Fun with Adam Smith: Five Things Some May Wish He’d Never Said

A lot of people talk about Adam Smith. Very few have read him. Capitalists uphold Smith for recognizing that people act in an economy out of their own self-interest, but he also said some things about poverty and income inequality that would make doctrinaire market libertarians throw up in their mouths a little. Here are five of my favorites.

#1: Poverty is Relative

“By necessaries I understand, not only the commodities which are indispensibly necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without” (III.ii.4).

For Adam Smith, linen shirts were a necessity. Why? Because it was expected that any decent person should own at least one linen shirt. For Smith, poverty is relative to society. Thus when pundits say that people in this country are not poor if they have cable television or cell phones, they would not find much support in the intellectual progenitor of modern capitalist thought. (Incidentally, it means that in the United States, it would be truer to Smith’s thought if we calculated the poverty line as a percentage of the median income rather than calculating based off food prices adjusted for inflation.)

#2: Reaganomics is Bunk

“For one very rich man, there must be at least five-hundred poor, and the affluence of the few supposes the indigence of the many” (V.ii.2).

Reaganomics is another name for what is called “supply-side economics.” Among other things, this theory holds that if rich people have more money, then poor people will also have more money. Smith disagrees. Though his genius was to realize that the market need not be a zero-sum game (an exchange in which one side must lose for the other side to win), he did not believe there could be very rich people without there also being very poor people. More importantly, the above suggests that, the greater the wealth of some, the greater the poverty of many.

#3: Wages are a Weather Vane

“The liberal reward of labour, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. The scanty maintenance of the labouring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition, that they are going fast backwards” (I.viii).

Most economists measure the health of the economy in terms of GDP (Gross Domestic Product). That is, if the nation produced a higher percentage of good this quarter than last quarter, then the economy is growing and is therefore healthy. But Smith tied the health of the economy to the wages of the working poor. If real wages were stagnant or shrinking, then it was a sign that the economy was in decline.

Incidentally, real wages have been in decline for decades.

#4: The Economy Serves Society

“No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged” (I.viii).

This one is worth reading in context because Adam Smith is speaking directly about the benefits a people gain from the improvement of the lot of the lowest ranks of society. Whatever improves the situation of the poor will be of benefit to the whole society. It is worth noting that, for Smith, the good of the market is not self-evident. He did not live in what Karl Polanyi calls a “market society” (which is a way of saying that we have put our economic cart before our social horse). For Smith, the market was a servant of the common good, and where that was not promoted, the market had gone awry. Case in point…

#5: Regulations are Good

“When the regulation…is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters” (I.x.2).

Many who invoke the name of Smith oppose regulations because they are bad for the economy, but Adam Smith opposed regulations that were bad for people. Note that justice and equity are the two criteria by which regulations are to be judged, not how the regulation will contribute to the GDP. Adam Smith did not care about the wealth of nations for its own sake. Rather, as Karl Polanyi wrote, “[W]ealth was to [Smith] merely an aspect of the life of the community, to the purposes of which it remained subordinate…” (The Great Transformation).

Of course, doctrinaire market libertarians might protest that I am misusing Adam Smith. Wealth of Nations is not the Bible, and Smith is not Jesus. Quoting passages does not disprove a market theory! Smith was certainly wrong about some things!

Which is partly my point. Quoting or talking about Adam Smith does not end all argument. Smith might have been wrong about some things, like the universality of self-interested exchange, which we Americans have turned into the sick axiom, “Greed is good!” (If you think that is what Adam Smith meant, by the way, then you really should read Theory of Moral Sentiments, a book which he thought was more important than Wealth of Nations.)

More importantly, however, the above passages can help us remember not to read Adam Smith anachronistically. Living in a market society, we tend to assume that what is good for GDP is good for everyone. Smith probably made the same assumption, but increased market efficiency was not the goal of Wealth of Nations. For him, the good of the market was not an end in itself. It was a subordinate end to the greater good: the flourishing of all; the common-wealth.