ADAM SMITH: DISTORTIONS, OMISSIONS, AND CONSEQUENCES
Jerome G. Manis, Ph..D.
“Invisible hand” appears only once in The Wealth of Nations (WN) by Adam Smith. It does not appear “with the marketplace.” Yet, the “invisible hand” is listed on the internet 1,650,000 times. It is listed with “Adam Smith” 259,000 times and with “the marketplace” 106,000 times.
Among internet listings of the Cato Institute are 41,000 on the invisible hand, including "In Defense of the Invisible Hand," by Norman P. Barry in a 1985 publication. More recent is the statement of its director of Tax Policy Studies, “We believe in the power of the Invisible Hand.” Another is its 2004 “Invisible Hand Explanations of Society.”
According to a Winter, 2000-01 report in the U.S. Army War College Parameters, “the greatest Western thinker about the power of information to drive change emerged in the British Isles in the guise of a political economist. Adam Smith, with his invisible hand of the marketplace, described two centuries in advance why the United States will continue to outperform mainland China,”
There are other discrepancies. Untrue is that Smith had endorsed “laissez-faire” which does not appear even once in WN. but received about four million listings on the internet, 290,000 citing Adam Smith. Not understood is the reason for his opposition to restraints on trade. Hardly known is Smith’s The Theory of Moral Sentiments (MS) and its emphasis upon justice and sympathy. One source for such serious differences between his image and reality began nearly two centuries ago.
Between 1800 and 1850, evangelicals became powerful in England. They contended that Adam Smith had portrayed an invisible hand of the marketplace. They also believed that this invisible hand was a perfectly designed instrument to reward good Christian behavior and to punish the sinful. For such reasons, Britain denied help during the Irish potato famine, resulting in many deaths and emigrations.
Smith made no such religious distinctions. In his view, “A man must always live by his work, and his wages must at least be sufficient to maintain him... (and) for him to bring up a family.” Especially significant is his statement that “The liberal reward of labor...is the natural symptom of increasing national wealth.”
He would be greatly surprised to learn that during the years 1979-2000, the real income of the poorest fifth of American households rose by 6.4% while that of the top fifth rose by 70% and the top 1% by 184%. Or that the ratio of chief corporative executives pay to that of workers rose from 42 to one, up to 4ll to one from 1982 to 2002.
The misconceptions and their outcomes need to be compared with the published works of Adam Smith, beginning with his early Lectures on Jurisprudence. Its index contains many listings for government, education, and wages and none for economy or wealth. They accord with the final sentence of a lengthy biography by Ian Ross explaining Smith’s aim “to help us to aspire to virtue rather than to wealth.”
Significant for understanding Smith is the era in which he lived from 1723 to 1790. It was a time throughout Great Britain when important contributions were being made to the modern world in science and capitalism. Especially relevant for the modern world were a group of scholars, widely identified as Scottish moral philosophers.
These noted Scotsmen included David Hume, Francis Hutcheson, Thomas Reid, and Adam Smith. As editor Knud Haakonssen stated in a 2003 printing of The Theory of Moral Sentiments, “Like his close friend and mentor, David Hume, Smith saw moral philosophy as central to a new science of human nature.” These concerns were part of the societal transformation during which Smith became a professor of moral philosophy in 1759 at Glasgow University.
His first book The Theory of Moral Sentiments began with two chapters on sympathy--evidence of its importance to Smith. Its very first sentence a states: “How selfish soever (sic) man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.”
Similar words in its lengthy first paragraph are “The fellow-feeling for the misery of others... Of this kind is pity or compassion, the emotion which we feel for the misery of others.” In that same first paragraph is his “that we derive sorrow from the sorrows of others is a matter of fact.” Throughout MS are comparable descriptions of empathic feelings, along with virtues, character, justice, benevolence, and the like.
Those moral sentiments contributed to its immediate and far reaching success It went through many printings, revisions, and translations in England, France, and Germany. Adam Smith was widely renowned long before the publication of WN.
In 1764, he became the tutor of a young duke and went with him to France. He was welcomed especially by its “philosophes,” the eminent men of letters in France He found them to have similar interests and ideas. Their enthusiasm over MS was very encouraging to him to keep improving it in later editions.
