Monday, June 7, 2010

ADAM SMITH AND THE FIRST MAJOR INSTALLMENT OF "THE DISMAL SCIENCE"

Adam Smith and the First Major Installment of
“The Dismal Science”

Before the late eighteenth century, various thinkers gave serious consideration to the interface between theology, politics, and economic issues. But it is clear that none of these thinkers, not even Thomas Aquinas or John Calvin, had really developed a full-blown theory of how economies worked. In 1776, however, that empty spot would be filled. In that year, a Scottish “moral philosopher” named Adam Smith published The Wealth of Nations, a volume destined to rock the intellectual world almost as powerfully as the revolution of that same year rocked the international world of politics.

Sometimes it seems as though a mystical sort of synchronicity brings apparently disparate forces together at the same moment. The late eighteenth century witnessed revolutions of various sorts—the two most prominent being the French and American revolutions, one of which created a new republic, and the other of which eventually created a new despotism. But political revolutions were not the only type of that genre. The Industrial Revolution was whipping into fever pitch at about the same time as the American Revolution, with new technologies such as the steam engine, the spinning jenny, and just a few years later, the cotton gin. This revolution in technology was preceded, about a century earlier, by a Scientific Revolution known to us as the Enlightenment. That movement, insofar as it can be called a “movement,” itself built on the foundation of the Reformation, which was ushered in at least partly as a result of the Renaissance, an intellectual and artistic explosion which was also preceded by the Scholastic tradition of the twelfth and thirteenth centuries. What seems clear from this is that there is no mystical synchronicity, but, rather, movements and individuals building their innovations, in part, on foundations laid by others.

It is not mere happenstance that the Industrial Revolution, the Declaration of Independence, and Adam Smith’s famous volume all came at about the same time. (It is a bit odd that the Declaration and Wealth of Nations happened the same year, though!) These are connected to one another, even as they built on the foundations laid by Renaissance and Scholastic Scholars, and on the religious ideologies of the Protestant Reformers and the Evangelical Revivalists. The individualism implied in Luther’s doctrine of justification by faith, the notion of personal responsibility found in Calvin’s views on work, the concept of political freedom in a state with a division of powers articulated by both Locke and Montesquieu all came together in Smith’s volume and drove him to articulate a view of economics which is implicit in many of those earlier thinkers, but which never did quite come together until his work. As Skousen puts it, “Prior to this famous date, six thousand years of recorded history had passed without a seminal work being published on the subject that dominated every waking hour of practically every human being: making a living.” That history changed in a single day.

Smith’s basic ideology can be easily summed up, though his tome was nearly a thousand pages long. He believed in free trade, the division of labor, and the development of industrial technology. Throughout the book Smith advocated the principle of “natural liberty,” which meant, for him, that people ought to have the freedom to do what they want with little interference from the state, so long as they are law-abiding citizens. This is especially the case with reference to economic decisions. Smith believed that economic freedom was a basic human liberty, a view that he held in common with John Locke, who affirmed that we have inalienable rights to life, liberty, and the pursuit of property. In Wealth of Nations, he argued, “To prohibit a great people . . . from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind.” The Scottish philosopher made it his point to stand up for those rights.

What was this “natural freedom”? For our Adam Smith, it included the right to buy goods from any source without having to pay crippling tariffs if the goods happened to be imported. It includes the right to seek any kind of employment one might desire. This was heavily restricted in most European countries in Smith’s day by both government regulations that required workers to obtain government permission to change jobs and by the stranglehold that trade guilds had on most skilled labor, trade guilds that held their authority by government sanction. Natural liberty for Smith also entailed the right to pay any wage that the market might bear and to charge any price for goods that the market might sustain, without the government setting standards for such things, arbitrary or otherwise. It also included the freedom to generate, accumulate, retain, and pass on capital and wealth to the next generation (or to anyone else) without government intrusion in the process. Adam Smith encouraged “the virtues of thrift, capital investment, and labor-saving machinery as essential ingredients to promote rising living standards.”

The most obvious implication of “natural liberty” was free trade. But Smith wrote during a time when trade was anything but free. Since the prevailing belief of mercantilism was that wealth was defined in terms of the accumulation of silver and gold, any threat to that supply was tantamount to a military threat. Because of that, most European countries had elaborate protectionist policies in matters of trade. High import tariffs were used to make it economically difficult for foreign countries to sell their goods in other countries—the cost passed on to consumers made it difficult for any but the richest of persons to buy those commodities. In the mercantilist understanding, trade was war.

