Posts Tagged ‘Adam Smith’

The cause of current disharmony in the United States

December 24, 2012

“The man of system…seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chessboard.  He does not consider that the pieces upon the chessboard have no other principle of motion besides that which the hand impresses upon them; but that, in the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.  If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably and the society must be at all times in the highest degree of disorder.” Adam Smith, The Theory of Moral Sentiments, 1759

Capitalism or market economy? That may be the relevant question!

January 11, 2012

“The Financial Times is debating capitalism, but what it is really debating is the future of the market economy….Sloppy language leads to sloppy thinking. By continuing to use the 19th-century term capitalism for an economic system that has evolved into something altogether different, we are liable to misunderstand the sources of strength of the market economy and the role capital plays within it.” John Kay, ‘Capitalism is the wrong target’, Financial Times, January 11, 2012

Karl Marx never used the word capitalism in his seminal text, Das Kapital.  However, following the publication of this book, the noun came to describe the system of business organization that emerged to make the industrial revolution possible. And by the mid-19th century that system was (albeit briefly) central to the economic landscape of the developing nations.

Wealthy individuals – either by themselves or with a small group of active partners – built and owned both the factories and the plants in which a new working class was employed and the machinery inside those premises. Under capitalism, so defined, business leaders exercised economic power from their ownership of capital and from the control that such ownership gave them over the means of production and exchange. 

The economic power thus provided was not unlimited. It was severely constrained by competitive pressures exerted through the wider market process. But economic power surely existed within each such island of conscious power in that wide ocean of unconscious cooperation and  competition.

By the end of the 19th century, capitalism, so defined, was in significant decline.  Legislation passed in Marx’s time permitted the establishment of the limited liability corporation, thus allowing the emergence of businesses characterized by widely dispersed share ownership. By the 1930s, economists were writing about the implications of  a resulting divorce between ownership and control.

The emergence of a cadre of professional managers holding only limited stock in the corporations that they ran, essentially marked the end of capitalism – narrowly defined – for the fastest growing segments of  the economies of industrializing nations.

“The value of raw materials is only a small part of the value of the production of a complex modern economy, and the value of physical assets is only a small part of the value of most modern businesses.  The critical resources of today’s company are not its buildings and machines but its competitive advantages – its systems of organization, its reputation with suppliers and customers, its capacity for innovation.  These attributes are not, in any relevant sense, capable of being owned by anyone at all.” John Kay, ibid.

As always, John Kay’s insights open up fruitful avenues for thought and scholarship. Has the time now come to praise capitalism for its 19th century achievements, while recognizing that it plays only a limited role in the modern corporate economy?  By refocusing our attention on the market economy as a whole, the raw edges of class warfare surely will be blunted, and the relevance of human cooperation and exchange, rather than conflict and war, once again will move center stage.

Such indeed was the case in 1776 when Adam Smith’s great treatise – The Wealth of Nations –  first saw the light of day, long before the word ‘capitalism’ had emerged to redefine market cooperation in terms of alleged class warfare.

Laissez-Faire Capitalism

March 31, 2010

“When I say ‘capitalism’, I mean a full, pure, uncontrolled laissez-faire capitalism – with a separation of state and economics, in the same way and for the same reasons as the separation of state and church.” Ayn Rand, ‘The Objectivist Ethics’  The Virtue of Selfishness

“In a capitalist society, all human relationships are voluntary.  Men are free to cooperate or not, to deal with one another or not, as their own individual judgments, convictions, and interests dictate.  They can deal with one another only in terms of and by means of reason, i.e., by means of discussion, persuasion, and contractual agreement, by voluntary choice to mutual benefit.  The right to agree with others is not a problem in any society; it is the right to disagree that is crucial.  It is the institution of private property that protects and implements the right to disagree – and thus keeps the road open to man’s most valuable attribute (valuable personally, socially, and objectively):  the creative mind.” Ayn Rand, ‘What is Capitalism?’ Capitalism: The Unknown Ideal

