Monday, December 12, 2005

Adam Smith's Soft Side
By Sherrod Brown Globalist Bookshelf, Wednesday, December 14, 2005

In the global trade debate, Adam Smith is usually heralded as perhaps history’s greatest proponent of capitalism. Against that backdrop, U.S. Congressman Sherrod Brown, author of "Myths of Free Trade," has a surprising finding. He argues that, contrary to the teachings of Smith's 20th- and 21st-century apostles, the Scottish philosopher more often than not sided with workers.

As Adam Smith wrote in his 18th century book, "The Wealth of Nations," "When the regulation is in support of the workman, it is always just and equitable — but it is sometimes otherwise when in favour of the masters."

The distinguished American economist John Kenneth Galbraith said about "The Wealth of Nations:" “It is much celebrated by the ministry of the righteous right, few of whom have read it.

“Were they to do so — disapproval of the corporate form, approval of a wealth tax — they would be greatly shocked.”

The elite vs. the public
Throughout his life, Smith recognized and understood the goals of the elite.
The elite’s interest, he wrote, “is never exactly the same with that of the public, who [the elite] 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 advantages of high wages
He advocated high wages as beneficial to employer and employee alike, and he advocated the abolition of slavery because “the work done by free men comes cheaper in the end than that performed by slaves.”

He took this view not so much because of a fear of revolt, but because generally satisfied well-paid workers would create wealth in a society and increase purchasing power for the domestic economy. “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”

Likewise, Adam Smith’s support of free trade seemed contingent on several things. He supported the Acts of Trade and Navigation, requiring British goods to be sent on British ships manned by British sailors.

The merits of tariffs
He believed that tariffs serve a useful purpose. He expressed caution when a nation contemplates lowering tariffs, for an immediate and precipitous reduction could throw large numbers of people out of work.

And he expressed little caution about temporary retaliatory tariffs when one nation had erected major barriers against another to harm that nation. “The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods,” he wrote.

Selective memory
Economic historians and less-learned editorial writers seem to have forgotten that Smith — in foreign trade as in the domestic economy — believed that his invisible hand could do great harm to a nation and its citizens “unless government takes great pains to prevent it.”

Two hundred years later, Adam Smith’s invisible hand would guide an economy driven by consumer behavior — occasionally regulated by government — and measured by its consumption and ever-growing standard of living.
Low prices mattered. Comparative advantage — British economist David Ricardo’s theory by which the lowest-cost producer should produce and sell — mattered. The buyer always stood paramount.

Traveling capital
And society’s success was a product of the degree and quantity of purchase. But neither Smith nor Ricardo foresaw the mobility of capital. They expected capital to remain in the home country, while goods would be produced according to the law of comparative advantage.

The power of production
German economist Friedrich List, on the other hand, saw a different world, a world where a society’s success is defined more by what it could produce than by what it consumed. What is good for consumers today is not necessarily what is good for the country long term.

“The forces of production are the tree on which wealth grows. The tree which bears the fruit is of itself of greater value than the fruit itself,” List wrote in his seminal 1841 work "The National System of Political Economy." A nation is not measured by its wealth and its purchasing power, but “in the proportion in which it has more developed its powers of production.”

National interest, List said, should take precedence over cheap consumer goods purchased from a foreign power. Why, he asked, were European powers able to rule and colonize Asia, Africa and Latin America?

Darwinism revisited?
The less-developed countries were not able to make the tools and weapons and machines that they needed. In List’s view, it was not a question of right or wrong, it was simply a question of weak or strong, and he wanted his nation strong.
Other great economic thinkers throughout history have also strongly opposed unrestricted free trade.

A happy medium
As John Maynard Keynes wrote, “Ideas, knowledge, art, hospitality, travel — these are the things which should of their nature be international.
But let goods be homespun whenever it is reasonably and conveniently possible, and above all, let finance be primarily national.”

Free trade should never override local customs, laws, environmental protection and local rights. National interest also mattered a great deal to Adam Smith.
Regulation of the invisible hand and direction from the government — especially in the areas of commercial navigation, national security and military preparedness — were of paramount importance.

Domestic investment
Smith argued that investment at home produces “more revenue and employment” than investment in foreign trade. “By preferring the support of domestic to that of foreign investment, [the capitalist] intends only his own security — and by directing that industry in such a manner as its produce what may be of the greatest value, he intends only his own gain, and he is in this, as in many other issues, led by an invisible hand to promote an end which was no part of his intention.”

Monopolistic mercantilism
Four score and some years later, Abraham Lincoln echoed Smith’s assertion: “Abandonment of the protective policy by the American Government must result in the increase of both useless labor, and idleness — and so, in proportion must produce want and ruin among our people.”

Smith was most opposed to mercantilism. He saw merchants set up large corporate monopolies like the East India Company. He seemed to be a free trader sometimes and an anti-free trader other times. But he was never a mercantilist. “The government of an exclusive company is perhaps the worst of all governments for any country whatever.”

Smith’s true outlook
In the last 12 years of his life, Smith, as if to convince history of his true sentiments, worked as a commissioner of customs in Edinburgh, a job which charged him with “obstructing imports into Scotland” and enforcing Great Britain’s protectionist trade policy, mostly aimed at the fledgling, new country across the Atlantic.

“To expect that freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or a Utopia should ever be established in it,” he told succeeding generations.

Adapted from the book "Myths of Free Trade: Why American Trade Policy Has Failed" by Sherrod Brown, copyright © 2004. Reprinted by arrangement with The New Press.


jemy said...

good entry. the comments on trade liberalization i agree with and it's illuminating to see that even the very people credited with trade lib (smith, ricardo) were never naive as to think that "free trade" is the solution to all national ills.

i agree (and have always advocated) that a "happy medium" between free trade and protectionism, between national interest and multilateralism, can and should exist. it is the job of everyone now to put their heads together and help come out with that happy medium for the Philippines.

Bert M. Drona said...

Adam Smith was an economist AND philosopher. Prior to his famous "Wealth of Nations" he has published "Theory of Moral Sentiments" demonstrating his awareness of human conducts as it impacts society.

Despite trends to negate the existence of "human nature", reality tells us that it exists. And that life, personal and societal, is on the whole a balancing act, a process of "dynamic equilibrium", a dialectic process, or a pursuit of a "happy medium" as you call it.

As to our homeland, we can not afford, as we are doing now, to join (compete in) an ABSOLUTE "free trade" system at this point of economic development.

We are at the point where certain protectionism has to be implemented, which other developing and developed countries has and STILL do; a fact that that can found if one will do a serious study of what's going on in the economic world.

As to putting our heads together, it is easier said than done. Economic policies are made by government officials, technocrats and politicians; and the most citizens can do is influence them (by educating themselves and acting to influence these same people). Bottomline, I do not believe and think that this can happen.

jemy said...

i agree with regard to your comments on trade.

as to whether people can work together, perhaps you're right. still, i'm a believer in what ts eliot once said: for us there's only the trying, the rest is not our business.

Bert M. Drona said...


Thanks for your response.

Though I do not believe any significant, if not radical, change for the common good, i.e. impoverished majority, can happen in our homeland short of a bloody revolution (again not a guarantee for the better but an opportunity for changes, discussed in my previous blogs);I agree too that we have to keep on trying. And one small way is to write/discuss about these issues, however boring to many.

As you correctly said, let's keep on trying.