The Real Adam Smith

adam-smith

“The real Adam Smith – you know, the one who wrote Wealth of Nations. Not the one you worship before, but the one who wrote it.” — Noam Chomsky (in response to a question)

Adam Smith is regarded by many people today, on both the “left” and “right” of politics, as some sort of foaming-at-the-mouth free market arch-capitalist. They might find it interesting to read Wealth of Nations.

Yes, arguments for markets are made, but within some sort of historical context that tends to be forgotten. What also tends to be forgotten, pretty much entirely, are the underlying ethical reasons why Adam Smith advocated some of the more familiar conclusions he came to in Wealth of Nations. I’ll argue here that he desired to use markets as a system that would help ordinary people to raise themselves out of poverty. He also desired state interventions to support them in this goal. Reading the book carefully, one discovers that, in modern political parlance, his attitudes were essentially social democratic and anti-corporate. He would presumably be appalled by today’s neo-liberal capitalism. See if you agree with me after finishing this post – I’ll be quoting him extensively to back up my position. So let’s get started!

Most people are familiar with the opening passages about pin manufacturing, where Adam Smith writes that:

“The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour. …

To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them.

I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.” bk 1, ch 1

Popular over-familiarity with passages such as the above lead the later classical economist Jean-Baptiste Say to remark that:

“A man, whose whole life is devoted to the execution of a single operation, will most assuredly acquire the faculty of executing it better and quicker than others; but he will, at the same time, be rendered less fit for every other occupation, corporeal or intellectual; his other faculties will be gradually blunted or extinguished; and the man, as an individual, will degenerate in consequence. To have never done any thing but make the eighteenth part of a pin, is a sorry account for a human being to give of his existence.”

Adam Smith would agree entirely, as we’ll see later. But what of the conditions of labour anyway? In a later chapter on this subject, he is pretty clear that the workers are in a much weaker bargaining position than the masters, and so something like trade unions might be expected to develop in attempts to secure basic worker’s rights. He writes that:

“What are the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, a merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate. To violate this combination is everywhere a most unpopular action, and a sort of reproach to a master among his neighbours and equals. We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things, which nobody ever hears of. Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy, till the moment of execution, and when the workmen yield, as they sometimes do, without resistance, though severely felt by them, they are never heard of by other people. Such combinations, however, are frequently resisted by a contrary defensive combination of the workmen; who sometimes too, without any provocation of this kind, combine of their own accord to raise the price of their labour.” bk, 1 ch 8

A little later he goes on to argue for economic growth on the grounds that, by increasing the demand and hence wages for labour, it will improve the living conditions of the labouring classes:

“It deserves to be remarked, perhaps, that it is in the progressive state, while the society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the labouring poor, of the great body of the people, seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state. The progressive state is in reality the cheerful and the hearty state to all the different orders of the society. The stationary is dull; the declining, melancholy.” bk 1, ch 8

He later concludes chapter 9 with this further comment on the class struggle:

“Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”  bk 1, ch 9

Adam Smith had a big influence upon Karl Marx and introduces in the first book of Wealth of Nations many of the concepts that Marx went on to employ extensively in his critiques of capitalism. For example, it is Adam Smith who introduces the idea of use and exchange value:

“The word value, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called “value in use”; the other, “value in exchange.” The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.” bk 1, ch 5

He also expresses a similar idea to Marx about “value” manifesting itself as a social opportuinity cost:

“The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. What is bought with money or with goods is purchased by labour as much as what we acquire by the toil of our own body. That money or those goods indeed save us this toil. They contain the value of a certain quantity of labour which we exchange for what is supposed at the time to contain the value of an equal quantity. Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased; and its value, to those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labour which it can enable them to purchase or command.” bk 1, ch 5

However in contrast to Marx he goes on to say that human labour is not the sole source of surplus value, writing for example in the second book that:

