Tuesday, February 15, 2011
Capitalism Defined, Part II: In the Beginning Was Adam
Inevitably, any study of capitalism must pay homage to Adam Smith, the reclusive Scottish academic who founded the modern study of economics. Smith was a moral philosopher before he became an economist, and one can divide his writings on early capitalist societies, published in 1776 as The Wealth of Nations, into descriptive observations and normative judgments. This has been true of much economic writing ever since.
Smith was somewhat vague about the definition of capital, because he was reluctant to identify it with any particular substance (such as gold or silver). Rather, he identified capital by its purpose: either to buy goods (food, raw materials, textiles) for resale, or to improve land or purchase machinery and "instruments of trade" (Book II, Chapter 1). The former he identified as "circulating" and the latter as "fixed" capital. Circulating capital mainly generated profits for merchants, fixed capital for masters and landlords.
Smith made it clear (or as clear as he could in a diffuse, rambling, 1000-plus-page brick of a book) that he viewed the owners of capital as the wellsprings of wealth and productivity. They increased the productivity of land through improvements like fertilizer and better breeds of livestock; they increased the output of manufacturing establishments with machinery and the division of labor; and they provided an incentive for both forms of improvement by fostering commerce. The limit on a country's industry, Smith asserted, is "what the capital of the society can employ" (Book IV, Chapter 2). Small wonder he has so long enjoyed a good reputation with entrepreneurs, dividend-drawers, and hack writers for the Cato Institute.
I digress. It's also important to note that Wealth of Nations wasn't a billet doux to the capitalist class. Smith had normative judgments to pass against them, as well as their antagonists. True, in Books I and V Smith famously argued for limited government intervention in the economy. Governments should, he said, lift existing controls on the circulation of labor and capital, and stop chartering monopolistic corporations that restricted competition. However, he also noted that merchants and masters were themselves frequently responsible for stifling economic productivity and general welfare. Merchants artificially raised prices by keeping smaller market towns ignorant of the existence of competitors, and by withholding goods from the market. Masters, meanwhile, were in "tacit but constant and uniform combination" (Book I, Chapter 8) to hold down wages and thereby maximize profits. The former tactics injured consumers, the latter workers, whom Smith insisted were entitled to fair compensation. Low wages injured productivity, since ill-fed workers had less energy, and inhibited family formation and demographic growth, which Smith regarded as social goods.
Unfortunately, Smith observed, wages and profits tended to move in opposite directions, except in "new colonies" where resources were ample and labor scarce. And since people were primarily motivated, in Smith's worldview, by self-interest, there was little one could do to convince capitalists to pay a just wage*, since this would injure their profits. Removing government controls on the movement and employment of labor was Smith's only solution to this problem: if workers could more easily enter skilled trades and leave their home parishes in search of employment, their bargaining power would increase. Otherwise, Smith had no ready solution to one of the central problems of capitalism: the tendency of capitalists to pile up money at the expense of their employees. In his remarks on the inverse relationship of wages to profits, Smith even prefigured the central argument of Thomas Malthus, who wrote that human populations tended to outgrow their food supply unless curtailed by disaster or dearth, and David Ricardo's Iron Law of Wages. Both of these ideas would, in turn, strongly influence the subject of my next entry in this series, Karl Marx. (Dum dum dum!)
(Above image courtesy of http://www.magixl.com/cliparts/)
* Henry Ford's observation that well-paid workers became well-heeled customers was still 150 years away.