How Laissez Faire was Adam Smith?

Gavin Kennedy of Adam Smith's Lost Legacy says not as much as you may have been led to believe:

How Laissez Faire was Adam Smith?, by Gavin Kennedy: Greg Whiteside writes ... here: "Adam Smith must be rolling over in his grave right now":

Arguably the father of modern economics, Adam Smith was a proponent of a Laissez-Faire style of economics. ...

Comment ‘Rolling over in his grave’? Not quite. I’m glad Greg Whiteside began with ‘arguably’. He wasn’t so sure then, and he shouldn’t be because Adam Smith did not recommend laissez faire economics, though he had many opportunities to do so. He doesn’t mention laissez faire (leave alone; or ‘laissez nous faire’, leave us alone', in its original format) in Wealth Of Nations, nor in anything else he wrote, including his correspondence.

That he is reputed to be a proponent of laissez faire is a fault of the people who started this assertion on no other basis than they had not read Wealth Of Nations through, confining their reading to selected quotations. If they had read Wealth Of Nations they would find items on the following list:

To the generally accepted roles for government, Smith added others of a more controversial nature. For some, it is an issue of fundamental principle; for others it is a boundary dispute. Among these issues Smith identified:

● The Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’;
● Punishment and enforcement after acts of dishonesty, violence, and fraud;
● Sterling marks on plate and stamps upon linen and woollen cloth
● Enforcement of contracts by a system of justice;
● Wages to be paid in money, not goods;
● Regulations of paper money in banking;
● Obligations to build party wars to prevent the spread of fire;
● Rights of farmers to send farm produce to the best market (except ‘only in the most urgent necessity’);
● Premiums and other encouragements to advance the linen and woollen industries’;
● Police or preservation of the ‘cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances’;
● ensuring the ‘cheapness or plenty [of provisions]’;
● patrols by town guards, fire fighters and of other hazardous accidents;
● Erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours);
● Coinage and the Mint;
● Post office;
● Regulation of institutions, i.e., company structures (joint stock companies; co-partneries, regulated companies);
● Temporary monopolies, including copyright, patents, if fixed duration;
● Education of youth (publicly funded ‘village schools’, curriculum design,);
● Education of people of all ages (tythes or land tax)
● Encouragement of ‘the frequency and gaiety of publick diversions’:
● The prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population;
● Encouragement of martial exercises;
● Registration of mortgages for land, houses, and boats over two tons;
● Government restrictions on interest for borrowing (usury laws) to overcome investor ‘stupidity’;
● Limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’)
● Moderate export taxes on wool exports for government revenue

In short, Adam Smith was more concerned with what worked in a commercial society than he was with abstract principles. He did not believe that the exercise of self interest ensured that social benefits would necessarily follow and he gave 50 instances in Books I and II of the malign outcomes of self interest from ‘merchants and manufacturers’, ‘rulers of mankind’, ‘legislators’ and people who influence them, ‘sovereigns’, and ‘employees of monopolists’. On historical precedent, the situation was not likely to change quickly. In fact it still hasn’t and, if anything, in many aspects it has got worse.

Living not far from where Adam Smith is buried in Edinburgh, I can report there have been no reports of any unusual disturbances from his grave site.

This is important, "Adam Smith was more concerned with what worked in a commercial society than he was with abstract principles," and failure to recognize this leads to many misinterpretations of what Smith wrote. As for the term "laissez faire," my recollection is that "laissez faire, laissez passer" originates with the Physiocrat Vincent de Gournay.

Update: Gavin Kennedy follows up with a nice discussion of the origins of the phrase laissez faire.

Comments

[Bruce Wilder]

Smith was hostile to the remnants of medieval authority in the organizing of the economy -- hostile to the guilds, for example. His 18th century world had few examples of the bureaucratic enterprise, which dominates the modern developed economy, and which, in its nascent forms seemed so promising to the Marxists. He was skeptical of those few examples, including the great international trading monopolies, like the East India companies, and the fire and life insurance companies of London.

