How has Adam Smith influenced modern ideas about society and the economy? How helpful, in your view, has that influence been?

Adam Smith

2006

Adam Smith

The end of the Cold War has been interpreted by many observers as the victory of democratic capitalism over this victory represents the "end of history (Fujiyama , 188 that is the end of an epoch in which two fundamentally contradictory ideologies of political economy , capitalism and socialism , competed for the hearts and minds of people throughout the world . As Eastern Europe , the former Soviet Union and mainland China surge toward market-based economies and in some cases democratic political systems , the West is less and less

inclined to critically examine the state of its own economic and political institutions . However , most western nations are themselves characterized by increasing structural unemployment , increasing crime rising inequality , political apathy , and generally declining living standards . The demise of the Stalinist political economy in the East says very little about the absolute virtue of Western institutions , only that the Western model is relatively superior in fulfilling individuals economic and political aspirations . While critiques of capitalism whether in its classical or contemporary forms , most often originate from a Marxian , neo-Marxian , or at least quasi-Marxian perspective , we find the most effective critic of contemporary capitalism to be Adam Smith himself . Indeed , several of Marx 's basic criticisms of capitalism can be found in the work of Smith , who well understood both the promise and pitfalls of the economic system he theorized

Capitalism has been interpreted as constituting a moral , immoral , or amoral system by social and economic theorists of various ideological persuasions . For example , defenders of capitalism like Michael Novak stress the aspects of consumer sovereignty , individual choice and responsibility , material progress , and even theological virtuousness (Novak , 74 . Critics of capitalism , on the other had , focus on such negative aspects as the exploitation of labour , hyper-materialism , waste and environmental degradation , and a chronically unequal distribution of resources . Other observers maintain that capitalism is simply one of a variety of ways of organizing a nation 's economic affairs and that it should be judged simply on its ability (or inability ) to allocate resources in such a way as to sustain and extend a comparatively high standard-of-living for the average citizen

Each of the preceding perspectives has its merits as well as its drawbacks , yet each also largely ignores the normative orientation of Adam Smith as he developed the framework for a capitalist economic system over two centuries ago . The period in which Smith completed his opus The Wealth of Nations ' was known as the Mercantilist Era Mercantilism was an economic system geared to maximize the power of the nation-state relative to other nation-states through pursuit of autarky or self-sufficiency . The mercantilist state attempted to maximize its exports while minimizing its imports from other states with which it was competing . Colonial possessions supplied the mercantilist state with law materials as well as markets for its finished goods . In its quest for autarky , mercantilist political economy required a high degree of administrative centralization it was thus consistent with non-democratic political institutions as well as noncompetitive (i .e monopolistic ) domestic economic structures . As Smith stated "It cannot be very difficult to determine who have been the contrivers of this whole mercantile system not the customers , we may believe , whose interest has been entirely neglected but the producers , whose interest has been so carefully attended to (Smith , 1976 : 626

Smith developed his model of a market driven , consumer-based economic system as an alternative to the political economy of mercantilism Whereas mercantilism involved consumers subsidizing producers in a system of centralized (and thus authoritarian ) economic and political structures , Smith envisioned a production system organized according to the consumer 's interests (expressed as demand . Further , this new economic system oriented to maximizing the welfare of the economic consumer by providing goods and services according to the market forces of supply and demand would be compatible with a democratic political system oriented to maximizing the welfare of the citizen as a political consumer . The political economy Smith was advocating was thus based on maximizing consumer /citizen choice in both economic and political spheres . Smith 's paradigm shifted the institutional emphasis from centralized to decentralized structures , from authoritarianism to representative democracy , from monopoly to competitive markets , from autarky to international interdependence through a spatially expanding division of labour , and from producer appropriation of the societal surplus to consumer sovereignty . His system , which would later be called "capitalism , was as revolutionary a concept with respect to the dominant mercantilism of its day as Marx 's communism was to the capitalism of the mid-nineteenth century . As Thomas Sowell observes It is impossible to appreciate fully the thrust of Adam Smith 's arguments concerning laissez-faire until he is regarded as very much and very self-consciously , a social critic of eighteenth-century society .The concepts of laissez-faire and consumer sovereignty had some quite radical implications in Smith 's time . I do not wish to portray Smith as a radical in any of the twentieth-century meanings of the term , but in eighteenth-century Britain these were distinctly radical ideas , with radical policy implications (Sowell , 34

