The Ideological Distortions of the ‘Invisible Hand’ | Adam Smith #1
By: Lance Li
Tags: Invisible Hand, Adam Smith, Market, Economics, Free Trade

But, as a nuanced and subtle thinker, Smith was no mercantilist either. In terms of public policy, he was highly skeptical of the role of the state in “direct[ing] private people” on economic decisions that individuals themselves can “judge much better than any statesman or lawgiver”, which not only would lead to the “most unnecessary attention” but subsequently the decrease in the general trust in government. Regulations such as “the monopoly of the home market”, much as it may be instrumental in promoting the trade advantage of “a particular manufacture” much “sooner than it could have been otherwise”, “must” be “either… useful or… hurtful” “in almost all cases”.

The promotion and security of the domestic industry and its employments are rather the natural and inevitable results of the psychology of ‘home bias’ and does not depend upon the mercantilist regulations whatsoever. But, “[t]hough the same capital never will maintain the same quantity of productive labour in a distant [employment] as in a near employment,” for many of such “nearer employments” to carry on, foreign goods might prove to be “necessary”. In this, Smith see both the advantages of domestic capital investment and employment, and its limitations that can only be remedied through some foreign investment and employment. However, in either way, rather than letting “both capital and industry” promote “their natural employments” “of its own accord… with the greatest possible rapidity”, “the sum total… of its industry, or of its revenue” certainly can not be “augment[ed]” but to be “diminishe[d]” as “the immediate effect of every such regulation.”

Notice that this is not the same as professing that market competition, if left unregulated, will automatically result in the nirvana of optimal equilibrium — there is no such thing as an equilibrium for Adam Smith and other Classical economists. If there must be any such thing, it is the natural price of goods determined by labour time, an empirically supported theory that’s universally rejected and bashed by mainstream economics. Furthermore, Smith’s mixed view of ‘free trade’ nowhere amounts to the level of an ideological doctrine, which “can only be sustained by a distortion of Smith” (Meeropol, 2004). In fact, it was acknowledged, with the exception of “the rude produce of the soil” (husbandry and agriculture), that:

“If the free importation of foreign manufactures were permitted, several of the home manufactures would probably suffer, and some of them, perhaps, go to ruin altogether, and a considerable part of the stock and industry at present employed in them would be forced to find out some other employment.”

Nor was this a capitalist manifesto, defending the so-called ‘success stories’ of private tyranny. At the core of the neoliberal conception of politics in economics is the false dichotomy between the oppressive state control and free capitalist enterprise, which was somehow often been attributed to Smith. In an essay modestly named and translated as “The General Theory of Surpluses as a Formalization of the Underlying Theoretical Thought of Adam Smith, His Predecessors and His Contemporaries”, Maurice Allais, a ‘Nobel’ Laureate, considered Smith’s Wealth of Nations as “a stinging criticism of interventionism by governments.” The “one fundamental guiding idea,” he claimed, is “that the free decentralized action of economic agents in a system of competition and private property brings advantages for each of them. In Smith’s own famous words, each one, moved by his selfish interest, is in reality led by an ‘invisible hand’ to satisfy the interests of all the others [and] constantly brings the economy towards a situation of coherent interdependence where a certain ‘optimum’ is realized” (Allais, 2005).

One capable of imagination can imagine Smith being literally infuriated in his grave by this passage. With class as the basic components of economic analysis in Classical economics rather than merely individuals and firms, Smith was no less skeptical of the capitalist class than the state. The main political issue at stake, for him, is rather the capture of the state by the capitalist class. In fact, it is the “merchants and manufacturers” who are “the contrivers of this whole mercantile system”, “the principal architects” of the very policies Smith devoted the book in critiquing, whose interest “has [predictably] been most peculiarly attended to” while the interest of “the consumers… [and] some other sets of producers, has been sacrificed to it.” The mercantile regulations, as Smith asserted, were so designed to precisely serve the interest of those who designed them (Smith, 2007).

As a matter of fact, Smith wasn’t against state intervention altogether: he actually advocated for some regulatory measures that most of his ardent followers would never imagine. Take the case of the ‘division of labour’. Smith was known for favorable comments on the division of labor in the opening chapters of book, in which it was credited for leading to “[t]he 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”. And by cherry-picking and stressing such commentary in universities, it has been utilized to rationalize the regime of Capitalism as, more or less accurately, an efficient system for progress and innovation. However, what’s rarely been taken notice of is Smith’s comments against the “division of labour” later in the text, in which the only solution suggested was the government prevention of such practice. He says, due to the absence of the opportunity to develop and utilize their “understanding” for creative “invention”, “the great body of the people,” “whose whole life is spent in performing a few simple operations,” “naturally loses” and “generally becomes as stupid and ignorant as it is possible for a human creature to become.” The “torpor of his mind” that the process of “the division of labour” brought about not only would disable the workers from having “any rational conversation”, “conceiving any generous, noble, or tender sentiment”, and “forming any just judgment”, but also “corrupts the courage of his mind” and “the activity of his body”. And “unless [the] government takes some pains to prevent it”, “the labouring poor” “in every improved and civilised society” would inevitably sacrifice their “intellectual, social, and martial virtues” (Smith, 2007).

