The professed object of Dr Adam Smith’s inquiry is the nature and causes of the wealth of nations. There is another inquiry, however, perhaps still more interesting, which he occasionally mixes with it, I mean an inquiry into the causes which affect the happiness of nations or the happiness and comfort of the lower orders of society, which is the most numerous class in every nation. — An Essay on the Principle of Population (1798) by Thomas Malthus.
The important point about Smith’s system, on the other hand, is that it precluded steep inequalities not out of a normative concern with equality but by virtue of the design that aimed to maximize wealth. Once we put the building blocks of his system together, concentration of wealth simply cannot emerge. In Smith, profits should be low and labor wages high, legislation in favor of the worker is “always just and equitable,” land should be distributed widely and evenly, inheritance laws should partition fortunes, taxation can be high if it is equitable, and the science of the legislator is necessary to thwart rentiers and manipulators. Political theorists and economists have highlighted some of these points, but the counterfactual “what would the distribution of wealth be if all the building blocks were ever in place?” has not been posed. Doing so encourages us to question why steep inequality is accepted as a fact, instead of a pathology that the market economy was not supposed to generate in the first place.--Deborah Boucoyannis.
At the (LSE) British Politics and Policy blog, the political theorist, Boucoyannis,* has posted a wonderful précis of her terrific paper on Adam Smith's (1776) Wealth of Nations (hereafter WN) that I heartily recommend to anybody interested in the political economy of WN, and its ongoing significance (especially the Smithian critique of speculative profits).** It's a fantastic piece. I offer one friendly observation and two, related minor quibbles.
First, it is worth pointing out that asking about the counterfactual “what would the distribution of wealth be if all the building blocks were ever in place?” is, in fact, invited by WN and not some post-facto anachronism. To see this point one has to pay attention to a crucial concept in WN, the natural price: "the natural price...is the lowest at which [a trader] is likely to sell [goods] for any considerable time; at least where there is perfect liberty, or where he may change his trade as often as he pleases." (WN 1.7.7) One might think that this is a descriptive statement, but 'perfect liberty' obtains only when the labor and commodity markets, especially, are competitive and free (WN 1.7.27, 78). And the whole of WN is one giant lament that this is not so (at one point he describes the very idea of having free trade as Utopia.) The “natural price” is, then, the counterfactual, localized price of a good if there were not all kinds of obstacles preventing the free movement of capital, labor, and goods. That is to say, it comes down to what the world would be like if there were no impediments to the mobility of resources.
This situation of natural liberty does not exist in Smith’s time (or ours). But as I have argued elsewhere, Smith's political economy is, in fact, aimed at the development of models of historical development that can provide a counterfactual baseline from which empirical deviations can become significant evidentially (see also here). As Boucoyannis argues, once one thinks through the counterfactuals then it's clear that Smith thinks that after a certain economic development if one introduces markets inequality will decline. Boucoyannis goes further in showing that in Smith's system (for a commercial society) "concentration of wealth simply cannot emerge."***
My two quibbles involve her claim that Smith's system "precluded steep inequalities not out of a normative concern with equality but by virtue of the design that aimed to maximize wealth." Now, I think she means to say here something more like this: that regardless of any normative concern with equality, Smith's system of political economy is designed in such a way (namely to maximize wealth) that it will inevitably reduce inequalities such that these remain small. That she means this is clear from the fact that elsewhere in the blog piece, she writes "the building blocks of Smith’s economic system do not allow the concentration of wealth—not due to normative constraints, but to how the blocks are set up in his theory to maximize the “wealth of nations.” That is to say, she treats Smith as having an institutional design that with the proper legal and political (taxation, interest ceilings, limited banking, free markets in labor and good, education, etc.) mechanisms in place will not rely on moral or normative incentives.
Now, the first quibble is that Smith's system is not designed with the aim toward maximizing wealth. It's true that he thinks that individual merchants aim to maximize profit. But as Boucoyannis aptly notes their profit is not a good sign. Rather, his system is designed to increase happiness and create flourishing: "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable." (WN 1.8 ) So, wealth is an instrument toward the true end. *In fact, according to Smith, in practice growth and what we would call full employment are really the key to happiness and flourishing in WN. As others have noted, the concern with flourishing and happiness shows up also in non economic contexts in WN: “the constitution of the church of Rome may be considered as the most formidable combination that ever was formed against the authority and security of civil government, as well as against the liberty, reason, and happiness of mankind, which can flourish only where civil government is able to protect them.” (WN 5.1.g)
My second quibble is that Smith does let the normative do some work within his institutional design. But this I do not just mean that Smith proposes quite a few institutions that are designed to improve moral character and a variety of virtues (education, religion, standing army, etc.) But it also infiltrates his economic analysis. For example, he also offers what he takes to be a descriptive point about why we pay taxes:
Every tax, however, is to the person who pays it a badge, not of slavery, but of liberty. It denotes that he is subject to government, indeed, but that, as he has some property, he cannot himself be the property of a master. (WN 5)
As free people, we recognize that the size of and the right to our (derived) property is the product of our shared activities and this is good (recall). That is, he expects that we pay our taxes not out of fear, but out of pride and moral obligation. Moreover, and more important for my quibble, he counts on economic agents to evaluate each other normatively, too. As he advocates, "If you would have your work tolerably executed, it must be done in the suburbs, where the workmen having no exclusive privilege, have nothing but their character to depend upon, and you must then smuggle it into the town as well as you can." (WN 1.10; see also this important passage.)
I think my two quibbles are compatible with Boucayannis' approach. But it's important for my purposes that Smith thinks that (as Liza Herzog argues in her book) economic agents do not leave morality behind them in properly ordered markets.
* Full disclosure: Boucoyannis and I met in graduate school, but had little contact there or since.
**In a way, Boucoyannis' paper is the capstone and transformation of a thirty year trend to re-discover the progressive Smith in Wealth of Nations (that can help explain why folk like Thomas Paine, Mary Wollstonecraft, Sophie de Grouchy, James Millar, and others could admire him so much) that was pioneered by Spencer Pack, Emma Rothschild, Sandra Peart & David Levy, and Sam Fleischacker, and those they inspired.
*** I am slightly amending Boucoyannis' claim for a particular advanced, economic stage of development. (I think it is clear that for Smith in a shepherding stage great inequality is unavoidable.)
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