While Marx 's critique of classical economics has proved to be the most influential , Smith himself had envisioned the potential weaknesses of his model . In a recent article , James Wilson notes five moral problems Smith associated with capitalism : impoverishing the spirit of the workers and the work ethic more generally , creating cities in which anonymity facilitated price-fixing , expanding the ranks of the idle rich , inducing government to foster monopolies and selective privileges and separating ownership and control as the scale and capital requirements of business firms increased (Wilson , 129

Perhaps the dysfunction of capitalistic paradigm Smith feared most was the concentration of economic resources by monopolistic joint-stock corporations . He wrote at length about the abuses of such monopolistic joint-stock companies as the East India Company , the Hudson 's Bay Company , and the South Sea Company (Wilson , 115 . As noted by Ginzberg "Smith 's concerns about the evils of monopoly went beyond the unjustified rewards that accrued to the man who was able to rig the market . A still more untoward consequence of monopoly was the ineffective management that in Smith 's view was the likely concomitant of an entrepreneur 's being sheltered from the cold winds of competition (Ginzberg , 41 . Smith also expected that concentrated economic resources could be readily translated into political influence , which he considered similar to other commodities for which there was a supply and demand . Smith was particularly scathing with regard to the political powers exercised by economic interests . He warned that legislative proposals emanating from the business sector ought always to be listened to with great precaution , and ought never be adopted till after having been long and carefully examined , not only with the most scrupulous , but with the most suspicious attention (Smith , 1980 :359 . His advocacy of an economic system based on small producers , each lacking the ability to affect prices through the exercise of market power , thus had direct political implications . Competitive markets would ensure that no producer assumed a dominant position from which it could influence the market either directly (through price-fixing , predatory pricing , etc or indirectly

Smith also recognized the necessity of a strong work ethic to provide the twin dynamics for increasing productivity and accelerating capital accumulation . In this vein , he noted that "Capitals are increased by parsimony [frugality] , and diminished by prodigality and misconduct (Smith , 1980 : 437 . As the worker became productive , better paid , and saw his standard-of-living rise , however , he demanded more leisure time and engaged in increasingly conspicuous consumption . This shift in emphasis from the virtues of productivity , frugality , and responsibility to leisure and consumption-related activities undermined the basic normative and behavioral foundations of classical capitalism . This paradox , that a capitalist system might fall victim to its own material successes as the social emphasis shifted from production to consumption and the values necessary to sustain labour productivity and capital accumulation lost their influence , was the focus of much significant works of contemporary political scientists and macroeconomists . It was Adam Smith , however , who first identified this paradox in his observation that "the principle which prompts to expense is the passion for present enjoyment (Smith , 1980 : 441 . He was particularly concerned that the industriousness of the middle and working classes would be undermined by their desire to emulate through demonstration effects the extravagant behavior of the rich and famous , whose virtues he was extremely dubious of (Wilson , 139

Capitalism is an economic system based upon private property , production for profit (mostly ) wage labour , and a market mechanism to allocate a society 's productive resources . Democracy is a political system founded on the basic principle that people should have a voice in the decisions which affect their lives . As explained above , capitalism and democracy are theoretically compatible in the sense that each system is organized to maximize individual choice and liberty . Capitalism maximizes the choices available to the consumer , whose spending patterns drive the resource allocation process in the economy (hence the concept of consumer sovereignty . Democracy maximizes the choices available to the voter , whose political interests and voting patterns result in government which is accountable to and representative of the body politic . The form of political economy formulated and advocated by Smith may thus be termed democratic capitalism . Unfortunately , much of the theoretical compatibility between capitalism and democracy , as well as the manner in which each system is supposed to operate , breaks down in reality , and this notorious breakdown can be considered in the case of the US , world famous capitalistic system

