Which great critic of merchants and manufacturers denounced the "clamour and sophistry", “the impertinent jealousy”, “mean rapacity”, “mean and malignant expedients”, “sneaking arts”, “interesting sophistry” and “interested falsehood” of business people who espoused “the vile maxim, 'all for themselves, and nothing for other people'”? Karl Marx? Friedrich Engels? No. It was Adam Smith – as Gertrude Himmelfarb reminded readers of her 2001 essay for The Public Interest – “The idea of compassion: The British vs. the French Enlightenment”.

One senior policymaker who is fully aware of the true Adam Smith is the current Governor of the Bank of England, Mark Carney. In remarks on “Inclusive Capitalism” made in May 2014 he said: “To maintain the balance of an inclusive social contract, it is necessary to recognise the importance of values and beliefs in economic life. Economic and political philosophers from Adam Smith (1759) to Hayek (1960) have long recognised that beliefs are part of inherited social capital, which provides the social framework for the free market.”

Mr Carney continued:

“Unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.”

“Das Adam Smith problem” was first identified by German philosophers but has occupied many great minds over the more than two centuries since this son of Kirkcaldy and of the Scottish Enlightenment wrote his two great books: The Theory of Moral Sentiments (1759) AND An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Could the ideas of the two books be reconciled or is the Smith of “Theory” – where the subject matter is the moral and social character of people – incompatible with the Smith of “Wealth of Nations” – where people are allegedly slaves to market forces; led by the invisible hand to do good for others but also, without constraint, will “seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public”?

For Dr Craig Smith, Lecturer in the Scottish Enlightenment at the University of Glasgow and a close student of Smith there is no serious tension. Adam Smith’s namesake notes that Adam Smith "assumes a certain social structure before he even talks about the market.” Dr Smith continues: “This is the solution to the famous Adam Smith Problem (or non-problem). 19th Century German historians thought that Smith contradicted himself because he stressed “self-interest” in Wealth of Nations and “sympathy” in his Theory of Moral Sentiments, but of course the whole point is that the trade in Wealth of Nations takes place and flourishes in a society with the moral relationships described in Theory."

What are these “moral relationships”? How do you connect the sympathy for others that Smith introduced in 1759 with the self-interest of 1776? One key to resolution is in appreciating the gulf of difference between self-interest and selfishness. Smith had a very broad definition of self-interest. It contained other-regarding as well as self-regarding dimensions. And “other” in this context is much more than the needs and desires of an individual self’s household or immediate neighbours. At the very beginning of The Theory of Moral Sentiments Smith wrote:

“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it... That we often derive sorrow from the sorrows of others, is a matter of fact too obvious to require any instances to prove it.”

And while some people are more interested in the happiness and pain of others, Smith was at pains to insist that fellow-feeling was “by no means confined to the virtuous or the humane”. “Fellow-feeling” is not exclusively a virtue in Smith’s thinking – it is also a natural, instinctive passion. “The greatest ruffian,” he wrote, “the most hardened violator of the laws of society, is not altogether without it.” Even the fallen animal within us, in other words, as much as the civilised, educated conscience forces all of us at some times and in some situations to be interested in the happiness of others.

It is not the mission of this manifesto to provide a definitive answer to “Das Adam Smith problem”. I would, nonethless, recommend Russ Roberts’ “How Adam Smith Can Change Your Life” (2014) as containing the pithiest summary of Smith’s moral philosophy: “Seek wisdom and virtue. Behave as if an impartial spectator is watching you.”


My reason for focusing on the perceived intellectual tension between Smith’s two great books is not to explore every dimension of it – let alone to resolve it - but to remind all of us of how the man often described as the intellectual godfather of free market philosophy began his work. Smith would hardly recognise contemporary economics: its dry utilitarianism; its endless charts; the econometrics only intelligible to Russian-educated rocket scientists; and the text book conceptions of “homo economicus”. I’m not sure he’d recognise a lot of his modern day disciples either – those uber-libertarians always ready to defend every market outcome.

