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The Critic of Exploitation:
“Wherein consisted the happiness and perfection of a man, considered not only as an individual, but as the member of a family, of a state, and of the great society of mankind, was the object which the ancient moral philosophy proposed to investigate…
In the ancient philosophy the perfection of virtue was represented as necessarily productive, to the person who possessed it, of the most perfect happiness in this life.” The Wealth of Nations
CONTENTS
1. Adam Smith, Philosopher Economist, a Critic of Exploitation who defined the Moral Foundation for the Free Market Economy. 2. Diagram of key factors, including self-interest, identified by Adam Smith which determine the wealth of nations.
1. Adam Smith the Critic of Exploitation
An Insight into the Philosopher Economist who defined the Moral Foundation for the Free Market Economy
Adam Smith (1723 – 1790) can be said to have been the first thinker to explain in detail how wealth is created and what really drives modern economies. That was over two hundred years ago in his widely acclaimed treatise, The Wealth of Nations. Today, this work is often considered the foundation of the discipline of economics. In the 18th century, however, there was no separate discipline called economics, and Smith spent most of his professional life as Professor of Moral Philosophy at Glasgow University and considered far more than just the causes of wealth. In The Wealth of Nations, Smith identified self-interest as a driving force in a free market economy. However, Smith published an earlier book, The Theory of Moral Sentiments, where he explored other aspects of human motivation, including benevolence. He also expounded on moral issues relevant to the free market economy. Despite his conclusions about the benefits of a free market, with an appropriate role for the State, critics have denigrated the free market economy and Smith’s advocacy of that system. The system is perceived by its critics to be based on selfishness or by 1829 in France, “… exploitation, in the sense of turning to account for selfish purposes”.[3] This paper challenges these critics and the assertion that Adam Smith’s work in any way condoned exploitation. In fact, there is ample evidence to show he strongly condemned actions which harmed the weak and the poor at the same time as advocating a free market economy. The paper also explains the influence of the thinking of ancient moral philosophers on how Smith perceived the moral foundation of the free market economy. For today’s critics selfishness has been replaced by reference to greed and if that is not sufficiently colourful - “crass greed”. “Greed is good” is even said to be the creed of the proponents of free markets and in today’s universal media distribution this has gained widespread currency. Such negative perceptions of the market economy have the potential to undermine its moral foundation and therefore its general acceptance. However Smith shows a free market economy does not depend on greed. Smith’s central notion of self-interest is quite different to greed. We have from Aristotle in The Politics how readily criticism of self-interest (self-love) can be misdirected: “Self-love is rightly censured, but what is really censured is not so much love of oneself as love of oneself in excess – just as we also blame the lover of money (not so much for loving money as for loving it in excess); the simple feeling of love for any of these things (self, or property, or money) is more or less universal.” In Adam Smith’s first major work, The Theory of Moral Sentiments, he fortunately made it clear he draws on the Stoic notion of self-interest (which he also refers to as synonymous with self-love[4]) which is quite different to selfishness or crass greed. “Every man, as the Stoics used to say, is first and principally recommended to his own care; and every man is certainly, in every respect, fitter and abler to take care of himself than of any other person.” “Regard to our own private happiness and interest, too, appear upon many occasions very laudable principles of action. The habits of economy, industry, discretion, attention and application of thought are generally supposed to be cultivated from self-interested motives, and, at the same time, are apprehended to be very praiseworthy qualities, which deserve the esteem and approbation of every body … Carelessness and want of economy are universally disapproved of, not, however, as proceeding from a want of benevolence, but from a want of the proper attention to the objects of self-interest.” Here Smith aligns the pursuit of private happiness with the virtuous habits of ancient moral philosophy. Benevolence he says cannot overcome the failings of proper concern for our own self-interest, and in saying so foreshadowed the contemporary debate about the importance of self-reliance for a sense of wellbeing and happiness compared with the debilitating impact of welfare dependency. The Stoics were a dominant school of philosophy in Greek and Roman times from the 4th century BC to the 4th century AD. Their school was finally closed by the Christians in 600AD although Stoic philosophy influenced early Christian scholars who were interested in their principles. In 17th and 18th century England there was a revival of interest in Stoic philosophy with its emphasis on self command and rational behaviour and there being nothing in life to fear when one had a personal philosophy of not harming others. This was the time of Adam Smith. The renowned Essay On Man by Alexander Pope, written at that time, reflected many Stoic values which are consistent with Christianity and which helped shape the rules of conduct of society. The Stoic understanding of self-interest, which was aligned with self-reliance, was at odds with actions that harmed others, and limited by what could be achieved fairly. Actions through selfishness or greed which harmed others were deemed to cause moral harm and remorse to the perpetrator and therefore ultimately to cause self-harm rather than serve self-interest. They said “run the race to win but not by actions such as tripping your opponent”. Cicero, heavily influenced by Stoicism, in his book, On Duties, expressed in no uncertain terms this philosophy: “Thus it is the error of men who are not strictly upright to seize upon something that seems to be expedient and straightway to dissociate that from the question of moral right. To this error the assassin’s dagger, the poisoned cup, the forged wills owe their origin; this gives rise to theft, embezzlement of public funds, exploitation and plundering of provincials and citizens; this engenders also the lust for excessive wealth, for despotic power, and finally for making oneself king even in the midst of a free people; and anything more atrocious or repulsive than such a passion cannot be conceived. For with a false perspective they see the material rewards but not the punishment – I do not mean the penalty of the law, which they often escape, but the heaviest penalty of all, their own demoralisation.” The Stoics aim was to lead a good life which was achieved through virtue and self-reliance. Moral harm through behaviour which exploited others was contrary to their philosophy. Smith, who was indebted to Stoic moral philosophy, therefore had the Stoic notion of self-interest embodying moral constraint in mind. This is the self-interest, closely allied to self-reliance, which works to mutual advantage and provides the moral foundation of the market economy. In The Wealth of Nations he says,
“But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want and you shall have this that you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.”
