Capitalism Adam Smith Quotes

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with most unnecessary attention but assume an authority which could safely be trusted to no council and senate whatever, and which would nowhere be so dangerous as in the hands of man who have folly and presumption enough to fancy himself fit to exercise it.

How do you cause people to believe in an imagined order such as Christianity, democracy or capitalism? First, you never admit that the order is imagined. You always insist that the order sustaining society is an objective reality created by the great gods or by the laws of nature. People are unequal, not because Hammurabi said so, but because Enlil and Marduk decreed it. People are equal, not because Thomas Jefferson said so, but because God created them that way. Free markets are the best economic system, not because Adam Smith said so, but because these are the immutable laws of nature.

Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention

But no moral philosopher, from Aristotle to Aquinas, to John Locke and Adam Smith, divorced economics from a set of moral ends or held the production of wealth to be an end in itself; rather it was seen as a means to the realization of virtue, a means of leading a civilized life.

It is not from the benevolence of the Butcher, the Brewer or the Baker that we expect our dinner, but from their regard to their own interest

76. David Hume – Treatise on Human Nature; Essays Moral and Political; An Enquiry Concerning Human Understanding 77. Jean-Jacques Rousseau – On the Origin of Inequality; On the Political Economy; Emile – or, On Education, The Social Contract 78. Laurence Sterne – Tristram Shandy; A Sentimental Journey through France and Italy 79. Adam Smith – The Theory of Moral Sentiments; The Wealth of Nations 80. Immanuel Kant – Critique of Pure Reason; Fundamental Principles of the Metaphysics of Morals; Critique of Practical Reason; The Science of Right; Critique of Judgment; Perpetual Peace 81. Edward Gibbon – The Decline and Fall of the Roman Empire; Autobiography 82. James Boswell – Journal; Life of Samuel Johnson, Ll.D. 83. Antoine Laurent Lavoisier – Traité Élémentaire de Chimie (Elements of Chemistry) 84. Alexander Hamilton, John Jay, and James Madison – Federalist Papers 85. Jeremy Bentham – Introduction to the Principles of Morals and Legislation; Theory of Fictions 86. Johann Wolfgang von Goethe – Faust; Poetry and Truth 87. Jean Baptiste Joseph Fourier – Analytical Theory of Heat 88. Georg Wilhelm Friedrich Hegel – Phenomenology of Spirit; Philosophy of Right; Lectures on the Philosophy of History 89. William Wordsworth – Poems 90. Samuel Taylor Coleridge – Poems; Biographia Literaria 91. Jane Austen – Pride and Prejudice; Emma 92. Carl von Clausewitz – On War 93. Stendhal – The Red and the Black; The Charterhouse of Parma; On Love 94. Lord Byron – Don Juan 95. Arthur Schopenhauer – Studies in Pessimism 96. Michael Faraday – Chemical History of a Candle; Experimental Researches in Electricity 97. Charles Lyell – Principles of Geology 98. Auguste Comte – The Positive Philosophy 99. Honoré de Balzac – Père Goriot; Eugenie Grandet 100. Ralph Waldo Emerson – Representative Men; Essays; Journal 101. Nathaniel Hawthorne – The Scarlet Letter 102. Alexis de Tocqueville – Democracy in America 103. John Stuart Mill – A System of Logic; On Liberty; Representative Government; Utilitarianism; The Subjection of Women; Autobiography 104. Charles Darwin – The Origin of Species; The Descent of Man; Autobiography 105. Charles Dickens – Pickwick Papers; David Copperfield; Hard Times 106. Claude Bernard – Introduction to the Study of Experimental Medicine 107. Henry David Thoreau – Civil Disobedience; Walden 108. Karl Marx – Capital; Communist Manifesto 109. George Eliot – Adam Bede; Middlemarch 110. Herman Melville – Moby-Dick; Billy Budd 111. Fyodor Dostoevsky – Crime and Punishment; The Idiot; The Brothers Karamazov 112. Gustave Flaubert – Madame Bovary; Three Stories 113. Henrik Ibsen – Plays 114. Leo Tolstoy – War and Peace; Anna Karenina; What is Art?; Twenty-Three Tales 115. Mark Twain – The Adventures of Huckleberry Finn; The Mysterious Stranger 116. William James – The Principles of Psychology; The Varieties of Religious Experience; Pragmatism; Essays in Radical Empiricism 117. Henry James – The American; The Ambassadors 118. Friedrich Wilhelm Nietzsche – Thus Spoke Zarathustra; Beyond Good and Evil; The Genealogy of Morals;The Will to Power 119. Jules Henri Poincaré – Science and Hypothesis; Science and Method 120. Sigmund Freud – The Interpretation of Dreams; Introductory Lectures on Psychoanalysis; Civilization and Its Discontents; New Introductory Lectures on Psychoanalysis 121. George Bernard Shaw – Plays and Prefaces