Much has been written about his meetings with “physiocrats” whose belief in “laissez-faire” has been said to have influenced the writing of WN. To the contrary, however, he questioned their ideas as extremism. Historian Jerry Muller has repeatedly rejected the notion that Smith endorsed “laissez faire.” Also, according to biographer Ross, Smith viewed leading physiocrat Francois Quesnay as “the doctrine head of a sect.”
Returning to England in 1766, he was assured of a lifetime income by the duke’s family. He then retired from teaching and concentrated on WN, first printed in 1776, 17 years after MS. Just as in MS, he described human beings as being concerned about others and nowhere did he describe people as naturally selfish. In reality, to Ross “his writings are a direct challenge to the theories of intrinsic human selfishness advanced by Hobbes and Mandeville.”
Sympathy for workers appears in the WN chapter “On the Wages of Labour.” Central is his emphasis on the great advantage “masters” have over labor. “We rarely hear of the combinations of masters, though frequently of those of workmen.” Smith offered detailed descriptions of the ways used by masters to keep down the wages of their workers. To him, “Labour, therefore, is the real measure of the exchangeable value of all commodities.”
While he favored limited government and taxes, he wrote explaining why various public services were necessary. Thus, he endorsed the payment of “salaries of all the different judges, high and low, together with the whole expense of administration and execution of justice.” Smith was an expert on taxation who sought and got the position of Commissioner of Customs for Scotland in 1778.
Especially notable is that the last three chapters of more than 280 pages in WN dealt with government expenses, revenues, taxes, and public debts. It is very important, remarkable, and virtually unnoticed. The first part provided for public works, justice, and various institutions as well as for the “education of youth.”
Its lengthy section on religious instruction “for people of all ages” is hardly orthodox. He describes how “to correct whatever was unsocial or disagreeably rigorous in the morals of all the little sects.” To Smith,“The first of those remedies is the study of science and philosophy.” The second involves “gaiety of public” focusing on “painting, poetry, music, dancing;” and similar activities.
Chapter II described a wide variety of taxes. They mentioned taxes on rent, on land, the produce of land, homes, profit, stock, employment, wages, every different species of revenue, capitation taxes, and upon consumable commodities. Hardly evidence of an anti-tax personna.
Chapter III was entitled Of Public Debts. This important section justified public debt not only in time of war but also for commerce, justice, education, and general well=being.
To Adam Smith, the source of the wealth of nations was the division of labor, the subject of WN’s first three chapters, and one of many indications of his concern for labor. By comparison, not a single chapter was devoted to free trade though several references were made to “restraints on trade.” Free trade or freedom of trade does appear only several times in the indexes of the various printings of this volume.
Smith favored free trade mainly to replace the then current mercantile system controlled by monarchical governments. Mercantilism judged a nation's wealth by its stock of gold and silver, rather than by income, productivity, standards of living, or other possible indicators. Also mercantilists believed the world had a limited supply of wealth--gold and silver--and so one country could grow rich only at the expense of another.
According to mercantilism, a nation that did not have gold or silver mines had to rely on foreign trade to be successful. That called for an excess of exports over imports, that is, a favorable balance of trade. During the 15th to 18th centuries, gold served as the chief means of settling international debts. A nation that exported more than it imported could collect the difference in gold from the importing countries.
From that perspective, imports were undesirable since they had to be paid for in gold. To Smith, goods not gold were the true measure of wealth. He opposed what he called mercantilist, “Restraints upon the importation from foreign countries of such goods as can be produced at home.”
Neither mercantilism nor free trade attracted the newly formed United States. Although largely unnoticed today, it became an industrialized nation by blocking imports from Great Britain. Alexander Hamilton’s 1791 “Report on Manufactures” proposed tariffs on imports to help finance the new nation and to aid industry. Protectionism grew greatly during the following century with tariffs as high as 40% on certain manufactured products.
Around 1871. British economist William Jevons asserted that “The Theory of Economy thus treated a close analogy to the science of Statistics and the Law of Exchange are found to resemble the Laws of Equilibrium.” With this claim the evangelical vision of the marketplace had been transformed into a supposedly scientific law.
