Saturday, November 21, 2009

Adam Smith Quotations

Jonathan Schwarz writes in “A Tiny Revolution” (HERE)

Once Again Adam Smith Betrays the Principles of Adam Smith

Several finance professionals just co-wrote a column for the New York Times saying this:

American workers are overpaid, relative to equally productive employees elsewhere doing the same work. If the global economy is to get into balance, that gap must close...the recession shows that many workers are paid more than they’re worth.

Here's Adam Smith, describing columns like this in The Wealth of Nations in 1776:

"In reality high profits tend much more to raise the price of work than high wages. Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”

I agree with Jonathan Schwarz that many people who write on Adam Smith are highly selective in their quotations from him, and also apparently unaware of the context in which his quotation appears.

This suggests that Adam Smith is more often quoted than read in the original from which they quote. Jonathan concludes: “I assume these people just never read anything”, and I agree.

It is not clear from Jonathan’s piece exactly on what grounds the “finance professionals” who contributed to the New York Times piece made their assertions about US productivity. However, it is not clear to me on what grounds Jonathan makes that particular quotation from Wealth Of Nations. *

From memory Smith's reference to the failure to mention the role of higher profits in determining high prices is part of his analysis of higher monopoly profits imposed on consumers by the colonial trade, a most protected business in British affairs, due to the imposed monopoly on the carriage trade (shipping) under the Navigation Acts and the application of marchnats' monopoly trade to and from Britain and Europe.

These monopoly practices enabled Britain to export to the British colonies in North America a wide range of consumer and producer commodities and to charge high monopoly prices in the absence of competition from European rivals.

Moreover, as all colonial exports had to be shipped in British ships with British crews, on the same monopoly basis, the same British traders were able to pay lower prices for colonial goods (nobody else was allowed to compete with them by paying higher prices), and, then charge British consumers high prices to buy the imports once landed in Britain (and other European consumers had to pay higher prices on goods off-loaded and transhipped to the continent).

Adam Smith exposed this highly-profitable, extended monopoly racket in Book IV of Wealth Of Nations. British and colonial consumers both lost out in the racket, though British ‘merchants and manufacturers’ gained from it.

That was Adam Smith’s point about the merchants saying “nothing concerning the bad effects of high profits” and for them blaming the fact of the relatively high wages of labour in the Colonies (compared to wgae sin Britian) on the high prices the merchants charged to British consumers for colonial imports.

It was a con, but Smith saw through it.

Therefore, I don’t think we can use these historical facts to justify, though perfectly warranted, criticism of the “finance professionals” who described US workers today as being “overpaid”. They may well be wrong, but so to Jonathan Schwarz may be wrong too, in selecting Adam Smith’s quotation to justify his criticism of the “finance professionals”.

Incidentally, this foreign-trade racket was highly profitable for thos merchants who risked the perils of the 18th century sea-trade. But some British merchants preferred not to take on the risks, despite the profits, and preferred for "their own security" to stick exclusively with domestic UK trade, which led Smith, having explained these circumstances clearly in Book IV, Chapter ii, paragraphs 1-9, to use the popular 18th-century “invisible hand” metaphor for those merchants who opted out of the colonial trade.

[Apologies for not supplying all the references here, but my Adam Smith library (Glasgow edition of the Works and Correspondence of Adam Smith, Oxford University Press) is in another place, temporarily].

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Anonymous Anonymous said...

very well explained.Thanks for sharing such a nice blog !

UK trade

11:30 am  

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