When I arrived at University with solid left wing familial credentials to my name, my first reaction on hearing that Adam Smith would be an integral part of my first year politics studies was one of repugnance. Was Smith not the godfather of Thatcherism? Was Smith’s theories not adopted by the neo-liberalists to wreak untold havoc on my home town and the British Working class in general? Indeed Margaret Thatcher’s favourite think tank took Smith’s name- the Adam Smith Institute. To someone of my background who had experienced the wholescale socio-economic demolition of his hometown, the name of Adam Smith was synonymous with all that I detested about Thatcherism, Reaganomics and supply side economics. Indeed does Adam Smith not appear on that great symbol of Government subjection to big business, the £20 Bank of England note?
However, as I studied both Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations and Theory of moral sentiments I began to come to the opinion that not only was Smith erroneously adopted as the godfather of right wing neo-liberalism but was wholly undeserving of left wing vilification as a right wing demagogue. From even the most basic reading of both wealth of nations and moral sentiments it becomes clear that Smith, far from promoting the neo-liberal consensus which corrodes the very fabric of our society; would in fact be horrified at the neo-liberal experiment and it’s socio-economic consequences. In this sense it is important that Smith be rescued from both his neo-liberal hijacking and from left wing ire.
I profess to being neither an economist nor an economic expert but if this piece goes some way to dispelling some of the popular preconceptions of Adam Smith as the neo-liberal father of contemporary Capitalist society then I will consider this piece to have done its job.
"Neo-Liberalism" means we are talking about a new kind of liberalism. So what was the old kind? The liberal school of economics became famous in Europe when Adam Smith, a Scottish economist, published a book in 1776 called The Wealth of Nations. He and others advocated the abolition of government intervention in economic matters. No restrictions on manufacturing, no barriers to commerce, no tariffs, he said; free trade was the best way for a nation's economy to develop. Such ideas were "liberal" in the sense of no controls. This application of individualism encouraged "free" enterprise," "free" competition -- which came to mean, free for the capitalists to make huge profits as they wished." - Elizabeth Martinez, left wing activist and feminist.
This wholly erroneous left wing interpretation of Adam Smith is borne out of his adoption by the Chicago school in the 1950’s as well as Thatcher and Reagan as the prophet of free trade, unrestrained capitalism and laissez faire Government. If we accept this view at face value, it is not difficult to make the logical leap between Smith's writings and the appalling exploitation of men, women and children from the earliest period of the Industrial Revolution to the vast socio-economic inequalities being wreaked by today’s neo-liberals across both the developed and the developing world. However, is this a gross misinterpretation of Smith’s theories and analysis of Political economy?
The wealth of nations written in 1776, was based on Smith’s perception that the 50 miles between the Clyde and the Forth was an International market with the port of Glasgow importing sugar and tobacco which was then sold on to England and Europe. Whilst local industry produced cloth, pottery and hardware, Highlanders drove cattle into the Forth/Clyde plain to sell and fishermen landed their catches. Smith’s observations of the economic forces at work in this International market led to his account that in comparison with the three previous epochs of economic history- the age of Hunting, the age of Sheperding and the age of Agriculture, (Smith’s lectures on jurisprudence) the contemporary epoch- Commerce was creating more wealth and being of greater benefit to Society than any of the previous three epochs. The wealth of nations was an investigation into the processes involved in this new age of commerce and Smith’s views on how all society could benefit as a result.
Much of the misinterpretation of Smith’s economic theories come from misreadings of his famous ‘’invisible hand’’ passage:
“Every individual...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.” (Book IV)
Conservative and neo-liberal thinkers adopted the ‘’invisible hand’’ passage wholesale as the model for the elimination of tax and spend Government, unrestrained and unregulated free market activity and laissez faire Government, arguing that the benefits of unrestrained markets will trickle down to the lower echelons of society. The "invisible hand" clearly shows that pursuing private interest unwittingly or not, benefits all of society and so all business and individuals should be free of Government fetters in order to enrich themselves with the added benefit that as a result it enriches the rest of society. This is the basic model of supply side economics, Thatcherism and Reaganomics.
