Saturday, June 09, 2012

Adam Smith and the Myth of Laissez Faire

Jonathan Finegold Catalán reviews (7 June) The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years by Lawrence H. White, Cambridge University Press, 2012 HERE 
“Adam Smith’s Distrust of Business”
“While The Clash of Economic Ideas does not put too great of stress on it, White does go to some length to make sure the reader walks away knowing that Smith placed value on laissez-faire only because he saw it as a restraint on the evils of the businessman.  To some, this seems difficult to fit in with the idea that Smith stands for, essentially, an unbridled market, the classical conception of freedom and liberty, and the pursuit of self-interest.  One explanation might be the “bleeding heart” one, showing the compatibility between capitalism and the welfare of society’s poorest members.  Certainly, this was one of Smith’s interests when defending the market economy in The Wealth of Nations.  But, his general support of the market follows a much more fundamental insight.
Smith saw mercantilism as a process of collusion between the State and merchants, allowing the latter to take advantage of the former’s monopoly on force for their own benefit and against the well-being of the average consumer.  He did not recognize the State as an effective tool to restrain the potential damages that self-interest could wreak in a completely unrestrained environment.  Rather, Smith saw the market as the mechanism of restraint; it is the market which increases competition between merchants, figuratively enslaving them to the wants of the consumer.  This “macroeconomic” interpretation may stem from his views on the division of labor, which he also saw as a restraint on the actions of men.  Indeed, the division of labor makes all dependent on others, meaning that one needs to produce to the benefit of others in order to earn the income to consume for one’s own wellbeing.  Inter-dependency and competition jointly restrain the producer in favor of the welfare of society as a whole.
While Smith may be rightfully invoked against some of the modern arguments in favor of intervention, as does White, one must be wary of overuse.  Our author notes at least one exception to Smith’s support for capitalism: public goods. In cases where the market cannot guarantee the existence of competition — as disputed as these are — Smith may have readily supported interventionism.  During his time, he may not have recognized a great many examples (although, Smith did argue in favor of various forms of interventionism25), but the modern rise of welfare economics may be seen as just as Smithian as any modern free-market theory.
Let us be clear: Adam Smith did not use the words “Laissez-faire” in anything that he wrote, published in his lifetime or posthumous, or in any student notes that have so far been found, or in any reports of his lectures by those who attended them (John Millar, James Woodrow, Lord Buchan, John Stuart, etc.,) or by those who knew him intimately (such as Dugald Stewart, whose father was a student at Glasgow with Smith).
How Lawrence White knows that “Smith placed value on laissez-faire” or that “he saw it as a restraint on the evils of the businessman” is not explained (perhaps this is an assertion of the reviewer?).
We know that Smith knew of the use and meaning of laissez-faire from his close association with the Physiocratic circle around Quesnay during his visits to Paris (1764-67).  The fact is that laissez-faire never entered his vocabulary.  Nor did an English translation.  This has not prevented many commentators from seeking to use Smith’s use of Natural Liberty as a synonym for laissez-faire.  It was not the same thing. 
Natural Liberty was a philosophical concept based on Natural Law theories as expressed by Grotius and Pufendorf, the latter of which authored several textbooks in Latin in wide use across Europe, including the four Scottish Universities (where all lectures were traditionally taught in Latin, at least in Glasgow up to Hutcheson and Smith’s classes), Smith was fluent in Latin (and Greek, French and Italian).
The originator of laissez-faire was a ‘plain spoken’ French merchant, M. le Gendre, a deputy of commerce, who responded to the question put to them by Colbert, the French minister, what he could do for them at a meeting that Colbert convened: “lassez nous faire’ le Gendre replied in 1690. Those who quote the phrase today often miss these details. Note that it was a merchant who favoured laissez faire.  Consumers were not asked but are supposed to be the main beneficiaries of laissez-faire. Smith remained suspicious of merchants who from Elizabethan times had monopolised who could practise their trade and where, in the infamous Town Guilds.  People of the same trade seldom meet together, even for merriment and diversion, but the conversation sends in a conspiracy against the public, or in some contrivance to raise prices” (WN I.x.c.27: 145).  Laissez-faire was of dubious benefit, given its claimants hence Smith never advocated it.
He believed that consumption was the sole end of production and competition was the antidote to open and secret monopolies.  Far from leaving merchants alone, he wanted them under the pressure of free competition of consumer choice.  Colbert typified state regulations of trade and France was a prime example where government regulations abounded, with numerous officious Inspectors of French street markets and fairs inspecting every detail, not to ensure open competition, but to ensure the State’s passion for order.  Absent these regulated orders,enforced by the Inspectors ,the merchants would have imposed their own orders, and their likely behaviours, if free to do so, would not have worked for the best interests of their captive customers.  Trade guilds, legal or unofficial, under the cloak of laissez-faire worked for the interests of merchants, not consumers.
So where did cries by merchants and manufacturers for ‘laissez faire come from throughout the 19th century?  Two French economists, Say and Bastiat, were prominent in cries for laissez-faire, using Adam Smith’s name as cover for its popularity among politicians and merchant campaigners against the ‘Corn Laws’ and the newly passed but limited Factory Acts.   The words laissez-faire are now endemic across the non-socialist political spectrum, particularly in the USA.
So what reliance should we place on Jonathan Finegold Catalán’s claim that “Smith placed value on laissez-faire only because he saw it as a restraint on the evils of the businessman”?
I suggest very little.   It does not correspond to the historical facts about Adam Smith and perpetuates a myth about his advocacy of laissez-fire.  He was not beholden to the intentions of merchants and manufacturers - they cannot be trusted - and neither can government Inspectors.


Blogger Jonathan Finegold Catalán said...

I used "laissez-faire" as a synonym for "free markets," so I didn't intend to suggest that Smith used the actual term "laissez-faire." Now, that Smith didn't support "free markets" -- then I (and, I think, White) assumed that he did, and perhaps we're wrong. I think, though, that White does routinely consider what you state in your last sentence, and that is basically what I tried to emphasize in that part of the review.

10:03 pm  
Blogger Jonathan Finegold Catalán said...

I'm not sure if the first comment went through (not logged in through Google or something -- I'll try again). I didn't mean to suggest that Smith used the actual term "laissez-faire." I used the word "laissez-faire" as a synonym of "free markets" -- perhaps, as you note, incorrectly. That's entirely my fault. It's just that I thought it would be pretty well understood within context (of free markets). Regarding White's book, his coverage of Smith acknowledges pretty much what you write in the very last sentence of this post, and that's what I was trying to reiterate in my review.

10:06 pm  
Blogger Gavin Kennedy said...

Thank you for your posts. The delay between posting and it appearing on the Blog is due to my moderation gateway, brought about by gross abuse from trolls, sex trades, and abuse.
I am not always available to scan for comments, especially when domestic chores and grandchildren are visiting.
Smith was in favour of freer markets. of that there is little doubt. He did not advocate laissez-faire, as asserted in the early 19th century, and now believed passionately today.
His stance, I think is well expressed in the stance of being in favour of 'markets where possible, regulation and intervention where necessary'.
Ideas do matter, both when we get them right and when we get them wrong.
I enjoyed reading your Blog.

2:46 pm  
Blogger Vilhelmo said...

How did Smith define the term "free market"?

I was under the impression that it meant a market free of privilege, of unearned income, of economic rents. It was a market free from the vestiges of feudalism that rewarded privilege instead of work.

1:28 am  

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