An Inquiry Into The Nature And Causes Of The Wealth Of Nations by Adam Smith – A New Look

An Inquiry Into The Nature And Causes Of The Wealth Of Nations by Adam Smith – A New Look

Proverbially, the horse’s mouth is always the best source. Academically, primary material is usually the most reliable. So now what is to be found by revisiting a major work of the past, a work whose current iconic status has provided a multiplicity of quotes and endless justification of current positions? In the case of Adam Smith’s An Inquiry Into The Nature And Causes Of The Wealth Of Nations, what can be gained now from revisiting the text is enlightenment, a great deal of surprise and yet another realisation that when sophistication is reduced to mere icon, it is often not only the detail that is lost.

Written in 1776, less than 70 years after the Act of Union that created Great Britain out of England and Scotland, and during the American Revolution, Smith’s book analysed the history of economic and commercial relations at the very start of Britain’s industrial transformation. Britain’s colonial expansion was under way, while the empires of Portugal and Spain were already long established. Wars with the Dutch had been fought and won to establish trading supremacy, the East India Company had monopolised the Asia trade and had as a result become the de facto ruler of India. The British had already become a nation of tea drinkers.

In the economics and politics of the twenty-first century, Adam Smith’s Wealth Of Nations is more usually associated with the politics of the right, associated with calls for free trade and demands that governments withdraw as far as possible from commercial interchange, an activity that is regarded as capable of regulating itself. And this position is asserted despite the fact that much of today’s trade is in the hands of corporations that are often larger than some of the governments that are criticised by corporate apologists for their meddling. So dominant is this thumbnail sketch of The Wealth Of Nations that a general reader may assume there is no profit in revisiting the text to seek new experience. Such a general reader would be wholly wrong, since this much quoted work is full of surprises.

The oft-quoted and more often assumed summary of Smith’s analysis – for that is precisely what this book represents – arises from the author’s repeated insistence on the albeit presumed existence of a “natural” order of things. Smith assumed that if left alone to find its own level, free of interference from interests capable of influencing the supply or price, then a traded good or service would inevitably gravitate towards natural levels of both consumption and price, the one obviously influencing the other via the familiar concept of demand. This natural level, however, could become distorted. For Smith, government influence via regulation, quota, taxation or, more commonly, monopoly, usually results in disrupted, artificial trade, its dysfunction as often a consequence of incompetence as it is because of inappropriate control. But what is not usually quoted from Smith’s work is that he often blames producer or merchant cartels for this counter-productive meddling as much as he does governments. Indeed, some of the most vehement and serious criticism in the Wealth Of Nations is reserved for commercial corporations, especially The East India Company, a giant of contemporary international trade. Their corporate interest receives Smith’s blame for a whole host of ills, such as profiteering, distorting trade, creating surpluses and shortages and even causing famine. In addition, Smith was clearly no friend of those who populated chambers of trade or monopoly holdings of any kind, since all such interests could distort his “natural” markets.

Adam Smith was clearly in favour of both education and training. He saw education as being capable of developing skill, knowledge and sometimes wisdom. He recognised that different kinds of human labour would necessarily attract different rates of reward, since different skills and capabilities required different amounts of commitment to secure them. Effectively, he was recognising in his own language the existence of what we now call human capital.

The acquisition of such talents (the acquired and useful abilities of all the inhabitants and members of the society), by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person… The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labour, and which, though it costs a certain expense, repays that expense with a profit.

Here then is human capital, but also recognition of education as an investment, both personal and societal. He also thus stated the labour theory of value.

The real value of all the different component parts of price… is measured by the quantity of labour which they can… purchase or command. Labour measures the value, not only of that part of price which resolves itself into labour, but of that which resolves itself into rent, and of that which resolves itself into profit… In the price of corn, for example, one part pays the rent of the landlord, another pays the wages or maintenance of the labourers and labouring cattle employed in producing it, and the third pays the profit of the farmer.

