By Adam Smith
Professor of Moral Philosophy (EmerFDR’s economic justice concerns raised in the historical voices series: Washington’s constitutional warnings, [Lincoln’s democratic preserLincoln’s democratic preservation, and Jesus’s moral imperatives. For creative process insights, seJesus’s moral imperativestion_paper.md).
Abstract
This paper examines the economic developments of 2025 through the lens of moral philosophy and political economy, with particular attention to how contemporary policies align with or contradict the principles of natural liberty outlined in An Inquiry into the Nature and Causes of the Wealth of Nations. The analysis reveals that while technological innovations like artificial intelligence demonstrate the continued power of the division of labor to enhance productivity, concurrent developments in trade policy, financial speculation, and wealth concentration represent a troubling departure from the conditions necessary for genuine prosperity. The paper argues that the current economic moment represents not a vindication of free market principles, but rather their systematic perversion by what I term “mercantilist revival” - policies that benefit the politically connected at the expense of productive economic activity.
I. Introduction: The Perversion of Natural Liberty
In the year 2025, I find myself in the peculiar position of observing an economic system that claims inspiration from my work while systematically violating its fundamental principles. The global economy faces what can only be described as a crisis of contradictions: unprecedented technological capabilities coinciding with protectionist trade policies reminiscent of the mercantile system I spent considerable effort refuting, financial instruments divorced from productive value creation, and levels of inequality that threaten the very social cohesion upon which beneficial commerce depends.
This inquiry seeks to examine these developments through the framework of moral philosophy, asking not merely whether current policies are efficient, but whether they align with the principles of justice and benevolence that must underpin any sustainable economic order. As I wrote in The Theory of Moral Sentiments, our economic arrangements must be evaluated not only by their immediate effects but by their tendency to promote or undermine the conditions for human flourishing.
II. The Great Tariff Folly: Mercantilism Resurgent
The Return of Beggar-Thy-Neighbor Policies
The most immediately striking feature of 2025’s economic landscape is the revival of protectionist policies on a scale not seen since the 1930s. The implementation of what are termed “reciprocal tariffs” reaching levels exceeding those of a century past represents a fundamental misunderstanding of the principles that generate wealth among nations.
Current projections estimate that these tariff policies will impose costs of approximately $1,200 per American household while reducing national welfare by 2% in moderate scenarios and up to 8% in more severe implementations. Such figures would have been unsurprising to me, as they confirm what I demonstrated in The Wealth of Nations: that attempts to secure advantage through restricting trade inevitably impoverish the very nations that implement them.
The geographical distribution of these effects proves particularly instructive. While some American states may benefit modestly from protected industries, the broader pattern shows losses concentrated among working populations, with gains accruing primarily to those with sufficient political influence to secure protective measures. This exemplifies what I warned against as the “mean rapacity, the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind.”
The Fallacy of Trade Balance Obsession
The justification for these policies rests on the ancient mercantilist error of treating trade as a zero-sum competition rather than a mutually beneficial exchange. The notion that a “trade deficit” represents national loss demonstrates the same conceptual confusion I encountered in my own era when dealing with the Balance of Trade doctrine.
A nation’s true wealth consists not in the accumulation of specie or the achievement of export surpluses, but in the productive capacity of its people and the efficiency with which they can satisfy their wants through voluntary exchange. When American policymakers impose tariffs to “drive bilateral trade deficits to zero,” they reveal a fundamental misunderstanding of how wealth is actually created.
III. Artificial Intelligence and the New Division of Labor
The Promise of Enhanced Productivity
Amid the folly of trade policy, the development of artificial intelligence represents perhaps the most significant advancement in the division of labor since the introduction of machinery during my lifetime. Current evidence suggests that workers utilizing these tools report time savings of approximately 5.4%, translating to productivity gains of over 1% for the entire workforce.
This development exemplifies the principle I illustrated with my famous pin factory example: when complex tasks are divided into constituent elements and systematized, productivity increases dramatically. Artificial intelligence represents an extreme form of this division, where cognitive tasks themselves become subject to specialization and mechanical assistance.
Projections of the technology’s potential economic impact range from modest gains of $2.6 trillion annually to more ambitious estimates exceeding $4.4 trillion. While the precise figures remain uncertain, the fundamental principle is clear: technologies that enhance human productive capacity create genuine wealth, unlike the artificial scarcities created by protectionist policies.
