Britain Must Embrace Adam Smith to Fix Its Economy

Adam Smith’s The Wealth of Nations turned 250 this week. Remarkably, this nuanced yet revolutionary book has largely stood the test of time, even if today’s politicians pay scant heed to its insights.

Smith showed that productivity improvements determine living standards. Those gains emerge when people are free to specialise, trade and invest across wide markets under secure rules. Crucially, such an open, competitive commercial society does not just enrich merchants or princes. By deepening the division of labour, it spreads “universal opulence” to ordinary people.

His central question still vexes economists today: what makes nations rich? Not piling up precious metals through trade surpluses, he showed, as the 18th-century mercantilists — or President Trump — believe. Nor states or kings deciding what production should occur — another tempting theory today.

No, prosperity is underpinned by the division of labour. When people specialise in what they do best, output expands. And what facilitates this? Trade, both within and across borders. Open, competitive markets harness our self-interest to improve general welfare by providing things others want, allowing a deeper, richer specialisation to occur.

Writing before the Industrial Revolution, Smith’s analysis was not a theory of technological change. But his prescriptions — wider markets, free trade, the rule of law, the removal of anticompetitive privileges and capital accumulation — can still explain much of the prosperity gap across countries operating with similar technologies.

This matters for Britain. When politicians talk growth, they often discuss “industrial strategies” for frontier technologies: AI, life sciences, advanced manufacturing. Smith objected to directing “private people in what manner they ought to employ their capitals”. But Britain’s real problem is not an absence of new tech. Our living-standards gap with the US — even France — shows we do not squeeze the full gains from today’s knowhow, partly because we ignore Smith’s efficiency prescriptions.

True, Britain has not followed America’s bout of protectionism. But Brexit has not been used to cut as many tariff and non-tariff barriers as possible. Worse, politicians who champion free trade abroad readily block exchange at home.

Government policy tightly rations key inputs such as energy and land. Planning rules block the expansion of productive cities and clusters, ruling out efficiency gains from better job matching and agglomeration. Across sectors, regulation similarly obstructs mutually beneficial exchange. Some ministers today favour using policy to shrink “low productivity” sectors such as hospitality.

Smith showed how market price movements steer labour and capital toward productive uses. Yet from energy to labour markets, modern government muffles those signals through price regulation. Wages, said Smith, naturally vary “with the ease or hardship, the cleanliness or dirtiness, the honourableness or dishonourableness of the employment”, not just skill. Yet today equal pay laws see retail workers and warehouse staff, bin men and teaching assistants, mandated to be paid the same for work judges deem of “equal value”, market prices be damned.

Taxes, wrote Smith, should be predictable, transparent and as low as possible. Britain instead has built a maze of cliff edges, targeted reliefs and punitive marginal rates. We tax transactions that gum up housing markets and constantly yo-yo corporate tax rates and allowances. Then we act surprised when investment is weak.

Smith’s writing is rich enough that free markets’ critics can always find lines justifying exceptions. “Landowners love to reap where they never sowed,” he wrote, and he saw how capitalists can be opportunistic rent-seekers. With this, and his criticism of slavery, Smith was a radical liberal thinker with a clear-eyed view of human nature and the limits of commerce alone.

Yet Smith ultimately believed the surest route to prosperity was broadening markets and resisting state-entrenched favouritism. “The natural effort of every individual to better his own condition … is so powerful a principle,” he wrote, that it alone can carry society “to wealth and prosperity”. Unfortunately, modern Britain has piled up too many of what Smith called “impertinent obstructions” to those efforts.