In February 2005, the US Federal Reserve Chairman Alan Greenspan delivered the Adam Smith Memorial Lecture at the birthplace of Adam Smith, philosopher-economist and author of The Wealth of Nations, which was published in 1776. Smith was born in Kirkcaldy, a small town on the east coast of Scotland, where UK Chancellor of the Exchequer Gordon Brown was reared.
|Alan Greenspan originally took office as Chairman of the Federal Reserve Board (1987-2006) to fill an unexpired term as a member of the Board on August 11, 1987. Dr. Greenspan was reappointed to the Board to a full 14-year term, which began February 1, 1992, and ends January 31, 2006. He has been designated Chairman by Presidents Reagan, Bush, Clinton, and Bush|
Greenspan said, "In the broad sweep of history, it is ideas that matter. Indeed, the world is ruled by little else. As John Maynard Keynes famously observed: 'Practical men, who believe themselves to be quite exempt from intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.' Emperors and armies come and go; but unless they leave new ideas in their wake, they are of passing historic consequence."
The short list of intellectuals who have materially advanced the betterment of civilization unquestionably includes Adam Smith. He is a towering contributor to the development of the modern world. In his Wealth of Nations, Smith reached far beyond the insights of his predecessors to frame a global view of how market economies, just then emerging, worked. In so doing, he supported changes in societal organization that were to measurably enhance world standards of living.
Greenspan said that for most of recorded history, people appear to have acquiesced in, and in some ways embraced, a society that was static and predictable. A young twelfth-century vassal could look forward to tilling the same plot of his landlord's soil until disease, famine, natural disaster, or violence ended his life. And that end often came quickly. Life expectancy at birth was, on average, twenty-five years, the same as it had been for the previous thousand years. Moreover, the vassal could fully expect that his children and doubtless their children, in turn, would till the same plot. Perhaps such a programmed life had a certain security, established by a rigid social and legal hierarchy that left little to individual enterprise.
|Adam Smith (1723-1790) Photo: Baker Library, Harvard Business School|
To be sure, improved agricultural techniques and the expansion of trade beyond the largely self-sufficient feudal manor increased the division of labour and raised living standards and populations, but growth in both was glacial. In the fifteenth century, the great mass of people were engaged in the same productive practices as those of their forebears many generations earlier.
Greenspan said that Smith lived at a time when market forces were beginning to erode the rigidities of the remaining feudal and medieval practices and the mercantilism that followed them. Influenced by the ideas and events of the Reformation, which helped undermine the concept of the divine right of kings, a view of individuals acting independently of ecclesiastic and state restraint emerged in the early part of the eighteenth century. For the first time, modern notions of political and economic freedom began to gain traction. Those ideas, associated with the Age of Enlightenment, especially in England, Scotland, and France, gave rise to a vision of a society in which individuals guided by reason were free to choose their destinies unshackled from repressive restrictions and custom.
The essence of An Inquiry into the Nature and Causes of the Wealth of Nations
Adam Smith said that to enhance the wealth of a nation, every man, consistent with the law, should be "free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of ... other ... men." "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." The individual is driven by private gain but is "led by an invisible hand" to promote the public good, "which was no part of his intention." This last insight is all the more extraordinary in that, for much of human history, acting in one's self-interest--indeed, seeking to accumulate wealth--had been perceived as unseemly and was, in some instances, illegal.
In the opening paragraphs of The Wealth of Nations, Smith recognized the crucial role played by the expansion of labour productivity in improving welfare when he cited "the skill, dexterity, and judgment with which labour is generally applied" as one of the essential determinants of a nation's standard of living. "Whatever be the soil, climate, or extent of territory of any particular nation, the abundance or scantiness of its annual supply must in that particular situation, depend upon ... the productive powers of labour."
More than two centuries of economic thought have added little to those insights.
Adam Smith wrote: To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.
Smith, on remarkably little formal empirical evidence, drew broad inferences about the nature of commercial organization and institutions that led to a set of principles that would profoundly influence and alter a significant segment of the civilized world of that time. Economies based on those principles first created levels of sustenance adequate to enable the population to grow and later--far later--to create material conditions of living that fostered an increase in life expectancy. The latter development opened up the possibility that individuals could establish long-term personal goals, a possibility that was remote to all but a sliver of earlier generations.
Political labels and distortion
Many politicians have claimed Adam Smith as an intellectual patron but as Shakespeare said in the Merchant of Venice: The devil can cite Scripture for his purpose.
In US politics, the label conservative can be confusing.
For example, Senator Barry Goldwater who was defeated in a landslide in the 1964 presidential election was viewed as an icon of the US conservative movement until the election of Ronald Reagan in 1980. Goldwater was for limited government and being consistent, was a libertarian. For example, he had no problem with gays in the US military as long as they could shoot straight. Another conservative Pat Robertson, one of America's best-known religious extremists, seeks to impose a social dictatorship while also claiming to support "free enterprise."
