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Friday, March 9, 2012

Adam Smith versus Business

Suspicion well-grounded.

I admit it: I like Adam Smith. His perceptiveness never fails to impress. True, he didn’t foresee the marginal revolution that Carl Menger would launch a century later (with, less significantly in my view, Jevons and Walras), but give the guy a break. The Wealth of Nations is a great piece of work.

One thing I find refreshing in Smith is his wariness of business people. This is something we ought to frequently remind market skeptics. Smith knew the difference between being sympathetic to the competitive economy – which he called the “system of natural liberty” — and being sympathetic to owners of capital (who might well have acquired it by less-than-kosher means, that is, through political privilege). He knew something about business lobbies.

This famous passage from book 1, chapter 10 of Wealth is often quoted by opponents of the free market:

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.

The quote is used to justify antitrust law and other government intervention. But as has often been pointed out in response, Smith had no such policies in mind. We know this because he immediately follows with:

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 them necessary.

Prime Beneficiaries

Government should do nothing to encourage or enable attempts to limit competition. But of course government does that all the time at the behest of business and to the detriment of consumers and workers. Hampering competition raises prices for the former and weakens bargaining power — and therefore lowers wages — for the latter. Those groups would be the prime beneficiaries of freed markets.

That’s not the only time Smith expresses his anti-business sentiment. In the next chapter he discusses the division of income among landlords, workers, and owners of capital. Here Smith and the classicals suffered from their lack of marginal analysis, subjectivism, and thoroughgoing methodological individualism. As Professor Joseph Salerno has written,

Regarding the question concerning the determination of the incomes of the factors of production, the Classical analysis was almost completely worthless because, once again, it was conducted in terms of broad and homogeneous classes, such as “labor” “land” and “capital.” This diverted the Classical theorists from the important task of explaining the market value or actual prices of specific kinds of resources, instead favoring a chimerical search for the principles by which the aggregate income shares of the three classes of factor owners — laborers, landlords and capitalists — are governed. The Classical school’s theory of distribution was thus totally disconnected from its quasi-praxeological theory of price, and focused almost exclusively on the differing objective qualities of land, labor, and capital as the explanation for the division of aggregate income among them. Whereas the core of Classical price and production theory included a sophisticated theory of calculable action, Classical distribution theory crudely focused on the technical qualities of goods alone.

“Narrow the Competition”

Nevertheless, Smith’s chapter contains another perceptive skeptical reference to “those who live by profit.”  He writes:

Merchants and master manufacturers are . . . the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the public consideration. As during their whole lives they are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen. As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of the society, their judgment, even when given with the greatest candour (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects, than with regard to the latter. . . . The interest of the dealers . . . in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. [Emphasis added.]

Smith harbored no romanticism about those who have long seen rent-seeking as the path to wealth not available in the freed market. In case we didn’t quite get his point, Smith goes on:

The proposal of any new law or regulation of commerce which comes from this order [that is, “those who live by profit”], 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 with the 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. [Emphasis added.]

Smith grew up under mercantilism and knew well of what he wrote. America grew up largely under mercantilism and its cousin, Hamiltonian-Lincolnian corporatism. In this respect advocates of the freed market should embrace Smith’s understanding of political economy: that a powerful force against freedom emanates from where they might least expect to find it.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.