August 11, 2010
How to think about…Adam Smith
It’s quite common to see people across the blogosphere haranguing over the legacy of Adam Smith. Typically, leftists will make angry noises about how Adam Smith was not a swivel-eyed free-market zealot; a Thatcherite avant la lettre of the sort now found at the (so-called) Adam Smith Institute.
But unfortunately such noises usually lack detailed substantiation. And this isn’t surprising; outside of academia it can be difficult to find clear explanations for why Smith was a more complicated figure than the libertarian caricature allows for. What I’d like to do, therefore, is offer a small attempt to rectify this dearth of easy-access resources. Consider it a minor public service, born of post-dissertation boredom.
My aim however is not to show that Smith was somehow a hero of “the left”. Personally, I think that’s simply anachronistic, and thereby unacceptable. There’s no honest way of claiming that a thinker deeply embedded in 18th Century political situations and concerns can unproblematically be signed-up to one broad tribe in today’s vastly different economic, political, historical and social setting. But what I do want to provide are some reasons for appreciating that Smith’s ideas stand in tension with much modern free-market right wingery.
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Normally a starting point is shared between both modern left and right: that Smith was the first “modern” economist. But this isn’t very accurate. It’s much better to describe Smith as a moral and political philosopher who wrote a major tract – his Enquiry into the Nature and Causes of the Wealth of Nations – focusing on the political economy of modern commercial nation-states in competitive international arenas.
That long redescription matters. Smith did not set out to write some sort of “textbook” about how economics “works”. No doubt there is much in the WofN which does attempt to understand the structure and functioning of economic processes. Yet the purpose of such analysis is to underpin Smith’s primary project: of understanding and explaining how commercial nation states interact with each other, when driven not simply by the logic of economic production but also by the more powerful and often countervailing logic of war and military competition. Thus, the WofN is as much a piece of international political strategising as it is of economic theory.
Core to Smith’s outlook, however, was something he shared with his friend and predecessor the great philosopher David Hume: that the logic of economics and the logic of politics (including especially that of war) had to be understood as intimately and permanently inter-related. Whilst it might be intellectually enlightening to hypothesise about a world of pure economic interactions, it was useless and naive to think that such a world could ever exist in practice. In reality, the dictates and demands of politics would forever be present, warping the logic of economics to serve the ends and demands of statesmen as well as citizens. The outcome was what Hume called “jealousy of trade”; a situation whereby competitive nation states would twist the workings of commerce and trade to the perceived needs of national defence and aggrandisement. For Smith as for Hume, this was an inevitable fact of life in the real world, and it had to be faced-down and dealt with, not wistfully imagined away or ignored.
However, I’m actually going to draw here on two quotes from Smith’s first book, The Theory of Moral Sentiments. Although this work was published in 1759, before the WofN, the passages I’m interested in were actually added by Smith to the final 1789 edition, 13 years after the WofN was first published. (There is little doubt amongst contemporary scholars that Smith wanted his final version of the TMS to be read in conjunction with his economic ideas, which he also revised until his death).
The first passage which commands our attention is this:
“This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all ages.”
To understand this passage we need to contextualise it a little. Smith was responding to – and indeed partially conceding – a point made most forcefully by Jean-Jacques Rousseau. That commercial society – or what we would now call capitalism – inevitably corrupts those who live within it.
Rousseau’s classic statement of this idea came in his polemical essay A Discourse on the Foundations of Inequality (better known as the Second Discourse). There, Rousseau railed against the rise of commercial society, which he saw not only as grounded upon avarice, self-interest and greed, but as leading to unacceptable levels of inequality and the simultaneous corruption of human beings into nasty, selfish, competitive creatures.
Smith disagreed with much of Rousseau’s diagnosis. In particular, he saw a liberalised commercial society as being to the justifiable benefit of the poorest because although great inequality would inevitably result from the establishment of commercialism, the material gains to the worst-off would justify this. Indeed, insofar as Smith was prepared to tolerate considerable inequality on the justification that it was correlated to rising living standards for all, he does share much in common with the non-egalitarian free market right of today.
