Hazem Saghieh

What Adam Smith Did and Didn’t Say

Few thinkers have had their ideas explained as reductively as Adam Smith: they have been boiled down to one or two phrases from his book “The Wealth of Nations” (which is two books). His 1959 book “The Theory of Moral Sentiments,” which was published 17 years before “The Wealth of Nations”, is rarely referred to. Moreover, his contribution has also been taken out of its historical context, which is the early days of modern capitalism, rendering its critiques historically absolutist.

Smith was the world’s first economist, and he was a historian and moral philosopher interested in logic and aesthetics. He was particularly interested in human “empathy,” to which he dedicated the first two chapters of “The Theory of Moral Sentiments,” where he credits it with ensuring social cohesion. And he did not believe that all people are egoists who always want to receive more and give less.

It is true that he had broad hopes for the future of capitalism, but Smith also argued that people have “higher” needs like leading decent lives, receiving an education, and residing in beautiful cities. He never disregarded his concern with reconciling profit with human progress and improved conditions, nor with pushing the wealthy to treat others better.

Accordingly, he was not persuaded by the Christian response that feelings of guilt would impel the wealthy to do good, as he believed the rich to be cold-hearted and unfazed by guilt. Nonetheless, he was not convinced that high taxes were the solution either, as they scared the rich off.

This does not imply that he was against the imposition of taxes as such, like the neoliberals who see it as “punishing the successful for their success.” Indeed, taxes limit the injustices suffered by the poor, as well as the centralization of wealth (which reduces the wealth of nations) so long as they do not become a gateway for granting the state more weight in the economy.

His strange, perhaps naive, suggestion was that the rich are less concerned by wealth than they are by status and prestige. They do not accumulate money because they are greedy, but in pursuit of respect and admiration. Thus, governments should be understanding of their vanity, offering them status and prestige in return for doing good deeds that benefit the public, thereby directing their “vanity to proper objects.”

In fact “The Wealth of Nations” is the culminating moment of Enlightenment social thought. In mid-18th century England, wealth grew immensely, and to explain this phenomenon and encourage attaining greater wealth, Smith sought to apply the “scientific” method, which had proven useful for physics, to his social research.

As for “The Wealth of Nations” itself, which took around 20 years to write, it is in a sense an exaltation of the modern division of labor. Indeed, what one person could accomplish in a single day was now divided into many more specialized and more profitable tasks. The manufacture of pins is the most popular and repeated example he gives, as it had been split into 18 unique processes at the time.

Previously, whoever wanted a pin had to seek the family artisan. While he is doubtlessly dexterous, this artisan makes pins slowly and can only make a few of them each day. The price of pins inevitably increases as a result, and market shortages arise. If we applied this principle to other commodities, we would conclude that the artisanal mode of production is inefficient compared to large-scale, optimized capitalist production based on the division of labor and specialization.

By making labor more efficient, and thus more productive, the division of labor greatly increases the wealth of societies, thereby making people happier, as it is difficult for one to be happy where there is scarcity and frustration.

However, the division of labor and the expansion of the market are impeded by two factors: Natural causes that can only be overcome by subjugating and taming nature and shortening distances, and government intervention that limits the division of labor by shrinking the market. That is why monopolies and protective tariffs should be avoided, while governments should be pushed to leave markets alone. If a “laissez-faire” policy is adopted, supply and demand will balance each other out naturally, generating the best goods and services. This is what Smith called “the invisible hand of the market.”

This social transformation which was produced by the division of labor engendered massive social problems that Smith did not ignore, despite not having had, in the mid-18th century, the data available to subsequent critics of capitalism. On top of that, his mission was to emphasize the productivity of modern capitalism, not distribution under it, which is where most of capitalism’s problems lie.

He believed that one of the negative repercussions of the division of labor was that it turned the workers, who had become proficient at doing a single repetitive task, into idiots. This is not very different from what Marx said later on when he compared them to machines. In his discussion of how to offset this alienation, Smith stressed the importance of education, raising wages, and using surplus wealth to help the weakest segments of society and ensure that they do not starve.

The implications of the transition to a modern economy, both positive and negative, are boundless: Rising unemployment, especially among traditional artisans, creates perpetual surplus labor, giving rise to a state of affairs in which the generation of wealth is accompanied by grave hardships and injustices suffered by the first few generations of the transition to an economy in which labor is divided.

However, the age of machines would marginalize manual work and bridge the gap between the work could be done by men and that which women could do, enhancing the position and status of the latter. Preceding Marxism, Smith argued that the development of the industrial economy would give rise to a social hierarchy founded on individuals’ wealth and profession, splitting society into conflicting social classes.

Ironically, however, this is precisely where the “Marxist” Smith makes his most significant error. He believed that employers would implicitly collude to stifle wages to the greatest extent possible and that this would be facilitated by their limited number, the robust social relationships they forged amongst themselves, and their links to government.

However, what we saw later on, before the rise of neoliberalism, is that mass production requires mass consumption to ensure that the products are turned over. Otherwise, what would be done by these huge quantities of manufactured goods? In this sense, we saw 20th century capitalists, like Henry Ford in the US and Giovanni Agnelli in Italy, contradict Smith’s prediction, raising workers’ purchasing power and proving that repressing wages is not inherent to capitalism.

Adam Smith founded economics as a science and influenced Marx, who wanted to bring down capitalism, just as he influenced Keynes, who wanted to save it from itself. It would be no exaggeration to say that his ideas, despite their objective and subjective shortcomings, are nonetheless miles ahead of the “left wing” theories that expropriate the economy - and society along with it - as well as the “right wing” neoliberalism that would splinter from his liberalism.