Former British Prime Minister Margaret Thatcher achieved much in reforming the UK economy but she had some significant blindspots. She appeared to see business decision making as always consistent with the public good and her infamous comment that there is no such thing as "society" set her apart from Adam Smith.
Given the alternative of a self-serving closed shop or a public subsidy or the option of a monopoly, there are few if any true-blue adherents of Adam Smith.
It may surprise some but anyone who bothers to read The Wealth of Nations, will find that this participant in the Age of Enlightenment, was far from an apologist for what is termed unbridled capitalism.
Smith supported high wages and progressive taxation
While Adam Smith emphasised the motivating force of self-interest and gains from free trade, he also viewed freedom in a broader sense than economic freedom and championed the disadvantaged.
Smith was concerned about the encroachment of government on economic activity, but he was sometimes tolerant of government intervention, "especially when the object is to reduce poverty." Smith argued, "When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favour of the masters." He saw a conspiracy on the part of employers "always and everywhere" to keep wages as low as possible.
Particular acts of parliament, however, still attempt sometimes to regulate wages in particular trades and in particular places. Thus the 8th of George III. prohibits under heavy penalties all master taylors in London, and five miles round it, from giving, and their workmen from accepting, more than two shillings and sevenpence halfpenny a day, except in the case of a general mourning. Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters. Thus the law which obliges the masters in several different trades to pay their workmen in money and not in goods, is quite just and equitable. It imposes no real hardship upon the masters. It only obliges them to pay that value in money, which they pretended to pay, but did not always really pay, in goods. This law is in favour of the workmen; but the 8th of George III. is in favour of the masters. When masters combine together in order to reduce the wages of their workmen, they commonly enter into a private bond or agreement, not to give more than a certain wage under a certain penalty. Were the workmen to enter into a contrary combination of the same kind, not to accept of a certain wage under a certain penalty, the law would punish them very severely; and if it dealt impartially, it would treat the masters in the same manner. But the 8th of George III. enforces by law that very regulation which masters sometimes attempt to establish by such combinations. The complaint of the workmen, that it puts the ablest and most industrious upon the same footing with an ordinary workman, seems perfectly well founded.
In the chapter Of the Wages of Labour, Smith wrote: We rarely hear, it has been said, of the combinations of masters; though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate. To violate this combination is every where a most unpopular action, and a sort of reproach to a master among his neighbours and equals. We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things which nobody ever hears of. Masters too sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy, till the moment of execution, and when the workmen yield, as they sometimes do, without resistance, though severely felt by them, they are never heard of by other people. Such combinations, however, are frequently resisted by a contrary defensive combination of the workmen; who sometimes too, without any provocation of this kind, combine of their own accord to raise the price of their labour. Their usual pretences are, sometimes the high price of provisions; sometimes the great profit which their masters make by their work. But whether their combinations be offensive or defensive, they are always abundantly heard of. In order to bring the point to a speedy decision, they have always recourse to the loudest clamour, and sometimes to the most shocking violence and outrage. They are desperate, and act with the folly and extravagance of desperate men, who must either starve, or frighten their masters into an immediate compliance with their demands. The masters upon these occasions are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen. The workmen, accordingly, very seldom derive any advantage from the violence of those tumultuous combinations, which, partly from the interposition of the civil magistrate, partly from the superior steadiness of the masters, partly from the necessity which the greater part of the workmen are under of submitting for the sake of present subsistence, generally end in nothing, but the punishment or ruin of the ringleaders.
|Letter from Adam Smith to Edinburgh bookseller Thomas Cadwell Photo: Baker Library, Harvard Business School |
Smith wrote in the same chapter: No society can surely 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.
Adam Smith also advocated progressive taxation.
It is not very unreasonable that the rich should contribute to the public expence, not only in proportion to their revenue, but something more than in that proportion.
Adam Smith on education
Smith supported universal government-financed education as he saw that the division of labour destined people to perform monotonous mind-numbing tasks that eroded their intelligence.
More than two centuries later, most work today could be so described.
In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life.
Propensity towards monopoly and restriction of competition
Smith persistently worried that merchants and manufacturers pursuing their own self-interest, would orchestrate government regulation and patronage to their advantage. He saw the apprentice system as a means of restricting entry into various trades and nothing much has changed in the interval if one substitutes the term "professions" for "trades."
Adam Smith was an eighteenth century consumer advocate.
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.
A regulation which obliges all those of the same trade in a particular town to enter their names and places of abode in a public register, facilitates such assemblies. It connects individuals who might never otherwise be known to one another, and gives every man of the trade a direction where to find every other man of it.