But what Smith does not share with the modern free market right is a concession to Rousseau that commercial society – that is, systems of production and distribution founded upon the interaction of self-interested profit seekers – is deeply and worryingly corrupting of individuals themselves. Although Smith did not take the diagnosis to be as severe as Rousseau, Smith was also deeply concerned that a system based on self interest – as capitalism must be – carried worrying consequences for the well-being of individuals engaged in it. As Tim Worstall – of the Adam Smith Institute, appropriately enough – ably demonstrated here, this concern about the psychological effects upon individuals of a system based on competitive self-interest is hardly common to today’s free-market right.
The second passage I want to consider is as follows:
“He seems to imagine that he can arrange the different members of great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chessboard have no other principle of motion besides that which the hand impresses upon them; but that, in the great “chessboard of human society, every single piece has a principle of motion of its own, altogether different from which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.”
This, of course, is part of Smith’s famed attack upon “the man of system”, once invoked by no less than Margaret Thatcher. Although to modern eyes this passage reads like an attack on bureaucratic state planners – of the Soviet sort right through to the Social Democratic left – it was originally directed at quite another group.
The “men of system” that Smith had in his sights were the French physiocrats of the second half of the 18th Century. Paradoxically, the physiocrats had much in common with Smith. Like him, they thought that economic logic clearly showed that societies would flourish if free trade were instantiated (particularly in the grain trade) and commercial restrictions removed so as to allow the market to allocate resources more efficiently than mercantile planners could possibly achieve. In terms of economic “theory”, both Smith and the physiocrats thought that moving to a system of “natural liberty” – i.e. free market commercialism – would be superior to the confused and counterproductive attempts by individual states to restrict trade with the aim of undercutting their rivals. Both Smith and the physiocrats recognised – correctly – that protectionism hurt everyone but that (counter-intuitively) freeing trade within and between states would lead to the “opulence” of all participating states.
But where Smith differed – and differed fiercely – from the physiocrats was in his recognition that free market reforms could not work in practice as they would in theory. The reason for this was a facet of the wider issue mentioned above: jealousy of trade. Although in theory if everybody accepted the free-market liberalisation of (say) the grain trade without question and set-about acting rationally in response to it, everything would work out fine, and indeed production and efficiency would increase. The “game” of society would go well.
In practice, however, this simply would not occur; the “pieces on the chessboard” had their own principles of motion. For example, individuals threatened by temporary fluctuations in grain price due to the interactions of supply and demand would (quite reasonably, from their own perspective) react adversely and demand that the powers-that-be intervene so as to secure prices, and in turn food supplies. Although Smith agreed with the physiocrats that in the long-run this would likely have perverse consequences and make food production lower and famine more likely, the fact was that in the short-term panicked individuals would make demands upon those in political power to interfere with the market, and that political leaders desiring to keep both their positions and their heads would respond accordingly.
As a result Smith was adamant that any economic reforms had to be made cautiously, slowly, and in full recognition of the fact that the logic of economics was always liable to be rapidly usurped and twisted by the logic of politics. Whilst Smith doubtless favoured the liberalisation of (for example) the grain trade, he opposed the programme of the physiocrats to implement free-market reforms instantly, as though the real world were a chessboard where each piece would behave exactly as the controlling player wished and demanded. In reality, the logic of politics – however disruptive from the viewpoint of the economist – would always be present, and had to be accepted as a fact of life. Economic policy must be adapted accordingly, and liberalising reforms suspended insofar as the unavoidable impact of the logic of politics made them dangerous to the stability and immediate well-being of society.
Smith’s sophisticated acceptance of the divergence between economic theory, and its inevitable corruption when put into political practice, thus comes into neat contrast with those modern-day-physiocrats of the cruder wings of the Thatcherite economic right. Then as now there abound economic policy makers who – with the best of intentions – construct free-market reforms based on theories which posit the individuals affected as acting rationally from the viewpoint of economics. What such reformers often neglect, of course, is that the logic of politics is inevitable and inescapable in real-world practice: that the pieces on the chessboard will not always move as the logic of the market would like them, and that as a result “the game of society” will go “miserably”.
