Sunday, February 22, 2015

Adam Smith

“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 self-interest.”

Adam Smith (1723 - 1790) was a Scottish moral and political philosopher whose work forms the theoretical basis of modern capitalism, and a great deal of subsequent economics. His life wasn't very interesting, so let's skip it.

 In his Theory of Moral Sentiments (1759), Adam Smith argued that ethics are grounded in our social instinct, which gives us the ability to imagine ourselves in the place of others. Doing this, we are moved to approve or condemn both the motives and the actions of others. However, we are not inconsistent, and not quite moral, if excuse ourselves from the full severity of our maxims, while using them to evaluate others. Thus the highest moral development is the consistent application of the same maxim, to ourselves and to others. In this way we learn both to be more lenient with others, and more severe with ourselves.

 In The Wealth of Nations (1776) he argued against the prevailing Mercantile theory of economics, which held that the wealth of a nation consisted in its stock of gold and silver. When a nation exports products, it imports gold or silver in return; when it imports products, it exports gold and silver. Therefor imports represent a net drain on the national wealth, and exports a net benefit. Economic policy should aim at Autarky (economic self-sufficiency) and high tariffs to decrease imports, and an aggressive foreign commerce to increase exports.

 This is the reasoning which led the British Parliament to place trade restrictions on the American colonies. For instance, if an American merchant wanted to purchase sugar so he could sell candy, it was illegal for him to get it from sellers in the French Caribbean – he had to buy it from a seller in the British islands instead. This boosted sales for British sugar growers, and kept the gold and silver that payed for his sugar circulating within the British Empire. However, by excluding French competition it also forced the American merchant to pay more for the sugar than it was really worth.

 Adam Smith argued that these policies did more harm than good. When the candy dealer sold his candies, the price had to reflect the inflated cost of the sugar. As a result, the buyer had fewer and more expensive options, and the dealer realized fewer profits. The sugar planter didn’t really benefit either, because at some point he would have to enter the market as a consumer in order to spend his profits. For instance, if he wanted to buy hoes and plows his plantation, he would have to get them from an iron manufacturer, who was also charging inflated prices for an inferior selection of goods, as a result of some restriction on the iron trade. In this way, mercantilism amounted to a vast impoverishment of the real wealth of the nation, which was not measured in gold or silver, but in the industry of the people and the quality of goods.

 Louis XIV once asked his famous finance minister, Jean-Baptiste Colbert, how he could best grow the economy of France. Colbert is supposed to have replied “laissez faire” – which is to say, “leave it alone.” Adam Smith agreed. Individuals know their own self interest – they don’t need the state to tell it to them. If they’re given the chance, they’ll pursue wealth in their own ways. Some ways will work, others won’t – through this constant experimentation and competition, those practices which produce the greatest wealth for the nation will eventually predominate. Meanwhile, the competition between manufacturers, merchants, professionals, and other sellers will keep prices low, and quality high. The individual seller might not have the state telling him what to do all the time, but it won’t have the state to protect him if he is inefficient or lazy either – the freedom of the market place comes with responsibility to be useful to other people.

 The state, according to Smith, has three functions: protection from foreign invasion, the administration of justice, and the maintenance of public works and institutions. He was suspicious of any attempt to create a fiscal policy, feeling that this must inevitably work to the advantage of some members of society against others. Perhaps surprisingly, it was not the employees, but the employers, who he thought tended to abuse the power of the state. “The interest of the dealers,” he said, “… in any particular branch of trade or manufacturers, is always in some respects different from, and even opposite to that of the public. The proposal of any new law, or regulation of commerce, which comes from this order ought always to be listened to with great precaution.” In the end, the market will have its say – the state can only impoverish the nation by thwarting it.

Part of a series on the Enlightenment (VIII of XVII)

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