[John Morrison]

On his "Critiques of Libertarianism" site, Mike Huben provides an example of an ignorant libertarian being tricked by a Karl Marx quote that was originally from Adam Smith.

http://world.std.com/~mhuben/ostrum.html

His site has many quotes from Adam Smith that sound unabashedly liberal, almost Marxist even.

[Denis Drew]

I would have loved to have read what Smith might have written about the "race to the bottom" had his span been 50 years later along and he had had a chance to observe the onset of industrialization -- and the consequent displacement of the "thousand-island economy" of mostly small individual entrepreneurs (e.g., cloth buyers) of evenly matched bargaining power with individual artisans (manual weavers).

The unfettered free market is as lacking in realism as pure communism and over the same lack: lack of built in checks and balances to keep one group from putting another over the barrel. "Imagining" that some automatic market mechanism will blindly insure fair competition is what a head-shrinker might call "magical thinking."

Industrialization had not yet hit this side of the Atlantic when our political system was set up as a set of checks and balances. And because of America's unsettled land provided more (competing) opportunities for the common man, the race to the bottom never hit as hard here as it hit in Europe, nor as steadily.

The race has been biting the wages and benefits of 90% of our workforce in varying degrees -- from a bit of a bite to abject penury at the low end (the Crips and Bloods could not whip and good paying Ronald McDonald; and wouldn't want to) -- for three and a half decades now. It's about time for America to introduce fitting checks and balances into our economic system: which in this age is spelled "sector-wide labor contracts" of some permutation or combination*; the practice around the better paid (than America) OECD world.

[* http://ontodayspage.blogspot.com/2007/12/
could-french-canadian-labor-setup-be.html ]

[hari]

Dennis Drew - I sympathize with your frustration!

However, I think, US has still a way to travel before minimum wage becomes a federal law!

And I don't think current political ideology (doesn't matter which label!) will change radically even with Demos in power - because they're invariably a divided/pluralistic political party - which in context of OECD developments means unit-labour-cost will move down in US - as it moves up here in EU + China and India.

The Germans have just now agreed on minimum wage for postal workers (afraid of foreign takeover!) by the privatization of the postal services under EU law. But there's debate to set minimum wage in other sectors.

Under Merkel, it might just happen, I suspect.

Going back to Adam Smith, I think he'd much in common with Marx because of his own origin and writing on social condition in UK.

And, sometimes, we're unable to appreciate the impact of industrial revolution (in Europe) and its aftermath. The pace of change was such that when we look back into economic history it's impossible to visualize what laissez faire, in fact, meant.

The French Revolution (1789) was a critical point in terms of violent interruption of the rule of the nobility and bourgeoise - resurgence of the commoner! It put fear not only in the German borgeoise but more importantly, it meant the fall of the great Austro-Hungarian Empire! The latter was the bullwork and protector of the Vatican...

[realpc]

There is nothing on that list saying government should provide safety, security, freedom from want, every form of medical care, for every citizen. It doesn't say government should take a third of everyone's income to redistribute.

The list includes mostly things that almost everyone agrees the central government has to handle.

It does not count as evidence that Smith didn't believe in laissez-faire. And just because he didn't use that exact term doesn't mean he didn't mean something like that.

Laissez-faire doesn't mean anarchy, it just means the government should have respect for citizens and not try to dominate them.

I didn't read The Wealth of Nations. Maybe someday. But it's so long and covers so much ground you could probably quote-mine it to support almost anything. Sort of like the bible.

[James Killus]

Ah, "the government, the government," it alone contains all that is pernicious.

Where might I find this "government" of which so much is spoken? Can I strangle it in its bath? Where? At the police station, or in a court? At the DMV, or at the crossroads at midnight? May I see the government in the ballot box or out in the legislative lobby? Does it stand astride the aircraft carrier, or in that writ of habeas corpus?

