Adam Smith’s Solution to Poverty

Even in the 18th century he understood that only economic growth would improve living standards.

By Rainer Zitelmann. Excerpts:

"A famous passage from “The Wealth of Nations”: “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of so much of their own labor as to be themselves tolerably well fed, clothed, and lodged.”

Today, these words are sometimes misinterpreted to claim that Smith advocated government-led redistribution of wealth. That wasn’t his intention, and he certainly wasn’t calling for social revolution. Poverty, according to Smith, wasn’t preordained, and above all, he didn’t trust government. He points out that only economic growth can raise living standards. Continuous economic growth is the only way to raise wages, and a stagnant economy leads to falling wages. Elsewhere he writes that famines are the result of government price controls."

"Smith was right about the effects of economic growth, as the past few decades have confirmed. In recent years, the decline in poverty has accelerated at a pace unmatched in any previous period of human history. In 1981 the absolute poverty rate, which the World Bank currently defines as living on less than $1.90 a day, was 42.7%. By 2000, it had fallen to 27.8%, and today it is less than 9%.

Smith predicted that only an expansion of markets could lead to increased prosperity. This is precisely what has happened since the fall of socialist planned economies. In China, the introduction of private property and market reforms reduced the share of people living in extreme poverty from 88% in 1981 to less than 1% today. Free-market economist Zhang Weiying of Peking University says, “China’s rapid economic development over the past four decades is a victory of Adam Smith’s concept of the market.” Contrary to prevailing interpretations in the West, Mr. Zhang says economic growth and declining poverty in China weren’t “because of the state, but in spite of the state,” caused by the introduction of private property."

"he warned in a [1755] lecture: “Man is generally considered by statesmen and projectors as the materials of a sort of political mechanics. Projectors disturb nature in the course of her operations in human affairs; and it requires no more than to let her alone, and give her fair play in the pursuit of her ends, that she may establish her own designs. . . . All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”"