“Observe the paradoxes built up about capitalism.  It has been called a system of selfishness (which, in my sense of the term, it is) – yet it is the only system that drew men to unite on a large scale into great countries, and peacefully to cooperate across national boundaries, while all the collectivist, internationalist, One-World systems are splitting the world into Balkanized tribes.  Capitalism has been called a system of greed – yet it is the system that raised the standard of living of its poorest citizens to heights no collectivist system has ever begun to equal, and no tribal gang can conceive of.  Capitalism has been called nationalistic- -yet it is the only system that banished ethnicity, and made it possible, in the United States, for men of various, formerly antagonistic nationalities to live together in peace.  Capitalism has been called cruel – yet it brought such hope, progress and general good will that the young people of today, who have seen it, find it hard to believe.  As to pride, dignity, self-confidence, self-esteem – these are characteristics that mark a man for martyrdom in a tribal society and under any social system except capitalism.” Ayn Rand, ‘Global Balkanization’, The Voice of Reason

Since my columns are so favorable to laissez-faire capitalism, let me define the term more precisely, picking up on the above-outlined thoughts of Ayn Rand. For without question, I share her enthusiasm for the economic system that enabled the United States to achieve its former greatness as a nation; a greatness that now has been squandered in a rush to state capitalism and progressive socialism. For the United States economy has not remotely resembled  laissez-faire capitalism since Woodrow Wilson used World War I as an excuse to build a command economy. Since March 21, 2010 the United States is a social market economy, virtually indistinguishable from Germany, France and the United Kingdom.  Under progressive anti-capitalist  leadership, it is headed towards liberal fascism in a manner not at all dissimilar to Mussolini’s Italy during the 1930s.

Laissez-faire, a French term that translates loosely as ‘let things alone’, originated in the eighteenth century with a school of French economists known as the Physiocrats, who opposed trade restrictions that supported mercantilism.  Adam Smith popularized the term and gave it added influence in his 1776  book, The Wealth of Nations.  Smith argued that a nation’s well-being and economic progress are assured when individuals are free to apply their capital and labor, without state intervention, in a competitive market economy. He outlined how the self-interested activities of individuals promotes the general welfare under such conditions.  The doctrine of laissez-faire thus involves not only a  policy implication of non-intervention by the state, but also a positive philosophy that recognizes a natural harmony between individual and social interests.

In the hands of Jeremy Bentham, the doctrine of laissez-faire became a philosophy of individualism and of utilitarian ethics. The doctrine reached its zenith during the nineteenth century,  in the writings of  the young John Stuart Mill, who defined what has become accepted (with the exception of anarchists in the tradition of Murray Rothbard) as the minimum level of state intervention.  Among such interventions for the greater good, Mill included the power to secure property rights and to enforce contracts, as well as to provide for internal order, protection from external threats, and such public goods as transport systems, sanitation, public health and state-supported education. Throughout the second half of the nineteenth century, following the Repeal of the Corn Laws, Great Britain epitomized the system of laissez-faire capitalism, thus creating the wealth that  enabled it to become the greatest Empire that the world had ever known.

The United States never adhered unconditionally to the doctrine of laissez-faire, either theoretically or practically. Tariffs were key revenue-raising components of American trade policy almost from the country’s independence.  Antitrust laws – in the form of the Sherman Act (1890) and the Clayton Act (1914) similarly violated laissez-faire principles.  During the first half of the twentieth century, numerous examples of state intervention – minimum wage laws, workers’ compensation statutes, hours legislation, and social security laws belied professed allegeiance to laissez-faire principles. Since the Great Depression and World War II, only a small minority of Americans espouse laissez-faire capitalism, correctly defined.

Truth, however, is not to be found necessarily in numbers. In my judgment, the Remnants are correct in their judgment that laissez-faire capitalism is the only system known to mankind that simultaneously promotes individual freedom and the wealth of a nation to the highest feasible levels.  As such, the doctrine is to be revered and not derided, as is the current unfortunate, irresponsible tendency throughout the United States.


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