Smith also differentiated clearly between the use value and the exchange value of a good. A hundred years later, Marx would begin Das Kapital with a similar analysis. Smith’s assertion that the tradable price of a good covered three areas of cost – labour, rent and profit – also opened up two important issues. A century later Marx would cite greed as a reason why those who controlled capital – the life-blood of trade – could seek to maximise the profit element of the cost of a good, a practice that would inevitably lead to the increased exploitation of the labour involved, since their contribution to the cost could be controlled, even depressed. And in Smith’s own analysis the likely effects of price rises in a good would be to put up rents, thus eventually benefiting landlords and landowners. Thus even in Smith’s work, those who represented the more powerful interests would be the ones to reap the lion’s share of the benefits of trade, even the lion’s share of growth in the economy or expansion of trade.

Smith saw business owners as a group as nothing less than likely conspirators in raising prices. He stated this quite explicitly.

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.

He also warns against charitable intentions, especially ones where those with commercial interest participate or organise, since these often offer justification for the gatherings where interested parties could meet and conspire.

A regulation which enables those of the same trade to tax themselves, in order to provide for their poor, their sick, their widows and orphans, by giving them a common interest to manage, renders such assemblies necessary

So that is why, despite their laudable aims and significant achievements, we eventually do not trust movements such as freemasons, lions, rotaries or charitable endeavours funded by corporate riches.

Smith does recognise that workers might organise to drive up the cost of labour, just as owners certainly do conspire to raise profits. He repeatedly, however, cites the existence of an imbalance of power in this apparently competitive relationship between owners and workers. Governments often legislate against trade unions, but rarely act to curb profiteering. We hear, he says, of every attempt to organise labour, but usually nothing of corporate conspiracy.

We have no acts of parliament against combining to lower the price of work, but many against combining to raise it.

Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this (natural) 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. 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 labour. Their usual pretences are, sometimes the high price of provisions, sometimes the great profit which their masters make by their work. But whether their combinations be offensive or defensive, they are always abundantly heard of.

Smith seems to link the concept of “natural” to transactions between individuals and organisations of only moderate size, ones that are capable of influencing only a minuscule fraction of the overall trade in a good. Perhaps the largest trading group of his time was the East India Company, but this organisation he usually associates with incompetence or conspiracy or both. The problem with this contemporary corporate giant was twofold: its monopolistic advantage and its proximity to political power. The company, indeed, was the de facto ruler of India and, over two hundred years before Amartya Sen suggested via the concept of entitlement, that famines can operate selectively and often in times of plenty, Smith suggested that famines in India were largely a result of maladministration driven primarily by greed.

The drought in Bengal, a few years ago, might probably have occasioned a very great dearth. Some improper regulations, some injudicious restraints, imposed by the servants of the East India Company upon the rice trade, contributed, perhaps, to turn that dearth into a famine…

… famine has never arisen from any other cause but the violence of government attempting, by improper means, to remedy the inconveniencies of a dearth…

In an extensive corn country, between all the different parts of which there is a free commerce and communication, the scarcity occasioned by the most unfavourable seasons can never be so great as to produce a famine; and the scantiest crop, if managed with frugality and economy, will maintain, through the year, the same number of people that are commonly fed in a more affluent manner by one of moderate plenty…

Such exclusive companies, therefore, are nuisances in every respect; always more or less inconvenient to the countries in which they are established, and destructive to those which have the misfortune to fall under their government.

Smith’s analysis of empire, or the colonies, as contemporary language would have labelled it, suggested that the home country, at the centre of the empire, should offer administration for and representation of all of its constituent parts. He suggests this not to assert power, but to ensure even treatment of subjects.

