Adam Smith

Introductory Lecture to Adam Smith (1723-1790)

Adam Smith wrote the classic work, The Wealth of Nations, in 1776. Many scholars consider this work the definitive articulation of laissez-faire capitalism, for the following reasons.

I. The technical and social division of labor

Managers of capital stock segment work into its component parts using specialized machines. This organization has a multiplier effect on the mass production of commodities. The medium of exchange is money, which is also a fluid commodity. Work, however, is monotonous, repetitious, and detailed in nature. Smith talks about the efficiency of labor, but does not deny the psychological effect of alienation on the worker. His point of view is strictly that of the employer of capitalism. Socially, there are buyers and sellers of capital in the free marketplace where everybody has equal information and can make a rational decision as to how to act. They theoretically have parity; in fact, they do not.

Manufacturers, merchants and bankers, factory workers, and farmers make up the producers in society.

II. Commodities

Commodities can be either abstract (labor) or concrete (artifacts of production) in nature.. Goods and services (education) and gold and silver (mercantilism versus free trade) together comprise the wealth of a nation. Money is concrete (it can be handled, and its physical transfer enables commercial transactions); labor is abstract (it is initially only a concept). A person can exchange money for life's necessities and luxuries. "In this popular sense, therefore, labor, like commodities, may be said to have a real and a nominal price. Its real price may be said to consist in the quantity of the necessaries and conveniences of life which are given for it; its nominal price, in the quantity of money. The laborer is rich or poor, is well or ill rewarded, in proportion to the real, and to the nominal price of his labor."

III. Profit and Price

"The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which the one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced. He could have no interest to employ them, unless he expected from the sale of their work something more than what was sufficient to replace his stock to him; and he could have no interest to employ a great stock rather than a small one, unless his profits were to bear some proportion to the extent of his stock." "Wages, profit, and rent, are the three original sources of all revenue as well as all exchangeable value. All other revenue is ultimately derived from some one or other of these." The market price is determined by unconstrained supply and demand.

IV. Natural Price

The market price (nominal value) is measured against the natural price (the labor theory of value). "The natural price itself varies with the natural rate of each of its component parts, of wages, profit, and rent, and in every society this rate varies according to their circumstance, according to their riches or poverty, their advancing, stationary, or declining condition." And what is the natural price of commodities? "The whole quantity of industry annually employed in order to bring any commodity to a market, naturally suits itself in this manner to effectual demand. It naturally aims at bringing always the precise quantity thither which may be sufficient to supply, and not more than supply, that demand."

V. Political Economy

The state has an obligation to collect revenue to render public services. In a minimalist state no private individual would otherwise find to his profit to pursue.

VI. Mercantilism versus Free Trade

Gold and silver bullion are the measure of the fixed wealth of a nation. In free trade, Smith argues that there are no national borders that enjoy restrictive tariffs as in mercantilism, for capitalism is commercial and fluid in its dynamic. In laissez-faire capitalism, he argues for global competition. Colonialism is inherent in the worldview of capitalism, for its market must be worldwide. So, whether mercantile or commercial in character, nation-states will seek colonies to exploit their natural resources cheaply, and sell their goods and services dearly. Profit is the name of the game. Smith argues for the supremacy of the commercial form of capitalism because it is based on real growth and the development of a middle class with entrepreneurial values, rather than on the master mentality that exploits the peasant societies of third world countries. "The commodities of Europe were almost all new to America, and many of those of America were new to Europe. A new set of exchanges, therefore, began to take place which had never been thought of before, and which should naturally have proved as advantageous to the new, as it certainly did to the old continent. The savage injustice of the Europeans rendered an event, which ought to have been beneficial to all, ruinous and destructive to several of those unfortunate countries." "The two principles being established, however, that wealth consisted in gold and silver, and that those metals could be brought into a country which had no mines only by the balance of trade, . . . Its two great engines for enriching the country, therefore, were restraints upon importation, and and encouragements to exportation." So, Smith realized that imperial ventures could very well bankrupt a country's treasury and the collective morality of its people. The true wealth of nations lies in its technical and social division of labor with expanding commercial opportunities and profits and the talents and skills of its working people achieved through education. He would prove very prescient, particularly as the American Revolution was in progress.

After World War II, Smith's prognostications proved true and Great Britain sank into a modest power as its empire dissolved.

VII. The Invisible Hand

In The Wealth of Nations, Smith boldly asserts "But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of the industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value, 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 the 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 led by an invisible hand." In short, the public market regulates the apparent random private transactions of individuals rationally pursuing their selfish, but enlightened economic interests.

Smith believes this invisible hand is like a machine that produces a cornucopia of goods and services. He acknowledges that much of this wealth is inherently meretricious, but the desires are created by human conventions and customs, not by emanation from natural laws. He is thus much in the vein of David Hume in terms of a theory of sentiments. His key idea is that of an impartial observer. Individuals identifies by imagination with the standpoint of a collective other in the sense of seeing himself through this philosophical vehicle. That identification provides us a faculty of judgment to measure the aesthetic value of things to individuals; these values are often relative to time and physical circumstances. Smith does not necessarily believe that the ceaseless pursuit of a better life can lead to happiness; to the contrary, the effect may be to create insatiable desires.

For Smith, the success of the commercial system over mercantilism lay in free competition. Laws should not restrain trade. Natural justice protected private property through the emergence of the judiciary as a branch of government independent of Parliament and the King. The rule of law guaranteed that all participants in economic life would be equally protected. This provided a great impetus to diligence and industry by businessmen, knowing that the fruits of entrepreneurs' labors would enjoy natural liberty and the surety of positive laws. Cmmercial and mercantile capitalism both constrained the feudal order as agrarian laws were modernized to rationalize food production through agrarian science and technology, with rents to be reinvested in development of fertile lands for a growing population.

