Adam Smith Was a Critic of Corporatism, Not Free Markets

Adam Smith did not present a true critique of free market capitalism, but instead critiqued both overt forms of state capitalism, which during the period he wrote in was known as mercantilism, and covert forms of state capitalism, such as subsidisation within the corporate form of businesses and business relations. Thus a distinction needs to made between the free market and state capitalism. By free markets, I take definitions that Adam Smith gave of individuals bartering and trucking with each other based on concepts of self-interest, as well as later developments by libertarian and anarchist thinkers, whereby free markets are not seen as a zero-sum game, but rather a lateral structure where voluntary, mutually beneficial transactions can occur. When discussing state capitalism, I mean the active use of state-power within markets to influence an outcome beneficial to a certain party at the expense of both the other party and third parties. On free markets, Adam Smith was a vociferous believer, seeing them as economically and morally astute. In many areas of the economy, Smith believed that competition driven by a free market system created the best outcomes. He saw this to be the case with wages and labour, trade and prices. Further, he saw such free trade and competition as drivers of productivity, where mutually beneficial trade increased general prosperity and allowed for innovation. Smith believed this whole system to be guided by a form of self-regulation, or the invisible hand, whereby resources are guided by the needs and wants of individuals and goods are not simply horded in a zero-sum game scenario. This leads onto later libertarian arguments that show the market not to be a vertical, hierarchical system but rather lateral in basis, with wealth and resources spread widely rather than concentrated. Smith also presents a moral argument in favour of free markets and away from control and centralisation. He considered free markets to be the best distributer of freedom. Further he saw government as something of an antithesis to the freedom the marketplace provided. Thus he derived the idea that government should be limited to defence from external and internal threats and for the provision of certain public works. Transactions without coercion and the freedom to truck and barter were what Smith saw as the foundation of a free society, and he believed that humans’ natural inclinations of sympathy as well as self-interest were what made these systems work. Thus when he critiqued capitalism and its derivations he was not critiquing true free markets, as have been theorised by libertarian scholars, but rather state capitalism and the unfair, coerced privileges it provides. Within the Wealth of Nations Smith presents a critique of mercantilism, a system of protectionist trade that benefits large, wealthy producers and landowners over workers and consumers. He saw government subsidisation as creating unfair results and protecting unproductive interests from fair competition. Smith also presented a critique of business interests and the corporate model. He saw them as against the interests of the public i.e. consumers and workers and as a form of state subsidy respectively. Again drawing from the libertarian tradition, many writers have shown that Smith was correct in his thoughts on corporations, with them deriving benefits from government-based privileges such as restrictive labour laws, wage laws and transport subsidies. Overall, Smith was an ardent supporter of free markets and the benefits they brought, both on an economic and moral level, and saw the state capitalism and corporations of his time as the antithesis of this system.

Smith saw the free market as an efficient system which allowed for the most well-organized production and use of goods within a nation. As stated by the Constitutional Rights Foundation “Adam Smith described free markets as ‘an obvious and simple system of natural liberty.’ He did not favor the landowner, the factory owner, or the worker, but rather all of society”[1] showing that Smith saw a society based around the market as a great equaliser, favouring no particular interest but that of the desires of consumers and the innovation of producers. This can be seen with Smith’s view of wages, where he believes wages are created by the conditions of labour and the skills involved. Smith states “if the one species of labour requires an uncommon degree of dexterity and ingenuity, the esteem which men have for such talents will naturally give a value to their produce, superior to what would be due to the time employed about it”[2] showing that wages are created through market conditions of value, where more skilled work is paid greater than unskilled labour. This is Smith’s conception of human capital[3], where wage differentials are based on ideas of skill and danger in labour. This also meant Smith had a tentative opposition to wage laws, both those created by organised labour and those created by business conglomerates. As Martin states “The first ‘proof text’, to speak loosely, comes from Book One of the Wealth of Nations. Here Rothschild cites Smith’s observation that ‘when the regulation, therefore, [of wages or working conditions] is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favor of the masters'”[4] showing Smith’s belief that wage laws enacted as a benefit can have unintended consequences. This follows many free market arguments against the minimum wage and forms of state-enforced labour legislation, whereby minimum wage laws created as a benefit to workers have actually created unemployment among individuals who aren’t skilled enough for employers to pay them the minimum wage. Further, it shows a genuine belief in the free market as the best determinant of wages, rather than being decided by vested interests.

