Capitalism & Adam Smith

Capitalism has been magical for creating wealth and opportunity for the US especially in its ability to attract venture capital and finance innovations and big ideas. The down side comes with the implied shareholder mandate that corporat management choose the most profitable alternative with the widest marginal return for short term gain, often without regard for labor or moral outcome. Taxation as a remedy and over regulation, choke off the magic of corporate growth and competition while doing little for the shareholders, employees or customers.

            In the long run, however, employee safety, security, and prosperity translate into high moral, productivity and profit. The same can be said for customers. In the long run, fair pricing, quality product and customer service translate into loyalty and market sustainability. Unfortunately, short term greed often gets in the way, especially when corporations and the economy are stressed by foreign exploitation and internal capital divergence. Balance is everything.

            Advocates of unregulated laisse faire competition -- the magic hand of self-regulation -- often refer to Adam Smith and the implosion of the Russian empire in support of deregulation while a wave of socialist rebellion demands crippling taxation on corporations and an égalité’ without the means and the productivity to sustain it.

            We can probably achieve the required balance with a common culture and a common will -- but probably not with multi-culturism and open conflict, some food for thought.

With permission from Globalization or Democracy, available soon.

“Adam Smith (1723-1790) was the epitome of the absent-minded professor: introverted and deeply analytical, he exhibited unusual habits of speech, gait, and facial expression, talked to himself since childhood, painting a familiar persona of semi-autism. Smith was born in the county of Fife, Scotland, his father, a senior solicitor and judge advocate, died two months after Adam was born. Raised by his mother, Smith never married but for his intellectual associations. Entering the University of Glasgow at age 14, Adam studied moral philosophy, graduated 1740 at age 17, and entered graduate studies at Balliol College, Oxford with a scholarship. Smith begin public lectures in 1774 and in 1751 earned a professorship at Glasgow; he published The Theory of Moral Sentiments in 1759, a morality based on empathy, earning a professorship at Oxford.

            In 1763 Smith left his prestigious professorship at Oxford for twice the pay to tutor the nephew of Charles Townshend; in that capacity he traveled to France, was a companion of David Hume, years his senior, and met Voltaire and Benjamin Franklin. Smith become more interested in economics and the tension between a free market, laissez fair and mercantilism, drawing a distinction between productive and non-productive labor, a distinction between agriculture and manufacturing versus the employment and consumption of the nobility and the church, the so-called Bourgeois.  That same distinction might be seen today in the employment and consumption of the so called 1%.

            In 1766, Smith's tour as a tutor ended and he returned to Scotland, spending the next ten years writing The Wealth of Nations, wherein he advocated a division of labor between nations, and argued the theory that rational self-interest and competition created a self-regulating economy, an invisible hand that would guide the economy to prosperity. The theory included free trade between nations, wherein each nation's resources and skills could be optimized for the mutual benefit of each. One nation's production might favor agriculture while another silk or textiles, and yet another pig iron and manufacturing. Wealth of Nations was researched, detailed and written in such extraordinary depth as to remove all doubt. One tends to remember only the invisible hand of enlightened self-interest and interpret it as justifying greed.

            The Wealth of Nations, published in 1776: the year of the American Revolution, impacted the world with a view whose timing and impact was profound. Thus, ended an era of mercantilism, dominated by nobility and church. However, the industrial revolution which followed replaced the nobility and the surf with an oligarchy and an exploitation of labor, crueler than the agrarian serfdom that came before.

Indeed, industrial productivity created great wealth and economic mobility for a new oligarchy, along with greater and more open competition. This new economic framework, called classical economics, favored productivity, division of labor over accumulation of gold and silver but brought with it an exploitation of labor, a poverty that grew in proportion to the growth in wealth. Smith was a moralist; he would not have condoned the extent of poverty. Smith addressed these issues but in difficult terms—perhaps his was an assumption of a pervading moral ethic that would contain the excesses. His caution was there, however, if you pause to read it. For instance, in the First three sentences from Wealth of Nations Smith writes,

“The annual labor of every nation is the fund which originally supplies it with all the necessities and conveniences of life which it annually consumes, and which consists always either in the immediate produce of that labor, or in what is purchased with that produce from other nations. According therefore as this produce, or what is purchased with it, bears a greater or smaller proportion to the number of those who are to consume it, the nation will be better of worse supplied with all the necessities and conveniences for which it has occasion. But this proportion must in every nation be regulated by two different circumstances: first, by the skill, dexterity, and judgment with which its labor is generally applied; and secondly, by the proportion between the number of those who are employed in useful labor, and those who are not so employed.”

If you read only the first two sentences and do not read the third, you miss the essence of Smith’s caution and concern, a concern re-echoed in his third edition and in his other book, The Theory of Moral Sentiments, 1759, last edition 1790. These later works came during the period of the Scotch enlightenment, focusing on the morality of free trade, “The Real Adam Smith, Morality and Markets” video ^[1]

            Unfortunately, Smith’s economics, broadly misapplied as classical economics, and the Industrial Revolution, did not lead to a sustainable égalité but became the seed of revolution. Smith, in his last edition, rejected unbalanced free trade and expanded on its problems in his later book, Theory of Moral Sentiments in 1790. Meanwhile in America, the revolution, unlimited land, natural resources, and expansion, prospered with this new formula of free-for-all business and competition. Even today with the failure of Russia’s Communist model, Adam Smith paradoxically reemerges in the US as the gold standard for the classical model, of laissez-fair capitalism.^[2]

            Those who view Adam Smith’s Wealth of Nations as a magic bullet for free trade and unrestricted capitalism and prosperity should read the 5th edition (1790) and his final edition of The Theory of Moral Sentiments (1790), the year of his death.^[3]”

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[1] The Real Adam Smith, Johan Norberg, a video on YouTube and Amazon, http://www.gstatic.com/tv/thumb/tvbanners/12618469/p12618469_b_v8_aa.jpg

[2] Bridging Adam Smith’s Theory of Moral Sentiments and Wealth of Nations John Dwyer, “Journal of British Studies” Oct 2005, pp-662-687

[3] Journal of British Studies vol 44 #4, Bridging Adam Smith’s Theory of Moral Sentiments and Wealth of Nations, John Dwyer, Oct 2005 pp 662-687