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.