On issues of labour and the workforce, he believed the market provided the best and most productive outcomes for the nation. This can be seen in his attitude towards the division of labour, where he believes “the greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour”[5]. Again he saw this down to the efficiency the market creates within labour and employment. However, Smith also criticised the extremities of division of labour for its psychological effects, stating “he man whose whole life is spent in performing a few simple operations…loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become”[6]. On the other hand Smith’s view on division of labour is not itself a condemnation or anti-free market, but rather a recognition that with the division of labour, exploitative actions can occur on the part of employers. However, if we look to libertarian definitions of what a truly free market would look like, such as those proffered by Kevin Carson, we see that many markets would be based around local production and favour worker-owned enterprises and small businesses, focusing on different types of division of labour in which “these efficiencies can be realised just as easily by dividing the operations so that individual workers perform them one after the other”[7], thus reducing the chances of exploitation and alienation. It must be noted that the modern corporate form of employment or the industrial forms of employment seen in the 19th century are not indicative of either a free market or the division of labour, but rather of exploitation through state-assisted means[8]. Then there is also Smith’s prescription of education to the problem of alienation, which Smith gives a radical formula for.

Smith saw education as a general benefit that to some extent should be paid for via taxation[9]. However he also makes the case for user fees for such a public service, stating “This expense, however, might perhaps with equal propriety, and even with some advantage, be defrayed altogether by…the voluntary contribution of those who think they have occasion for either the one or the other”[10]. This itself shows a free market approach to the provision of government services, putting the responsibility of payment upon those who actually use the service. Smith had similar views on other public services, including roads, as Carson notes “Adam Smith argued over 200 years ago that the fairest way of funding transportation infrastructure was user fees rather than general revenues”[11]. These views go hand in hand with the conception of a free market, with free market-type ideas being proscribed for public services as well. Smith’s views of government in general again show a preference for the free market. Smith believed that the duty of government should be limited to defence, against both internal and foreign threats, and the provision of certain public services[12]. Overall, Smith saw the free market as an agent of economic efficiency that was able to bring about the circumstances of prosperity for workers and producers, as well as being an equaliser within society. Even in areas where he did criticise concepts produced from free markets, such as the division of labour, he seems to be merely criticising their extremes and even provides solutions that themselves follow some form of market principles.

Smith further believed in the legitimacy of free market capitalism at a moral level. He saw the free market as a self-regulating system based upon conceptions of self-interest, whereby, as way of an example, “a butcher does not supply meat based on good-hearted intentions, but because he profits by selling meat”[13]. Thus goods are distributed based on the idea of profit-seeking, guided by what Smith termed the invisible hand. Smith explains this concept, saying “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”[14]. This concept gives a moral justification for the workings of the free market, showing the distributive effects created by self-interest and freedom. This further developed into a concept of human nature that was self-organising, producing its own distributive ends. As the ASI state “a prospering social order did not need to be controlled by kings and ministers. It would grow, organically, as a product of human nature. It would grow best in an open, competitive marketplace, with free exchange and without coercion”[15]. Within the Theory of Moral Sentiments Smith also believed that human nature was geared towards feelings of sympathy and compassion, within an idea he termed fellow-feeling. As Smith explains “Sympathy, though its meaning was, perhaps, originally the same, may now, however, without much impropriety, be made use of to denote our fellow-feeling with any passion whatever”[16] explaining that we as fellow humans feel sympathy towards others and thus a need to help those who need it, rather than simply letting them fall by the wayside. These concepts of self-interest and fellow-feeling show a complex view of human nature created by what is termed spontaneous order, which ” is what happens when you leave people alone—when entrepreneurs … see the desires of people … and then provide for them”[17]. This moral justification that Smith provides is fully in line with modern perceptions of the free market, where signals and information are dictated by the wants and needs of those who participate in the market. However this concept, the invisible hand, has been criticised as being wrought out as a justification for the excesses of what some term the free market. They believe Smith has been misquoted and used for an ideology he himself did not agree with. Despite this, what many libertarian thinkers have shown is that the invisible hand does work within the market where allowed, and that the real problem, as Smith saw himself, is the state and its distorting actions within the market.

