Saturday, September 05, 2009

Was 'Capitalism' Designed by Adam Smith?

In a debate, so far conducted as an exchange of comments, I have made a longer comment than the system allows, so I have brought it a a post below:

I refer to my post and subsequent comments 'Beyond the Facts' with Antony North, below'

'This was not how capitalism was meant to be, originally devised by Adam Smith as a philosophy to go alongside thrift.'

My problem with this sentence is the part: “how capitalism was meant to be”.

Societies are not ‘meant to be’ (if so, who by? How does the ‘meant to be’ work?, etc.).

Societies are not ‘designed’ by any one person. All attempts at utopias fail; good intentions account for nothing; nobody
‘designed’ any previous society.

Gatherers engaged in certain behaviours which they inherited from their primate ancestors (the common ancestor of both hominines (hominids) and chimpanzees). They developed regional behavioural differences. The pre-history of primates and hominines show variations (east and west African chimpanzees, bonobo’s, and the lineage of hominines went through at least 18 different species before the human species emerged, 400,000 years ago). Homo sapiens also varied in their adaptabilities to local conditions.

Gatherers, opportunistically, also hunted small-sized animals (as do chimpanzees), later going after scavenged carcasses and, eventually hunted bigger game, assisted by primitive technologies – worked stones and wooden shaped weapons.

No individual designed these changes – those that worked assisted survival; those never tried left those who never tried at the inherited level of subsistence (for most hominid species, they had long histories, counted in hundreds of thousands of years before their extinctions).

Shepherding was picked up by minorities of local tribes, as was farming. The majority of gatherer-hunters/scavengers remained as they were as humans for most of the 400,000 year span lived by humans so far. As John Locke put it: 'in the beginning al the world was America’ (in reaction to the discovery by higher technology tribes of lower technology tribes still living as did our forebears in the forest). Even today, there are some isolated tribes still living off their surroundings as the whole world once lived.

The division of labour was not designed by anybody; it happened as individuals found it worked for them. Professor Frances Hutchison opined in his posthumous work, A System of Moral Philosophy (1755), that the leader divided up the tribe into separate jobs, which was solely from his imagination. Where did the leader get the idea from? Or was it discovered independently scores of thousands of times over and again across human societies?

Hence, I come back to the question of who invented capitalism, a question that must also explain how and why it took different forms across the globe among those human societies that had moved from pastoral subsistence to ‘towns and countryside’ and had survived and functioned in many different forms across Europe and Asia, from the Atlantic to China, with many examples of some societies collapsing (Mediterranean) or stagnating (India and China) and not sustaining (or reviving) into commercial societies, as happened in late-Medieval western Europe from the 15th century.

The rise of commercial civil societies in the 18th century is explained historically and how and why they went on into distinctive forms of capitalism from mid-19th century onwards.

Crediting an individual when there were many individuals thinking and contributing their ideas, is the folly of such assertions. Just because some key thinkers (Pufendorf, Chydenius, Quesnay, Cantillon, Turgot, List, Hamilton are less well known today is not a good reason to hand such a role to Adam Smith, who did not live long enough to codify how British capitalism (which evolved differently from Scandinavian, French, German, and US capitalism) evolved. Moreover, as much of his legacy had been heavily distorted, and confused with others (Mandeville, the Physiocrats, Ferdinand Lasalle, Marx, etc., - see my Adam Smith’s Lost Legacy, 2005: Palgrave-Macmillan) it is not difficult to rebut the idea that he ‘designed’ capitalism.

You ask: ‘Is it correct to say Smith devised his concepts within an ethic of thrift? I think so’.

I answer that it is a extreme generalization. ‘Thrift’ as you postulate is in Smith’s philosophy expressed as ‘frugality’, as opposed to ‘prodigality’.

Thackeray and others, (say, Trollope) noted the extravagant living of the upper-orders and saw the corruptions of the finance capital, which was the essence of late-19th century ‘capitalism’. Corruption was already evident in the South Sea Bubble, the East India Company, etc., in Smith’s time, in a relatively smaller–scale commercial society, and was more than evident in the decline of Rome. Adam Smith observed; he did not predict nor proscribe.

Capitalism evolved whatever Adam Smith or anybody else thought about the society they lived in. It has ever been thus; human nature is unchanging.

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Blogger Don said...

