived and oppres- sed the public', especially if these people were behind the very visible hand of the government which had since Elizabethan times controlled British trade by keeping out imports and promoting exports. Fore- igners who wanted British products were thus obliged to settle up in precious metals which were supposed to accumulate in the national treasury. Smith called this the `mercantile system' and viewed it as a vast, parasitic racket.

`It cannot be very difficult to determine who have been the contrivers of this whole mercantile system,' he writes in Wealth.

Not the consumers, we may believe, whose interests have been entirely neglected, but the producers, whose interest has been so carefully attended to, and among this latter class, our merchants and manufacturers have been by far the principal architects. It is the industry which is carried on for the benefit of the rich and powerful that is principally encouraged by our mercantile system. That which is carried on for the benefit of the poor and the indigent is too often either neglected or oppressed.

Far from regarding buying cheap and selling dear as the noblest of human callings, Smith saw as one of the principal advantages of the unregulated marketplace the hope that merchants could not combine to get control of it, although they never give up trying: `people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.'

Smith's mercantilism, then, was of a rather clubby, British kind: grocers with a thumb on the scales; butchers plotting a sawdust sausage over a pint at the Butch- er's Arms; politicians bending the laws for a discreet fee. A more ambitious form of mercantilism had, however, been high state policy on the European continent since the Dark Ages. In this system, the bullion generated by restricting imports and stimulating exports was used to hire mercenaries, mostly Swiss, who conquered new provinces and thus increased the export base, which brought in more bullion to hire more Swiss to conquer more pro- vinces, and so on. As it happened, it was the German states who excelled at this form of martial economics, used, fortu-

nately, mostly against each other.

Smith's Britain was defended, not by expensive Swiss, but by the navy, fine for convoying trade and planting the flag in new dominions, all but useless for seizing the provinces of powerful competitors. Smith therefore argued that free, peace- able international trade would multiply the wonders worked by the Invisible Hand at home, and the richer the trading partners, the better for all of them: 'I pray for the prosperity of France,' he told his asto- nished readers, 'as much as for that of my own country.' Trade between any two countries enriches both,' he wrote, in one of his more famous formulations, adding a Smithian qualification his admirers gener- ally leave out, 'but not necessarily to the same extent.' Smith agreed that defence was more important than affluence, if it came to that hard choice, but predicted that the general prosperity generated by free trade would decrease envy, increase mutual dependence, and lessen the chances of war.

IT ALL came true. A hiccup with the American war, a bigger one with Napo- leon's, but thereafter for a century trade, and particularly British trade, spread around the planet, sail gave way to steam, horse to rail, the world was pretty much at peace and, among English-speakers in particular, most of the glory went to Adam Smith. 'Free trade' rings sweetly in our ears and fits well into Smith's 'simple system of natural liberty', which sounds to us even better, and for a long time both paid off. Britain, and then Britain's Amer- ican apprentice, became the richest coun- tries on earth, and all the while with easy minds: while our merchants and manufac- turers pursued the almighty pound and dollar with religious zeal, Smith taught that it was actually the consumers, aka suffering humanity, you and I, who stood to benefit. The hard-headed Scots professor himself, canny and optimistic at the same time, is an endearing figure, and we can all recognise his treacherous tradesmen and their sly tricks. Smith's doctrines have come to sound both revolutionary and self-evident, and as Ronald Reagan and Margaret Thatcher have demonstrated, it is still possible after all these years to gather winning votes with the promise that they will, at long last, be put into effect.

But now we have the Germans and the Japanese. Both claim to be free traders, although hardly anyone else thinks they are. Both run depressingly large trade and current account surpluses, which suggest that they may be sneaky mercantilists of some sort. In a world pleading for capital they alone have money to lend, confirming that they are turning out products every- one wants and no one else can match. Neither has any significant natural re- sources, and — here's a funny coincidence — in living memory the same pair leagued together to make war on the world, includ- ing all the followers of Adam Smith. Secret studies indicate that Germans and Japanese may be arrogant, devious and lacking in a sense of humour, but offer no clue as to why they are so rich. What guides their Invisible Hand? What would the author of The Wealth of Nations make of these supremely successful Johnny- come-latelies to the world's bazaar?

In the first place, we should recall that Smith knew nothing of the Industrial Re-

'Good heavens! You don't see many of those any more.'

volution about to break over his country. His anecdotes are all about brewers and bakers, and the biggest enterprise in his book is a pin factory with 16 em- ployees. In his day the system of joint stock limited liability capitalism had barely be- gun to outgrow its roots in the financing of fur- and spice-trading voyages, and the increasing 'capital stock' Smith identified as one of the agents of prosperity was mostly hand tools, only just beginning to be driven by wind and water-power.

In the same year the Wealth of Nations came out the firm of James Watt and Matthew Boulton borrowed £12,000 from the London banks to launch the steam engine on the world market, a first and fateful exercise of the most characteristic of all capitalist manoeuvres, the promotion of technological innovation on borrowed money. By the time Watt's wheels were changing his world out of recognition, Smith was long since drawing his heavenly dividends.

GERMANY and Japan did not come on to the world industrial scene until a century after Smith's death, when it was already clear that there were quicker ways up the technological ladder than a lift from the Invisible Hand. Both were already strong states with powerful bureaucracies when they determined to join the advanced Western world as fast as possible, mostly for military reasons. Both consider the obsession of English-speakers with indi- vidual rights to be selfish, if not downright anti-social. The old German slogan Gemeinutz geht vor Eigenutz, the common good outranks individual interests (a great favourite of the man with the moustache) could still serve as a motto for both. The Tubingen economist Freidrich List once wrote that he could not see why it was virtuous for individuals to seek wealth, as Smith recommended, but wrong for a nation to do so. Ever since, Germans and Japanese have had the same problem with

Adam's economics of egotism.

