The last article I wrote dealing with Adam Smith received an objection from a person by the nickname of “Restorer” which took me to task: [Source]

The piece doesn't ever really say that Smithian economics works despite, or rather because of, the fact that its practicioners are mercantilistic in philosophy as far as their own practices go.

Restorer has a good point, one explored thoroughly by Walter Wriston, chairman of what used to be Citibank back in the 1980s. According to Wriston, the market will work despite big government because Smith’s invisible hand still impels anyone in the stream of trade to satisfy the needs of consumers based upon their own self- interest. As long as people are selfish, the marketplace will keep producing as usual, though at a sub-optimal level - despite the United States moving from a laissez-faire economy to a welfare state, whose modernizing feature was Keynes providing a theoretical justification for what Louis XIV, Colbert and John Law basically blundered into: the issuing of government bonds as a far more convenient way of tapping the national wealth than accumulating precious metals, especially when coin clipping is automated and regulated by the use of fiat currency.

What could be called the “Wriston model” is theoretically quite interesting. Old Walt played off Keynes’ division of economic processes into macro- and microeconomics by saying that a perhaps dominant government presence in the economy has its impact primarily at the macro level – interest rates and changes in the price level. At the micro level, on the other hand, the blooming red tape of the previous century is nothing more than the increasing specification of rules, which does not strip the micro-economy from a basically laissez-faire orientation because all laissez-faire economies work under a framework of rules. As far as the specific damage done by proliferation of regulations is concerned, most of these are simply codification of regular production rules already existing. The voluminous prohibitions are there simply to prevent business deviance, the source of most reckless and/or predatory behavior. If this proves to have a disparate impact on small business, certain exemptions for shops under “x” employees (say, forty) can be put in as amendments to these regulations. Only a small fraction of which has to be known by the average businessperson, anyway; the only economic unit with a need-to-know for the bulk of them are huge corporations, especially conglomerates.

To put this bluntly:

1. Government interference in the economy impinges primarily at the macroeconomic level, with unsound monetary policy being the primary disturber.
2. The bulk of red tape is form-fitted for the relevant regulated industries – many firms depend on this red tape. The regulators know very well that mis-glued tape will result in the crippling or even destruction of the regulated industry; this keeps ‘em sensible.
3. Because of #2, an Adam Smith-style economy does exist at present and works fine. The main source of business trouble is the effect of bad macro policy, just as good macro policy shows up in a healthy and growing economy.
4. [This is the punch.] The bulk of the complaints about “red tape” are hasty generalizations from a cumbersome Income Tax code. Institute a back-of-the-envelope tax form, including one for corporations which takes GAAP as a reliable earnings estimator, and the invisible hand will work reliably except for macro shocks.

This brand of Adam Smithianism is clearly based upon the works of Milton Friedman, after feel-good confidence has been added. Friedman groomed for the country club, as it were.

But the more hardcore type of Smithian would be shocked at the above, as it uses the work and words of Smith to justify a State that seems to have slipped far away from Smith’s ideal of minimal government. To this kind of Smithian, an alleged “Keynesian Synthesis,” combining the best of laissez-faire and Colbert-style mercantilism, sounds a lot like dressing the body of the latter in the suit of the former.

Why the dispute? Or, to put it another way: why would Smith’s advocacy of minimal government be so unheard nowadays?

Because of what might have gotten lost as political economy turned into economics. This quote from The Wealth of Nations still rings true in every textbook uninfected with propaganda:

But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, 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.... By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. {Book 4, Chapter 2]

Here’s another well-known quote, which indicates the relevant nub:

But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely. The charity of well-disposed people, indeed, supplies him with the whole fund of his subsistence.... The greater part of his occasional wants are supplied in the same manner as those of other people, by treaty, by barter, and by purchase. [Book 1, Chapter 2]

And here’s the “iota” that’s under dispute, one revolving around the presence or absence of nuance:

Is Smith referring, under his breath, in the above snippet, to a tendency for each citizen of a market society to be hypocritical when they claim disinterestedness?

If your answer is “No,” then you’re a Wriston type. The invisible hand is simply a matter of the mechanics of a market society.

But if your answer is “Yes,” then you know quite well what the average nineteenth-century American was referring to when he or she used the word “hog.” Which makes you outmoded in some social circles, such is the truth.

The latter needs to be explicated further by using an analogy. Assume that the usual amount of gay individuals live in a society where homosexuality is outlawed. The specific amounts of their homosexual vs. heterosexual impulses vary – perhaps through the normal distribution.

Citizens of such a State that are totally homosexual will live lonely lives as bachelors until death. But the bulk of them will try to displace their homosexual urgings through marriage to a serviceable partner of the opposite gender.

Now, assume a society like ours, where homosexuality is permitted. No displacement is needed now; any homosexual type is free to follow their inclinations.

Here’s how the above relates: some economic agents are cussedly independent and others are profoundly dependent; this varies too. Under minimal government, those few that are permanently dependent on “society” will more likely than not live and die poor. The rest will sublimate their yearning for either security or a government stamp on their economic activities in a way consistent with the Invisible Hand, after some mezzanine-level cursing. But when the principle of laissez-faire is breached, a lot of dependency attitudes will come right out of the closet.

Whether “flaming mercantilism” is good for society or not is largely a political opinion, of course; hence the ambiguity of the comparison.