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Oct 1, 2013

The Other Adam Smith, Part 2

George Smith discusses some of Adam Smith’s social, political, and moral objections to governmental interference in the economy, as found in the Wealth of Nations.

One of the most famous parts of the Wealth of Nations is its criticism of mercantilism—a later term for what Adam Smith called “the mercantile system.” This label denotes a system of economic protectionism (sometimes called “economic nationalism”) in which tariffs, trade regulations, and other legal barriers to free commerce had been promoted by merchants and manufacturers to further their own economic interests—at the expense, of course, of the great mass of consumers who were thereby forced to pay higher prices for commodities. How seriously Smith took this problem may be gauged by his remark that the “absurd and oppressive monopolies” that merchants and manufacturers have “extorted from the legislature” may, like the laws of Draco, be said to be “all written in blood.”

The common allegation of Marxists and other opponents of the free market, to the effect that Adam Smith was an apologist for the “capitalist class,” cannot be sustained upon even a cursory reading of the Wealth of Nations, in which we find acerbic attacks on that very class. But more on this a little later.

Smith was especially concerned about the deleterious effects of mercantilist policies on the poor, who would otherwise benefit greatly by the abundance and low prices in a free, competitive market.

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.

This concern for the “poor and indigent” was far more than an incidental gesture by Adam Smith. Throughout the Wealth of Nations, we find the recurring argument that free markets, the division of labor, and a progressively expanding economy will bring about “that universal opulence which extends itself to the lowest ranks of the people,” and “a general plenty [that] diffuses itself through all the different ranks of the society.”

Masses of desperately poor people over a long period of time serve as an indicator that free markets have not been permitted to operate in that society. “The liberal reward of labour…is the natural symptom of increasing national wealth,” which is brought about by the expanding economy of a free market. “The scanty maintenance of the labouring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition that they are going fast backwards.”

Smith was appalled by the mercantilist argument that common laborers should be paid nothing more than subsistence wages, lest they become discontented with their station in life and strive to better themselves.

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 feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged.

If Adam Smith was a passionate defender of capitalism (in the sense of property rights in a free market), he was also a passionate critic of capitalists. Contrary to popular academic opinion, Smith did not defend a naïve “harmony of interests” doctrine in the realm of economics. He did not believe that everyone will benefit equally from a policy of laissez-faire, nor did he maintain that what is good for business is necessarily good for society as a whole.

In the Wealth of Nations, Smith distinguishes between three economic classes—or “orders,” as he usually calls them. The first is the agricultural class of landowners who derive their revenue from rent. The second is the laboring class of workers who receive wages. The third is the commercial (or mercantile) class of merchants and manufacturers who earn profits. The agricultural and laboring classes share a common interest in the continuously expanding economy of a competitive market, so their interest “is inseparably connected with the general interest of society.” But the same is not true of merchants and manufacturers; the interest of this mercantile class “has not the same connection with the general interest of society as that of the other two.” Indeed, it “is always in some respects different from, and even opposite to, that of the public.”

Merchants and manufacturers typically oppose the free market because their rate of profit is systematically lowered by competition. They therefore attempt to keep profits artificially high by persuading governments to enact tariffs, bounties, and various economic regulations. Such policies benefit the mercantile class at the expense of everyone else. By using the power of government to raise their profits above what they would normally be in a competitive market, merchants and manufacturers impose “an absurd tax upon the rest of their fellow citizens.”

Smith provides an interesting account of how the mercantile system became the dominant policy of Europe for several centuries. Although mercantilism benefited one class at the expense of others, it was misrepresented by merchants and manufacturers as conducive to the general good of their country. Mercantilism was thus regarded by Smith as an “ideology” in the narrow Marxian sense, i.e., as a theoretical rationalization of class interests.

The main theoretical tenet of mercantilism was the balance of trade doctrine. Mercantilists insisted that a country can benefit from international trade only if the money-price of its exports exceeds that of its imports. And this alleged need for a favorable balance of trade was used as the primary justification for hampering competition from abroad through tariffs and the like, and for the granting of bounties to domestic industries.

Smith repeatedly expresses contempt for this mercantilist ideology. It is always in the interest of the great majority of the people to buy whatever they want at the cheapest price: “This proposition is so very manifest, that it seems to be ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind.” The mercantile classes, forever animated by the spirit of monopoly, used the power of government to serve their own selfish ends. While reaping excessive and unjust profits through the power of government, they camouflaged their exploitation with the ideology of mercantilism, which equated their own economic interests with the public good. “The sneaking arts of underling tradesmen are thus erected into political maxims for the conduct of a great empire.”

The political maxims of mercantilism were fraught with disastrous implications far beyond their economic impact. The mercantilists saw international trade as a zero-sum game with winners and losers, in which the interest of one nation “consisted in beggaring all their neighbors.” Each nation looked “with an invidious eye” upon the prosperity of its trading partners, regarding their gain as its own loss. “Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity.” Mercantilist ideology, which promoted the delusion that one nation can benefit economically only at the expense of other nations, had encouraged many destructive and unnecessary wars. Thus did the “impertinent jealousy of merchants and manufacturers” prove fatal to the peace of Europe and cause more devastation than even the most rapacious kings and ministers.

Smith doubts that a remedy can be found for the violence and injustice of political rulers, this ancient evil was too deeply rooted in human nature. But much could be done to mitigate the “mean rapacity” of merchants and manufacturers. If their “monopolizing spirit” cannot be eliminated, it “may very easily be prevented from disturbing the tranquility of any body but themselves.” Smith’s preventive measure is the free market, a “system of natural liberty” in which everyone must compete on equal terms without recourse to the coercive mechanism of government.

This point, though generally understood by libertarians, is commonly distorted beyond recognition by critics of the free market. A free market, according to Smith, is not a playground for merchants and manufacturers in which they can run roughshod over the interests of others. On the contrary, the free market imposes severe restraints on that very class by denying to it special governmental privileges. This restraint is absolutely essential to the common good, since merchants and manufacturers have the resources needed to influence governmental policies and are especially skilled in that nefarious enterprise. We should therefore remove this mechanism of exploitation by insisting that everyone, including merchants and manufacturers, follow the ordinary rules of justice when dealing with others.

One final point should be made about Adam Smith’s approach to the exploitation inherent in governmental privileges and regulations. Although his criticisms often deal with the harmful consequences of mercantilism (as we would expect in a work largely devoted to economic issues), Smith also appeals to the natural rights of workers. Consider the following passage in which Smith criticizes apprenticeship laws:

The property which every man has in his own labour, as it is the original foundation of all other property, so it is the most sacred and inviolable. The patrimony of a poor man lies in the strength and dexterity of his hands; and to hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbor, is a plain violation of this most sacred property. It is a manifest encroachment upon the just liberty both of the workman, and of those who might be disposed to employ him. As it hinders the one from working at what he thinks proper, so it hinders the others from employing whom they think proper. To judge whether he is fit to be employed, may surely be trusted to the discretion of the employers whose interest it so much concerns. The affected anxiety of the law-giver lest they should employ an improper person, is evidently as impertinent as it is absurd.

A key word in this passage, in my judgment, is “impertinent.” Economic regulations are not merely unwise or inefficient; they also manifest great disrespect for the autonomy of human beings. And in assuming that legislators know better how to further the interests of individuals than do those individuals themselves, such laws are downright insolent.

This moral outrage by an absent-minded Scottish professor, even in regard to dryasdust economic regulations, is something that all libertarians should keep in mind.

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