Progressive Writers Bloc

The Real Adam Smith — Part I

By Bill Becker

Bill Becker

In 1776, a kindly professor of moral philosophy, Adam Smith, published a most delightful and hugely informative book, An Inquiry Into the Nature and Causes of the Wealth of Nations. Today it is usually reprinted simply as The Wealth of Nations. Wealth of Nations earned Smith the impressive title "the father of capitalism."

Sadly, the modern American business community has so distorted Smith's masterwork as to make him into something of a monster. Were this gentle Scotsman to appear on the scene today, he would be horrified at the suggestion that he is the "godfather" of modern capitalist practice. Indeed, his likely response is well imagined by Jonathan B. Wight in Saving Adam Smith (Prentice Hall, 2002). There, a humble mechanic channels Smith, who tries to set the record straight as to the real meaning of his text.

As it happens, America's captains of industry and finance make only limited use of Smith's work, and there they get it wrong. I refer to Smith's famous "invisible hand," the mechanism by which, so they assert, an unfettered market will bring prosperity to all — someday.

In fact, Smith mentions the invisible hand only once in Wealth of Nations, and in a limited economic context. Noting that "the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry," Smith reckons that every owner of capital "therefore endeavours as much as he can both to employ his capital in the support of domestic industry, and ... to render the annual revenue of the society as great as he can." Smith notes, however, that our capitalist is in no way acting from altruistic motives, or even loyalty to the homeland: "By preferring the support of domestic to that of foreign industry, he intends only his own security, and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention."

Contrary to the use made of the "invisible hand" by corporate America, Smith's message is clear: the owner of capital will naturally use his capital to bolster domestic industry and the domestic economy, rather than shipping it off to foreign countries. This is in stark contrast to the modern capitalist, who does not hesitate to purchase a productive, profitable company that provides its workers a decent wage and benefits, fire the workers (usually abrogating the retirement plan as well), dismantle it, sell off its parts, and then ship what's left of the plant to a Third-World country to produce goods at slave wages.

Elsewhere in Wealth of Nations Smith also contradicts corporate America's suggestion that the invisible hand assists everyone equally. In his day, the capitalists exercised considerably greater economic power than the other sectors of the economy: labor, and the owners of land. Add the ability of the modern financial sector to instantaneously transfer huge amounts of capital and currency across national borders, and the imbalance is far greater today than it was then.

Smith concludes with scant approval for the workings of the invisible hand: "Nor is it always the worse for the society that it was no part of it. By pursuing his down interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."

This passage can imply only that the purely self-interested behavior of the "merchants" of Smith's day was at least sometimes "the worse for the society." If their economic decisions "frequently" benefit society, it can only be concluded that they sometimes — perhaps even frequently, often or usually — do not.

In Part II of this essay, I will show that Adam Smith was not nearly as friendly toward the business classes as our modern capitalists suggest.

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