The Relevance of Adam Smith

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

I’m retuning to the issue of interpreting Adam Smith, which I referred to when posting in the Manchester Metropolitan University Workshops in Political Theory two days ago, I had hoped to post on Adam Smith yesterday. As I indicated two days ago, there was a paper on Adam Smith I found very unsatisfying. I made some comments on the paper but was only able to mention a few of the problems I found with the paper, and as far as I can see it other people in the workshop made the same criticisms after I spoke, but in less direct ways. I found the paper disappointing, but useful, in making a standard series of errors about Adam Smith which are typical of one kind of left-inclined commentators. I am going to summarise this as briefly as possible, and referring as much as possible to the very obvious mistakes, rather than the more subtle problems that will arise in any interpretative work. At the bottom I refer to what I think was good in that paper.

Mistake One

Adam Smith was not an original thinker, because a lot of what he said had been said by other people before.

Reply.

All great thinkers are preceded by various people who express parts of what appear’s in that thinker’s work. The achievement of major original thinkers, like Smith, is to integrate a wide range of previous work on the topic, adding some new thoughts along with grasping links and contradictions which appear when integrating everything. Just about everyone agrees that Smith produced a great original classic: An Inquiry into the Nature and Causes of the Wealth of Nations.

Mistake Two

Adam Smith is not relevant to current economics, and we know this because Mil refers to Smith’s work as partly obsolete and imperfect everywhere (in The Principles of Political Economy). Another supporting argument was that An Inquiry into the Nature and Causes of the Wealth of Nations covers a wider range of material than current economics and is therefore irrelevant to current economics.

Reply.

Most economists continue to refer to Smith as the founder of the discipline and refer to his ideas.

Miill’s comments are a statement of the obvious: any book on economics becomes increasingly obsolete over time because of new developments in the discipline and changing economic circumstances. However, economists continue to use use ideas from Smith and his earlier successors, particularly David Ricardo and Karl Marx. Smith’s relevance compared with Marx has clearly increased in most people’s minds since the 1970s.

Recent economists, most notably the Nobel Prize winner, Gary Beck, have been very interested in taking economics into the territory of psychology, anthropology and sociology. This means that recent economists have written about things like the history of religion, and the development of social ethics, discussed by Smith in Wealth of Nations.

Mistake Three

Adam Smith regards value and wealth as essentially the produce of agricultural labour, and regards industrial production and trade as less valuable.

Reply.

As others pointed out in the workshop, Smith thought that agriculture was more productive only in the sense that it requires less capital (though of course this has changed over time).

There is a confusion in what the speaker said between Smith and the Physiocrats the French economic school which included Turgot, Quesnay, and Mirabeau the Elder. The Physiocrats opposed Mercantilist restrictions on trade and thought all economic value comes from land. Smith clearly rejects their emphasis on land, even if by later standards, he exaggerates the role of agriculture. The slightly more subtle mistake the speaker was making here, was to confuse Smith’s emphasis on natural stages of development with a critique of wealth from industrial production and trade. As I suggested in a post on August 16th, Smith was tied to a teleological way of thinking in which nature and society unfold in necessary steps, a way of thinking which was not throughly challenged until the late 19th Century. The result of this is that he is disturbed when agricultural wealth is stimulated by towns, though even this is ambiguous since in some passages he refers approvingly to the ways in which urban wealth increases agricultural wealth.

Mistake Four

Smith was a left-wing, therefore anti-free market thinker because he opposed Mercantilism.

Reply.

Im extrapolating a bit here, but that seems to be the only way of understanding the way the speaker framed criticisms of Mercantilism. Mercantilism refers to the belief that the world contains a finite amount of wealth, particularly in god, and that trade between states is a way in which one country takes wealth from another. Imports are to be discouraged because paying for them causes wealth to leave the country, and exports are to be discouraged where it means that objects of value are leaving the country. Mercantilist policies were tied to the aristocratic and monarchic states of the time, and Smith criticises those states. The speaker used a slippage between criticising those states and criticising capitalism.

Mistake Five.

Smith did not approve of capitalism because there was less of it in his time and the word did not exist.

Reply.

The fact he word ‘capitalism’ did not exist is irrelevant and it is a feeble rhetorical trick to suggest it is relevant. Clearly Smith wanted to see more and more of what we now call capitalism.

Mistake six

Smith did not opposed socialism because the word did not exist.

