Salon interviews the late Adam Smith

[one...two...tree 2,762]

The 18th century's patron saint of free markets shares his surprising views about Barack Obama and the U.S. economy

Editor's note: The remarks of Adam Smith are all quotations from his book "The Wealth of Nations," first published in 1776.

By Michael Lind

Our guest today is Adam Smith, a major figure of the Enlightenment who is widely considered to be the father of modern economic theory. He is a former professor at the University of Glasgow and the author of "The Theory of Moral Sentiments" (1759) and "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776), his best-known book. Professor Smith joins us from Scotland.

Professor Smith, the Obama administration recently imposed tariffs on China, after companies and unions in the U.S. complained that the Chinese tire industry benefits from Chinese subsidies as well as an undervalued exchange rate. Most editorial pages and magazines in the prestige press denounced the tire tariffs as a threat to free trade. You are generally considered the patron saint of free trade. What is your view of the tariffs on Chinese tires?

The case in which it may sometimes be a matter of deliberation how far it is proper to continue the free importation of certain foreign goods is when some foreign nation restrains by high duties or prohibitions the importation of some of our manufactures into their country ... There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods. To judge whether such retaliations are likely to produce such an effect does not, perhaps, belong so much to the science of a legislator, whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs.

It will come as a great surprise to many people to learn that Adam Smith favors retaliatory tariffs in some cases. Would you make any other exceptions to the general rule of free trade?

There seem to be two cases in which it will generally be advantageous to lay some burden upon foreign [industry] for the encouragement of domestic industry. The first is when some particular sort of industry is necessary for the defence of the country ... The second case, in which it will generally be advantageous to lay some burden upon foreign [industry] for the encouragement of domestic industry is when some tax is imposed at home upon the produce of the latter. In this case, it seems reasonable that an equal tax should be imposed upon the like produce of the former. This would not give the monopoly of the home market to domestic industry, nor turn towards a particular employment a greater share of the stock and labour of the country than what would naturally go to it. It would only hinder any part of what would naturally go to it from being turned away by the tax into a less natural direction, and would leave the competition between foreign and domestic industry, after the tax, as nearly as possible upon the same footing as before it.

Interesting. Your second point brings to mind the argument that American exports are punished, because most countries in Europe and Asia impose a value-added or VAT tax on U.S. imports, and at the same time grant VAT rebates to products that they export -- penalizing American exports while subsidizing their own. Some argue that the adoption of a VAT in the U.S. could level the playing field.

It is often claimed that globalization is a force that cannot and should not be slowed down. And yet although you favor free trade in general, you argue that national economies should be opened up to foreign competition only slowly and carefully, in order to minimize economic and social disruption. Would you please explain your reasoning?

The undertaker of a great manufacture, who, by the home markets being suddenly laid open to the competition of foreigners, should be obliged to abandon his trade, would no doubt suffer very considerably. That part of his capital which had usually been employed in purchasing materials and in paying his workmen might, without much difficulty, perhaps, find another employment. But that part of it which was fixed in workhouses, and in the instruments of trade, could scarce be disposed of without considerable loss. The equitable regard, therefore, to his interest requires that changes of this kind should never be introduced suddenly, but slowly, gradually, and after a very long warning.

The minimum wage in the United States today is far below what it was a few decades ago, thanks to inflation. At the same time, in the last generation wages have stagnated while roughly half of the gains from economic growth have gone to a tiny number of rich Americans. Many conservative economists and business executives argue that companies cannot afford high wages for ordinary workers. Aren't high salaries and bonuses costs as well?

Our merchants and master manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.

One common theme of economic conservatives is that poor people in the U.S. are not really poor, compared to the truly destitute in developing countries. Many poor Americans own cars and television sets. Do you think that poverty should be measured in absolute, world-wide terms, or in relative terms, with reference to the living standards of particular societies?

By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but whatever the customs of the country renders it indecent for creditable people, even the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into, without extreme bad conduct. Custom, in the same manner, has rendered leather shoes a necessary of life in England.

Many libertarians and conservatives argue that the only fair tax system would be a flat tax. In your opinion should the tax system be flat or progressive?

The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess ... It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.

American labor activists and many liberals support the Employee Free Choice Act (EFCA), which would make it easier for workers to form unions. Many conservative economists argue that greater unionization would cripple the U.S., causing higher unemployment and rendering the U.S. economy less competitive. Do you agree?

We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate ... Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate.

Speaking of combinations, here in the United States we are witnessing major lobbying campaigns by lenders to prevent Congress from creating a consumer credit protection agency and by health insurance companies that seek to defeat a public health insurance option. What do you think of organized lobbying by business interests?

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.

