Smith decided that price had 'component parts'. He settled on three of them: labor, profits of stock (i.e., return on capital), and rent of land. Price theory is a recondite area of economics as people in the stock market, the commodities market, or the market for a house know, and as people in those Econ classrooms know to their terror. And Smith's confusions about price were even more confused than modern confusions.
When Smith was trying to put value on price and price on value he didn't have an Econ textbook to explain to him the 'law of marginal utility'. This would be postulated a century later by Carl von Menger, founder of the Austrian school of economics. Translating Econ textbook text into English, marginal utility means that we value a good only according to how much we value the specific unit of the good that we most recently consumed, not according to how much we value the good for being so good.
Smith came very close to stumbling on marginal utility when he noted that 'Nothing is more useful than water: but it will purchase scarce any thing.'9 With an additional eight ounces of water all we get is a trip to the bathroom in the middle of the night. With an additional eight ounces of gold we get the upfront payment to lease a Lexus. Marginal utility explains why gold, vital to the life of no one except hip-hop performers and fiancés, is so high-priced.
However, the high price we pay for premium bottled water sends the law of marginal utility up the spout. That is where all price theory should go. Witness Adam Smith wrestling with his: 'If among a nation of hunters, for example, it usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer.'10 Wait. Can killing a beaver, even in supposition, really be twice as hard as killing a deer? Deer can run like hell. We know where the beaver lives. It built the beaver dam. We've got the beaver's home address. Even if it does take twice as long to kill a beaver – wading around in the beaver pond smacking at Bucky's head with the flat side of a canoe paddle – who wants a beaver? It's not like the nation of hunters is wearing a lot of top hats. And after a long day of hunting, take your pick – a juicy tenderloin of venison or beaver soup?
There is an admitted pleasure in watching someone so much more intellectual than oneself going so intellectually wrong. Smith decided that labor was the most important component of price: 'Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard.'11 Then, within two pages, he contradicts himself: 'the real price of labour … is very different upon different occasions.'12 But earlier he'd written, 'The real price of everything … is the toil and trouble of acquiring it.'13
Something in the fine philosophical mind of Adam Smith made him resist the mastery of the obvious. There is a statement from the thirteenth century, attributed to Albertus Magnus, that price is what 'goods are worth according to the estimate of the market at the time of sale'. But before a proposal is made to abandon the complexities of Adam Smith and go back to thinking plain old medieval common sense, it's worth considering some of the other thinking that was common in medieval times. Albertus Magnus preached the eighth Crusade, the last and most pointless. It didn't even try to go to the Holy Land. The eighth Crusade sailed, like an armed Carnival cruise, to Tunis.
Yet there was this about Adam Smith: Even when he was wrong he was smarter than other people. Perhaps he was especially smarter than those awful people who always know the 'value' of everything and are so eager to tell us its rightful price or its rightful pricelessness.
Labor is not a component of price, which doesn't have components. Things cost what they cost. But by founding the logical structure of The Wealth of Nations on the premise of labor – on how we divide it, on how we share its fruits, on the whole toil and trouble of our lives – Smith hit upon the material and moral necessity of our freedom.
Adam Smith, Capitalism's Scourge
Adam Smith cannot be said to have constructed the capitalist system. What he did was provide the logic of a level ground of economic rights upon which free enterprise could be built more easily. And he suggested to the builders that they use the wheelbarrow of free trade, the plumb bob of self-interest, and all the specialized tools of specialization. However, when Smith undertook to consider how free enterprise allocates what it produces – 'the Order according to which its Produce is naturally distributed' – he hit capitalism hard enough to make its boiled shirtfront roll up like a window shade.
Some acolytes of Smith might be surprised if they ever read him. He wrote that 'the oppression of the poor must establish the monopoly of the rich',14 and that profit 'is always highest in the countries which are going fastest to ruin'.15 About concepts such as 'full employment' Smith could make a noise like a John Kenneth Galbraith: 'If the society were annually to employ all the labour which it can annually purchase … the produce of every succeeding year would be of vastly greater value than that of the foregoing.'16 And Smith could follow that with a worse noise, a Thorstein Veblen of a raspberry: 'But there is no country in which the whole annual produce is employed in maintaining the industrious. The idle every where consume a great part of it.'17
Adam Smith was tough on the landed gentry: 'As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed.'18 He would have been amused to see the dukes and duchesses of England reduced to keeping circus animals and other attractions on their great estates and letting fat day-trippers waddle through their stately homes, camcording the noble ancestors on the walls.