“No equal capital puts into motion a greater quantity of productive labour than that of the farmer. Not only his labouring servants, but his labouring cattle, are productive labourers. In agriculture, too, nature labours along with man; and though her labour costs no expense, its produce has its value, as well as that of the most expensive workmen. The most important operations of agriculture seem intended not so much to increase, though they do that too, as to direct the fertility of nature towards the production of the plants most profitable to man. A field overgrown with briars and brambles may frequently produce as great a quantity of vegetables as the best cultivated vineyard or corn field. Planting and tillage frequently regulate more than they animate the active fertility of nature; and after all their labour, a great part of the work always remains to be done by her. The labourers and labouring cattle, therefore, employed in agriculture, not only occasion, like the workmen in manufactures, the reproduction of a value equal to their own consumption, or to the capital which employs them, together with its owners’ profits; but of a much greater value.” bk 2, ch 5

[my highlights indicate the sources of surplus value additional to human labour which Adam Smith postulates]

Adam Smith presently comes to his general argument for markets. Markets are advocated on the grounds that they will lead to greater equality of conditions amongst, and less exploitation of, the labouring classes:

“The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality. If in the same neighbourhood, there was any employment evidently either more or less advantageous than the rest, so many people would crowd into it in the one case, and so many would desert it in the other, that its advantages would soon return to the level of other employments. This at least would be the case in a society where things were left to follow their natural course, where there was perfect liberty, and where every man was perfectly free both to choose what occupation he thought proper, and to change it as often as he thought proper. Every man’s interest would prompt him to seek the advantageous, and to shun the disadvantageous employment.” bk 1, ch 10

So, no restrictions by governments upon immigration then – at least not if we are taking Adam Smith’s preconditions under which markets can be advocated at all seriously. He, like David Ricardo after him, assumes the free movement of labour and the relative immobility of capital as conditions under which markets will operate – but in today’s “free markets” one finds the assumption is reversed. The famous “invisible hand” phrase appears only once in Wealth of Nations (in bk 4, ch 2) and if you look at the context refers to a (flawed, it turned out) argument that a preference for domestic investment of capital would save England’s economy from the ravages of what today is called “globalisation”. So the “invisible hand” was employed in the context of an argument against today’s global neo- “liberal” economic system.

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In the second book Adam Smith considers the management of stock. He helpfully divides stock into capital stock and subsistence stock, writing that:

“When the stock which a man possesses is no more than sufficient to maintain him for a few days or a few weeks, he seldom thinks of deriving any revenue from it. He consumes it as sparingly as he can, and endeavours by his labour to acquire something which may supply its place before it be consumed altogether. His revenue is, in this case, derived from his labour only. This is the state of the greater part of the labouring poor in all countries.

But when he possesses stock sufficient to maintain him for months or years, he naturally endeavours to derive a revenue from the greater part of it; reserving only so much for his immediate consumption as may maintain him till this revenue begins to come in. His whole stock, therefore, is distinguished into two parts. That part which, he expects, is to afford him this revenue, is called his capital. The other is that which supplies his immediate consumption.” bk 2, ch 1

He then goes on to analyse the banking system of his day in relation to the management of stock, making the second book of more historical than contemporary interest. While considering a moderate rate of interest on money lent as a just compensation for risk (an argument that doesn’t really work today, since banks don’t lend money…) he also advocates anti-usury laws:

“The legal rate [of interest], it is to be observed, though it ought to be somewhat above, ought not to be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent would be lent to prodigals and projectors, who alone would be willing to give this high interest. Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.

Where the legal rate of interest, on the contrary, is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people than in those of the other. A great part of the capital of the country is thus thrown into the hands in which it is most likely to be employed with advantage.” bk 2, ch 4

The above passage is just one example of how Adam Smith was not in favour of deregulated markets as a point of principle, but rather considered each case on its individual merits and where necessary sought to use government regulation to tweak the incentive structure of markets so as to better serve the public good.

He also in this book gives a nice description of how the fractional reserve banking system functioned in his day, on the gold standard, writing:

“A particular banker lends among his customers his own promissory notes, to the extent, we shall suppose, of a hundred thousand pounds. As those notes serve all the purposes of money, his debtors pay him the same interest as if he had lent them so much money. This interest is the source of his gain. Though some of those notes are continually coming back upon him for payment, part of them continue to circulate for months and years together. Though he has generally in circulation, therefore, notes to the extent of a hundred thousand pounds, twenty thousand pounds in gold and silver may frequently be a sufficient provision for answering occasional demands. By this operation, therefore, twenty thousand pounds in gold and silver perform all the functions which a hundred thousand could otherwise have performed. The same exchanges may be made, the same quantity of consumable goods may be circulated and distributed to their proper consumers, by means of his promissory notes, to the value of a hundred thousand pounds, as by an equal value of gold and silver money. Eighty thousand pounds of gold and silver, therefore, can, in this manner, be spared from the circulation of the country; and if different operations of the same kind should, at the same time, be carried on by many different banks and bankers, the whole circulation may thus be conducted with a fifth part only of the gold and silver which would otherwise have been requisite.” bk 2, ch 2

But our modern banking system works nothing like the above description and so much of the subsequent analysis in this book doesn’t carry over to today’s economy.