History has shown quite clearly that capitalism leads to a massive concentration of economic resources in the hands of a tiny minority of firms and property holders . This point is not disputed even by the staunchest defenders of capitalism . In the United States today there exists around 12 million business firms , yet the fifty largest firms make almost half of all profits . According to UCLA sociologist Maurice Zeitlin "the richest 1 of families own 31 .50 of everything owned by all American families , while the bottom 50 of families retain only 3 of the national wealth (Zeitlin , 231-232 . This incredible concentration of economic resources translates , however imperfectly into political power and undermines the democratic process . Moreover , as the labour market segments into dual categories of secure high-skill /high-wage professionals and low-wage / low-skill service workers , with tremendous mobility barriers in between , the hegemony of the work ethic is undermined . Importantly , it is not only the working classes but the entire society which has been vulgarized by the hegemony of consumption and the commodification of human relations

In the United States today , Adam Smith 's caveats on the pernicious aspects of capitalism are largely ignored . Instead , it is theorized and taught economics and politics as though they are distinct areas unconnected by the common thread of resources pursuing interests . The massive concentration of economic power was noted above . The political implications of this economic concentration are hard to ignore . How else to explain the 1980s , when trillions of dollars of wealth were shifted upward through massive tax cuts for the wealthy , defense spending , and the savings and loan scandal . Meanwhile , middle class incomes stagnated investment in social programs (education , housing , welfare ) decreased poverty increased , homelessness mushroomed , and prison populations doubled nationally . The minimum wage , although raised recently , still fails to lift a working person out of the poverty category . Taxes have become tremendously regressive , and the public expenditures middle and upper-class taxpayers do support are generally confined to increases in police budgets and prison construction to treat the symptoms whose basic causes can be traced to the increasingly unequal distribution of resources in American society

In critiquing the ethical foundations of capitalism , Marx is often the first resort . In this essay , I have critiqued contemporary American capitalism from a Smithian perspective , which I feel is more effective than the admittedly incisive but ideologically stigmatized Marxian approach . Smith is the father of capitalism , yet he is also in many ways its most powerful critic . He identified many of the potential dysfunctions which have manifested themselves over the past two centuries in the United States and elsewhere . Smith 's project was motivated by a deep ethical concern for the average citizen who was exploited by the mercantilism of his day . Smith theorized capitalism to liberate the consumer and foster a political economy which would be more democratic and responsive to the wants and needs of the individual Capitalism has had many successes in terms of improving the material prosperity of some peoples and some nations . Yet , many of Smith 's fears have come to fruition , calling into question the ethical basis of contemporary capitalism . I conclude that the political economy of American capitalism is in deep crisis due to the concentration of economic and political power and the hegemony of consumption . The major effects of these developments include the de-politicization of the citizenry through widespread disillusionment with and withdrawal from politics , the abandonment of government 's progressive influence on the economy and the imposition of a neo-Victorian socioeconomic , the undermining of the work ethic and other production-related activities and the accelerating destruction of the physical environment . It remains an open question whether Adam Smith or Karl Marx would be more surprised and appalled at the current state of affairs in the Western World

Bibliography

Fujiyama , Francis : 1991 , The End of History and the Last Man (Harper Row , New York

Ginzberg , Eli : 1979 , An Economy Formed by Men ' in G .

. O 'Driscoll (ed , Adam Smith and Modern Political Economy (Iowa State University Press , Ames , Iowa

Novak , Michael : 1982 , The Spirit of Democratic Capitalism (Simon Schuster , New York

Smith , Adam : 1976 , An Inquiry into the Nature and Causes of the Wealth of Nations (Clarendon Press , Oxford

Smith , Adam : 1980 , The Wealth of Nations edited by A . Skinner (Penguin Books , New York

Sowell , Thomas : 1979 'Adam Smith in Theory and Practice , in G .

br O 'Driscoll (ed , Adam Smith and Modern Political Economy (Iowa State University Press , Ames , Iowa

Wilson , James Q : 1989 'Adam Smith on Business Ethics , California Management Review 32 (1 , Fall

Zeitlin , Maurice : 1989 'Who Owns America , in M . Zeitlin (ed , The Large Corporation and Contemporary Classes (Rutgers University Press New Brunswick , NJ

PAGE 9

PAGE 9 ...