November 8, 2019
Thanks to Ned Boulberhane, a 2019 Harrison Middleton University Fellow in Ideas, for today’s post.
At the 2018 Left Forum at John Jay College in New York City, the economist Michael Hudson made a bold claim. He proposed that when Adam Smith wrote of free markets in the his literary classic, The Wealth of Nations, he was not referring to a market free from government oversight, but rather his view of a free market was one that meant free from monopolies. I was left with the natural response of...."wait, really?" And I knew that I had to investigate more. Thus, we begin our examination of free markets and the vision of Adam Smith.
To begin, while Adam Smith is almost certainly more well-known for his work, The Wealth of Nations, he was also the author of a previous book, The Theory of Moral Sentiment. Through exploration of even the most simple biographies, it is evident that Smith wanted to be known not only for his insight into economics, but also as a moral philosopher. The Wealth of Nations is a particular work where Adam Smith attempted to find common ground between the uses of capitalism and the moral betterment of humanity. Thus, in short achieving a system where trade could occur freely but not conducted in an immoral way.
Michael Hudson is the celebrated author of J is for Junk Economics, and a self-proclaimed debt historian. In addition, to the claim he made regarding Adam Smith and the free markets, he expanded his statement by saying that since the time of the palace economies, the concept of a strong public sector is what moves a civilization forward. If the private sector becomes too large and too powerful, it can move the public sector to its advantage. This allows for oligarchy to propagate. While that statement comes at the issue from a strong perspective, Adam Smith addressed a similar issue in the first book of The Wealth of Nations, for it appears Smith's most pressing issue regarding markets was free trade. It would be impossible to have a system of free trade if a monopoly holds all the power to trade. The monopoly would dominate the market, and concepts such as price competition, innovation, and entrepreneurship would be impossible.
Noam Chomsky is also very critical of how Adam Smith is interpreted in the 21st Century. The term "free market" is used frequently in contemporary political discussions, but Chomsky also highlights a particular issue with one of Smith's more famous phrases: The Invisible Hand. It is true that Smith used the term invisible hand, but it does not refer to an outside power that can manipulate markets. Smith's statement on the invisible hand, which occurs about midway through the dense volume, is a prediction that home bias will occur in economic decision making. What it refers to is that when capital markets are conducting trade and activities, there will be a rather expected preference given to the traders and actors within one's home community. Perhaps a modern day example of this is "Buy Local" or "Support Local Farmers." Smith made the proposition that it would be as if they were protected by an invisible hand.
Chomsky highlights one other particular issue regarding Adam Smith and the free market. This revolves around Smith's interpretation of the division of labor. To illustrate, Smith was heavily opposed to the concept of unregulated and unrestricted access to business and corporate ability. If the private sector were ever to cross the line and institute practices that were harmful to human life, Smith believed that it was the responsibility of the government to step in and prevent such actions from becoming more heinous, tying into Hudson's statement that the private sector can move the public sector it its advantage. In short, Smith saw the need for government oversight and regulation, so that humans would not be exploited.
There is famous but casual expression, "economics is an art not a science." Some might challenge this by saying that it is a social science, and the writings of Adam Smith are somewhat in the middle. As previously mentioned, Adam Smith sought to apply the concept of moral philosophy to free trade. However, one of the most important things that Smith expresses in the early books of The Wealth of Nations appears to be that the human social element in economic thought must never be forgotten. In lighter terms, trade is a good thing. Unrestricted trade that causes a detriment to human life is not.
The term "free market" is used in the news on a frequent basis. After hearing Michael Hudson's presentation on markets, I knew that I wanted to explore this subject. It might sound strange, but I almost feel disappointed that I did not find too many areas of disagreement. However, to give some form of push back and after reading through Smith's (sometimes painfully) dense economic classic, it seems that the heart and soul of his focus was not on government regulation. Perhaps current political thinkers would jump at the chance to throw their hats behind Smith hearing that he was for regulation and against unrestricted capitalism, but it seems they will have to wait. From the writings of Adam Smith we can see that he was in favor of protecting human life and honoring the concept of community. His regard for the invisible hand is evidence of that and perhaps a sort of ideal that one could strive toward: trade and cooperation bringing people together, respect for one's own community, and a path to economic prosperity with a sense of fairness.
To respond to the statement that was asked at the beginning, it seems that it is partially correct. While it appears true that Adam Smith was opposed to monopolies blocking the possibilities of free trade, he was more concerned with economics benefiting as many people as possible, and that served as the heart of his issue. While in our present day and age a world where capitalism is conducted on a fair and moral basis with respect to humanity and the Earth might be difficult for many to imagine, but perhaps it is also fair to say that someone such as Adam Smith would not be deterred by challengers. In life one often has to strive toward the ideal. It may seem difficult or nearly impossible, but through the strides one learns along the journey.
Chomsky, Noam. (n.d.). “Noam Chomsky on Adam Smith.” New York.
Hudson, Michael. (2017). J is for Junk Economics: a Guide to Reality in an Age of Deception. Place of publication not identified: Islet.
Hudson, Michael. (n.d.). Left Forum 2018. Left Forum 2018. New York.
Smith, Adam. (1981). The Wealth of Nations. London: Dent.
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