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The third (quite short) book considers the foundations of the 18th century mercantile system, which replaced feudalism to set the stage for the industrial revolution. Adam Smith begins with a description of how the town and country trade their subsistence stock and manufactured commodities respectively, to their mutual benefit:

“The country supplies the town with the means of subsistence and the materials of manufacture. The town repays this supply by sending back a part of the manufactured produce to the inhabitants of the country. The town, in which there neither is nor can be any reproduction of substances, may very properly be said to gain its whole wealth and subsistence from the country. We must not, however, upon this account, imagine that the gain of the town is the loss of the country. The gains of both are mutual and reciprocal, and the division of labour is in this, as in all other cases, advantageous to all the different persons employed in the various occupations into which it is subdivided. The inhabitants of the country purchase of the town a greater quantity of manufactured goods, with the produce of a much smaller quantity of their own labour, than they must have employed had they attempted to prepare them themselves. The town affords a market for the surplus produce of the country, or what is over and above the maintenance of the cultivators, and it is there that the inhabitants of the country exchange it for something else which is in demand among them.” bk 3, ch 1

After a discussion of the developments after the fall of Rome leading to the market systems described above, he concludes this book with a brief sketch of how the feudal system gradually “withered away”, as a Marxist might say:

“But what all the violence of the feudal institutions could never have effected, the silent and insensible operation of foreign commerce and manufactures gradually brought about. These gradually furnished the great proprietors with something for which they could exchange the whole surplus produce of their lands, and which they could consume themselves without sharing it either with tenants or retainers. All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons. For a pair of diamond buckles, perhaps, or for something as frivolous and useless, they exchanged the maintenance, or what is the same thing, the price of the maintenance of a thousand men for a year, and with it the whole weight and authority which it could give them. The buckles, however, were to be all their own, and no other human creature was to have any share of them; whereas in the more ancient method of expense they must have shared with at least a thousand people. With the judges that were to determine the preference this difference was perfectly decisive; and thus, for the gratification of the most childish, the meanest, and the most sordid of all vanities, they gradually bartered their whole power and authority. …

Having sold their birthright, not like Esau for a mess of pottage in time of hunger and necessity, but in the wantonness of plenty, for trinkets and baubles, fitter to be the playthings of children than the serious pursuits of men, they became as insignificant as any substantial burgher or tradesman in a city. A regular government was established in the country as well as in the city, nobody having sufficient power to disturb its operations in the one any more than in the other. …

A revolution of the greatest importance to the public happiness was in this manner brought about by two different orders of people who had not the least intention to serve the public. To gratify the most childish vanity was the sole motive of the great proprietors. The merchants and artificers, much less ridiculous, acted merely from a view to their own interest, and in pursuit of their own pedlar principle of turning a penny wherever a penny was to be got. Neither of them had either knowledge or foresight of that great revolution which the folly of the one, and the industry of the other, was gradually bringing about. It is thus that through the greater part of Europe the commerce and manufactures of cities, instead of being the effect, have been the cause and occasion of the improvement and cultivation of the country.” bk3, ch4

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In the fourth book Adam Smith considers the systems of political economy of his day. His contempt for “the merchants and manufacturers” becomes quite clear in this book. As already stated, the goal he has in mind is greater equality of conditions, which markets can seek to provide thorough satisfying the needs of the general population. He considers this goal self-evident, writing that:

“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.” bk 4, ch 8

He is generally opposed to restrictions (“duties”) upon imports and subsidies (“bounties”) for exports, preferring the price to find its “natural level”. For example:

