The Competitiveness of Nations
in a Global Knowledge-Based Economy
October 200
3Warren J. Samuels
The Political Economy of Adam Smith *
Ethics, Vol. 87, No. 3
Apr. 1977, 189-207.
Index
The Interpretation of Adam Smith
Smith’s Synoptic and Synthetic System
The Interpretation of Adam Smith
Adam Smith and John Locke
are the premier philosophers of modern Western civilization. Such stature is Smith’s in part because he
comprehended and analyzed the deepest levels of the newly developing industrial
market economy. [1] I propose to interpret Smith’s picture of the market
economy in terms of his total system of thought and analysis. This system, with all its oppositions and
tensions, comprises Smith’s solution to the problem of order, or of the
organization and control of the economic system. Expressed somewhat differently, I shall
inquire into the significance for economic policy of the central argument
presented in the Wealth of Nations. Smith
speaks to the ages, or at least he is still being heard in our age. What does he have to say on the most
fundamental level? What is really going
on in our economic system, according to Adam Smith?
I first must acknowledge
certain considerations involved in the retrospective interpretation of the
history of thought in general and of specific classic literature in particular.
[2] These considerations necessarily limit my analysis and
argument.
First, each generation has
the task and the opportunity of reinterpreting Smith for itself. There is no escaping this, nor would we desire
to. [3]
*C Woody
Thompson Address, Midwest Economics Association, April 1, 1976. Comments and suggestions, upon an earlier
draft, by John Henderson, Elizabeth Johnston, Herbert Kisch,
Sylvia Samuels, and Warner Wick, are gratefully acknowledged. This is a further revision of a version
published in the Summer 1976 issue of the Nebraska
Journal of Economics and Business, whose permission is acknowledged with
thanks.
1. True, he has some interesting if not important
things to say about practical issues and details of economic organization and
policy, not all of which, by any means, we are obligated to accept. His views on interest rate regulation and the
corporation are two examples. But his
opinions often are of interest because he is taking a position, more or less
idiosyncratic, about some practical aspect of the fundamental structure and
process of the market economy and/or its political correlatives.
2. Several of these considerations are discussed in
Warren J. Samuels, “The History of Economic Thought as Intellectual History,” History
of Political Economy 6, no. 3 (Fall 1974): 305-23.
3. Interpretation, of course, serves several functions, among them
social control. In the Wealth of
Nations and in the Theory of Moral Sentiments, Smith examined the
social control mecha-[nisms of the existing society and economy. One indicator of the historic importance of
Smith’s work has been that the interpretation of the Wealth of Nations has
become a facet of the social control system of the Western economies. Yet this only illustrates the general view
that the entire history of economic thought has meaning as knowledge, social
control, and psychic balm, since economics may serve as both explanation and
rationalization. The interpretation of
the Wealth of Nations has become part of the quest for moral and legal
rules, a quest which to Adam Smith, as we will see, is a very important part of
the socioeconomic system.]
HHC: [bracketed] displayed
on page 190 of original.
189
Second, it should be clear
that the understanding of Adam Smith is influenced by the problems, interests,
and values which each interpreter, whether an individual or a generation, brings
to his work. This is one facet of the
inescapable tension between the data (or “facts”) of history and the mind of
the historian. Furthermore, the history
of the interpretation of Smith influences our subsequent perceptions of
problems, interests, and values. In both
respects, the meaning of the man arises in and through our efforts to apprehend
him. It is therefore both necessary and
difficult to pierce several veils, not the least being one’s own ideology, in
order to approach Smith more closely.
Third, the interpretation
of Smith has been influenced by a selective filtration process [4] which has
permitted certain views to remain viable and others not, a process deeply
channeled by ideology, power, and whatever governs professional or disciplinary
concerns, including the felt needs of both orthodoxy and heterodoxy in
economics, each of which has had its own dogmas and preconceptions about the
past and present. No less perceptive an
authority than Alex Macfie has remarked, with regard
to the historical overemphasis upon the economic side of Smith’s work, that
“the immense economic impact of the Wealth of Nations [arose]
considerably out of the way it could be used to support the more dominant
economic forces of his and later times.” [5] Similarly, John Maurice Clark attributed the immediate success
of the Wealth of Nations to a shift of “class interests.” [6] Ideological and other filtration has permitted most economists
and noneconomists to have only an aphoristic
appreciation of Smith’s view of the economic world. One wonders whether he would have thought the
notoriety worthwhile if, in achieving it, his work and analysis were
caricatured.
Fourth, I would recall the
mixed reception that has been given to the Wealth of Nations as, in Frank
Knight’s phrase, “a propaganda for economic freedom.” [7] Of course, the book and its reasoning have been frequently invoked and
made increasingly sophisticated as an argument in favor of the market and
commercial freedom. Yet many, like
Knight, have perceived that Smith was too deep and subtle, and too admitting of
unsafe thoughts,
4. See Warren S. Gramm,
“Natural Selection in Economic Thought: Ideology, Power, and the Keynesian
Revolution,” Journal of Economic Issues 7, no. 1 (March 1973): 1-28.
5. A. L. Macfie, The Individual in Society (London: George
Allen & Unwin, 1967), p. 13.
6. John Maurice Clark, “Adam Smith and the Currents of
History,” in Adam Smith, 1776-1926 (Chicago: University of Chicago
Press, 1928), p. 73.
7. Frank H. Knight, “Theory of Economic Policy and the
History of Doctrines,” Ethics 63 (July 1953): 279.
190
to permit his book to be readily effective propaganda
once one looked beyond certain obvious passages. The reception and status given to the Wealth
of Nations has depended upon many variables, including the interpreters’
perceptions of Smith and of the necessary and desirable course of social and
economic policy in their own times. [8]
Fifth, I would urge that
the most significant aspect of Smith and the Wealth of Nations resides
in the total matrix of interpretations and mutual critiques, not in any single
one, however attractive, useful, ostensibly complete, or accurate it may be. No one interpretation can capture the complexity
and fecundity of Smith’s mind or the social meaning of his work.
