Adam Smith’s Misunderstanding of Wealth Creation and His Abhorrence of Greed
January 31, 2023
What are the most important things to understand about Smith? Soll points to Smith's misunderstanding of wealth creation and his disgust with merchant's greed.
What are the most important things to understand about Smith? Soll points to Smith's misunderstanding of wealth creation and his disgust with merchant's greed.
This is the fourth and final entry in a series of writings; You can find the previous entries linked below:
Jerry Z. Muller's “Muller on Soll's Free Market: The History of an Idea”
Jacob Soll's “A Literal versus Historical Reading of Adam Smith”
Jerry Z. Muller’s “An Accurate versus Inaccurate Reading of Adam Smith”
Jacob Soll's “A Literal versus Historical Reading of Adam Smith”
Jerry Z. Muller’s “An Accurate versus Inaccurate Reading of Adam Smith”
What is obvious from this exchange is that there are many different readings of Adam Smith and it is possible to speak past each other ad infinitum. I believe the most important point about Adam Smith’s economics is that it misunderstands the basic processes of capitalist wealth creation. Smith believed that agriculture was the most productive sector of an economy, and that manufacturing and trade had to rely on it. According to Smith’s stages of development, countries with weak agricultural systems cannot create healthy commercial societies capable of foreign trade. Today, we know this is simply not true. Even in the early modern period, leaders of Florence, Venice, Holland, and other commercial states were very aware that their initial wealth did not come from agriculture.
Smith says in An Inquiry Into the Nature and Causes of the Wealth of Nations (Wealth of Nations): “No equal capital puts into motion a greater quantity of productive labor than that of the farmer (II, v, 12).” This is part of Smith’s labor theory, by which all value comes from labor, and agricultural labor is the most productive thing in society:
In [manufacturing] nature does nothing; man does all and the reproduction must always be in proportion to the strength of the agents that occasion it. The capital employed in agriculture, therefore, not only puts into motion a greater quantity of productive labour than any equal capital employed in manufactures, but in proportion too to the quantity of productive labor which it employs, it adds a much great value to the annual produce of the land and labour of the country, to the real wealth and revenue of its inhabitants. Of all the ways in which a capital can be employed, it is by far the most advantageous to a society (II, v, 12).
Put this into the context that Smith believed that societies evolved in a stadial manner: from hunters to shepherds to agriculture and so on to commerce.[1] By the seventeenth century, it was standard for political economists to write that urban wealth was not dependent on agriculture, but rather simply on industry and trade. Golden Age Holland began importing food stuffs so that the land could be used for industry. In other words, countries did not necessarily need to go through these stages or foster agriculture. They could simply create industry by artifice and invention, as Venice and Holland did. Those responsible for the First Industrial Revolution knew that wealth came from industry and technology. Industrial pioneers, such as Josiah Wedgwood, understood that his workers could not work hard enough to make his pottery kilns productive. For that, he needed to make the kilns bigger and work faster. The same was happening with steam-powered looms: wealth came not from the toil of laborers, but from the “falling price per output unit based on the exponential growth obtained by technological applications.”[2] This is the story of the Industrial Revolution.
Looking at the world from Scotland and from the great estate of his patron the duke of Buccleuch, Smith believed that improving agriculture was the essential element in creating more material wealth for industry, or that “the progress of improvement” of “rude produce” was necessary to commercial expansion (I, xi, j). However, this process was not necessary to creating wealth. Countries such as Holland did not always produce “rude produce,” but rather got it from other countries. Holland became rich precisely by doing the opposite of Smith’s process. Two years after Smith’s death, Alexander Hamilton made this point very clear. He understood that figures like Smith thought that America’s wealth came from its agriculture. Smith believed that a country whose wealth was based on the “artifice” of industry could not attain the wealth of a country whose economy focused on agriculture:
Compare the slow progress of those European countries to which wealth depends very much upon commerce and manufactures, with the rapid advances of our North American colonies, of which wealth is founded altogether in agriculture (III. iv. 19).
