On Pin-heads and Laissez fairies

On the interpretation of Adam Smith’s The Wealth of Nations

“Not only is the book the foundation of classical economic theory, it is a statement of the moral imperative driving laissez-faire capitalism.”

Robert Velasquez VanDeHey

“Adam Smith gave first voice to the economic theory on which capitalism has relied ever since–laissez-faire economics. He maintained that the free reign of self-interest would result in a well-ordered economy and in a vast increase of overall wealth, that an “invisible hand” wove the random strands of individual self-interests into a dynamic and growing economic tapestry. Government should not intervene in the working of the economy; virtually absolute liberty should be the byword of the economic system.”

Michael B. Friedman “In Praise of Liberalism”

“Laissez faire-The doctrine that interference of government in business and economic affairs should be minimal. Adam Smith’s The Wealth of Nations (1776) described laissez-faire economics in terms of an “invisible hand” that would provide for the maximum good for all, if businessmen were free to pursue profitable opportunities as they saw them. Laissez-faire is French for “allow to do.” See also Austrian economics.”

Barron’s Finance & Investment Dictionary

Adam Smith was a complex and nuanced thinker. He was aware that the world is complex and often full of unintended consequences (the intended meaning of the invisible hand metaphor).  He never explicitly says “This is the purpose my book” “My conclusion is… “or “I set out to try to prove…” His ideas and arguments have to be derived from a careful understanding of all of the parts—as well as their relation to and commentary on each other. Because of this, Smith’s The Wealth of Nations is apt to be misunderstood and has become a source for ideas and theories which may have little to do with his actual meaning or intention.

With so vast a canvas—the book is 1200 pages long—it does not lead to a single definitive, decisive and simple interpretation. There is some flexibility in how it can be understood and applied. That said, some interpretations are more complete and consistent with the entirety of the work, while others tend to rely on just a few excerpts or out of context quotations. This abbreviated method of reading Smith has lead to two prominent misconceptions:

1) The Classical Economists (The Pin Heads) read only the first chapters on the benefits of the division of labor—increased production, specialized expertise, greater profit margins—as reflected in Smith’s pin factory example (note the irony). Somehow the classical economists never got around to the later chapters where Smith warns of the soul crushing effects of the division of labor on the social and moral development of real human beings.

2) The Neo-Classical Economists (The laissez fairies) advocate the fantasy that humans can and should be morally bankrupt, selfish, unconcerned with the welfare of others and apply themselves entirely to personal avarice. And somehow all this will be magically transformed (the mechanism and/or connections are rarely, if ever, detailed) by an Invisible Hand to create an ideal and benevolent utopian society.

Smith, unlike his supposed advocates and supporters, shuns dogma and mysticism. He avoids saying “things should be done this way” and instead points out the benefits and concerns of problems within the system that should be preserved, eliminated or moderated on the basis of particular local conditions and circumstances. He provides a framework useful for problem solving rather than a universal system of answers. He seems to be aware that this is an ongoing unfinished project that will require regular adjustment and experiment.

His view of mercantilism & commerce is complex and multi-faceted. There is good that comes from the division of Labor (Book I) and bad (Book V). Commerce creates good results (hard work & prosperity) and bad results (conspiracy to artificially raise prices and profits, extravagance and luxury).

Smith does advocate liberty, but mostly for the worker in choosing his location, employment to match his skills, abilities and interests. For the “undertakers” he advocates a liberty from inequitable monopolies, privileges, etc. that hamper natural pricing. He does not advocate “liberty” from laws, regulation and taxation, which he regards as essential to creating an uncorrupted and beneficial political economy. The goal of political economy is to create a better life for all, not extravagant riches for some.

Smith does not advocate laissez faire economics as many claim. Instead he prefers to eliminate the constraints and privileges that create artificial and inequitable prices and wages.

He appreciates the motivation and prosperity but not for the goal of unrestrained self-interest, greed and luxury but for the betterment of society. Which is why he looks for government control of the behavior of merchants (who if left to their own would misbehave) and heavily progressive taxation (Book VI). These taxes are to be used to support public works and education for the benefit of all.

The benefits of commerce are discussed in the early part of the work (Books I & II), the problems and need for regulation, policing and taxation in the later parts (Books V & VI) which is one of the reasons I always feel that the laissez faire advocates never got beyond the first couple hundred pages in their reading and miss the main points of his argument.

Of course this is just my interpretation of a large and complex book. I’m sure there are many other equally good interpretations that could fit such a large and intricate work. But I am also quite sure that the standard laissez faire interpretation is seriously flawed and only applies to parts of the work and is inconsistent with the work as a whole. In fact in order to support such an interpretation one must very selectively cherry-pick out of context details and ignore or deny much of the book.

I would be interested in hearing objections and counter-arguments but only if they are based on the overall argument of the entire work (or better yet, Smith’s entire oeuvre). I don’t find convincing the standard arguments based on the same handful out-of-context quotes. That is not a basis for understanding the meaning of a complex and detailed 1200-page book. I want to arrive at an understanding of what Smith is really trying to say rather than, like most Smith advocates, fit him into some preconceived notion “of the moral imperative driving laissez-faire capitalism.” That approach seems like exactly the sort of “conspiracy against the public” that Smith argues against.

In the end I find it rather ironic that those who idolize and worship Adam Smith today haven’t read much beyond Book II of The Wealth of Nations, while Noam Chomsky seems to have found the time to read and understand the entire book.

“He’s pre-capitalist, a figure of the Enlightenment. What we would call capitalism he despised. People read snippets of Adam Smith, the few phrases they teach in school. Everybody reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division of labor is. But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be. And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceeding to its limits.”

Noam Chomsky, Class Warfare (1995)

Related articles

• “Adam Smith and the Myth of Laissez Faire” (economistsview.typepad.com)
• Those Who Control the Past Control the Future (c4ss.org)

~ by severalfourmany on May 1, 2012.