Reply.

Again a feeble rhetorical manipulation. Smith opposed what we now call socialism, when he supported the sanctity of private property and opposed most forms of intervention in the economy.

Mistake Seven

Smith was like left-wingers now because his ideas were taken up by late 18th and early 19th century radicals and labour movements, including many French revolutionaries, so by people opposed to monarchical and aristocratic privilege.

Reply.

Left used to refer to people who though allocation of resources was better done by markets than by the state, this has nothing to do with the current socialist left, or even social democrats. Labour representative were concerned with forms of state intervention which held down wages, prevent labour from organising, and pushed up the price of basic items in the budget of labourers. Again these are different from the major aims of the current left. Left wing people in power, or even conservative states trying to accommodate working class demands, moved the issue away from cutting down that state to expanding the state as a means of regulating the economy and redistributing wealth.

Mistake Eight

Free marketers now support state interventionism and therefore contradict Smith’s demands for a less statism.

Reply.

This contradicts other comments the speaker made. It is simply not true that current free marketeers accept existing state interventionism. I drew the attention of the speaker to libertarian thinkers who oppose the privileged relations between corporations and the state. The speaker started stonewalling and trying to change the subject to how libertarianism used to refer to left wing positions, an obvious sign that he could not back up his argument. I insisted on pointing out that free market thinkers like Hayek, Mises and Friedman, and organisations using their views, are extremely critical of links between corporations and the state, including the use of war in promoting sectional economic interests.

Mistake Nine

The speaker clearly though the Thatcher and Reagan governments, and other ‘free market’ governments since represent the most radical forms of free market thinking.

Reply

Reagan and Thatcher get some support from free market thinkers for some of their economic policies. They are also strongly criticised for leaving the essence of the interventionist state in place, and for continuing state support for favoured economic enterprises.

Mistake Ten

The speaker claimed that books IV and V of An Inquiry into the Nature and Causes of the Wealth of Nations justify levels of state interventionism and social welfarism in contradiction with current free marketeers.

Reply.

This is true in reference to anarcho-capitalists like Murray Rothbard and Hans-Hermann Hoppe, or minarchists (night watchman state) like Ludwig von Mises and Robert Nozick. It is not true with reference to Friedrich Hayek or Milton Friedman who are considerably more influential than the minarchists and anarcho-capitalists. The speaker clearly thought Friedman was less interventionist and welfarist than Smith. So what is the interventionism that the speaker alluded to in Smith. Books IV and V of The Wealth of Nations are concerned with: reducing ways in which states have limited trade and taken private property from subjects; expanding education, which should be mostly provided privately with the state supporting the poorest; raising revenue from taxes on consumption; protecting trade outposts fro violence through state military support. This is definitely a very limited role for the state, and certainly goes no further in that direction than Hayek or Friedman.

Mistake Eleven

The speaker said that Smith would be against free markets now because he takes the side of labourers.

Reply.

Smith takes the side of labourers in preferring low taxes on necessary goods, and in allowing labourers to seek the highest possible wages by removing barriers to competition between labourers and between companies when they are hiring labourers. Clearly this has nothing to do with being against free markets and capitalism.

Mistake Twelve

The speaker appeared to think that the discussion of negative and positive liberty comes from Isaiah Berlin, in his 1969 essay, ‘Two Concepts of Liberty’. That is the distinction between liberty from state compulsion and the liberty that arises from state action to expand human capacities.

Reply

I believe Isaiah Berlin’s essay to be highly overrated, its greatest virtue is to draw readers back to important late 18th and early 19th century discussions of liberty. At this time, Kant referred to negative and positive freedom in ethics; Wilhelm von Humboldt referred to negative and positive welfare; Benjamin Constant referred to the liberty of the moderns and the ancients. These all refer to the negative/positive liberty type distinction, though in Kant it’s a distinction about the relation of reason to action. These discussions are anticipated by what Hobbes and then Montesquieu have to say about the kinds of liberty which exist in different ancient and modern states.

Mistake Thirteen

Takes us back to mistake two. The speaker seemed to think that Smith’ status as a Professor of Moral Philosophy and the broad range of topics he lectured and wrote on undermines his place as an economist and free marketeer.

Reply.