During the 1980s, some followers of British Prime Minister Margaret Thatcher and American President Ronald Reagan wore neckties decorated by your profile. Thatcher said, "There is no such thing as society," and Reagan said, "Government is not the solution. Government is the problem." According to free-market conservatives, government should be run like a private-sector business and the noblest figures in society are business executives and entrepreneurs. Do you agree?

The violence and injustice of the rulers of mankind is an ancient evil, for which, I am afraid, the nature of human affairs can scarce admit of a remedy. But the mean rapacity, the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind, though it cannot perhaps be corrected may very easily be prevented from disturbing the tranquility of anybody but themselves.

http://www.salon.com/opinion/feature/2009/...ith/index1.html

Edited October 6, 2009 by Col. 'Bat' Guano

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But WWJD?

[one...two...tree 2,762]

But WWJD?

Where was He in 1776? He doesn't even have a U.S. birth certificate. Major fail.

[I AM NOT THAT GUY 5,715]

It's true! The Democrats can make the dead speak...

and vote...

and make campaign cotributions.

[one...two...tree 2,762]

It's true! The Democrats can make the dead speak...

Do Libertarians have a patent on quoting Adam Smith?

[one...two...tree 2,762]

Interview with Adam Smith (1994)...by a Libertarian! What??? Oh my word! What will Bill say now? And they're not even quoting him but acting as Medium! Uh oh!

(excerpt)

Each issue of The Region has carried an interview with a leader from within the Federal Reserve or with someone whose work or ideas have been of interest to our policymakers. In planning this issue, we decided that Adam Smith, who many consider the father of modern economics, would make a perfect interview. Needless to say, speaking with Mr. Smith is a bit of a problem, and for the obvious reason. To solve the problem, we contacted Professor Edwin G. West, a renowned expert on Adam Smith to serve as our "medium." Currently, West is professor emeritus at Carleton University, Ottawa, where his areas of expertise are public finance, public choice and the history of economic thought, particularly with respect to the work of Adam Smith.

His book, Adam Smith and Modern Economics: From Market Behaviour to Public Choice, was published by Edward Elgar in 1990. In the area of the history of economic thought, his article, "Joint Supply Theory before Mill," will appear in History of Political Economy, finance.

Professor West, who received his doctorate in economics from London University, will have two special American editions of earlier works published in the near future by the Liberty Fund: Education and the State(1970) and Education and the Industrial Revolution(1975).

Region: In The Wealth of Nations you spoke of the invisible hand that guides the marketplace and said that unencumbered markets should work well. Since then we have had many "experiments" with different approaches to national economies, which have yielded a wealth of information. In light of the evidence, do you feel vindicated?

Smith: Before addressing what you call "experiments" with different approaches to national economies, let me remind you that there was quite a variety in my own day. Like other members of the Scottish School I was trying to establish what you now call a comparative systems approach, and you will find in my The Wealth of Nations a wide survey of many forms of societies, including Greek republics, democracies, monarchies, federal governments, governments of mercantile companies, the American colonies and established churches. I was attempting to determine what bearing these institutional differences had upon relative economic success. But what was also new was that such success was measured in terms of per capita, not per monarch, per company or per church success.

Your question presents my central hypothesis as being that "unencumbered" markets work best. In The Wealth of Nations my understanding of freedom from "encumbrance" is summarized in my call for "natural liberty." This condition presumes a well designed constitution, respect for the rule of law and the absence of any preferential treatment of special interests. Allow me to quote from The Wealth of Nations (Book 4, Chapter 9):

All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. The sovereign is completely discharged from a duty, in the attempting to perform which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of society.

The last sentence of this quotation, suitably rephrased, could, I believe, be used as an appropriate epitaph for the socialist regimes that collapsed in the 1980s and '90s. Acting like sovereigns, their principal committees had indeed been exposed to innumerable delusions. They failed to realize that no human wisdom or knowledge could ever be sufficient for "superintending the industry of private interests of society."

In my own day I diagnosed many similar problems where natural liberty was shunned. I showed that this situation was associated, for instance, with the disastrous attempt at government by the East India Company in the 18th century, and with the onerous system of taxation of the poor in France.

The last part of your question asks whether, in view of the experience of 20th century experiments, my predictions have been vindicated. I would answer yes especially on the issue of liberty. In a 1991 article, Scully and Slottje selected a total of 15 attributes of economic freedom. These included freedoms of property, international financial transactions, movement, information, peaceful assembly and communication through the print media. A special feature of the analysis was the weighting of the attributes in their construction of an index of economic liberty. After constructing a number of summary indexes, the authors found each of them to be robust. All the rankings indicated that economic growth and real domestic product per capita are positively correlated with economic liberty. So I do indeed feel vindicated!

Region: How well can we expect markets to function in countries where profit and entrepreneurship have really never been part of the cultural fabric? Specifically, what are the prospects for Russia?

