Adam Smith versus the Adam Smith Institute (2023)

From the June 2023 issue of the Socialist Standard

If Adam Smith has a bad reputation amongst socialists it is not his fault. Marx himself had a high regard for Smith and discussed his views in great detail. It’s the fault of people like those who set up the Adam Smith Institute in 1977 to campaign for governments to give capitalist corporations a free hand to pursue profits as they think fit.

Writing in the middle of the 18th century — he was born in 300 years ago in 1723, published The Wealth of Nations in 1776, and died in 1790 — Smith was a witness to the beginnings of industrial capitalism in Britain. His book was written as a criticism of the policy (known as ‘mercantilism’), pursued by governments in his day, of trying to encourage exports by subsidies and restrict imports by tariffs with a view to building up the amount of gold in the home country. He wanted such government intervention to be ended and advocated instead laissez-faire, with governments letting the market function freely, as the best way to increase a country’s wealth.

Smith believed that he was discovering the natural laws of ‘political economy’ and adopted an objective, scientific approach to the subject. This was what Marx admired in him. He realised that Smith was genuinely trying to understand how capitalism worked, unlike the ‘vulgar economists’ of his own day who were merely ideological apologists for capitalism. His criticism was that Smith thought he was discovering natural laws whereas he was studying those only of one particular, transitory economic system. This was in fact Marx ‘s criticism of the whole school of economic thought that Smith’s book gave rise to, his ‘critique of political economy’ (the sub-title of Capital).

The Wealth of Nations famously begins with Smith’s analysis of the division of labour and how this allows more wealth to be produced, using a pin-making factory as an example (incidentally, a sign of the low level of industrial development in his day). He goes on to examine the concept of ‘value’, distinguishing between ‘value-in-use’ and ‘value-in-exchange’. It is the latter that interests him as a student of economic phenomena. His conclusion as to what measures the exchange-value, or price, of a commodity will come as a shock to some of his modern-day admirers:

‘The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities’ (Book I, chapter V).

This was too much for the Adam Smith Institute and has led Eamonn Butler, the Institute’s Director, in his The Condensed Wealth of Nations on their website, to virtually repudiate it:

‘For many commentators, this looks uncomfortably like a crude labour theory of value, which focuses on production costs and overlooks demand. Some argue that it led Karl Marx into his appalling errors about labour. One could defend Smith as just trying to simplify things by talking about an age before land or capital ownership, where labour was the sole production cost, and temporarily ignoring other factors such as land and capital, and also ignoring demand, all of which he goes into later. At best his words are misleading, at worst they are mistaken: but then he was breaking new ground’ (www.adamsmith.org/the-wealth-of-nations).

The ‘defence’ that Smith was writing of a time before there was ‘land and capital ownership’ does not stand up, as Smith explicitly stated that he was writing of a situation when ‘stock has accumulated in the hands of particular persons’. That the Adam Smith Institute should find Smith’s ideas here ‘uncomfortable’ is easy to understand.

Smith can certainly be called an advocate of capitalism, though not of the corporate capitalism we know today and for which the Adam Smith Institute stands. In Smith’s day, if you were a capitalist employer you risked everything should your business fail, as today’s generalised limited liability did not exist. You were personally responsible for all your business debts, so that if your business failed disastrously you could end up in a debtor’s prison. Capitalists take no such risk today; with limited liability, they are only liable for the amount they have invested.

Such companies did exist in Smith’s day but they had to be set up by Royal Charter or Act of Parliament, such as the East India Company. The irony is — at least for those who try to project Smith as a defender of capitalist corporations — that he didn’t like these, for the same reason that the Adam Smith Institute and other free-marketeers don’t like government-run industries: that the people in charge were managing other people’s money and not their own and so wouldn’t be so concerned about avoiding waste and inefficiency; the famous invisible hand would not necessarily move them to act in the general interest.