Sixth, I should say that
the history of the interpretation of Smith is as interesting and instructive,
and as difficult to fathom, as the interpretation of Smith himself. Suffice it to say that the very nature and
identity of vulgar Smithism is itself a matter of
interpretation; that there is a tension between the confidence that one can
determine “what Smith really meant” and the needs of reinterpretation; that it
is difficult to transcend the filtration process, in part because its results
inevitably help select our perceptions; and that I intend here not some “final”
word, but one contribution to the continuing matrix of interpretations. [9]
Adam Smith was no ordinary
economic writer; he was a premier philosopher of Western civilization. He worked out many of the distinctive
principles of a civilization newly coming into being, [10] and the
complexity of such a task can hardly be overestimated. A philosophy of civilization deals with what
Joseph Spengler has called the problem of order,
requiring continuous readjustments between freedom (or
autonomy) and control, continuity and change, and hierarchy and equality.” Each such philosophy encompasses not only
freedom or continuity, but also the systematic handling of freedom and control
and continuity and change, according to the authoritative principles of
the civilization or of those who determine them. Vis-à-vis other civilizations and on its own
terms, each civilization and its philosophy evolves a more or less distinctive
resolution of the problem of order. This
may be perceived and defined in terms of some view of freedom, or otherwise,
but it includes within it all the elements which comprise
8. For example, see the disparate interpretations of
the significance of the Wealth of Nations presented at the Political
Economy Club centennial celebration; Political Economy Club, Revised Report
of the Proceedings at the Dinner of 31st May, 1876, Held in Celebration of the
Hundredth Year of the Publication of the “Wealth of Nations” (London:
Longmans, Green, Reader & Dyer, 1876).
9. The interpretation given below is largely in the
tradition of Jacob Viner, Glenn Morrow, Alex Macfie, and Nathan Rosenberg, among others, all of whom
deserve prior exculpation for the uses to which I have put their ideas. The influence of Joseph Spengler
also will be evident.
10. Wesley C. Mitchell, Types of Economic Theory, ed.
Joseph Dorfman (New York: Kelley, 1967), 1:165.
11. Joseph J. Spengler, “The
Problem of Order in Economic Affairs,” Southern Economic Journal 15
(July 1948): 1-29, and “Hierarchy vs. Equality: Persisting Conflict,” Kyklos 21(1968): 2 17-36.
191
the problem of order: freedom, control, continuity,
change, hierarchy, and equality. Each
civilization and its philosophy is thus a synthesis of often seemingly
contradictory or antinomial elements, such as the
controls necessary to permit a particular freedom to exist, and so on. Civilizations represent systems of social
control, whatever the character and scope of perceived and actual freedom
therein, whatever their resolution of hierarchy versus equality and of
continuity versus change. At the level
of a civilization, the problem of order is holistic, and one must speak of patterns
of freedom and control, and so on. On
a lower level there exist particular conflicts regarding the details of the
problem of order. Adam Smith must be
interpreted in terms of such a context and on the level of abstraction required
by the general problem of order.
Let there be no mistake
about acknowledging the obvious: Adam Smith most distinctively stood for
private enterprise, private property, self-interest, voluntary exchange, the
limited state, and the market. He was
the philosopher of a system of spontaneous economic activity, or resource allocation
through market forces, and of efficiency (as it has
come to be called) comprehended in terms of self-interest or maximization of
personal well-being. The market, in the Smithian view, is a mechanism for resolving basic economic
problems and for producing order without elaborate central direction, the
“mystery,” as Mark Blaug expressed it, [12] of order
achieved through exchange entered into by private individuals manifesting “the
uniform, constant, and uninterrupted effort of every man to better his condition.”
[13]
All this does in fact characterize the
distinctive argument presented in the Wealth of Nations, which heralds the
market system and its conceptions of freedom, welfare, and the nature, origin,
and mode of their realization.
Yet, as I suggested several
years ago, there is a second model of order in the Wealth of Nations, a
model of the economy as a system of power. [14] Smith understood the deep forces of organization and
control at work in the economic system. He
realized how market forces operate only within, and give
effect to, the structure of power and, especially, how those with access to and
(in some sense) control over government use it. Market order is achieved only within the
structure of power. Both the market and
power govern whose interests will count in the economy. Markets are structured by power, and market
solutions are power-structure specific. Power
and market relations both constitute sets of variables in a general interdependent
system.
It is possible to
exaggerate the analysis of conflict and power in Smith, but it is also possible
to exaggerate the analysis of voluntary market exchange, and it is the latter
which has developed as a consequence of the
12. Mark Blaug, Economic
Theory in Retrospect, rev. ed. (Homewood, Ill.: Irwin, 1968), p. 6.
13. Adam Smith, The
Wealth of Nations (New York: Modern Library, 1937), p. 326.
14. Warren J. Samuels, “Adam Smith and the Economy as a
System of Power,” Indian Economic Journal 20 (January-March 1973): 363-81.
192
filtration system governing the development of interpretation. Smith’s realism and fecundity include both
market exchange narrowly considered and the power play over rights and other
bases of access to and participation in the market, including the complex
economic role of government. Smith
includes both market and power models in his conception of how society works
out resolutions to the problem of order. What is distinctive about the market economy
is not the absence of fundamental power relations, but their particular form. It is necessary to examine the system on more
than its own (ideological) terms and consciousness, and it is this which Smith
largely did.
Smith’s Synoptic and Synthetic System
The juxtaposition and
combination of power and market models must be seen, however, as but one part
of Smith’s total conception of the economic system and its underlying
processes. Smith, many of his contemporaries,
such as David Hume, and many successors, such as Karl Marx, Carl Menger, Vilfredo Pareto, and Max
Weber, each had a synoptic grasp upon or approach to the world. Smith, and the
Scottish school in general, “thought of economics only as one chapter (not the
most important) in a general theory of society involving psychology and ethics,
social and individual, law, politics, and social philosophy as well.” [15] Smith had not only a synoptic view of the world but also,
and most suitably, a synthetic way of thinking; results were a consequence of
the integration or composition of complex and often seemingly contradictory
elements.
Let me outline the
important points which must be added to the juxtaposition and combination of
market and power.