Everyday without consciously being aware people are involved in a multitude of transactions which are in the self-interest of both parties and mutually beneficial. It is only at the margin that there are exceptions and these have been used by critics of the free market to support their case. But it is wrong to generalise from these exceptions. They are properly considered for regulations which are seen as necessary and which protect the public without abandoning a free market philosophy. For example, regulations in the pharmaceutical industry which ensure product safety. Similarly the State provides the framework for taxes, environmental standards, defence and the legal system. Smith went on to illustrate the working of self-interest in the market economy with the famous reference to the customer not being able to rely on the benevolence of the butcher, the brewer or the baker for our dinner but on their self-interest. This unfortunately has been painted as a picture of the customer being exploited by “self-interest”. Smith left it unstated but had he added that, neither could the butcher, the brewer or the baker have relied on the benevolence of the customer for their livelihood, then the emphasis on transactions in a free market for mutual benefit would have been apparent and consistent with the quotation above. It follows in a competitive market that Smith would also say the butcher could not expect benevolent customers to support his livelihood if he supplied tough or contaminated meat. Self-interest is therefore identified by Smith as beneficial in society and works for the advantage of all. Professor Gavin Kennedy in his authoritative book, Adam Smith’s Lost Legacy, reaffirms the importance of self-interest, “Selfishness causes harm to others, but self-interest benefits others. It is this distinction that is critical and which has been lost sight of.” The contemporary relevance of the importance of the welfare of consumers in the market economy is emphasised by W. Edwards Demming, regarded by many as the father of modern Quality Management. He had similar thoughts about the mutual benefit of transactions when he referred to the “virtuous cycle”. That is, continuous market research to establish consumers’ requirements and to design, manufacture and deliver products that meet those criteria – a process which ensures a focus on providing service to consumers and thereby a service to the community. Profit and jobs are the reward for effective meeting of consumer requirements. Loss is the penalty for failure. In other words, to be successful in a competitive free market, respect for the needs of others is essential - a virtue consistent with ancient moral philosophy. Schemes such as exploiting monopoly power, which put producers’ interests ahead of the interests of consumers, debases this principle and such schemes were the subject of the strongest possible attack by Smith. In The Wealth of Nations, Smith identifies specialisation as the principle agent contributing to the generation of wealth. Specialisation, he goes on to say, is facilitated by free trade, innovation, money, and efficient transport. All contribute to the effectiveness of specialisation, in improving labour productivity, the creation of wealth and the ultimate wellbeing of the community. Nowhere does Smith refer to actions now labeled as selfish or greedy and harmful to buyer and seller, as contributing to wealth creation. Instead he attacks businessmen for abusing market power to extract higher prices from the consumers than would be the case in a competitive market. He makes a case against restrictive apprenticeships to protect guilds. He is a critic of wasteful expenditure by governments. He strongly criticised elements of the educational system for the self-serving behaviour of the administration and staff at the expense of students. Also the church was reprimanded for placing opulence and luxury ahead of helping the poor. He condemns business colluding with government to gain an advantage through restrictions on trade. These were courageous and pointed attacks in 18th century Scotland. In short, The Wealth of Nations was just as much an attack on what he perceived as exploitation and selfishness as a book promoting a free market economy. For Smith it was important to protect the weak and the poor against exploitation and harm. He advocated the market economy as the most effective way to create wealth and to raise the standard of living of everybody, including the working poor. In The Wealth of Nations he said; “It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. The liberal reward of labour, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. 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.” For Smith a “well governed” society provides for free competitive markets, law and order and infrastructure. He saw law and order as critical and if removed “… that fabric which to raise and support this world … must in a moment crumble to atoms.” We see the wisdom of his insight, drawn from the lessons of history, when we reflect on how wages have increased and poverty has been reduced in developing countries where there has been a freeing up of markets and the strengthening of the rule of law. Critics of Smith and the free market who predicted the system would cause wages to decline have been proven wrong. The generation of wealth also provides the basis for expression of what Adam Smith saw as that other part of human nature - benevolence. The not-for-profit sector in many countries makes a significant contribution to the welfare of the community. Benevolence provides a strong motivation for this sector. In the USA charity has been the equivalent of 1.9% of GDP on average over the past forty years. In 2005, boosted by the response to disasters, the total was US$260.3 billion or equivalent to 2.1% of GDP[6]. In Australia, the Australian Bureau of Statistics found community organisations provided just over A$7 billion of services during 1999/2000. They also provided employment for almost 218,000 people in addition to support from 278,000 volunteers. We can conclude that Smith’s Stoic perception of self-interest embodying moral constraint cannot be seen to condone greed. Indeed, Smith shows a free market encourages civility through the need for mutual respect and a convergence of interest, between buyer and seller, for free exchange. This paper also reveals he was a relentless critic of exploitation. Today it is fashionable to blame the free market for unethical behaviour and exploitation. But critics of such behaviour should take inspiration from Smith and rightly censure the personal and moral failures of those actually responsible rather than blame the free market system. Moreover the community should promote those moral values which Smith saw as being so important for an effective free market economy.