Smith was tougher yet on the very people who, in his time, were beginning to generate the wealth of nations that he proposed to increase. Despite his friendship with merchants and manufacturers in Edinburgh and Glasgow, Smith had a cool loathing for the class:
Masters are always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labour.19
Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price … of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.20
The interest of the dealers … in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public.21
Smith was not a fan of what would come to be called lobbying:
The proposal of any new law or regulation of commerce which comes from [merchants and manufacturers] ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined … with the most suspicious attention.22
The recent scandals in the US Congress concerning Jack Abramoff and his ilk would have appalled Adam Smith as much as they appall any good Washington Post editorial writer. But Smith, we can assume, would have had enough respect for his readers' intelligence not to feign shock.
And Smith was no enthusiast for the privatization of government functions. Concerning the East India Company and its rule of Bengal, Smith wrote, 'The government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatever.'23
Adam Smith, Capitalism's Champion
What made Adam Smith different from the later and more foolish critics of capitalism was that he never reasoned backward about the cause of economic disparity. 'It is not,' Smith wrote, 'because one man keeps a coach while his neighbour walks a-foot, that the one is rich and the other poor.'24
Smith also possessed none of the moral contempt for profit itself that would soon become the laurel wreath crowning every philosophical pretension. It crowned the pretension of Percy Bysshe Shelley, to give a comic example, and that of Pol Pot, to give a tragic one. The first insurrection in history to style itself 'communist' would occur within a few years of Smith's death. It aimed to overthrow the French Revolution's Directory, of all things. The uprising was led by
François-Noel Babeuf, who took the name 'Gracchus' after Tiberius Gracchus the younger, the second-century BC radical land reformer and would-be dictator of Rome. Tiberius, predictably, was murdered by his opponents. And, predictably, so was Babeuf.
Instead of this sort of thing – sadly familiar to students of modern history – Smith wanted 'the establishment of a government which afforded to industry the only encouragement which it requires, some tolerable security that it shall enjoy the fruits of its own labour'.25 Smith did not consider profits to be the same as 'pernicious gains'. He held that excessive profits were the result of laws that limited or guaranteed trade. A 'violent police' was the term he used for such legislative interference in free enterprise.
And even with a brutal constabulary of trade regulations, pernicious gains are to be preferred to pernicious losses. Imagine a world where we went about our daily activities deliberately intending not to profit by them – eating pebbles, wooing the furniture, getting in our car for the sole purpose of driving into a tree.
Smith saw an ordinary rate of profit not as what it ideologically is to the ideological, but as what it actually is to the profit-maker, 'his revenue, the proper fund of his subsistence'.26 The freedoms of competition force the price the profitmaker charges for his goods to be 'the lowest at which he is likely to sell them … at least where there is perfect liberty'.27 The italics are added and the phrase cannot be underscored too heavily. Smith was fostering free enterprise, and he was also nurturing – just in time – resistance to socialism. 'Nothing can be more absurd,' he wrote, 'than to imagine that men in general should work less when they work for themselves, than when they work for other people.'28 And when other people are 'The People' – not individuals but an abstraction – the absurdity becomes an insanity.
Adam Smith was not a modern libertarian, but he was a libertarian critic of capitalism. Problems of equality were not to be solved with more laws. In a free market, wages may be too low, but, Smith wrote, 'law can never regulate them properly, though it has often pretended to do so.'29 Greater capitalist equality was to be achieved with greater equity capital, so that 'in consequence of the flourishing circumstances of the society, the real price of labour should rise very considerably.'30
Likewise the problems of free markets were not to be solved by increased regulation of those markets, but by increased freedom in them: 'To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it.'31 Every law concerning commerce – even the most beneficent, such as the Pure Food and Drug Act – contains an element of narrowing the competition and should be 'examined … with the most suspicious attention'. Congress banned cigarette advertising on radio and TV in 1970, about the same time that the entire nation got stoned on pot. Was Nixon's drug dealer behind the legislation?
Adam Smith, Capitalism's Original Money Maven
Another reason that Adam Smith defended economic freedom, and all the unpleasant questions of money that come with economic freedom, was that he understood the money. It was in book 1 of Wealth that Smith, with his 'Digression concerning the Variations in the Value of Silver', may be said to have deflated money, or our notion of it (or any notion that a prolonged discussion of it is interesting). Smith showed that the mercantilist attitude toward the precious metals could be summed up as: 'Premium is going for three dollars a gallon! Better fill up the car! Gas won't always be this valuable!' And Smith pointed out that questions of money aren't the questions we should be asking, because 'money is the exact measure of the real exchangeable value of all commodities … at the same time and place only.'32 The questions we should be asking are about how we can get to a better time and place.