First, a fact that is quite
well known but whose significance is not so well appreciated, is that Smith’s
approach to moral philosophy encompassed four realms of thought and action:
natural theology, ethics, justice (or jurisprudence), and expediency (by which
he meant concern for wealth, power, and prosperity). The domain of ethics was explored in the Theory
of Moral Sentiments; expediency, or wealth and associated power, in the Wealth
of Nations; and justice was to be the object of another discourse, to
consist of “an account of the general principles of law and government, and of
the different revolutions they have undergone in the different ages and periods
of society, not only in what concerns justice, but in what concerns police
[policy], revenue, and arms, and whatever else is the object of the law.” In lieu of this latter volume we have had one
transcription of his lectures. [17] The point is that the moral, market, and legal orders are
distinguishable interacting subprocesses of a larger
whole and that their interaction is an important part of their operation and
explanation.
Second, it was Smith’s view
that what transpired in the life of the
15. Macfie, p. 16; see p. 147
and passim.
16. Adam Smith, The
Theory of Moral Sentiments (New York: Kelley, 1966), p. 503.
17. Adam Smith, Lectures on
Justice, Police, Revenue and Arms (New York: Kelley, 1964).
193
individual and Society was a synthesis of a number of forces. These included self-love, self-interest,
self-command, sympathy, benevolence, moral rules, and legal control. Individual thought and behavior represented a
balance or synthesis of motives, each of which had complex origins. Social and individual phenomena were a product
of both reason and feeling and of both rationalism and authority. There is both deliberative and nondeliberative choice in society. [18]
Third, society exhibits
tendencies toward both harmony and conflict, with tension between them. There are great conflicts in society, and such
harmony as exists does so within the existing System and structure and is very
rough and limited; moreover, it is a created and not a fully spontaneous
harmony. [19]
Fourth, it is easy to lose
sight of the foregoing because in both the Theory of Moral Sentiments and
the Wealth of Nations Smith himself presented a synthesis of
naturalistic deductive lines of reasoning and factual inductive arguments. Needless to say, tensions exist between these
two procedures. [20] As for society itself, there is a synthesis of
“experience, induction from it, and the final faith.” [21]
Adam Smith’s mind
encompassed both the broad, dynamic, interactive, and open-ended process of
resolving the problem of order and the set of its on-going solutions. The process was at any point constrained by
the status quo and, for Smith himself, by certain normative pluralistic
requirements (however ambiguous they may appear in retrospect). [22] Smith’s was an essentially modern, albeit undeveloped, theory
of society. Inevitably, the tendency of
interpreters is to see and emphasize portions of his analysis, but we must not
lose sight of Smith’s synoptic and synthetic whole, with its interdependence,
ambiguity, and tensions. The strength of
partial analysis is necessarily associated with its limits, including the
neglect both of interaction between subprocesses and
of the general interdependent character of the whole. What happens to or in one subprocess
profoundly affects and is affected by what transpires in the others. This is a system which Gunnar
Myrdal calls cumulative causation. Interpretation cannot properly reduce Smith’s
analysis to single-factor explanations or to narrow normative systems without
doing injury to his synoptic and synthetic view of the realities of economic
life. Apparent closure, vis-à-vis the
open-endedness of his analysis, is a result of ideological filtration which,
however inevitable, necessary, and even salutary, nonetheless fails to present
the entire Smithian
18. Macfie, chaps. 5, 6, and passim; Warren J.
Samuels, The Classical Theory of Economic Policy (Cleveland: World,
1966), chap. 2 and passim.
19. Lionel Robbins, The Theory of Economic Policy in
English Classical Political Economy (London: Macmillan, 1953), pp. 25-29;
Samuels, Classical Theory, pp. 7-9.
20. Macfie, pp. 108, 122, and
passim; Glenn R. Morrow, “Adam Smith: Moralist and Philosopher,” in Adam
Smith, 1776-1926 (Chicago: University of Chicago Press, 1928), pp. 168-71.
21. Macfie, pp. 102-3, n. 4.
22. Samuels, Classical Theory, chap. 5; Robbins,
chap. 6; and A. W. Coats, The Classical
Economists and Economic Policy (London: Methuen, 1971), pp. 5 ff.
194
analysis. His work
serves to caution us that basic problems must be defined in such a way as not
to foreclose analytical consideration of important variables and forces but
rather to stress certain critical antinomies ensconced within them. There are inevitable interactions, tensions,
and problems which are characteristic of the working out of solutions to the
problem of order.
The greatest difficulty in
both positive and normative analysis is to project adequately the system of
freedom under analysis while providing an important and explicit place for the
system of control necessary for that system. The same is true with regard to continuity and
change. It was Adam Smith’s genius to
have treated this as a critical part of his synthetic and synoptic analysis. As Macfie remarks,
“Some of Smith’s arguments seem to conflict with others, and the charge of
inconsistency has been brought against him, with undoubted justice. But while consistency is certainly a virtue
and an ideal, we live in a world shot through with inconsistencies. In this regard, I like to remember the saying
of Emerson: “With consistency a great soul had simply nothing to do”: an
exaggeration, no doubt; but in due measure true, at least for geniuses. [23] The same point has been made by others: Reinhold Niebuhr wrote that “life is full of contradictions and
ambiguities” and that “we live our lives in various realms of meaning which do
not cohere rationally.” [24] F. Scott Fitzgerald wrote that “the test of a first-rate intelligence is
the ability to hold two opposed ideas in the mind at the same time, and still
retain the ability to f unction.” [25] Niels Bohr distinguished between “minor truths, whose
opposites are plainly false, and great truths, whose opposites are also true.” [26] However much ideological filtration may have distorted and
emasculated Smith’s analysis, his was a first-rate intelligence. He did comprehend great truths whose wisdom
and accuracy resided in their synthesis with opposites which were also true in
distinguishable respects. Nowhere is
this insight more important than in regard to his analysis of market and power
and of freedom and control, but it is also true, and important, in regard to
his analysis of moral rules, law, and institutions generally.