Under the present system of management, therefore, Great Britain derives nothing but loss from the dominion which she assumes over her colonies…

But there was no doubt that those involved in the colonies should be represented in the political system at home…

The assembly which deliberates and decides concerning the affairs of every part of the empire, in order to be properly informed, ought certainly to have representatives from every part of it…

It must be remembered that the American colonies were already in revolt, so this was a politically difficult stance to take at the time, especially since one of the fundamental differences between the home country and the colonies concerned representation. Smith did, however, distinguish between the civilised and the savage inhabitants of the empire, so let us not be too carried away with the apparent modernity of much of the ideas. One must assume that his franchise would only have extended to the settlers.

He was in no doubt that technology could innovate.

There is scarce a common trade, which does not afford some opportunities of applying to it the principles of geometry and mechanics, and which would not, therefore, gradually exercise and improve the common people in those principles, the necessary introduction to the most sublime, as well as to the most useful sciences.

And the concept of modernisation, at least as applied to the reduction of the power of existing structures, notably regent and church, was something he supported.

In the state in which things were, (previously), 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. In that constitution, the grossest delusions of superstition were supported in such a manner by the private interests of so great a number of people, as put them out of all danger from any assault of human reason; because, though human reason might, perhaps, have been able to unveil, even to the eyes of the common people, some of the delusions of superstition, it could never have dissolved the ties of private interest. Had this constitution been attacked by no other enemies but the feeble efforts of human reason, it must have endured for ever. But that immense and well-built fabric, which all the wisdom and virtue of man could never have shaken, much less have overturned, was, by the natural course of things, first weakened, and afterwards in part destroyed; and is now likely, in the course of a few centuries more, perhaps, to crumble into ruins altogether.

Read with care, this passage is found to suggest that dominant economic and political interest may only be challenged by some form of insurrection, though Smith clearly does not use the word “revolution”.

But overall, what will strike the twenty-first century reader of Smith’s Wealth Of Nations is its complete lack of polemic. This is not a political tract, and neither does it ever descend into propaganda. What will impress throughout is the author’s stated desire to research and present the facts, as they were able to be researched by him at the time. Yes, Smith makes assumptions about what is civilised and what is savage. He also assumes some state he calls “natural”, without ever really addressing a definition. Effectively he leaves us to conclude that this state is achieved by letting things happen without deliberate meddling. How there might be a trade in anything without human beings meddling in something is one of the great weaknesses in his analysis. Like Marx a century later, he seems unable to conceive of any sectional interest larger than the state. But he also believed that, when organisations achieve a size capable of challenging the state’s assumed supremacy, then they would use that power to serve their own sectional interests to the detriment of all others. We seem to have arrived at Marx again.

But, again like Marx in Das Kapital, Smith analyses the data available to him, conducts research, constructs argument and supplies copious illustrative detail. Much of his theory is based on historical records on the price of corn. This he sees as the singular subsistence that everyone must obtain and which, therefore, must contains within its price movements reflections of contemporary prosperity. Thus the pricing of a single commodity over the ages mirrors the fortunes of entire nations and economies. He even extends this to introduce a concept of inflation generated via increased money supply. When precious metals are repatriated from the colonies, especially to Spain and Portugal, he argues, then the availability of capital increases, and so the price of corn inflates. On even more up-to-date scenarios, Smith even analyses the operation of a traded secondary debt market. In the eighteenth century, this was manifest in the trading of credit notes from one bank to another, obtaining new short-term loans to pay off existing debts, when their due dates approached.

Overall Adam Smith’s Wealth Of Nations, when taken in the original, surprises more often than it confirms. It is certainly not the polemic that it becomes when quoted in iconic form to justify contemporary neo-liberal or neo-conservative politics that it, itself, neither describes nor advocates. It does champion non-intervention, but it lists large corporate interests, those often championed by today’s political promoters of the work, as part of the problem, not the solution. As ever, the horse’s mouth is the best place to look and the nature of what we find there gives the lie to what issues from many professedly interested parties, who mouth the title as apparent justification for their own ideas, ideas that the book itself does not express.