Tuesday, March 20, 2007

It Takes More than Labour Alone to Create Wealth

Following the excellent article by Ian Bell on Adam Smith in The Herald, correcting some ideas about him that are patently wrong (though a bit off in some respects), which I praised on Lost Legacy, The Herald’s letter page carries a contribution by Alan McCombes, the ‘policy coordinator’ of the ‘Scottish Socialist Party. In it he writes:

“Adding to Ian Bell's superb essay on Adam Smith, your correspondent RF Morrison rightly differentiates between money and wealth (March 19). His definition of wealth, "the production of socially useful goods and services", is spot-on.
Unfortunately, almost all our mainstream parties' politicians fail to understand that distinction. They endlessly extol the virtues of Scotland's "wealth creators" and promise them an array of incentives designed to encourage further wealth creation. In fact, many of these so-called wealth creators do nothing of the sort. Their main contribution to society is to shuffle money around, enriching themselves in the process.

It is not necessary to have a PhD in economics to work out that wealth is created, not by merchant bankers, venture capitalists, property speculators, currency dealers, stockbrokers or shareholders, but by those who work in our factories, offices, call centres, hospitals, schools, buses, trains, farms, fishing boats, mines, oil rigs, newspapers and countless other workplaces.”

The premise of in Alan Mcombe’s letter is slightly wrong (the way it reads):

‘His definition of wealth, "the production of socially useful goods and services"’. If ‘his’ refers to Ian Bell and excludes Adam Smith, McCombe is wrong in so far as Adam Smith is concerned.

Book IV of Wealth of Nations (and elsewhere, of course) makes the point several times in Smith criticism of ‘mercantile commerce’ that ‘wealth’ is not the amount of gold and silver bullion a country collects. Wealth, writes Smith from Book I onwards, is the ‘annual produce of land and labour’ in a country; it is the annual output of the ‘necessaries, conveniences and amusements of life’. Money is merely a means of exchange to facilitate exchange in markets; it is not wealth, except in the popular imagination.

It is not clear what ‘socially useful’ means, though it sounds vaguely Marxist.

The idea that only one factor of production creates wealth (in Smith’s sense) is false, and patently so. Many countries have vast resources of labour available, but live in abject poverty. They do not have access to capital – labour will not work without wages to buy the ‘necessaries, conveniences, and amusements’ of life. If all you need was labour (willing or coercible) to work to produce real wealth then Mao’s China would have been growing rich without access to foreign capital investment and technology. India and Africa would be virtual Eden Gardens, and so would all points of the compass outwards.

If Mr McCombe believes that getting rid of the people who bring capital to the opportunities to produce real wealth (the annual produce of ‘land and labour’ in Smith’s 18th century terms) – an analogous view to the Russian communists who decided that the ‘Kulaks’ (richer farmers) were an obstacle to the creation of wealth, and Mao tried with the ‘communes’ – his recipe for wealth creation is as likely to be as successful as that of Mugabe’s Zimbabwe, the tragedy of which can be seen before our eyes today.

Adam Smith understood about the creation of wealth. Mr McCombe, and the 'wealth is money' people too, apparently do not.


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