This section will sketch
the interdependence and tensions contained within Smith’s synoptic and
synthetic analysis. Most of the
discussion concerns the nature and role of the market, its relation to other
institutions of social control, and the relation of self-interest to the market
and to moral
23. Macfie, p. 139. On the problem of Smith’s consistency, see
Ralph Anspach, “The Implications of the Theory of
Moral Sentiments for Adam Smith’s Economic Thought,” History of
Political Economy 4, no. 1 (Spring 1972): 203-5.
24. Russel B. Nye, “The
Thirties: The Framework of Belief,” Centennial Review 19 (Spring 1975):
52.
25. Quoted in James Cerruti, “Stockholm,” National
Geographic 149, no. 1 (January 1976): 59.
26. Richard Schlegel, Book Review, Journal of Economic issues 7, no. 3 (September 1973): 480.
195
and legal rules, all involving the socialization of the
individual. We will see that the usual
formulation of his message “completely short-circuits much of the real
substance of Smith’s work.” [27]
Smith viewed the market as
a regulatory system, itself an institution of social control. The invisible hand is supposed to control
individual conflicts and the excesses of competition and to “safeguard the
public good through healthy competition. Such is his faith.” [28] The market above all is an institutional mechanism to
compel men to pursue self-interest in social rather than antisocial ways. [28] As Rosenberg has said, “The price system, as Smith saw it, was an
intensely coercive mechanism [which] tied the dynamic and powerful motive force
of self-interest to the general welfare. Its free operation would, in most cases, leave
the individual producer no alternative but to pursue his economic interests in
a manner conducive to the national welfare.” [30] Smith’s emphasis is not solely, or not so much, upon the
self-regulatory character of the market as upon the regulation of self-interest
by the market. The regulatory function
of the market is quite neglected by the modern emphasis upon market solutions
as being a priori optimal or upon an a priori free market. This often blind invocation of the market
neglects the fact that Smith’s simple and obvious system of natural liberty was
a shrewd method of harnessing and releasing the human propensities deemed
favorable to the creation of opulence and good order and suppressing the
unfavorable ones.
Notice the merely tentative
propriety attributed by Smith to market results. It is true that the individual’s search for
“the most advantageous employment for whatever capital he can command...
naturally, or rather necessarily leads him to prefer that employment which is
most advantageous to the society.” [31] But his most elaborate statement of the general principle
is considerably qualified:
As every individual, therefore, endeavors as much as
he can both to employ his capital in the support of domestic industry and so to
direct that industry that its produce may be of the greatest value; every
individual necessarily labours to render the annual
revenue of the society as great as he can. He generally, indeed, neither intends to
promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that
of foreign industry, he intends only his own security; and 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. Nor is it always the worse for the society
that it was no part of it. By pursuing
his own interest he frequently promotes that of the society more effectually
than when he really intends to promote it. [32]
27. Nathan Rosenberg, “Some Institutional Aspects of
the Wealth of Nations,” Journal of Political Economy 68 (December 1960):
557.
28. Macfie, p. 62.
29. Rosenberg, p. 558.
30. Ibid., p. 560.
31. Smith, The
Wealth of Nations, p. 421.
32. Ibid., p. 423.
196
Notice that Smith here does not say that in all cases
self-interest is led by an invisible hand to promote the public interest; only
“in this, as in many other cases” does this occur. Again, pursuit of self-interest does not always
promote the interest of society, only “frequently.” The market, as a regulatory system, is seen by
Smith as a more or less newly discovered institution of social control, but its
operation is not a priori optimal.
The market must be associated with the operation of other institutions
of social control; there is no presumptive optimality of market solutions. The principle of the optimality of markets and
market solutions, in all its forms, is a later principle with both explanatory
and legitimizing roles and does not adequately reflect Smith. The market must be seen as qualified in its
operation by the impact of moral and legal rules and other institutions which
are themselves a matter of choice and evolution.
The market, in Smith’s
total scheme, operated within and gave effect to the rest of the institutional
system as well as to individual choice within the system. Voluntary exchange takes places only within
legal and moral rules as well as the market. The market, according to Smith, must be
comprehended within the larger system involved in the continuing resolution of
the problem of order, however much it may contribute thereto. The order produced by markets can only arise
if the legal and moral framework is operating well; as Rosenberg has written,
the “decisive superiority” of the price system “as a way of organizing economic
life lay in the fact that, when it was surrounded by appropriate
institutions, it tied the dynamic and powerful motive force of self-interest
to the general welfare.” [33] The market does not do so alone.
It is a fundamental
argument of Adam Smith that institutions, including moral and legal rules and
rule making, function as social control.
Morrow, Macfie, and Rosenberg have elaborately
spelled this out. [34] As Macfie has argued, for
example, “the central and fruitful proposition of the Moral Sentiments is
not the natural theism, but the inductive argument based on the sympathetic
feelings of the impartial spectator, with its historical setting of societies
developing through the growth of social institutions, education, custom, moral
rules and the institutions of justice.” [35] For Rosenberg,
“one of the major themes of the Wealth of Nations, of course, is its
exhaustive examination of the manner in which institutional arrangements
structure the decision-making of the individual, sometimes in a manner which
harmonizes private interest and social interest, and sometimes in a manner
which disrupts them.” [36] “The question is, in each case, whether institutions do, or do not,
harness man’s selfish interests to the general welfare.” [37] The Wealth of Nations, then, is Smith’s “attempt
to define, in
33. Rosenberg, p. 560.
34. Morrow; Macfie;
Rosenberg, “Some Institutional Aspects of the Wealth of Nations” and
“Adam Smith on the Division of Labour: Two Views or
One?” Economica 32 (May 1965): 127-39.
35. Macfie, p. 107.
36. Rosenberg, “Adam Smith on the Division of Labour,” p. 129.
37. Rosenberg, “Some Institutional Aspects of the Wealth
of Nations,” p. 560.