Similar views were appearing elsewhere and soon become dominant. In the United States, the neoclassical theory of the free market is accepted as though it was ordained by God and confirmed by science. To Smith, it allows self-interest to override the public interest and public justice.
Contemporary free trade has had little benefit for nearly one third of the world population. According to the World Bank, one of the most worrisome global trends of the past two decades of international free trade is that countries with around two billion people are in danger of becoming marginal to the world economy. Among the very poorest of those countries are former colonies, many in Africa.
The beginnings of colonialist trade appear to have grown around the 15th and 16th centuries among the coastal European nations. Profitable sugar, coffee, cotton, and tobacco plantations in their colonies were enhanced through the slave trade. Begun during the mercantilist era and continued as free trade, England’s commerce in slaves allowed it to buy cotton cheaply and sell the finished textiles to less developed countries.
Only a few pages were devoted to slavery in WN. Smith wrote that “the work done by slaves, though it appears to cost only their maintenance, is in the end the dearest of any.” That view may seem questionable but his impersonal discussion of slavery hardly accords with his discussions of sympathy and justice.
The slave trade had become a major enterprise for the American colonists during the 18th century. While not comparable to the extent of European slavery shipping, New England ships brought hundreds of thousands of slaves from African ports, selling them throughout the Americas. Only after independence did the northern states oppose slavery which “free trade” southerners defended.
By the 1850s, profits from the various colonies led to capturing at least 10 million African slaves for the Western Hemisphere. Two million are believed to have died at sea while more millions died from overwork, hunger, and disease, not a very good justification of free trade.
The discussion by Smith of colonies in WN is quite extensive. Along with scattered references to colonies is a section of about a hundred pages on the topic. They deal with many historic cases but the main focus is upon his era. Also, the tone is less detached than that of slavery.
While he seems to approve of colonization as a way of providing new lands for cultivation by emigrants, he barely mentions slavery in this lengthy chapter. Instead, the discussion is largely of their financial arrangements. Moreover, he made no effort at considering their outcome.
Today, the modern world remains troubled by civil wars among the many former colonies and by the difficulties of the descendants of former slaves. While the slave trade was an accepted form of free trade between nations for many centuries, the international weapons trade is its modern successor and an even more destructive free trade.
Its damage is greatest among the former colonies, especially those on the continent of Africa. Colonizing nations had created new political entities out of diverse tribes, religions, and language groups. Their divisions have resulted in frequent disagreements and conflicts. Numerous sellers of armaments urge the many factions in these backward nations to buy large quantities of costly weaponry. Not only is that very profitable, but it keeps poor nations indebted to and dependent upon rich ones.
Private and governmental gun trade totals about a trillion dollars annually. Among the largest makers and dealers in selling guns, grenades, tanks, bombers, and other weapons are the five members of the UN security council: Britain, China, France. Russia, and the United States.
Smith surely would approve of the following conditions described in the British periodical The Economist. “Looking around the world, you do not see many economies, least of all rich ones, doing as well as America’s. In the inexhaustible capacity of its private sector to innovate, in the seemingly unquenchable desire to reinvent itself, the United States still leads the world, and reaps the material rewards of that leadership.”
What would he say about America’s lack of sympathy for slums, homeless, handicapped, lower life expectancy, wage-cutting, disappearing pensions, and huge prison population? How would he respond to 46 million people without national health insurance, unlike other modern nations? Yet, the United States leads the world in its number of billionaires.
There have been many failed attempts to adopt some form of national health insurance in the United States. A basic reason is the economic assumption that private health care is better than public health care. For one thing, it is alleged that the people will go to the doctor too often when the government pays the costs. Thus, a 2004 report to the president stated this habit is a “moral hazard” of unnecessary medical visits.
In fact, the total per person cost of private health care in the United States is twice the cost of countries with national health care. Much of our high costs are the result of the more serious illnesses of the uninsured. They are high because the uninsured don’t get health care until they visit the emergency room for very serious, costly, and charitable treatment.
Moreover, the alleged benefits of the marketplace and free trade has led to increasing “privatization.” Among the latest is the privatizing of prisons which can build and house convicted offenders at lower cost than government. Since “correction” has long been dropped from the prison agenda, these private jails can hardly be expected to do otherwise. That would hardly accord with the sympathy and justice of Smith.