“Bounties upon the exportation of any homemade commodity are liable, first to that general objection which may be made to all the different expedients of the mercantile system; the objection of forcing some part of the industry of the country into a channel less advantageous than that in which it would run of its own accord: and, secondly, to the particular objection of forcing it, not only into a channel that is less advantageous, but into one that is actually disadvantageous; the trade which cannot be carried on but by means of a bounty being necessarily a losing trade.” bk 4, ch 5

He goes on to describe how the “merchants and master manufacturers” will exploit a corrupt political process to ensure the production of their own commodities are generously subsidised, amongst other benefits, writing that:

“This monopoly [of the merchants and manufacturers] has so much increased the number of some particular tribes of them that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature. 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.” bk 4, ch 2

Comments which have considerable contemporary relevance, given the plutocracy’s almost total capture of our political and economic systems, using their sponsoring of political campaigns and private armies of corporate lobbyists. To pick one of the more grievous examples: today highly subsidised crops from US and European agribusiness are routinely dumped upon developing markets, leading (in combination with financial speculation – i.e. “betting on food”) to wild fluctuations in the price of food and the destruction of efficient domestic farmers’ markets. Hardly a trivial matter, as the suicides of 200,000 Indian farmers and counting will attest to. If corporate control of the global food system concerns you, check out Vandana Shiva’s work and the World Development Movement’s food sovereignty campaign.

Global food prices Jan 2011

Adam Smith instead desires international trade, like the national market, to serve as a mutually beneficial means of realising greater equality of conditions between all traders by lifting the poorer nations out of poverty, writing that:

“By uniting, in some measure, the most distant parts of the world, by enabling them to relieve one another’s wants, to increase one another’s enjoyments, and to encourage one another’s industry, their general tendency would seem to be beneficial. To the natives however, both of the East and West Indies, all the commercial benefits which can have resulted from those events have been sunk and lost in the dreadful misfortunes which they have occasioned.

These misfortunes, however, seem to have arisen rather from accident than from anything in the nature of those events themselves. At the particular time when these discoveries were made, the superiority of force happened to be so great on the side of the Europeans that they were enabled to commit with impunity every sort of injustice in those remote countries. Hereafter, perhaps, the natives of those countries may grow stronger, or those of Europe may grow weaker, and the inhabitants of all the different quarters of the world may arrive at that equality of courage and force which, by inspiring mutual fear, can alone overawe the injustice of independent nations into some sort of respect for the rights of one another. But nothing seems more likely to establish this equality of force than that mutual communication of knowledge and of all sorts of improvements which an extensive commerce from all countries to all countries naturally, or rather necessarily, carries along with it.” bk 4, ch 7

Given these desires for peaceful, mutually beneficial international trade, he also spoke out against the “savage injustice of the Europeans” in the Americas; lamenting, I presume, the destruction of Aztec civilisation and its magnificent cities like Tenochtitlán, writing earlier in book 4 that:

“By opening a new and inexhaustible market to all the commodities of Europe, it [the discovery of the Americas] gave occasion to new divisions of labour and improvements of art, which in the narrow circle of the ancient commerce, could never have taken place for want of a market to take off the greater part of their produce. The productive powers of labour were improved, and its produce increased in all the different countries of Europe, and together with it the real revenue and wealth of the inhabitants. The commodities of Europe were almost all new to America, and many of those of America were new to Europe. A new set of exchanges, therefore, began to take place which had never been thought of before, and which should naturally have proved as advantageous to the new, as it certainly did to the old continent. The savage injustice of the Europeans rendered an event, which ought to have been beneficial to all, ruinous and destructive to several of those unfortunate countries.” bk 4, ch 1

He goes on to conclude that “the mercantile system” (and what we today call “neoliberalism”) allows the “merchants and manufacturers” to pervert legislation towards their “sole end and purpose” – production for profit – and away from the legitimate “sole end and purpose” of production – to satisfy human needs:

“It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interests has been so carefully attended to; and among this later class our merchants and manufactures have been by far the principal architects. In the mercantile regulations, which have been taken notice of in this chapter, the interest of our manufacturers has been most peculiarly attended to; and the interest, not so much of the consumers, as that of some other sets of producers, has been sacrificed to it.” bk 4, ch 8

God alone knows what he would make of today’s neo- “liberal” capitalist system.