The Troubling Concentration of Benefits
However, the implementation of artificial intelligence raises profound concerns about the distribution of gains from technological progress. Evidence suggests that these tools may disproportionately benefit high-income workers while displacing others, potentially exacerbating rather than alleviating inequality.
This pattern contradicts the natural tendency of beneficial innovations to spread throughout society when markets operate freely. The concentration of AI development within a small number of large technology companies, combined with the substantial capital requirements for implementation, suggests that artificial barriers may prevent these productivity gains from being broadly shared.
Most troubling is the projection that AI adoption may worsen overall inequality despite generating substantial aggregate benefits. This represents a fundamental failure of our economic arrangements - when productivity-enhancing innovations benefit only a narrow class rather than society broadly, something has gone seriously wrong with the distribution mechanism.
Energy Constraints and Sustainability
The massive energy requirements of artificial intelligence systems - potentially tripling current data center consumption to 1,500 terawatt-hours by 2030 - raise additional concerns about sustainability and cost distribution. When the benefits of a technology accrue primarily to capital owners while the environmental and infrastructure costs are borne by society generally, we observe another form of the rent-seeking behavior I consistently opposed.
IV. The Cryptocurrency Delusion: Speculation Masquerading as Innovation
Digital Tokens and the Nature of Money
Perhaps no development in 2025 perplexes me more than the elevation of “cryptocurrency” to the status of national policy priority. The declaration by the American president that he wishes to be “the first crypto president” and the direction of government agencies to support this industry suggests that speculative digital tokens have achieved legitimacy I struggle to comprehend.
In my analysis, money serves three essential functions: medium of exchange, unit of account, and store of value. These functions emerge naturally from the needs of commerce and are most effectively fulfilled by instruments that possess intrinsic stability and broad acceptance. The extreme volatility and speculative nature of most cryptocurrencies suggests they fail to meet these fundamental criteria.
The regulatory battles between different American agencies over whether these tokens constitute “securities” or “commodities” reveal the conceptual confusion at the heart of this phenomenon. When financial instruments cannot be clearly categorized within existing frameworks, it often indicates they represent novel forms of speculation rather than genuine innovations in productive capacity.
Stablecoins and the Possibility of Useful Innovation
However, the development of “stablecoins” - digital tokens designed to maintain stable value relative to established currencies - may represent a genuine innovation in reducing transaction costs for international commerce. If these instruments can facilitate faster, cheaper cross-border payments while maintaining value stability, they would align with my understanding of beneficial financial innovation.
The European Union’s implementation of comprehensive cryptocurrency regulation through the Markets in Crypto-Assets framework suggests a more measured approach than the American enthusiasm. By establishing clear rules for consumer protection while allowing experimentation, European policymakers demonstrate the kind of balanced regulation that could harness any genuine benefits while preventing the worst excesses of speculation.
V. The Inequality Crisis: The Greatest Moral Challenge
The Concentration of Wealth and Power
The most alarming development in 2025’s economic landscape is the extreme concentration of wealth and the growing influence of the wealthy over political processes. Survey data indicates that 54% of adults across 36 nations describe inequality as a “very big problem,” while 60% believe that “rich people having too much political influence” contributes significantly to economic inequality.
These figures would not surprise me, as they reflect exactly the kind of development I warned against when discussing the tendency of merchants and manufacturers to use political influence to secure advantages unavailable through fair competition. When wealth becomes concentrated enough to distort the political process, the entire system of natural liberty comes under threat.
The statistical reality confirms the severity of the problem: between 1979 and 2021, the income of the richest 0.01% of American households grew 27 times faster than that of the bottom 20%. Such extreme divergence cannot be explained by differences in productive contribution alone - it suggests systematic advantages that violate the principles of fair competition.
The Breakdown of Social Cohesion
Perhaps most troubling is the finding that majorities in 33 of 36 nations believe their economic systems require “major changes or complete reform.” When people lose faith in the fairness of economic arrangements, they may abandon support for the very principles - such as voluntary exchange and open competition - that could actually improve their circumstances.
This represents the gravest threat to the system of natural liberty: not external opposition, but internal decay caused by the perversion of market principles by those with sufficient power to manipulate them for private advantage. When “free market” rhetoric provides cover for rent-seeking behavior, it discredits the genuine benefits of competitive exchange.