Of course this last point applies to much of the left, too. Smith’s point about the men of system applies now to bureaucratic planners who believe that the state can always intervene and direct affairs without the “pieces on the chessboard” having their own alternative principles of motion, leading well-intentioned reforms to have unexpected and undesirable consequences. The disaster of state Sovietism proves that well enough.
But what’s important to remember is that Smith originally intended the point to be made against those who would too quickly introduce the market into situations where its effects would be intolerable for the people affected by them, leading to unforseen and destructive political responses. This, for Smith, was just a fact of life, and economic policy had to be shaped accordingly. The consequent complexity of this view means that even as a pro-market, liberalising proponent of nascent commercial society, Smith stands a long way from the cruder free-market sections of today’s economic and political right.
Luis Enrique said,
August 11, 2010 at 1:02 pm
Paul,
I don’t know whether you’ve come across him already, but Gavin Kennedy has written a book, and occasionally policies the blogosphere, trying to correct the smith=free market zealot mistake.
http://adamsmithslostlegacy.com/
Paul Sagar said,
August 11, 2010 at 1:05 pm
Luis, yeah I’ve come across Gavin Kennedy’s blog as he links here sometimes. It’s good stuff, though I don’t know how he keeps up the energy to do it day-in-day out!
Tim Worstall said,
August 11, 2010 at 1:31 pm
“I don’t know whether you’ve come across him already, but Gavin Kennedy has written a book, and occasionally policies the blogosphere, trying to correct the smith=free market zealot mistake. ”
Err, quite….which is why Gavin Kennedy is a Fellow at the ASI.
Mark said,
August 11, 2010 at 5:25 pm
You could say exactly the same for liberal social policies (beloved of the left as well as libertarians) foisted upon an unwilling public
Whatever the theoretical benefits, there may well be very real political consequences if people aren’t ready for them.
Paul Sagar said,
August 11, 2010 at 7:31 pm
Mark,
Absolutely. That’s part of the reason Smith remains a thinker who still repays close and carefuly reading today.
Dan said,
August 12, 2010 at 4:44 pm
I’m afraid I don’t buy your argument here at all.
To the first point: you seem to imply the quote supports the idea that Smith concedes that “commercial society – or what we would now call capitalism – inevitably corrupts those who live within it.” But I think this is a questionable conclusion to draw; after all, there is nothing in the quote which specifically attributes the cause of the disposition that Smith is complaining about to capitalism or even commercial society more generally. Indeed, he says that his complaint is “complaint of moralists in all ages” so I don’t see the justification for singling out commercial society there.
To the second point: you don’t really substantiate your interpretation with any quotes so it’s hard to see where you’re getting it from. But my impression was that the disagreement between Smith and the Physiocrats mainly concerned the economic role of land. The Physiocrats thought that only land (and agriculture) contributed economic value, and that manufacturing produced no net gains. I looked it up, and indeed that does seem to be Smith’s main issue with the Physiocrats in TWON: “The capital error of this system, however, seems to lie in its representing the class of artificers, manufacturers, and merchants, as altogether barren and unproductive.” So it is by no means clear to me that your representation of the dispute between them is on the right lines. (I could definitely be wrong here since I am no Smith expert, but I’d certainly like to see more of a textual basis for the views you’re attributing to him before I’d be persuaded.)
Lastly, and I think more interesting than Smith exegesis, there is a substantial body of free-market economic thinking which absolutely does not fall into the kind of trap you’re talking about: public choice theory. If anyone understands the corrupting influence of the political mode of decision-making on economics, it is contemporary public choice theorists like Buchanon, Tullock, Stigler, Becker, etc. What’s more, they do so by assuming “the individuals affected as acting rationally from the viewpoint of economics” – the big difference being that they also include politicians and political actors under the scope of rational choice. I know you’re only aiming this at what you call the “cruder” free-marketeers, but I thought it worth pointing out that sophisticated free-marketeers have done a lot of work on analysing the interplay between political and economic institutions – and the end result should not be especially reassuring to statists.
Paul Sagar said,
August 12, 2010 at 10:41 pm
Dan,
Thanks for your comment – answering it will allow me to expand a bit on the above, which was already too long for a blog post but scrimping a bit on some of the more detailed substantiation.
