In the bailout-a-week political climate, it is all too easy to believe that free-market economics are as passe as powdered wigs. Everyone, it seems, is a socialist now, and the old gospel of laissez-faire and free enterprise has been discredited by a cascade of free-market failures that threaten to bring down the economy of the entire developed world.
"For too long, the prevailing attitude in Washington has been that the market always knows best," Congressman Henry Waxman (D-Calif.) said recently. Economist and newly minted Nobel Laureate Paul Krugman has counseled the new Obama administration to "figure out how much help they think the economy needs, then add 50 percent." According to Krugman, "it's much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little."
In short, the free markets, we are told, have failed, and more government supervision and central planning is the only possible cure. In truth, the economic meltdown we are now experiencing is a result of government intervention, not the free market. But that does not stop the proponents of interventionism from blaming the market for the problem and advocating more intervention as the solution. *
In such times, we would do well to remember that free-market capitalism has been defended eloquently for over 200 years, and that the West, particularly the United States, has prospered because of the acceptance, mostly in the 19th century, of economic freedom, in principle if not always in practice. The men who gave us the theory of free-market economics were lonely, often misunderstood voices in their day as much as in ours, offering timeless economic truths to any who had, and have, ears to hear.
Adam Smith (1723-1790)
Generally regarded as the founder of the modern science of economics, the late 18th-century product of the Scottish Enlightenment, and a contemporary of Hume and Hutcheson, among others, Smith has a less-deserved reputation as a champion of free-market economics per se. By all accounts an eccentric if affable academician, Adam Smith popularized certain ideas that have come to be taken for granted by free-market economists, such as the notion that men in their economic activities are guided by self-interest (not necessarily selfishness), giving the appearance of an "invisible hand" that organizes human enterprise and guides it into maximally productive channels. "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner," wrote Smith in his most famous work, An Inquiry into the Nature and Causes of the Wealth of Nations, "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."
Elsewhere in that landmark work, Smith pointed out that the division of labor in a free market leads to much greater productivity because it permits greater specialization. A single person manufacturing pins, for example, might produce 20 per day, but many different people engaged individually in the various steps of pin manufacture might produce many thousands during the same interval.
Smith believed that value arose from the amount of labor required to produce a given product, a notion that came to be known as the "labor theory of value." This idea, unfortunately, was mistaken, as later generations of economists, especially in the so-called Austrian School, discovered. However, the labor theory of value was used by Karl Marx and other communist and socialist economists to justify central planning since, if value was a strict consequence of labor invested, then "correct" valuations could be determined by enlightened central planners. Some noteworthy economists, like Murray Rothbard and Joseph Schumpeter, believed Adam Smith's contributions to economics to be greatly …