But that other organization, what is its name, the one that takes your labor, but only after the blood test, and then lies to you as a matter of policy? I'm sure that there are laws that are supposed to bind it, but it has a penchant for breaking those laws (well, who does not, after all?), and for buying the law itself, when not watched carefully. But it is arranged for the accumulation of wealth, and since 'tis a noble thing to be rich, this organization is the source of all nobility.

Oh wait, we have another entry, another claim to the "invisible hand," (and a smighty fist) one that demands a monopoly on morality and rectitude, I'm sure I've heard such claims, amid the scandals and betrayals, and let's only whisper at the darker crimes. But hell, the offer of life eternal is worth any price, is it not? Obedience, certainly. And only a bit of bloodshed, just for spice.

But government, yes, government, there's the culprit. We'd all still be in the bloody Garden of Eden save for the vile ballot box.

[notsneaky]

"However, I think, US has still a way to travel before minimum wage becomes a federal law!"

Hari, (and Denis Drew) what the -h are you talking about? Minimum wage is a federal law already!

Anyway. I actually don't see much on that list that, say, Milton Friedman, would disagree with. There are a couple but it's mostly the standard 'enforce contracts, provide public goods and internalize externalities' list.

[notsneaky]

Well, ok, maybe not this one:

"Encouragement of martial exercises"

I'm not sure exactly what that means but I think I'll have to go against Adam Smith on this one.

[Lafayette]

DD: The race has been biting the wages and benefits of 90% of our workforce in varying degrees -- from a bit of a bite to abject penury at the low end

Very dramatic (90%?!?) and dead wrong.

What next? A proposition that America institutes tariff barriers against Chinese goods?

Right, then we are back into the protectionist mentality that brought about both the Depression and then WW2.

The US is NO LONGER the motor of the world. The world's second largest market economy has taken over that role, the same one to which the US remains a debtor.

Time to take our expectations down a notch. Unskilled jobs have left America for places where they are done more cheaply. And there is every indication that they will continue to do so, if dislocation is at all possible.

Time to wake up to the fact that the dislocation was ineluctable and its consequence was to bring to America (and the world) gadgets that greatly extended the purchasing power of the low- and middle-class.

The benefit of such trade is there, whether you like it or not.

[Carolyn Kay]

From the chapter, "Adam Smith's Mistake", of my book:

The primary basis of the right-wing elites’ selfishness justification campaign is the notion that the father of modern economics, Adam Smith, proved that indulging one’s self-interest to the exclusion of all else is a good thing. The allegation is based on one sentence in Smith’s most widely read book, Wealth of Nations: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” In other words, merchants will not give us the components of our dinner unless we pay them.

But even Smith did not believe that receiving money for their wares is merchants’ only motivation. Looking at the famous sentence in the context of the paragraph in which it appears sheds some light on what Smith may have actually meant, as opposed to what he is presumed today to have meant.

[M]an has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only

So Smith himself was aware that some force must limit self-interest, at least in business dealings. After all, as clinical psychologist Kenneth Lux pointed out in Adam Smith’s Mistake, pure self-interest should lead butchers, brewers, and bakers to cheat us if they can, to put their thumbs on the scale when weighing their contributions to our dinner, making us pay more than we actually owe them. As Lux says, “It is not self-interest that prevents someone from cheating. Self-interest only dictates that they not get caught.”

In the vast majority of our business dealings, people do not cheat us. What, then, is the correcting mechanism? Lux goes on to discuss Smith’s idea of what the countervailing force must be.

Smith's forthright talk of businessmen cheating and oppressing the public seems to stand in direct contradiction to his advocacy of self-interest as the sole principle necessary for the achievement of the public good. The saving grace was supposed to be the “invisible hand” of competition. It was competition that would keep these instincts and “expensive vanities” of the merchants, dealers, and landlords in line.

...But as Lux observes, self-interest also strongly encourages people in business to “tie up” the invisible hand. Today’s crony capitalists have given us countless examples of how easily competition can be thwarted. They carve up markets, fix prices, and drive competitors out of business using unfair, even ruthless tactics. It is for these reasons that every country in the world puts restrictions on businesses, limitations meant in many cases to prevent collusion and to promote honesty and competition.