197
very specific terms, the details of the institutional
structure which will best harmonize the individual’s pursuit of his selfish
interests with the broader interests of society.” [38]
Among other things, in
Smith’s analysis institutions govern distribution. For example, he was concerned with the social
gains and costs of the division of labor. One of his points, in modern terms, is that
institutions govern their distribution among classes. In other words, there is a complex set of
distributional, hierarchical, and aggregate-income level trade-off s and
related choices to be made through institutions. [39] As expressed by Rosenberg, “Smith is constantly
searching out the impact of specific institutional forms upon the human actor. Given his basic conception of human motivations
and propensities, the specific kinds of behavior which we may expect of any
individual will depend on the way the institutions surrounding him are
structured, for these determine the alternatives open to him and establish the
system of rewards and penalties within which he is compelled to operate.” [40]
For Smith as for Hume,
predictability of human behavior was brought about by the continuity generated
by stabilized relationships embodied in institutions. “Once the institutional framework is
specified,” says Rosenberg, “human behavior becomes highly predictable.” [41]
Institutions also govern
the answer to the question of whose liberty is to be achieved. (Or, liberty for what? [42]) Smith was surely influenced by Stoic natural
liberty and natural harmony doctrines, but he was also aware that social action
of one form or another was necessary to discriminate between liberties and
between actions. Selectivity is
necessary unless all action be deemed
harmonious and all exercise of liberty be sanctioned as “natural.” Belief in ultimate rationality and harmony
does not avoid the problem of evaluating the status quo with regard to the
actual elements of harmony and disharmony and of rationality and irrationality
in accordance with the principles of approbation and disapprobation. It is precisely the role of moral and legal
rules, and their respective underlying processes, to govern such evaluation. It is the business of morality and law, as
well as of the market, to regulate the detailed realities of freedom and of
exposure to freedom. Speaking of banking
regulations and fire walls, Smith said that “those exertions of the natural
liberty of a few individuals, which might endanger the security of a few
individuals, are, and ought to be, restrained by the laws of all governments;
of the most free, as well as of the most despotical.”
[43] Moral and legal controls constitute part of the basis of
the market, so that sympathy as well as division of labor may serve as social
38. Ibid., p. 559.
39. Rosenberg, “Adam Smith on the Division of Labour,” pp. 136-38.
40. Rosenberg, “Some Institutional Aspects of the Wealth
of Nations,” p. 563.
41. Ibid, p. 563.
42. Macfie, p. 148.
43. Smith, p. 308.
198
cement; whatever harmony and freedom exists is a function of
other institutions besides the market. [44]
The process involved in the
foregoing may be examined by surveying Smith’s conception of the socialization
of the individual. Self-love is restrained
by the growth of moral rules and social institutions which control it
“appropriately” through informed sympathy. [45] Smith “concentrated on the social sanctions of morality
rather than the individual one” of conscience. [46] The critical factor to Smith is not individual
self-interest as such, but the moralization of the passions “through the
gradual establishment of general rules, in the course of social progress, and
through the reactions of individuals to such rules and conventions, in the
course of their social living.” [47] As Morrow explains, “It is because the individual is in his very nature
socialized, a product of the social environment, that he can in general be left
without external interference to act in accordance with the demands of his
individual nature.” [48]
The Smithian
model is one of controlled freedom; freedom of behavior and choice exists only
within the socially established norms of conduct. Smith “certainly believed that it was only on
ethical grounds that controlled liberty for individuals was justified and
essential. This justified freedom
(within limits) is the personal foundation of his individual and moral economic
theory. The strategic factor, however,
is not so much the freedom of the individual, which has received too
unqualified attention since 1776, as the limitations on
freedom which Smith always added were necessary, if freedom to pursue
self-interest were to be moralized.” [49]
Hence the paradox
that “in his main argument, Smith was always fundamentally the sociologist,
though in his equally basic argument for the (suitably controlled) freedom of
the individual he was the eternal radical.” [50] The individual is elevated to be the prime element in the
economic system, but the individual not only operates within a moral and legal
framework but is also a socialized or moralized individual. We might also say that the individual is a
legalized individual. Self-love and
self-interest go hand in hand with social control and socialization. It is true both that vanity has a social
function in motivating self-interest and that “the great secret of
education is to direct vanity to proper objects.” In Smith we have both self-interested behavior
and the control of self-interest by moral and legal rules. Self-interest exists
44. Rosenberg, “Some Institutional Aspects of the Wealth
of Nations,” pp. 559, 560, and passim; Macfie.
45. Macfie, p. 81.
46. Ibid., pp. 97-98.
47. Ibid., p. 117; see p. 118.
48. Morrow, p. 178; see pp. 166-67, 172, 177. See also
Gladys Bryson, Man and Society (New York: Kelley, 1968); and Louis
Schneider, The Scottish Moralists on Human Nature and Society (Chicago:
University of Chicago Press, 1967).
49. Macfie, pp. 117-18.
50. Ibid., p. 91, n. 23.
51. Ibid., pp. 72-73; Smith, The
Theory of Moral Sentiments, p. 380.
199
only within social control. [52] Self-interest not only is operated upon by the market but
also is defined, channeled, and restrained by moral and legal rules and by the
operation of benevolence, sympathy, and the principle of the impartial
spectator. Socialization operates
through sympathy and the impartial spectator as internalized social control. [53]
Smith charts the operation
of individual conscience (the impartial spectator plus the sense of propriety)
and of social conscience (the general rules of conduct) which interact and
together constitute the formation and internalization of social control. Individual choice and rationality exist within
collective choice and rationality, which are in turn influenced by individual
choice and rationality. The operation of
the principles of approbation and disapprobation applied to the actions of
oneself and others both govern and are influenced by the sense of propriety and
moral rules. The impartial spectator
principle helps build up the moral rules and customs which serve as social
cement, yet the principle depends for its content on already internalized
social control. It is truly a process of
cumulative causation or general interdependence and not one in which particular
rules or particular patterns of socialized behavior may be taken as given once
and for all. Interdependence signifies
endogenous change.