2. Diagram of key factors identified by Adam Smith
The diagram on the following page shows the key elements, including self-interest, identified by Adam Smith which determine the wealth of nations. Relevant supporting references from The Theory of Moral Sentiments and The Wealth of Nations follow the diagram. His insights draw on the lessons of history, his observations and experiences. Dr Alan Greenspan, Chairman, American Federal Reserve 2004, has said, “Adam Smith is as relevant today as he was more than two centuries ago.” [7] The scope of the diagram is broader that conventional economic models. In addition to identifying the causes of wealth it illustrates the factors which Smith saw as impediments to growth and the critical role of the rule of law and property rights. They have the potential, as he says in The Wealth of Nations, to cause things to move “fast backwards”.
"An Inquiry into the Nature and Causes of the Wealth of Nations” [8] Nature of Wealth(1) Annual Produce “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.” “It would be too ridiculous to go about seriously to prove that wealth does not consist in money, or in gold and silver; but in what money purchases, and is valuable only for purchasing.” “The division of labour is the great cause of the increase of public opulence, which is always proportional to the industry of the people, and not to the quantity of gold and silver as is foolishly imagined.” “The real value of all the different component parts of price, it must be observed, is measured by the quantity of labour which they can, each of them, purchase or command. Labour measures the value not only of that part of price which resolves itself into labour, but of that which resolves itself into rent, and of that which resolves itself into profit.” “In exchanging the complete manufacture either for money, for labour, or for other goods, over and above what may be sufficient to pay the price of the materials, and the wages of the workmen, something must be given for the profits of the undertakers of the work who hazards stock in this adventure.” Causes of Wealth(2) Responsible for One’s Self (Self Interest/Self Love) “In every part of the universe we observe means adjusted with the nicest artifice to the ends which they are intended to produce; and in the mechanism of a plant, or animal body, admire how every thing is contrived for advancing the two great purposes of nature, the support of the individual, and the propagation of the species.” The Theory of Moral Sentiments “Every man, as the Stoics used to say, is first and principally recommended to his own care; and every man is certainly, in every respect, fitter and abler to take care of himself than of any other person.” The Theory of Moral Sentiments “Regard to our own private happiness and interest, too, appear upon many occasions very laudable principles of action. The habits of economy, industry, discretion, attention and application of thought are generally supposed to be cultivated from self-interested motives, and, at the same time, are apprehended to be very praiseworthy qualities, which deserve the esteem and approbation of every body … Carelessness and want of economy are universally disapproved of, not, however, as proceeding from a want of benevolence, but from a want of the proper attention to the objects of self-interest.” The Theory of Moral Sentiments “The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impediment and obstructions with which the folly of human laws too often incumbers its operations.” (2) a. Benevolence “The great division of our affections is into the selfish and the benevolent." The Theory of Moral Sentiments “How selfish soever 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. Of this kind is pity or compassion, the emotion which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment like all the other original passions of human nature, is by no means confined to the virtuous and humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, it is not altogether without it.” [9] The Theory of Moral Sentiments (3) The Propensity to Trade/Exchange “This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.” “In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. 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, and never talk to them of our own necessities but of their advantages.” (4) Division of Labour “The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour.” “As it is by treaty, by barter, and by purchase, that we obtain from one another the greater part of those mutual good offices which we stand in need of, so it is this same trucking disposition which originally gives occasion to the division of labour. In a tribe of hunters or shepherds a particular person makes bows and arrows, for example, with more readiness and dexterity than any other. He frequently exchanges them for cattle or for venison with his companions; and he finds at last that he can in this manner get more cattle and venison, than if he himself went to the field to catch them. From a regard to his own interest, therefore, the making of bows and arrows grows to be his chief business, and he becomes a sort of armourer.” “Each animal is still obliged to support and defend itself, separately and independently, and derives no sort of advantage from that variety of talents with which nature has distinguished its fellows. Among men, on the contrary, the most dissimilar geniuses are of use to one another; the different produces of their respective talents, by the general disposition to truck, barter, and exchange, being brought, as it were, into a common stock, where every man may purchase whatever part of the produce of other men’s talents he has occasion for.” “The increase of demand, besides, though in the beginning it may sometimes raise the price of goods, never fails to lower it in the long run. It encourages production, and thereby increases the competition of the producers, who, in order to undersell one another, have recource to new divisions of labour and new improvements of art, which might never otherwise have been thought of.” (5) Extent of Market “As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market.” (6) Transport “As by means of water-carriage a more extensive market is opened to every sort of industry than what land-carriage alone can afford it, so it is upon the sea-coast, and along the banks of navigable rivers, that industry of every kind naturally begins to subdivide and improve itself, and