In the natural sciences, some checks exist on the prolonged acceptance of nutty ideas, which do not hold up well under experimental and observational tests and cannot readily be shown to give rise to useful working technologies. But in economics and the other social studies, nutty ideas may hang around for centuries. Today, leading presidential candidates and tens of millions of voters in the USA embrace ideas that might have been drawn from a 17th-century book on the theory and practice of mercantilism, and multitudes of politicians and ordinary people espouse notions that Adam Smith, David Ricardo, and others exploded more than two centuries ago. In these realms, nearly everyone simply believes whatever he feels good about believing.

Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.

These people live in many lands, speak different languages, practice different religions, may even hate one another- yet none of these differences prevented them from cooperating to produce a pencil. How did it happen? Adam Smith gave us the answer two hundred years ago.

What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

Public services are never better performed than when their reward comes only in consequence of their being performed, and is proportioned to the diligence employed in performing them.

Commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice, in which the people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported by law, and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts from all those who are able to pay. Commerce and manufactures, in short, can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government.

Adam Smith FRSE (baptised June 5, 1723 O.S. / June 16 N.S. – July 17, 1790) was a Scottish moral philosopher and a pioneering political economist. He is also the founder of economics. One of the key figures of the intellectual movement known as the Scottish Enlightenment, he is known primarily as the author of two treatises: The Theory of Moral Sentiments (1759), and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). The latter was one of the earliest attempts to systematically study the historical development of industry and commerce in Europe, as well as a sustained attack on the doctrines of mercantilism. Smith's work helped to create the modern academic discipline of economics and provided one of the best-known intellectual rationales for free trade, capitalism, and libertarianism. Adam Smith is now depicted on the back of the Bank of England £20 note. Source: Wikipedia

But the cruelest of our revenue laws, I will venture to affirm, are mild and gentle, in comparison to some of those which the clamour of our merchants and manufacturers has extorted from the legislature, for the support of their own absurd and oppressive monopolies. Like the laws of Draco, these laws may be said to be all written in blood.

The stock that is laid out in a house, if it is to be the dwelling-house of the proprietor, ceases from that moment to serve in the function of a capital, or to afford any revenue to its owner. A dwelling-house, as such, contributes nothing to the revenue of its inhabitant; and though it is, no doubt, extremely useful to him, it is as his clothes and household furniture are useful to him, which, however, make a part of his expense, and not of his revenue.

The thought experiment of Adam Smith correctly takes into account the fact that people rationally pursue their economic interests. Of course they do. But this thought experiment fails to take into account the extent to which people are also guided by noneconomic motivations. And it fails to take into account the extent to which they are irrational or misguided. It ignores the animal spirits.

From Adam Smith’s pin factory to Moore’s Law of microchips, the division of labor drives the extension of the market, not the other way around. Supply creates its own demand through the proliferation of goods and services down the curves of learning, entropy, and imagination.

The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not to no single person, but to no council and senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

It was not for nothing that Adam Smith wrote that “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” The romantic notion of politics holds that Big Business is synonymous with capitalism and the archenemy of socialism. In fact, Big Business is reliably against most of what must go into any modern definition of capitalism: free trade, free enterprise, free markets, and the impartial rule of law. Big Business reliably seeks to use the state to seek advantages in trade and to crush smaller (and often more innovative) competitors.

