The UNwealth of Nations: Adam Smith Betrayed by Capitalism
What passes as a corporate capitalist political economy falsely attributed to The Wealth of Nations is, in reality, the UNwealth of Nations: Adam Smith betrayed.
The interest of the dealers, however, in any particular branch of trade or manufacture, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the publick; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order, ought always be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have upon many occasions, both deceived and oppressed it (Smith, The Wealth of Nations, p. 278).
Adam Smith posited that profits are often highest in nations on the verge of economic failure. While he granted several causes for this, his main cause related to profits obtained by indebting the economy — the same kind of indebtedness we now see in Wall Street’s speculative shell games. For Smith didn’t measure wealth in terms of gold and silver but rather in terms of labor.
As a philosopher of the Enlightenment period, Smith penned The Wealth of Nations before the advent of capitalism—a 19th-century concept, so he never used the word capitalist, nor did he ever discuss capitalism as a political economy. What he did provide were two arguments — the first one against state-sponsored monopolies formed at the behest of the merchant–manufacturing class; and the second one for free markets that exist under the theoretical conditions of perfect liberty. Yet if this were all we knew of him, we would know nothing of Adam Smith, because he also recognized that “perfect liberty” would never be a reality and that people do not act solely in self-interest. Though the butcher, baker, and brewer might be motivated by self-interest when providing you with dinner, when that same butcher, baker or brewer jumps into a lake to save you from drowning, it is out of sheer benevolence.
People often cite Smith on the division of labor, which is unarguably a major topic in The Wealth of Nations. They also cite his now infamous invisible hand. But rarely is it revealed that Smith despised the grotesque outcomes inherent in the division labor. Nor is it acknowledged that he believed free markets that go unchecked are immoral and susceptible to corruption. During the period Smith was writing, the merchants and manufacturers within the British government were the chief architects of policy. As such, they made sure their needs were attended to. Although Smith lacked modern statistical data, he was certain that the actions of the merchant class in government were devastating not only the southern colonies such as India but the general citizenry of Great Britain as well. Smith also believed that the merchants and manufacturers, by capturing the British government, were unintentionally compromising the idea of a sustainable commercial society. Sound familiar? Suffice it to say, what passes as our current corporate capitalist political economy would appall Smith. And the claim that he is somehow the “father” of that system is disingenuous at best.
Let us also deride the notion that multinational corporations are being contained by some sort of moral-good-producing “invisible hand.” The neoliberal notion of free capital flow as a panacea is an illusion. The resulting race-to-the-bottom pay schemas and exploitation of cheap foreign labor are the exact opposite of what Smith advocated. Smith envisioned the invisible hand working to keep investment local. He thus denounced the powerful East India Company, one of the first to offer limited liability to its shareholders, as a burdensome monopoly responsible for the horrific massacres in Bengal.
Modern Perversions of Adam Smith’s Views
Today’s multinational corporations follow in the footsteps of the East India Company. Are Cross-border agreements really forms of free trade, or are they some sort of perverse rendition of a command economy in which the control is handed over to a corporate oligarchy? NAFTA, the daddy of all these agreements, has proven to be a net exporter of both jobs and capital. It has further been destructive to the states it was supposed to lift up. The bill of goods we were sold when NAFTA passed never came to fruition. NAFTA supporters hyped an increase in exports while remaining silent on the ill effects of increased imports. Why? Because imports supplant goods that otherwise would be made in the United States by domestic workers, thus displacing jobs and defeating their hype. When George H. W. Bush proclaimed in 2002 that NAFTA had created two million jobs, he failed to mention how many jobs were lost.
And what is seldom acknowledged is that many parts of NAFTA were a form of protectionism, designed to benefit the 1%, our modern version of Smith’s masters of mankind. Buried in the NAFTA agreement were complex rules of origin that distinguished goods originating from member countries from goods originating from non-member countries. The sourcing restrictions included in these rules wholly distorted “free” trade. At the same time, no protections were afforded to either labor standards or the environment. Instead, NAFTA weakened collective bargaining rights, suppressed real wages, and decimated the fringe benefits of workers.
Between 1994, the year NAFTA was implemented, and 2000, unemployment fell to record lows. But early in 2001, it took an abrupt turn and began to rise. According to the Bureau of Labor Statistics (BLS), 2.4 million jobs were lost in the domestic economy between March 2001 and October 2003. These losses were concentrated in the manufacturing sector, which experienced a total decline of 2.4 million jobs.
And how did corporate profit and executive pay fare in the same time frame? The United State Department of Commerce reported that pretax corporate profits grew 26% from 2001 to 2003, and corporate federal income taxes fell by 21%. And according to the Producer Price Index (PPI), CEO pay, adjusted for inflation, increased a whopping 937% from 1978 to 2013. The CEO-to-worker compensation ratio grew to 122.6-to-1 in 1995 and peaked at 383.4-to-1 in 2000.
It has now been 24 years since NAFTA was implemented, and the BLS report for January of 2018 isn’t the healthy and promising account of our economy that the Trump administration is making it out to be. It certainly bears little relation to their recent actions, as it’s too soon for such actions to have affected anything. According to the report, the economy added 148,000 jobs and the unemployment rate remained steady at 4.1%.
But should these numbers be viewed in isolation? I’d argue they should not, since nominal wage growth remains far lower than it should be in a healthy economy. According to the BLS, the national unemployment rate in December of 2007, at the beginning of the great recession, was 5%. But by June of 2009, it had climbed to 9.5%. Wage data was not much better. Wage increases for private sector employees from 2007 to 2009 slowed to a paltry 1.3% in December of 2009 from a year earlier. From 2016 to 2017 nominal hourly wages increased a mere 2.5% by December and continue to remain below levels constant with the Fed’s target inflation rate.
Under NAFTA, income inequality has escalated. Going into 2018, the richest 1% control close to 40% of the wealth—truly an example of Smith’s “masters of mankind.” And, as we have witnessed over the past few decades, corporate profits have continued to reach record highs while the wages of average workers have stagnated. Any notion that this will change given the recent cut in the corporate tax rate would be intellectually dishonest since wages are tied to neither tax rates nor corporate profits. Wages increase when employers need to compete for more workers — an assumption that seems unreliable given globalization and our race to the bottom.
Can These Problems Be Solved?
So what are some possible solutions? We have established that a truly free market does not exist. Nor does trickle-down prosperity. The questions we should be asking therefore are: How much inequality are we willing to tolerate, and what groups should benefit from our regulatory and tax policy? It is clear that since the early 1970’s the “masters of man” have been the main beneficiaries. This has led to historic income inequality, regulatory capture, and a population swayed by reflexive nationalistic tendencies. None of this bodes well for the nation. The decreases in expendable income and inherent consumption will eventually adversely affect the greedy 1%. They should stop and realize this.
But given how unlikely that is, I propose readjusting the scales.
We should increase tax rates on higher income earners. We should eliminate loopholes that allow corporations to pay close to nothing in taxes. And please spare me the discussion on marginal tax rates, as it is the effective rates that matter. How about also eliminating carried interest? How about increasing tax rates on corporations that have excessive CEO-to-worker pay disparities? How about we end revolving doors between corporations and political appointments? And most importantly, how about we rein in the excesses of Wall Street once and for all. Glass-Steagall should have never been overturned. I am talking to you, Bill Clinton.
In the words of Smith:
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 (Smith, The Wealth of Nations, p. 33).