The speaker seems to assume that economics is only about prices, when it is about more general questions of ranking choices in individual and social action, which connect with questions of law, ethics etc that Smith was also concerned with. The speaker claimed that An Inquiry into the Nature and Causes of the Wealth of Nations was a wok of moral inquiry. In some ways it is, which in no way contradicts its status as a work of economics. The speaker appears to be making the absurd assumption that one cannot be simultaneously concerned with ethics and with issues of choice, and preference, which are often expressed in terms of prices within a monetised economy.

Mistake Fourteen

The speaker assumed some contradiction between: Aristotelian elements in Smith like a concern with standards of value, and teleology (the end towards something is moving); and free market capitalist thinking.

Reply.

The speaker exaggerates the Aristotelian elements in Smith. Unlike Aristotle, Smith was not concerned with determining a real value and excluding price variations, and he was certainly not supporting the limits in economic inequality (between citizens) proposed by Aristotle. Smith cannot both be strongly teleological in thinking, therefore seeing natural inevitability in the movement from land to city to trade, and believe that movement away from agricultural wealth is bad. Smith sometimes seems inclined to weak versions of those propositions, making it possible to refer to a tension perhaps, but the speaker referred to both propositions in a very strong way without noting the problem.

Generally Badly Formed Argument

Some of this is covered above, as when the speaker implies that Smith is left wing in the current sense by referring to the links between Smith and non-socialist radicals of the original left.

A really obvious problem is that the speaker claimed that Smith would be against capitalism as it is now and that he is irrelevant.

If Smith is irrelevant, his supposed arguments against capitalism must be irrelevant.

The speaker condemned current free markets while saying there are no free markets.

USEFUL POINTS

As I have already noted, the speaker drew attention to the way early radicals like Mary Wollstonecraft, William Godwin and Jeremy Bentham, used Smith’s ideas. I have already stated what I think is wrong with taking this as a reason for thinking Smith can be connected with socialist though. When they do lean towards a redistribution of wealth they are going beyond Smith.

The speaker referred to liberty in Smith as independence rather than as the ‘negative liberty’ or freedom from external compulsion. We might wander how much difference there is between the two and the speaker did not express this potentially useful thought clearly. If we clarify the thought, the point is that Smith was concerned with more than just leaving people alone but also with promoting the virtue that will enable the best possible use of that liberty in a spirt of general independence of mind. As I suggested in a post of 22nd August, this does bring Smith close to classical republican thinking which values political participation, rather than the more anti-political individualism of a lot of current libertarian thinking. On the other hand, individualistic liberalism and republicanism are widely recognised to have been combined in a variety of thinkers from Locke to Mill. I agree that it is unfortunate that current libertarians tend to ignore this. Gerald Gaus provides an interesting and valuable exception.

Adam Smith: Bourgeois Republican Patriotism

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

The final post on my recent re-reading of An Inquiry into the Nature and Causes of the Wealth of Nations. The end of the book is taken up with discussion of taxes. The most ideal situation for Smith here seems to be found in the modern merchant republics of Hamburg and the Netherlands. In both cases, he suggests that occasionally taxes are raised through a wealth tax, tax on the total worth of individuals which is paid voluntarily, Everyone makes a payment based on unchallenged self-assessment, and Smith claims that great honesty is shown in both states. Smith does not suggest that taxes could be regularly raised in this way, even if citizens could be expected to be frequently so honest, frequent taxes on the total worth of individuals would destroy the capacity to pay taxes up by using up all individual wealth.

The worst examples Smith gives of taxation are in France, at that time an absolutist monarchy administered at local and national level by the aristocracy in patchwork of different tax regimes. The irregularity of tax is one problem, another major problem is that heavy taxes are placed on the necessities of life. Smith strongly believes that taxes should fall most heavily on luxuries mostly consumed by the rich. Smith is not a redistributionist though, he does not suggest progressive rates of tax, and restricts taxation to taxes on consumption rather than on income (leaving aside occasional wealth taxes). His reasons for opposing taxes on the necessities of life are explained just as much in terms of keeping the cost of labour down, as in terms of assisting the labouring classes, but the two things are difficult to keep completely distinct.

Britain occupies a middle place between the Dutch Republic and France. Smith welcomes the lack of taxes on internal trade within Great Britain, but is concerned about taxes on the necessities of life. He is very condemnatory of customs on imported goods, suggesting that these promote smuggling and are not respected by citizens who frequently buy from smugglers; he suggests that customs taxes should be replaced by excises taxes (both used to be levied by a distinct unit of British government) on the manufacture of goods.