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In the fifth and final book, he comes on to the subject of the extent to which the government should intervene in the affairs of the market system to secure ethical aims for society. Here his “social democratic” outlook becomes quite clear. Recall that in the opening chapter of the book he lauds the increases in production brought about by the division of labour. But recall also that Adam Smith advocates prospering markets on the grounds that they equalise conditions of labour to reduce exploitation, and improve the circumstances of “the great body of the people”  – he has compassion for the labouring classes and desires to improve their general welfare. He now comes to sketch out how he sees the division of labour as likely to proceed and how it will be necessary for governments to intervene to prevent human capacities being entirely corrupted, in the manner Say suggested earlier:

“In some cases the state of the society necessarily places the greater part of individuals in such situations as naturally form in them, without any attention of government, almost all the abilities and virtues which that state requires, or perhaps can admit of. In other cases the state of the society does not place the part of individuals in such situations, and some attention of government is necessary in order to prevent the almost entire corruption and degeneracy of the great body of the people.

In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.

The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expense of his intellectual, social, and martial virtues. But in every improved and civilised society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.bk 5, ch 1

On these grounds he advocates state intervention to provide a program of education for the labouring classes, because:

“They have little time to spare for education. Their parents can scarce afford to maintain them even in infancy. As soon as they are able to work they must apply to some trade by which they can earn their subsistence. That trade, too, is generally so simple and uniform as to give little exercise to the understanding, while, at the same time, their labour is both so constant and so severe, that it leaves them little leisure and less inclination to apply to, or even to think of, anything else.

But though the common people cannot, in any civilized society, be so well instructed as people of some rank and fortune, the most essential parts of education, however, to read, write, and account, can be acquired at so early a period of life that the greater part even of those who are to be bred to the lowest occupations have time to acquire them before they can be employed in those occupations. For a very small expense the public can facilitate, can encourage, and can even impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education.”

The public can facilitate this acquisition by establishing in every parish or district a little school, where children may be taught for a reward so moderate that even a common labourer may afford it; the master being partly, but not wholly, paid by the public, because, if he was wholly, or even principally, paid by it, he would soon learn to neglect his business. In Scotland the establishment of such parish schools has taught almost the whole common people to read, and a very great proportion of them to write and account.” bk 5, ch 1

As well as “little schools”, he also advocates that the state encourage the development of the arts:

“The state, by encouraging, that is by giving entire liberty to all those who for their own interest would attempt without scandal or indecency, to amuse and divert the people by painting, poetry, music, dancing; by all sorts of dramatic representations and exhibitions, would easily dissipate, in the greater part of them, that melancholy and gloomy humour which is almost always the nurse of popular superstition and enthusiasm. Public diversions have always been the objects of dread and hatred to all the fanatical promoters of those popular frenzies. The gaiety and good humour which those diversions inspire were altogether inconsistent with that temper of mind which was fittest for their purpose, or which they could best work upon. Dramatic representations, besides, frequently exposing their artifices to public ridicule, and sometimes even to public execration, were upon that account, more than all other diversions, the objects of their peculiar abhorrence.” bk 5, ch 1

He also comments (at the end of book 4) that, as well as the protection of its citizens, the state has:

“the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence to any individual, or small number of individuals, though it may frequently do much more than repay it to a great society. The proper performance of those several duties of the sovereign necessarily supposes a certain expence; and this expence again necessarily requires a certain revenue to support it.” bk 4, ch 10

I live in the UK and presume on these grounds that he would advocate supporting the NHS were he writing today. Consider that the US-style private healthcare system we are being press-ganged into (against the strong wishes of the electorate – thought such plans are not made in their interests…) would probably have about twice the per-capita costs of the present state healthcare system.

So finally, how is all this to be paid for? Adam Smith advocates some forms of taxation and discourage others. About taxation in general he comments that:

“The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities.” bk 5, ch 2

He thus advocates taxation on luxuries, for example a kind of “mansions tax” on the grounds that the rich can better afford to pay it:

“The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion” bk 5, ch 2

He discourages taxes upon the profits of stock, on the grounds firstly that:

“The revenue or profit arising from stock naturally divides itself into two parts; that which pays the interest, and which belongs to the owner of the stock, and that surplus part which is over and above what is necessary for paying the interest.

