Murry Rothbard’s chapter, The Celebrated Adam Smith, in his Economic Thought before Adam Smith begins:
Adam Smith … is a mystery in a puzzle wrapped in an enigma. The mystery is the enormous and unprecedented gap between Smith’s exalted reputation and the reality of his dubious contributions to economic thought. (Rothbard, Economic Thought before Adam Smith, P. 443)
A prior chapter in Economic thought before Adam Smith extols Richard Cantillon, the Irish banker and author of Essay on the Nature of Trade in General, as the “founding father of modern economics”. Precedence is on the side of Cantillon since he wrote his work at least four decades prior to Smith’s beginning work on The Wealth of Nations. On the other hand, The Wealth of Nations, at 900 pages versus the Essay’s 146 pages, appears to be more thoroughly thought out. But appearances can be deceiving. The only way to compare the two works is by reading and analyzing them.
That latter type of comparison reveals that the authors employed polar opposite models of how products and services are created in an economy. Cantillon recognized what has become a standard concept in economics called the factors of production and their associated theoretical payments – land (rent), labor (wages), capital (interest) and entrepreneurship (profit). Smith was aware of Cantillon’s Essay because he criticized him on Page 68 of The Wealth of Nations (both authors wrongfully assumed that minimum labor rates were determined by the subsistence cost of unskilled labor. History has demonstrated that even the cost of unskilled labor increased significantly during the Industrial Revolution).
There is not a single reference to entrepreneurship in The Wealth of Nations. To the contrary, Smith describes the purpose of Book I of his well-known work:
Of the Causes of Improvements in the productive powers of Labour, and the order according to which its Produce is naturally distributed to different Ranks of the People (see Wealth of Nations table of contents).
The next four chapters are allocated to an explanation of the contribution of the division of labor to economic flourishing. Smith seems to be conveying the idea that a labor pool spontaneously creates new divisions of labor. But new divisions of labor destroy the old, so why would labor pursue a course that appears to make workers unemployed? The truth is that most new divisions of labor are envisioned, instead, by those who assume risk in bringing products and services to market.
Cantillon described entrepreneurship in his Essay, Part I, Chapter 13,
The circulation and exchange of goods as well as the production of goods and merchandise, are carried out in Europe by entrepreneurs in conditions of risk
In that chapter, Cantillon successively described farmers, wool manufacturers, and drapers as examples of entrepreneurs. He then expanded the definition to include other occupations that involve risk. Finally, according to Cantillon,
All the inhabitants [of the state] are dependents [of each other] with the exception of the prince and the landlords; that they may be divided into two classes, namely entrepreneurs and hired people; …
He then concluded this paragraph with a remarkable statement:
Even beggars and thieves are entrepreneurs [because they assume risk]. (Rothbard, Economic Thought before Adam Smith, P. 27)
These statements make more sense when we consider the times. The New World had been discovered in 1492, but it would take some time before improved ship building and navigational instrument technology would make the three-way trade route between Europe, Africa and the Americas profitable. In the meantime, the British Agricultural Revolution was beginning to change agricultural methods in ways that allowed fewer farmers to feed a nation.
Cantillon’s remark about beggars and thieves could easily be dismissed as facetious. But Cantillon was a serious writer. He was making a point about a major transition that was occurring in advanced economies that Adam Smith probably failed to grasp. Consider how Smith described Book I of The Wealth of Nations:
Of the Causes of Improvements in the productive powers of Labour, and the order according to which its Produce is naturally distributed to different Ranks of the People (see Wealth of Nations table of contents).
Free enterprise had begun breaking down the old top-down feudal order. Economic rank (e.g., lords and vassals) was giving way to a merit-based system in which a person’s standing was measured by his or her contribution to the economy. Notice also that Smith’s bias toward labor is revealed in his claiming that produce was “naturally distributed”. In advanced economies, wealth is distributed by the market. This was just one of many instances in The Wealth of Nations that avoided the role of entrepreneurship.
Once that bias is suspected, the following statement by Smith comes into focus:
The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour. (Smith, The Wealth of Nations, P. 3)
This statement leaves one believing that the innovation that was apparent beginning in the early 18th century arose from workers behavior changing after being static for more than a thousand years. It is an outright contradiction to Professor Donald Boudreaux’s hockey stick of human prosperity. Notice how Smith avoided any mention of the true role of the entrepreneur in the following statement:
The produce of almost all other labour is liable to the like deduction of profit. In all arts and manufactures the greater part of the workmen stand in need of a master to advance them the materials of their work, and their wages and maintenance till it be compleated. He shares in the produce of their labour, or in the value which it adds to the materials upon which it is bestowed; and in this share consists his profit. (Smith, The Wealth of Nations, P. 65)
Karl Marx gave credit to Adam Smith for his “insights” as the following suggests, according to Professor Kellner of the University of Texas:
The ideas of the dominant class become the dominant ideas of the age, Marx believed, and in his view Adam Smith expressed and systematized the ideas on economics and capitalism, science and human nature of the rising and eventual triumphant bourgeoisie. Smith was not, however, for Marx a crass apologist whose ideas were constructed explicitly to defend the interests of the industrial class. Rather, he saw Smith as a conscientious theorist who expressed the leading ideas of his age, saw deeply into fundamental tendencies, and fell prey to its illusions. No one can transcend the limits of his age, and Adam Smith could not foresee the problems that the developing capitalist system would produce that began to surface during Marx’s life. Marx’s complex critique/appreciation of Smith is cogently summarized in a passage in the second volume of [Marx’s] Theories of Surplus Values:
One might question Professor Kellner’s free market credentials, but he certainly identified the influence Adam Smith had on Karl Marx. Both Kellner and Karl Marx are in opposition to Professor Boudreaux’s hockey stick of human prosperity. And both failed to grasp that the bourgeoisie was not an economic class as that term was understood prior to the 18th century. Entrepreneurship, according to Cantillon, was an attribute open to all. This break with feudalism occurred over a long period of time, but by the early 18th century it would demonstrate that a merit-based free market would soon replace feudalism.
What is the bigger lesson to be learned from the differences between Richard Cantillon and Adam Smith? There are only two fundamental ways of interacting in a society – (1) cooperation/competition (the way of the free market), or (2) contention (the struggle for dominance among politically connected special interest groups). The first method succeeds because it is based upon voluntary, mutually beneficial exchange, constantly growing the size of the economy. The second fails because it is based upon coercion and the assumption that the economy is a zero-sum game, i.e., that for some to gain, some must lose. That is not sustainable when the funding of special interests is papered over by the creation of money by the Federal Reserve System. That may create the illusion that most of the politically-connected special interest groups can feed at the federal trough simultaneously. But that assumption may not be fully tested for decades. At some point, however, potential lenders become unwilling to acquire the government’s bonds and the structure falls like a house of cards. The United States appears to be close to that situation.
The differences between Cantillon and Smith’s thinking first played out in the 18th century, but are even more relevant today. Both of the two major parties in the United States subscribe to the Smithian myth about the creation of wealth in an economy. They differ only on their implementation of 17th century mercantilism. Democrats focus on growing the size of the federal government and serving special interests. Republicans promise to reduce the size of government, but somehow fail to control its growth when they are in power. They, too, are willing to serve special interests, most notably the military-industrial complex.
Neither party has clearly embraced the reduction of the size of the federal government, necessary if the explosion of the federal debt is not to destroy the currency. There is no political solution to this challenge. The United States is experiencing an up-tick in domestic violence, that if left unchecked, will lead to civil war. The answer to the challenge is to understand and embrace Cantillon’s wisdom.
© Phil Duffy 2025
