To refute the laissez-faire capitalism often ascribed to Adam Smith, it is only necessary to quote . . . Adam Smith

It would be nearly impossible to quantify the number of times that pro-corporate, laissez-faire activists have used the phrase �invisible hand� to justify all manner of unjust and brutal economic policies and their outcomes. This concept has provided to the pro-corporate right an enormous intellectual legitimacy and advantage over their liberal and leftist opponents who seek to limit the excesses of private corporate power. Faced with the unquestioned assumptions implied in the idea of the �invisible hand,� the arguments of liberal opponents often draw little more than scorn, derision, or silence.

The legitimacy of unregulated corporate power is further entrenched by largely unchallenged claims that laissez-faire capitalism is the closest incarnation of the Enlightenment values of rationality, freedom, human rights, and political self-determination. For example, Andrew Bernstein, writing in Capitalism Magazine, states �The Enlightenment upheld three fundamental principles: the rational mind, the rights of the individual, political-economic freedom. These principles form the essence of capitalism. Capitalism is -- historically and philosophically -- the political/economic system of the Enlightenment.�[1]

Indeed, the success of such propaganda seems to have permanently distorted the thinking of leftists and made many of them hate the Enlightenment, the philosophic movement that provides the basis for values of reason, freedom, and human rights. As a result, a profound state of confusion exists among many supporters of these values, who are then easily manipulated into embracing suicidal and self-destructive post-modernist philosophies, in which objectively provable facts are regarded as mere social constructions.[2]

The purpose of this article is to consider constructive ways in which opponents of undemocratic private power might counter the arguments put forth by laissez-faire activists. In particular, it is useful to consider what Adam Smith, the Enlightenment philosopher, actually thought about capitalism, political and economic freedom, and human rights. Did he really describe capitalism as the promoter and protector of Enlightenment values? The answers will surprise those who have never questioned the corporate-funded, laissez-faire activists who have constructed the popular image of Adam Smith.

Even so, it would be a distortion to ignore legitimate points raised by the Right as they read Smith. Smith became chair of logic at Glasgow University in Great Britain in 1751, and then chair of moral philosophy in 1752. He was appointed commissioner of customs in 1778,[3] two years after the American colonies declared independence from King George III.[4] In 1776, he published his famous economics tome, An Inquiry Into the Nature and Causes of the Wealth of Nations,[3] commonly referred to as Wealth of Nations, to which the remainder of this essay will refer.

Smith opens Wealth of Nations with a lengthy description of how the division of labor, or specialization, benefits and increases trade. Many anti-capitalist workers and philosophers, such as Marx, objected to the division of labor and the wage system, claiming that they alienated producers from their work. In contrast, Smith seems to approve of the division of labor wholeheartedly. He writes in the first paragraph of the first chapter that �The greatest improvement in the productive powers of labour . . . seem to have been the effects of the division of labour.�[5] Division of labor makes workers more efficient,[6] but specialization is limited by the size of the market.[7] Higher wages are the product, not of the total wealth of a society, but of the rate at which wealth is expanding.[8]

One of the early advocates of free trade, Smith deplores the use of tariffs and other protectionist measures. He argues, for example, that constraining imports sacrifices the good of the consumer to the profit of manufacturers.[9] Smith rails against regulations meant to enhance domestic industries, claiming that they actually harm the nation. He objects especially to subsidies and monopolies. Trade conducted freely is always beneficial. �That trade which, without force or constraint, is naturally and regularly carried on between any two places is always advantageous . . ."[10]

Subsidies hurt the economy because they force trade into much less efficient channels than if there were no subsidies.[11] Other types of regulation hurt the economy because they enforce monopolies that misallocate resources. The private interests of individuals naturally lead them to allocate resources most efficiently.[12] Because workers and laborers are the most susceptible to a drop in, or stagnation of, economic growth, they suffer because of misguided regulation.[13]

While Smith believed it was better for the nation if individuals did employ their investment capital nearer to home than far away, Smith was adamantly opposed to regulating such deployment of capital: �What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual . . . can, in his local situation, judge much better than any statesman or lawgiver can do for him.� Favoring domestic industry with regulation interferes with private individuals� right to deploy their own capital as they see fit. Such regulation �must, in almost all cases, be either a useless or a hurtful regulation.�[14]

