Wednesday, May 06, 2009

Misuse of Adam Smith Quotation

Yesterday I posted on Noam Chomsky’s Education is Ignorance’ and commented on this paragraph:

“[Smith] did give an argument for markets, but the argument was that under conditions of perfect liberty, markets will lead to perfect equality. That's the argument for them, because he thought that equality of condition (not just opportunity) is what you should be aiming at.”

I said: ‘I am at a loss to place this statement in Wealth Of Nations, not to recognise Smith as advocating it as an aim ‘you should be aiming at’.

A reader, “andrew”, kindly offered this quotation:

"Adam Smith, The Wealth of Nations, Chicago: University of Chicago Press, 1976 (original 1776). An excerpt (Book I, ch. X, p. 111):
“The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality. If in the same neighbourhood, there was any employment evidently either more or less advantageous than the rest, so many people would crowd into it in the one case, and so many would desert it in the other, that its advantages would soon return to the level of other employments. This at least would be the case in a society where things were left to follow their natural course, where there was perfect liberty, and where every man was perfectly free both to chuse what occupation he thought proper, and to change it as often as he thought proper.

First, who is Andrew? His profile is ‘unavailable’. However, Andrew quotes from the same edition of Wealth Of Nations as below, which corresponds to the edition that Chomsky praises. Interesting. How close to Chomsky is ‘Andrew’?:

Chomsky: “the University of Chicago, the great bastion of free market economics, etc., etc., published a bicentennial edition of the hero, a scholarly edition with all the footnotes and the introduction by a Nobel Prize winner, George Stigler, a huge index, a real scholarly edition. That's the one I used. It's the best edition. The scholarly framework was very interesting, including Stigler's introduction.

Andrew: “Adam Smith, The Wealth of Nations, Chicago: University of Chicago Press, 1976 (original 1776). An excerpt (Book I, ch. X, p. 111)”.

So they both read the same edition. I have decided to respond on the main page of Lost Legacy, rather than only in the Comments page because the issue raised is quite important and some readers may miss it otherwise.

Chomsky’s assertion is an interesting comment in itself of his method.

It is quite clear from my post yesterday that I took, and I think most readers will have taken, Chomsky’s claim to Adam Smith on ‘equality’ was about equality in the general sense, as opposed to the phenomenon of growing inequality of 21st Century capitalism, and not about the tendency to the equality of market prices in a competitive economy.

Now I know, and I am sure that Chomsky knows, that Adam Smith did not advance such a proposition of society becoming more equal – he rarely made predictions about the future, perhaps because of his knowledge that events seldom work out as predicted (unintended consequences, and so on). Distributive justice was not agenda in mid-18th century Britain, other than in the classical philosophic tradition, which had little to do equality in the modern sense, and had more to do with distribution according to merit.

Turning to Andrew’s helpful provision (for which I thank him) of the quotation upon which Chomsky builds his assertion, we can immediately see that ‘equality’ of which Adam Smith refers and the ‘equality’ that Chomsky asserts does not have the same meaning.

Smith: “The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality.”

This is unexceptional. Smith refers to prices determined by homogeneous and mobile factors – wages of labour, levels of profit from capital stock, and, for good measure, prices of products - under competitive conditions will tend to the same level. A version of this proposition, today, is part of Economic 101, and on its assumptions few would quarrel.

But that is not how Chomsky presented his case: Smith gave ‘an argument for markets’ and everybody can see that it has not quite worked out like that. We have considerable inequality, not converging equality (if anything it is diverging).

Question: how could Adam Smith get it so wrong? Chomsky’s answer: because modern capitalism does not conform to Smith’s idealised model outline in the paragraph quoted(for all the reasons which Chomsky rehearses endlessly in his critique of modern capitalism). We agree on that.

Back to Adam Smith. The quotation about wage and profit which started this debate is in paragraph 1, Chapter X of Book I of Wealth of Nations: ‘Of Wages and Profit in the different Employments of Labour and Stock’ (WN I.x.a: 3 paragraphs; p 116).

Smith follows this opening paragraph with 115 further paragraphs analysing and explaining how and why there are ‘Inequalities arising from the Nature of the Employment Themselves’ (Part I: 52 paragraphs: WN I.x.b: pp 116-135;) and ‘Inequalities occasioned by the Policy of Europe’ (Part II: 63 paragraphs; WN I.x.c: pp 135- 193). [All my references are to the Glasgow Edition, Oxford University Press, 1976, widely known among serious scholars as the definitive edition, not introduced by George Stigler of Chicago University.]

Adam Smith did not think markets were competitive in 18th century Britain, and not much has happened since to make them so, almost entirely from the non-competitive elements introduced, often by ‘merchants and manufacturers, of whom as a group, in the main he had severe suspicions about their motives, and the motives of legislators and those who influenced them, who followed the prescriptions of mercantile political economy – false doctrines of ‘jealousy of trade’, monopoly privileges, tariff protectionism, wealth defined by balance of payments surpluses, gold bullion, guild trades rights, chartered trading monopolies awarded by the King and parliament, colonies, and expensive wars for dynastic and trivial ends.

I suggest that Chomsky (and Andrew) read the rest of chapter X and appreciate how realistic Smith was about labour and capital markets. Smith did not expect equality to emerge from commercial society; he did expect, flaws and all, that to the extent that revenues from the great wheel of circulation, which made up a commercial economy, were directed to productive labour and the ‘annual output of the necessaries, conveniences, and amusements of life’, via wage employment of the labouring poor, would provide subsistence for the poor majority of the population in a manner superior to their destitution under all previous modes of subsistence.

Of course, to the extent that such revenues were spent in unproductive activities, the prodigals – private individuals or public governments – would slow down the small percentage of growth below that which may be possible – it only takes a few percent to make a difference to the poor. It wasn’t equality in the Chomsky implied sense that Smith saw as possible – it was jobs with growth that would also grow population, enabling labouring families to survive longer, to breed and reach adulthood.

Per capita incomes and population growth in the 19th century – not withstanding the horrors of the industrial revolution – continued to grow under commercial capitalism, and did not produce a nation of stupid zombies. Emigration is not a dominant feature out of North America. Capitalism gave the people a share, which is more than its known alternatives.

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Blogger Marc Chehab said...

Very good article! I thought Smith' argument was based on his realisation that prices pay for rent, wages and profit and that, in a market, capitalists would have to adjust their profits, so that the market price gravitates towards the natural price... no? it's quite a while since i read it, i'll investigate it when i'm at home, but it's in book 1, chapter 7:
"Of the Natural and Market Price of Commodities"

10:12 am  

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