From Edmund Burke:

"Mere parsimony is not economy. It is separable in theory from it; and in fact it may, or it may not, be a part of economy, according to circumstances. Expense, and great expense, may be an essential part in true economy. If parsimony were to be considered as one of the kinds of that virtue, there is, however, another and a higher economy. Economy is a distributive virtue, and consists not in saving, but in selection. Parsimony requires no providence, no sagacity, no powers of combination, no comparison, no judgment. Mere instinct, and that not an instinct of the noblest kind, may produce this false economy in perfection. The other economy has larger views. It demands a discriminating judgment, and a firm, sagacious mind. It shuts one door to impudent importunity, only to open another, and a wider, to unpresuming merit.— Noble Lord (VI. 53)"

7:47 pm  
Blogger Gavin Kennedy said...

Hi Don

In Smith's view the key to growth in a commercial society was how the owner of capital stock spent his net revenue (profits) each cycle, after paying his costs of labour and materials.

If he invested it in productive labour (that labour that earned its costs and those of materials, to earn pfotis) it would set in motion the additional employment in each round, increasing total output of the 'necessaries, coveniences, and amusements of life').

If he spent it on consumption beyond that level necessary to sustain life, which did not return to him as a revenue in excess of costs, he was detracting from growth inducing revenue streams.

Burying it in the ground had the same unproductive effect. As he was talking about a relatively small proportion from the 'great wheel of circulation', it didn't tkae long to run down total revenues, and reverse employment inducing activities.

Parsimony of itself was as Burke suggested; unproductive. In an active commercial society, savings from revenue become investment. People save to earn interest; borrowers of savings for productive investment borrow to earn profits.

Prodigals borrow to spend unproductively.


9:21 pm  
Blogger anthonynorth said...

You are making the usual bold assertions about how societies developed in prehistory, placing contemporary thoughts onto the past. It may have been like this, it may not.
As I hinted in my comments, as I see it societies do not simply emerge, but are guided by a knowledge/power elite. A consensus grows from this, and society develops as dictated, and not purely as a form of emergence.
Smith's intellectual contribution to the knowledge/power structure is, I think, essential, laying a moral framework to free trade and the development of capitalism. But the reality is, as I state, this was done alongside thrift. Take this away and we have excess.
This was the point of my original words to which you took exception. I find nothing wrong with my statement. You seem to have a problem with the word 'devised'. You give the impression that Smith was some passive observer and nothing more. I have never, yet, come across a writer or thinker like this. We have Ego. We hope our words will have power amd influence. Devised means 'plan' as well as invent.
As I read it, as well as focusing on a point which was not the central element of my words, you have not yet shown that the original statement is wrong.

11:13 pm  
Blogger Gavin Kennedy said...


I think we may have to disagree about our different ideas.

You made the assertion that Adam Smith’s ideas about how capitalism should function as if he devised, planned, proscribed or whatever its nature and form and, by implication, either that those involved didn’t behave as he advised.

I objected to this ‘designed’ view of how societies evolved, showing that in every case of known societies there is no evidence of an ‘elite’ deciding what ought to happen and then implementing their intentions.

Adam Smith observed, he did not prescribe. He rarely made a prediction. He was not overly idealist about the prospects of reforming human behaviours, nor about the likely role of
‘merchants and manufacturers’, legislators, and those who influenced them, in being part of the remedy.

In fact, he mocked the French Physiocrats for laying down that to progress to opulence the nation must ‘enjoy perfect liberty and perfect justice’, because if that was a necessary condition ‘there is not in the world a nation that could ever have prospered’ (Wealth Of Nations, IV.ix.28: page 674).

You believe that Smith laid down “a moral framework to free trade and the development of capitalism”; I assert that Smith’s role was more modest.

He wrote Moral Sentiments (1759) summarising his lectures on ethics, delivered to students at Glasgow, which is not prescriptive in the sense that you imply. He was well aware that ‘men of humanity’ were not a majority (evidenced by the behaviours of the old ‘elites’ and the emerging new elites).

Wealth Of Nations is a polemic on how current society was following the wrong policies (mercantile political economy) and discussed the consequences for the current society. He had no idea about what was happening immediately (the so-called industrial revolution) nor what was likely to happen in future (finance capitalism – the word and the phenomenon came 60 years later).