Smith inveighs at length against mandatory apprenticeships, and he regards regulations requiring apprenticeships as infringement upon the rights of both employers and employees. The mandatory apprenticeship is �a manifest encroachment upon the just liberty both of the workman, and of those who might be disposed to employ him.�[15] Smith also argues against restrictions on the movement of labor. �The policy of Europe, by obstructing the free circulation of labour and stock both from employment to employment, and from place to place, occasions in some cases a very inconvenient inequality . . ."[16]

Smith does not particularly object to the inequality between laborers and proprietors; he believes that proprietors suffer greatly if general prosperity declines, stating �The order of proprietors may, perhaps, gain more by the prosperity of the society, than that of labourers: but there is no order that suffers so cruelly from its decline.�[17]

Now, let us consider some of Adam Smith�s arguments that contradict the modern message of conservative laissez-faire capitalism.

1. Adam Smith was pro-labor

Adam Smith discusses the relationship between workers and owners, or labor and masters, respectively, stating �It is not, however, difficult to foresee which of the two parties must . . . have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorises, or at least does not prohibit their combinations, while it prohibits those of the workmen.�[18] This statement describes the legal environment which has dominated US labor history, where the courts repeatedly sided against labor both in the enactment of workplace protection and through the issuance of injunctions to break strikes.[19]

The U.S. labor movement struggled for over a century to obtain the right to collectively bargain. Smith anticipates the vigor with which the masters would oppose the workers, noting that in labor disputes, the masters �never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen.�[20] Smith tells us that it is, in fact, the masters who enjoy a favorable bias in the public arena. �We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject.�[21] Smith explains the goal of such �combinations,� and their frequency: �Masters are always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate.� But sometimes, the masters determine that even the actual prevailing wage is too high, meaning, �Masters too sometimes enter into particular combinations to sink the wages of labour even below this 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,�[22] issuing another reminder that the hardships inflicted by masters on workers seldom receive public attention.

Smith notes that workmen sometimes �combine of their own accord to raise the price of their labour.�[23] While the reasons for forming such combinations may vary, �whether their combinations be offensive or defensive, they are always abundantly heard of.� Smith�s description of the overall situation is one where any real or perceived imposition on the masters is abundantly publicized, whereas the hardships imposed by the masters on the workers receives little attention. While it is true that the workmen �have always recourse to the loudest clamour, and sometimes to the most shocking violence and outrage,� Smith explains, �They are desperate, and act with the folly and extravagance of desperate men, who must either starve, or frighten their masters into an immediate compliance with their demands.� In spite of such antagonism, however, �The workmen, accordingly, very seldom derive any advantage from the violence of those tumultuous combinations, which . . . generally end in nothing, but the punishment or ruin of the ring-leaders.�[24] Smith comments on what he thinks a fair wage might be: �It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged.�[25] Such a statement dispenses with current notions that workers only deserve what the �free market� happens to provide.

2. Adam Smith distrusted and denounced the capitalist class

Adam Smith describes the relations of the three fundamental groups in the economy, the proprietors of land, those whose wages support them, and third, the owners of stock, who employ the workers and thus control the economy due to their ownership. Smith observes that the interests of the owners does not always match the interests of workers or even society at large. The reason is:

�the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin. The interest of this third order, therefore . . . is always in some respects different from, and even opposite to, that of the public . . . to narrow the competition, is always the interest of the dealers . . . but to narrow the competition . . . can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.�[26] [emphasis added]

Smith also describes a major impediment to the genuine free trade that he advocates: the lobbyist. Public opinion is against the establishment of complete free trade, but �What is much more unconquerable� is the �private interest of many individuals.� The monopoly of manufactures was �like an overgrown standing army� which have �become formidable to the government, and upon many occasions intimidate the legislature.�[27]

3. Adam Smith argued against corporate privilege

Smith believed that the primary purpose of the corporation was to secure special privileges. �The policy of Europe occasions a very important inequality . . . by restraining the competition in some employments to a smaller number than might otherwise be disposed to enter into them. The exclusive privileges of corporations are the principal means it makes use of for this purpose.�[28] �[An] increase of competition would reduce the profits of the masters as well as the wages of the workmen. The trades, the crafts, the mysteries, would all be losers. But the public would be a gainer, the work of all artificers coming in this way much cheaper to market.�[29]

Corporations inhibit competition, which would otherwise lower costs through the reduction of wages and profits. In this manner, both the workers and the owners of the corporations have a stake in maintaining the system. Such interplay of interests explains the willingness of organized labor, in the auto industry, for example, to band together with their corporate employers in the early 1980�s to support the bailout of Chrysler with taxpayer money, putting Japanese vehicles of higher quality at a disadvantage.

