ADAM SMITH for the WORKING CLASS
OR
Can an Invisible Hand Pick Your Pocket?

by Jack Stewart

This article is about Adam Smiths book The Wealth of Nations. This book is sometimes called the "Bible" of the market economy. Few writings are more often quoted as justifications for the free market than those of Adam Smith. This article deals with some material from the book that are almost never quoted by defenders of the free market.


INTRODUCTION for the (fully documented) two page article.

Adam Smith (1723 - 1790): He was a Scottish political economist and philosopher. He is also responsible for the popularity of the phrase, "the invisible guiding hand." His book The Wealth of Nations, published in 1776, laid the foundations of classical free market economic theory, and is sometimes called the "bible" of capitalism. The book was extremely popular. There were four English editions and many foreign translations published during his life. Many of our nation's founding fathers had read the book by the time they attended the Constitutional Convention to write the U.S. Constitution.


The Classic Benefits of a Market

Adam Smith explained the benefits of the market economy. The market economy uses the individual's motives of economic self-interest, and transfers them into useful goods and services through competition.

The goods and services can be accepted as useful because the consumer chooses to purchase them instead of other competing goods and services.

The producer is motivated to attempt to provide goods and services that have an equal quality as competing goods and services, but at a lower price. His reward will be to create greater demand for his product, compared to other competing products. The producer can also attempt to provide higher quality goods and services that consumers will purchase at a higher price.

In theory, a market economy produces useful goods and services, as well as either wages and/or profits that have a social justification. However, Adam Smith knew the difference between theory and the real world.

All quotes in the two page article ( excluding the supplemental material section ) are from Smith's book The Wealth of Nations, and all quotes except the first are from volume 1, book 1, chapter 8, and follow in the same sequence as in the chapter.

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ADAM SMITH for the WORKING CLASS
OR
Can an Invisible Hand Pick Your Pocket?

Ever since the original capitalist economist, Adam Smith, it has been understood that the reconciling of individual self-interest and the public good, in a capitalist economic system, requires individual market competition. However, Adam Smith was aware of how things worked in the real world.

"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."
(Vol_1*Book_1*Chap_10)

Besides prices there were problems about wages.

"What are the common wages of labor depends everywhere upon the contract usually made between those two parties (workmen - and masters), whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are as disposed to combine in order to raise, the latter in order to lower the wages of labor."
(Vol_1*Book_1*Chapt_

Note: The term master is no longer used by workers in the United States. After the American revolution workers in New York started using the Dutch word "baas" (boss), because they felt that the term master was demeaning. The translation of the Dutch word baas is master.
Source: Look up the origin of the word boss in any good dictionary.

Although Smith accepted that competition for better profits and wages could turn individual self-interest into socially productive labor, he also was aware that these same values of self-interest would help ensure that every effort was made to lessen competition. In fact as Smith continues his observations he might even be considered to have some Marxist or class based conclusions.

"It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily;........"
(Vol_1*Book_1*Chapt_

The Scottish economist continues with further observations of inequality within capitalism.

"We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labor above their actual rate."
(Vol_1*Book_1*Chapt_

"Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy, till the moment of execution, and when the workmen yield, as they sometimes do, without resistance, though severely felt by them, they are never heard of by other people."
(Vol_1*Book_1*Chapt_

In this modern day and age I guess that we can forget about combinations in silence and secrecy. The fact that the capitalists own the media should not lead us to believe UH - oops. OK! Forget about the modern age. However, we along with Adam Smith should not completely forget about combinations of workers. And he does not!

"Such combinations, however, are frequently resisted by a contrary defensive combination of the workmen; who sometimes too, without any provocation of this kind, combine of their own accord to raise the price of their labor."
(Vol_1*Book_1*Chapt_

"But whether their combinations be offensive or defensive, they are always abundantly heard of. In order to bring the point to a speedy decision, they have always recourse to the loudest clamour, and sometimes to the most shocking violence and outrage ."
(Vol_1*book_1*Chapt_


In my opinion Adam Smith, unlike Karl Marx, believed that capitalism would work in theory. However, in practice co-operation (combinations) among the theoretically, competing capitalists (masters), and also among the workers, meant that there was no truly "fair" wage or profit or price. Because of this fact much unproductive activity is engaged in by workers and capitalists trying to combine to get their "fair" share. Smith also believed that capitalism tends to over-reward the capitalists, because "The masters being fewer in number, can combine much more easily..." and they also have more time and resources. Also since there is no fair wage or level of profit under capitalism, and the workers are the least secure; capitalism has a tendency toward violence; "the most shocking violence and outrage".