Writing during the era of rule by monarchs and nobility, Smith could not have conceived of governments much influenced by wealthy enterprises. Yet, he was fully aware of the selfishness of enterprisers. Thus in WN, “People of the same trade meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public.”
To Muller, “The Wealth of Nations is a compendium of the attempts of individuals and groups to promote their own interests at the expense of the public interest.” That view could apply to the serious law violations by Enron, Tyco, WorldCom, by other giant corporations, and by many earlier commercial misdeeds. No invisible hand curbed their misconduct but only the occasional actions of state prosecutors.
Law violations by leading corporations are not new. Fifty years ago a noted American criminologist Edwin Sutherland reported that our 70 largest corporations had averaged 14 convictions for law violations in their average 45-year existence. Many other studies since then have reported similar patterns of law violations by American corporations.
Such corporate law violations are called crimes by criminologists although the American legal system does not do so. That is because the United States has two separate and unequal justice systems--criminal justice and regulatory justice. Under regulatory justice, corporate law violations receive scant public notice, neither in official reports nor in the media.
Nationally, the criminal justice system is largely the Department of Justice. The Federal Bureau of Investigation is its primary branch which obtains data concerning assault, fraud, homicide, and other violations of federal and local laws. Its reports consist of individual law violations published annually by the FBI--but not corporate violations. Regulatory justice is the domain of a great variety of independent federal agencies which deal mainly with corporations.
The reason for our regulatory justice system goes back to English law. Because England does not have a constitution, its laws are based upon precedent. Those precedents were compiled during the 18th century by Sir William Blackstone, a contemporary of Adam Smith. Included in the Blackstone’s famed legal commentary is the following: “...a corporation cannot commit treason, felony, or other crime in its corporate capacity; though its members may in their own distinct individual capacity.”
Although Blackstone received several footnotes in WN, his explanation of corporative immunity from criminal prosecution was not cited. Since corporations then were chartered by British kings, their exemption may have seemed appropriate to Smith. However, protection of corporations also have found considerable support in American jurisprudence.
As the Constitution of the United States made no chartering provision for corporations, they were established by the various states. These state charters have varied in many ways. But commonly they have placed little limits on the actions of their chartered enterprises--and they immunize corporations themselves from criminal penalties though not their employees. Eventually, the federal government created national agencies or commissions to “regulate” the actions of corporations.
In recent decades, new financial entities have emerged with even less oversight or regulation. Among them are huge equity funds and hedge funds owned by small numbers of extremely affluent investors. Acting quietly, often internationally, public safeguards or enforcement are negligible. A common technique is to buy businesses, withdraw their cash reserves and pension funds, strip them of profitable entities, load them with debt, and then sell them. In the absence of legal standards, they cannot be called law violators or criminals.
Despite these regulatory agencies, nothing prevents the creation of new corporations for questionable purposes. According to Sierra magazine, a corporation became chartered in April, 2004 for “demonstrating how states sanction and protect corporations, even those dedicated to making money at the expense of public health and the environment.” Named “Licensed to Kill,” it was chartered as a tobacco company.
Law violations by corporations and other large financial entities with few moral or legal restraints would have horrified Adam Smith. To him in WN. “Society, however, cannot subsist among those who are at all times ready to hurt and injure one another...Justice, on the contrary, is the main pillar that upholds the whole edifice...the immense fabric of society.”
Still, he recognized that nations may be ruled for the benefit of the few rather than the many. He wrote that laws and justice were not always in the best “interest of the government, sometimes the interest of particular orders of men, warp the positive laws of the country from what natural justice would prescribe.”.
One such recent allegation is that for decades, asbestos makers and insurers kept workers and consumers in the dark about asbestos toxicity, blocked publication of research showing asbestos caused cancer, and lied to the public. Their actions caused 10,000 deaths in 2003 alone.
In December, 2005, newspapers reported that Wal-Mart has been ordered to pay $172 million to 116,000 employes for illegally preventing them from taking meal breaks. Another 40 law suits have been filed against Wal-Mart, the largest private employer in the United States. Only 30% of its employees are eligible for needs like health insurance and pensions,
According to William Chambliss in Power, Politics, and Crime: “Corporate crimes are more costly, more dangerous, and more violent than the robberies, burglaries, assaults, and murders reported by the FBI in the Uniform Crime Reports.” Many other reports of corporate crime in the United States have been published in the past two decades.