In the book The Emperor�s Nightingale, Robert Monks analyzes Wealth of Nations and argues that Smith voiced four basic concerns about the corporation, then called a joint-stock company. These were the tendencies to seek unlimited life, unlimited size, unlimited power, and unlimited license.[30]

Monks first point is that Smith saw that corporations tended to seek unlimited life, and argued that their charters be terminated upon completion of whatever task they originally had set out to accomplish. �A temporary monopoly of this kind may be vindicated upon the same principles upon which a like monopoly of a new machine is granted to its inventor, and that of a new book to its author. But upon the expiration of the term, the monopoly ought certainly to [terminate] . . . and the trade to be laid open to all the subjects of the state.�

Smith then explains the effects of permanent monopoly: �By a perpetual monopoly, all the other subjects of the state are taxed very absurdly in two different ways; first, by the high price of goods . . . and, secondly, by their total exclusion from a branch of business . . ."[31]

Secondly, Monks argues that Smith objected to the corporation�s tendency to increase in size seemingly without bound. �Such companies . . . commonly draw to themselves much greater stocks than any private copartnery can boast. The trading stock of the South Sea Company, at one time, amounted to upwards of thirty-three million eight hundred thousand pounds. The dividend capital of the Bank of England amounts at present, to ten millions [sic] seven hundred and eighty thousand pounds.� Capital of such size makes it easy for managers to neglect its management.�[32]

Monks' third point is that Smith argued against the corporation�s tendency to unaccountable power and corruption. Speaking of the East India Company, he writes �The great increase of their fortune had, it seems, only served to furnish their servants with a pretext for greater profusion, and a concern for greater malversation,* than in proportion even to that increase of fortune.�[33] Smith also notes the malevolent role that could be played by investors in such corporations. He explains that a stockholder might purchase stock in the East India Company �merely for the influence which he expects to acquire by a vote in the court of proprietors. It gives him a share, though not in the plunder, yet in the appointment of the plunderers of India� so that he may �enjoy this influence . . . and . . . provide for a certain number of his friends,� even though there may be little return on the actual capital invested.[34]

In Smith�s time, corporations often received charters to establish garrisons and forts in the British Empire. They also often were granted the right to negotiate peace settlements or declare war. �The joint stock companies which have had the one right, have constantly exercised the other, and have frequently had it expressly conferred upon them.� Of this bestowal of war-making ability, he writes �How unjustly, how capriciously, how cruelly they have commonly exercised it, is too well known from recent experience,�[35] an experience the world all too often forgets.

Monks' fourth point, which he calls the quest for �unlimited license,� encompasses the other three, but includes the lack of accountability so often found in the corporation. Monks quotes Smith, �The directors of such companies, however, being the managers rather of other people�s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own . . . Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.�[36]

Smith saw other hazards besides error or waste inherent in the separation of ownership and management. Speaking of the investors and proprietors of the East India Company, referring to them at one point as unaccountable �sovereigns� over the people of India, Smith wrote �No other sovereigns ever were, or, from the nature of things, ever could be, so perfectly indifferent about the happiness or misery of their subjects, the improvement or waste of their dominions, the glory or disgrace of their administration, as, from irresistible moral causes, the greater part of the proprietors of such a mercantile company are, and necessarily must be.�[37]

Smith regarded the corporation as another impediment to free trade, which needed to be weakened by removing its special privileges. �Let the same natural liberty of exercising what species of industry they please, be restored to all his majesty�s subjects . . . that is, break down the exclusive privileges of corporations, and repeal the statute of apprenticeship . . . and add to these the repeal of the law of settlements, so that a poor workman, when thrown out of employment either in one trade or in one place, may seek for it in another trade or place, without the fear of a prosecution or of a removal.�[38]