Presumably that policy protected domestic production and manufacturing. Of course, what happened was that other countries enacted similar protective tariffs, thus preventing exports, which in turn damaged the economy of the producing nation that wanted to sell its goods in other countries. Smith argued that this circular policy of protection and threat helped no one in the long run, except the governments that collected the tariffs. When international trade itself is viewed as a kind of warfare, no one is helped and everyone is hurt. So, Smith argued for massive reductions of tariffs as a means to causing the wealth of all nations to increase. In his understanding the wealth of nations was not gold and silver, but productivity.

The second implication of “natural liberty” was the division of labor. Many trades had been regulated by government, by trade guilds, and by lack of technological advance so that there were many barriers to a worker being able to be hired and to have mobility in the work place. But in the area of technological development and innovation that came with industrialization some of that was already beginning to change in Smith’s day. His most famous example of the division of labor is his discussion if the “pin factory.” In previous generations a single individual would apprentice and then eventually master the skill of making pins to be used by seamstresses. There were many steps in making pins—cutting the wire, straightening the wire, sharpening the point, making the head, packaging the pins, and so forth. Pin-makers carefully protected their trade so that they could keep the price of pins high and so that they could earn a good profit, and forces within government and the guilds helped keep them protected.

Smith proposed, however, that an assembly-line process made more sense. Rather than have one man working, and making, perhaps, twenty pins in a day, Smith conjectured that ten workers, each of whom was adept at only one part of the process—cutting wire, sharpening points, etc.—that such persons, because they were not having to stop over and over again in the day to change work stations (Smith called it, quaintly, "sauntering"), could be far more productive. He estimated that the twenty pins made by one man per day might actually exceed 48,000 pins made by ten people operating under the principle of the “division of labor.” This would create more productivity, would employ more people in the making of pins, and would cause the cost of pins to decrease substantially, which, in turn, would lower household expenses, freeing up capital to be used to purchase other commodities, which, in turn, would create more jobs. Someone is hurt in the division of labor of course—the Master pin-maker, who now has to find other employment—but vast numbers of other people are helped in the process.

The third entailment of “natural liberty” would be to encourage industrial technological development. If the government and the guilds no longer control manufacturing and commerce, entrepreneurs and inventors would have a financial incentive to devote creative energy and time to technological development. When we think of the late eighteenth to the mid-nineteenth century, we think of a time of great technological advances. The steam engine (used on both land and water), the spinning jenny, the cotton gin, agriculture advances such as the McCormick reaper and the John Deere steel plow and new forms of milling grain and many other examples could be adduced to demonstrate how the Scientific Revolution had impacted and produced the Industrial Revolution.

It is not merely coincidence that many of these new inventions were created in Britain where governmental changes were giving greater freedom to individuals and in the new United States of America where the government laid a lighter hand on business and inventive creativity. Smith believed that a greater degree of liberty granted by governments would inevitably result in newer inventions that would make labor easier, faster, and more profitable. He was convinced that there was nothing wrong and everything right with all of this.

“Natural liberty” then was the key to economic development and the rising wealth of nations. There were, in addition, two other elements that we will discuss more briefly. The first is competition. Individuals have the right to compete with one another in the production and exchange of goods and services. Competition, in Smith’s view, is a sign of a healthy economy. There are several threats to competition, most of which are represented by the two regular sources of difficulty Smith had already identified: government and protectionist trade guilds or unions.

Governments can and do give preferential treatment either to certain sectors of the economy, or to certain competitors for the market within the economy, or to the guilds and unions. This is, in fact, the historic trend of governments all over the world. Some sector of the economy or some union or some wealthy entrepreneur provides needed political support to governmental leaders, and, in turn, they are rewarded with special government protection. This undermines competition, and, in the long run, eviscerates the freedoms of the people, and generally causes an increase in the cost for goods and service for all. To put it practically, it creates unemployment and rising inflation, along with other economic difficulties.

Alongside “natural liberty” and “competition,” Smith identifies one other important component to the development of wealth, and that is “justice.” “Justice,” for Smith, means that the economic actions of individuals must be just and honest. This is an important aspect of Smith’s philosophy that is sometimes ignored by his critics. Economic exchanges ought to be done in a just and honest manner. “Capitalism” (not Smith’s word, by the way), is not greed endorsed by political entitlement. This statement by Smith incorporates all three elements: “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man or order of men.” In other words, the process works as people pursue their own interests, but pursue them in a just manner.

