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Saturday, December 31, 2011

Rethinking Liberal Theory 5: Adam Smith, moral philosopher of the marketplace

by John MacBeath Watkins

In 1776, two important documents in the evolution of liberalism were published: The Declaration of Independence and The Wealth of Nations.

The Declaration of Independence is a political document, based on a legal system of values. It is almost entirely about who is to blame (hint: his first name was George, and he lived in a very large dwelling in England.) A great deal of it has to do with the king's efforts to keep the colonies from governing themselves. The quartering of soldiers, outlawed in our constitution, was one of the things they objected to, because they were being required to give a place to live to the very troops that were burning their towns (for example, Falmouth, Maine, located on the site of modern-day Portland, burned on Oct. 18, 1775.)

The Declaration objects to the King preventing the colonies from naturalizing new citizens, or encouraging their migration, because apparently the colonists did not regard themselves as entirely English or want only English subjects to immigrate. In short, they were saying that they were not exactly part of the English tribe, and should be allowed to absorb people of other ethnicities. That's a fundamental difference in their view of who they were, and not one the king was likely to welcome.

Adam Smith, on the other hand, was not so concerned with law, which may at first glance seem strange, because he was by profession a moral philosopher. He was at one time the Head of Moral Philosophy at Glasgow University, and his major work there was The Theory of Moral Sentiments. In short, he was a man interested in values. Through the good offices of David Hume, a fellow philosopher of the Scottish Enlightenment, he got a very well-paid position as tutor to Henry Scott, the Duke of Buccleuch, which makes me very happy to be writing this rather than trying to pronounce Buccleuch. This enabled him to travel the continent and meet such great minds as Voltaire, Benjamin Franklin,  and François Quesnay, a prominent physiocrat.

It always struck me as odd that the first widely recognized school of economics should be the physiocrats, who considered only the agricultural sector productive of wealth. This is a view they share with Confucious, strangely enough. The economic philosophy they rebelled against, mercantilism, bears in many ways more resemblance to modern economics. The physiocrats divided the world into the proprietary class, the landowners, the productive class, those who worked the land, and the sterile class, the merchants and artisans. They were influenced by Vincent de Gournay, French intendent of Commerce in the 1750s, who's motto was Laissez faire et laissez passer, le monde va de lui même! (let do and let pass, the world goes on by itself.) In Thomas Jefferson's mistrust of cities and idealization of the independent yeoman we see the influence of the physiocrats, in the Federalist advocacy for the role of the government in developing the nation we see the influence of the mercantilists.

Mercantilism focused on the balance of trade, on the wealth of kings, and the accumulation of gold. The current economic policies of China might be said to have evolved from the physiocrat phase, in which intellectuals were sent to work with the peasants because this would teach them what was truly of value, to the mercantilist phase, in which the goal is to get more wealth from the world than you give up.

But in any case, it set Smith's mind to work on the issue of how values work to produce wealth. Unlike the physiocrats, he did think merchants and craftsmen could produce wealth. Like the physiocrats, he thought people acted in their own self-interest, producing the public good as a side effect:

"It is 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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."

But he also foresaw the concept of market manipulation:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”


And why is this bad? Because it is an attempt to pervert the system for expressing value judgments that we've been discussing since Part 1 of this series, the value system Hobbes adapted from commerce to give secular legitimacy to sovereigns and stop the religious wars that were tearing England and Europe apart. Coercion and deception are morally objectionable because they are efforts to corrupt the system of values on which commerce is based, therefore parasitic and a threat to the system's proper functioning.

Once again, that Hobbes quotation I keep going back to:

The Value, or WORTH of a man, is as of all other things, his Price; that is to say, so much as would be given for the use of his Power: and therefore is not absolute; but a thing dependant on the need and judgement of another.

The worth of things is expressed in the marketplace with prices, and an effort to rig prices is an effort to pervert social values; a sort of lie. Smith laid out the moral justification, in other words, for anti-trust law, because one of the the intersections of the legal and market systems of value was at the points where markets were not allowed to function. Smith was not a fan of the laissez-faire advocated by Gournay, because he thought the participants in any trade would prefer to pervert the system of social values rather than have to deliver value for money. Thus, regulation of some sort was needed, but even that could be perverted.