4. Adam Smith argued for investment at the local or domestic level

Perhaps the most often misquoted of Smith�s statements is the ubiquitous �invisible hand.� Arguably Smith�s most famous phrase, it should be examined in context. The full paragraph is as follows:

�But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.�[39] [emphasis added]

In other words, by preferring to employ capital domestically, traders benefit the society more than they know or intend. This theme of giving precedence to domestic deployment (investment) of capital flies in the face of business and financial globalization as currently practiced under the rubric of �free trade.� For example, Nicolas Kristoff and David Sanger described how President Clinton adopted and aggressively pushed the policy of free-flowing international capital that preceded, and likely caused, the East Asia financial crisis of 1997-1998.[40]

5. Adam Smith advocated taxing the rich

Smith advocated taxing the rich to support the poor by the use of a tollway tax: �When the toll upon carriages of luxury, upon coaches, postchaises, &c. is made somewhat higher in proportion to their weight, than upon carriages of necessary use, such as carts and wagons, &c. the indolence and vanity of the rich is made to contribute in a very easy manner to the relief of the poor . . ."[41]

6. Adam Smith observed that state power could be used to protect human rights

�The law, so far as it gives some weak protection to the slave against the violence of his master, is likely to be better executed in a colony where the government is in a great measure arbitrary, than in one where it is altogether free. In every country where the unfortunate law of slavery is established, the magistrate, when he protects the slave, intermeddles in some measure in the management of the private property of the master; and, in a free country . . . he dare not do this but with the greatest caution and circumspection . . . But in a country . . . where it is usual for the magistrate to intermeddle even in the management of the private property of individuals . . . it is much easier for him to give some protection to the slave; and common humanity naturally disposes him to do so.� Smith concludes, �That the condition of a slave is better under an arbitrary than under a free government, is, I believe, supported by the history of all ages and nations.�[42]

7. Adam Smith looked to government-supported education to mitigate the effects of the division of labor

While Adam Smith expounded upon the virtues of the division of labor early in the book, he simultaneously abhorred the effects of the division of labor, upon which capitalism is founded, and recommended government sponsored education to compensate for its deleterious effects. Smith eloquently describes the effects of the division of labor upon the largest portion of society, the labourers, whose work becomes �confined to a few very simple operations, frequently to one or two.� Unfortunately, people derive their understanding of the world from their everyday experience, which is largely their daily work. This means that:

�The man whose whole life is spent in performing a few simple operations . . . generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him, not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging; and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life . . . renders him incapable of exerting his strength with vigour and perseverance, in any other employment than that to which he has been bred. . . . in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.�[43] [emphasis added]

A comprehensive interpretation of Wealth of Nations

Many who might agree with Smith as he criticized capitalists and corporations may be hesitant to accept his defense of free trade. However, it is important to understand that trade and capitalism are not synonymous. Trade, ingenuity, and the entrepreneurial spirit existed for millennia before capitalism. What Smith criticized was not economic activity, prosperity, or initiative, but the effects of concentrations of power and wealth. He argued that such concentrations actually hurt society, because those who accumulated such power re-engineered society for their own benefit. While Smith acknowledged that government policies may be counterproductive or even stupid, Smith claimed that it was private power that acted in a truly malicious fashion.

Nevertheless, much of what Smith says against the institution of the corporation applies equally well to the institution of government. For example, when discussing how the management of large corporations were managing �other people�s money,� and thus likely to waste and squander it, such a moral hazard runs rampant in government. Statements he made against war-mongering corporations that operated the forts and garrisons in his time apply equally well to oppressive, war-mongering governments.

Smith does not address a crucial difference between the corporation and the government. Governments, however imperfect, can be brought under a degree of democratic control. In principle, voters can remove corrupt or ineffective politicians. The public has no direct input as to how powerful private individuals or businesses deploy their capital. Consumers may choose what to buy from whom, but multinational corporations receive income from the sales of goods, services, interest income and even currency speculation. Consumers have little ability to check the political and economic power of multinational corporations because of the corporations� enormous diversity of income sources. As Smith described, those who profit from such corporations also have a disproportionate influence on the legal system. Only the legal institutions of governments can challenge excessive private power. If one desires a great weakening of government, one must also advocate the abolishment, at a minimum, of corporations that enjoy unlimited life and power.