But is this the central economic and social theory theory that Smith espoused? The famous ‘’invisible hand’’ passage arrives at a time when Smith argues that markets can raise productivity and promote economic growth and that how in certain circumstances private pursuit can unwittingly create economic benefits for others. It is the only time in the entire book that Smith makes mention of ‘’the invisible hand.’’
What the neo-liberals either unwittingly or purposely fail to address is that Smith spends several chapters in the wealth of nations critiquing the private interests of businessmen. In several chapters Smith makes clear that left alone to do what they want, businessmen and companies form monopolies, cartels, powerful lobbyists and can easily undermine the public interest:
"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"- (Book I)
Additionally, Smith makes clear that businessmen:
’’ generally have an interest to deceive and even oppress the public and who accordingly have, upon many occasions, both deceived and oppressed it’’ (Book I, Ch XI)
Tellingly, on the subject of taxes, Smith’s view that:
"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state."
is completely at odds with the tax avoidance/tax evasion practices carried out by most Big Business interests in today’s neo-liberal environment. Smith makes clear that it is a moral duty to contribute in taxes in proportion to what you receive from trading and pursuing your economic interests in the nation state. This is anathema to the neo-liberal agenda of concentrating wealth and removing it from the country of origin into tax havens.
Indeed, Smith next underlines the concept of progressive taxation as a desirable pursuit for Government to help the poor in Book V:
"The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."
Again, totally at odds with the low taxation agenda of neo-liberalism and showing great awareness of the plight of the ordinary person in the Commerce age.
In Smith’s view, only a well run and ordered Government and Polity can curb the worst excesses of business interests whilst ensuring economic growth can be of benefit to all of society.
But what of the ordinary worker, where do they fit in, in the grand scheme of "Commerce"? Smith whilst admiring the "division of labour" in which most "common people" were involved in, was also aware of the alienation that repetitive actions involved in specialisation can create. Whilst division of labour creates greater production and wealth, it also creates alienation-
"their labour is both so constant and so severe, that it leaves them little leisure and less inclination to apply to, or even think of anything else" (Book I, ChV
Smith argues that an economic system that would stunt the minds of its workers is morally unacceptable. Inherent in this theory is that the modern tendency to create economic models without regard to their moral defensibility (eg the first great neo-liberal experiment of Pinochet’s Chile) would be repugnant to Smith.
Smith believes the cure for alienation is publicly funded education and that an educated nation is the most efficient and well governed. Smith’s solution to the worst effects of alienation can be construed as paternalistic and simplistic, however when comparing his arguments in favour of education for the workers with the conditions of the working classes at the height of the Industrial Revolution, it is clear that the so called "godfather of capitalism" is distinctly out of synch with the ethos he was supposed to have created. The ethos of the ‘undeserving poor’ found no truck with Smith as he constantly argues in favour of intervention to improve the conditions for the workers.
So what is the central message of Adam Smith? Smith believed that whilst the "Age of Commerce" was the most beneficial to contemporary society in comparison with previous epochs, he believed at the same time that society should be for the benefit of all and not the few:
"what improves the circumstances of the greater part can never be regarded as an 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."(Book I Chapter VIII)
I hope to have argued that Smith would have found the living and working conditions of millions during the Industrial Revolution in the name of free trade Capitalism abhorrent. Additionally, his concepts of progressive taxation, interventionist Government to curb the selfish excesses of the businessman and to promote Commerce for the good of all society, are completely at odds with the socio-economic mantra espoused by those neo-liberal dogmatists who would take Smith’s name in vain. I also hope that I have argued that Smith is undeserving of the left wing ire that is directed at him.
I finish with a quote of Smith’s which proves incredibly prescient in the light of contemporary neo-liberal society’s love and worship of the rich whilst at the same time its detestation of the poor:
"This disposition to admire, and almost to worship, the rich and powerful, and to despise, or, at least neglect persons of poor and mean conditions, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments."(Theory of Moral Sentiments)
It is right and good that Adam Smith should be rescued from the neo-liberals.