Smith then was not a major critic of the free market system. Instead Smith criticised the cronyism involved in the economy, for example when the state distorted signals and subsidised and favoured certain industries and businesses over others. In fact, Smith attacked these system vociferously, in particular the corporation and mercantilism. On mercantilism, Smith saw protectionist measures used to enrich one nation over others, thus making trade a zero-sum game that could only be won by the best hoarders of gold and silver. As the CRF notes “In a major section of The Wealth of Nations, Smith attacked mercantilist trade practices. He insisted…further stimulated the division of labor, expanded the production of trade goods, and increased ‘the real revenue and wealth’ of all”[18]. Further “Smith criticized how the British Parliament had passed laws…imposed high import duties, gave subsidies to favoured companies, and granted monopolies to powerful special interests like the East India Company”[19] showing that Smith saw the effects of state subsidisation as detrimental to economic wellbeing and the function of a free market. Smith also showed similar dislike for corporations. Smith himself states that “The majority of a corporation can enact a bye-law with proper penalties, which will limit the competition more effectually and more durably than any voluntary combination whatever”[20] explaining that corporations allow for businessmen to join together and limit competition for themselves. In fact, Smith demonstrates the fact that corporations are in many ways inimical to the state, and are a product of state privilege. As Elliott notes, “In joint stock companies, Smith said, shareholders tended to know little about the running of the company, raked off a half-yearly dividend and, if things went wrong, stood only to lose the value of their shares”[21] showing Smith had a disdain for organisations that were given legal privilege to squander profit and treat debts irresponsibly. Many subsequent scholars have further criticised the corporation as the antithesis of a truly free market. As Van Dun shows “The large publicly traded corporation enjoys at least one legal privilege: its “legal personality,” which it shares with the granter of the privilege, the state”[22], demonstrating the fact that modern corporations are state-sanctioned benefits that other competitors don’t have access to. There have also been arguments put forth that corporations don’t bring about efficient ends. As Smith noted “The pretence that corporations are necessary for the better government of the trade is without any foundation”[23]. Carson also sees this, and further notes that for corporations to maintain efficiency, they are reliant on state-based privileges and legislation. Carson states “As we shall see below, the failure of the trust movement at the turn of the 20th century reflected the insufficiency of railroad subsidies, tariffs and patents alone to maintain stable monopoly power. But without the government subsidized ‘internal improvements’ of the nineteenth century, it is doubtful that most national scale industrial firms would have existed”[24]. Again this shows how early corporations were reliant upon transport subsidies that allowed them to create large, national markets where such firms could dominate. Scholars such as Carson and Long have further noted that without such state sanctioned privilege, truly free markets would be based at the local level, with many being small in size and extremely competitive. This was similar to Smith’s view of the best way to organise free markets. As Korten shows “Smith believed the efficient market is composed of small, owner-managed enterprises located in the communities where the owners reside”[25]. Thus Smith shows a genuine disdain for state intervention and what it produces within a market. Rather than being a critic of such a free market, Smith was in fact a major critic of mercantilism and corporatism. Free markets to him were locally organised and based around moral conceptions of self-interest and sympathy, and not centres of greed and avarice. As has been shown, this is where modern free-market advocates have taken their theory, showing that without state-privilege, many markets would be locally based and owner-managed, rather than being controlled by corporate monoliths as they are today.

Smith was no critic of free market capitalism, believing such a system to be just, moral and the best provider of freedom within a society. He saw the free market as extremely efficient providing the best outcomes for producers and consumers and creating true national wealth. He also proscribed free-market type solutions to the provision of public services, through concepts such as user fees and voluntary payment for education. Through ideas of the invisible hand, he saw this system as self-regulating, created through a process of spontaneous order where we trade and exchange because of our own self-interest, and we care for each other within our society because it is our nature to be sympathetic. This is why Smith believed the market to be best organised at a local level, as it means consumers and producers take care of those they are familiar with and prevents centralisation and greed. Smith himself “strongly disliked both governments and corporations”[26] and believed that centralisation within an economy was a problem. This is why he was disdainful of corporations and mercantilism, seeing them as antithetical to freedom and free trade and as a product of the state and its economic interventions. Thus Smith wasn’t a critic of free market capitalism, which he saw as a system of equal organisation that allowed for greater economic efficiency, but was instead a critic of state capitalism, where power is hierarchical and centralised in favour of vested interests and against the interests of the general public.

[1] CRF. (2007). Adam Smith and The Wealth of Nations. Available: http://www.crf-usa.org/bill-of-rights-in-action/bria-23-1-a-adam-smith-and-the-wealth-of-nations.html. Last accessed 27th Apr 2015.

[2] Smith, A (2007). An Inquiry Into the Causes and Nature of the Wealth of Nations. New York: MetaLibri. 65.