In his argument for unregulated global capitalism, referred to at the beginning of this article, Bernstein claims � . . . Adam Smith, as fully of the Enlightenment in his thinking as in his lifespan, advocated a system of �natural liberty. . . . On grounds of both economic utility and the rights of man, Smith endorsed economic liberty -- the rights of the individuals to compete freely and peacefully, free of coercive interference from the government. . . ."[44]

We can now begin to formulate a Smith-based rebuttal to this oversimplified and inaccurate portrayal of Adam Smith. Regarding economic utility, Smith showed that the capitalist class and the corporation could undermine economic efficiency and utility because of their propensity to form �combinations� and limit or eliminate their competition. Government could undermine efficiency and utility by protectionist policies, which also reduce competition. Yet sometimes the state (the �arbitrary� government) is necessary to protect human rights, and sometimes the capitalists, the �third order of men� would �deceive and even . . . oppress the public.� He described how corporations were likely to foment wars instead of preferring free and peaceful competition. The capitalist and the corporation are just as susceptible to the corruption of power as is a despotic government. Smith implied that �economic liberty� should not include the right for capitalists, working through government, to issue unlimited corporate charters, and that limiting the scope and lifetime of the corporation could restore the free and peaceful competition that Smith thought would keep capitalist self-interest in check.

The American public would surely be receptive to such arguments. Confidently argued and disseminated, such discussions and analysis could appear in op-eds and web sites and build intellectual support for more fair and equitable economic policies, whatever such policies might later look like in detail.

Notes

1 Andrew Bernstein, �Global Capitalism: The Solution to World Oppression and Poverty,� Part 2 of 3, Capitalism Magazine, September 29, 2005

2. Alan D. Sokal, �Transgressing the Boundaries: Towards a Transformative Hermeneutics of Quantum Gravity,� Social Text #46/47, 217-252 (spring/summer 1996)

Alan D. Sokal, �A Physicist Experiments With Cultural Studies,� Lingua Franca, May/June 1996, 62-64, http://www.physics.nyu.edu/faculty/sokal/lingua_franca_v4/lingua_franca_v4.html

3. The Library of Economics and Liberty, Biography of Adam Smith (1723-90), Liberty Fund, Inc., 1999-2002

4. Britannia Home, Monarchs, House of Brunswick, Hanover Line, George III (1760-1820 AD), Britannia.com LLC

5. Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, rev ed (1776; repr., New York: Random House, 1994), 3

6. Ibid., 7

7. Ibid., 19

8. Ibid., 79

9. Ibid., 715-716

10. Ibid., 521

11. Ibid., 541

12. Ibid., 680

13. Ibid., 286

14. Ibid., 485

15. Ibid., 140

16. Ibid., 155

17. Ibid., 286

18. Ibid., 75-76

19. The history of government injunction against labor in the U.S. is long. See, for example, Foster Rhea Dulles and Melvyn Dubofsky, Labor in America A History, 4^th ed. (Arlington Heights, Illinois, Harlan Davidson, 1984) 169, 189, 228-229, 253, 339 and more.

20. Ibid., 77

21. Ibid., 76

22. Ibid., 76

23. Ibid., 76

24. Ibid., 77

25. Ibid., 90

26. Ibid., 287-288

27. Ibid., 501

28. Ibid., 136

29. Ibid., 142

30. Robert A.G. Monks, The Emperor�s Nightingale: Restoring the Integrity of the Corporation (Oxford: Capstone Publishing Limited, 1998), 27

31. The Wealth of Nations, 814

32. Ibid., 800

33. Ibid., 811

34. Ibid., 812

35. Ibid., 814

36. Ibid., 800

37. Ibid., 812

38. Ibid., 501

39. Ibid., 484-485

40 Nicholas D. Kristoff and David E. Sanger, �How U.S. Wooed Asia To Let Cash Flow In,� The New York Times, 16 February 1999.

41. The Wealth of Nations, 781

42. Ibid., 634

43. Ibid., 840

44 Bernstein, �Global Capitalism