There can be few who have not heard of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations. Recently, when trekking (or ‘tramping’, as kiwis – the people not the birds – like to call it) I grew tired of reading light literature and decided I needed to peruse something a little more demanding. Hence, after years of procrastination, I finally started on Volume One of the ‘Wealth of Nations’. I had put this off because I had had the impression that the book was simply an early description of the laws of supply and demand, and written (the obvious quote excepted) in such a manner as to justify every evil within the free market. Or, to be more precise, written in such a way as to allow justification of every evil within the free market. Reading Smith was a revelation. This essay is not intended to provide a synopsis of Smith’s magnum opus, but rather to highlight some of the reasons for my wishing that I had read it many years earlier.
There is, of course, the simple delight in reading the description of early economics. I should have given little consideration to the effects of wear and tear on gold coinage in the 18th century had it not been for Smith. But, more exciting, is the revelation of Smith’s humanity, his consideration of the effects of the economic and political system upon the poor and disadvantaged. Throughout Smith’s work, his discussions are couched primarily in terms of benefits to the population as a whole, rather than to business. Agree or disagree with his interpretation, Smith recognises a fact all too often forgotten by modern politicians and economists – economies are for people, not people for economies. He condemns the mistreatment both of the poor of these isles and of the indigenous people of the colonies. These interesting passages give a very different view of Smith to that usually presented in the media.
Smith sees little to recommend the aristocracy, the then leaders of society. “All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.” He goes on to argue that as economies presented greater opportunities to hoard wealth, even in the most foolish and worthless manner, so the opportunity was taken. “For a pair of diamond buckles, […] or for something as frivolous and useless, they exchanged the maintenance […] of 1000 men for a year.” Smith notes that so short-sighted were the aristocracy that they failed to see that the loss of their retainers would slowly erode their personal power, gradually transferring that power to the mercantile classes, for whom he clearly had the greatest admiration. “…… but the mean rapacity, the monopolizing spirit, of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind, though it cannot, perhaps, be corrected, may very easily be prevented from disturbing the tranquillity of anybody but themselves.” I wonder if anybody in the BBC has ever read The Wealth of Nations? One must assume, from the fact that businessmen are brought forward to comment on every issue under the sun, from health to education, that it cannot be so.
Indeed, even in Smith’s day it appears that merchants and manufacturers had their opinions widely sought and applauded: “…who by their wealth draw to themselves the greatest share of the public consideration”. But Smith warns: “As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of the society, their judgment, even when given with the greatest candour […] is much more to be depended upon with regard to the former of those two objects”. Oddly enough I do not recall a BBC presenter issuing a similar warning, along the lines of ‘Before the CBI representative speaks, let us consider the words of Adam Smith “As their thoughts, however …”’ . But perhaps I missed that bit.
I had put off reading The Wealth of Nations because of the impression that it justifies every evil within the free market
Smith gives some practical examples of the political effects of allowing policies to be unduly influenced by the mercantile classes. “By extorting from the legislature bounties upon the exportation of their own linen, high duties upon the importation of foreign linen, and a total prohibition of consumption of some sorts of French linen, they endeavour to sell their goods as dear as possible. By encouraging the importation of foreign linen yarn, and thereby bringing it into completion with that which is made by our own people, they endeavour to buy the work of the poor spinners as cheaply as possible.” This is but one example of Smith’s words on the effects of building an economic system founded upon the advice of the CBI of the day. A more general summary of his views is provided by the following quote: “They are as intent to keep down the wages of their own weavers, as the earnings of the poor spinners; and it is by no means for the benefit of the workmen that they endeavour either to raise the price of the complete work, or to lower that of the rude materials. It is the industry which is carried on for the benefit of the rich and the powerful, that is principally encouraged by our mercantile system. That which is carried on for the benefit of the poor and the indigent is too often either neglected or oppressed.”
Naturally the imbalance in voice is reflected, then as today, in political government. “It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. […] We have no acts of parliament against combining to lower the price of work, but many against combining to raise it.”
