Tuesday, February 26, 2008

Exchange Pre-Dates Capitalism

Bill Bonner writes (25 February) in The Daily Reckoning (here) that
Capitalism Was Just Fine Until Politicians Got Involved’

The genius of capitalism was described by Adam Smith more than 200 years ago: Let a man seek his own advantage; sometimes he will flourish. Sometimes he will flounder. But always, the process of innovation and failure will reward the ‘common good.’
“It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest,” is how he put it.”

There is no connection between the two paragraphs.

The first is off the pace: Adam Smith did not write about what became capitalism in the mid-19th century (when the word was first invented in English by an English novelist, William Makepeace Thackery (The Newcomes, 1854).

Smith wrote about small scale merchants and manufacturers, and local town markets where produce was sold from near and far but definitely not in ‘big boxes’. Most business was small scale, funded by scrimped savings from past incomes, occasional inheritance, and modest borrowing. They were single owners or small co-partneries, in which the owners pledged all their assets in cases of bankruptcy – their liabilities were unlimited and extended to their entire fortunes.

There were a few larger-scale enterprises in coal mining, potteries, engineering works and shipping, but for the most part capital-stock was scarce, risky and carefully managed. By the end of the 18th century and through the 19th century, larger amounts of capital became available, associated with the entrepreneurial innovators, as a separate capital-owning stratum slowly emerged, eventually able to amass large capitals.

New organizational forms appeared, re-modelled from the large chartered monopoly trading companies which had been formed to serve overseas trade and colonies, but without the trappings of monopoly powers and closely linked to civil projects and technological innovations.

The famous ‘butcher, brewer, and baker’ example long pre-dated 19th century capitalism. It was linked to the pre-historic propensity to ‘truck, barter, and exchange’, which Adam Smith regarded was the core principle of human behaviour in the simplest of market-place transactions. Fittingly, it appears in Book I of Wealth Of Nations as a necessary consequence of the division of labour and specialisation.

It is integral to Adam Smith’s theory of exchange: ‘Give me that which I want, and you shall have this which you want, is the meaning of every such offer, and it is in this manner that we obtain from one another the greater part of those good offices which we stand in need of.’ (WN I.ii.2: p 26) I

t is clear that to serve our own interests, we must, absolutely must, serve the interests of those with whom we transact. This is more than an individual ‘seek[ing] his own advantage’. He has to do so by serving the interests of the other person, which is why he can only succeed by addressing ‘their regard to their own interest’ and not just his own.

Once people realised this truth (because it worked) aeons ago, then societies had an alternative to mere plunder as the source of their wealth, which he described as the ‘annual consumption of the necessaries, conveniences, and amusements of life’. Violence can consume wealth, it cannot create it. A man seeking ‘his own advantage’ needs a partner to exchange what each wants from each other. That pre-dates capitalism by many millennia. That is what Adam Smith wrote about.


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