On the website of the admirable Adam Smith Institute there is a list of Smith quotations. Here’s one of them, quoted verbatim:

“Every individual… neither intends to promote the public interest, nor knows how much he is promoting it… he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

That is an unfortunate place to stop the quote because Smith’s next two sentences are just as interesting. “Nor is it,” writes Smith, “always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” Those extra sentences don’t transform the meaning but they certainly qualify it. Society’s interests are only promoted “frequently” by the invisible hand. In a University of Oxford discussion paper, published in August 2012, Avner Offer writes:

“The ‘invisible hand’ is invoked only once in The Wealth of Nations. Its effectiveness is understated: it is merely ‘not always the worse for society’; and it does not necessarily promote the interests of society, it only does so ‘frequently’. The miraculous powers it has subsequently acquired may not have been intended by its author. In contrast, the ‘impartial spectator’ (the internalised norm of propriety), is invoked sixty-six times in Smith’s first book, The Theory of Moral Sentiments, and its authority, the authority of conscience, is taken as binding.”

And even if Smith honoured self-interest and respected the invisible hand it was not supreme for him. In The Theory of Moral Sentiments he stated that “the wise and virtuous man is at all times willing that his own private interest should be sacrificed to the public interest of his own particular order or society.”

Smith was first and foremost a professor of moral philosophy. His life’s work was devoted to a systemic account of men and women as social beings. To explain our social identity Smith expounded two related concepts: “sympathy” and the “spectator”. He debated these concepts with the giants of his time: David Hume, Adam Ferguson, Francis Hutcheson and, of course, Edmund Burke.

The relationship with Edmund Burke was particularly important. Burke was interested in the health of the “small platoons” of family, place of worship, neighbourhood charity and voluntary association. “To be attached to the subdivision,” wrote Burke in Reflections on the French Revolution, “to love the little platoon we belong to in society, is the first principle (the germ as it were) of public affections. It is the first link in the series by which we proceed towards a love to our country, and to mankind.” In other words – through the subdivisions or the small platoons – our sense of what Smith would call “sympathy” is developed. Just as Smith’s 1759 and 1776 books weren’t in great tension, neither were Smith and Burke. Smith is reported to have remarked of Burke that he was "the only man I ever knew who thinks on economic subjects exactly as I do, without any previous communications having passed between us".

In a polemic entitled “Adam Smith, the Last of the Former Virtue Ethicists” Professor Deidre McCloskey of the University of Illinois at Chicago makes the important observation that Smith did not just want to be a mere bystander, a describer, or, indeed, a spectator. He had moral ideals – or “recommendations” of how things should be ordered:

“The Impartial Spectator, or the Kantian or even the Benthamite equivalent, are not merely behavioural observations about how people develop ethically. They are recommendations. Recommendations depend on faith and hope and transcendent love, articulated from the identity of an urbane resident of Edinburgh, for example, hopeful for a rather better society, loving sweetly the imagined result. As Fleischacker notes, “When we ask after the “nature” of human beings we are looking for what human beings “really” want, beneath the surface trappings. . . . Human nature always includes what people aspire to, for Smith; it is never reduced [as in the economist’s version of utilitarianism] to the desires they merely happen to have.”


If a true understanding of Smith leads us to restore moral considerations to economics perhaps now is a good time to be sure we know what we’re talking about when we talk about “capitalism”? Up until now I’ve rather loosely switched between talking about capitalism, the free market and private enterprise. Others – the system’s critics – increasingly talk of “neoliberalism”.

We should perhaps start by noting that “capitalism” – as currently understood – is not a popular term. A Reason-Rupe survey carried out in August 2014 found that 55% of Americans had a favourable idea of capitalism. My guess is that if the poll had been taken a few years before the crash of 2008 – rather than a few years afterwards – that number would be higher still. Nonetheless, the Reason-Rope survey found that capitalism was also much more favoured than socialism (which had a 36% favourable rating) and a “government managed economy” (30% favourable rating). (It is interesting to note - in passing - that socialism appears to communicate an ethical quality that government management does not). But back to the data: beating capitalism by 69% to 55% in the Reason-Rupe survey was the “free market”. Only 21% had an unfavourable view of the free market. Nearly twice as many – 38% - had an unfavourable view of capitalism.

The Reason-Rupe poll shouldn’t just prompt a shift of language. It should prompt a deeper shift of thinking. Away from capitalism and the idea of large businesses, big bank balances and politically well-connected tycoons and towards a free market of competitive, dynamic and customer-orientated businesses.


