What would Adam Smith make of the UK’s Covid-19 splurge?

Stewart, previously a critic of mine, said in the body of his remarks: “I think it’s only fair to balance the scales when Michael writes something I can agree with, and I wish to congratulate him for showing that he does indeed understand that the dangers of capitalism are realised when it facilitates and rewards unprincipled greed …

“I have a new respect for Michael Fry, and I found this column entirely redeeming. I certainly hope this is a side of Michael we might see more of, and that his previous evangelism for the untempered detriments of capitalism was untypical of his broader thinking.”

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As a columnist more accustomed to kicks than ha’pence from the readers of The National, this brightened up my self-isolated breakfast.

So today I’ll show Stewart a bit more of the cheery side of me. But first I need to point out that, in the original piece to which he responded, the word greed was never mentioned.

In fact I do not believe greed to be the basis of capitalism. I am not denying that greed exists, or that it finds room to operate inside the capitalist system – just as it did also in the corruption of communist systems before 1989, or indeed in the Labour-run Glasgow city council down to 2017.

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Greed plays a part in political systems because it is an element of human nature. The greedy child grasps for two sweeties when it could settle for one, leaving its playmate with none. In our economy the greedy child may grow up to become a hedge fund manager, making millions from the manipulation of the stock market, for instance, by cashing in when it crashes; he would previously have taken a position allowing him to do so.

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Simultaneous heavy losses to small investors, with their life’s savings in pension funds or unit trusts, would be to this speculator a matter of total indifference, if not the occasion of some glee. And I will not deny there are supporters of the capitalist system who see such outcomes as a virtue of it.

Ivan Boesky, the insider trader on Wall Street who was caught out and fined $100 million, passed on his wisdom to admiring students at Berkeley Haas, a US business school, with these words: “I think greed is healthy. You can be greedy and still feel good about yourself.”

Even so, I believe this view of the capitalist system to be a false one. I have come to my belief on the authority of Adam Smith, the Kirkcaldy-born father of modern economics.

In my column I have from time to time had discussions with readers about Smith, in which we have on the whole reached agreement that he needs to be considered as the author not only of The Wealth of Nations (1776), the manual of capitalism, but also of the previous The Theory of Moral Sentiments (1759), which seeks the human origins – rather than the religious origins – of morality. The two books are not easy to reconcile. But if we can do so, then we may understand why capitalism amounts to more than greed.

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At bottom, the glib assumption that Smith favoured greed is simply wrong. He decried it often and at length. This was because he wished to draw a distinction between greed and the human quality he saw behind the effective operation of free markets, that is to say, prudent and virtuous self-interest.

True, the clarity of Smith’s view has tended to get obscured in the economics of our own day. This sets more store by mathematical certainty, or pseudo-certainty, than human truth. It’s why financial crises can burst on us without any warning whatever, even though the scientific value of this kind of economics is supposed to lie in prediction.

Its concept of humanity, so far as it has one, is that we are isolated, rational, calculating materialists enjoying no social or moral connections with other human beings – and certainly no scope for heroism (see Boesky).

By contrast, Smith found us to be fundamentally social animals. While our faculties are weak and we have problems maintaining a rational approach to life, we are capable of heroic action. What we need to make the best of ourselves is reflection on the world and self-control, to sum up the message of The Theory of Moral Sentiments.

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Turning to The Wealth of Nations, we find Smith arguing that self-control is encouraged within an institutional setting of competitive markets because economic actors have an incentive to be worthy of trust. Competitive markets support the development of reliable behaviours. Yet Smith’s moral system goes far beyond enlightened self-interest in explaining the internal controls that humans develop as they become properly socialised.

The moral system is based on sympathy, and Smith stresses that “sympathy … cannot, in any sense, be regarded as a selfish principle”.

This is because of its operation in a real world, with markets and people who deal in them. These economic actors can be too blinkered to understand what they are actually doing. If they are greedy, they could perhaps go on a spending spree. Yet it will only result in over-production and so, of all things, a surplus for redistribution to the poor.

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In that case, the rich “are led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society”.

So their greed, once it freely runs its course, in the end evolves into virtue and happiness.

And it does so without interventions from government, which usually bring opposite effects.

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I wonder what Smith would have made of the coronavirus crisis, which has prompted such interventions on a scale never known before in history. They include public spending on a scale that makes the wildest proposals of Jeremy Corbyn or Nicola Sturgeon look rather stingy.

After 2019, when the UK had no budget at all, 2020 has already seen three budgets. Last Friday Chancellor Rishi Sunak more or less nationalised the economy to run up a government deficit that may well reach £200 billion (there is no official estimate yet). Compare that to the austerity we suffered as George Osborne tried to get his deficit down from £168bn.

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It’s far ahead, but to get back to earth we will eventually face two basic choices. Either we will accept that, for probably the rest of the 21st century, it will be right for government to run the economy hands-on. I’d only say that no UK government has ever learned in the long term to do that well. A Scottish government has yet to prove itself.

The second choice is to follow the way of Adam Smith, who depicted his own world of misjudgement and incompetence by governments.

He was right, but 100 years of trial and error were needed to make it a better world.