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The Adam Smith Lecture at Pembroke College: Smithian Inspirations and Their Difficult Fate in Central Europe

English Pages, 25. 4. 2013

I take it as a great honour to be invited to deliver this year’s Adam Smith Lecture here at Pembroke College. It is an honour for me both for this lecture’s connection with the great, if not the greatest name in social sciences and economics in history (which Adam Smith undoubtedly is) and for the distinguished speakers who were chosen to deliver this lecture in the past two years.

One of them was my good friend Nigel Lawson with whom we – not entirely successfully – try to oppose for years already the irrational and dangerous global warming doctrine. We try to wake up the sleeping majority in the country and elsewhere which does not take it sufficiently seriously. We try to warn against the still misunderstood, underestimated and disparaged threats it brings to human freedom and economic prosperity all over the world.

I also learned a lot from reading the last year´s lecture given by Charles Moore. He devoted it to Margaret Thatcher and to the connection between – to my great regret more and more forgotten and misinterpreted if not caricatured – Margaret Thatcher and Adam Smith. Margaret Thatcher´s death two weeks ago is an irreplaceable loss for all of us. I hope it will motivate serious scholars and writers to the increase of interest in the studying of her unique legacy. (Yesterday, I organized a small conference about Margaret Thatcher in Prague and spoke there as well.)

I would also like to mention Madsen Pirie and his Adam Smith Institute for the persistent efforts to keep the name of Adam Smith alive, as well as for the project to build his statue in Edinburg. I remember I visited the city some ten years ago and was surprised to see how invisible Adam Smith was there at that time.

I am not – similarly as Nigel Lawson put it – an Adam Smith scholar, someone who specializes in the history of economic doctrines, in classical political economy or directly in Adam Smith. As an economist, I “only” feel being one of his life-long humble students. I mention quite often his name and his ideas in my writings and speeches but I do not often quote him explicitly. I consider it rather cheap and unfair to hide myself behind the so well-known and so often repeated formulations made by this great economist and moral philosopher.

Nevertheless, this is not my first Adam Smith lecture. If I am not mistaken, the first one was in Dallas in 1991 at the invitation of the American Association of Business Economists. I got also two Adam Smith Awards. The first one – which was called Adam Smith Prisen – was given to me in 1994 in Copenhagen by a Danish institute called Libertas, the second one in 2006 in New York City by the Foundation for Economic Education whose monthly journal “The Freeman” has been an important source of liberal ideas for decades. As a conservative person, I am sorry that it ceased to be published in a printed form.

Adam Smith has been for me, since the time I was confronted with his ideas some half a century ago, a clear and undisputable compass and a strong guiding voice, which has been continuously telling me how to look at the world around me.

Adam Smith decisively and categorically

– rejected the long time prevailing protectionist instincts and in the field of economic policy the again and again returning mercantilistic doctrine by using arguments based on the advocacy of the benefits of free markets, of the unproductivity and destructiveness of tariffs and subsidies of all kinds and of the importance to fight the powerful vested interests of firms in monopolistic markets;

– even though he himself never used the term “laissez faire”, he coined many already canonical arguments in favour of free, unregulated markets and of minimum government intervention;

– he was the first to explicitly argue that “unfettered” markets bring about harmony, not chaos, that following narrow private, therefore, egoistic interests brings about benefits to other people and to the society as a whole. There is no other comparably significant and legendary idea in economics than his “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”;

– his “Invisible Hand” metaphor helped to explain the substance of markets in a revolutionary and eyes-opening way;

– his work constituted the economic theory as a well-defined field of social studies.

I know that you all know this and I must admit that you probably know it better than me. It was an integral part of your education – at least I hope in my rather innocent trust in the quality of British education system in the Brave New World of the 20^th century – but it was not part of my education. My education was built on a different set of ideas. In communist Czechoslovakia in my university years, Pre-Karl-Marx economists were handled more or less positively and friendly but all of them – Adam Smith, David Ricardo and other representatives of the school of classical political economy – were considered minor, less important forerunners of the great and untouchable Karl Marx. We were supposed to study what Marx wrote about them. To study Adam Smith directly was not required, perhaps not even recommended. By doing it, we would have been eventually able to see how much Marx himself owned to him for his own writings, whereas we were taught to take Marx as the only fully original author and scholar.