it is frequently not till a long time after that those improvements extend themselves to the inlands parts of the country.” “Good roads, canals, and navigable rivers, by diminishing the expense of carriage, put the remote parts of the country more nearly upon a level with those in the neighbourhood of the town. They are upon that account the greatest of all improvements. They encourage the cultivation of the remote, which must always be the most extensive circle of the country. They are advantageous to the town, by breaking down the monopoly of the country in its neighbourhood.” “The extent and easiness of this inland navigation was probably one of the principal causes of the early improvement of Egypt.” (7) Innovation “It is naturally to be expected, therefore, that some one or other of those who are employed in each particular branch of labour should soon find out easier and readier methods of performing their own particular work, wherever the nature of it admits of such improvement. A great part of the machines made use of in those manufacturers in which labour is most subdivided, were originally the inventions of common workmen, who, being each of them employed in some simple operation, naturally turned their thoughts towards finding out easier and readier methods of performing it. All the improvements in machinery, however, have by no means been the inventions of those who had the occasion to use the machines. Many improvements have been made by the ingenuity of the makers of the machines, when to make them become the business of a particular trade; and some by that of those who are called philosophers or men of speculation, whose trade it is not to do any thing, but to observe every thing; and who, upon that account, are often capable of combining together the powers of the most distant and dissimilar objects. In the progress of society, philosophy or speculation becomes, like every other employment, the principle or sole trade and occupation of a particular class of citizens. Like every other employment too, it is subdivided into a great number of different branches, each of which affords occupation to a particular tribe or class of philosophers; and this subdivision of employment in philosophy, as well as in every other business, improves dexterity, and saves time. Each individual becomes more expert in his own particular branch, more work is done upon the whole, and the quantity of science is considerably increased by it. I shall only observe, therefore, that the invention of all those machines by which labour is so much facilitated and abridged, seems to have been originally owing to the division of labour.” (8) Free Competitive Markets “In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so.” (9) Money “The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each of them be willing to purchase a part of it. But they have nothing to offer in exchange, except the different productions of their respective trades, and the butcher is already provided with all the bread and beer, which he has immediate occasion for. No exchange can, in this case, be made between them. He cannot be their merchant, nor they his customers; and they are all of them thus mutually less serviceable to one another. In order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner, as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry.” “In order to put industry into motion, three things are requisite; materials to work upon, tools to work with, and the wages or recompence for the sake of which the work is done. Money is neither a material to work upon, nor a tool to work with; and though the wages of the workman are commonly paid to him in money, his real revenue, like that of all other men, consists, not the money, but in the money's worth; not in the metal pieces, but in what can be got for them.” (10) Labour Productivity Improvements “This great increase of the quantity of work which, in consequence of the division of labour, the same number of people are capable of performing, is owing to three different circumstances; first to the increase of dexterity in every particular workman, secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and lastly, to the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many.” (11) Accumulation of Capital “Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaining an additional number of productive hands, or enables some other person to do so, by lending it to him for an interest, that is, for a share of the profits. As the capital of an individual can be increased only by what he saves from his annual revenue or his annual gains, so the capital of a society, which is the same with that of all the individuals who compose it, can be increased only in the same manner. As the accumulation of stock is previously necessary for carrying on this great improvement in the productive powers of labour, so that accumulation naturally leads to this improvement. The person who employs his stock in maintaining labour, necessarily wishes to employ it in such a manner as to produce as great a quantity of work as possible. He endeavours, therefore, both to make among his workmen the most proper distribution of employment, and to furnish them with the best machines which he can either invent or afford to purchase. His abilities in both these respects are generally in proportion to the extend of his stock, or to the number of people whom it can employ. The quantity of industry, therefore, not only increases in every country with the increase of the stock which employs it, but, in consequence of that increase, the same quantity of industry produces a much greater quantity of work. It is upon this account that all such improvements in mechanics, as enable the same number of workmen to perform an equal quantity of work with cheaper and simpler machinery than had been usual before, are always regarded as advantageous to every society.” (12) Sequential Development of Agriculture, Manufacturing then Foreign Commerce “According to the natural course of things, therefore, the greater part of the capital of every growing society is, first, directed to agriculture, afterwards to manufactures, and last of all to foreign commerce. This order of things is so very natural, that in every society that had any territory, it has always, I believe, been in some degree observed. Some of their lands must have been cultivated before any considerable towns could be established, and some sort of course industry of the manufacturing