You have still not outlined how your ‘elite design’ model transfers to societies; ignore that capitalism took many forms (and still does: the recent Chinese Communist model, for example); and seem to ignore the pre-history and history of every society known to anthropology.

If you believe that societies have been, can be, and will be designed to achieve a set of ethical principles, I admire your idealism, but sense that you will be disappointed in due course. All attempts to design utopias have failed; what we have instead is what we get. Smith modestly observed humanity, read the literature of the past, and studied what had happened.

I suggest you might read Smith on the ‘man of system (“very wise in his own conceit” who believes he can “arrange the different members of a great society with as much ease as the hand arranges the different pieces on a chessboard” (ignoring what should be plain from history) that in “human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it” (Moral Sentiments, VI.ii.2.17: page 233-34).


8:05 pm  
Blogger anthonynorth said...

I accept the emergence idea to a point, but think it will always be polluted by a growing elite. Power will always out. This is not a utopian view - as i pointed out in a previous comment, this is unfortunate. Yes, utopias always fail, which is the real tragedy. Such an elite is always counter productive in the end.
This elite gathers credibility through the influence of knowledge, of which philosophers play a part. You could say unwittingly - and to a point this is correct - but the fact remains writers write in order to influence. Why else would they bother?
Of course a system will vary dependent on local circumstances, but I think the elite model rises regardless. Take your primitive societies. Circumstances would naturally cause a growing process - your emergence - but it would not be accurate to say that they suddenly got up one morning and began herding. Rather, in each locality and time, someone would suddenly intuit the idea, and HE would shape the growing society.
For a more modern version, I've mentioned in a previous comment, Hayek and Mont Pelerin.

10:04 pm  
Blogger Gavin Kennedy said...

We have greater agreement than disagreement from your last post.

That an individual 'intuits' is most likely - growing plants as food may begin by spilt seeds springing up and somebody, a woman on domestic duties, noticing and tentatively trying to immitate. A puppy, goat kid, or calf found and children treating it as a pet.

All societies have alpha elites (male and female); any elite can afford philosophers, priests, shamans, and thugs. They are unavoidable. Sometimes they drive change for the good (innovation); more often for the bad (war, tyranny, and distorted morality).

Commercial societies (long present in Western Europe, less so elsewhere; and totally absent for much of the world until recently) have dispersed, minor elites, who turned to influencing the elites.
Early on, elites commanded resources and learned about civil government, and, later on, sources of wealth via taxaation, plunder, and conquest.

Mixed in all this was the circulation of 'knowledge' as absolute nonsense and superstition. Philosophers competed with Shamans for the attention of the elite. Still do.

At this point I agree that Hayek had a contribution that was close to being right. Marx had a contribution that was close to being absurd, and in the case of elites, absolutely tyrannical.

If this is near acaptable, we have about as much agreement as we are likely to achieve.

8:41 am  
Blogger anthonynorth said...

I think there's a certain amount of agreement here, except I'd argue that the way capitalism is presently progressing, we're slowly devolving back to a form of totalitarianism. I've written elsewhere that Hayek's Road To Serfdom was aptly named, but not for the reasons he meant. But that's another story ....

2:46 pm  
Blogger rjs said...

according to shimi & wiki:

"The origins of capitalism and free markets can be traced back to the Islamic Golden Age and Muslim Agricultural Revolution,[7] where the first market economy and earliest forms of merchant capitalism took root between the 8th–12th centuries, which some refer to as "Islamic capitalism".[8] A vigorous monetary economy was created by Muslims on the basis of the expanding levels of circulation of a stable high-value currency (the dinar) and the integration of monetary areas that were previously independent. Innovative new business techniques and forms of business organisation were introduced by economists, merchants and traders during this time...

4:35 pm  
Blogger Gavin Kennedy said...

Hi rjs

While Islamic economics has been neglected (not least in Islamic countries), market economies and commercial societies, long pre-date the 8th century (common era). Egypt, Babyon, persia, Greece, Rome, India and China, were large economies with considerable trade internally and with neighbours (some distant).

Commercial socieites grew up alongside shepherding and farming fairly early on after the agricultural 'revolution' 11 to 8,000 years ago.

By the time of Islamic expansion, the Mediterranean countries were engaged in trade (and warfare) for a millennia or two.

In no way am I downplaying early Islamic contributions to economic understanding; I think there is a danger of claiming priorities in widespread social changes.

9:05 am  

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