The discussion of British taxes runs into a more general discussion of the political system in Britain. He suggests that Scotland benefited from the union of the Scottish Parliament with the English Parliament, that is the abolition of the Scottish Parliament and the inclusion of Scottish representatives in the English Parliament. The reason he offers is the escape of the Scottish people from aristocratic domination. Smith objects to the principle of aristocracy rather than the Scottish aristocracy as such. He describes the Scottish aristos as honourable, as deserving of their station and so on. There is an implicit rejection of the very ideas of honour, station, and so on, there. He calls for a similar Act of Unio between Ireland and Britain to rescue the Irish from domination by a worse aristocracy, a Protestant English aristocracy who despised Catholic Irish tenant farmers. An Act of Union did take place in 1800 (creating the United Kingdom, the Irish component now only consists of Northern Ireland), and political discrimination against Catholics was ended in 1829. Unfortunately this did not bring about an end to mutual hostility, including violence.

Smith hints at hostility to aristocracy, and even monarchy, in contrast to his friends Edmund Burke and David Hume. It’s important to distinguish Smith as the least conservative, and most liberal, of that trio. There may be some tension with his idealisation of the merchant republics of the Netherlands and Hamburg. As Smith himself explains, the taxes paid by the Dutch merchants are dependent on their dominant place in Dutch politics. He gives a shining account of the republican patriotism of the Dutch merchants: their profits from trade and from lending money are greatly lowered by the taxes they pay. On the other hand, he believes that they will not be willing to pay those taxes if their political influence wanes. Smith did not really entertain the idea of democracy as votes for all, or certainly not in the text of The Wealth of Nations. He advocated representative government, but implicitly for the merchant class.

It may be that Smith assumed that the merchant class would be the most natural politicians, even in conditions of universal suffrage. His views are based on the assumption that labourers and merchants have common interests under a set of clear laws which maintain ‘free trade’ (by which Smith understood all that we would understand as free market, or open market). It seems to me that this is broadly correct, but Smith clearly underestimated the degree to which merchants and labourers would use the state, its laws and regulations, its expenditure and employment opportunities, as ways of promoting monopolies, and restrictions on market exchange; and clearly underestimated the degree to which these would become the sources of political conflict and the ways in which political parties would try to appeal to electoral alliances of various interests of these kinds. He did also gave us the intellectual tools to understand and criticise that process.

Adam Smith for a Unified European ‘Empire’

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

Were all nations to follow the liberal system if free exportation and free importation, the different states into which a great continent was divided would so far resemble the different provinces of a great empire.

(An Inquiry into the Nature and Causes of the Wealth of Nations. IV.v.b)

The quotation above does not directly support the formation of a continent wide ‘European Empire’ based in free trade. It’s not a big jump to infer this though. The biggest ambiguity would be how big the Empire should be? What is now Turkey and the Russian Federation? The whole of Eurasia? The ‘world continent’ of Eurasia and Africa? Since Smith must want ideally to see free trade throughout the world, how about a World Empire? He prefers the word continent, and it’s very likely he saw Europe as a distinct continent, possibly excluding Siberian Russia and the Ottoman lands in Anatolia. He seems to be toying with the idea of a world of continental free trade ‘empires’, which could be unified in a global free free trade. The phrase trade can be seen a covering a range of options with regard to how integrated markets are as a result of which we could talk about a free trade world, in which the removal of barriers is more complete within continental empires, than between continental Empires.

Smith clearly thinks of the emergence if continental empires as desirable. He is thinking in terms of economies which are still very agricultural, so that the issue is one of avoiding famine. This is best achieved by the best possible integration of the largest possible market, so that food can move quickly to areas suffering shortage. In terms of contemporary arguments, the equivalent would be reducing inflation, increasing competition and increasing economic growth. The integration of continent wide markets also depends on the existence of continent wide transport networks. Smith is suggesting that the work of the more advanced individual nations in closing internal barriers to trade and promoting internal communications could be done at the level of a European Empire. The suggestion is evidently of a state, and of a state beyond the bare minimum of an agency to protect life, property and contracts.

Adam Smith prophet of the European Union, and equivalents such as the African Union. Unfortunately the AU is a long way behind Europe in cutting internal trade barriers, sadly, and very sadly for those who starve to death, or survive at a bare minimum of subsistence.

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.