PHIL 219

1. PHIL 219 Adam Smith, The Wealth of Nations

2. Adam Smith (1723-1790) • Adam Smith was a philosopher and prominent member of what is known as the Scottish Enlightenment. • He spent his academic career at Glasgow University, where he was the Chair of Moral Philosophy. • He was also an important contributor to what was not yet a distinct field: economics. • He published two books: The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations.

3. Smith’s Moral Philosophy • Smith’s moral theory is a version of what is known as moral sense theory, an attempt to account for our moral judgements by connecting them to common emotional responses to events and actions. • Thus, for Smith our moral principles are, “founded upon experience of what, in particular instances, our moral faculties, our natural sense of merit and propriety, approve, or disapprove of” (Moral Sentiments, 159). • There are some important implications of Smith’s account. • Smith’s approach is anti-reductive. He doesn’t think we can reduce morality to a defined set of values (ala Natural Law Theory) or a fundamental principle (e.g. the Principle of Utility. • It shares much with Virtue Theory, particularly in the emphasis placed on practical judgment and discernment. Smith actually says his approach is ”pretty exactly” Aristotle’s. • More specifically, the system Smith works out is a combination of reflection on these ‘discerned’ moral principles and the development of virtue. The rules act as enabling constraints within which virtue can be produced. • This is an important contribution to our understanding of how norms, rules, and systems shape individuals. It is also key to Smith’s critique of the economic transformations going on around him.

4. Smith, Proto-Economist • There’s common agreement that The Wealth of Nations inaugurated economics as an independent discipline. • Philosophers and other folks had been talking about issues generally understood as ‘economic’ for a long time, but Smith for the first time directs his considerable intellectual energies to specify the issues and treat them as distinct from other related disciplines. • The separation wasn’t complete, however, as the name given to this new special science indicates: Political Economy. The name reflects the common assumption, shared by Smith, that you can’t understand economic activity independent of the state. • Political Economy thus included both what we now call economics as well as what we call political science.

5. The Wealth of Nations • The Wealth of Nations is a frequently quoted but infrequently read book. • Some of that is down to length, some of it to Smith’s style and methodological choices, but a lot of it can only be explained by the fact that there is a strong strain of criticism Smith offers of the newly developing capitalism that he describes in the book. • Some want to make of Smith not just a founder of economics as a discipline but also as a champion of capitalism: an economic system based on the private ownership of the means of production where production is aimed at profit. • Smith certainly understands the power of capitalism and his major economic contribution is to explain how capitalism works (largely by producing massive amounts of material wealth/capital). • But he is also sharply critical of what he characterizes as the dehumanizing effects of industrial labor on the workers (largely due to the narrow and limited sentiments encouraged by capitalism which lead us to see each other as purely economic agents lacking in the virtues he thinks so important). • As a result, he argues for limitations to the power of ’masters’ (property owners) and protections for workers that many modern defenders of capitalism reject.

6. The Question of The Wealth of Nations • The Wealth of Nations is motivated by a question that was becoming more an more obvious: why do some societies prosper and some don’t? • The 16th and 17th centuries was a period of European exploration and colonization of the rest of the world. This had brought great wealth, typically in the form of gold and silver, flooding into Europe, and the economy was dominated by this accumulation (what is known as mercantilism). • By the 18th century something new was happening. The capital that had been imported into the European economies began to be put to work with startling results: urbanization, increases in worker productivity, decreases in scarcity of commodities, increases in material prosperity. • Smith’s answer to the question serves as the principle by which he attempts to understand this new development. As the, “…labor of every nation is the fund which originally supplies it…” (492), relative prosperity is to be accounted for by the productivity of labor. Productivity is in turn a function or how labor is organized and the proportion of laborers to non-laborers. • Smith’s genius is to recognize that it’s organization that makes the difference. To use a common cliché, it’s about working smarter, not harder.

7. Structure of The Wealth of Nations • Given his answer, Smith’s project in The Wealth of Nations seems straightforward. • Book 1 is devoted to specifying the organizational principles Smith identifies in the newly emerging economic form (capitalism). • Book 2 examines the product of this economic form, capital accumulation, and discusses it’s organizational effects. • Book 3 considers how national policies (basically rural vs. urban) contribute to or diminish the prospects of capitalism. • Book 4 discusses how these policies are grounded in distinct political forms and institutions. • Book 5 completes the discussion by considering how and when the economic principles articulated in Books 1 & 2 are appropriately aimed at public, rather than private, good. • Our reading section has some famous pieces of Book 1, and short excerpts from Books 4 & 5.

