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Capitalism’s declaration of independence

No, not the American Declaration of Independence; 1776 was also the yearin which Adam Smith published his greatest work, The Wealth ofNations.

Smith said market forces were like an invisible hand: “It is not from thebenevolence of the butcher … that we expect our dinner, but from (his)regard to (his) own self-interest,” he wrote. Two centuries beforeMargaret Thatcher did so, Smith explicitly equated management of a kingdomwith the sound management of household expenses. He believed incompetition and opposed trade barriers and tariffs.

But in what is perhaps his second-best known quote, he observed: “Peopleof the same trade seldom meet together, even for merriment and diversion,but the conversation ends in a conspiracy against the public, or in somecontrivance to raise prices.” So Smith could tell a cartel when he sawone.

Adam Smith wrote that the wealth of nations was not determined, as themercantilist tradition would have it, by the amount of gold and silver acountry possessed, but by the productive output of a nation’slabourers.

In terms that readers of this magazine will appreciate, Adam Smith said ineffect that wealth was not a phenomenon of the balance sheet, but of theprofit and loss account. In this respect, it can be argued that he is notonly the father of economics, but of shareholder value creation.

That in itself is worth celebrating. But Smith was also critical of whathe called “state-chartered companies” – what we now call corporations.

“Being the managers of other people’s money than of their own, it cannotwell be expected that they should watch over it with the same anxiousvigilance with which the partners in a private copartnery frequently watchover their own,” he wrote. “Negligence and profusion, therefore, mustalways prevail, more or less, in the management of the affairs of such acompany.” The father of free market economics is watching you.

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