kind must have been carried on in those towns, before they could well think of employing themselves in foreign commerce.” (13) Free Trade “The love of our own nation often disposes us to view, with the most malignant jealousy and envy, the prosperity and aggrandisement of any other neighbouring nation. Independent and neighbouring nations, having no common superior to decide their disputes, all live in continual dread and suspicion of one another. Each sovereign, expecting little justice from his neighbours, is disposed to treat them with as little as he expects from them. The regard for the laws of nations, or for those rules which independent states profess or pretend to think themselves bound to observe in their dealings with one another, is often very little more than mere pretence and profession. From the smallest interest, upon the slightest provocation, we see those rules every day either evaded or directly violated without shame or remorse. Each nation foresees, or imagines it foresees, its own subjugation in the increasing power and aggrandisement of any of its neighbours; and the mean principle of national prejudice is often founded on the noble one of the love of our own country. France and England may each of them have some reason to dread the increase of the naval and military power of the other; but for either of them to envy the internal happiness and prosperity of the other, the cultivation of its lands, the advancement of its manufacturers, the increase of its commerce, the security and number of its ports and harbours, its proficiency in all the liberal arts and sciences, is surely beneath the dignity of two such great nations. These are the real improvements of the world we live in. Mankind are benefited, human nature is ennobled by them. In such improvements each nations ought not only to endeavour itself to excel, but, from the love of mankind, to promote, instead of obstructing, the excellence of its neighbours. These are all proper objects of national emulation, not of national prejudice or envy.” The Theory of Moral Sentiments “The importation of gold and silver is not the principle, much less the sole benefit which a nation derives from its foreign trade. Between whatever places foreign trade is carried on, they all of them drive two distinct benefits from it. It carries out that surplus part of the produce of their land and labour for which there is no demand among them, and brings back in returns for it something else which there is a demand. It gives a value to their superfluities, by exchanging them for something else, which may satisfy a part of their wants, and increase their enjoyments. By means of it, the narrowness of the home market does not hinder the division of labour in any particular branch of art or manufacture from being carried to the highest perfection. By opening a more extensive market for whatever part of the produce of their labour may exceed the home consumption, it encourages them to improve its productive powers, and to augment its annual produce to the utmost, and thereby to increase the real revenue and wealth of the society.” “What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” “Were all nations to follow the liberal system of free exportation and free importation, the different states into which a great continent was divided would so far resemble the different provinces of a great empire.” “The case in which it may sometimes be a matter of deliberation, how far, or in what manner, it is proper to restore the free importation of foreign goods, after it has been for some time interrupted, is, when particular manufacturers, by means of high duties or prohibitions upon all foreign goods which can come into competition with them, have been so far extended as to employ a great multitude of hands. Humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a good deal of reserve and circumspection. Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured so fast into the home market, as to deprive all at once many thousands of our people of their ordinary employment and means of subsistence.”[10] “If any particular manufacture was necessary, indeed, for the defence of the society, it might not always be prudent to depend on our neighbors for the supply; and if manufacture could not otherwise be supported at home, it might be not be unreasonable that all the other branches of industry should be taxed in order to support it.” (14) Optimum Allocation of Resources “The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality. If in the same neighbourhood, there was any employment evidently either more or less advantageous than the rest, so many people would crowd into it in the one case, and so many would desert it in the other, that its advantages would soon return to the level of other employments. This at least would be the case in a society where things were left to follow their natural course, where there is perfect liberty, and where every man was perfectly free both to choose what occupation be thought proper, and to change it as often as he thought proper. Every man's interest would prompt him to seek the advantageous, and to shun the disadvantageous employment. Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.” (15) Price Equilibrium “When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price. The actual price at which any commodity is commonly sold is called its market price. It may either be above, or below, or exactly the same with its natural price.” (16) Effective Government “According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain, because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.” (17) Defence “The first duty of the sovereign, that of protecting the society from the violence and invasion of other independent societies, can be performed only by means of a military force. But the expence both of preparing this military force in time of peace, and of employing it in time of war, is very different in the different states of society, in the different periods of improvement. An industrious, and upon that account wealthy nation, is of all nations the most likely to be attacked; and unless the state takes some new measures for the public defence, the natural habits of the people render them altogether incapable of defending themselves.” (18) Education “But though the common people cannot, in any civilized society, be so well instructed as people of some rank and fortune, the most essential parts of education, however, to read, write, and account, can be acquired at so early a period of life, that the greater part even of those who are to be bred to the lowest occupations, have time to acquire them before they can be employed in those occupations. For a very small expence the public can facilitate, can encourage, and can even impose upon almost the whole body of the people, the necessity of acquiring those most essential parts of education.” (Of the four items of fixed capital of society) – “… the acquired and useful abilities of all the inhabitants or members of the society. The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expence, which is a capital fixed and realized, as it were, in his person. Those talents, as they make a part of his fortune, so do they likewise of that of the society to which he belongs. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labour, and which, although it costs a certain expence, repays that expence with a profit.” Essential Requirements(19) Rule of Law and Property Rights “Justice, on the contrary, is the main pillar that upholds the noble edifice. If it is removed, the great, the immense fabric of human society, that fabric which to raise and support in this world if I may say so has the peculiar and darling care of Nature, must in a moment crumble into atoms.” The Theory of Moral Sentiments (II.ii.3.4) “If there is any society among robbers and murderers, they must at least, according to the trite observation, abstain from robbing and murdering one another. Beneficence, therefore, is less essential to the existence of society than justice. Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it. The acquisition of valuable and extensive property, therefore, necessarily requires the establishment of civil government.”[11] Impediments(20) Market Intervention “What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would no-where be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.” “It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interest has so carefully been attended to; and among this latter class our merchants and manufacturers have been by far the principal architects. In the mercantile regulations … the interest of our manufacturers has been most peculiarly attended to; and the interest, not so much of the consumers, as that of some other sets of producers, has been sacrificed to it. It is thus that every system which endeavours, either, by extraordinary encouragements, to draw towards a particular species of industry a greater share of the capital of the society than what would naturally go to it; or by extraordinary restraints, to force from a particular species of industry some share of the capital which would otherwise be employed in it; is in reality subversive of the great purpose which it means to promote. It retards, instead of accelerating; the progress of the society towards real wealth and greatness; and diminishes, instead of increasing, the real value of the annual produce of its land and labour.” “That indolence, which is the natural effect of the ease and security of their situation, renders them too often, not only ignorant, but incapable of that application of mind which is necessary in order to foresee and understand the consequences of any public regulation.” “The Man of System … is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely, and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that in the great chess-board of human society, every single piece has a principle of its own, altogether different from that which the legislature might chuse to impress upon it.” [12] (21) Public Debt “The practice of funding has gradually enfeebled every state which has adopted it. The Italian republics seem to have begun it. Genoa and Venice, the only two remaining which can pretend to an independent existence, have both been enfeebled by it. Spain seems to have learned the practice from the Italian republics, and (its taxes being probably less judicious than theirs) it has, in proportion to its natural strength, been still more enfeebled. The debts of Spain are of very old standing. It was deeply in debt before the end of the sixteenth century, about a hundred years before England owed a shilling. France, notwithstanding all its natural resources, languishes under an oppressive load of the same kind. The republic of the United Provinces is as much enfeebled by its debts.” (22) Taxes upon Necessities “In Holland the heavy taxes upon the necessaries of life have ruined, it is said, their principle manufactures, and are likely to discourage gradually even their fisheries and their trade in ship-building. The taxes upon the necessaries of life are inconsiderable in Great Britain, and no manufacture has hitherto been ruined by them.” (23) Primogeniture and Great Estates “Great tracts of uncultivated land were, in this manner not only engrossed by particular families, but the possibility of their being divided again was as much as possible precluded for ever. It seldom happens, however, that a great proprietor is a great improver. In the disorderly times which gave birth to those barbarous institutions, the great proprietor was sufficiently employed in defending his own territories, or in extending his jurisdiction and authority over those of his neighbours. He had no leisure to attend to the cultivation and improvement of land. When the establishment of law and order afforded him this leisure, he often wanted the inclination, and almost always the requisite abilities. If the expence of his house and person either equalled or exceeded his revenue, as it did very frequently, he had no stock to employ in this manner. If he was an economist, he generally found it more profitable to employ his annual savings in new purchases, than in the improvement of his old estate. To improve land with profit, like all other commercial projects, requires an exact attention to small savings and small gains, of which a man born to a great fortune, even though naturally frugal, is very seldom capable. The situation of such a person naturally disposes him to attend rather than ornament which pleases his fancy, than to profit for which he has so little occasion. The elegance of his dress, of his equipage, of his house, and household furniture, are objects which from his infancy he has been accustomed to have some anxiety about. The turn of mind which this habit naturally forms, follows him when he comes to think of the improvement of land. He embellishes perhaps four or five hundred acres in the