With respect to class, the rich and powerful, including the capitalist class, are precisely the ones who receive the strongest distrust from the thinker. “[W]hoever imagines… that masters rarely combine, is as ignorant of the world as of the subject.” Smith observed, echoing Karl Marx’s theory of capitalist exploitation roughly a century later: “Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate… sometimes enter into particular combinations to sink the wages of labour even below this rate”, driving the “desperate… workmen”, those “servants, labourers, and journeymen” “who must either starve, or frighten their masters into an immediate compliance with their demands”, into “tumultuous combinations” with the “recourse” of “the loudest clamour, and sometimes to the most shocking violence and outrage.”

“The masters upon these occasions are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen. The workmen, accordingly, very seldom derive any advantage from the violence of those tumultuous combinations, which, partly from the interposition of the civil magistrate, partly from the necessity superior steadiness of the masters, partly from the necessity which the greater part of the workmen are under of submitting for the sake of present subsistence, generally end in nothing, but the punishment or ruin of the ringleaders.”

And I would highly encourage all to read the exposition of capitalist exploitation and conspiracy against the public that Smith explained with such eloquence in full:

“As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of the society, their judgment, even when given with the greatest candour (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects than with regard to the latter. Their superiority over the country gentleman is not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his. It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction that their interest, and not his, was the interest of the public. The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”

The exact point can also be reflected from Smith’s Lectures on Jurisprudence (aka. Lectures on Justice, Police, Revenue and Arms), written in 1763 and published posthumously. In the words of an economic historian from Connecticut College, in these lectures that “display on almost Marxist quality” (especially in the similarities in the conception of history), “[a] close reading… shows that there are two basic types of rules and regulations which Smith argues should be eliminated: those that are antiquated and outmoded; and those which were basically made by and for the interest of the rich and powerful. It is these two particular sets of rules and regulations which Smith argues should be repealed; not any and all government rules and regulations” (Pack, 1994). Wouldn’t it be ironic to see the most adamant and fanatic preachers of Smith are precisely those that are the most enthusiastic in advocating for the business interest? As J. K. Galbraith once remarked:

“Devout free enterprisers in our day, who genuflect the mentions of Adam Smith’s name, rarely base their sermon on this particular text” (Galbraith, 1977).

Being one of these “enterprisers”, Milton Friedman once bragged about his patron saint’s “skepticism” against the active pursuit of public interest in a famous 1970 New York Times opinion article, using it to support a ‘critique’ against the (somehow) so-called “pure and unadulterated socialism”, short for the businesses’ “responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers” (or essentially anything that would normally be seen as centrist or even right-wing in all developed countries except the U.S.), making nonsensical extensions such as “it is hard for ‘good’ people to do ‘good[’ in a free society,] but that is a small price to pay for making it hard for ‘evil’ people to do ‘evil,’ especially since one man’s good is another’s evil” (Friedman, 1970). Commenting on the interest of the capitalist class, Smith stated:

It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.” “Merchants and manufacturers are the people who derive the greatest advantage from this monopoly of the home market. The prohibition of the importation of foreign cattle, and of salt provisions, together with the high duties upon foreign corn, which in times of moderate plenty amount to a prohibition, are not near so advantageous to the graziers and farmers of Great Britain as other regulations of the same kind are to its merchants and manufacturers.” “I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it” (Smith 2007).

Taking Smith’s words into context, my guess is that a three-year-old would conclude what uncle Smith is talking about here is what George W. Bush’s favorite philosopher, Jesus Christ, called ‘hypocrisy’. Friedman is absolutely correct to point out the contemptible nature of the capitalist enterprise, and this kind of genuineness is indeed rare in his profession and shall be lavishly congratulated. Besides that, there is no need whatsoever to further elaborate to demonstrate the fallacious and retarded nature of the argument made by Mr. Friedman as a whole. If the same logic was applied, it is as if Mr. Friedman would devoutly advise a fascist dictator not to impose parliamentary democracy upon the freedom-loving people, for it is not in the interest of the political class and the dominant capitalist class. And if history has any valuable lesson for any economist who supposedly preaches the ‘freedom to choose’, it would be a great disservice to the discipline to overlook the sordid records of the ‘Chicago Boys’, all of whom were mentored by Mr. Friedman and other crops of neoliberal doctrinaires, in shaping the policies of Pinochet’s junta in Chile, or what was called “structural adjustment” by the IMF and the World Bank, during a period of brutal authoritarian oppression that the neoliberals proudly referred to as the ‘Miracle of Chile’, after a violent coup staged by the CIA that overthrew the democratically-elected Marxist president, Salvador Allende, in September 11th, 1973.