In promoting this understanding of the free market I suspect I’ll have even most ardent libertarians on side but back to the definitional question again. What is the system we are defending or trying to build? It is a system that works best when it is tamed by strong social and governmental institutions. In his new book, Postcapitalism, the Marxist writer Paul Mason describes “neoliberalism” – the chattering class’s vogue term of abuse - as a belief in “uncontrolled markets”; a belief that “the state should be small (except for its riot squad and secret police)”; “that the natural state of humankind is to be a bunch of ruthless individuals, competing with each other.” I challenged Mr Mason on Twitter to identify one single, senior pro-capitalist politician in power, in the world today who fits his ideological description. Normally ever so engaging he didn’t reply to my challenge. John Rentoul of The Independent newspaper also tried and failed to get the Channel 4 News economics editor to prove he wasn’t Aunt Sallying his opponents. Mason didn’t because he couldn’t. No centre-right politician who has held high office in recent years is doing what Mason describes — not Angela Merkel, John Key, Tony Abbott, Malcolm Turnbull, Stephen Harper nor David Cameron. No US Republican presidential candidate believes in “neoliberalism”. No US Republican governor practices it.

One of the reasons that capitalism will survive is that it’s not the caricature Mason presents. Unlike Mason, capitalism’s defenders don’t have their heads buried in the thinking of dead, Marxist economists. They’re pragmatists. George Osborne, for example, the UK Chancellor of the Exchequer, has halved the speed of his deficit reduction policies and introduced a living wage. He’s cutting police (and riot squad) budgets so he can expand the British Health Service. He’s cutting welfare so he can increase infrastructure spending (a key theme of this manifesto – in chapter eight). And, in another sign that business isn’t trusted by George Osborne or the Thatcherite Business Secretary, Sajid Javid to always do the right thing, the introduction of an apprenticeship levy to compensate for British business’ decades-long failure to invest in vocational education.

Libertarians and other advocates of a minimal state play a vital role in politics. The tendencies towards bigger government within democracies are substantial. There are always well-organised interest groups who will make the case for subsidising this or regulating that. Voices constantly warning against the costs of regulation and taxation are essential antibodies. Libertarians cannot be allowed to dominate politics, however. The flexibility of capitalism and of capitalism’s defenders defeated the Marxists of yesteryear. It’ll defeat Mason’s Marxism too but only if capitalism’s defenders recognise ideological purity and “homo economicus” do not exist outside of textbooks. The system that is producing the reductions in poverty that we noted in the last chapter is not a pure free market. Government is involved in reducing inequalities, supporting innovation and infrastructure, and regulating bad practice. The system we are defending might more properly be called democratic capitalism.

Search for “Capitalism” on and up pops a results list to stir every agitator’s heart. There’s Naomi Klein’s “This Changes Everything: Capitalism Versus The Planet”. Michael Moore’s DVD on “Capitalism” – a story of how the dream of prosperity became a nightmare. And there are also books from Paul Mason, Thomas Piketty, Owen Jones, Ha-Joon Chang and Marxist writer David Harvey - none of them sympathetic. The very top search result, though, is for Arundhati Roy’s “Capitalism: A Ghost Story”. It’s an extraordinary onslaught on capitalism, America and the impact of free enterprise on Ms Roy’s India. Capitalism is blamed for poisoned rivers; the suicide of farmers; punishing debt; intense racism; corrupt politicians; “death squads”; and “obscene inequality”. The bombings of Hiroshima and Nagasaki are even presented as just one more illustration of military campaigns “fought to secure “the American way of life””. Even on The Guardian’s website, now the online home of the international left, the book is described as “an extended rant, strident, intemperate, conspiratorial, and relentlessly one-eyed in its outlook.” But it is the top book about capitalism on Amazon and it is not untypical of the relentless cultural attack on the free market system from the ideas-generating cultural classes.


Capitalism was not a term invented by its adherents. That is well established. But the popular suggestion that Karl Marx was the originator of the term is also wrong. The revolutionary French socialist Pierre-Joseph Proudhon – often known as the “father of anarchism” and best known for his dictum that “property is theft” - was probably the first person to ever use the term. For Proudhon it meant “property-owner”.

Dustin Mineau searched the histories of leading US-based free market groups and the capitalist term was no where to be found:

“The Foundation for Economic Education was created in 1946 to promote free markets. And no where in their founding 14 principals was the term capitalism. The American Enterprise Institute founded in 1943 didn't defend "capitalism", it defended "competitive, free-enterprise". The Founding article in William Buckley's conservative National Review mentions "capitalism" only in relation to socialism. Among the magazine's "convictions", it only states "The competitive price system" and no mention of "capitalism".”