Unfortunately, I’m going to have to do a little bit of arguing from authority; this is not to fob you off, but simply because in order to make my points in anything like a manageable way I need to make some unsubstantiated claims about the period under discussion. Nonetheless, I’ll supply some academic references so you can check out what I’m saying.
Regarding your first point, about Smith on corruption.
I genuinely don’t mean this in a rude way, but a basic knowledge of the intellectual context of the mid-late 18th Century would supply you with confirmation that Smith is definitely talking about the effects of commercialism. The 18th Century was a core period of transition between the early-modern European state system and the “modern” one which emerges by the 19th. A very important part of that transition in the intellectual culture of Europe – indeed, perhaps the main part of that intellectual transition – revolved around the debate as to whether commercial society could be tolerated insofar as the necessary pursuit and accumulation of luxury goods (and thereby societies full of “luxury”) would lead to the corruption of the citizenry.
Before the 18th Century there was a long and extremely firmly established tradition which maintained that insofar as luxury was corrupting, it had to be restrained. A huge part of this legacy was rooted in Christian ascetism; the lauding of poverty and the denigration of material gain. Most European sumptuary laws (i.e. those against luxury goods) were justified on quasi-theistic grounds. But another vastly important tradition was the renaissance revival of classical learning and the correlate belief that a state could flourish only if its people, and especially its rulers, were virtuous. Yet virtue – meaning, for example, the service of the common good not the pursuit of private gain, and the lauding of military virtues not “effeminate” pursuits of pampered luxury – was expressly degraded by luxury, which was the aim of much commerce, and the inevitable outcome of commercial society (or so it was widely thought). These two things together acted as enormous blocks upon the liberalising of markets to allow the development of modern commercialism.
By the mid-18th Century, however, it was being over-turned – albeit slowly. See, for example, the enormous body of work dedicated to the subject from contributors across Europe, contained in the collection Commerce, Culture and Liberty, Henry C. Clark (ed), (Indianapolis: Liberty Fund, 2003).
One particular figure who did much to overturn the earlier preconceptions about the commerce-luxury-corruption connection, however, was David Hume. He adopted a two-pronged attack: firstly, he argued that it was simply untrue that luxury corrupted citizens; secondly, he argued that modern commercial states transcended the frames of reference within which beliefs that the virtue of statesmen (in particular) was at the heart of good governance. Hume argued that “virtue” was irrelevant; what mattered was the correct ordering of institutions. And if that was gotten right, then luxury was not only manageable but would actually enhance the glory and power of the state. Accordingly, commerce was to be welcomed, and commercial society encouraged. (I detail the case for this over here).
Smith followed Hume, more or less, in the diagnosis that institutions, not individual “virtue”, mattered in matters of politics – and hence commercial society was to be cultivated not prevented. Yet Smith could never quite shake the Rousseauean claim: that commercial society corrupts individuals (though Smith dropped reference to “virtue” and quite consistently talked of the corruption of moral sentiments).
So, as it happens, Smith’s reference to moralists of all ages is not support for your interpretation – it’s support for mine. The ubiquity of the luxury-commerce-corruption debate in the 18th Century, and its long-established roots in Europe, both in a collective Christian heritage and in the Renaissance originating in quattrocento Italy which itself looked back to the Classical republics of Rome and Greece, meant that Smith was speaking quite typically in referring to this debate as one examined by moralists of “all ages”. That it’s no longer our debate, and that his words look alien, is testament simply to the fact that Smith and Hume were on the right side of history; the 19th Century followed the trajectory they advocated, and abandoned Rousseau and those who held similar objections.
For more on this I’d recommend the last chapter of
AlanJohn Robertson’s excellent book The Case for the Englightenment. Robertson there substantiates the Smith-replying-to-Rousseau claim, and locates it somewhat within the broader intellectual context of the 18th Century. But in sum, I am entitled to attribute my reading to that Smith quote, because given the relevant context he couldn’t really have been talking about anything else.As for your second point – that Smith is not targeting the Physiocrats when he denounces the “men of system” – I’m afraid you don’t offer much of a counter-argument. Yes, Smith disagreed with the Physiocrats over land value. But it’s odd to imply that he couldn’t therefore have disagreed with them about anything else.