Among them are John Braithwaite’s Corporate Crime in the Pharmaceutical Industry: Marshall Clinard, Corporate Corruption: Russell Mokhiber, Corporate Crime and Violence: Katherine Jamieson, The Organization of Corporate Crime: Frank Pearce and Steve Tombs, Toxic Capitalism: Corporate Crime and the Chemical Industry. Their findings do not appear in the media.
Although England is noted for forming its Parliament in the 13th century neither MS or WN lists democracy in its index. According to Muller, Adam Smith had noted in his lectures that democracy “had not been much of a success the few times it had been tried and in each case had been abandoned.” How he would have assessed American democracy would be of interest but must remain entirely conjectural.
In the semifinal page of his long, complete biography of Adam Smith, biographer Ross concludes that he clearly believed that “the happiness of others is necessary to us, and that our economic freedom, as indeed any other kind, is to be exercised with attention to justice to others.”
Indeed, Scotland--the land of Adam Smith--appears to have retained more of his concern for justice and sympathy (and perhaps fewer myths) in the realm of commerce than have other many other places. It provides care for the elderly and free bus services, nurseries, no university tuition fees, and a variety of mental health facilities.
Prior commentaries document the discrepancy between widespread images and the reality about Adam Smith, as evidenced in The Theory of Moral Sentiments and The Wealth of Nations. Overcoming the serious distortions of his views of free trade, invisible hand, and laissez-faire is very unlikely, perhaps impossible. Still, his advocacy of justice and sympathy can be followed and promoted by those who care for all human bengs.
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ECONOMIC ERRORS AND SOCIAL PROBLEMS
editECONOMIC ERRORS AND SOCIAL PROBLEMS
Jerome G. Manis, Ph.D.
Economic assumptions seldom are associated with social problems. For many, that term implies individual misbehavior, such as theft, forgery, murder, or drunken driving, Those occurrences are social problems, but their seriousness is far outweighed by the misdeeds of nations and of organizations.
Consider the millions of deaths, injuries, and destruction resulting from wars by nations and within nations. Or the claim by William Chambliss in Power, Politics, and Crime that “Corporate crimes are more costly, more dangerous, and more violent than the robberies, burglaries, assaults, and murders reported by the FBI in the Uniform Crime Reports.”
Unfortunately, law violations by corporations are not considered as crimes by government of the United States. That is because we have two separate and unequal justice systems. Corporations are subject to the jurisdiction of the regulatory justice system which includes a great variety of agencies. Unlike the criminal justice system, the regulatory justice units do not publicize their decisions or penalties.
Such deficiences underlie our commercial, legal, political, educational, and other social structures. They stem from a variety of widely accepted economic beliefs in the United States that are demonstrably wrong. Misconceptions about an invisible hand, laissez-faire, and tariffs, for example, have harmed Americans in the past and continue to do so today. My justification for making these assertions is based upon my training and my research as a sociologist concerned with social problems.
I have authored Serious Social Problems (Allyn and Bacon) and three articles in Social Problems, official journal of the Society for the Study of Social Problems. Basically helpful has been my M.A. from the University of Chicago and Ph.D. at Columbia University. I am professor emeritus of Western Michigan University, where I was director of its Center for Sociological Research and director of its sociology Ph.D. program.
I have received research grants from the National Science Foundation and from the federal Office of Education and the Public Health Service. I also have been Fulbright Professor at the University of Singapore and Silliman University (Philippines), as well as Fulbright Lecturer at universities in Israel, Serbia, and Taiwan.
These experiences have led me to the finding that misunderstandings of our economy have seriously harmed America, as well as many other nations throughout the world. Adam Smith: Distortions, Omissions, and Consequences describes some of the most basic errors.
America’s disregard for the importance of tariffs for its modernization and its newly emerging need for them is the basis of Friedrich List and American Industry. Globalization Again demonstrates how the failure to learn from the earlier period of colonization and the slave trade is placing many nations in great jeopardy. All three reports deal with important economic mistakes and their harmful outcomes.