Too bad I can't find a publisher.

Carolyn Kay
MakeThemAccountable.com

[Lafayette]

CK: The primary basis of the right-wing elites’ selfishness justification campaign is the notion that the father of modern economics, Adam Smith, proved that indulging one’s self-interest to the exclusion of all else is a good thing.

No one is judging whether dislocation of jobs (from America) is or is not a "good thing". We are not philosophers but economists, so we have opinions and not judgments.

Besides, what is a "bad thing" for Americans (because it induces unemployment), may be a "good thing" for the Chinese (because it produces employment). Or, has that simple but important fact escaped your attention?

Trade has both benefits and detriments, even if, on the whole, we prefer to think the former predominates. It is within that holistic context, however, that it must be viewed. It is neither "all good" nor "all bad" for any country that decides to trade. But, upon deciding to undertake global trade and commerce, then a country must recognize that "terms-of-trade" are what matter most. Not niceties such as "fair trade", which remain, at best, elusive despite their good intentions.

CK: So Smith himself was aware that some force must limit self-interest, at least in business dealings.

I must remind you that Smith was educated as a moralist and never was a businessman. Therefore, he was bound to have a moral purview on most matters of business, including trade and commerce.

Personally, I like such point-of-views. But, it is amazingly difficult to interject them tangibly in matters of trade/commerce. The "some force" that you talk about is, I suppose practically, assumed today to be the legal framework within which trade/commerce may function – not morality.

The law is rarely a good implement for morality. You may wish to think that killing your neighbour is forbidden by the Sixth Commandment. But, a great many others will see it simply as a good idea, given that we live within collective societies.

Far better to your ends is the promotion of "fair trade" by means of explaining to consumers labor exploitation and convincing them to exact that the goods/services they purchase are obtained by means of "fair trade practices" (meaning a fair price free of any subservient exploitation).

Only when such an attribute becomes a predominant "market value" -- such that people will prefer "fair traded" products to simply the cheapest available at Wal-Mart -- will you have achieved a moral objective.

And, there, you have a lonnnng row to hoe unfortunately.

PS: Please stop labeling ("right-wing elitists"), which engenders only polemic and avoids debate. Your first comment cited above is replete with tendentious name-calling. If you have a bona fide argument, then articulate it. Preferably, here, because you write well.

[Carolyn Kay]

Lafayette,

Of course there are tradeoffs, and I'm more willing that most to help my neighbor (even those halfway around the world), but not to my own detriment or to the detriment of my family and closer neighbors. But that is what this insistence on the notion that greed is good has brought us.

And yes, laws and regulation are today's reins on those who would maximize their own good by gaming the system. If you had clicked through and read more of the chapter, you would have found this:

Christopher Farrell, writing in Business Week, quotes Martin Fridson, chief high-yield strategist at Merrill Lynch and a market historian, from a 2002 talk before the Financial Management Association International,

[Adam Smith's famous image of the Invisible Hand is a] "very convenient cover story for people who are actually trying to stack the deck in their favor," [Fridson] says. America's business and finance elite preached the virtues of competitive capitalism while practicing the crony variety. The elites took no risks, and pocketed outsized rewards, by gaming the system with deceptive accounting practices and backroom compensation deals.

Government is the only institution we have that can be powerful enough to keep the corporate elites from gaming the system. As even conservative columnist George F. Will said, not long after the Enron implosion,

[A] mature capitalist economy is a government project. A properly functioning free market system does not spring spontaneously from society's soil as dandelions spring from suburban lawns. Rather, it is a complex creation of laws and mores that guarantee, among much else, transparency, meaning a sufficient stream -- torrent, really -- of reliable information about the condition and conduct of corporations.

Note Fridson's use of the word "elite". When right wingers stop referring to liberal elites, I'll consider stopping using the term "right-wing elites", but that's the only thing you can realistically call the eight to ten families who have funded all the stink tanks and media outlets that have blared the "greed is good" propaganda for more than 35 years--the Ahmanson, Bradley, Coors, Koch, Olin, Scaife, and other families.