It was in the eighteenth century that England became what (Adam) Smith called "a nation of shopkeepers".... (p. 58)

Thus Marx begins his attack on the liberal concept of freedom. The freedom of the market is not freedom at all. It is a fetishistic illusion. Under capitalism, individuals surrender to the discipline of abstract forces (such as the hidden hand of the market made much of by Adam Smith) that effectively govern their relations and choices. I can make something beautiful and take it to market, but if I don’t manage to exchange it then it has no value. Furthermore, I won’t have enough money to buy commodities to live. Market forces, which none of us individually control, regulate us. And part of what Marx wants to do in Capital is talk about this regulatory power that occurs even “in the midst of the accidental and ever-fluctuating exchange relations between the products.” Supply and demand fluctuations generate price fluctuations around some norm but cannot explain why a pair of shoes on average trades for four shirts. Within all the confusions of the marketplace, “the labour-time socially necessary to produce [commodities] asserts itself as a regulative law of nature. In the same way, the law of gravity asserts itself when a person’s house collapses on top of him” (168). This parallel between gravity and value is interesting: both are relations and not things, and both have to be conceptualized as immaterial but objective.

We can thus understand why bourgeois political economy held instinctively to Adam Smith’s confusion of the categories ‘fixed and circulating capital’ with the categories ‘constant and variable capital’, and uncritically echoed it from one generation down to the next for a whole century. It no longer distinguished at all between the portion of capital laid out on wages and the portion of capital laid out on raw material, and only formally distinguished the former from constant capital in terms of whether it was circulated bit by bit or all at once through the product. The basis for understanding the real movement of capitalist production, and thus of capitalist exploitation, was thus submerged at one blow. All that was involved, on this view, was the reappearance of values advanced.

The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way,” Adam Smith wrote in The Wealth of Nations, “and to bring both his industry and capital into competition with those of any other man, or order of men.

Capitalism today asks for faith in a god called “the hidden hand” and seems to have forgotten the goal of the original story. Adam Smith, capitalism's original storyteller, “wrote that the ultimate goal of business is not to make a profit. Profit is just the means. The goal is general welfare” (Wink 1992, 68).

Liberalism’s fatal hypocrisy […] was to rejoice in the virtuous Jills and Jacks, the neighborhood butchers, bakers and brewers, so as to defend the vile East India Companies, the Facebooks, the Amazons, which know no neighbors, have no partners, respect no moral sentiments [the other book by Adam Smith] and stop at nothing to destroy their competitors.

C'est donc la proportion existante entre la somme des capitaux et celle des revenus qui détermine partout la proportion dans laquelle se trouveront l'industrie et la fainéantise ; partout où les capitaux l'emportent, c'est l'industrie qui domine ; partout où ce sont les revenus, la fainéantise prévaut. Ainsi, toute augmentation ou diminution dans la masse des capitaux tend naturellement à augmenter ou à diminuer réellement la somme de l'industrie, le nombre des gens productifs et, par conséquent, la valeur échangeable du produit annuel des terres et du travail du pays, la richesse et le revenu réel de tous ses habitants. Les capitaux augmentent par l'économie ; ils diminuent par la prodigalité et la mauvaise conduite.

Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in his view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.

As these contrasts show, capitalism has undergone enormous changes in the last two and a half centuries. While some of Smith’s basic principles remain valid, they do so only at very general levels. For example, competition among profit-seeking firms may still be the key driving force of capitalism, as in Smith’s scheme. But it is not between small, anonymous firms which, accepting consumer tastes, fight it out by increasing the efficiency in the use of given technology. Today, competition is among huge multinational companies, with the ability not only to influence prices but to redefine technologies in a short span of time (think about the battle between Apple and Samsung) and to manipulate consumer tastes through brand-image building and advertising.