Smith: The useful pursuit of profit by entrepreneurs in a competitive market is hindered most, not by natural cultural differences but by despotic and short-sighted governments, which, in their greed for revenues, tax away any and all surpluses almost before they appear. I argued in The Wealth of Nations that markets evolve because of the propensity in human nature to "truck, barter, and exchange." This propensity, I suggested, is "common to all men." It is governments that artificially suppress it.

Soon after following their natural instincts to trade with each other, individuals will just as naturally begin to attempt to devise mutually acceptable rules of behavior such as common law respect for contracts. Constitutional arrangements that protect both individuals and their property can also be expected because without a firm and predictable legal framework the market system cannot thrive. To quote again from The Wealth of Nations (Book 5, Chapter 3):

Commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice, in which people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported by law, and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts from all those who are able to pay.

Witness, in contrast, the situation in Russia where today there is simply no legal basis for prosecuting the crime of fraud.

It is probably true to say that in successful market economies the evolution of rules from the bottom up, rather than imposition from the top down, encourages a kind of ideology that constrains people to behave in moral and predictable ways. They include honesty, fair play and adherence to professional ethics that sees it to be unworthy of us to cheat, bribe or misuse the authority of the state for selfish purposes.

Compared with Poland, Czechoslovakia and Hungary, Russia has been much further and longer away from the ideology just described. It will, therefore, be much more difficult to establish in that country a fully fledged market economy. Russian leaders, in fact, still see "reforms" as top-down engineering programs. Whereas in Poland reform was started by the opposition and by people outside the party, in Russia everything was started by the "apparatchiks." The term "reform" indeed now seems to have been redefined to mean a revival of statism. The worst example of it is the present attempt of Mr. Gerashchenko at the central bank to inflate the Russian economy to provide cash bailouts to defunct industries that make goods no one wants to buy.

Perhaps the most serious shortcoming of a regime that tries to plan and control thousands of economic decisions is that resources are diverted from fulfilling government's most basic responsibility: the protection of citizens from theft and personal assault. It is, thus, not surprising that, in his first State of the Nation address (in February 1994), President Boris Yeltsin singled out lawlessness in Russia as "the problem of the year." It is certainly an ominous situation when virtually all Russian shops, cafes and restaurants pay for private protection, as do 70 percent to 80 percent of larger commercial enterprises and banks.

Optimists can always be found, however. Referring to the obligation to pay protection money, one Moscow citizen recently observed, "We are at about the level of the U.S. in the 1930s. Three years ago we were at the level of the 1920s. So that is progress!"

http://www.minneapolisfed.org/publications...lay.cfm?id=3708

[I AM NOT THAT GUY 5,715]

It's okay. Jesus talked to me Sunday. He said, "Forgive Steven, he knows not what he does."

You are forgiven. No hard feelings?

[one...two...tree 2,762]

It's okay. Jesus talked to me Sunday. He said, "Forgive Steven, he knows not what he does."

You are forgiven. No hard feelings?

I think you should bow out gracefully instead of continuing to make yourself look foolish. Libertarians have regularly referred to Adam Smith when trying to sell their ideology. The OP did quite a nice and effective job of representing Adam Smith's views and he didn't even have to act as a Medium. He merely quoted him verbatim.

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It's okay. Jesus talked to me Sunday.

It's not ok. If Jesus talks to you, you should consider checking yourself into a mental health facility.

[Ban Hammer 14,665]

It's okay. Jesus talked to me Sunday.

It's not ok. If Jesus talks to you, you should consider checking yourself into a mental health facility.

why? jesus was mowing the yard and wanted to get paid.

[mRx 16]

Some argue that the adoption of a VAT in the U.S. could level the playing field.

If Europe and Asia want to impoverish their citizens by imposing additional costs to consumer goods, there is no need for the US to follow such a ridiculous policy.

We don't need equality in poverty--That's what a VAT in the US would give us.

[Mr. Big Dog 10,747]

Some argue that the adoption of a VAT in the U.S. could level the playing field.

If Europe and Asia want to impoverish their citizens by imposing additional costs to consumer goods, there is no need for the US to follow such a ridiculous policy.

We don't need equality in poverty--That's what a VAT in the US would give us.

Oh what a load of #######! Europe and Asia are impoverished now? Are you fcuking kidding me?

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Huge parts of Asia are.

[Mr. Big Dog 10,747]

Huge parts of Asia are.

Yes, so is most of Africa. Don't think the VAT is to blame.

[w¡n9Nµ7 §£@¥€r 123]

Huge parts of Asia are.

Yes, so is most of Africa. Don't think the VAT is to blame.

No but commies are. Commies like the same commies who like the VAT. Coincidence? Of course it is!