Dougald SteuertDugald Stewart, who gave Smith’s memorial lecture, certainly thought (in that lecture) that Smith’s main target was the Physiocrats. And as I said in the OP, the addition to the Theory of Moral Sentiments is important because Smith’s two works are complementary. The WofN is about economic functioning and correlate strategy for competitive nation states in a commercial arena plagued by war. TMS is for individual moral actors, advising them on how to view and interact with the world they inhabit. Unsurprisingly, therefore, the “men of system” addition comes in TMS – but it’s applicability to WofN should be clear.However, if you don’t believe me on this I strongly recommend you read the Jealousy of Trade collection by Istvan Hont. Of course I’m biased (as Istvan will be supervising me next year), but I think it’s fair to say that Jealousy of Trade is widely recognised by intellectual historians as perhaps the most major contribution to the study of the intellectual history of political economy for at least the past 20 years. In particular, I’d recommend his long Introduction (which summarises subsequent chapters, but also expands on them and lays-out the big picture claims of the book). Then also read Chapter 1 “The Language of Sociability and Commerce: Samuel Pufendorf and the Theoretical Foundations of the ‘Four Stages’ Theory” (which is basically a pre-requisite for understanding Smith properly) but most especially read Chapter 5, “Adam Smith and the Political Economy of the ‘Unnatural and Retrograde Order”. You may still choose to disagree with the Physiocrat reading – but you’ll have your work cut out to show why you are right.
As for your point about public choice, I’m fine with that. My intention was never to say that Smith is like nobody on the modern right – just that he’s far more complicated than one common caricature. It’s up to you if you want to say that Smith is therefore akin to a modern public choice theorist. Personally I’m hostile to that sort of thing, because I think it’s excessively anachronistic and therefore intellectually non-valuable. (There may, however, be certain political efficacies to be considered…but that’s a different story).
However, one final point. A while ago you expressed various sentiments to the effect that you don’t think it’s worth reading original works because all the ideas that matter are passed down and distilled unproblematically, so we can just read the latest summary. Hopefully the above illustrates some pitfalls of that position. In particular, that Smith’s ideas cannot just be “handed down”; they are contextually located and if we remove them from that context we are likely to seriously misunderstand what he meant; to transfer original insights into foreign contexts that unacceptably distort them.
But that’s just a facet of my wider belief that political theorists ought really to be historians as well.
Chris Brooke said,
August 13, 2010 at 4:59 am
Little slips: It’s John Robertson (not Alan), Dugald Stewart (not Dougald Steuert), and you probably mean the Discourse on the Origins of Inequality, rather than the DPE.
Incidentally, I think the point you make about Dugald Stewart is right — but in general he probably shouldn’t be taken as authoritative, especially in this discussion, of Smith’s politics. Stewart is probably more responsible than any other single individual for creating the myth of Smith as a generally conservative figure, in the period immediately after Smith’s death (which was a peculiarly politically hysterical period, what with the French Revolution, and the British state embarking on one of its periodic bouts of domestic repression).
On Dan’s point, Smith is unlikely to blame “capitalism” for the corruption of the moral sentiments, since this isn’t a word he uses. (It isn’t a word Marx uses, interestingly enough, though lots of people assume it is. He talks instead of “the capitalist mode of production”.) But I think Paul (and John Robertson) are right, and Dan is wrong.
It’s pretty clear now that to a very considerable extent Smith’s project can plausibly be read as a massive, systematic response to Rousseau’s arguments about the origins of inequality, and in general the first few editions of the Wealth of Nations maintain the line that we don’t really have to be worried about social inequality, for various reasons, such that (i) poor people will still live well in a Smithian economy, (ii) the rich aren’t any happier, anyway, and (iii) inequality doesn’t have the consequences for political instability & freedom that Rousseau alleged. And so on.
But from this point of view, the chapter on the corruption of the moral sentiments represents a very big wobble by Smith in his confidence in the basic soundness of his argument, for commercial society would lose a great deal of its appeal if, in general, it led to the destruction of the traditional role of the moral sentiments, and the chapter (as Paul implies) points to some of the reasons why we might think that commercial society will tend to this corruption.