I remember I permitted myself one of my early political misbehaviours. When speaking at a festive conference organized in Prague in 1967 on the occasion of the 100^th anniversary of “Das Kapital”, I quoted Paul Samuelson´s statement that “in the field of economic theory, Karl Marxwas a post-Ricardian of lesser importance”. It was not expected. I was not saved by the second part of his statement that Marx was one of the greatest social scientists in history. Our ideological purists were not happy with that (and neither with me).

Such statements were already possible, not directly personally dangerous at that time. Our country was paradoxically helped by the fact that the Czechoslovak economy experienced a totally unexpected economic crisis which happened several years before. The crisis was unexpected because it was generally believed and politically repeatedly proclaimed that the command economy based on the directive economic planning guaranteed a steady and harmonious economic growth. The evident failure which was impossible to hide opened the doors to nation-wide, sufficiently loud and deep debates and finally to the implementation of relatively far-reaching economic reforms which tried to combine plan and market. At that moment the idea of the market and together with it the name of Adam Smith were rediscovered in my country.

His ideas were, of course, used as a support for the reform process incompletely and inconsistently. Our reformers – the generation of my teachers – only wanted to use the market (as an instrument in their very visible hands), not to let the market itself spontaneously function. They also wanted to introduce the market for goods only, not the markets for labour and capital. A group of my friends and colleagues established – under my leadership – the so called Club of Young Economists which criticized these reforms from a truly Adam Smith´s position. We were, however, not allowed to see the economic success or failure of such reforms. As some of you may know, these reforms were brutally interrupted by the invasion of the armies of the Soviet Union and other Warsaw Pact countries into Czechoslovakia in August 1968. As a result of it, Adam Smith and his ideas were in our country more or less forgotten for additional two decades. And I am afraid not only in my country.

When I started to seriously study the standard Western economic theory in mid-1960s as a young research worker in the Institute of Economics of the Czechoslovak Academy of Sciences, I regularly read the British quarterly journals like “The Economic Journal” or “Economica” but if I remember correctly they were not full of quotations of Adam Smith. It was Keynes, Harrod, Kaldor, Joan Robinson and similar authors who occupied the British economic literature then. I also remember we were almost horrified by the flirtation of many distinguished economists with the progressivistic idea of the possible and eventually desirable convergence of economic systems. I also doubt that it would have been possible to establish the Adam Smith Institute at that time.

It has changed in the second half of 1970s and as we were reminded by Charles Moore in the last year´s Adam Smith Lecture, it was mostly thanks to Margaret Thatcher. She had the Smithian courage to advocate markets, capitalism and the importance and strength of private initiative, and to oppose government subsidies. She also had the courage to advocate capitalists, not trade-unions.

This very positive development in your country happened shortly before the collapse of communism which brings me to the second renaissance of Adam Smith in my country. After the fall of communism in November 1989, we immediately returned to his ideas. Much more to his ideas than to the reality of the Westeuropean “social market economy” of German or French origin. The sharp dispute opened between those of us who wanted a full-fledged market economy and “markets without adjectives” as I put it then and those on the other side of the ideological barricade who were dreaming about all kinds of “third ways”. My statement “the third way is the fastest way to the Third world”, made at the World Economic Forum in Davos in January 1990, became one of the symbols of the disputes of that era.

Everyone (almost) in our part of the world wanted to get rid of communism. The great majority of people was in favour of fundamental reforms. Everyone wanted freedom, parliamentary democracy and economic prosperity, but when I for the first time used the term “capitalism” in a TV debate several weeks after the Velvet Revolution, it was not greeted by everyone. It appeared not to be so self-evident. A lot of work in defending such an approach was necessary. Nevertheless, we felt it our task to make Thatcherite or perhaps Smithian type of reforms. We understood that it was necessary

- to open-up the country after half a century of life in a semi-autarkic society;

- to liberalize prices and foreign trade;         

- to radically deregulate the markets;

- to privatize the whole economy, not just a particular, small segment of it as it was the case in your country;

 - and to desubsidize the heavily distorted economy and to return it to economic principles.

Margaret Thatcher did similar things in your country a decade earlier. The only difference between your and our task was that we were not in the luxurious situation to have markets and to only partially liberalize them, to have a dominantly privately owned economy and to privatize only the residual state-owned sectors of the economy.

We had no private economy at all. I remember repeatedly saying that my hero Margaret Thatcher had to privatize 3 – 4 firms per year, whereas we were forced to privatize 3 – 4 firms per hour. It was a different challenge and it asked for slightly different privatization procedures. Nevertheless, I am glad to say here now that the advisors from your country sent personally by Margaret Thatcher to my ministry had more understanding for our tasks than anybody else. In spite of all the existing problems, we more or less succeeded in our historic task. The inefficient visible hand of the bureaucratic communist government was replaced by Adam Smith´ invisible hand of the market. We had the pleasant and satisfactory feeling that we reinstituted or reestablished the Adam Smith world from scratch in a relatively short period of time.