Several other topics
warrant brief notice. Two concern the
role of social conditioning in Smith’s analysis. Of these, the first treats the social basis of
man’s general motivational system. I
refer, in part, to Smith’s argument that it is the deception of the “pleasures
of wealth and greatness” which “rouses and keeps in continual motion the
industry of mankind.” [54]
This has, of course,
profound implications for Smith’s individualism. [55] He took for granted an organization of life which promoted material
welfare, the propriety of which was channeled and reinforced by the dominant
socioeconomic philosophy of life, that is, by socialization processes. In part this performed the social role of
overcoming indolence. [56] But it is important also to recognize that Smith was
clearly interested in other, nonmaterial dimensions of welfare; that he
recognized the moral corruption of overemphasizing wealth and success; [57] that he
distinguished between the role of
52. Morrow, pp. 166-67, 172, 177-78.
53. Macfie, pp. 70-71, 75,
128, and passim; Anspach; and A. W. Coats, “Adam
Smith’s Conception of Self-Interest in Economic and Political Affairs,” History
of Political Economy 7, no. 1 (Spring 1975): 132-36.
54. Macfie, pp. 47, 53-54, 60-76,
122-24; Nathan Rosenberg, “Adam Smith, Consumer Tastes, and Economic Growth,” Journal
of Political Economy 76 (May-June 1968): 371; and Samuels, The Classical
Theory of Economic Policy, p. 37.
55. Smith’s element of cynicism here (Macfie, p. 54) may be compared with Milton Friedman’s
criticism of what he considers intellectuals’ “contempt for what they regard as
material aspects of life.” See Milton
Friedman, Capitalism and Freedom (Chicago: University of Chicago Press,
1962), p. 8.
56. Rosenberg, “Adam Smith on Profits - Paradox Lost
and Regained,” Journal of Political Economy 82 (November-December 1974):
1187, and passim.
57. Macfie, p. 78.
200
the lure of wealth and the corrupting influences of
wealth acquired by both oneself and others; [58] and that he
felt that self-interest is not to be equated with selfishness, although he
provided no conclusive principle for differentiating useful self-interest from
selfishness, holding instead that such had to be worked out in society.
The second aspect of social
conditioning involves Smith’s view that preferences are endogenously determined
within the economic system broadly considered. They are a partial function of moralizing and
socializing processes which help define self-interest, including, of course,
the proper objects of vanity. [59] Institutions, in Smith’s analysis, help form the incentive and
reward system of individuals. [60] And of course the market itself is a partial source of
endogenously generated preferences; as Rosenberg says, “The growth of commerce
is instrumental in shaping character, in altering tastes, and in providing new
and more powerful incentives. [61]
Next, I would reiterate
that the dualism of power and the market should not be forgotten. Both complement Smith’s analysis of the
origin, operation, and impact of moral and legal forms of social control. In this connection, three incidental points
may be made. First, Smith appreciated
the complexities of power. He appears,
for example, to have been quite sophisticated in his understanding of how the
union of Scotland and England served in the former to diffuse power (by
limiting that of the local aristocracy), notwithstanding the somewhat more
apparent centralization of power. [62] Second, it appears that institutionally produced inequality
was more important to Smith than natural inequality. [63] Third, I note the open question of the relation(s) of the
division of labor to the power structure in Smith’s work.
Another point worth noting
is Smith’s policy consciousness, a product of his relative empiricism,
secularism, and down-to-earth realism. He
treats institutions not as inevitable, but as subject to redesign and change,
as the product of past choice and subject to revised choices. He did not revere the institutional status
quo; rather, he represents the eighteenth-century version of concern to
increase deliberative decision making in modern society. [64] Nonetheless, there is in Smith a sense of both the possibility of
improving man and his condition and the severe limits thereof. [65]
Smith, it should be
apparent, blended methodological individualist and methodological collectivist
levels of analysis, and he used both the individu-
58. Rosenberg, “Some Institutional Aspects of the Wealth
of Nations,” pp. 557 and passim, “Adam Smith, Consumer Tastes, and Economic
Growth.”
59. In general, see Rosenberg, “Adam Smith, Consumer
Tastes, and Economic Growth,” pp. 367, 370, 372.
60. Rosenberg, “Adam Smith on the Division of Labour,” pp. 129-30.
61. Rosenberg, “Adam Smith on Profits-Paradox Lost and
Regained,” p. 1185.
62. Macfie, p. 137.
63. Ibid., p. 120, n. 43.
64. Ibid., pp. 49ff; Samuels, Classical Theory, chaps.
2 and 5.
65. Macfie, p. 117.
201
al and society as units of analysis. There is both voluntary
exchange and a system, structure, and process of power. The individual is in one sense the prime
element or unit in the economic system, but the individual exists and acts only
within the evolving moral, legal, and institutional framework as a socialized
individual. There are both individual
choices and social forces. As Morrow has
argued, Smith used two analytical procedures: the method of regarding society
as a derivative of the individual and that of regarding the individual
as a product of society. Apropos of his
consideration of the concrete social environment “in explaining the nature of
the individual man,... Smith is one of the very few
thinkers of his time who had any realization of this complementary point of
view. [56] The filtration system has substantially worked to
disregard this aspect of his thought.
The last of these points,
treated only in passing, relates to Smith’s complex attitude toward businessmen
vis-à-vis (or, should I say, versus) consumers. His views may be summarized as follows: (1) a
functional emphasis upon the critical role of the business class in regard to
the organization and direction of production and thereby growth; (2) a
normative and perhaps positive emphasis upon consumption as the “sole end and
purpose of production” and upon the consumer as the primary beneficiary; [57] (3) a view of the market as a system of
control to overcome indolence but also to control the businessman through
socialization; and (4) a celebration of the business system but not of the
individual businessman. Indeed his views
of the behavior of businessmen were often critical; as Heilbroner
notes, Smith was “an admirer of their work but suspicious of their motives.” [58] In sum, Smith provided no defense of the market on probusiness
terms; there is no more presumptive optimality of market solutions than of
business decisions in Smith; all that came much later with more sophisticated
formulations of the central myth of capitalism.
This brings me to the
central topic of the evolution of legal and moral rules and institutions. Smith acknowledges, and indeed emphasizes, the
inductive development of moral and legal rules, their changing character and
content. [69] There is an evolutionary dimension to the evaluative
process in society. [70] Moral and legal rules evolve through the principles of
approbation and disapprobation operating through the impartial spectator
principle, expressing a refined sympathy and moral sensibility, as part of the
larger evolving system. [71] “It is by our gradual evolution of moral rules and customs from
innumerable cases that we develop those human institutions which are at once
the safeguards and the growing points of human soci-
66. Morrow, p. 172.
67. Smith, The
Wealth of Nations, p. 625.