If you’re interested in people like Gary Becker, Dan, and want to know more about what Smith’s arguments do and don’t have to do with the kind of things that he argues, you might like the early sections of Pierre Force’s book, Self-interest before Adam Smith, which is a book that tries to show that the Becker it’s-all-about-self-interested-instrumental-rationality position was alive and well in the seventeenth and eighteenth centuries, and was one of the positions that Smith (and others, including Rousseau and Hume) were targeting in their various writings.
Tim Worstall said,
August 13, 2010 at 8:14 am
“Smith followed Hume, more or less, in the diagnosis that institutions, not individual “virtue”, mattered in matters of politics – and hence commercial society was to be cultivated not prevented. Yet Smith could never quite shake the Rousseauean claim: that commercial society corrupts individuals (though Smith dropped reference to “virtue” and quite consistently talked of the corruption of moral sentiments). ”
I’ve always read that as being that Smith pointing out that when the institutions are created and governed by the producers that the natural propensity to such corruption is given free rein (and thus the businessmen meeting to plot against the public etc). Thus as an argument against the guilds and granted monopolies of early modern commerce. The correct institutions to regulate such behaviour being markets and competition.
But then I agree that this is likely me projecting my own concepts onto an authority which I can then use as an argument from authority….or perhaps it is.
Paul Sagar said,
August 13, 2010 at 9:52 am
Chris, thanks for that.
As for the stupid mistakes: my excuse is that I replied to Dan late last night, wired on caffeine and following a 75 mile bike ride. Nonetheless, they are mostly rather stupid mistakes.
However, regarding Rousseau and the 2nd Discourse vs. the essay on political economy, I did originally mean the latter, because I (perhaps mistakenly) read it as a more direct and polemical intervention into the luxury/commerce debate than perhaps the 2nd D was. But thinking about it now that’s a bit unlikely considering the relative importance of the 2nd D in the period, and anyway you’re the Rousseau expert so if you say it was the 2nd D, I’m happy to accept.
As for the use of the word “capitalism”, you’re obviously completely correct. I did mean to refer to “commercialism” exclusively, as a more accurate term, but force of habit etc.
Jon said,
August 22, 2010 at 11:41 am
Thought I might offer a philistine economist’s perspective. I know nothing of the links between Smith and Rousseau; indeed I know very little about the intellectual context of Smith’s writings at all (us economists have more important things to do than learn about such things, like solving game theory problems…) But a few things stand out to me when reading tWoN…
Firstly, it’s been a little while since I read tWoN, and I admit to never having read ToMS, but I want to gently take issue with what you suggest is the principle difference between Smith and modern ‘neoliberal’ ideologues, namely: “his recognition that free market reforms could not work in practice as they would in theory…Smith was adamant that any economic reforms had to be made cautiously, slowly, and in full recognition of the fact that the logic of economics was always liable to be rapidly usurped and twisted by the logic of politics”.
Don’t get me wrong, Smith certainly does differ from neolibs in recognising that “every single piece has a principle of motion of its own”. But your characterisation sounds suspiciously like what historian of economic thought Mark Blaug calls a ‘rational reconstruction’ of Smith in terms borrowed from modern debates over ‘shock therapy’ v ‘gradualism’, of the kind that surrounded the transition of the former planned economies to capitalism – on your reading, Smith v Physiocrats is a former-day version of Stiglitz v Sachs. You may well be right, but I don’t remember much in tWoN to suggest that ‘gradualism’ in introducing commercialism was really a big concern for Smith – I think there are more important differences between Smith and his latter-day appropriators.
So, a few points of my own… As far as I can tell, Smith offers three economic arguments in favour of ‘free markets’ as a way of organising economic activity. Because of extensive misquoting of the “invisible hand” phrase, people think that Smith gives some sort of proto-Walrasian argument as to how markets promote ‘allocative efficiency’ or something. He doesn’t – you won’t find any tangent indifference curves in tWoN. Also, the “invisible hand” comment isn’t given much importance by Smith – he doesn’t elaborate much upon it, and it’s buried deep in some paragraph in one of the more obscure chapters of book 4. And most interestingly, he uses it to describe almost the exact opposite phenomenon to what people always assume he meant by it – he describes the ‘home bias’ of investors, how even in the face of potentially higher profits abroad, they will consistently prefer to invest their capital at home, and thereby benefit domestic industry “as if by an invisible hand”; so the “invisible hand” refers to a parochial conservatism in investment strategy, rather than utility-maximising arbitrage.
