The Invisible Power of Special Interest Groups
June 11, 2025
Adam Smith gives reasons in Wealth of Nations to think that countering ambition with ambition is not enough in a world of special interests looking to influence, rather than directly control, the government.
Adam Smith gives reasons in Wealth of Nations to think that countering ambition with ambition is not enough in a world of special interests looking to influence, rather than directly control, the government.
Reading James Madison’s Federalist #51 and Chapter 2 of Book IV of Adam Smith’s Wealth of Nations together can give us an optimistic view of the world. Granted, Madison assumes that people are not angels, and Smith told us earlier that we do not get our dinner from the benevolence of the butcher, brewer, and baker, but from appealing to their interest. But these interested non-angels can be kept in check. Madison explains the balance of powers in a federalist government, and Smith the invisible hand of markets.
The institutional setting of a federalist government can be such that no power overtakes another: “The different governments will control each other, at the same time at that each will be controlled by itself” (#51). And business people prefer to keep their capital close to them, all else equal, thus allocating it in the most socially effective way, even if without intending it: “By preferring the support of domestick to that of foreign industry, he intends only his own security […] he intends only his own gain, and in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention” (WN IV.ii.9).
The key for both thinkers seems to be that when we play one interest against another interest, a power against another power, competition between them with make sure that none will prevail. In a world in which powers and interests compete, all is well.
But is it?
Smith appears just as optimistic as Madison at the beginning of the chapter, but he progressively becomes more and more cynical about the self-regulating powers of markets or the checks on legislative power.
Markets exist in societies with state power. And that state power can and does regulate markets. And one would think that in a state where the legislative power is balanced out by checks and balances, regulation of the market should work well. But in reality, one may ask, twisting a little the words of Adam Smith: is the legislator “whose deliberations ought to be governed by general principles” (WN IV.ii.39) really different from the “insidious and crafty animal, vulgarly called statesman or politician”? And is the legislator really kept in check both by the other political powers (and possibly by a federalist division of those powers—a case Smith did not actually consider)?
Madison tells us not to assume that people are angels. If they were, we would not need a government to begin with. Smith does not. But what does Smith do in the first part of the chapter? He does not necessarily assume angel merchants and manufacturers, but instead assumes they are sheepish business people, afraid of risk, and not necessarily very ambitious. They are not driven by benevolence or public spirit; they are driven by their own interest. Yet, they appear good-natured. The problem of monopolies, or taxation that protects domestic activities against foreign competitors, which is the problem that Smith is addressing in this chapter, appears coming from the “statesman or lawgiver” (WN IV.ii.10.; Note Smith’s uses of lawgiver here: is the lawgiver the same as the legislator or a politician?). It is the statesman or lawgiver who somehow is deluded by his own vision. The statemen or lawgiver, like the man of system Smith describes in The Theory of Moral Sentiments, thinks he can direct capital in better ways than the owners of capital themselves. But, Smith says, that is “folly” (WN IV.ii.10), “useless” or even “hurtful” (WN IV.ii.10).
So, in a sense, Smith opens a door that Madison does not discuss: what if politicians are “fools”? What if the legislative power does not just have “ambition”, as Madison claims, but it has also “folly”? Can a balance of powers keep in check folly as well as ambition as Madison suggests?
The Smithian question from WN IV.ii, but not necessarily the one from Federalist 51, now becomes: why are statesmen and lawgivers fools?
In the previous chapter, we are led to believe that part of the problem is the ignorance of the statesmen and lawgivers:
“[M]erchants [address] parliaments, and … the councils of princes, … nobles and country gentlemen, [as] those who were supposed to understand trade, to those who were conscious to themselves that they knew nothing about the matter. That foreign trade enriches the country, experience demonstrated to the nobles and country gentlemen, as well as to the merchants, but how, or in what manner, none of them well knew. The merchants knew perfectly in what manner it enriched themselves. It was their business to know it. But to know in what manner it enriched the country, was no part of their business” (WN IV.i.10, emphasis added).
But in this chapter (IV.ii.), Smith’s answer seems to be: statesmen and lawgivers are fooled. For Smith, even Misters with “great abilities,” such as Mr. Colbert, fall for the “sophistry of merchants and manufacturers” (WN IV.ii.38). The sheepish merchants and manufacturers from the beginning of the chapter are slowly but surely showing their dark side.
Let me share a long quotation from Smith. It will show that dark side and a major difference between Smith’s and Madison’s analysis:
“The member of parliament who supports every proposal for strengthening this monopoly, is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists” (WN IV.ii.43, emphasis added)
For Smith, what we now call special interest groups are willing and able to capture state power to benefit themselves through privileges which, then, are unwilling to give up. In the same paragraph, Smith in fact tells us that “to expect … that freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudice of the publick, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it.”
For Smith, the balance of powers, and mostly their independence from each other, is fundamental for the stability and prosperity of the country. But Smith sees another fundamental threat. He is concerned about special interest groups capturing state power via the legislature. And the problem is that these special interest groups are so powerful that they are able to extort from the legislature what they want.