The only activities in which Smith accepted that ‘a joint stock company’ was justified were banking, insurance, canals and water supply. This is another sign of how undeveloped capitalism was in his day, as the limited liability company is now the predominant form of business enterprise and essential to modern capitalism. The amount of capital required to run a capitalist enterprise is now too large to be raised by a single person (just as canals were in Smith’s day). Which shows that the era of individual capitalist ownership (where most ideological defenders of capitalism seem to be stuck) is a thing of the past, making the individual capitalist owner economically and socially redundant.

It shows that while in Smith’s day individual, private enterprise was viable this has long since ceased to be the case. Today production is too big for that; it is already socialised from a technological point of view in the sense of involving a vast network of producers to produce something. The problem is that control of production is not. This contradiction between socialised production and non-social ownership and control is the cause of today’s economic and social problems. The corporate ownership that has evolved to replace individual ownership is not the answer; in many ways it makes things worse. Nor is state ownership the answer. Both are still forms of sectional ownership. The contradiction can only be resolved by socialism where the means for producing wealth becomes the common property of society as a whole, under democratic control.

Adam Buick

Cooking the Books: Capitalism is working (2009)

The Cooking the Books column from the April 2009 issue of the Socialist Standard

The Times (9 March) carried an article by Eamonn Butler, the director of the Adam Smith Institute. Yes, they are still around, even if it might be thought that they would be keeping a low profile these days, given that the pursuit of profit has yet again led to overproduction and a financial and economic crisis, a really big one this time.

Butler began by quoting a speech by an American professor called Boettke at a recent gathering of Mad Marketeers in New York:

“If you bound the arms and legs of gold-medal swimmer Michael Phelps, weighed him down with chains, threw him in a pool and he sank, you wouldn't call it a ‘failure of swimming'. So, when markets have been weighted down by inept and excessive regulation, why call this a ‘failure of capitalism'?”

That depends on what you mean by capitalism. Boettke seems to mean the spontaneous operation of production for profit and the market. But that’s not really capitalism; it’s just a policy that some capitalists (and their paid and unpaid publicists) have favoured at some times.

Capitalism is a system of production for sale on a market with a view to profit. Ideologists such as Butler and Boettke are assuming that there is some irreconcilable conflict between the profit system and government intervention. But there isn’t. Capitalism has never existed without government intervention and never will. For a start, it is based on the exclusion of the majority from the ownership and control of the means of production, which are monopolised by a profit-seeking minority. A state is needed to maintain this exclusion. This has to be paid for, so taxes have to be levied. Capitalists in one country are in competition with capitalists from other countries, and governments have always intervened to help “their” capitalists with tariffs and subsidies and, if need be, by military action.

So, capitalism and the state are not incompatibles. They go together. What is true is that the consensus of capitalist opinion varies at times as to the desirable degree of government intervention. What seems to be annoying the Adam Smith Institute today is that their ideological rivals, the Keynesians, who have no qualms about government intervention in the capitalist economy, are making a come-back because of the present crisis.

“Up to now”, Butler wrote, “the Keynesians have made the running. Greed, they say, has brought down the world economy. Only massive public spending can revive it”. If by “greed” Butler means the pursuit of profits, the Keynesians are not against that, even if they certainly are in favour of trying to spend the way of the crisis. But that’s just an alternative policy for the profit system to the one favoured by the Adam Smith Institute. It’s not a negation of capitalism.

Butler proffers his own explanation for the crisis: “excessive regulation” (of course). This assumes that, without this, the crisis would not have occurred. He rather undermines this approach by concluding his article by saying that “occasional crises are the cost of the prosperity that entrepreneurial capitalism brings”.

So, crises are going to occur anyway, even in his ideal, unregulated capitalist world! And what, without excessive regulation to blame, would they be caused by if not by the pursuit of profits leading to overproduction in some sector in relation to the market, from which the only way out is a crisis to eliminate the lame ducks and the deadwood, as capitalists like to refer to their inefficient colleagues? In this sense, Boettke is right. This and other crises don’t represent the “failure of capitalism”, but capitalism working normally.