A regulation which enables those of the same trade to tax themselves in order to provide for their poor, their sick, their widows and orphans, by giving them a common interest to manage, renders such assemblies necessary.
An incorporation not only renders them necessary, but makes the act of the majority binding upon the whole. In a free trade an effectual combination cannot be established but by the unanimous consent of every single trader, and it cannot last longer than every single trader continues of the same mind. The majority of a corporation can enact a bye-law with proper penalties, which will limit the competition more effectually and more durably than any voluntary combination whatever.
The pretence that corporations are necessary for the better government of the trade, is without any foundation. The real and effectual discipline which is exercised over a workman is not that of his corporation, but that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence. An exclusive corporation necessarily weakens the force of this discipline. A particular set of workmen must then be employed, let them behave well or ill. It is upon this account that in many large incorporated towns no tolerable workmen are to be found, even in some of the most necessary trades. If you would have your work tolerably executed, it must be done in the suburbs, where the workmen, having no exclusive privilege, have nothing but their character to depend upon, and you must then smuggle it into the town as well as you can.
It is in this manner that the policy of Europe, by restraining the competition in some employments to a smaller number than would otherwise be disposed to enter into them, occasions a very important inequality in the whole of the advantages and disadvantages of the different employments of labour and stock.
In promoting free trade, Smith highlighted how British merchants promoted protectionism against their French counterparts by whipping up animosity even though a country would gain by having wealthy neighbours.
The capricious ambition of kings and ministers has not, during the present and the preceding century, been more fatal to the repose of Europe than the impertinent jealousy of merchants and manufacturers. The violence and injustice of the rulers of mankind is an ancient evil, for which, I am afraid, the nature of human affairs can scarce admit of a remedy. But the mean rapacity, the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind, though it cannot perhaps be corrected may very easily be prevented from disturbing the tranquillity of anybody but themselves.
That it was the spirit of monopoly which originally both invented and propagated this doctrine cannot be doubted; and they who first taught it were by no means such fools as they who believed it. In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind. Their interest is, in this respect, directly opposite to that of the great body of the people. As it is the interest of the freemen of a corporation to hinder the rest of the inhabitants from employing any workmen but themselves, so it is the interest of the merchants and manufacturers of every country to secure to themselves the monopoly of the home market. Hence in Great Britain, and in most other European countries, the extraordinary duties upon almost all goods imported by alien merchants. Hence the high duties and prohibitions upon all those foreign manufactures which can come into competition with our own. Hence, too, the extraordinary restraints upon the importation of almost all sorts of goods from those countries with which the balance of trade is supposed to be disadvantageous; that is, from those against whom national animosity happens to be most violently inflamed.
Adam Smith and Ireland
Smith wrote that by a union with Great Britain the greater part of the people of all ranks in Ireland would gain an equally complete deliverance from a much more oppressive aristocracy; an aristocracy not founded, like that of Scotland, in the natural and respectable distinctions of birth and fortune, but in the most odious of all distinctions, those of religious and political prejudices; distinctions which, more than any other, animate both the insolence of the oppressors and the hatred and indignation of the oppressed, and which commonly render the inhabitants of the same country more hostile to one another than those of different countries ever are. Without a union with Great Britain the inhabitants of Ireland are not likely for many ages to consider themselves as one people.
The union took effect a quarter century after the publication of The Wealth of Nations but it took more than a century for the infamous landlord system to be ended.
The experience of the union also showed that free trade alone is not a sufficient condition for economic growth. Regional policy is a concept that has only received attention in recent decades.
A patron for 21st century trade unionism?
Trade union leaders are as familiar with self-interest as political leaders. Self-interest is not however a synonym for greed. There are many business leaders who do not seek to grab a disproportionate share of the pie of success and related credit but greed is also not an uncommon vice.
Knee-jerk protectionism should be a thing of the past for trade unionism. Adam Smith promoted free trade, good conditions for workers, progressive taxation and competition to benefit the public.
The case of the rise of Europe's biggest low-fare airline Ryanair, is an illustration of how interests with a focus on the short-term, could have destroyed the opportunity of a great Irish success, which benefits a huge number of trade unionists.
Both the unions at State airline Aer Lingus and the main employers' lobby group that had the airline as a significant member, opposed competition while in the absence of European Union deregulation, Irish politicians would not have dared interfere with the protections enjoyed by what was viewed as a national icon.
Today in Ireland, progress in eliminating restrictions on competition in the non-tradable sectors of the Irish economy, has been glacial. The Irish Government's record in this area has been lamentable and Irish Ministers have resembled jellyfish when confronted by powerful vested interests.
Irish trade unionists could well ensure their relevance in a globalised world by embracing Adam Smith rather than remain as slaves of some truly defunct economist.