Carolyn Kay
MakeThemAccountable.com

[Lafayette]

CK: [Adam Smith's famous image of the Invisible Hand is a] "very convenient cover story for people who are actually trying to stack the deck in their favor," [Fridson] says.

I doubt Adam Smith would be particularly proud of that interpretation (of the Invisible Hand he had in mind).

Going out on a limb (because I did not know the distinguished gentleman in question), I would say he was making more an anthropological observation of the human animal, a species that is capable of survival by looking after his/her own interests.

What is wrong, imho, is to take one Adam Smith's references to explain human greed. Adams was a profoundly moral person, and would have found good in mankind, not evil. But, that was because he wasn't particularly LOOKING for evil. (Yes, maybe he was wrong not to do so?)

GW: A mature capitalist economy is a government project. A properly functioning free market system ... is a complex creation of laws and mores that guarantee ... a sufficient stream ... of reliable information about the condition and conduct of corporations.

Yes, but the emphasis should be enforcement of the game's rules, which has been sadly lacking.

I am most concerned about the pilfering of wealth from publicly owned corporate assets, by those who are entrusted with them by the stock owners. The manipulation of corporate boards by executives to accord themselves very often unmerited gains is notorious. This is Grand Theft, and all perfectly legal because there exists no legislation that regulates corporate management with an eye to protecting the small stock investor. (The pension funds fend for themselves with their ownership heft. But, the small guy is all alone.)

A car driver perhaps has more personal responsibility than a CEO for the consequences of his/her actions. It is amazing what the latter get away with, and visible prosecutions are only the tip of the iceberg.

Frankly, CK, we have similar concerns, but different points-of-view on the some matters. I don't mind, if you don't. ["Differences of opinion make for horse races" (Samuel Clemens); and for good debate I might add.]

[Carolyn Kay]

It would be a very boring world if we all agreed on everything.

But just one more word about Adam Smith. I've read that he was bothered by the conclusions he reached about selfishness, but I can't find a reference right now. The other (earlier) book he wrote, by the way, was The Theory of Moral Sentiments, in which he explored the more altruistic part of human nature.

We humans have both inclinations--toward selfishness and toward altruism--and we can't really ignore EITHER side of our nature, which is really what my book is all about.

Carolyn Kay
MakeThemAccountable.com

[Lafayette]

CK: We humans have both inclinations--toward selfishness and toward altruism--and we can't really ignore EITHER side of our nature

But we do. And that is what society is all about.

The glorification/adulation of wealth of present day America would horrify Smith, I am sure. The Wealth of a Nation was not intended, in his mind, I think, for a comparative few.

And, as for God, consider this citation from the Bible (Matthew 19:24): I tell you the truth, it is hard for a rich man to enter the kingdom of heaven. Again I tell you, it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God. Would Smith not have noted those words during his religious instruction? I doubt so.

Selfishness is simply self-gratification and we live in a consumer society that promises such at every turn. Also, if there were not consumers, there would be no income earners either. So, whilst we consume we also earn and the link between the two is very tight indeed.

We can deny consumerism as a modern plague, but we would replace it with what? Adam Smith's 18th century bucolic lifestyle? Hardly.

Consequently, we cannot, as a society, divorce ourselves from consumerism. It is our raison d'être. It pays the roof over our heads, the victuals on the table and the electricity (that provides most of the rest of our human comforts) -- and Ferraris for some but Toyotas for the rest of us.

We can however turn our attention to the Income Inequality that cries out for a solution. And, there, I see none better than increasing taxes on the exaggeratedly rich to pay for Public Services that will save neonatal lives, implement programs to each the young how to eat and avoid obesity, provide universal health care affordable to all, educate people to a quality secondary school education and in skills that will assure them durable employment, educate those who want to continue to the ultimate limit of their academic capacity, assure shelter and food for those who have been afflicted by their condition and whatever that condition.

Is that investment in Human Capital too much to ask for in supposedly the "Greatest Nation on earth"? Methinks not.