What can Adam Smith teach us about the moral economy of sanctioning oligarchs?

Part 1: The Economic and Moral Economy of Sanctions

The West is responding to Russia’s invasion of Ukraine under Vladmir Putin with a series of economic sanctions. Many economists have spoken to the economic effectiveness of such sanctions such as taking the Russian banks off the SWIFT trading system and limiting the central bank of Russia’s ability to access its foreign reserves, but what are the normative effects of such sanctions? The original economist, Adam Smith, had much to say about free trade. For Smith, trade is an important way to gain prosperity. He was against many interferences with the free market that would impede the wealth of nations such as tariffs, colonialism, and interferences in the labor market like the Settlement Act of the English poor laws. But for him, these kinds of barriers also limited interaction among strangers which had negative effects on the moral economy. Nicholas Mulder argues that sanctions, the economic weapon of modern warfare due to trade agreements, are likely to be ineffective because they encourage excessive nationalism. In Smith’s time, of course, the world was not interconnected by the trade agreements that exist today such as NATO; however, the world was still connected through trade. Blockades or tariffs were the much more common tools of privileging national goals. He frequently discusses tariffs, but mentions only once the potential negative effects of blockades noting how they artificially raise the price of goods: 

 

 

As I have written previously, Smith makes some exceptions for national defense in limiting trade, especially through tariffs. However, I’m interested less in the effects of trade disruptions on economic exchange, than its effects on moral exchange. Smith posited that there is a moral economy in trade, not just an economic one. We learn what kinds of behaviors are acceptable as we engage in both conversational and material exchange with others. World leaders have noted, for example, that the effects of sanctions will not just be limited to Russia and the Russian people. Because trade is a two-way transaction, countries in the West will also suffer the material effects of limiting trade—gasoline is a prominent example. One of the most interesting potential moral effects of the West’s economic sanctions on Russia could come from the sanctions on the Russian elite.

 

I have written about one moral role the superrich can have in society through the lens of Alexis de Tocqueville’s political theory. Smith is also a good resource on the moral role of the wealthiest in society. He examines the problem of what we today call crony capitalism, or a system where the wealthiest gain more profit because of their influence over the political process. In his Wealth of Nations, Smith acknowledges that the rich, the owners of capital or factory owners, would collude to try to keep wages low, including working with legislators. Smith writes, 

 

 

The workmen do not have easy access to lawmakers and struggle to combine because they cannot hold out for their demands against the capitalists because they need their wages to subsist and risk severe punishment from their employers (WN I.viii.14, 85). Contemporary economist, Randall Holcombe, has described a version of crony capitalism in the United States as political capitalism, defining it as, “an economic and political system in which the economic and political elite cooperate for their mutual benefit.”

 

The sanctioning of oligarchs is a reverse acknowledgement of the problem of crony capitalism. The theory being expounded by President Biden, for example, is that if the West can cut off access to the market to the oligarchs in Russia, they can use their disproportionate influence on Putin’s government to help stop the war in Ukraine. But another theory about why these sanctions might not work argues that the superrich have access to resources that the average person does not and therefore can use this wealth to evade the sanctions and continue using their wealth as they see fit. Smith was aware of the problems of crony capitalism, and he also was aware of the moral influence of the richest in society. 

 

In Part 2, I will discuss the insights Adam Smith provides about crony capitalism, the superrich, and the potential efficacy of sanctions.


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