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Adam Smith: Capitalism

Political Economy

Raizza P. Corpuz

De La Salle University- Dasmarias College of Liberal Arts- Graduate Studies 1st semester 2012-2013

I.

Introduction Smith vehemently opposed Mercantilism the practice of artificially maintaining a trade

surplus on the erroneous belief that doing so increased wealth. The primary advantage of trade, he argued, was that it opened up new markets for surplus goods and also provided some commodities from abroad at a lower cost than at home. With that, Smith launched a succession of free-trade economists and paved the way for David Ricardos and John Stuart Mill theories of comparative arrangement a generation later. In fact, he believed that government had an important role to play. Like most modern believers in free markets, Smith believed that the government should enforce contracts and grant patents and copyrights to encourage inventions and new ideas. He also thought that the government should provide public works, such as roads and bridges that, he assumed, would not be worthwhile for individuals to provide. Interestingly, though, he wanted the users of such public works to pay in proportion to their use. Smith favored retaliatory tariffs. Retaliation to bring down high tariff rates in other countries, he thought, would work. The recovery of a great foreign market, he wrote will generally more than compensate the transitory inconvenience of paying dearer during a short time for some sorts of goods. Smith believed that economic development was best fostered in an environment of free of competition that operated in accordance with universal natural laws. Because Smiths was the most systematic and comprehensive study of economics up until that time, his economic thinking became the basis for classical economics. And because more of his ideas have lasted than those of any other economist, some regard Adam Smith as the alpha and the omega of economic science.

II.

Discussion Adam Smith thoughts of Free Trade-Laissez Faire, Division of Labor and Invisible hand are some of the focal idea of Capitalism.

A. Adam Smith argues that it was market forces that ensured the production of the right goods
and services. This would happen because producers would want to make profits by providing them. Without government intervention, thus forming a laissez-faire environment, public well-being would increase from competition organizing production to suit the public.

This was the basis of the free market economy. Competition would mean producers trying to outsell each other and this would bring prices down to their lowest possible levels (making minimal profit). If there was not enough competition, this would mean that producers would make more profit. This would soon attract more firms to join this industry, bringing prices down. All this would end up benefiting the consumer without any necessary intervention. This system had 2 requirements, however: 1. 2. That the market needed to be free of government intervention. The other was that there had to be competition. Smith recognized immediately the danger of monopoly:

"A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate."

B. Smiths defense of CAPITALISM (or, in his terminology, commercial society) is unambiguous but qualified. There is no inconsistency here. Smiths commitment to a realistic liberalism led him to endorse commercial society over any previous socio-economic system as a social order in which the most people possible could live decent lives. But he was not the blind zealot for the market he is now portrayed as. Smith was acutely aware of the possible ethical shortcomings of commercial society and for example carefully read and responded to Rousseaus powerful critiques of its materialism, inequality, and in authenticity. While the structural features of commercial society set the terms of its main opportunities and challenges, they did not determine the outcome. Commercial society was for Smith an ethical project whose greatest potential benefits had to be struggled for, and which could and should be much better than it was. The Enlightenment concern for perfecting social order was both the background to Smiths thinking and a goal Smith eschewed. As Rousseau put it in The Social Contract (I.6),The problem is to find a form of association which will defend and protect with the whole common force the person and goods of each associate, and in which each, while uniting himself with all, may still obey himself alone, and remain as free as before. While Rousseau sought a perfect and absolute solution to the problem through his famous social contract, Smith argued that, under conditions of freedom and justice, society could endogenously produce a decent social order for co-ordinating moral and economic conduct without centralised direction or coercive moral policing by religious or secular authorities. In this sense his project can be seen as a working out of Lockes liberal political philosophy at the institutional level. Smith was not interested in what a perfect society might look like, but rather with understanding the world as it was and how it might be improved. So instead of analysing the requirements of a

perfectly just society he analysed the new socio-economic order of commercial society, characterized by an enormously increased division of labour, dependence on strangers, formal property rights, and individual mobility. And he saw that commercial society had enormous potential for enhancing general prosperity, justice, and freedom. Smith argued that protecting particular producers would lead to inefficient production, and that a national hoarding of species (i.e. cash in the form of coinage) would only increase prices, in an argument similar to that advanced by David Hume. His systematic treatment of how the exchange of goods, or a market, would create incentives to act in the general interest, became the basis of what was then called political economy and later economics. It was also the basis for a theory of law and government which would gradually supersede the mercantilist regime that was then prevalent. Smith asserts that when individuals make a trade they value what they are purchasing more than they value what they are giving in exchange for a commodity. If this were not the case, then they would not make the trade but retain ownership of the more valuable commodity. This notion underlies the concept of mutually-beneficial trade where it Although he is often described as the "father of capitalism" (and the "father of economics"), Adam Smith himself never used the term "capitalism". He described his own preferred economic system as "the system of natural liberty." However, Smith defined "capital" as stock, and "profit" as the just expectation of retaining the revenue from improvements made to that stock. Smith also viewed capital improvement as being the proper central aim of the economic and political system. A major difference between Adam Smith's view of economics and that of present day capitalist theory is that Adam Smith viewed value as a product of labor, and thus operated under the Labor Theory of Value, which was used by basically all economists until the Labor Theory of Value became central to Marxism. Towards the old view of Economics, People saw national wealth in terms of a countrys stock of gold and silver. Importing goods from abroad was seen as damaging because it meant that this wealth must be given up to pay for them; exporting goods was seen as good because these precious metals came back. The productivity of free exchange showed that this vast mercantilist edifice was folly. He argued that in a free exchange, both sides became better off. Quite simply, nobody would trade if they expected to lose from it. The buyer profits, just as the seller does. Imports are just as valuable to us as our exports are to others. Because trade benefits both sides, said Smith, it increases our prosperity just as surely as do agriculture or manufacture. A nations wealth is not the quantity of gold and silver in its vaults, but the total of its production and commerce what today we would call gross national product. The Wealth of Nations Deeply influenced the politicians of the time and provided the intellectual foundation of the great nineteenth-century era of free trade and economic expansion. Even today the common sense of free trade is accepted worldwide, whatever the practical difficulties of achieving it.

