Adam Smith: An Enlightened Life, By Nicholas Phillipson

Not many thinkers have been as unlucky in their disciples as Adam Smith. For Smith, economics was a humanistic inquiry grounded in human psychology and history. Law and politics, not the physical sciences, were the subjects to which economics was most closely allied. Believing that markets were not mechanical devices but social institutions, Smith spent his life promoting political economy: a widely-ranging discipline quite different from the introverted exercises in mathematical cleverness that dominate economics at the present time.

Adam Smith (1723-1790) needs rescuing from the dogmas peddled in his name by cheerleaders of the free market. It would never have occurred to him to imagine that the uncertainties of economic life could be removed by applying a formula, as today's "quants", who trade markets by computerised algorithms, would like to believe.

The Nobel Prize-winning economists who set up the hedge fund Long Term Capital Management, the collapse of which in 1998-2000 marks the real beginning of the global financial crisis, may have believed they were practitioners of the discipline that Smith helped found. In reality they were suffering from intellectual hubris, which a better understanding of Smith's work might have guarded them against.

Nicholas Phillipson's path-breaking biography shines new light on the complex development of this much-misunderstood thinker. The difficulties faced by anyone trying to write Smith's life are daunting. It is not only that Smith's ideas have been bastardised by many of his disciples. Smith compounded the problem by having most of his papers destroyed in the months before his death. A self-effacing, even secretive man, who avoided the public eye and found a sanctuary from the world by living for most of his life with his mother and sister, Smith did all he could to make the biographer's task impossible.

Yet a vivid picture emerges in Phillipson's book of this eccentric and self-absorbed personality. Lost in thought in long solitary walks, wrapped in a dressing-gown as he wandered 15 miles to Dunfermline from Kirkcaldy, the small coastal town to which he retreated with his mother and in which he declared he had had never been happier, laughing and talking to himself while carrying a bunch of flowers (perhaps to protect himself against the city's famously noxious smells) in the streets of Edinburgh, Smith presents an engagingly otherworldly figure. Though he was a devoted teacher and beloved by his friends, this theorist of human sympathy seems to have been most comfortable when he was able to keep most human beings at a safe distance.

Phillipson recaptures Smith as a personality in a way that has not been done before. At the same time, gives a fresh account of the gestation of Smith's ideas in the brilliant intellectual ferment of the Scottish Enlightenment, making clear the crucial influence of David Hume, a life-long friend. Without Hume's philosophy to draw on, Smith might have achieved very little. Yet there are differences between the two thinkers, and they are not generally to Smith's advantage.

Phillipson is keen to present Smith as a convinced religious unbeliever just like Hume, but Smith's habit of self-concealment leaves the evidence inevitably inconclusive. What is clear is that Smith failed to emulate the freedom of mind that he admired so much in his friend, even failing to honour Hume's deathbed plea to publish one of his greatest works, the Dialogues on Natural Religion, which would have attracted controversy of the kind Smith was anxious to avoid. Less candid than Hume in expressing his views, Smith was also less committed to sceptical inquiry. Unlike Hume, an Enlightenment thinker who was ready to question the power of reason, Smith was possessed by "the spirit of system"--the dream of containing all of human life within a single scheme of thought.

For Smith, history was a series of stages culminating in the "system of liberty", which he believed was taking shape in Scotland and England as he wrote and which regarded as the embodiment of progress. He acknowledged that the commercial civilisation that was emerging came with moral hazards (a feature of Smith's thought about which Phillipson tells us surprisingly little). Fearing that a market-driven division of labour could stultify moral and intellectual growth in workers, Smith was a strong supporter of public education. But he never doubted that commerce and liberty go together—if not at once, then certainly in the long run. Everything in Smith's work served this faith.

As presented in his Theory of Moral Sentiments - a book he regarded far more highly than the better known Wealth of Nations - Smith's system of ideas is far more subtle and penetrating than anything to be found among his self-styled disciples. But it is still a system, and it is as a system-builder that Smith differs from David Hume, who regarded overarching intellectual structures of any kind with deep mistrust.

In one of his wonderful essays, Hume confessed to "a suspicion that the world is still too young to fix many general truths in politics that will remain true to the latest posterity". He went on to question the belief - an article of faith for many in his time as in our own - that knowledge and wealth grow best in free societies and stagnate under "absolute government". "The subjects of an absolute prince," Hume cautioned, "may become our rivals in commerce as well as learning."

Hume was referring to pre-revolutionary France, but his observation applies with equal or greater force to China today. The post-Mao blend of communist despotism and unbridled capitalism may implode, as the ancien regime did in France. Then again, it may grow wealth at a faster rate than liberal societies for generations to come.

As Hume perceived, history is a succession accidents. We cannot foretell the future; but we can be sure it will be full of hybrid regimes - booming tyrannies and declining imperial republics, resource-rich theocracies and faltering knowledge economies, floundering social democracies and makeshifts that have yet to appear. Any grand theory in which one regime is set to crowd out all the rest is a delusion. For all its insights, Smith's theory of the wealth of nations is such a theory.

Despite his faults, Smith reminds us of what economics once used to be: an inquiry into the nature of society that understood markets to be no more infallible or incorruptible than any other human institution. If Hume remains a better guide, it is because he knew that human life is too miscellaneous and unpredictable to be confined in any "system" – including Smith's.

John Gray's latest book is 'Gray's Anatomy: selected writings' (Penguin)