68. Robert L. Heilbroner,
The Worldly Philosophers, 4th ed. (New
York: Simon & Schuster, 1972), p. 51.
69. Macfie, pp.
83-87 and passim.
70. Ibid., pp. 89-90.
71. Ibid., pp. 83, 87, 89; Morrow.
202
eties. In them the
clashes of ‘self-love’ and benevolence, of sentiment and reason, are so far
reconciled - reconciled in no absolute way, but pragmatically ambulando.” [72] Smith’s argument in the Theory of Moral Sentiments is
that moral and legal rules must be worked out and revised over time and cannot
be set down once and for all. [73] Not all unintended consequences of the market are, or are
to be accepted as, beneficent. Such
consequences may have adverse impact upon desired legal and moral rules or upon
human welfare, and such rules may be changed to correct for adversity. [74] As I noted earlier, the historical interpretation of the Wealth of
Nations had been part of the process through which moral and legal rules
have been revised, sometimes in one direction and sometimes in another.
Smith’s analysis thus
provides for reevaluation: of institutions, including the market, in regard to
the incidence of the reward and incentive system; [75] of legal
rules in the light of changing norms and circumstances; [76] of the
congruity of received values with new economic realities, including the terms
of fellow feeling, for example, in regard to the distinction of ranks and
respect for wealth and greatness ; [77] of the reformulation (redefinition and reassignment)
of property and other rights through law; of wealth vis-à-vis other
considerations; of the definition of injury in regard to the doing of what one
likes so long as it does not injure others; [78] of the meaning of “extraordinary” in what Smith
referred to as “extraordinary restraints” and “extraordinary encouragements”; [79] of the
proper objects to which education is to direct vanity; and, inter alia,
the substance and exercise of self-interest and egoism. [80]
It follows from this
understanding of Smith that the interactions which mark his synoptic and
synthetic system involve inevitable tensions. There is tension as to the content and
direction of social control. There are
tensions between the market, market forces, and institutions, and between
market social control and legal and moral social control. There is tension between self-interest and the
market as a regulatory system: individuals seek to escape from market control,
there are conflicts of self-interest, and the market has an open-ended role as
a conflict resolving system which, perhaps paradoxically, is capable of being
channeled by those who can control it. [81] There is tension over the appropriateness of institutions,
over the nature of injuries which should be avoided or prevented by rules and
rights, and over
72. Macfie, p. 57.
73. Smith, The
Theory of Moral Sentiments, pp. 499
ff.
74. Jacob Viner, “Adam Smith
and Laissez Faire,” in Adam Smith, 1776-1926 (Chicago: University of
Chicago Press, 1928), pp. 116-55.
75. Rosenberg, “Some Institutional Aspects of the Wealth
of Nations,” p. 562.
76. Viner; Samuels, Classical
Theory, chaps. 4 and 5.
77. Macfie, p. 124.
78. Smith, The
Wealth of Nations, p. 308; Viner.
79. Smith, The
Wealth of Nations, p. 650.
80. Macfie, p. 78 and passim;
Morrow.
81. Samuels, “Adam Smith and the Economy as a System of
Power.”
203
when the liberty of one is endangering the liberty of
another in such a way as to call for remedial action. There is tension over all the incidents of the
socialization process: If the great secret of education is to direct vanity to
proper objects, there is tension as to which (or whose) objects
are proper and as to how vanity is to be so directed. There are inevitable tensions over the
evaluation of aspects of the general motivational system, for example, over the
morality and immorality of wealth and self-interest, including the structure of
“institutional, arrangements [within which] to cut off all avenues (and there
are many) along which wealth may be pursued without contributing to the welfare
of society,” that is, over “the conditions under which [the] market mechanism
would operate most effectively.” [82] There is
tension over the power structure as such; [83] and, inter alia, over the conditions “wherein consist[s] the
happiness and perfection of a man, considered not only as an individual, but as
the member of a family, of a state, and of the great society of mankind.” [84] These tensions characterize the processes of socialization,
collective action, and group existence. They
were recognized as such by Smith, although they have been obscured by some
interpreters, who seem to have sought to sanction certain resolutions of the
problem of order, and thereby of these tensions, and not others, all in the
purported image of Smith. Such
interpretations presumptively overstate the degree and overspecify
the substance of the closure which Smith’s system permits.
I urge, then, that change,
reevaluation, and tension are necessarily critical aspects of Smith’s synoptic
and synthetic analysis. It is only by a
static partial equilibrium-like approach to the problem of order, one which
abstracts from the larger analysis, that one can reach conservative and laissez-faire
doctrines and conclusions. I say this
notwithstanding Smith’s role as premier philosopher of the market system and
the important conservative and free market elements in his analysis and without
trying to make a case for any particular set of moral and/or legal controls or
of changes therein. The deepest understanding of these aspects of Smith’s analysis require
consideration of his larger system. Without
doing so we will not understand the conflict between those who see any act of
government as an impediment of the market and those who see in government
activity a change in the legal and moral foundations of the market.
What, then, is the
significance of Smith for contemporary analysis and policy? Smith can be and is, of course, interpreted,
evaluated, and applied from any number of specific positive or normative
perspectives. His analysis is broad
enough to encompass quite a wide range of applications. His larger analysis - his
total system, of which the central invisible hand argument in the Wealth of
Nations is but one interacting part - permits and indeed has an important
place for many diverse phenomena. There are two
82. Rosenberg, “Some Institutional Aspects of the Wealth
of Nations,” pp. 560, 569.
83. Clark, pp. 58, 62, 73-74.
84. Smith, The
Wealth of Nations, p. 726.
