Another Misuse of Adam Smith's Views

David Sogge, 3 October, writes in Casino Crash: ‘Adam Smith responds to Bank Bailout!’ (HERE)

“Many know the Adam Smith remark (1776): “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public…” But Smith wrote other things that Wall Street types would choke on, including some remarks pertinent to the bailout plan railroaded at high speed through the US Congress at their behest.

Here are last two sentences of Book I of Smith’s Wealth of Nations:

“The proposal of any new law or regulation of commerce which comes from this order [profit takers], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”

Comment
Both quotations, in my view, are used without the necessary and prudent qualifications, which suggests that David Sogge, of the Transnational Institute, an organization ‘acting in the spirit of public scholarship’, which displays an unscholarly carelessness with Adam Smith’s ‘Wealth Of Nations’, a not uncommon feature of many of those who quote snippets from it.

The first quotation, shorn of its context, appear to be a general statement about ‘trades’, which today is easily taken by general readers to be applicable to modern businesses operating in a system of company laws, when in fact Smith referred to the behaviours of traders, journeymen, artificers, petty merchants, and members of the corporate guilds that managed the economic activities of towns which, by law, were privileged to make all kinds of decisions that could, and frequently did, restrict competition and raise prices against consumers.

The relevant context is found in Wealth Of Nations (WN I.x.c.14-32: pp 139-47).

Modern businesses are not analogous to Smith’s reference to ‘trades; indeed, today there are severe legal prohibitions and penalties on collusion of the kind identified by Smith in 16th-18th-century Britain. If anything, Smith’s reference to ‘trades’ in his context is more closer to the behaviours of modern trade unions – some still called ‘Guilds’ in the USA – than to modern businesses. Recently, the European courts fined heavily certain businesses that were found guilty of price collusion and even Hollywood was shut down by a 'Guild' for weeks.

The second quotation from Book I of Wealth Of Nations (WN I.x.p.1-10: pp 264-7) is part of a discussion about the three great orders: those who lived by rent (landlords), those who lived by wages (the employees), and those who lived by profit (18th-century merchants and manufacturers).

Smith felt that the [proprietors of land] were ‘inseparably connected with the general interest of society’ and ‘can never mislead [society]’ when it promotes its own interests ‘concerning any regulation of commerce or police’ (the latter an 18th-century word for providing society with the wherewithal to consume food – no food, no society).

The interests of labour were also strictly connected to society because wages arose from producing the ‘real wealth’ of society and rose or fell to reflect when society was healthy or in decline. Unfortunately, argues Smith, the labourer was ‘incapable of either comprehending his interests, or understanding [society’s interests] with his own’. This was part of Smith’s later notion that expenditure by government on the education of all children was justified in view of the prevailing ignorance among the majority of the population (Book V, Wealth Of Nations).

The third order, those ‘who live by profit’, put into motion ‘the greater part of the useful labour of society’, but the rate of profit is inversely related to the prosperity of society; high in the poorest and low in the richest. This gives them a peculiar role in that their interests are counter to those of a society because they do best when they restrict competition and when they promote monopolies. They tend to understand their interests, and accordingly they promote legislation that serves their interests. They oppose free trade in favour of restrictions, both monetary (tariffs and prohibitions) and strategic (jealousy of trade, hostility to foreign traders, military means, the Navigation Acts, and colonies.

Wealth Of Nations was not a textbook in economics; it is a critique of 18th-century mercantilist political economy (Books III and IV), using Britain as the prime example. It is in this context that the second quotation must be understood.

It was Smith’s intention that his readers, particularly legislators and those who influence them understood the consequences of their pursuing policies that served the interests of those merchants and manufacturers who stood the gain at the expense of the other two orders, and at the expense of growth of the commercial economy, particularly as faster growing economies were associated with higher wages and lower profits (though larger capitals produced greater absolute amounts of profit, albeit at lower rates), and, critically higher wages would raise the incomes of waged workers and their families.

Passing the quotation off as part of a critique of the ‘bailout’ of the debt-laden banks, which marketed high-risk loans at the behest of legislators, including republican and democratic presidents, senators and representatives, is disingenuous.

It is interesting that many participants in the debate use quotations from Smith (out of context) and myths about Smith (the so-called invisible hand) to criticise the so-called bailout and the so-called US ‘free market’ (actually a mercantilist economy in many ways), but seldom is any critic spelling out what should be done that will avert the early consequences of doing nothing.

The failure of credit availability among the banks will show up, fairly rapidly, in business failures, unemployment, and severe misery for millions in the famous ‘main streets’ across the USA, and it is this prospect that legislators (facing elections) will focus on quickly once they connect with their electorates (another aspect of 21st century circumstances not available to Adam Smith – he didn’t have a vote under the existing franchise).