So profound was the impact of Wealth of Nations that it is generally considered the most important economic work ever written. Terms that are commonly used today, such as invisible hand and division of labor, had their genesis in Smiths treatise. One of Smiths initial observations was that production was enhanced by the assigning of specific tasks to individual workers. This division of labor would maximize production by allowing workers to specialize in discrete aspects of the production process. He saw in the division of labor and in expanding markets virtually limitless possibilities for the expansion of wealth through manufacture and trade. Smith also argued that capital for the production and distribution of wealth could work most effectively in the absence of government interference. Such a laissez-fairethat is, leave alone or allow to bepolicy (a term popularized by Wealth of Nations) would, in his opinion, encourage the most efficient operation of private and commercial enterprises. He was not against government involvement in public projects too large for private investment, but rather objected to its meddling in the market mechanism. He also held that individuals acting in their own self-interest would naturally seek out economic activities that provided the greatest financial rewards. Smith was convinced that this selfinterest would in turn maximize the economic well-being of society as a whole. Ten years in the making, Wealth of Nations was published in 1776 and is considered the first great work in political economicsthe science of rules for the production, accumulation, distribution and consumption of wealth. One particularly radical view in Wealth of Nations was that wealth lay not in gold but in the productive capacity of all people, each seeking to benefit from his or her own labors. This democratic view flew in the face of royal treasuries, privileges of the aristocracy, or prerogatives doled out to merchants, farmers and working guilds. It is not coincidental that such democratic, egalitarian views arose simultaneously with the American Revolution and only just preceded the French Revolution of 1789. Smith believed that the true wealth of a nation came from the labor of all people and that the flow of goods and services constituted the ultimate aim and end of economic life. Smith asserted that capitalism was the most logical, lucrative, and moral political and economic system. In this system, individual people are free to own property and do with it what they wish, they can also spend and earn in the manner they see fit. Privately owned property combined

with the desire to earn, spend, and act productively leads to the natural market functions of the free market economy. The free market economy is dictated by competition which leads to the fairest prices and causes only the most efficient producers and consumers to benefit. Capitalism, for Smith, is not a political/economic philosophy that only benefits the rich. In his mind, everyone, because private property exists, has the chance to own, create, and earn their own living. Because of Smiths extensive virtue theory he relies heavily on the idea that ideally, many capitalists will master the higher level of virtues as to avoid becoming greedy and selfish. But, on the chance that they do not, the virtue of self-command, both a noble and lower virtue, will reign in any selfish desires. Smiths capitalist ideals are based on a moral system; he, unlike Marx, wants to avoid revolution at all costs and seek peace and justice at all times. The peace and order of a society is of more importance than even the relief of the miserable. It is clear that Smith would in no way agree with a revolution of the proletariat; but in his eyes, one would never be necessary. Because of the natural and logical benefits of capitalism, each person- from the poorest to the richest has the potential and the capability to better him or herself in the capitalist economic system. Smiths defense of capitalism (or, in his terminology, commercial society) is a commitment to a realistic liberalism led him to endorse commercial society over any previous socio-economic system as a social order in which the most people possible could live decent lives. But he was not the blind zealot for the market he is now portrayed as. Smith was acutely aware of the possible ethical shortcomings of commercial society and for example carefully read and responded to Rousseaus powerful critiques of its materialism, inequality, and in authenticity. While the structural features of commercial society set the terms of its main opportunities and challenges, they did not determine the outcome. Commercial society was for Smith an ethical project whose greatest potential benefits had to be struggled for, and which could and should be much better than it was. He justified commercial society for its tremendous contribution to the prosperity, justice, and freedom of its members, and most particularly for the poor and powerless in society. But he was no naive ideologue for free markets and profits.

References

Journal of Economic Perspectives--PerspectivesVolume 19, Number 3. Nava Ashraf, Colin F. Camerer and George Loewenstein Price, L.L. Adam Smith and His Relation to Recent Economics. The Economic Journal 3, no.10 (Jun., 1893): 239-254. http://economics.about.com/od/famouseconomists/a/adamsmith.htm, June 30, 2012 http://www.bized.co.uk/virtual/economy/library/economists/smithth.htm, June 30, 2012 http://www.econlib.org/library/Enc/bios/Smith.html , June 30, 2012 http://www.vision.org/visionmedia/biography-adam-smith/868.aspx July 1, 2012 http://www.vision.org/visionmedia/article.aspx?id=871 July 1, 2012 http://www.pbs.org/wgbh/commandingheights/shared/pdf/ess_adamsmithorigin.pdf July 1, 2012 http://rebirthofreason.com/Articles/Zantonavitch/Smith,_Marx,_Nock_The_Hyper-Focus_. July 1, 2012