The same is true on the British side of the Atlantic pond. The Institute of Economic Affairs, inspired by Friedrich August von Hayek’s Road to Serfdom and founded in 1955, described its mission “to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems”. Again – no mention of “capitalism”. Socialists, notes Mineau, had a monopoly on the term “capitalism” for the best part of one hundred years but Milton Friedman never liked monopolies and decided to break this one open in 1964 with his classic work, “Capitalism and Freedom”.

As we search for a proper definition of capitalism we should get the basics right and Andrew Lilico does that for us. Writing for The Daily Telegraph he argues that “under the (private) capitalist system, those with ideas for businesses but without money to fund them ("entrepreneurs") are free to seek money from those with investment funds available ("capitalists")”. In another piece for CapX he defines capitalism as only one of three components of “private capitalist markets” – the other two being private property (“a product of being a private person, an individual, a freeman”) and markets (“venues of freely chosen exchange; an integral necessity of a politically, religiously and morally liberal society”).

I think we need a definition that is broader, however and more in tune with that moral philosophy that Adam Smith would recognise. My colleague at the Legatum Institute, Graeme Leach, is increasingly convinced that values determine the long-term economic health of nations. Having immersed himself in books such as The Moral Foundations of Economic Behaviour (2011) by David Rose, Mass Flourishing (2013) by Edmund Phelps and Why Nations Fail (2012) by Daron Acemoglu and James Robinson he concludes that “honesty, freedom, responsibility, vitality and institutions” underpin sustainable wealth. “Prosperity,” he writes, “is built from the ground up, not top down from government... It has to come from the heart and the head of each and every individual.” There are people who have taken more ethical – dareIsay Smithian - approaches to capitalism and society in recent times. I owe much of my political development to the books, pamphlets and dinner table conversations of Lord (Brian) Griffiths, head of Margaret Thatcher’s Downing Street Policy Unit. “Monetarism and Morality”, “The Creation of Wealth” and his William Wilberforce lecture, delivered to the Conservative Christian Fellowship in 2000 are all essential reads. Wilhelm Röpke’s “A Humane Economy: The Social Framework of the Free Market”, 1960 and Arthur Seldon’s “Capitalism”, 1990 both had significant moral dimensions but if young economists have time to read only one book I would most recommend Michael Novak’s “The Spirit of Democratic Capitalism” (1982).

Marx, argues Michael Novak, was fundamentally wrong about the essence of capitalism. In an address to the Mont Pelerin Society in Sri Lanka in 2004 he said that private ownership, market exchange and the pursuit of profit had existed in the precapitalistic, feudal and aristocratic ages. The new thing about capitalism was enterprise: “the habit of employing human wit to invent new goods and services, and to discover new and better ways to bring them to the broadest possible public.” “One sees this,” said Novak, “in the very opening of Smith’s Inquiry into the Nature and Cause of the Wealth of Nations (1776), in his example of the invention of the machine for mass-producing pins. Such invention is the chief cause of new wealth.” Therefore, the cause of the wealth of nations is “caput” – the Latin word for Head or “top” and which forms English words such as captain, decapitate and, yes, capital.

In his Spirit of Democratic Capitalism the Templeton Prize-winning Novak doesn’t just provide an account of how the economy works. He urged his readers to understand our societies and nations as a product of three separate but overlapping spheres:

· one containing wealth-generating economic markets;

· one encompassing the democratic state and the legal system;

· and, third and most neglected and underestimated, the moral cultural realm.

If any of these spheres becomes too weak or two powerful then democratic capitalism will tend to dysfunctionality. The infographic below is my attempt at summarising what Michael Novak’s analysis should mean for us today:

The four final articles in this Prosperity for All manifesto – focusing on middle class welfare entitlements, infrastructure, free trade and financial regulation – might be expected to appear in a manifesto on capitalism written by a free marketer. But before we get to those subjects the next three chapters take up Michael Novak's conception of democratic capitalism. How do businesses make a bigger social contribution? How can democracy be saved from crony capitalists? And, first, how can policymakers refocus on the social underpinnings of democratic capitalism? 

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