Today, pundits like Matthew Yglesias argue that a great deal of our legal structure is designed to protect economic incumbents from competition, and Smith would have agreed, as he wrote:

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 be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.

So if people, for example, who do cosmetic things to fingernails and toenails say that their profession should require licensing, and the license should require X years of working in the field, we should ask if bad cuticle treatments are a major medical problem, or if this is intended to raise the incomes of people who do nails. What's important about this is that it shows Smith understood that a market is a made thing, a social artifact that can be perverted by social means such as lies and coercion. Without the legal system of values to place blame for such behavior and punish wrongdoers, could markets survive?

And if the markets are subjected to arbitrary political intervention, what begins as a political problem, described again in the Declaration of Independence...

He has obstructed the Administration of Justice, by refusing his Assent to Laws for establishing Judiciary powers.
He has made Judges dependent on his Will alone, for the tenure of their offices, and the amount and payment of their salaries.

... becomes an economic problem, to the point where stout merchants dress up in disguise and throw tea into Boston Harbor. If the courts are not just, but corrupted by the power and purse of the sovereign, can property be secure? If the sovereign's navy bombards your town with incendiary shot, then sends in the marines to finish burning the town, what does the deed to a property mean? The values of the marketplace can create wealth, but only when there is a functioning legal system. This is an additional problem to the notion that society is formed to protect property: Until such protection exists, even the concept of property is incoherent, and only the passion to possess exists.

In fact, to bring the discussion to the present day, I think one of the problems with modern Russia is that the advisers they brought in to help them form a market economy had lived so long in a society with functioning laws and courts, they did not realize how important these things are to the functioning of capitalism. As a result, Laissez faire et laissez passer was the motto of the new Russian state (until the oligopolists became entrenched and the state went back to being repressive.) Add to that the fact that they had spent generations convincing themselves that capitalists were gangsters, and their interpretation of capitalism soon became a society in which economic activity resembled a criminal enterprise, the courts were corrupted by those in power to reward their friends, and the wealth of the nation was lost as all the evils that old moral philolosopher Adam Smith warned of were realized.

Capitalism at its very beginnings faced a dilemma, that it needed regulation to function properly, but the regulation itself could produce mischief that would either unfairly benefit or unfairly penalize commerce. And that's important, because the system of values Smith described was a system for rewarding or penalizing behavior to produce actions that would benefit society as a whole rather than just the individual. A lack of regulation, excessive regulation, or regulation designed to unfairly benefit certain people was a corruption of the way we negotiate the meanings of our actions. Again, this goes back to Ferdinand de Saussure and his theory that language gives us the structure and categories of meanings that allow us to think in that abstract world that is so distinctively human. Manipulations of meaning make our structure of thought less coherent, and could even cause it to break down.

We speak of commercial speech in terms of advertising, but commerce itself is a kind of speech designed to answer the question, how much does that item mean to you? And if the question cannot be answered honestly because of lies or manipulation, our actions cannot accurately reflect this meaning.

Links for this series:

Rethinking liberal theory 1: Thomas Hobbes, blasphemer and patriot
Rethinking liberal theory 2: The outlaw John Locke, terrorist, liberal, and advocate of freedom
Rethinking liberal theory 3: A compact to protect property, or a conspiracy to create meaning?
Rethinking Liberal Theory 4: John Milton and the many shapes of truth
Rethinking Liberal Theory 5: Adam Smith, moral philosopher of the marketplace
Rethinking Liberal Theory 6: Mythmaking and manufacturing
Rethinking liberal theory 7: Hegel, the end of history, and the triumph of the liberal idea
Rethinking liberal theory 8: Liberalism and individualism: The invention of the Util and the way west
Rethinking liberal theory 9 Property and freedom: Why language is the basis for the social contract 
Rethinking Liberal theory 10: Physiocrats & mercantilists: The economic philosophies of the founding fathers
Rethinking Liberal Theory 11:Stateless income, global capital, and the death of empires
Rethinking Liberal Theory 12:Capitalism:So much more than market
Rethinking liberalism 13: What is money? 
Rethinking Liberalism 14: Tribalism and the emerging new world order
Rethinking liberalism 15: The poverty of neoconservative philosophy
Rethinking Liberalism 16: More on the poverty of neoconservative philosophy

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