In the chapter Conclusion of the Mercantile System (WN IV.viii.), he uses the expression extortion three times (out of the nine times total in the whole work):
- “The private interest of our merchants and manufacturers may, perhaps, have extorted from the legislature these exemptions…” (WN IV.viii.3);
- “By extorting from the legislature bounties…” (WN IV.viii.4);
- “But the cruelest of our revenue laws, I will venture to affirm, are mild and gentle, in comparison to some of those which the clamor of our merchants and manufacturers has extorted from the legislature, for the support of their own absurd and oppressive monopolies” (WN IV.viii.17)
The problem that Smith sees cannot be solved by pitching an interest against another interest, or thinking that “ambition must be made counteract ambition,” as Madison tells us in Federalist 51. In the case of special interest groups, their multiplication will not keep them in check, but multiply the requests for privileges, and potentially the granting of those privileges.
Smith gives an example of this, let’s call it ‘competition,’ in WN IV.ii. This particular example is almost innocuous, but it does not have to be. Think of what happened with farmers and landlords. They see that merchants and manufacturers cartelize and obtain monopolies or some other forms of protection. So farmers and landlords want to emulate the manufacturers—they also ask for protection. It just happened to be that the protections are, in practice, useless. For example, banning the importation of livestock from Ireland will have no effect on the price of livestock in Britain. Livestock, Smith tells us, is the only good that is more expensive to transport by water than by land. Irish livestock needs to be transported by boat to Britain. Livestock is heavy and it needs to be fed, so ships also need to bear the weight of food and water for the livestock. It is way too expensive. Nobody does it. Yet, in the spirit of competition (or, maybe better, emulation), farmers and landlords still asked for protection and obtained it.
The problem Smith addresses becomes more complicated because it there does not seem to be any good, feasible solution.
This is Smith’s suggested solution, with which he closes the chapter:
“The legislature, were it possible that its deliberations could always be directed, not by the clamorous importunity of partial interests, but by an extensive view of the general good, ought upon this very account, perhaps, to be particularly careful neither to establish any new monopolies of this kind, not to extend further those which are already established” (WN IV.ii.44).
Would that ever be possible?
One could suggest that the American Founders offered a sort of solution to Smith’s problem. Brianne Wolf, in another piece on AdamSmithWorks, provides a wonderful summary of the American Founders’ positions. As she shows, the Founders were concerned with plutocracy—with wealthy people getting into a position of power. They do not seem to be concerned about special interest groups capturing that power.
She states:
“John Adams favored an institutional solution whereby the aristocracy would be contained in a specific branch of government. Thomas Jefferson favored the popular vote as a what to check the power of the elite and elect he most virtuous people to office. Similarly, the Federalists trusted the vote of the average person as well as the institutions of separation of powers, checks and balances, and the extended republic they had put in place with the Constitution. The anti-Federalists wanted to institute proportional representation to ensure a balance between the interests of the elite and the least advantaged.”
But notice that their concerns seem to be different. The Founders are concerned about the wealthy being in power. But Smith is concerned about merchants and manufacturers (who may be wealthy) influencing power. Smith does not seem to be concerned about the wealthy per se. The wealthy can be merchants and manufacturers, but great landlords are also wealthy. The wealthy being in power is not necessarily an issue for Smith. As Wolf highlights, the solution Smith sees for the wealthy potentially harming the poor is free trade and some forms of progressive taxation. But in this framework, the “wealthy” are not a special interest group.
The issue for Smith is thus not the wealthy in power, but it is special interest groups influencing power:
“To found a great empire for the sole purpose of raising up a people of customers, may at first sight appear project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers. Such statesmen, and such statesmen only, are capable of fancying that they will find some advantage in employing the blood and treasure of their fellow citizens, to found and to maintain such an empire” (WN IV.vii.c.63. Emphasis added).
Merchants and manufacturers do not want to become statesmen; they want to stay merchants and manufacturers while influencing statesmen.
When it comes to the problem of a nation whose government is influenced by shopkeepers we are left with little hope from either Smith or Madison.
Smith admits that a government not influenced by shopkeepers is Utopia.
And Madison? Is a multiplication of levels of government, as in a federalist proposal, going to check the powers of special interest groups? Or is it only going to multiply the powers special interest groups can capture?
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Read more:
Adam Smith, the American Founding and the Political Problem of Wealth, Part 1 and Part 2, by Brianne Wolf
John Adams, Adam Smith, and the Passion for Distinction, by Dennis Rasmussen
Timeline: The American Founding at the Online Library of Liberty
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Read more:
Adam Smith, the American Founding and the Political Problem of Wealth, Part 1 and Part 2, by Brianne Wolf
John Adams, Adam Smith, and the Passion for Distinction, by Dennis Rasmussen
Timeline: The American Founding at the Online Library of Liberty