Hamilton strongly disagreed with and critiqued these agrarian ideas:
It has been maintained, that Agriculture is, not only, the most productive, but the only productive species of industry. The reality of this suggestion in either aspect, has, however, not been verified by any accurate detail of facts and calculations; and the general arguments, which are adduced to prove it, are rather subtle and paradoxical, than solid or convincing.[3]
After making many of the same critiques I make of Smith’s vision of an agriculture-based economy, Hamilton concludes that America needed to focus its economy on manufacturing as it produces more than agricultural labor through “machinery,” which increases the productive capacity “unencumbered too by the expense of maintaining the laborer.”[4] Like the physiocrats, Smith could not see that industry would create wealth beyond and without the economic support of farming. It must not be forgotten that Smith’s idea that an economy could be self-perpetuating was based on the idea that nature created the essential bounty for a commercial economy (note that Smith never uses the word capitalist) and that this wealth was unleashed by farm labor. Those who believe that Smith was advocating the pure general equilibrium theory of laissez-faire rely on Smith’s faulty vision of wealth-creation.
They also rely on the very modern idea that Smith believed that greed was the catalyst for the invisible hand. However, Smith claimed to loath greed. He was disgusted by the avarice of merchants:
It is by this superior knowledge of [merchant and master manufacturers’] own interest that they have frequently imposed upon [the country gentleman’s] 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 (I ix. p. 10).
It is precisely the greed of merchants and dealers that leads them to seek regulations which can cause monopolies. This allows them to manipulate politics away from the interests of agriculture and the greater good of society. It is, according to Smith, essential that good legislators keep an eye out for any such greedy, monopolizing tendency. The proposal of any new law or regulation of commerce which comes from this order [of dealers], 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 (ibid).
As I noted in my earlier post, Smith believed that the superior moral “legislator” will have the insight and fortitude to see through the greedy ruses of merchants. As Donald Winch notes in Adam Smith’s Politics: An essay in historiographic revision, Smith sided with Montesquieu and David Hume in believing in the “idea of the legislator and the great founder of states…” Winch insists that while Smith derided the common politician, he “regarded law and government as ‘the highest effort of human prudence and wisdom.’”[5] This was an idea he took from the Stoic morals of Cicero, which is one of the central themes of my book Free Market: The History of an Idea (Basic Books, 2022).
For Smith, “It is the not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest (I. ii. 2).” As Smith explains in The Theory of Moral Sentiments, benevolence is necessary for a society and it will not come from lower tradesmen or businessman. It will have to come from a higher order of moral individual and Smith is clear on the fact that benevolence and morality are essential in countering greed.[6] As I noted in my past post and as Winch also underlines, Smith has strong elitist tendencies:
[…] even the references in Wealth of Nations to ‘natural aristocracy’ could be taken to encompass merit and high station, especially if we take seriously, as we must, Smith’s views on the importance of, and sympathy accorded to, established wealth and authority.” (The italics are Winch’s).
I repeat the quote from The Theory of Moral Sentiments about the importance of elite legislators:
The man whose public spirit is prompted altogether by humanity and benevolence, will respect the established powers and privileges even of individuals, and still more those of the great orders and societies, into which the state is divided. Though he should consider some of them as in some measure abusive, he will content himself with moderating, what he often cannot annihilate without great violence. When he cannot conquer the rooted prejudices of the people by reason and persuasion, he will not attempt to subdue them by force; but will religiously observe what, by Cicero, is justly called the divine maxim of Plato, never to use violence to his country no more than to his parents. He will accommodate as well as he can, his public arrangements to the confirmed habits and prejudices of the people; and will remedy as well as he can, the inconveniences which may flow from the want of those regulations which the people are averse to submit to. When he cannot establish the best system of laws, he will not disdain to ameliorate the wrong; but like Solon, when he cannot establish the best system of laws, he will endeavour to establish the best that the people can bear (TMS VI, ii, 2, 15).
