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.


Susan M. Frey said...

Capitalist Societies: A Personal View

In reading your series on capitalism I benefit greatly from your recent post on Smith, since I’m shamefully ignorant of his writings. I’ve been thinking lately on what makes a capitalist society. Because I’m not an economist, historian, teacher, or financier I’ve the luxury of adopting an idiosyncratic definition that carries with it a limited threat of retribution (such as flak from dinner guests who find me obtuse). This relegates me, perhaps, to the ranks of amateurs who enthusiastically call in on late-night talk radio; but since I’m in bed by 9PM most nights, I’m reasonably safe from this indignity. Dazzled by definitions that are behavioral, materialistic, cultural, political, evolutionary, et cetera, I fall back on the most basic requirements. To me, capitalism is a system whereby commodities are privately owned and sold for a profit that benefits the owner. I refrain from defining terms such as “commodity,” “sold,” or “profit” because doing so will only get me into trouble. So my definition is, I’m sure, unhelpful to you because it is shallow. In my musings on mixed economies I am surprised to find myself rigid (and I’m not as yet sure why this is so). But to me, for a society to be called capitalistic I’d say that the system I’ve just described would have to be the dominant form of its economy. I’m guessing, for instance, that if we gaze on boatloads of amphora in ancient Alexandria, or observe a guild of drapers in medieval Peterborough, we might call these examples of capitalism in its infancy or at least, capitalism as a glint in the milkman’s eye. However I would not feel comfortable calling Greco-Roman Egypt or late medieval Britain capitalist societies. In other words, I can see people engaging in the behaviors of capitalism without necessarily thinking that they belong to a capitalist society. For me, it is a matter of degree. Just as I would not judge a person who has fleeting and rare moments of paranoia as possessing a paranoid personality, for a society to be a capitalist society I need to see in that society evidence of capitalist behavior that is both broad and deep. (Here, of course, I neglect to expand on my definition of “capitalist behavior,” except to write that it can be Malthusian and dark.) Luckily, I don’t find myself having to defend my position because I seldom (if ever) present it as a topic of conversation at dinner parties. I do see human interaction (as opposed to dollars and cents and cowrie shells) as driving my definition, and this is probably due to Marx. In my casual readings on the subject the most compelling and sexy definition of the word “commodity” that I have run across is from Marx who wrote (and I take unforgiveable liberties in paraphrasing) that a commodity is a “mysterious thing,” because people fail to see the complexity of relationships behind its creation, ownership, and distribution. Ain’t that the truth? I look forward to your upcoming post on Marx, confident in the expectation that you will: 1-entertain and educate; 2-not be as simplistic and clumsy in your approach to the material as yours truly, and; 3-not be phoning talk FM.

Dave Nichols said...

Thank you, Susan. You're right that Marx defined economic inputs (labor and capital) in terms of human interaction, and that's a subject I'll be addressing shortly, or whenever I finish reading the Grundrisse. I won't be calling late-night talk radio with my findings, but you're welcome to do so, provided you call talk shows in western Europe or north Africa.