204
key points here: The scope of his system is broad, and
its details, that is, the details which characterize a market economy and its
moral and legal elements, are quite open and subject to revision. There is in Smith’s total system what may be
called a joint determination process: On the one hand is the determination of
optimality through markets as individuals engage in voluntary exchange, and on
the other is the ongoing socialization process which governs the reformulation
of legal and moral rules, institutions, the power structure, and thereby the
substantive conditions or content of optimality, always in combination with
individual choice. Smith is quite obviously
pro-market, but not in a way that deems market solutions optimal per se. He does not propose, let alone establish, the
exclusive or a priori presumptive
optimality of market solutions. Rather,
he articulates the role of the market as a regulatory system which performs
well or not, depending upon the role of institutions and other forces of social
control. Smith did not use his economic
theory to justify conclusions which were beyond its scope, given the terms of
his larger analysis, although he is easily enough interpreted as having done
so. To Smith, reality is not a simple
question of market-optimality versus standards or norms of legal and moral social
control; rather, the market gives effect to and operates upon such social control.
His system is much larger than the
dominant view of his work has admitted. Indeed,
his larger analysis actually serves to explain the continued conflicts over
proposed changes of moral and legal rules, institutions, power, values, and so
on: Such conflicts are central to his conception of the evolution of the total
economic system. And herein lies a major contemporary significance of Smith. Interpretive overkill, perhaps in an effort to
make Smith’s analysis safe for the system, has tended to obfuscate the larger
process he deemed to be a crucial part of the social system.
Contrary, then, to the more
typical usages of Smith and especially of the Wealth of Nations, I would
urge that he provides not a set of immediate policy solutions or presumptions
but a framework within which, given that it postulates and legitimizes a market
economy, there can be no unequivocal or conclusive a priori determination of practical policy issues. It is Smith’s message that these issues need
to be worked out through the principles of approbation, disapprobation, the
impartial spectator, and so on. Policy
requires more than market-premised economic theory, in part because there is
more to the operation of the economy than such theory incorporates. The theory of the market does not itself
explain the larger system of which the market is a part, nor does it
conclusively assert the superiority of market solutions within the existing
systemic structure. Smith’s emphasis
upon the market tells us much about the general character of his desired
economic system and how it works in general, but it tells us very little about
the details of the continuing resolution of the problem of order under its aegis.
Smith was aware of the limited probative
value of his economic reasoning and therefore of the limits of what science can
and cannot do. [85] The
85. Macfie, p. 13.
205
ultimate message of his synoptic and synthetic analysis is the
openness - the empty boxes - which it presents and therefore the choices which
it both permits and requires. This
conclusion stands in marked contrast to the more conventional view that Smith’s
message is to leave things alone. His
inclusion of the tensions, which I have discussed, serves to indicate the vacuousness of that view. To Smith, such tensions were not going to be
resolved once and for all, nor were market solutions the only ones permitted or
justified. It is a result of past
filtration of Smith’s analysis that such a view as I have given may be
perceived as statist.
The evolution of the
interpretation of Smith, and of the doctrinal defense of the ongoing system of
which that interpretation has been a part, has been a process of both
filtration and conversion. Through
filtration much of the substance and significance of Smith’s larger system has
been excluded, including some fundamental social processes and many continuing
tensions. Through conversion, his
analysis of the market, the invisible hand, has been transformed from an
analysis and justification of relatively small-scale individual activity to
that of large-scale enterprise to which some economists refer as the corporate
system. Both filtration and conversion
are inevitable processes. They function
not only to rationalize selected aspects of the changing status quo, but also, in that respect and others, as important
parts of the social valuational process. The point here is that in all these respects
Smith’s total system and analysis have been transformed.
Much has changed since
Smith’s time; the modern world is vastly different in technology, institutions,
political geography, historical experience, world view, social stratification,
and economic organization and control. One
does find in the Wealth of Nations the germs of many of the conflicts of
modern Western civilization, but Smith largely antedated the conflicts between
capital and labor and between property and nonproperty
rights and positions in the economy. Yet
these conflicts have a place in his system. He offers no genuine, unequivocal, and
conclusive solution to any of those conflicts, but the probability that they
will arise is predictable from the total analysis. Nevertheless, past usages of Smith have
functioned either to deny the propriety of many of those conflicts or to
channel their resolution. There is no
more conclusive ground for citing Smith in favor of a probusiness
or property solution than there is for citing him in repudiation of the
conflicts themselves. Given a market
system, Smith’s is a relatively open system. His analysis also recognizes, of course, that
labor and capital are each jockeying for position to control the other, that government is an instrument of those who are in
a position to use it, and that much asymmetry of position characterizes both
conflicts. [86] Neither the conflict between laborer and capitalist nor that
over property rights was considered essentially antimarket
by Smith.
The fact of the matter, of
course, is that the defense of the market,
86. Samuels, “Adam Smith and the Economy as a System of
Power.”
206
quite properly often in the name of Smith, has also served
as a defense of existing power structures. Market theory has been used to obfuscate the
problems of power, of moral and legal rules, and of the use of government, and
to canonize existing power positions and their use of morality and law. One does not find in Smith the gains-from-trade
and voluntarism arguments used in such a way as to rationalize the existing
power structure. Rather, Smith
delineates the deep processes, however laden with controversy, through which
institutions, legal and moral rules, and power structures are made subject to nonmarket revision. One
cannot speak for Smith’s reaction to a world of large-scale economic units, but
it seems obvious to me that he might say that moral and legal controls, indeed
the very corporate institution, should be subject to revision. [87] Surely Smith would have sympathized with Henry Simons’s
statement that “we may recognize, in the almost unlimited grants of powers to
corporate bodies, one of the greatest sins of governments against the
free-enterprise system.” [88] In Smith’s view, market solutions are not necessarily optimal; one must
consider the power structure and other factors before one can reach that
conclusion. It is a gross and misleading
oversimplification of Smith to invoke his conception of the market without
further examination of these other factors. [89]
Adam Smith was a premier
philosopher of the market economy, more so than our intellectual heritage has
often allowed. The greatness of his
analysis is that it is an open system in much the same sense that the
market economy itself is an open system - notwithstanding the efforts of
the already established and powerful to the contrary. If we understood Smith better, it might be an
even more open system, but that is quite another story.
87. Macfie, p. 120; Clark,
pp. 54, 75.
88. Henry C. Simons, Economic Policy for a Free
Society (Chicago: University of Chicago Press, 1948), p. 52.