Comments on Adam Smith’s Opinion on Policies Supported by “Merchants and Manufacturers”

Adam Smith (1723-1790) oft cited writer on Free Markets, in the Wealth of Nations (the quotes come from the conclusion of the last chapter of Book I) breaks society into three primary “orders” and discusses their relationship with the prosperity of a society. “…the whole price of the annual produce, naturally divides itself, it has already been observed, into three parts; the rent of land, the wages of labor, and the profit of stock; and constitutes a revenue to three different orders of people;…” To put it more into the context of our time, I would add to the renters of land those that earn their keep through interest and dividends. Investors and traders easily fall into the definition of those earning their keep from profits.

The point Smith makes is that the well being of the first order, those living from rent, rises and falls with the prosperity of the society as a whole. “The interest of the first of those three great orders, it appears from what has just been said, is strictly and inseparably connected with the general interest of the society.” Therefore policies they sponsor to benefit themselves invariably also benefit society.

“The interest of the second order, that of those who live by wages, is as strictly connected with the interest of the society as that of the first.” The wages rise as a society advances and fall as it stagnates, with catastrophic results when it declines. “The order of proprietors may, perhaps, gain more by prosperity of the society, than that of labourers: but there is no order that suffers so cruelly from its decline.” Smith states that because of their condition and education they tend to either not have access to information or the ability to analyze it and “In deliberation, therefore, his voice is little heard and less regarded, except upon some particular occasion, when his clamor is animated, set on, and supported by his employers, not for his, but for their own particular purpose.” Today the “order” may be better educated and informed but still have relatively little clout with only unions arguing for policies that improve their lot.

Smith devotes a larger portion of this discussion to the ‘order” that lives on profits. Whereas the well being of the first two “orders” is directly tied into the success of a society, that is not the case with the third. “But the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension, of the society.” (We saw this during this last recession where the income of the wealthy rose by 20%, while a large segment of wage earners lost jobs) “Merchants and master manufacturers are, in this order, therefore, the two classes of people who commonly employ the largest capital, and who by their wealth draw to themselves the greatest share of the public consideration.” “The interest of the dealers, however, in any particular branch of trade or manufacturers, is always in some respect different from, and even opposite to, that of the public.” “As their thoughts, however, are commonly exercised about the interest of their own particular branch of business, than about that of society, their judgment, even when given with great candor (which it has not been upon every occasion), is much more to be depended on with regards to the former of the two objects, than with regard to the latter,” (This was part of my argument discussed in another post, for why businessmen should not be politicians.)

He concludes Book I saying: “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.

This is not a condemnation of free markets but simply a reiteration that the benefit derived by society from market activities is coincidental. The role of a good government is to ensure that all three “orders” are considered, and not yield to the most powerful voice but to hear them all and be suspicious of the voice of the “order” driven by profit. Having heard all the voices set policy and regulate markets to insure that their activities lead to the prosperity of the entire society.

Undoing 80 years of Liberal Policies

Yesterday I heard a comment made by Newt Gingrich that precipitated an “aha moment”. He said something to the effect that this upcoming election was an opportunity for America to undo all the Left’s social policies of the last 80 years. Newt openly and loudly said something that has been talked about in conservative circles for decades. So if indeed that is the Republican, or at least their extreme end’s strategy, then in that context, many of the tactics employed today make sense.

· Holding steadfast to the notion of “no tax increases” forces the government to cut spending and not allowing those cuts to occur in areas like defense and business subsidies, forces cuts of social services.
· The zeal for balancing the budget I believe, is also in reality a move to reduce spending on social services. This is demonstrated by the fact that the Republicans are allowing no revenue increases and are willing to chance a deep recession here and global economic turmoil
· The movement to make impotent or eliminate public service unions, the last bastions of organizations representing labor. (I wonder to what extent the labor disputes initiated by owners of the NFL and NBA teams are influenced by this broad agenda?)
· Eliminating public education by privatizing it under the guise of education reform. I believe that the movement, Students First, initiated by Michelle Rhee, may be more about ideology than education.
· The recent proposal to privatizing Medicare
· Past attempts to privatize Social Security
· Constant attempts to prevent the formation of, undermine or eliminate regulatory agencies focused on protecting the consumer or labor.

The Republican’s intransigence, in this context makes total sense. The cry for job creation is only a ruse to placate the public. Their real aim is to rid the country of as much “socialist” programs now, just in case they cannot win the next election or better yet to destroy Obama’s chances for reelection by whatever means and short term consequences be damned.

The Right tends to be more xenophobic and often speaks of our exceptionalism. Over the last eighty years we have become the strongest economy with the strongest military, have sent a man to the moon, bankrupted the Soviet Union, and developed a standard of living that continues to attract many to our shores. Though not perfect, our government must have done something right over those 80 years. I wonder what we would look like were it not for the “social” programs Newt rails against?

Punishing Job Creators

Among my least favorite things are the term “job creators” used by conservatives when talking about the wealthy and the notion that taxes are a punishment. From the right you often hear increasing taxes on the rich is punishing the job creators. Though I personally feel the job creators are buyers of stuff and therefore anyone with money in their pockets prepared to spend it (even unemployment insurance recipients) create or maintain jobs.

Setting all that aside, to not “punish the job creators” I propose the following compromise. Not all wealthy people create jobs. Actors, athletes, traders, writers, hedge fund managers etc. probably do not except perhaps in a very obtuse way if one wants to really argue the point. My suggestion is that we raise taxes on anyone earning over some amount. If they can demonstrate that within the tax period they have indeed created jobs, their taxes will be refunded to the extent of the salaries for the newly employed. (Loopholes such as hiring a family member as administrative assistants need to be studied and eliminated.) This will separate the “job creators” from just ordinary wealthy people and allow us to raise some revenues without “punishing” them if indeed that is what we do. Taxes, in this case may, not only not inhibit job growth, but actually accelerate it.