This latter part of profit is evidently a subject not taxable directly. It is the compensation, and in most cases it is no more than a very moderate compensation, for the risk and trouble of employing the stock. The employer must have this compensation, otherwise he cannot, consistently with his own interest, continue the employment. If he was taxed directly, therefore, in proportion to the whole profit, he would be obliged either to raise the rate of his profit, or to charge the tax upon the interest of money; that is, to pay less interest. If he raised the rate of his profit in proportion to the tax, the whole tax, though it might be advanced by him, would be finally paid by one or other of two different sets of people, according to the different ways in which he might employ the stock of which he had the management.” bk 5, ch 2

and secondly that:

“The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country.  He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax, and would remove his stock to some other country where he could, either carry on his business, or enjoy his fortune more at his ease.  By removing his stock he would put an end to all the industry which it had maintained in the country which he left.” bk 5, ch 2

Familiar arguments (tax corporations more and they’ll just charge us more / move abroad, taking jobs with them) and often made today by multi-national corporations or their apologists in university economics departments; but it is important to bear in mind the historical context in which Adam Smith makes them. He probably has in mind here the interests of shopkeepers and craftspeople – the equivalent of today’s struggling small-business man – and not those of the “merchants and manufacturers” of whom we have seen he is extremely critical, particularly of their designs to manipulate the legislative process towards their own ends of production for profit, as today’s multi-national corporations obviously do. As Noam Chomsky put it in his lecture Prospects For Democracy:

“He [Adam Smith] was describing a world very different from ours; so much so that the descriptions and the explanations really don’t carry over very well – but the ideas do. He lived too early to see the modern, autocratic structures of state-capitalism  and he didn’t anticipate their development. But he was already at that period very much opposed to joint-stock companies – what we nowadays call corporations – and he was particularly opposed to them if, as he feared might happen, they would become personified and made permanent; that is they would gain the status of immortal persons, in effect, with all the rights of persons – except immortal. And that in fact is exactly what happened in the nineteenth century.”

For example, Adam Smith expresses strong objections to “exclusive privileges” being granted to joint-stock companies – such as what we today would call “limited liability” and “delegated management” – writing that:

“In a private copartnery, each partner is bound for the debts contracted by the company to the whole extent of his fortune. In a joint stock company, on the contrary, each partner is bound only to the extent of his share.

The trade of a joint stock company is always managed by a court of directors. This court, indeed, is frequently subject, in many respects, to the control of a general court of proprietors. But the greater part of those proprietors seldom pretend to understand anything of the business of the company, and when the spirit of faction happens not to prevail among them, give themselves no trouble about it, but receive contentedly such half-yearly or yearly dividend as the directors think proper to make to them. This total exemption from trouble and from risk, beyond a limited sum, encourages many people to become adventurers in joint stock companies, who would, upon no account, hazard their fortunes in any private copartnery. …

The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.”

bk5, ch 1 [my highlights emphasise his implied criticisms of today’s “limited liability” and “deferred management”, respectively]

Should his earlier arguments against the taxation of trade be applied to today’s personified transnational corporation then? Probably not – and think about it in pragmatic terms as well: why would a profitable modern multi-nationals like Starbucks move abroad, surrendering an entire national market (in a glutted global market, no less) to its competitors? The argument makes no sense. They can well afford to pay tax and so they should pay it at the very least, as Adam Smith says, “in proportion to their respective abilities” and perhaps “something more than in that proportion” – either of which implies quite a lot more tax than they currently pay! If, for the time being, we have to suffer a world in which corporations are “people”, I say they should pay taxes like people – neo- “liberal” apologists cannot have it both ways!

In conclusion then, I think that one should very much bear in mind that Wealth of Nation was first published in 1776, long before anything like the modern corporation with its diverse array of legal protections (such as “legal personality”, “perpetual lifetime”, “delegated management” and “limited liability”) existed. As such, when you hear Adam Smith’s arguments for shopkeepers and craftsmen applied uncritically to the modern corporation, reach for you wallet. Hopefully the passages quoted go some way to supporting my initial assertions – whilst also sketching the broad scope and ethical aims of the book – and may help towards reclaiming the legacy an influential liberal thinker from a good deal of intellectual distortion recently brought to bear by ideologues of neo- “liberalism”.

