(Walter Bagehot and Adam Smith, part 7)

When did Adam Smith decide to write a treatise on political economy, and more importantly, what motivated him to write such a book? According to Walter Bagehot, Smith’s three-year residency overseas was the decisive moment. (See Bagehot 1876, pp. 29-35, paragraphs 17-28.) For the reasons I give below, I concur with Bagehot.

Among other things, Bagehot not only devotes the largest chunk of his Adam Smith essay — 11 out of 40 paragraphs — to Smith’s sojourn in France; he also describes in vivid detail — quoting key passages directly from The Wealth of Nations — the mishmash of outmoded trade barriers, oppressive taxes, and other “economic[] errors” that Smith found there. (See especially paragraph 18 of Bagehot’s 1876 essay, where Bagehot explains the logic of French mercantilism.) But what must have surprised or astonished Adam Smith’s imagination and intellect more than anything else during his time abroad were the counter-intuitive and radical doctrines of the French “Économistes” led by the great polymath François Quesnay (pictured below), one of the inventors a decade earlier of a new method of analysis called the Tableau économique, the first formal model of the economy. (As an aside, in his early essay on the history of astronomy Adam Smith himself had emphasized the pivotal role that the emotions of wonder, surprise, and admiration play in the development of science.)

Despite Smith’s admiration of the Économistes, Quesnay’s new school of political economy possessed an irredeemable and fatal flaw. Bagehot himself identifies this fateful paradox on page 35 of his essay (paragraph 27), a logical contradiction that would doom the future fortune of the French peoples, literally and figuratively. On the one hand, the Économistes were the champions of economic freedom, or in the immortal words of Walter Bagehot: this new school of laissez-faire economists “delighted in proving that the whole structure of the French laws upon industry was wrong; that prohibitions ought not to be imposed on the import of foreign manufactures; that [subsidies] ought not to be given to native ones; that the exportation of corn ought to be free; that the whole country ought to be a fiscal unit; that there should be no duty between any province; and so on in other cases.” (Bagehot 1876, p. 32; para. 22.)

But at the same time, the Économistes, starting with Quesnay himself, had “an eager zeal for … despotism”, for they wanted to accomplish their radical laissez faire reforms “by the fiat of the sovereign.” (Bagehot 1876, p. 35; para. 27.) In other words, a free market requires a strong central government (a political authority strong enough to, at a minimum, define, allocate, and enforce property rights as well as guarantee law and order), but a strong central government, in turn, poses a great risk to freedom. That is the logical contradiction of Quesnay and his disciples. Does this paradox have a solution? As I shall explain in my next Bagehot/Smith post, Adam Smith would devote the next ten years of his life (1766-1776) attempting to solve it.