Claims of Adam Smith's 'Monumental Error' Shown to be False

A debate about Adam Smith’s ‘grave error’ on Mises.org Blog (here.

First the statement of the ‘monumental’ and ‘grave error:

‘Adam Smith and Karl Marx's basic and monumental (in consequences) error'

Juan Fernando Carpio writes:

“What could these two thinkers, considered to be opposites, have in common? It turns out that Karl Marx inherits from Adam Smith a very basic error, one which has monumental consequences and has changed the world forever.

Adam Smith tells us in his famous treatise on the wealth of nations that in primitive conditions or small towns, those who would go to the market to sell their produce, cattle or manufacturing obtained salaries (wages) from their neighbors in the process. Salaries? Grave error.”

My initial question to Juan Fernando Carpio:

“Could you give a reference in Adam Smith's works to his use of the word 'salary', or a 'substitute' word, please?

And perhaps also to the source reference to his statement that for going to market someone received a 'salary' or 'wage' or 'income'.
Thanks, Gavin Kennedy."

To which Juan Fernando Carpio responded:

“For Gavin Kennedy:

"The profits of stock, it may perhaps be thought, are only a different name for the wages of a particular sort of labour, the labour of inspection and direction. They are, however, altogether different, are regulated by quite different principles, and bear no proportion to the quantity, the hardship, or the ingenuity of this supposed labour of inspection and direction. They are regulated altogether by the value of the stock employed, and are greater or smaller in proportion to the extent of this stock. Let us suppose, for example, that in some particular place, where the common annual profits of manufacturing stock are ten per cent. there are two different manufactures, in each of which twenty workmen are employed at the rate of fifteen pounds a year each, or at the expence of three hundred a year in each manufactory. Let us suppose too, that the coarse materials annually wrought up in the one cost only seven hundred pounds, while the finer materials in the other cost seven thousand. The capital annually employed in the one will in this case amount only to one thousand pounds; whereas that employed in the other will amount to seven thousand three hundred pounds. At the rate of ten per cent. therefore, the undertaker of the one will expect an yearly profit of about one hundred pounds only; while that of the other will expect about seven hundred and thirty pounds. But though their profits are so very different, their labour of inspection and direction may be either altogether or very nearly the same. In many great works, almost the whole labour of this kind is committed to some principal clerk."
Chapter six. His treatment of wages and labor is anything but a call for confusion and disregard for the role of the pure capitalist.”
[Wealth Of Nations: I.vi.6. p 66]

To which I replied:

“I asked for a source for your statement that an entrepreneur going to market on behalf of others earned a 'salary'.

Your reference does not give one. 'Salary' is not a word I believe Smith would use.

In the reference you give from Book I, he speaks of profit as the earnings of capital and excludes these earning as comparable to 'wages', in this case of supervision. He gives an example showing this.

I do not think you have made your point about Adam Smith at all.

'Capitalism', pure or otherwise, was never mentioned by Smith (the word was invented in English in 1854). Turgot used the word 'capitaliste' in French. Smith wrote about commercial society before 19th century capitalism. He died in 1790.”

To which Juan Fernando Carpio replied a few hours later:

“Gavin, it's not the terms that matter, but the underlying concept. I think the line "The profits of stock, it may perhaps be thought, are only a different name for the wages of a particular sort of labour, the labour of inspection and direction." is pretty clear.

To which I replied this morning:

“I have no wish to bash this issue to death, but when reading Adam Smith, you must read closely what he writes. He often states a proposition and then follows it with a rebuttal.

Remember, he was a rhetorician in the classical mode, a form of argument now redundant. He was also a university teacher and in the 18th century his classes consisted of boys, all necessarily qualified in Latin (lectures used to be given in Latin in 18th century Scotland, though Smith, fluent in Latin, lectured in English). The first line you quote is 'pretty clear' - he states what some people 'may perhaps' have 'thought':

"The profits of stock, it may perhaps be thought, are only a different name for the wages of a particular sort of labour, the labour of inspection and direction."

This does not mean that he 'thought' it too, for he goes on in the very next line to repudiate that 'thought':

"They are, however, altogether different, are regulated by quite different principles, and bear no proportion to the quantity, the hardship, or the ingenuity of this supposed labour of inspection and direction. They are regulated altogether by the value of the stock employed, and are greater or smaller in proportion to the extent of this stock."

Now that is what Smith 'thought' and believed, and it is more than 'pretty clear', it is ABSOLUTELY clear, that he believed in the second sentence and NOT the first.

If the terms do not matter, 'the underlying concept does', and Smith makes it clear what he considers to be the 'underlying concept'.

Adam Smith did NOT on this occasion make a 'monumental error' (I cannot speak for Karl Marx!), but you are in danger of making an error of attribution to Smith something in which he said something completely different to that which you have attributed to him.

The Mises.org editor should have noted this.”

Comment
I have had occasion to question the use that writers in the Mises tradition sometimes use in their attributions to Adam Smith in order to discredit him. The most glaring example was the publication of papers by Murray Rothbard, a leading ‘Austrian’ economist, on Smith’s alleged ‘errors’ (plus plagiarism to boot) on the division of labour. Rothbard completely muddled Smith’s account and blamed him for Marxism! (See archives for 2005-6)

Juan Fernando Carpio is following a similar line of criticism of Adam Smith, though I believe, so far, in his case that his error is one of innocently misreading Smith’s text, rather than from malice, as it was in Rothbard’s case.

If Juan Fernando Carpo read to the end of the paragraph he quoted, he would find Adam Smith’s views made quite explicit:

‘In the price of commodities, therefore, the profits of stock constitute a component part altogether different from the wages of labour, and regulated by quite different principles.’ [Wealth Of Nations, I.vi.6: p 67]

The owners of capital receive the incomes from capital as the owners of the capital concerned. If there is a clearer statement of the refutation of Juan Fernando Carpo’s attribution to Adam Smith of views he never held, I do not know how it would be written differently.

Therefore, on this occasion, Smith did not make a ‘monumental error’ that had ‘grave consequences’. Whatever was ‘inherited’ by Karl Marx, it was not from Adam Smith.

It is Juan Fernando Carpo who is in academic ‘danger’ of making a ‘monumental’ error of embarrassing proportions if he does not simply retract his attributions to Adam Smith. Whether he does or not is up to him, but I am comforted to know that in Juan Fernando Carpo's case it will not change 'the world forever'.