Devotees of a dead Scotsman

Was Adam Smith the champion of ‘free market and classical liberal views’? Chis Gray thinks not

Adam Smith, 1723-1790

It has been observed that the history of ideas is, to a large extent, the history of their distortion. This arises in part from the fact that the originators of systems or schools of thought are often followed by individuals who bestow their own bias upon the approach of the originators, with the result that the system takes on a new direction. It can be demonstrated that this has happened in the case of the thought of the Buddha, of Confucius, of Aristotle, of Jesus, of Muhammad, and, closer to our own day, in the case of Karl Marx and Leon Trotsky. No doubt the list could be extended.

In Adam Smith’s case, I submit, we have a particularly glaring example of the syndrome. The Adam Smith Institute, founded in 1977, exists to propagate “radical policy options in the light of public choice theory” based on “free market and classical liberal views”.1 This entails a biased view of Smith.

It is easy to see why, in this case, the particular distortion has come about. The apologists for the ‘free market’ have seized on a particular passage from The wealth of nations, in which Smith invokes divine providence as the source of a beneficent socio-economic model, where individuals manage to contribute to the general good (economically speaking) by advancing their own personal interest. Smith writes:

… every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, 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.”2

We may observe, in passing, the bias of this “invisible hand” in favour of “domestic” as against “foreign industry”, which tends to cast doubt on the impartiality of providence in this area: however, we can presumably count on the operation of said hand in foreign nations also, so perhaps all is well.

Another parallel passage appears to support a view of human nature as one in which rational economic calculation holds sway at the expense of more philanthropic perspectives:

… man has almost constant occasion for the help of his brethren, and it is vain for him to expect it from their benevolence only … It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.3

This perspective has been seized on by mainstream economic theorists as the behavioural foundation of ‘rational choice’ and as expressive of a certain ideal-type individual known as homo economicus (economic man) - a person who always endeavours to choose what is in his/her own economic interest, come what may. This conception is in turn fathered upon Adam Smith, and is used to justify a Panglossian vision of globalisation, in which the prevailing international division of labour ostensibly accords with the optimum, which means it should not be ‘intervened’ against. It is theoretically possible to construct an argument in support of this view - a position commonly known as the ‘Washington consensus’ - but it is not possible to ascribe such a position to Adam Smith or to use his name in order effectively to justify the status quo.

What the devotees of the Adam Smith Institute gloss over is that Smith, despite his championing of the welfare aspects of economic competition, was well aware of the ability of producers of all kinds to advance their own interest in a fashion detrimental to the interests of consumers (we should remember that production, after all, is carried on ultimately for the benefit of the consumer). Smith writes:

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 and 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.4

This appears in the context of an attack on corporative regulation of trade - a feature of the mediaeval economic inheritance which Smith saw as an obstacle to the proper development of industry in these islands. Smith held that:

The pretence that corporations are necessary for the better government of the trade is without any foundation. The real and effectual discipline which is exercised over a workman is not that of his corporation, but that of his customers.5

One can conclude from this that Smith was, in effect, in favour of a ‘regulated market’, and that, therefore, he can be seen as potentially in favour of what has been called ‘social democracy’ (ie, a reformed and regulated capitalism) rather than ‘neoliberalism’. This is buttressed by numerous passages in The wealth of nations (and in The theory of moral sentiments), such as one in which Smith voices his implicit agreement with the French encyclopaedist, Denis Diderot, who wrote: “Si le journalier est mécontent, la France est mécontent” (“If the day labourer is discontented, then France is discontented”).

Smith writes:

No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who food, clothe, and lodge the whole body of the people should have such a share of the produce of the their own labour as to be themselves tolerably well fed, clothed and lodged.6

He is also well aware of the principle of the ‘economy of high wages’: “The liberal reward of labour, as it encourages the propagation, so it increases the industry of the common people”7

The Penguin editor, Andrew Skinner, quotes approvingly Jacob Viner’s judgement on Smith:

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 further if government, by improving its standard of competence, honesty and public spirit, showed itself entitled to wider responsibilities.8

In this context it is essential to keep cognizance of Smith’s summary of the state’s basic duties:

According to the system of natural liberty, the sovereign has only three duties to attend to … first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.”9

It seems to me that the second duty outlined need not be read narrowly as the institution of an effective legal system, but could be construed more broadly as legitimating a sort of ‘balance of interest’ between the various social classes, along the lines advocated by the ancient Athenian statesman, Solon. In that case, we would have a further instance of a ‘social democratic’ tendency in Adam Smith’s thought.