That was, however, not the end of the story, because we had no other way out than to become part of the European Union sooner or later. We were afraid of that. Let me quote Charles Moore from his last year´s lecture: “In her support for the European Single Market in the mid-1980s, Mrs. Thatcher ignored the problem that this was part of a political project which was intended to smooth down competition rather than promote it, and to take power away from elected governments and transfer it to “fonctionnaires” in Brussels”. I would put it differently. Margaret Thatcher did not ignore it. She was aware of it as she demonstrated most visibly in her Brugges speech but she probably did not oppose it sufficiently in her government´s European policy. She was not alone. I always had the feeling that the British policy towards Brussels has been underestimating the true intentions of continental politicians. The Channel has been always considered a sort of “Maginot line” by many British politicians. Nevertheless, I would criticize Margaret Thatcher more for her – not negligence but explicit – support of the global warming alarmism[1].

As regards the EU, we are not directly helped by Adam Smith. It is, of course, not surprising that he did not leave us any written document about the current European unification process. He lived in the era of the trust in the Westphalian paradigm of the importance of  and of the positive role played by nation states. However, I guess, he would support the European economic integration as the final step in the demercantilization of Europe (even though he would not be happy with its regionalism) but I am convinced he would be against the massive politicization of life in Europe, against the stifling of free markets and against the concentration of such an enormous power in Brussels. Competition among legislations of individual states is as important as the competition among firms.

Dismantling communism in my country was a move in the direction of the Adam Smith world. On the contrary, our approaching and finally entering the EU was a move out of the world of Adam Smith which is the feeling more and more people share in the country where I live these days. Even the endless and almost deafening EU propaganda does not fully succeed in blocking the free thinking of people in Europe. We have fortunately still not yet reached the Orwellian world of his seminal “1984”, but I am afraid we are coming closer and closer to it.

To say this explicitly now, after the end of my political carrier, is not my suddenly discovered truth. Even in my highest political roles in the Czech Republic – as Prime Minister and as President of the country – I spoke openly about the dangers connected with the European political unification and centralization and with the dream of the Eurocrats called “an ever-closer union”. My recent book “European Integration without Illusions”, published in England last year under a slightly shifted title “Europe – the Shattering of Illusions”[2], is available already in seven European languages – including English, German, Italian and Spanish. There is, however, no publishing house ready to publish it in France. It proves that the French politicians are not yet out of their illusions. Their power – in their already postdemocratic country – is so strong that the publishers are afraid of being connected with such a book.

I believe Adam Smith would not be happy to live in the contemporary postdemocratic, postpolitical, politically correct European society. I guess he would oppose not only the constantly expanding redistribution policies inside individual countries, but very strongly also the new phenomenon of international redistribution which appeared in Europe in the last few years. He would probably oppose the so called transfer union – together with Great Britain, Sweden and the Czech Republic – which is prepared as a solution of the current sovereign debt crisis. He would also insist on the need to carefully define the difference between private and public goods and would oppose including the elimination of climate fluctuations into the category of public goods. He would also disagree with the large-scale distortions of the price system by huge subsidies resulting from the implementation of many tenets of the environmentalist´ doctrine. And he would disagree with many other similar things.

Europe needs a fundamental change along Adam Smith lines. But how to do it? Is it the task of powerful politicians in Brussels and of their fellow-travelers in individual EU member countries? Or should it be done in a Smithian way? By the people? By free citizens in already not fully sovereign EU member countries? Should it be done by a visible or by an invisible hand? My answer to these questions is clear and straightforward: freedom and economic prosperity cannot be saved by the suddenly enlightened politicians. It cannot be saved at the frequent EU summits in Brussels. It must be the result of the free discourse of millions of people on the European continent. The change must come from bellow, not from above. It must be a Smithian (or Hayekian) process of spontaneous evolution, not constructism. It must be human action, not human design, to quote another great social scientist, Ludwig von Mises. But it all started with Adam Smith. We owe him a lot.

Once again, it was a great honour for me to speak in Cambridge about Adam Smith. Thank you for making it possible.

Václav Klaus, The Adam Smith Lecture, Pembroke College, University of Cambridge, UK, April 24, 2013