But the factory system was not to come for another generation, to the detriment of the common workers both in the cities and on the land. The former class became impoverished until the rise of the labor union movement. Of course, capitalists would argue that unions were monopolies of labor, causing its price to rise and constraining the untrammeled expansion of profits. That story of class warfare was to be taken up by Marx and other socialist thinkers preceding and following him.

In The Theory of Moral Sentiments, Smith claims that sympathy contributes to the wealth of nations because those of opulence "are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society . . . and afford means to the multiplication of the species." Laborers are driven not solely by self-interest, but also by a desire to be seen well in the eyes of other people. Hence, a degree of sympathy for your fellow man does enter into the picture at the work scene, and the source of that sympathy is imagination.

VIII. Public Policy

Taxation, according to Smith in Wealth of Nations, is inflationary, for it raises the cost of labor and hence of commodities in general. Monopolies and corporations act against the public interest. They are so powerful they can intimidate Members of Parliament. "Taxes imposed with a view to prevent, or even to diminish importation, are evidently as destructive of the revenue of the customs as of the freedom of trade." Government must promote public works, where it is only the mechanism available to absorb the risk no private individual would undertake, such as road work and defense.

IX. Education

"If the authority to which he is subject resides in the body corporate, the college, or university, of which he is a member, and in which the greater part of the other members are, like himself, persons who either are or ought to be teachers, they are likely to make common cause, to be all very indulgent to one another, and every man to consent that his neighbor may neglect his duty, provided he himself is allowed to neglect his own. In the university of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretense of teaching." Here Smith is saying that university professors, in general, acting in the capacity of agents of a corporate entity will not exert themselves to the fullest if there is no competition and there are no sanctions for derelictions in performing duties.

X. Summary Points

Smith made major contributions to the study of the political economy in his time, which was pre-Industrial Revolution. Contrary to current ideological beliefs, he was a friend of the common man and was concerned by his being beaten down into an idiot-like existence because of harsh working conditions. Smith thought that the elements of the political class who engaged in conspicuous consumption were unfit to govern. He propounded the Law of Accumulation and the Law of Population. Reduced to its simplest terms, he believed that commercial capitalism produced a static society that limited its growth potential. Capitalists had to accumulate capital through profits in order to develop industry. Expansion of industry led to a need for more labor, entailing more workers with higher wages. Those wages drove up the cost of production to the extent that eventually profits fell to a norm or equilibrium point, frustrating the political economy's long-term growth. Thus there was a closed cycle that stymied the takeoff of capital needed to develop a middle class, as understood in Smith's time.

Smith basically believed in free trade, particularly to keep the price of foodstuffs down by importing them from mainland Europe. The Law of Population says that as small businesses augment their profits, part of these profits will go to raise the minimum wage. With more wages, workers will have larger families. The increased labor supply will drive down wages again to a subsistence level. Hence, trends tended to be cyclical, always returning to an equilibrium minimum wage in that labor was a factor of production and hence a mere commodity. The capitalist would pay the worker only enough to reproduce his kind to maintain an adequate labor force. Consumption drove the economy; thus, consumers and their demand created a supply of products and services to meet their needs and desires and, yes, to improve the standard of living. Government had more of a role in Smith's philosophy than is generally acknowledged. It was to provide for the general welfare and has charitable components, such as creating housing for the poor, because Great Britain was undergoing urbanization. Smith was a decent man who was not above condemning rich men for their prodigal ways at the expense of the public good.

Adam Smith had a deep influence on Marx. Smith had an evolutionary perspective on how the division of labor historically stimulated economic growth. Marx picked up on that theme in a historical materialist perspective that emphasized class conflict. Smith emphasized human benevolence and disposition toward justice as his point of reference. Cooperation would be essential for a society to develop with the communal harmony necessary for a collective consensus that smoothed over class differences, which Smith considered secondary. Smith's evolutionary rather than revolutionary approach allowed for differences to be worked out in the marketplace where there would always be imperfect information. Hence, political decisions could only be partial and could best beattacked by a minimalist state.

XI. The Psychoanalysis of Money: Post-Adam Smith Considerations

In our society, money equals power equals sex, and that adds up to status.

1. There is a fetish element to the commodity of money. People of wealth take on fantastic qualities as the heroes of our society based on this one criterion. This is the fallacy of mistaking the part for the whole. The relationship between things replaces the relationship between people. Having money becomes mistaken for being an individual of virtue. In fact, there is no significant correlation. It is part of the American ideology.

2. In the period of capitalist accumulation, the acquisitive personality, with all its unpleasant characteristics, becomes dominant in the political economy as both role model and power broker.

3. There are anal sadistic traits that can be attributed to the capitalist as he spurs the growth of the wealth of a nation. Unfortunately, after legitimate economic goals are attained, these characteristics pervade other spheres of society as well.

4. The authoritarian personality remains fixated at the anal stage of development. Sublimation ensues with an individual's love of acquiring money perceived as respectability. The captain of industry emerges from this ideology of American success stories. There follows the deep repression of sadistic and masochistic impulses. Psychoanalysis recovers "lost" memories in the struggle for power (and control) in the nuclear family. The patient sees that forbidden objects of love are displaced onto substitutes, such as money. Individuals are particularly susceptible to nervous disorders during times of economic crises. The repressed issues forth in the form of damaged individuals, dysfunctional in every domain of society.