Imperialism

It would be interesting to know if the supporters of the Adam Smith Institute are keen to publicise the master’s views on imperialism. I suspect they would prefer not to do so. Smith is very clear and very forthright in his opinions on this subject. Speaking of the colonisation of America, he says:

Folly and injustice seem to have been the principles which presided over and directed the first project of establishing those colonies; the folly of hunting after gold and silver mines, and the injustice of coveting the possessions of a country, whose harmless natives, far from having ever injured the people of Europe, had received the first adventurers with every mark of kindness and hospitality.10

And:

When those establishments were effectuated, and had become so considerable as to attract the attention of the mother country, the first regulations which she made with regard to them had always in view to secure to herself the monopoly of their commerce, to confine their market and to enlarge her own at their expense, and, consequently, rather to damp and discourage than to quicken and forward the cause of their prosperity. In the different ways in which this monopoly has been exercised consists one of the most essential differences in the policy of the different European nations with regard to their colonies. The best of them all, that of England, is only somewhat less illiberal and oppressive than that of any of the rest.”11

He is particularly scathing about the Dutch rule in Indonesia:

In the spice islands the Dutch are said to burn all the spiceries which a fertile season produces beyond what they expect to dispose of in Europe with such a profit as they think sufficient … By different arts of oppression they have reduced the population of several of the Moluccas nearly to the number which is sufficient to supply with fresh provisions and other necessaries of life their own insignificant garrisons, and such of their ships as occasionally come there for a cargo of spices. Under the government even of the Portuguese, however, those islands are said to have been tolerably well inhabited. The English [East India] company has not yet had time to establish in Bengal so perfectly destructive a system.12

The implication seems to be that the British East India Company’s policies point in the same direction. Indeed the company does not escape censure, as in the following description of those investing in it:

Frequently a man of great, sometimes even a man of small, fortune is willing to purchase a thousand pounds’ share in India stock merely for the influence he expects to acquire by a vote in the court of proprietors. It gives him a share, though not in the plunder, yet in the appointment of the plunderers of India; the court of directors, though they make that appointment, being necessarily more or less under the influence of the proprietors, who not only elect those directors, but sometimes overrule the appointments of their servants in India.

Provided he can enjoy this influence for a few years, and thereby provide for a certain number of his friends, he frequently cares little about the dividend, or even about the value of the stock upon which his vote is founded. About the prosperity of the great empire, in the government of which that vote gives him a share, he seldom cares at all.

No other sovereigns ever were, or, from the nature of things, ever could be, so perfectly indifferent about the happiness or misery of their subjects, the improvement or waste of their dominions, the glory or disgrace of the their administration, as, from irresistible moral causes, the greater part of the proprietors of such a mercantile company are, and necessarily must be.13

The notion seems to have arisen that Adam Smith fostered a narrow conception of human nature expressed in particular in the economic sphere, in which ‘rational self-interest’ is the only relevant consideration in action. This version of humanity then becomes elevated as homo economicus, and the problems called into being by it have been designated as (in the words of a German scholar) “das Adam Smith Problem” (“the Adam Smith Problem”). In my view this is something of a pseudo-problem. The ideal-type individual specified does not exist, and, moreover, did not exist for Adam Smith. His idea of economic justice was not an exclusively individualist one: rather, it focused on society. That is why it is necessary to read The wealth of nations alongside and in conjunction with The theory of moral sentiments, and not just on its own.

In his book on ethics, Smith writes: “The wisdom of every state or commonwealth endeavours, as well as it can, to employ the force of the society to restrain those who are subject to its authority, from hurting or disturbing the happiness of one another.”14 The effect of this is that “it does not follow that a regard for the welfare of society should be the sole virtuous motive of action, but only that, in any competition, it ought to cast the balance against all other motives.”15 Smith understood clearly “the tendency of virtue to promote, and of vice to disturb the order of society”.16

It seems that the use of Adam Smith as the ‘defunct economist’ practical men should appeal to as the justifying authority for the current capitalist mode of production is illegitimate. It is illegitimate because Smith wrote in the period of upswing of capitalism, before its inherent tendency to crisis became fully manifest - for that it was necessary to wait until the 19th century.

We cannot know what Smith would have said about the gold standard, the protectionism of the 1930s, the Bretton Woods system, the current difficulties of the euro zone or whatever - even if we can hazard some shrewd guesses. But if you object to the invocation of a dead German, or dead Russians, why invoke a dead Scotsman?

Notes

1. See http://en.wikipedia.org/wiki/Adam_Smith_Institute.

2. A Smith The wealth of nations London 1982, Book 4, Vol 2, p32 (my emphasis).

3. Ibid Book 1, Vol 1, pp118-19.

4. Ibid Book 1, Vol 1, pp232-33.

5. Ibid Book 1, Vol 1, p233.

6. Ibid Book 1, Vol 1, p181.

7. Ibid Book 1, Vol 1, p184.

8. Ibid Book 1, Vol 2, pli.

9. Ibid Book 1, Vol 2, p274.

10. Ibid Book 1, p170.

11. Ibid Book 1, p171.

12. Ibid Book 1, pp220-21.

13. Ibid Book 1, pp341-42.

14. A Smith The theory of moral sentiments London 2009, p257.

15. Ibid p258.

16. Ibid p358.