The man of benevolent public spirit was not as Smith said, the butcher, the brewer, or the baker. Indeed, how could society work if everyone were greedy and eschewed benevolence? Smith did not think it could. Therefore, leaders of higher moral ilk were necessary to create good legislation and to be impartial spectators.
This brings me to Jerry Muller’s constant attempts to discredit my readings through critiques of my footnotes. Once upon a time—the time Anthony Grafton describes in his book The Footnote: A Curious History (1997)—publishers encouraged footnotes and authors relished them as a locus for erudition, tangential conversations, and sometimes downright nasty squabbles. As "trade" presses and academia have increasingly parted ways, publishers now actively discourage this kind of conversational footnoting. Happily, we now have social media and other digital formats where we can continue our squabbles and conversations.
My original notes were filled with discussions which added to the main text, but Basic Books’ formatting rules require that all notes be herded to the end of each paragraph and prohibits any discussion in notes. I removed my commentaries and some non-essential subtlety was lost. One of the most famous footnotes in history is by Edward Gibbon, where, as an aside, he calls the great Greek theologian Origen’s literalist reading of the Bible “unfortunate.”[7] This is commentary to his main text. To understand the many uses of footnotes and the dangers of literal readings, it might be helpful to consult it to understand its full meaning. In the case of my reference to Anthony Grafton, I provided a short commentary about how when reading Smith, one must take into account that while many leading writers of the Enlightenment, Gibbon foremost among them, used footnotes, Adam Smith did not. This seemingly tangential story is significant here. In foregoing footnotes, I believe Smith was being canny, trying to avoid unproductive sniping, and being misrepresented by critics and readers, which is understandable. Smith hedged on many troublesome topics of his day, whether it be religion, slavery, legislators and the Scottish landed elite, or the Highland Clearances. Whatever Smiths intentions, his style, ambiguities and contradictions make his work all the harder to pin down. Authors do not always write clearly, nor do they make perfect sense. This means that readers will often have to look to Smith’s biography, or to historical context to understand his work, its meaning, many contradictions, and remaining mysteries.[8]
[1] Adam Smith, Lectures on Jurisprudence (Liberty Fund, 1978), 14.
[2] Hiram Caton, “The Preindustrial Economics of Adam Smith,” Journal of Economic History 45, 4 (1985), 833-853 at 833.
[3] Alexander Hamilton, Report on Manufactures (Boston: Home Market Club, 1892), p. 8.
[4] Ibid., 17.
[5] Donald Winch, Adam Smith’s Politics: An Essay in Historiographic Revision (Cambridge: Cambridge University Press, 1978), p. 159.
[6] Donald Winch, Adam Smith’s Politics: An Essay in Historiographic Revision (Cambridge: Cambridge University Press, 1978), p. 101.
[7] Edward Gibbon, History of the Decline and Fall of the Roman Empire, 6 vols. (London: Strahan, 1776-1789), vol. 1, chap. 15, n. 96.
[8] Donald Winch, Adam Smith’s Politics: An Essay in Historiographic Revision (Cambridge: Cambridge University Press, 1978), p. 101.
[2] Hiram Caton, “The Preindustrial Economics of Adam Smith,” Journal of Economic History 45, 4 (1985), 833-853 at 833.
[3] Alexander Hamilton, Report on Manufactures (Boston: Home Market Club, 1892), p. 8.
[4] Ibid., 17.
[5] Donald Winch, Adam Smith’s Politics: An Essay in Historiographic Revision (Cambridge: Cambridge University Press, 1978), p. 159.
[6] Donald Winch, Adam Smith’s Politics: An Essay in Historiographic Revision (Cambridge: Cambridge University Press, 1978), p. 101.
[7] Edward Gibbon, History of the Decline and Fall of the Roman Empire, 6 vols. (London: Strahan, 1776-1789), vol. 1, chap. 15, n. 96.
[8] Donald Winch, Adam Smith’s Politics: An Essay in Historiographic Revision (Cambridge: Cambridge University Press, 1978), p. 101.