Adam Smith on the Crisis of Capitalism

Ideology is a powerful thing.  Whether one’s ideology is based in racism, equality, or the assertion of overwhelming political power, it cannot be denied that people are driven to extremes by their ideas of what is right and good.  People have willingly killed and died for their ideologies, so it is not surprising that people driven by ideology have frequently disregarded or otherwise ignored small but important flaws in their ideas.  Today’s American culture has reached such a point of conformity in its support of capitalism.  The government de-regulation movement, which has emerged since the 1970s, has accomplished little other than the monopolization of entire industries such as media, health care, and national defense.  Each of these industries has clear importance for the population’s prosperity; yet, like many other areas of the economy, that very prosperity is under attack by the rigid acceptance of what the population believes are the “laws” of market capitalism and free trade.  Such unquestioned acceptance of capitalism’s benefits entirely ignores warnings given by Adam Smith in his major work, Wealth of Nations (1776).  Though Smith’s book is often held up as the greatest description of capitalism’s benefits, Americans generally ignore its warnings regarding the destruction of competition that would inevitably result in monopolists’ control over government and society.  Adam Smith gave these warnings just as the engines of industrial capitalism were picking up speed.  Americans today would do very well to heed these warnings.

Adam Smith’s greatest statement regarding the need for government regulation of capitalism occurs at the end of Book One of the Wealth of Nations.

The interest of the dealers [referring to stock owners, manufacturers, and merchants], 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 public; 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, and absurd tax upon the rest of their fellow-citizens. (Adam Smith, Wealth of Nations (Amherst, New York: Prometheus Books, 1991), pages 219-220)

Smith here stated that the economic “interests” of businessmen are naturally opposed to the public interest.  This is because the natural goal of any businessman is to acquire, by any means necessary, a monopoly over the entire industry or trade that he is involved in.  The obvious result of such a monopoly would be the destruction of all competitors, which inevitably hurts the public by reducing choice, efficiency, and progress while raising prices to whatever levels the monopolist deems necessary to achieve his desired profit.  Though Smith warned against such an “absurd tax,” Americans today have been convinced that government de-regulation is necessary to rid the economic world of a burdensome bureaucracy.  The public’s need for media, health care, and military defense is clear; but it is also clear that rampant government de-regulation in each of these areas has permitted monopolies in forming and taking control of their markets.  The “absurd tax” has become a reality.  The remainder of this essay will reveal exactly why Adam Smith warned against the dangers of monopolies: their inefficiencies, the untrustworthiness of corporate leaders, their exploitation of workers, and their ability to control government to favor their own business demands.

Monopolies Destroy Capitalism

Monopolies hurt capitalism.  This is because monopolies tend to be far less efficient, since they have no real competitors threatening to break into their market.  With no worries, the business reigns are loosened so long as they continue delivering profit (which a monopoly cannot avoid doing since its products are the only choice on the market) and efficiency suffers as a result.  Smith pointed out how a lack of corporate fear of profit-loss clearly hurts the public interest.  “The pretence that corporations are necessary for the better government of the trade, is without any foundation.  The real and effectual discipline which is exercised over a workman is not that of his corporation, but that of his customers.  It is the fear of losing their employment which restrains his frauds and corrects his negligence.  An exclusive corporation necessarily weakens the force of this discipline.” (Smith, Wealth of Nations, page 138)  Because a worker works best when he fears losing customers through fraud or negligence, any movement in the direction of monopoly should worry the public.  Such monopolies reduce public choice to the point that the worker no longer fears losing customers.  Where would the customers go?

The problem is ugliest in such vital fields as health care or military defense.    If the public needs what the worker produces, and a monopoly exists in that industry, then the producers can be as fraudulent, negligent, and even as inefficient as they choose without fear of losing profits.  Much later in Wealth of Nations, Smith wrote that such monopolies grow so inefficient that they would be incapable of survival without government favoritism.  “Without a monopoly, however, a joint stock company, it would appear from experience, cannot long carry on any branch of foreign trade. . . .  [Business competition] is a species of warfare of which the operations are continually changing, and which can scarce ever be conducted successfully, without such an unremitting exertion of vigilance and attention, as cannot long be expected from the directors of a joint stock company.” (Smith, Wealth of Nations, page 481)  In short, those who run monopolistic businesses eventually run short of “vigilance and attention” because such hard work is not needed to guard the company’s profits.  Therefore, the existence of monopoly entirely contradicts capitalism’s reliance on competition and efficiency.  In permitting the unchecked conglomeration of economic and productive power, such monopolies are today killing the competition and efficiency that are capitalism’s lifeblood.

Mistrust of Merchants

Of course, an inefficient monopoly cannot last long without either public complaint or attempts by new businesses to break into the market.  Because monopolies are inherently run with a lack of “vigilance and attention,” their inefficiencies would likely make them prime targets for political or competitive attack.  The monopolist is then left two possible means of survival: he can either reform his business (and its directors) to run more efficiently in order to head off outsider attempts at breaking into the market, or he can “influence” political leaders and force them to ensure his continued monopoly.  Most monopolists choose the latter, since it is usually less expensive.  Adam Smith clearly recognized this dilemma; explicitly warning the public to not trust what he labeled as “merchants.”

