Free Market + Adam Smith = Regulation?

In President Obama’s weekly radio address, he explained his view that “free markets” and “regulation” are not inherently contradictory:   
 

I have long been a vigorous defender of free markets. And I believe we need a strong and vibrant financial sector so that businesses can get loans; families can afford mortgages; entrepreneurs can find the capital to start a new company, sell a new product, offer a new service. But what we have seen over the past two years is that without reasonable and clear rules to check abuse and protect families, markets don’t function freely.  In fact, it was just the opposite.

 
At first, I thought of the many people who would be shocked (and/or appalled) at this notion of regulating “free” markets; Adam Smith’s “free hand” theory, after all, seems to be all many people need to know about economics.  This, in turn, reminded me of the introduction Michael Lewis (Moneyball, The Blind Side) wrote as editor to The Real Price of Everything, an enormous compilation of fundamental works in economics from Adam Smith, Thomas Malthus, David Ricardo, Charles Mackay, Thorstein Veblen, and John Maynard Keynes.  (For what it’s worth, I have found this to be a great, and daunting, resource.) 
 
Lewis explains that there are (at least) two Smiths – one who believed that self-interest is the primary motivator of how people (and markets) operate and another who believed that there were times when a “visible hand” needed to step in to ensure that markets operate appropriately.  So why is the first Smith so well known?  Lewis theorizes that the famous “pin factory” example is on page 2; later, and darker, views of the market, including the need for government to play a role in avoiding abuse of the “ordinary worker,” don’t show up for hundreds of pages.
 

None of this means that the recent regulatory proposals (supported by the President) are the perfect (or even proper) means of providing government oversight, or even that Adam Smith was right on either count. It does mean, though, that when using economics as the basis for new laws and regulations (or repealing old ones), there is real value in going beyond page 2. 

--Josh Fershee