Adam Smith is famous for the phrase "led by an invisible hand" or incorrectly "the invisible guiding hand". (Book_IV*Chapt_2) But whether the hand is leading or guiding, apparently it can also be picking your pocket!

Supplemental Material
Documented background material that provides a historical context that is rarely understood by U.S. students of Adam Smith.


The Wealth of Nations provides some hints of Smith's views about the proper level of political power that business people should have in a government. However; to make any sense of his words, I need to provide some historical background.

England, in 1776, was far from being a democracy. The nobility ruled England; however, small farmers, merchants, and manufactures had gained some political power

In 1670, the traditional right of trial, by a jury of the defendant's peers, became much more powerful. The King's Chief Justice ruled that a jury could not be punished for bringing in a verdict that the Judge thought was unreasonable. This gave the jury the right to nullify the law in any specific trial! It's no accident that our U.S. Constitution and the Bill of Rights mention trial by jury six times. Our founding fathers understood the importance of the jury to protect the citizens from any state including a republic.

References and background on the constitutionally protected right of a U.S. citizen to use their jury vote for political purposes.

THIS IS VERY USEFUL INFORMATION - YOU MIGHT DISCOVER THAT YOU HAVE TWICE THE POLITICAL POWER THAT YOU THOUGHT YOU HAD!


Also, the House of Commons belonged to the propertied class, but it had very little power. The House of Lords could veto any bill passed by the Commons with a simple majority vote. The only power the House of Commons had, was a negative power. It had the power to tax the propertied classes or to refuse to do so. Remember that the American revolution started with the cry, "No taxation without representation." The importance of this political right becomes much more obvious, when we realize that; this was about the only political power possessed by the merchant class! For the American colonists this was even more true, after the King replaced trial by jury with admiralty military courts for customs trials in the American colonies.

Authors note: I don't remember the name of the book I used as a source for the information in the above paragraph, but the following web location provides some decent documentation.

http://www.parliament.uk/works/lords.cfm


Given the preceding background information, Smith's political views are surprising. In the following quotes, Adam Smith does not desire greater political power for these merchants or "shopkeepers." In fact, he warns that the interest of merchants is exactly opposite that of sovereigns. Smith is using the term sovereign to mean the supreme political power, as in the sentence, "In a democracy the people are sovereign." He can only talk about merchants acting as sovereigns, because many colonies, such as the Dutch East India Company, and the Hudson Bay Company, were started as corporations after getting a grant from the king. In practice the directors "ruled" the colonies.

To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers.
....Snip...
But a company of merchants are, it seems, incapable of considering themselves as sovereigns . . . Their mercantile habits draw them in this manner, almost necessarily, though perhaps insensibly, to prefer upon all ordinary occasions the little and transitory profit of the monopolist to the great and permanent revenue of the sovereign . . . As sovereigns, their interest is exactly the same with that of the country which they govern. As merchants their interest is directly opposite to that interest.
(Book_Four*Chapt_VII*Of_Colonies)

In the next chapter, he is warning his readers that the interests of merchants and manufacturers, which apparently created a system of protected trade and markets, called the mercantile system, has sacrificed the interests of the consumer. Basically he is saying that they have had a bad influence on the government.

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.
......... snip ......
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 been so carefully attended to; and among this latter class our merchants and manufacturers have been by far the principal architects.
(Book_Four*Chapter_VIII*Conclusion_of_the_Mercanti le_System)


I wonder what Adam Smith would have thought about a government whose Supreme Court holds that money is freedom of speech. Would he have considered people who agreed with that view, such as many members of the American Civil Liberties Union, to be pickpockets?

AUTHOR: Jack Stewart

stewjack@newsguy.com

Reprinted at PoliticalForum.com with permission.

In other words Smith was worried about price and wage fixing which did happen a lot in early America. Nevertheless with a greater population and free trade, we have more choice than ever and it is far harder to fix prices/wages. A free market economy works fine for goods, services and labor and that is why even Libertarians are against price and wage fixing. It is government's proper duty to stop that, but never government's duty to regulate Capitalism with things like minimum wage, labor conditions, etc... As long as the market is free from fixing then there will be enough labor competition to have proper wages and working conditions.