Smith, Bentham, and the Limits of Liberalism

Adam Smith argued in the Wealth of Nations that free markets generally produce better outcomes than regulated ones, because individual self-interest, when unimpeded, drives resources toward their most productive uses. But Smith retained usury laws on the ground that without them lenders would fund reckless "projectors" rather than prudent borrowers. Bentham's reply is sharp: this argument assumes that the state is better than the market at identifying creditworthy ventures — an assumption that contradicts the entire logic of Smith's economics.

For Bentham, the disagreement with Smith is resolved by returning to utility. The question is not whether usury is morally distasteful — it may well be — but whether laws against it produce more happiness than their absence. On this test, usury laws fail: they restrict supply, raise actual borrowing costs, and penalise the very people they purport to help. The consistent application of utility, like the consistent application of Smith's own market logic, demands their repeal.

Bentham later described the Defence as an attempt to "push Adam Smith's principles a little further than he had carried them himself."