So on to his *actual* arguments. At least one is a bit rubbish: it’s his famous quote about how it can never pay an individual to produce for himself what he can obtain cheaper elsewhere, and “what is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom” (again tucked away somewhere in book 4). This is an argument based on ‘absolute advantage’. But 1.) it’s pretty simplistic, 2.) it is, technically-speaking, wrong (or at least highly incomplete), as Ricardo later showed with his more sophisticated stuff about ‘*comparative* advantage’, 3.) I don’t really like the ‘fallacy of composition’ thing going on there; if there’s anything Keynes taught us about economic methodology, it’s not to use microeconomic parables to answer macroeconomic questions.
So Smith really gives *two* interesting arguments for free markets which are worth looking at. They appear right at the start of the book, in probably the two most important chapters of tWoN from a modern economics pov, and the interesting thing about them is just how different they are to modern ‘neoliberal’ arguments.
The first is kind of a technical argument, in book1, chap 3, ‘That the Division of Labour is Limited by the Extent of the Market’. Smith considers the most important determinant of productivity to be the extent of the division of labour; he then claims that ‘the division of labour is limited by the extent of the market’ (ie. it’s prob not worth organising your pin factory based on an elaborate system of intra-firm specialisation if you’re restricted to selling in a small market town in the Scottish Highlands, cos you’ll only be able to sell a small fraction of the extra production you’ll be able to generate; it’s def worth it if you can sell 100,000 pins a day); a ‘free market’ with no restrictions (either domestically or internationally) then allows access to greater markets, and by this fact allows a greater division of labour, and thus greater productivity.
This is an ‘increasing returns to scale’ argument if ever I saw one. Modern neoliberal economists are still quite scared of IRS – if you include it in formal models, it often means competitive equilibria don’t exist; perhaps even more scarily, it’s easy to make arguments in favour of protection/against competition if you appeal to IRS (whether those arguments are *any good* is another question, but they can certainly be made on that basis). More generally, James Galbraith (son of the late-great-JK) contrasts ‘Smithian’ with ‘Ricardian’ arguments for free trade (both domestically and internationally) – roughly, ‘neoliberals’ tend to use the latter, ‘Keyesians’ the former; needless to say, the latter are much better.
Secondly, and most interestingly, is a kind of ‘moral’ argument in book1, chapter X, ‘Of Wages and Profit in the Different Employments of Labour and Stock’, which is an argument based on *equality*. Here Smith talks about the determinants of wages, and the reasons why they vary between different trades and industries. This chapter basically invents what modern labour economists would call the theory of ‘compensating differentials’ (or ‘hedonic wage theory’) – indeed, modern labour economics textbooks often admit as much. He says that, in competitive labour markets where workers can freely move around unrestricted, then:
“The whole of the advantages and disadvantages of the different employments of labour and stock must…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”
He gives five factors which “make up for a small pecuniary gain in some employments, and counter-balance a great one in others”, namely 1) “ease or hardship, the cleanliness or dirtiness, the honourableness or dishonourableness of the employment”, 2) “easiness and cheapness, or the difficulty and expence of learning the business”, 3) “constancy or inconstancy of employment”, 4) “small or great trust which must be reposed in the workmen”, and 5) “probability or improbability of success”.
So the point is: yes, free labour markets produce *pecuniary* inequalities, but these are just compensating for *non-pecuniary* aspects of employment, so that markets produce a tendency towards the *total* (ie. pecuniary plus non-pecuniary, ie. “The whole of the advantages and disadvantages…”) rewards to labour being everywhere equal. He says basically the same of profits in different sectors.