neighbourhood of his house, at ten times the expence which the land is worth after all his improvements; and finds that if he was to improve his whole estate in the same manner and he has little taste for any other, he would be a bankrupt before he had finished the tenth part of it. There still remain in both parts of the United Kingdom some great estates which have continued without interruption in the hands of the same family since the times of feudal anarchy. Compare the present condition of these estates with the possessions of the small proprietors in their neighbourhood and you will require no other argument to convince you how unfavourable such extensive property is to improvement.” (24) Bounties “The effect of bounties, like that of all the other expedients of the mercantile system, can only be to force the trade of a country into a channel much less advantageous than that in which it would naturally run of its own accord. The laws concerning corn may every where be compared to the laws concerning religion. The people feel themselves so much interested in what relates either to their subsistence in this life, or to their happiness in a life to come, that government must yield to their prejudices, and, in order to preserve the public tranquillity, establish that system which they approve of. It is upon this account, perhaps, that we so seldom find a reasonable system established with regard to either of those two capital objects.” “… the bounty to the white herring fishery is a tonnage bounty; and is proportioned to the burden of the ship, not to her diligence or success in the fishery; and it has, I am afraid, been too common for vessels to fit out for the sole purpose of catching, not the fish, but the bounty.” (25) Government Extravagance “It is of the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expence, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.” (26) Exploiting Monopoly Power “A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments.” “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 then necessary.” “The single advantage which the monopoly procures to a single order of men is in many different ways hurtful to the general interest of the country.” “…. To attempt to diminish in any respect the monopoly which our manufacturers have obtained against us. This monopoly has so much increased the number of some particular tribes of them, that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature. The member of parliament who supports every proposal for strengthening this monopoly, is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services, can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists.” “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.” (27) Slave Labour “It appears, accordingly, from the experience of all ages and nations, I believe, that the work done by freemen comes cheaper in the end that that performed by slaves…” “The liberal reward of labour, therefore, as it is the effect of increasing wealth, so it is the cause of increasing population. To complain of it is to lament over the necessary effect and cause of the greatest public prosperity.” “But if great improvements are seldom to be expected from great proprietors, they are least of all to be expected when they employ slaves for their workmen. The experience of all ages and nations, I believe, demonstrates that the work done by slaves, though it appears to cost only their maintenance, is in the end the dearest of any. A person who can acquire no property, can have no other interest but to eat as much, and to labour as little as possible.” (28) Exclusive Privileges of Corporations “The constant view of such companies is always to raise the rate of their own profit as high as they can; to keep the market, both for the goods which they export, and for those which they import, as much understocked as they can: which can be done only by restraining the competition, or by discouraging new adventurers from entering the trade.” (29) Colonies “After all the unjust attempts, therefore, of every country in Europe to engross to itself the whole advantage of the trade of its own colonies, no country has yet been able to engross to itself any thing but the expence of supporting in time of peace and of defending in time of war the oppressive authority which it assumes over them. The inconveniences resulting from the possession of its colonies, every country has engrossed to itself completely. The advantages resulting from their trade it has been obliged to share with many other countries.” “Great Britain derives nothing but loss from the dominion which she assumes over her colonies.” Outcome(30) Liberal Reward of Labour “It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. The liberal reward of labour, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. 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.” (31) Increase in Number of Inhabitants “The liberal reward of labour, therefore, as it is the effect of increasing wealth, so it is the cause of increasing population. To complain of it, is to lament over the necessary effect and cause of the greatest public prosperity.” (32) Negative Impact of Repetitive Tasks on Workers “It is the progress of the division to of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations; frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him, not only incapable of relishing or bearing a part in any national conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging; and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance, in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government take some pains to prevent it.” [13] (33) Church Opulence Depriving Poor “In the produce of arts, manufactures, and commerce, the clergy, like the great barons, found something for which they could exchange their rude produce, and thereby discovered the means of spending their whole revenues upon their own persons, without giving any considerable share of them to other people. Their charity became gradually less extensive, their hospitality less numerous, and by degrees dwindled away altogether… The inferior ranks of people no longer looked upon that order, as they had done before, as the comforters of their distress, and the relievers of their indigence. On the contrary, they were provoked and disgusted by the vanity, luxury, and expense of the richer clergy, who appeared to spend upon their own pleasures what had always before been regarded as the patrimony of the poor.”
