Reclaiming Adam Smith

wealth of nations

Contrary to conservative claims, Adam Smith was a liberal who argued for government intervention to ensure economic growth and “general prosperity.” I find it intriguing that he attributes Britain’s global economic dominance to “division of labor” and a superior agricultural system. Despite an entire chapter in Book I on the origin of money, he makes no mention of the role of English banks in creating money (which started in 1666), which kick started the industrial revolution. 

The Wealth of Nations

by Adam Smith

Abridged Version by Laurence Dickey, Professor of History, University of Wisconsin-Madison (Hackett Publishing 1993)

Book Review

The Wealth of Nations consists of five books (written between 1767-1784). Adam Smith’s work is cited extensively by neoliberals and neoconservatives as justification for ending government regulation of corporations . Free marketeers argue that regulation negatively impacts the totally unobstructed free market Adam Smith allegedly advocates.

I think it’s high time for liberals, progressives and left libertarians to reclaim Adam Smith as one of our own. Smith self-identifies as a liberal – one of the first in Europe. He also frequently advocates for what he calls “progressive” economics, i.e. government intervention to ensure that rich people invest their profits in increasing productive labor, rather than corruption and vice.

The 1993 Edition

Smith’s writing tends to be quite repetitive, as large sections of the later books predate the earlier ones. In his abridged version, Dickey merely summarizes material Smith has introduced in earlier sections. There is also a generous preface, as well as appendices, that position Smith among the various writers of the 18th century Scottish Enlightenment. In this way Dickey shows that, to a large extent, the Wealth of Nations is a consolidation of widely held views on basic economic principles.

The overall intent of the Wealth of Nations is 1) to make general observations about the economic and social changes that underlay the transformation from feudalism to modern industrial society and 2) to lay out basic macroeconomic principles that Smith believes are essential for a prosperous, politically stable nation which provides an adequate standard of living for its workforce. The latter is extremely important to Smith, both as a principle of social justice and to prevent social unrest.

Contrary to claims made by free market conservatives, nowhere does The Wealth of Nations make the case for a totally unregulated free market economy. Quite the contrary, Book V Revenue of the Sovereign or Commonwealth makes a strong argument that government intervention is essential in free markets to ensure economic growth and general prosperity.

Book I (Of the Causes of Improvement in the Productive Powers of Labour)

Book I describes the historical development of international trade and the origin of money. It also lays out Smith’s belief that “division of labor” – in which individual farmers stopped making their own plows, dwellings, shoes, clothes, etc. and organized into specialized trades to provide these services – was the fundamental socio-economic change that made modern economic development and western-style democracy possible.

A notable omission here is Smith’s failure to mention the role private banks assumed in issuing money after the 1666 Free Coinage Act. Carroll Quigley (see The Real Vampires: an Insider’s View of Banks ) argues that Britain’s control over international finance (not British agriculture and “division of labor”) was responsible for Britain’s lengthy dominance over world commerce and trade. I suspect that Smith, like many modern day politicians, had no idea that private banks were creating the money supply out of thin air.

Book I also makes the case that daily “subsistence” (i.e. wages) should be proportioned to the cost of daily necessities and that slavery is uneconomical:

“No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe and lodge the whole body of the people should have such as share of their own labour as to be themselves totally well fed, clothed and lodged.”

Book II (Of the Nature, Accumulation, and Employment of Stock)

Book II lays out Smith’s view that capital accumulation (the reinvestment of profits to employ more workers) further advances divisions and subdivisions of labor to improve the “productive power of labor” and the wealth of society. Here Smith emphasizes the importance of spreading wealth to wider and wider circles of people to keep employment constant and prevent social disorder.

Book II also emphasizes what Smith calls “frugality” or the “mediocrity-of-money” as being essential to this capitalization. He also calls for limited government intervention (which Book V elaborates on) to ensure “doux-commerce.” This he defines as an economy based on “frugality,” in which rich people invest their profits in increasing productive labor, rather than luxuries, corruption and vice, which contribute nothing to a society’s economic well being.

Neoliberals often make Smith out as an advocate of laissez-faire economics, in which economic imbalances and social injustice is addressed by the “invisible hand” of competitive market forces. It was actually one of Smith’s contemporaries J. Harris who made this argument.

Book III (Of the Different Progress of Opulence in Different Nations)

Book III elaborates on Smith’s ideas about the accumulation of capital and “frugality,” as well as describing the rise of cities and mercantilism, which in Smith’s view negatively impacts investment in agriculture. Using numerous historical examples, he argues that the inability of a country or empire to produce their own food (and subsequent reliance on food imports) always results in their downfall.

Book IV (Of Systems of Political Oeconomy)

Book IV is a frontal attack on mercantilism, which Smith despises. “Monopoly,” according to Smith, “is the sole engine of the mercantile system.”

Smith, who makes the strong argument that money has no intrinsic value of its own, blames mercantilism on an overemphasis on accumulating gold and silver reserves (money), at the expense of genuine productive capacity and overall economic wealth. He’s highly critical of European nations for being obsessed with a positive balance of trade (to build up their gold and silver reserves). He’s also critical of the wrongheaded way they go about it, through the granting of monopoly rights and protective tariffs, and quotas, which always negatively impact domestic production.

This book also outlines Smith’s views on government intervention. According to Smith, a sovereign (government) has three duties:

  1. To protect society from violence or invasion
  2. To protect, as far as possible, every member of society from injustice or oppression from every other member of society). Smith calls for direct government intervention in “facilitating” investment in agriculture.
  3. To maintain certain public works and institutions “which can never be for [the benefit of] certain individuals or groups of individuals.”

Book V (Of the Revenue of the Sovereign or Commonwealth)

Book V – elaborates on specific interventions Smith would allow government to make “in relations between the rich and poor.” He argues for a government role in ensuring that educational institutions provide moral up-lift (i.e. a “culture of frugality”) to ensure the continuing investment necessary to create jobs.

Here he also delves at length into the effect of military spending on economic wealth. He argues that military spending must be strictly limited and never paid for by borrowing. He predicts that indebtedness for military spending will eventually cause the economic ruin of all European countries.

1 thought on “Reclaiming Adam Smith

  1. Pingback: Adam Smith | The Most Revolutionary Act

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