Now that doesn’t look like a ‘trickle down’ argument of the sort you suggest Smith is making. It’s not so much “yes commercialism increases inequality, but this doesn’t matter because the poor are better off in absolute terms anyway under a Smithian system”; it looks suspiciously like “commercialism is desirable *because it produces a tendency towards perfect equality*”, and indeed equality of *outcome*, measured in terms of psychic utility or whatever.
Smith’s argument against the ‘policy of Europe’, then, is that typical restrictions like the Statute of Artificers or the granting of gov monopolies to certain corporations accords arbitrary privilege to particular economic actors by *preventing* these equalising forces from coming into play. The implication then presumably being that if markets *don’t* work in this way (which they don’t: Smith doesn’t look at the demand side of the labour market, eg), then commercialism *ain’t* as desirable as he thinks.
Now I know all y’all are really into political theory and intellectual history etc, of which I am almost entirely ignorant, and so it’s possible that I’m being hideously anachronistic, or that I’m not up to speed on my Rawls or whatever, but superficially at least, that argument looks *pretty far* from a standard neoliberal argument for free markets.
As if to stress how important equality seems to be to Smith, I count about 40 uses of the word ‘equality’ or variants thereon in that single chapter. Try the same on a piece of Cato Institute market-cheerleading and see how many hits you get.
And if you look at specific ‘policy prescriptions’, then again and again you find stuff that would give any modern neoliberal a coronary. You already pointed out on another post what Smith says on taxes and how the rich should pay proportionately more. Another I particular like is the fact that Smith was strongly in favour of very tight usury laws: “The legal rate…ought not be much above the lowest market rate”, which would imply in current circumstances banks being banned from charging rates much above 0.5%.
And before you charge me with anachronism, the arguments he gives in favour of usury laws are remarkably modern and could probably be applied to modern credit markets: he recognises that at very high interest rates, only “prodigals and projectors” with highly risky speculative investments will want to borrow, which would be a waste of the nation’s scarce capital, ie. basically an ‘adverse selection‘ argument. This is a primitive intuition of the fact that when there are heterogeneous ‘types’ of participants or goods or whatever in the market, and market participants have imperfect info about which type is which, then even competitive market outcomes can be *highly* inefficient, from both private and social pov – this is precisely the stuff Joe Stiglitz won his Nobel Prize for (eg. ‘Credit Rationing in Markets with Imperfect Info’, Stiglitz & Weiss, 1981 appeals to exactly the same ‘sorting’ role that the rate of interest plays as Smith does).
Finally, Smith, and indeed classical economics in general, is very much preoccupied with ’class analysis’ – this used to be the way of doing economics, but neoclassical economics has abandoned this in favour of the ‘representative consumer’ approach, for better or for worse. For example, the bits of tWoN that everyone skips over, namely the v lengthy historical digressions, are mostly pretty boring, but Blaug points out that they develop a kind of proto-‘Marxist’ theory of the state as being basically an instrument for protecting the property of the rich. And of course it goes without saying that Smith is incredibly cynical about the motives of these economic elites, “the masters” as he calls them – quotes about how they “combine” to basically fuck everyone over are so easy to find in tWoN it‘s ridiculous.
To ‘conclude’, as it were, my favourite quote about Smith is from the great Chicago economist Jacob Viner:
“If we draw up a list of the defects that Smith admits in the ‘simple system of natural liberty’ – the conflicts of interest, the cases where the pursuit of private gains leads to socially undesirable results – we should have sufficient ammunition…for several socialist orations”
Sorry, *very* long post. I didn’t start out intending to write an essay, but it kind of happened anyway. I just also happen to feel pretty strongly about the whole appropriation-of-AS-by-idiot-libertarians thing…
How to think about…The Wealth of Nations « Bad Conscience said,
August 25, 2010 at 8:01 am
[...] in Economics, Intellectual History, Politics at 8:00 am by Paul Sagar The I recently posted some thoughts about why Adam Smith’s Theory of Moral Sentiments tells against any crude [...]
Fish, Barrel « Bad Conscience said,
August 25, 2010 at 6:58 pm
[...] So in truth, I don’t really need to link through to the recent posts showing why Adam Smith is no friend of modern libertarians (and especially not of the crude UKLP sort) – though what the hell. [...]