THE AUTHOR Richard Morgan AM
Richard Morgan has a degree in Agricultural Science, University of Melbourne, and is a graduate of the Faculty of Economics and Commerce, University of Melbourne. A businessman with extensive experience in major public companies at a senior executive level he has long taken a special interest in the work of Adam Smith. He is Principal of BPC Holdings Pty Ltd, a private company, with investments in agribusiness and venture capital. Mr Morgan has served as a Director and Treasurer of the Victorian Chamber of Commerce and Industry, a Council Member and National Treasurer of the Australian Institute of Agricultural Science and Technology, and a Council Member of Geelong Grammar School. He is a member of the Council of the Australian Institute of International Affairs, Victoria. Mr Morgan tutored in Banking and Finance in the Faculty of Economics and Commerce at the University of Melbourne. He is an Honorary Life Member of the Australian Red Cross and the past National Chairman of the Society. He was made a Member of the Order of Australia for services to the community and received the Australian Centenary Medal for services to the Australian Red Cross.
[1] Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations. Published in 1776, although the manuscript of lectures he read in 1750-1 “contained many of the most important opinions in The Wealth of Nations”, Dugold, Stewart, Account of the Life and Writings of Adam Smith, 1793 (p33). [2] The Theory of Moral Sentiments is, however, best known for Smith’s theory of how empathy with others, or what he called sympathy, helped guide acceptable social behaviour. [3] Quoted by Dr William Coleman, Senior Lecturer at the School of Economics, Australian National University, in his book, Economics and its Enemies. [4] The Theory of Moral Sentiments (11.ii.1.15) where self-love is used in the context of Stoic philosophy. [5] The Theory of Moral Sentiments (II.ii.3.4) [6] Financial Times, 19 June 2006 [7] Private correspondence 2004 Graeme Barrett. [8] Apart from references marked “The Theory of Moral Sentiments” (TM) quotes are from “An Inquiry into the Nature and Causes of the Wealth of Nations” (WN).
Smith wrote TM when he was Professor of Moral Philosophy at the Glasgow University. He planned to cover philosophy in three parts: TM dealing with ethics; WN political economy and a third Jurisprudence. The latter was not completed during his lifetime and the relevant papers, along with others, were burnt in accordance with his Will after his death. Gavin Kennedy, in Adam Smith’s Lost Legacy, makes the case that it is most likely he instructed the papers to be burnt to protect his colleagues with whom he corresponded about views on constitutional monarchy. The papers would have been controversial at that time and could potentially have put his friends at risk.
[9] Smith recognised benevolence as a part of human nature in TM. Apart from acknowledging the work of the Church in helping the poor he did not consider how benevolence might contribute to the wealth of society in WN. More recently the significant role of the “Not for Profit” sector has gained recognition.
[10] Smith does say however that the effect would be “much less than is commonly imagined” for two reasons. Firstly, employment in export industries would not be effected and secondly the people thrown out of work may readily find alternative employment. [11] In relevant contemporary work Hernando de Soto in “The Mystery of Capital” demonstrates the importance of property rights for economic development. Of de Soto’s work, Milton Friedman had to say, “de Soto has demonstrated in practice that titling hitherto untitled assets is an extremely effective way to promote economic development of society as a whole. He offers politicians a project which can contribute to the welfare of their country and at the same time enhance their own political standing, a wonderful combination.” Francis Fukuyama quotes Friedman in an article in the Australian Financial Review 4 August 2004, “Milton Friedman admitted that his advice to former socialist countries in the early ‘90s had been to “privatise, privatise, privatise”. “But I was wrong,” he continued, “It turns out that the rule of law is probably more basic than privatisation.”
[12] There is a nice example of the accuracy of Smith's insight into the mind of the “Man of System” related in “The Closed Circle” by David Pryce-Jones. It is a record of Muhammad Ali, the ruler of Egypt from 1811 to 1849, speaking to the British Consul in 1826. “I collected all power into my hands in order to ensure efficiency. The question is one concerned with production, and if I fail to act, who else would? Who is going to provide the necessary funds, suggest the plans to be followed and the crops to be planted? Who is going to force the people to acquire knowledge and sciences which made Europe progress? I was forced to lead this country as children must be led because allowing it to function alone would only lead to chaos again.” A contemporary witness describes how Muhummad Ali and his state “inflicted terrible or harsh duties on women of poor areas, subjecting them to forced labour which the entire population of several villages, men, women, children and young girls, led by the sheikh al-balad (a man designated to be mayor), were taken, chained, and laboriously found their way to the appointed place. They were forced to buy cloth of the state at a price fixed by the administration and were forbidden to weave their own clothes. All dresses had to bear a stamp attesting that the material came from government stores.” [13] Critics of the capitalist free market system have attributed the deleterious effect of repetitive work as alienating and exploiting labour and a failure of that system. They have expounded an alternative to the capitalist free market economy but not appreciated that any system which provides that much needed increase in wealth for community development will, as Smith points out, rely on specialisation. The alternative would therefore also involve repetitive work and would not provide a solution to the problem identified by Smith. Smith, on the other hand, stressed the importance of education to redress the effect of repetitive work and provide the opportunity for a more rewarding occupation. He advocated that the State should ensure everyone had access to education.
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