8. What about that organization? • “The greatest improvement in the productive powers of labour…seems to have been the effects of the division of labour” (493c2). • This is Smith’s conclusion about the uniqueness and power of capitalism. Division of labor organizes workers in a way that maximizes their productivity. • To illustrate this, Smith uses a famous example: the pin factory (494c1-2). • The illustration reveals that the division of labor produces three specific advantages: • Repetition of tasks makes the worker more skilled a their specific contribution to the productive activity. • Makes workers more efficient by decreasing waste time. • Familiarity with the fine-grained parts of a particular task makes innovation in productive technology more likely. • These advantages in turn explain the substantial increase in material prosperity evident in the new capitalist economies, an increase which Smith describes in terms which continue to be invoked today in support of capitalism (496c1-497c1).

9. Where did this idea come from? • In what is probably the most well-known part of The Wealth of Nations (Book 1, Ch. 2), Smith locates the source of the development of the division of labor in a “natural propensity” towards transactional social interactions. • While acknowledging that not all social interactions are transactional, Smith insists that, “The greater part of…[human] wants are supplied…by treaty, by barter, and by purchase” (497-8). • “Wants” here refers to material needs or desires. • Smith understand these transactions to be governed by individual interest and mutual disinterest, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest” (497c2). • This transactional propensity, in combination with the ‘obvious and natural’ distribution of talents and aptitudes naturally inclines people to separate and pursue different various forms of productive activity, an inclination which, when private ownership of the means of production establishes the context of shared labor (i.e., the factory, inevitably leads to the division of labor.

10. Private Property and Wage Labor • The other big organizing principle that Smith sees playing a role the development of capitalism was how private ownership of the means of production changed the relationship between the worker and their production. • Prior to the localization of laboring in privately property, “…the whole produce of labouring belongs to the labourer” (499c1). With private ownership of the means of production, the worker’s relationship to their production is interrupted by the owner (in Smith’s terminology, the ‘Master’). • What the worker gets instead of the product of their labor is a wage: a monetary payment in exchange for work. • Smith is very clear about how wage labor works. He envisions the worker and the the master operating under a form of contract (a social contract!?) the terms of which include the specification of a wage.

11. Who has the power? • In such a contract, Smith recognizes, the master has most of the power because, "In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate" (499c2). • Smith reviews some of the obvious features of the power differential, acknowledging that for the most part the contract works to the advantage of the master. • There is a "silver lining." There is a lowest possible wage that the master can pay: subsistence + reproduction (500c2). • The worker is not without some power. As a resource, their value increases as supply tightens.  • What's another factor that gives workers bargaining power? Why didn't Smith see it?

12. Political Economy • In Book 4 of The Wealth of Nations Smith defines a science: Political Economy. "Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects; first, to provide a plentiful revenue or subsistence for the people, or more  properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for publick services" (501c1). • As was established in Book 3, there have been historically two different ways in which rulers have attempted to respond to the first demand: agriculture and commerce. • As Smith sees it, commerce has won, and so he focusses his attention there. If we assume self-interest, then commerce's advantage is explained by the fact that the dominance of self-interest ensures that everyone will seek to maximize their capital. Smith arges that reason suggests a basic economic principle: The Invisible Hand.  • One important feature of his analysis that many fail to note. The constraint of self-interest is supposed to maximize both private and public interest. Failure in either case indicates irrationality in the market and opens the possibility of public intervention in the market. 

13. The Duties of the Sovereign • The title of Chapter IX of Book 4 is misleading in the context of our selections. We are given the last two paragraphs of the Book, which is a summary of the whole Book, not of Smith's treatment of agriculture (which is cursory). • What is summarized is Smith's account of the legitimate functions of the sovereign, which (remember) is thus an account of how the authorized power of the state can be employed legitimately (is justified). • On this account, the sovereign has three legitimate duties: • To the integrity of the state (defense from foreign aggression). • To the maintence of justice (internal integrity). • To the public good (in the form of public works).

14. On the Revenue of the Sovereign • Book 4 of The Wealth of Nations is devoted to an analysis of the duties citizens have to the state. • These duties arise in response to the duties the sovereign has. Given that, for example, the state could not defend itself from attack without funds to support an army, the citizens have a duty to provide for the 'common defense.' • In what, Smith seems to be assuming, is some sort of representative or parliamentary democracy, this provision takes the form of taxation.  • Smith specifies four principles which should govern any scheme of taxation. • Taxation should be means based; taxation is relative to wealth. • Tax rates should be fixed and public. • Taxes should be levied at a time suited to their efficient payment (levy them when people have the money.  • Taxation should be minimal (that is, we should seek the balance point between social need and individual responsibility).

15. On Defecits • One way in which many contemporary economists differ from Smith is in their estimation of the value and risks of governmental borrowing. Smith argues strongly against it and in addition insists that specific sectors may be individually responsible for debt incurred in their support. • He's thinking about the American colonies, but a recent example may be the big commercial banks in 2008. • Smith's condemnation is reasonable. Recent European history had plenty of examples of nations failing because of excess debt. • More sophisticated lending instruments, and sheer size of the economy have led most contemporary economists to agree that on some (primarily stimulative) occasions at least, defecit spending is good for the economy (and the country!).