Friday, January 18, 2008

Adam Smith on Profits or Wages Causing High Prices

Altercation by makes a couple of quotations from Adam Smith in Media Matters from America (17 Jan) (here)

Speaking of stimuli, conservatives like to claim Adam Smith as their patron saint but the man was a liberal through and through. (For extra credit, find him here.) Anyway, look at this quote of his I found in Paul Starr's Freedom's Power: The True Force of Liberalism (Basic Books, 2007):

Far from being an apologist for the capitalist class, Smith showed his sympathies for workers throughout The Wealth of Nations. In his chapter on "Profits of Stock," for example, he wrote, "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 good ... 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."

Also this one:

"Servers, labourers, and workmen of different kinds make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed cloath, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed, and lodged."

Seems fair enough to me, especially the second quotation, which features at the end of my new book, Adam Smith: the moral philosopher and his political economy’ (in press; Palgrave Macmillan, ‘Great Thinkers in Economics’ series).

The first quotation is from the debate about the relative role of profits and wages in prices (WN I.ix.24: p 115) and Smith’s conclusion from his discussion of the economics is about right, in my view: ‘They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.’

In Book IV (viii.c: 25-29) Smith returns to this theme and addresses the debate among those who supported mercantile political economy (mainly the merchants and manufacturers, and those who legislated under their influence) and those few, like Adam Smith who did not.

Here is the relevant context from Wealth Of Nations for his repetition of the same accusation (it's worth reading the chapter):

Secondly, this monopoly has necessarily contributed to keep up the rate of profit in all the different branches of British trade higher than it naturally would have been, had all nations been allowed a free trade to the British colonies.
The monopoly of the colony trade, as it necessarily drew towards that trade a greater proportion of the capital of Great Britain than what would have gone to it of its own accord; so by the expulsion of all foreign capitals it necessarily reduced the whole quantity of capital employed in that trade below what it naturally would have been in the case of a free trade. But, by lessening the competition of capitals in that branch of trade, it necessarily raised the rate of profit*88 in that branch. By lessening, too, the competition of British capitals in all other branches of trade, it necessarily raised the rate of British profit in all those other branches. Whatever may have been, at any particular period, since the establishment of the act of navigation, the state or extent of the mercantile capital of Great Britain, the monopoly of the colony trade must, during the continuance of that state, have raised the ordinary rate of British profit higher than it otherwise would have been both in that and in all the other branches of British trade. If, since the establishment of the act of navigation, the ordinary rate of British profit has fallen considerably, as it certainly has, it must have fallen still lower, had not the monopoly established by that act contributed to keep it up

But whatever raises in any country the ordinary rate of profit higher than it otherwise would be, necessarily subjects that country both to an absolute and to a relative disadvantage in every branch of trade of which she has not the monopoly.
It subjects her to an absolute disadvantage; because in such branches of trade her merchants cannot get this greater profit, without selling dearer than they otherwise would do both the goods of foreign countries which they import into their own, and the goods of their own country which they export to foreign countries. Their own country must both buy dearer and sell dearer; must both buy less and sell less; must both enjoy less and produce less, than she otherwise would do.

It subjects her to a relative disadvantage; because in such branches of trade it sets other countries which are not subject to the same absolute disadvantage either more above her or less below her than they otherwise would be. It enables them both to enjoy more and to produce more in proportion to what she enjoys and produces. It renders their superiority greater or their inferiority less than it otherwise would be. By raising the price of her produce above what it otherwise would be, it enables the merchants of other countries to undersell her in foreign markets, and thereby to justle her out of almost all those branches of trade, of which she has not the monopoly.

Our merchants frequently complain of the high wages of British labour as the cause of their manufactures being undersold in foreign markets; but they are silent about the high profits of stock. They complain of the extravagant gain of other people; but they say nothing of their own. The high profits of British stock, however, may contribute towards raising the price of British manufactures in many cases as much, and in some perhaps more, than the high wages of British labour.

It is the above analysis in Book IV that brings out the best in Adam Smith’s analytical mind (there is much more to read and enjoy from dipping into Book IV).

Unfortunately, so many quotation hunters are simply looking for support for their current prejudices that they seldom stop and read beyond the ‘famous’ lines they often quote. Eric Alterman didn't even get it from Wealth Of Nations directly; he took the quotations from a secondary source!

PS: Neither quotation makes Adam Smith a ‘liberal’, a conservative, or anything else.


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