Saturday, 15 August 2009

Adam Smith and the Ethics of The Wealth of Nations

Primary version of this post, with visual content, at Barry Stocker's Weblog.

Adam Smith wrote two important books: An Inquiry into the Nature and Causes of the Wealth of Nations and Theory of Moral Sentiments. This division of labour between economics (in the book which maybe founded the discipline) and ethics has produced some unfortunate results. Both critics of, and enthusiasts for, free market economies have taken this to mean that we look in the Theory of Moral Sentiments for Smith’s ethical views, and not The Wealth of Nations. For the enthusiast for the market, the Theory of Moral Sentiments provides the complement to The Wealth of Nations; the critic of the free market economy, may suppose that Smith’s ethics is in some kind of contradiction with his political economy. Late 19th Century German Adam Smith commentators took to this paradigm with enthusiasm for a while labelling it ‘das Adam Smith Problem’. Most people do not belong as that generation did that there is a contradiction between the two books. Some points still have not been recognised widely enough though.

There is a moral vision underlying Wealth of Nations, which is that of commerce thriving without certain kinds of restriction will be good for human civilisation and welfare. The emphasis though is not on those who become rich from a functioning market economy, but on the advantages to labourers, and their families, as workers and as consumers. Smith was very sober in his attitudes and doesn’t really care for luxury and what we now call conspicuous consumption. He does not want to restrict it, but he does treat is more as a something to be endured than something to be enjoyed. The point for Smith is that we cannot restrict the economy without restricting the liberties and economic welfare of labourers. Labourers are free to find the best employment and get the best conditions where there is little in the the way of economic restrictions. Smith has a lot to say about urban and agricultural labourers in Scotland and the chances they get from economic freedom.

Smith points out that laws requiring 7 years of apprenticeship before being legally permitted to practise as a master craftsmen is a disadvantage to labourers. 7 years of apprenticeship puts an enormous financial burden on the apprentice, and effectively restricts entry to the trade, pushing up the money made by qualified masters. That means higher prices for labourers as consumers. Clearly master craftsmen lose out if guild restrictions are lifted but everyone else gains.

Creating an artificially well compensated class just above labourers creates unemployment for labourers who would be willing to go into that trade at a lower wage, and the high wage artificially directs labour to that occupation instead of others which are productive for society.

Smith refers to the restrictions on labourer moving between districts at that time and moving into a new area to find work, and increase wealth by deploying thier labour where it is wanted.

Another problem which arises in interpreting Smith, from the non-market enthusiasts point of view, is to equate morality with restrictions on the market. The non-free marketeers like to quote a passage about tradesmen conspiring against everyone else when gathered together, even for purely social purposes. However, Smith’s solution is not of legal measures against such conspiring which he thinks could interfere with liberty and justice. He argues for the state to withdraw measures which force merchants to belong to a town corporation of disclose names and addresses on some public register, as this only encourages them to get together and get conspiring. Conspiracies by merchants are best tackled by competition, so that merchants outside the conspiracy – and there are always some as such conspiracies are always about restricting conspiracies – will force down prices and raise quality. This is to the benefit of labourers as well, since their wages and conditions are improved by competition between employers for their labour.

Smith introduces the idea that employers should not force workers to exhaust themselves constantly. As he points out, it is simply not possible to work well and work at full speed for more than a few days in a row. The ethics comes out of practical reality, rather than an abstract standard. It is no less ethical to say that something is wrong because it harms the perpetrator.

This extends to arguments about slavery. Smith refers to slavery as economically inefficient because even the modestly rational slave owner in all circumstances has to keep the slave and the slaves’ family alive and in reasonable condition for work, however productive or unproductive the slave is. Both employers and employees benefit from freedom to find the best match. From what I can gather Smith may have slightly simplified the situation, in practice slave owners did use incentives of a financial kind, or the promise of manumission, in order to get better work out of slaves. Nevertheless, Smith’s overall point holds, it’s clear enough that the more complex forms of economic organisation which emerge with growing prosperity and larger markets, are not compatible with labour and owner tied to each other for ever.

The size of the market is an important point for Smith in general. A large market destroys the older forms of labour organisation, because the bigger the market is, the more competition there is, and the more reason there is to reorganise labour around more division of labour and new forms of labour. Smith recognises this can lead to very boring repetitive work for some, but it’s unlikely there was any more of than in agricultural labour which involves boring repetitive work, for many hours a day particularly in the Summer, and which is very demanding physically. This evolution of the division of labour certainly leads to economies based on free labour. The growing market has the additional ethical benefit of linking people together, in Smith’s time barriers to trade within nations had not been eliminated, so to some degree he is talking about the task of completing a nation through measures promoting economic freedom, and he believed that should extend to the world and the joining together of people throughout the world.

I have emphasised that Smith often sees the free market as the solution to bad behaviour by merchants, rather than restrictive legislation. It is important to note that this in not true in every case. For example Smith says both that it is morally wrong for a employer to give goods to a labourer instead of cash, and that the law should intervene in this case. One could also add that a market functions better on currency than barter, so employers who essentially pay for labour with barter are undermining the market. In some respects Smith thinks the law should intervene to protect labourers and the implication is that overall efficiency of the market may be improved by measures, though strictly limited of this kind. This also shows that Smith does not belong to the libertarian extreme where there is no public good, only contracts between individuals, and possibly a state which exists merely to enforce those contracts. I don’t think Smith belongs with A Rawlsian commitment to limiting inequality in some rational design of society either, despite Rawls’ attempts to incorporate Smith into the thinking of A Theory of Justive. While Smith recognises that basic justice has a place in economic thinking, certainly not to the extent of the kind of corrections and compensations Rawls favours. It’s important to recognise the space between Rawls and and the most absolutist forms of free market libertarianism.

A moralising tone appears when Smith refers to the advantage of a labourer going into business as an individual instead of working with a mass of other employees. Smith believes this will keep the labourer away from corrupting influences. Smith’s greatest respect is for hard working, sober, and disciplined, people in the middle station of life. There is something a bit like Rousseau here, though they are far apart on economics. It certainly distinguishes Smith from his friends David Hume and Edmund Burke, who both associated with the aristocracy and gave reasons why people prefer to do so. Smith, Burke and Hume are sometimes grouped together, they did all share a belief in the benefits of commerce, but Smith stands as the one who is more democratic in social spirit.

What I’ve been referring above is not morality in the sense of a purely moral realm. It’s more like an emergent ethics, which arises from describing the workings of the economy. That does not make it less ethically significant, and even provides a positive insight into the scope of ethics. Though the situation in Smith studies has certainly advanced since ‘das Adam Smith Problem’, a lot of perceptions about Smith have not changed outside the ranks of commentators. Even in the commentaries, there’s still a tendency to see The Wealth of Nations as compatible with Theory of Moral Sentiments, and as having a moral dimension in that context, rather than making its own ethical points.

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