But, unlike the Russians, neither Ger- many nor Japan ever took their admiration of the state to the point of having it mend shoes or give haircuts. Smith's wisdom about the need for competition to keep the tradesmen honest is universally valid, and both the former Axis powers make great use of the marketplace to find out what their people want, and thus what they are prepared to work hard to get. What distinguishes these economies are the great manufacturing corporations — Siemens, Krupp, Hitachi, Mitsubishi — working hand in glove with semi-autonomous state institutions like the Ministry of Interna- tional Trade and Industry, the Finanz- ministerium, the Bundesbank and the Bank of Japan to develop technologies, pool resources and carve out market shares. We're all in this together, in another catchphrase popular in both coun- tries. Today Nagoya and Nuremburg, tomorrow the world.

The similarity of their systems of nomi- nally private enterprise co-operating and competing under state supervision is not an accident, and has nothing to do either with racial superiority or supposed German and Japanese national characteristics as de- tected by advisory panels of scholars who would, on recent showing be better off back at their studies. The two, in fact, have a common source, not surprisingly, in war.

In 1914, when it became clear that Germany was not going to win in a summer campaign and the outcome was going to be decided by siege, the Jewish industrialist Walther Rathenau (later murdered by Nazis) was set to develop a huge organisa- tion to take charge of German industry, setting production targets and allotting the raw materials available for them. Rathe-

nau's Kriegsrohstoff-Abteilung was one of

the reasons German resistance lasted for four years, despite the tight Allied block- ade. In 1927 the Japanese general staff, fearful that Japan would one day have to stand a similar siege by the English- speaking naval powers traded a reduction of one division against the setting up of a similar bureaucracy charged with surveying the war potential of Japanese manufactur- ing. These organisations are the distant ancestors of, respectively the German eco- nomics ministry and the Japanese ministry of international trade and industry, the dreaded MITI.

Britain and the United States submitted to similar economic directorates in both wars — as Smith forecast, no one relies on the invisible hand when it comes to nation- al defence — but they were disbanded in the glow of victory. Germany and Japan, however, had been laid waste (by us) as no contestant in war had been since the Dark Ages. It was natural that their wartime bureaucracies, following the purge of ob- vious political leaders, should take charge of national reconstruction which, in coun- tries bereft of empires and natural re- sources would of necessity have to be based on international trade.

So Germany and Japan have resumed their drive for world power, but this time over markets. Internally, they are striking- ly similar: while nominally capitalist and even from time to time acclaimed as Smithian, their stock exchanges are thick- ets of interlocking ownership which keep out foreigners, imports are largely control- led by local producers, and the take-over of their key companies by outsiders is, when disapproved of by their bureaucra- cies, all but impossible. (The purchase last week by French interests of a German jogging-shoe business is not going to change the overall picture. No one gets Mercedes.) Externally, the Germans and Japanese have used their current account surpluses to set up overseas distribution networks and buy administrative buildings and sales outlets, and to hire mercenary PR men and publicists which should all, in the fulness of time, lead to more sales, bigger market shares and fatter surpluses — a form of neo- or perhaps Nippo-mercantilism re- miniscent of the heady days of the Middle Ages.

Now that technology, changing at a faster pace than ever before, is plainly the great engine of economic growth around the world it seems obvious that nations ambitious to be wealthy should get aboard, particularly as all it takes is ingenious investors and money, which is to be had as a result of successful innovation and keep- ing the lads at it.

In particular, the information and elec- tronics industries would seem to be the natural successors to the bridges and light- houses of Smith's day, which he thought too critical to the general welfare to be left to market forces (the idea that Smith had a market solution for everything is as false as the notion that he was an uncritical apolo- gist for businessmen).

That national rewards are to be had from directing resources, beyond what indi- viduals are prepared to risk in these fields, would seem to be, not a plot to reverse the outcome of recent wars, but simply an intelligent reading of how the world is going, unclouded by the views of a long- dead Scots feelosofer. Those already equipped to salvage the wreckage of empires are in a strong position: West Germans are going to get the most favour- able opportunities in Eastern Europe, if there are any, and Japan last week announced at the same Houston summit to which Mrs Thatcher made her impassioned appeal for free trade that it was resuming dealings with China, beginning with an enormous yen loan.

The outburst at the Ridley lunch- table is now easier to follow. Consumer- oriented economic rationality, old Adam's programme, is only compatible with national sovereignty if you are the econo- mic top dog, a position for which Germany and Japan now compete and Britain has long since lost. But both sovereignty and economic efficiency are essential elements of the doctrine generally called Thatcher- ism. Sooner or later reality had to be faced. Who would feel this racking dilemma more keenly than a devoted Thatcherite who happened to be Secretary for Trade and Industry?

The proposal that Britain should join the European Monetary System, meaning that the City would stay in business after 1992, but that the pound would once and for all how the knee to the deutschmark, must have been enough to unhinge the noblest mind. The tension grew, became intoler- able. Across the table a personable young editor switched on his Japanese tape- recorder, the ear of posterity. Anything a loud noise, the glint of sunlight on porcelain, a sip of German wine — would have been enough to set off the inevitable, uncontrolled chain reaction.

The rest, like the Wealth of Nations, is economic history.