[3] Library of Economics and Liberty, 2008

[4] Martin, C. (2011). Adam Smith and Liberal Economics: Reading the Minimum Wage Debate of 1795-96. A Journal of the American Institute for Economic Research. 8 (2), 110-125.

[5] Smith, A (2007). An Inquiry Into the Causes and Nature of the Wealth of Nations. New York: MetaLibri. 14.

[6] Smith, A (2007). An Inquiry Into the Causes and Nature of the Wealth of Nations. New York: MetaLibri. 782.

[7] Gabb, S. (2009). Review by Sean Gabb of Kevin Carson’s “Organization Theory”. Available: https://libertarianalliance.wordpress.com/2009/06/17/review-by-sean-gabb-of-kevin-carsons-organization-theory/. Last accessed 25th Apr 2015.

[8] Carson, K (2008). Organization Theory. Seattle: BookSurge. 53.

[9] Smith believed in local taxation as the answer “because there is greater accountability and better moral judgment” (Mueller, P. 2015)

[10] Smith, A (2007). An Inquiry Into the Causes and Nature of the Wealth of Nations. New York: MetaLibri. 816.

[11] Carson, K. (2010). The Distorting Effects of Transportation Subsidies. Available: http://fee.org/freeman/detail/the-distorting-effects-of-transportation-subsidies. Last accessed 25th Apr 2015.

[12] Mueller, P. (2015). Exceptions to Liberty in Adam Smith’s Works. Available: http://www.libertarianism.org/columns/exceptions-liberty-adam-smiths-works. Last accessed 25th Apr 2015.

[13] Beattie, A. (2015). Adam Smith And “The Wealth Of Nations” . Available: http://www.investopedia.com/articles/economics/09/adam-smith-wealth-of-nations.asp. Last accessed 27th Apr 2015.

[14] Smith, A (2007). An Inquiry Into the Causes and Nature of the Wealth of Nations. New York: MetaLibri. 456.

[15] Adam Smith Institute. (2014). Introduction to Adam Smith. Available: http://www.adamsmith.org/introduction/. Last accessed 27th Apr 2015.

[16] Smith, A (2005). The Theory of Moral Sentiments. Sao Paulo: MetaLibri. 6.

[17] Stossel, J. (2011). Spontaneous Order. Available: http://reason.com/archives/2011/02/10/spontaneous-order/singlepage. Last accessed 27th Apr 2015.

[18] CRF. (2007). Adam Smith and The Wealth of Nations. Available: http://www.crf-usa.org/bill-of-rights-in-action/bria-23-1-a-adam-smith-and-the-wealth-of-nations.html. Last accessed 27th Apr 2015.

[19] CRF. (2007). Adam Smith and The Wealth of Nations. Available: http://www.crf-usa.org/bill-of-rights-in-action/bria-23-1-a-adam-smith-and-the-wealth-of-nations.html. Last accessed 27th Apr 2015.

[20] Smith, A (2007). An Inquiry Into the Causes and Nature of the Wealth of Nations. New York: MetaLibri. 146.

[21] Elliott, L. (2007). Plc: prerogative of the unaccountable few. Available: http://www.theguardian.com/business/2007/jul/09/politics.economicpolicy. Last accessed 27th Apr 2015.

[22] Van Dun, F. (2003). Is the Corporation a Free-Market Institution?. Available: http://fee.org/freeman/detail/is-the-corporation-a-free-market-institution. Last accessed 27th Apr 2015.

[23] Smith, A (2007). An Inquiry Into the Causes and Nature of the Wealth of Nations. New York: MetaLibri. 146.

[24] Carson, K (2008). Organization Theory. Seattle: BookSurge. 66.

[25] Korten, D. (1995). When Corporations Rule the World: The Betrayal of Adam Smith – Excerpt. Available: http://livingeconomiesforum.org/Adam-Smith. Last accessed 27th Apr 2015. Library of Economics and Liberty. (2008). Adam Smith. Available: http://www.econlib.org/library/Enc/bios/Smith.html. Last accessed 25th Apr 2015.

[26] Korten, D. (1995). When Corporations Rule the World: The Betrayal of Adam Smith – Excerpt. Available: http://livingeconomiesforum.org/Adam-Smith. Last accessed 27th Apr 2015. Library of Economics and Liberty. (2008). Adam Smith. Available: http://www.econlib.org/library/Enc/bios/Smith.html. Last accessed 25th Apr 2015.

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