I have the same opinion of Sir James Stewarts Book that you have. Without once mentioning it, I flatter myself, that every false principle in it, will meet with a clear and distinct confutation in mine.--Adam Smith to William Pulteney Esqr, Member of Parliament, Kirkcaldy, 3 Sept. 1772
When an expert speaks to a member of parliament we should always be a bit mistrustful. However, in the Wealth of Nations (1776) Smith does not mention Steuart's nearly forgotten (1767) An Inquiry Into the Principles of Political Economy. (As Salim Rashid has explored, Smith is not generous in his citations.) So, we do not learn what Steaurt's true principles are by Smith's lights. James Steuart (1713-1780) had an exciting life, but after the publications of the Wealth of Nations Steuart's political economy became completely overshadowed by Smith's, despite their shared debts to Hume. This is a shame. For, while Steuart, who -- as the late Andrew Skinner has noted -- has a fantastic treatment of price-formation (a topic that is handled very schematically in Smith's Inquiry), is not the most elegant writer, Steuart's Inquiry is prophetic of the world we live in: in Steuart's economic universe there are free markets alongside active government interventions. (What's missing in Steuart's treatment are the large bureaucratic agencies that simulate markets--Oskar Lange and data-mining came much later.)
In particular, according to to Steuart: "The duty of the statesman is to support the double competition every where and to permit only the gentle alternate vibrations of the two scales." (229; quoting from the Dublin edition of 1770). This is the only duty of the statesman mentioned by Steuart. Steuart's is, in fact, the vision of neo-liberalism, especially the ordo-Liberals (Röpke, Eucken, and to some degree Hayek), which -- as Foucault has nicely described -- also make it the state's primary goal to create and maintain the possibilities of free markets. (This is not to claim that Steaurt and the ord0-Liberals have the same ideas about the means of doing so.)
Now, a few lines below the one and only time that Smith invokes the invisible hand in the Wealth of Nations (recall recent treatment here, and by, Jeff, Protevi, Stocker and Gavin Kennedy), Smith concludes his argument by claiming that
The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. (WN 4.2.9, 455-56)
Now, Smith also has epistemic arguments against the statesman taking on this role (ones that Hayek developed and articulated brilliantly later). But in the invisible hand passage Smith's argument is, in part, practical: the government would be taking on tasks that are not only unnecessary, but also burdensome. This means that the opportunity costs are going to be considerable for little or no gain. But Smith's argument is fundamentally political (and moral ). Even if a government could overcome the epistemic barriers to directing individuals on how they should pursue their own economic interests, Smith claims that it should not be given such “authority.” For it would be be “dangerous,” especially if the government is overconfident enough to pursue such interventions. Smith does not, in fact, explain what he has in mind. Smith distrusts arbitrary government power and advocates that government should stay out of people’s lives. Fair enough.
But, it turns out Steaurt anticipates the political aspect of Smith's argument, and he has a response. In one of Steuart's more rhetorically effective passages, he writes:
The power of a modern Prince let him be by the constitution of his kingdom ever so absolute becomes immediately limited so soon as he establishes the plan of oeconomy which we are endeavouring to explain. If his authority formerly resembled the solidity and force of the wedge which may indifferently be made use of for splitting of timber stones and other hard bodies and which may be thrown aside and taken up again at pleasure it will at length come to resemble the watch which is good for no other purpose than to mark the progression of time and which is immediately destroyed if put to any other use or touched by any but the gentlest hand. As modern oeconomy therefore is the most effectual bridle ever invented against the folly of despotism.(here)
Now, from the start of his Inquiry, Steuart makes clear that the statesman should only direct by way of "stated rules" from which one ought not depart. Not unlike the public choice theorist, James Buchanan, Steuart sharply distinguishes between the role of setting up "new and more useful institutions institutions," which (echoing Hume and Montesquieu) must be done in accord with the "spirit, manners, habits and customs of the people" and the rule following role of the statesman within those institutions.
Let's grant Steuart -- for the sake of argument, if you wish -- that commercial societies do successfully constrain the folly of governments (relative to other kinds of political economies--so, that sets the bar fairly low). Steuart also clearly thinks that rule-governing governments of commercial societies change their character over time. They become hyper-specialized and become less capable of other tasks (especially making war on their own and other people). In fact, Steuart here launches one of the enduring myths about the nature of government in commercial society. (A myth shared by friends and overconfident enemies of commercial states.) Steuart has no empirical basis for this claim because as Steuart (and Smith) insisted at the time countries were only recently commercializing.
In fact, Smith's crucial response to Steuart's position reveals his most fundamental orientation: “the violence and injustice of the rulers of mankind” has, in practice, no “remedy.” (WN 4.3.c.9, 493) That is to say, for all of Smith's nods to providence, at bottom Smith rejects theodicy. It is an ironic fact that neo-Liberalism, which arose in response to two World Wars that demonstrated that Steaurt was mistaken about the state's capacity at multi-tasking, shares Steuart's vision.