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~ by freedomthistime on December 19, 2012.

4 Responses to “The Real Adam Smith”

  1. It’s an open question whether Smith adhered to the Labour Theory of Value. For Marx, the LTV existing primarily to refute the notion that capital was ‘deserving’ of any reward. Adam Smith’s passage on the cattle does not dispute this. Insofar as he considered profits justified, you are correct that historical context must be noted. Industrial England consisted of many small firms who took on labourers and educated and trained them. Hence, what Smith considers profit is potentially really more of a wage, plus money that may be reinvested in the enterprise. It was surely nothing like that accrued by modern multinationals.

    However, we must be careful not to idealise Smith. Michael Perelman has a book (The Invention of Capitalism) which is partly an attack on Smith, and while I think he goes too far, there is some truth to it. His basic message is Smith’s downplaying of the sometimes brutal history of capitalism – the foreclosure movement and game laws, for example, which deprived peasants of their means of subsistence so that they were forced to work in factories. Perelman shows that it’s unlikely that Smith was unaware of this, and so his downplaying of the development of industrial relations as ‘natural’ is questionable. Similar rhetoric can be found in Smith’s discussion of the European invasions – he seems to consider these an unfortunate footnote to the development of new markets, rather than an integral part of the historical rise of capitalism. Overall, Smith’s errors were mostly ones of omission rather than commission.

    • Fair enough. Re. the LTV, you’re probably right about Marx’s motivations. I’m of the opinion that whether or not the profits of capital are justified is an ethical question; it cannot be given any objective, “scientific” answer. I think Marx lead socialism down something of a blind alley here, though there are other areas of his thought I value (more here). You might now be wondering what I think about the ethics of profits on capital. Well, there is a very good discussion of this in chapter 5, “Economic Justice”, of Robin Hahnel’s new book Of the People, By the People and I fully endorse his conclusion there, that people should be remunerated not for a combination of productive and human capital (i.e. mostly genetic and inheritance lotteries) but for effort and/or sacrifice at socially useful work.

      I absolutely agree that we shouldn’t idealise Adam Smith (or Marx, for that matter). He was just a man, living at a particular moment of history; he had some good ideas, some not so good ideas and some ideas no longer relevant to our age. With hindsight, a lot of his arguments look quite naive (e.g. that the “invisible hand” will save us from “globalisation”). Having said that, I think he mostly meant well and my main aim here was to make that point; particularly to some folks on “the left” who, based upon major and ongoing intellectual distortion by “the right”, view him as some kind of apologist for systems of power. Whereas the passages I’ve quoted here from Wealth of Nations (and others) show he was highly critical of the system of power of his day (mercantilism) and desired free markets as an alternative to help “the great body of the people” and not “our merchants and master manufacturers”.

      Thanks for the book tip, it sounds interesting and I may very well check it out some time. I’d like to learn more about the early history of the industrial revolution.

  2. “I live in the UK and presume on these grounds that he would advocate supporting the NHS were he writing today”.

    No he wouldn’t. The quote you use makes no mention of any specific policy area. Notwithstanding the fact that the NHS costs a ruinous 8+% of GDP, a similar standard of service could be provided far cheaper in the private sphere.

    “Consider that the US-style private healthcare system we are being press-ganged into…”

    That is utter drivel: The USA spends double that of the UK on social healthcare; not that that is a good thing.

    • I’m a bit confused by your comment Ed. The UK’s “8+% GDP” is actually one of the lowest figures amongst comparable European healthcare systems – hardly “ruinous”. And as you yourself point out, the US (private) system has around twice the UK’s per capita cost. So I’m skeptical that any private UK healthcare system would be “far cheaper” than the NHS – you presumably have in mind something very different from a US-style system? (which costs them a whopping 17+% of GDP)

      I was merely pointing out in my blog that Adam Smith was no market doctrinarian. He was happy to leave certain matters to the state where he thought it would do the job more efficiently. And I presumed (in the absence of evidence to the contrary) that healthcare was an example of this. It’s obviously true we can’t go ask Adam Smith – I was making an extrapolation from 1776 to 2013 based upon his general principle. Maybe we can just agree to disagree here? Or have you a specific country in mind that uses a private healthcare system with better outcomes and/or lower costs than a comparable state healthcare system?

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