Adam Smith: 250 years
This week 250 years ago, Adam Smith published An Inquiry Into the Nature and Causes of the Wealth of Nations – and invented economics. Made up of five ‘books’ over 1000 pages, the Wealth of Nations is really the ‘old testament bible’ of classical political economy, with David Ricardo’s Principles of Economics, written in 1819, as the new testament.
Adam Smith has become the guru of ‘laisser-faire’, free market economics – the man that Chicago University economists like George Stigler and Milton Friedman turned to as their theoretical mentor for the ‘free market’. He has been lauded by right-wing free market politicians like Margaret Thatcher, inspiring them to adopt policies to reduce the size of government and state and ‘let the market rule’ in all aspects of social organization. And global free market economists like Friedrich Hayek and the Austrian school of free market economics look to Smith for their basic approach. There is even a ‘think-tank’ based in the UK named after him that claims to develop economic policy based on clear ‘free market’ principles. Its slogan is “Using free markets to create a richer, freer, happier world.”
His most famous statement in the Wealth of Nations is about the so-called ‘invisible hand’ of the market: “(Each individual) generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it…He intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
Smith is arguing here that, as each individual pursues his or her own economic activity, the individual is unaware that the combination of all these individual actions produces a market for production and consumption that is not under his or her control but leads ‘invisibly’ to a better outcome for all. Behind this was Smith’s great insight that modern industry is based on a division of labour: when the production of commodity is broken down into discrete parts where human labour specializes instead of workers doing every part of the process, productivity rises and costs and prices fall. While Smith tells us the benefits of the division of labour in capitalist production, Marx tells us the dark side of the division of labour: the alienation of humanity turning creative work into toil and drudgery.
For Smith, individuals competing on a market will deliver an outcome beneficial to all. And from this flowed the view that “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” This is the classic basis of modern neoclassical economics: based on the myth that the consumer is ‘sovereign’. Marx later showed that it is production that is ‘sovereign’, or more precisely, the ‘sovereign’ of private ownership of the means of production enables capitalists to employ labour, who have no property, for production for profit.
Smith was strongly opposed to monopoly of which there were many in his time, often controlled by a corrupt, monarchical state. In his view, these monopolies ruined industry and reduced entrepreneurial initiative and thus productivity and prosperity. He was particularly opposed to mercantilism, the doctrine of international trade where nations protected their industries and built up surpluses rather than expand trade. He explained why protectionism is always self-defeating. “By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?”
The Wealth of Nations may have made Smith’s name as the father of mainstream economics based on markets free of interference by government, monopolies and labour unions. But he also wrote an earlier book in 1759, called The Theory of Moral Sentiments. Those reading both these books closely will find that Smith was not some raging free market evangelist that denied the role of government or for that matter considered that human behaviour was driven by material self-interest and nothing else. That is a myth created by today’s free marketers that Smith was opposed to government and to moral behaviour over material interest. On the contrary. Chicago economist Jacob Viner of the 1920s summed it up: “Adam Smith was not a doctrinaire advocate of laissez faire. He saw a wide and elastic range of activity for government, and he was prepared to extend it even farther if government, by improving its standards of competence, honesty, and public spirit, showed itself enticed to wider responsibilities. He devoted more effort to the presentation of his case for individual freedom than to exploring the possibilities of service through government. [but] Smith saw that self-interest and competition were sometimes treacherous to the public interest they were supposed to serve, and he was prepared to rely upon government for the performance of many tasks which individuals as such would not do, or could not do, or could do only badly. He did not believe that laissez faire was always good, or always bad. It depended on circumstances; and as best he could, Adam Smith took into account all of the circumstances he could find.”
Marx was a close reader of The Wealth of Nations. He recognized Smith’s contribution in attempting to develop a theory of value based on labour. As Smith said: “Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price.” But Marx went on to criticize Smith for inconsistency in his labour theory of value, for Smith reverted to a theory of value based of ‘factors of production’ ie rent from landlords, profits from capitalists and wages from labour, rather than all value being created by labour and then appropriated by landlords and capitalists. The factors of production theory now dominates modern mainstream economics and the labour theory of value has been put in the bin. As Marx said: “Adam Smith’s contradictions are of significance because they contain problems which it is true he does not solve, but which he reveals by contradicting himself. His correct instinct in this connection is best shown by the fact that his successors take opposing stands based on one aspect of his teaching or the other.” Theories of Surplus Value I, 151.
Indeed, Adam Smith was not a consistent free trade supporter. His position was nuanced by the state of the British economy at the time. He supported the Navigation Acts – which regulated trade and shipping between England, its colonies, and other countries – despite that the acts mandating that goods be transported on British ships even if other options were cheaper. “Defence,” he wrote in The Wealth of Nations, “is of much more importance than opulence.” Denouncing desirable security policies as “protectionist” was beside the point. After all, the security and survival of the capitalist state was more important than the free market in international trade. It’s a message for now when the ‘defence’ of the US imperialist state takes precedence even over the profitability of global capital.
The ideas expressed in the Wealth of Nations 250 years ago will be reconsidered for our times this summer at the World Association for Political Economy conference in London.
No comments:
Post a Comment