When these three components come together in a nation’s economy, argued Smith, there will develop a “natural harmony” of interests between workers, landlords, entrepreneurs, and investors. In the pin factory workers and managers have to work together to accomplish their tasks. The division of labor was, for Smith, the key to a productive economy.

Consider the manufacture of a wool coat. There are dozens of steps in the process of growing the wool, shearing the sheep, making the cloth, producing the dye, bringing other cloths such as cotton into the process, the manufacture of buttons, of a fur collar, and many other steps besides. Large numbers of workers, most of whom never meet one another, are involved in making a single woolen coat. Each of their labor contributes to the other, though they never meet. Nor will they likely meet the eventual purchaser of the finished product—the retail consumer. At every step along the way people are simply pursuing their own self-interests—working to earn a paycheck, operating a business for profit, participating in a craft for various reasons, and shopping—and the net result is that everyone gets something out of it, something that they want.

Why does each one do that? Because each one is seeking his or her own self-interest of putting food on the table, of paying for college education, and so on. “By pursuing his own self-interest, every individual is led by an invisible hand to promote the public interest.” The larger part of this particular paragraph is worth quoting: "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. We address ourselves, not to their humanity, but to their self-love. . . . Every individual . . . who employs capital . . . and labours . . . neither intends to promote the public interest, nor knows how much he is promoting it . . . he is 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 society." Through the concept of the “invisible hand,” Smith contends that if an economy is just left to operate, it will do so in such a way that peoples’ needs are met through the hydraulic process of working and living, buying and selling, running businesses and employing personnel.

Though this part of Smith’s argument has sometimes been vilified by critics as “Smith’s grabbing hand,” this is to misunderstand his whole point. He is simply saying that an economic system in this age in which we live is not intended to and never could work simply on an altruistic basis and no other. Rather, each man or woman, knowing his or her own needs and the needs of the family, will work to supply those needs. But each one working to supply the needs of family will contribute to the whole enterprise. Would there be abuses to the system that might arise? Certainly, and it would not be long before critics would identify Das Adam Smith Problem. That will be dealt with later in this discussion (actually not in this blog--you have to buy the book!).

Smith’s views on free trade spilled over into his understanding of religious freedom. He lived, of course, in a country, Scotland, that had a state church, though by his day there was a great deal of religious liberty in his country. Smith believed that “a great multitude of religious sects” would promote toleration and would be a healthy thing for a nation. In other words, what he thought was good for the economy—freedom from government intrusion—he also believed was good for church and religion.

Smith’s book was not met with universal acclaim, though at the time it was hard to find any substantial critics. Certainly in the next century the book would have plenty of detractors. But the book has received high praise, even from those who, at the end of the day, do not accept his system of economics. English historian Henry Thomas Buckle opined that in terms of its eventual impact, the book “is probably the most important book that has ever been written.” Readers on both sides of the Atlantic found this tome to be extremely helpful in understanding just what economics is, and just why nations had struggled for centuries to generate and sustain wealth over time. The book just “made sense” to many in its day, not the least of which intellectuals and industrialists in the new world of America.

One other issue has to be dealt with in understanding Adam Smith’s contribution to economics. As we noted earlier, Smith argues that the primary motive for economic activity is “self-interest.” Everyone, pursuing the need to take care of the needs of themselves and their family, will engage in work, commerce, and buying and selling. But that is not the only motivation for Smith. The other is “sympathy.” He argued that everyone has a basic desire to be accepted by others. In pre-industrial times this manifested itself in village life where everyone knew everyone else and where it was important to build good relations so that one’s business and personal life could prosper. Even in the industrialized city, though, this would still be necessary, since, over the long run, a good reputation would be important for success. But these two motivations might appear to be at odds with one another. German philosophers believed they were, and designated this motivation crisis, “Das Adam Smith Problem.” It was not a problem for Smith himself, however, since it was his belief that economic activity and moral behavior were not contradictory to each other.

In the early twenty-first century we live in a time when capitalism has been written off by many. Some even claim that it is the cause of the economic woes that have afflicted us recently. They say, "we have tried that, and look where it has gotten us." I want to respond by saying, "We have never tried it." Even in our country since at least the 1860s government intrusion of and manipulation of the economy (usually at the request of business!) have left us with a model not really tried in a national economy. I think we need a Das Adam Smith Revival!

(Excerpted from the forthcoming book, Seeking the City by Chad Brand and Tom Pratt.)

Chad Owen Brand

2 comments:

  1. Dr. Brand, this was a good read. I look forward to the book!

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