The world-class French economic historian Fernande Braudel once posed an interesting question in one of his books. “Which country,” he asked, “just prior to the Industrial Revolution, would experts have predicted to be the first to become industrialized?” His answer was even more interesting. It was neither a place in Western Europe nor was it the United States. No, India then had the most advanced manufacturing system and seemed on a springboard to catapult into a full-fledged Capitalist society?
So why didn’t India fulfill this expectation?
Braudel’s reply was that India’s employers kept wages so low for its workers that there was no impetus to seek labor-saving machines and techniques to cut down costs. Thus in Western Europe and the U.S. where labor scarcity had led to higher wages, innovations appeared that helped to usher in the beginnings of Capitalism, as we know it.
Already, in 1776, when the American Revolution was already in progress, a work of economic philosophy was published that has been deemed the “Bible of Capitalism.” It was written by a Scottish professor named Adam Smith and the shorthand version of the long title of his masterwork was The Wealth of Nations.
In opposition to the then current theory of economic governance known as Mercantilism, which rated countries on how well they hoarded gold and silver and entailed a lot of governmental restrictions, Smith imposed a concept of Laissez-faire. The full French quote was “Laissez-faire et laissez-passer, la monde va de lui meme,” or “Let do and let pass, the world goes on by itself.” He also postulated “an Invisible Hand,” sort of like the Islamic passive concept of kismet – “let God take care of it, don’t do anything and the market can do no wrong.”
Or at least that part of Smith’s philosophy was seized upon by the businessmen and entrepreneurs of the day and given such a meaning. They deliberately ignored his opposition to monopolies and belief that some restrictions on Capitalism were necessary.
The Capitalism that emerged during Adam Smith’s years has been referred to as “pre-industrial Capitalism”. In the U.S., it began with factories – particularly those producing cotton textiles. A spinning mill started operating in Pawtucket, R.I. as early as 1791. New England became a center for this type of production. By the second decade of the 1800’s, other similar mills had opened on a much larger scale in Waltham, MA, then Lowell and Lawrence, MA, then Manchester, NH and into Maine. These companies were capitalized at $1 million and for the most part had young women workers off the farms who were paternally housed in well-kept and chaperoned dormitories and “encouraged to participate in amateur literary exercises.” Some persons called it “welfare Capitalism.”
Whatever its name, this early, formative reorganizing of economies away from the Mercantilist model has in three centuries expanded into the world’s reigning mode of business operation. It has come forth with rules and philosophies that essentially say: “There should be no rules and restrictions on us and let us do our own thing.” And they add: “We can do so because Adam Smith said we could.”
But a careful reading of the Wealth of Nations and other works by the Scottish professor reveals that he never said anything of the sort.
Smith emphasized that “a true laissez-faire economy would quickly become a conspiracy of business and industry against consumers, with the former scheming to influence politics and regulation,” and could degenerate into price fixing monopolies. It would not have surprised the old gentleman that the number one board game invented after his death to teach youngsters about business is called Monopoly and has been selling the concept of grabbing all you can for almost a century.
Adam Smith is also famous for his striking phrase “the Invisible Hand.” This simile has been taken by free-market enthusiasts to mean that some god-like force is at work in sustaining an economy and so don’t worry about a thing. In reality, what Adam Smith intended to point out was that individuals, in following their own self-interest, also created opportunities for others without intending to do so. The way Smith put it was: “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.”
Yet emphasizing his mistrust that the economic powers would use their muscle in the marketplace ever more acutely to aggrandize themselves, he proclaimed that any new law or regulation proposed by businesses should be scrupulously examined before being adopted. In his own day, he had the example of the monopolistic East India Company, whose clumsy efforts to control commerce in the 13 North American colonies had led to hated bad laws and ultimately a triumphant American Revolution.
In support of these suspicions, he openly worried that the infant industries he championed were supplied subsidies in order to help them grow yet when fully mature and successful would still demand the governmental money , although no longer needing it except to fatten the take-home pay of leaders of the companies.
Adam Smith said many things that would be anathema to the present-day Wall Street Journal editors or the talking heads at Fox News.
He consistently called for high wages for the poor – how purchasing power was essential for a healthy economy.
He was against flat taxes, arguing: “The rich should contribute to the public expense, not only in proportion to their revenue, but something more in that proportion.” Taxation to him was “a badge, not of slavery, but of liberty.” He spoke of “the gluttony of the rich” as “unproductive labor.”
Claims have been made that Adam Smith would have strongly supported a minimum wage.”
Most unusually, Herbert Stein, an economic advisor to President Richard Nixon, senior fellow at the American Enterprise Institute and veteran Wall Street Journal contributor, has said he had deduced from what he read in The Wealth of Nations that Smith would have supported the FDA (Federal Drug Administration), the Consumer Product Safety Commission, mandating employer health benefits for employees, and even discriminatory taxation to deter improper or luxurious behavior.
Clubs have been formed and institutes created flaunting their own versions of what the great Scotsman meant. But be advised that Adam Smith would have been horrified by how his words, intentions and thought have been distorted to the “advantage” of others. It would not be the first time in history that unscrupulous self-seekers have twisted their founder’s message.