The proposal of any new law or regulation of commerce which comes from this order, ought always to 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, Wealth of Nations, page 220)

Precisely because the businessman’s vested, economic “interest” is never the same as the public interest, the public must always be wary of “any new law or regulation” proposed by businessmen that would affect businessmen.  In fact, the public should not just be cautious, but must be outright suspicious of their intentions.  In short, businessmen are in business in order to make money; Smith says that they are willing to “deceive and even to oppress the public” in order to raise their profits as high as possible.  Their great personal wealth, monopolistic tendencies, and political power actually enable businessmen to propose laws and to control politicians in order to accomplish any of their economic goals.  Smith has implied that the public should not simply be attentive to this inherent problem of capitalism, but that they should also act in creating government regulations aimed at curbing such disastrous effects.  Adam Smith’s warnings against trusting the “merchants” have not been heeded, and the public at large suffers the consequences of such inattentiveness.

Exploitation of Workers

Smith commented on the fact that industrial capitalism grows primarily through the exploitation of the average worker.  Smith wrote in Wealth of Nations that, while capitalism creates the average worker as perhaps the most important factor in the economy (because their collective labor accounts for nearly all material production occurring in society), capitalistic businessmen will always attempt to control these workers by a combination of overburdening them with work and denying them an educated political voice.

But though the interest of the labourer is strictly connected with that of the society, he is incapable either of comprehending that interest, or of understanding its connexion with his own.  His condition leaves him no time to receive the necessary information, and his education and habits are commonly such as to render him unfit to judge even though he was fully informed.  In the public deliberations, therefore, his voice is little heard and less regarded, except upon some particular occasions, when his clamour is animated, set on, and supported by his employers, not for his, but for their own particular purposes. (Smith, Wealth of Nations, page 218)

The laborers’ “interest” is intimately connected with the interests of the general society because that society is overwhelmingly made up of common laborers; the society cannot flourish in its entirety if its majority is kept in ignorance and poverty.  However, capitalistic owners (always seeking monopolistic control of the market) do all in their power to keep control over this huge laboring population.  They accomplish this by forcing the public to work long hours which leaves the public little time for education or political awareness.  The only time that workers’ interests become important in political debates are those rare occasions when their demands happen to align with something that their owners want to increase profits.  Clearly, Adam Smith suggests that some type of worker organization or government regulation is required to overcome such harshly imbedded powers that businessmen use to control the political culture.

Smith presents the capitalistic worker as intuitively understanding that he is dominated by his employers, but incapable of any political action to affect his poverty.  By overburdening the workers with labor, by denying them education, and by refusing to support their claims, Smith argues that capitalistic workers often lack the power to enact changes that would benefit them.  Only government regulation of capitalism can solve such problems.

 Power of Monopolies to Control Government

Just as the public should fear monopolies using their power to buy their way out of their harmful actions, Adam Smith also warned us to beware of a similar attempt by businessmen to assert their power to exploit workers.  Smith feared monopolists’ ability to use their wealth to “influence” politicians in pursuit and guardianship of their profit margins.

This monopoly has so much increased the number of some particular tribes of [manufacturers], that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature.  The member of parliament who supports every proposal for strengthening this monopoly, is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance.  If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services, can protect him from the most infamous abuse and destruction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists. (Smith, Wealth of Nations, page 368)

According to Smith, the first step taken by capitalistic monopolists is to “intimidate the legislature.”  This is presumably done by giving part of their personal wealth to politicians in the form of personal gifts or campaign donations.  As legislators come to depend on such gifts for their expensive lifestyle or their re-election, the businessmen grow to own the politician.  Much of the politician’s “reputation for understanding trade” or otherwise being a good public servant are the result of a campaign built and paid for by the business interests.  If the politician were ever to vote according to his own opinion or conscience, without the permission of his business owner, then the politician opens himself to the full destructive power of the businessman’s wealth.  The politician’s professional reputation is insulted, his personal reputation is viciously attacked, and he may even come under the threat of assassination or other types of physical harm.  Adam Smith in this way presumed that the political corruption resulting from businessmen’s control over government would only grow with the profits that industrial capitalism would generate for the monopolists.  Those who tend to monopolize economic power also tend to monopolize political power.  The two are heavily and inherently connected.

As Adam Smith predicted throughout Wealth of Nations, industrial capitalism has given the modern world an amount of material production, and with it personal enjoyment, far beyond that of any epoch of human history.  The division of labor has led to an undeniable degree of economic growth and human benefit over the past two hundred years.  However, Smith also warned us of the dangers of capitalism and the inherent drive of businessmen to attain monopolies over their respective markets and industries.  In the United States, cultural and ideological devotion to Smith’s ideas regarding the benefits of capitalism run extremely high.  Wealth of Nations is often held up as “the best statement and defense of capitalistic economics.” (Smith, Wealth of Nations, page viii)  Americans would do well to also observe Smith’s many warnings regarding the motives and powers of capitalist owners and monopolists.  Americans today should continue reading Wealth of Nations and should consider its ideas as hugely important today.

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