Adam Smith on Today’s Global Economy
This year marks the 250th anniversary of two seminal texts: the US Declaration of Independence and Adam Smith’s The Wealth of Nations. One made popular sovereignty the basis of political liberty; the other helped make markets the central organizing force of modern society. Amid accelerating deglobalization, escalating climate change, the rise of AI, and growing government intervention, it is worth revisiting Smith and asking what he would make of the forces reshaping the world economy.
Smith’s concept of the “invisible hand,” the idea that individuals pursuing their own interests in competitive markets can advance the broader good, offers a useful lens through which to consider what he might think about deglobalization. His famous example of the pin factory, which illustrated how specialization across the stages of production dramatically increased efficiency and output, is equally instructive.
Modern globalization extended ideas like market exchange and specialization across borders, fueling decades of global growth. By contrast, the forces driving deglobalization run directly counter to Smith’s belief in competitive markets, because tariffs distort trade, regulatory barriers restrict capital flows, and closed borders limit labor mobility (and this amid an unprecedented migration crisis that has displaced more than 100 million people worldwide). Smith would almost certainly view today’s increasingly siloed economic order as a drag on efficiency, growth, and prosperity.
When it comes to climate change, Smith would likely reproach himself for grossly underestimating the societal costs of the industrialization his ideas helped unleash. While the Industrial Revolution generated immense wealth, Smith did not anticipate its significant negative externalities, most notably pollution and greenhouse-gas emissions.
Faced with these problems today, Smith would probably still favor market-based mechanisms. He would likely emphasize investment and incentives rather than heavy-handed regulation, in line with Ronald Coase’s insight that clearly defining who bears the costs of externalities like emissions can enable markets to find efficient solutions.
Smith would also oppose sweeping bans that restrict individual choice. To the extent that carbon taxes are needed, he would insist they be transparent and designed to encourage cleaner production rather than punish polluters.
While Smith would welcome AI’s potential to boost productivity and economic growth, he would be troubled by the growing market power of major tech companies. As a fierce critic of monopolistic behavior, he was wary of any arrangement that resembled collusion or excessive concentration. Given that most of the economic value generated by AI is accruing to the owners of capital rather than workers, he would also worry about the distribution of those gains.
Smith, who wrote extensively about social cohesion, would probably be appalled by growing income and wealth inequality, and by disparities in access to essential public goods like education and health care. These realities might lead him to conclude that the role of government must evolve to address imbalances that markets alone cannot correct.
In particular, in a world where machines generate vast amounts of wealth without creating enough jobs, today’s Smith might advocate shifting more of the tax burden onto highly productive firms while strengthening social safety nets. He might also give the state greater latitude to fund public goods through taxation, intervene when markets fail, and protect competition.
In certain sectors, such as defense, Smith might even accept limited government investment when markets cannot provide essential capabilities. But he would not go so far as to make the state the primary arbiter of capital and labor. His instinct would be to preserve the central role of markets whenever possible.
Smith is often portrayed as the original champion of unfettered capitalism, a thinker who believed that markets could solve every problem. But this is a caricature of his views. Smith was, above all, a pragmatist. Although he believed societies should first look to markets for solutions, he also recognized their limits, a view partly shaped by the financial excesses and speculative manias behind the Mississippi and South Sea bubbles of the early 18th century.
Moreover, Smith’s economic ideas were always grounded in a broader moral philosophy. Keenly aware of the frailties of human behavior, he recognized how easily individuals can distort markets through cronyism, collusion, and monopoly. If he were alive today, he would still advocate a balance between markets as the primary engine of prosperity and thoughtful oversight aimed at mitigating externalities and preventing excessive market power.
In confronting the defining economic challenges of our time, we should keep that equilibrium in mind: trust markets where they work, correct them when they fail, and never lose sight of the moral foundations that underpin a healthy economic system.
*Dambisa Moyo, is an international economist the author of Edge of Chaos: Why Democracy Is Failing to Deliver Economic Growth – and How to Fix It (Basic Books, 2018).