Race, Gender, and Systemic Exclusion
The data reveals that inequality operates along multiple dimensions, with Black unemployment at 6.0% compared to 3.8% for white workers, and women and minorities dramatically underrepresented in the highest-paying positions. This suggests that barriers to full participation in economic life persist, preventing the economy from benefiting from the talents of all its members.
Such exclusion represents not only a moral failing but an economic inefficiency of the first order. When artificial barriers prevent individuals from applying their talents where they could be most productive, society loses the benefits of optimal labor allocation while perpetuating unjust disadvantages.
VI. The Interconnected Crisis and Its Resolution
The Perfect Storm of Policy Failures
The economic developments of 2025 represent a convergence of policy failures that threaten to undermine the foundations of beneficial commerce. Trade wars reduce global efficiency while benefiting narrow interests. Technological innovations concentrate benefits among the already advantaged rather than spreading broadly. Financial speculation diverts resources from productive investment. Growing inequality undermines social cohesion and political legitimacy.
These developments are not independent phenomena but interconnected manifestations of a single problem: the capture of economic policy by those with sufficient influence to distort markets in their favor while claiming to defend market principles.
The Path Forward: Returning to First Principles
The solution lies not in abandoning market mechanisms but in returning to the genuine principles of natural liberty I outlined in my original work. This requires:
First, the elimination of artificial barriers to trade. The current tariff policies should be recognized as what they are: taxes on consumers that benefit narrow producer interests at the expense of general prosperity. True free trade requires the removal of barriers, not their multiplication under different names.
Second, policies to ensure broad access to the benefits of technological progress. This may require anti-monopoly enforcement, public investment in education and infrastructure, and careful regulation to prevent the concentration of AI capabilities in too few hands.
Third, financial regulation that distinguishes between productive investment and speculation. While innovation in payment systems should be encouraged, speculative instruments that create systemic risk without corresponding productive value should be appropriately constrained.
Fourth, progressive taxation and inheritance policies that prevent excessive wealth concentration. As I noted in The Wealth of Nations, the wealthy should contribute proportionally more to public expenses, and excessive inheritance perpetuates unearned advantages that violate principles of merit-based advancement.
Fifth, vigorous enforcement of competition policy to prevent the formation of monopolies and cartels that extract rents from consumers while stifling innovation.
VII. Conclusion: The Moral Foundation of Economic Policy
The economic disruptions of 2025 serve as a stark reminder that technical efficiency cannot be separated from moral considerations. An economic system that generates aggregate growth while concentrating benefits among a narrow elite and imposing costs on the broader population is neither sustainable nor just.
My original work was motivated by the observation that individual self-interest, when channeled through appropriate institutions and moral constraints, could serve the general good. The “invisible hand” operates only when markets are genuinely competitive, when information flows freely, when externalities are properly addressed, and when the political system remains insulated from capture by narrow interests.
The current moment reveals what happens when these conditions are not met: policies justified by appeals to market efficiency that actually represent their systematic violation. The task for policymakers is not to choose between markets and government intervention, but to design institutions that harness the beneficial aspects of competitive exchange while preventing their corruption by rent-seeking behavior.
The artificial intelligence revolution demonstrates that humanity’s capacity for beneficial innovation remains undiminished. The question is whether our political and economic institutions can evolve to ensure that such innovations serve human flourishing rather than merely enriching those with the power to control their implementation.
As I wrote in The Theory of Moral Sentiments, “The rich only select from the heap what is most precious and agreeable.” The challenge of our time is to structure economic arrangements so that what is most precious and agreeable to the few aligns with what benefits the many. This requires not the abandonment of market principles, but their proper application within a framework of justice and benevolence.
The economic disruptions of 2025 represent both a crisis and an opportunity: a crisis of legitimacy for perverted market arrangements, but an opportunity to return to the genuine principles of natural liberty that can promote both prosperity and justice. Whether this opportunity is seized will depend on our collective commitment to placing human flourishing above narrow self-interest - the same moral foundation upon which all beneficial economic arrangements must ultimately rest.
Adam Smith (1723-1790) was Professor of Moral Philosophy at the University of Glasgow and author of The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). This paper represents his theoretical analysis of contemporary economic developments as observed in 2025.