But what were Smith’s views on those individuals who combined to raise the price of work? That Smith has observed the effects of the manipulation of politics for the benefit of the mercantile class is not the same as noting that Smith disapproves of the actions of that class. Of course, his rather derogatory description of the mercantile classes (“the mean rapacity”) might be taken as an indication, but Smith spells out his views rather more precisely. The following not only leaves little doubt as to Smith’s views on the rights of the poorer members of society to share in any increasing prosperity but also makes a much broader point: “Is this improvement in the circumstances of the lower ranks of the people [sharing in economic growth via rising wages] to be regarded as an advantage, or as an inconveniency, to the society? The answer seems at first abundantly plain. Servants, labourers, and workmen […], make up the far greater part of every great political society. But what improves the circumstances of the greater part, can never be regarded as any inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” Smith could not have read all the recent research into the impacts of inequality, but these final lines might be thought of as prescient.
In Greece, as in this country, calls for austerity tend to be treated in the press as sensible and rational, whilst calls for expanded public expenditure, emphasising the importance of reducing unemployment and poverty over debt, are deemed populist and irrational. Thus The Telegraph (14 June 2012) states that pro-austerity politicians may “be replaced by a ragbag of populist politicians”. Yet the final lines in the previous quote would suggest that Smith might have taken a rather different view. Logically, if Smith believed that it cannot be argued that it is bad for society when the majority benefit then it follows that it cannot be good for society if the majority suffer. Thus, in Greece, or the UK, policies that reduce (or do not tackle) evasion of taxes on the wealthy, whilst imposing austerity, cannot be good. Equally, following Keynesian economic logic to maintain the well-being of the majority must be good (or at least cannot be argued to be bad).
Of course, I am aware that some will argue that Smith would not have been opposed to austerity, because he would have been persuaded by the arguments laid out by today’s neoliberals that it is in the long-term best interests of all. I am convinced, having read Smith’s work, that he would have taken a hard look at the history of the distribution of wealth and power over the last few decades, and exposed this sophistry for what it is. I also believe he would have agreed with Wilkinson and Pickett’s thesis: that gross inequality is corrosive to society as a whole.
Smith’s best known quote – or perhaps I should say ‘misquote’ -’the invisible hand of the market’, appears but once in his writing, and is in fact the ‘invisible hand’, the word ‘market’ not appearing. “He generally, indeed, neither intends to promote the public interest, […] By preferring the support of domestic to that of foreign industry, he intends only his own security; […] 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. […] By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.” Thus in Smith’s view the “inconveniency” of foreign investment will encourage the investor to create jobs and prosperity at home. Compare that with Chomsky’s view (Al Jazera , 16 May 2012) of the US economy since the 1970’s: “When the 1970s came along, there were sudden and sharp changes: de-industrialisation, the off-shoring of production, and the shift to financial institutions,” in short, everything the “invisible hand” once made very difficult. Can anybody recall the CBI or the Adam Smith Institute condemning off-shoring as fundamentally against Smith’s view of economics?
But alongside condemning injustice at home Smith, against a background of rampant imperialism and comfortable racist assumptions of the superiority of the white man, equally condemned injustice abroad. It is certainly fair to say that he railed against contemporary methods of governing colonies. Smith regarded colonial trade restrictions as highly inefficient, resulting in ordinary people paying more for their basic goods. But Smith’s view of colonies, and their ethics, went beyond simple economics, his views perhaps being reflected in the later words of the nationalist José Gervasio Artigas: “recordemos que ellos tienen el principal direcho…”: “…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 possession 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.” “Folly and injustice” – with the addition of other commodities, most notably oil, this certainly seems to apply today.
To return to the present crisis, what has Smith to say to these “misguided souls” who believe that our failing economies might be tackled by cutting the 90-odd billion lost in tax evasion and tax avoidance and increase rather than decrease the taxes paid by the wealthiest one per cent or so? “The subjects of every state ought to contribute towards the support of government as nearly as possible in proportion to their respective abilities, that is in proportion to the revenue which they respectively enjoy.” But when he says “as nearly as possible”, this is not because he thinks it fair that the very wealthy should evade their taxes. “It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but in something rather more than in proportion.”
The RBS was founded in 1727, the first addition of An Inquiry into the Nature and Causes of the Wealth of Nations appeared in 1776. Why, oh why, did nobody on the RBS board apparently bother to read it (perhaps this was the first board which did not)? For, in relation to the banking crisis, the last word is, most emphatically, Smith’s!
“The practice [of banking] is capable of being reduced to strict rules. To depart from these rules in consequence of some flattering expectation of extraordinary gain is almost always extremely dangerous, and often fatal.”