Sunday, January 22, 2012

The Truth About Adam Smith

It’s amazing how often Capitalists love to quote Adam Smith, the author of the book Wealth of Nations, which one might call the Capitalist Bible. Well, maybe I should rephrase that. I really should write that it’s amazing how Capitalists love to pick and choose quotes from Adam Smith but fail to mention views that he held that they disagree with.

Capitalists love to refer to Adam Smith’s “invisible hand” when it comes to the power of the market. I have no problem with that habit being that the market would still be an important part of an Economic Democracy. Very simply put, Smith was indeed right that what we today call natural selection when applied to the market can indeed make for a better product or service.

However, he made many statements in the Wealth of Nations that Capitalists and their defenders fail to mention.

Progressive Taxation
"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."

Smith also wrote:
"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities, that is, in proportion to the revenue which they respectively enjoy under the protection of the state."

These two statements are especially timely. Right now on Capitol Hill, one of the biggest arguments is whether the tax rates for the rich should be raised. It’s obvious that Adam Smith supported a progressive tax on the wealthy.

"No society can surely be flourishing and happy, of which the greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged."

Another hot topic right now is the fact that there has been such a growth in the disparity in incomes between the very rich and, well, everyone else. A small percentage of the wealthy American population has gained dramatically while the rest of the nation has seen dramatic drops in wealth.

Fair Wages v Profits
"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."

It's amazing how Capitalists fail to mention this statement. Smith is saying clearly that workers deserve a fair wage and actually refers to "the bad effects of high profits" and "the pernicious effects of their own gains."

Trade Associations
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty or justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary."

I wonder how many business trade associations would admit that they meet "in a conspiracy against the public?"

Labor Protection Laws
"Whenever the legislature attempts to regulate the differences between masters and their workmen, its counselors are always the masters. When the regulation, therefore, is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favor of the masters."

There’s a statement here that deserves repeating, "When the regulation, therefore, is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favor of the masters." Such regulation in favor of labor "is always just and equitable" but is sometime not when "in favor of the masters." The reader needs to remember that at the time the word master was used for the sole-proprietor or what we today would say boss.

Redistribution of Wealth
"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."

For Capitalists the term "redistribution of wealth" is a filthy phrase. However, here we find Smith saying the opposition of such redistribution is a "vile maxim."

Worship of the Wealthy
"This disposition to admire, and almost to worship, the rich and powerful, and to despise, or, at least neglect persons of poor and mean conditions, 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."

We all know the obsession many have with the 'Lives of the Rich and Famous.' Smith found such obsessions "the great and most universal cause of the corruption of our moral sentiments."

Looking Out for Number One
"How selfish so ever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it."

Even though much of Smith's writings seem harsh he couldn’t help but accept that it was in our nature to care for our neighbors. Even he admitted that altruism was part of human nature.

"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.... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company."

Capitalists have many ways of trying to explain away this statement. Some say he's only referring to sovereign entities that were created by the Crown and had been granted exclusive monopolies, such as the British East India Company. However, the establishment by the State of a company with a monopoly of the system doesn’t appear in his wording. His criticism is that the managers are watching over "other people's money than of their own." Another defense is that modern corporations have accountability systems set-up to compensate for this, which didn’t exist in Smith’s time. The problem with this argument is that recent history has shown this to be false. Companies such as Enron, Arthur Anderson and Countrywide Financial are just a few examples.

I’m not saying Smith was always right. Nor am I saying that if alive today he would be an advocate of Economic Democracy. However, I do want to bring some balance to the discussion on his work.


Anonymous said...

A nice selection of quotes. Well done I was looking for the "other peoples money" excerpt when I came across this site. -Well done

Anonymous said...

This is anxcellent site. Clearly Smith is not, and never was a market fundamentalist,or, in any way self-serving and dogmatic. He was too sincere and intelligent for that.
These quotes also provide some insight into the discussion regarding an inherent contradiction in Smith's overall body of work.
His work in moral philosphy tends to suggest that humans are guided by empathy but his work in economics suggest that they are guided by self-interest.