The rich may be piggish, but money is not a Circe that transforms them into creatures with larger gullets than we have. 'The rich man consumes no more food than his poor neighbour,'33 Smith wrote, referring to the reasonable prosperity of his time and place. In the unreasonable prosperity of our time and place it's the other way around. The larger the pie wagon the more likely that he or she is living below the government's officially decreed poverty level. Smith stated his meaning better in The Theory of Moral Sentiments, in the passage where the invisible hand was originally mentioned.* The rich, he said,
consume little more than the poor, and in spite of their natural selfishness and rapacity, … though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants.34
*This is not quite true. The most noted two words of Adam Smith's oeuvre were initially used in his essay, 'The History of Astronomy', probably written when Smith was in his twenties. But there he employed them in a disparaging way. Smith was noting that man has always had some understanding of physics, that 'fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature.' Smith averred that not even the ignorant ancients thought 'the invisible hand of Jupiter' was 'employed in those matters'. (EPS 49)
Smith did not intend the invisible hand to be understood as it usually is understood, as the agency by which economic liberty automatically produces economic progress. When he meant that, he said it: 'government which afforded to industry the only encouragement which it requires'. And the one other time that he used the phrase was in book 4 of The Wealth of Nations, in a discourse on the benefits of employing capital 'in the support of domestick industry', (W/L 456) where Smith – according to his own free trade principles – was wrong.
The economic benefits of wealth in a free market quickly overflow the humble vessel that is Paris Hilton, and they do not trickle down, they pour.
Adam Smith, Capitalism's Therapist
Smith understood the money that people have, and he understood people. Living before the social sciences had split into warring camps (or had claimed the dignity of being sciences), Smith was free to be a psychologist as well as an economist. The word psychologist existed in the eighteenth century, but its meaning was 'one who treats concerning the soul', or, as Smith most likely would have said, 'the imagination'. And Smith saw that the human imagination contains darker and more deeply rooted ambitions than greed for cash. In The Theory of Moral Sentiments he wrote:
To those who have been accustomed to the possession, or even to the hope of public admiration, all other pleasures sicken and decay … Place, that great object which divides the wives of aldermen, is the end of half the labours of human life; and is the cause of all the tumult and bustle, all the rapine and injustice.35
And of the Academy Awards and Us Weekly.
There is a limit to what people will do for money, but there is no limit to what people will do to go on The Jerry Springer Show. Money is not enough. To be called 'rich as Croesus' has never been a badge of prestige. The filthy rich king of Lydia wound up a prisoner of Persia's emperor Cyrus. It was Croesus who caused Solon to say that no man should be called happy until he is dead. Or famous.
As for death and glory, there's another ambition that leads to that, plus tumult, bustle, rapine, injustice, and Us Weekly. The desire for power pushes a man, Smith wrote, to 'the highest degree of arrogance … to erect his own judgment into the supreme standard of right and wrong … to fancy himself the only wise and worthy man in the commonwealth'.36 Smith managed to describe not only Barbra Streisand but everyone in the world of politics.
There is no toil and trouble as bad as politics. The freedom of the market, though of uncertain fairness, is better than the shackle of government, where unfairness is perfectly certain. And there's an additional factor that makes business superior to politics. Smith saw that a free society tends to disconnect power from pelf. Referring to the Great Britain of his
era, Smith wrote, 'The person who either acquires, or succeeds to a great fortune, does not necessarily acquire or succeed to any political power, either civil or military. His fortune may, perhaps, afford him the means of acquiring both, but … does not necessarily convey to him either.'37 And no amount of current groveling for campaign contributions makes this less true. Politics may be terribly influenced by money, but political power cannot simply be purchased in the marketplace. Ross Perot proved this, happily, as did, less happily, Steve Forbes.
Political powers are different from free market goods. This has to do with the nature of freedom, which is based on equality and self-possession. A citizen of a free country has property rights not only in 'the strength and dexterity of his hands' but in the strength and dexterity of his mind. 'And to hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbour, is a plain violation of …' Voting rights in Florida in 2000, maybe? It's not that we can't be bought, it's that we own certain prerogatives that can't be sold. Our rights are, to use a term from property law that appears in the Declaration of Independence, 'unalienable'.
Another reason that political powers are different from free market goods has to do with the nature of markets. Unfettered private exchange cannot be limited – as the Chinese government thinks it can – to things. Material items are indivisible from the knowledge of how to make them and the ideas upon which that knowledge is based. All the more so, now, in an 'information age'. Free markets lead to thinking, that eternal enemy of politicians.
On the Wealth of Nations Page 5