The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations

Well, our economic system "works," it just works in the interests of the masters, and I'd like to see one that works in the interests of the general population. And that will only happen when they are the "principal architects" of policy, to borrow Adam Smith's phrase. I mean, as long as power is narrowly concentrated, whether in the economic or the political system, you know who's going to benefit from the policies―you don't have to be a genius to figure that out. That's why democracy would be a good thing for the general public. But of course, achieving real democracy will require that the whole system of corporate capitalism be completely dismantled―because it's radically anti-democratic. And that can't be done by a stroke of the pen, you know: you have to build up alternative popular institutions, which could allow control over society's investment decisions to be moved into the hands of working people and communities. That's a long job, it requires building up an entire cultural and institutional basis for the changes, it's not something that's just going to happen on its own. There are people who have written about what such a system might look like―kind of a "participatory economy," it's sometimes called. But sure, that's the way to go, I think.

Mais le revenu annuel de toute société est toujours précisément égal à la valeur échangeable de tout le produit annuel de son industrie, ou plutôt c'est précisément la même chose que cette valeur échangeable. Par conséquent, puisque chaque individu tâche, le plus qu'il peut, 1° d'employer son capital à faire valoir l'industrie nationale, et - 2° de diriger cette industrie de manière à lui faire produire la plus grande valeur possible, chaque individu travaille nécessairement à rendre aussi grand que possible le revenu annuel de la société. A la vérité, son intention, en général, n'est pas en cela de servir l'intérêt public, et il ne sait même pas jusqu'à quel point il peut être utile à la société. En préférant le succès de l'industrie nationale à celui de l'industrie étrangère, il ne pense qu'à se donner personnellement une plus grande sûreté ; et en dirigeant cette industrie de manière à ce que son produit ait le plus de valeur possible, il ne pense qu'à son propre gain ; en cela, comme dans beaucoup d'autres cas, il est conduit par une main invisible à remplir une fin qui n'entre nullement dans ses intentions ; et ce n'est pas toujours ce qu'il y a de plus mal pour la société, que cette fin n'entre pour rien dans ses intentions. Tout en ne cherchant que son intérêt personnel, il travaille souvent d'une manière bien plus efficace pour l'intérêt de la société, que s'il avait réellement pour but d'y travailler. Je n'ai jamais vu que ceux qui aspiraient, dans leurs entreprises de commerce, à travailler pour le bien général, aient fait beaucoup de bonnes choses. Il est vrai que cette belle passion n'est pas très commune parmi les marchands, et qu'il ne faudrait pas de longs discours pour les en guérir.

Philip Wicksteed, The Common Sense of Political Economy, 1911; John Bates Clark, The Distribution of Wealth, 1899; Eugen von Böhm-Bawerk, The Positive Theory of Capital, 1888; Karl Menger, Principles of Economics, 1871; W. Stanley Jevons, The Theory of Political Economy, 1871; John Stuart Mill, Principles of Political Economy, 1848; David Ricardo, Principles of Political Economy and Taxation, 1817; and Adam Smith, The Wealth of Nations, 1776.

Adam Smith, with his half-baked idea about a hidden hand that works the cotton looms, decides to use that as his central metaphor for unrestrained Free Market capitalism. You don’t need to regulate the banks or the financiers when there’s an invisible five-fingered regulator who’s a bit like God to make sure that the money-looms don’t snare or tangle. That’s the monetarist mystic idol-shit, the voodoo economics Ronald Regan put his faith in, and that middle-class dunce Margaret Thatcher when they cheerily deregulated most of the financial institutions. And that’s why the Boroughs exists, Adam Smith’s idea. That’s why the last fuck knows how many generations of this family are a toilet queue without a pot to piss in, and that’s why everyone we know is broke. It’s all there in the current underneath that bridge down Tanner Street. That was the first one, the first dark, satanic mill.

As the brilliant economist-educator Russell Roberts points out, chroniclers of the cult of celebrity have an extensive pedigree. Writing in The Theory of Moral Sentiments in 1759, Adam Smith points out, 'We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous.' This perfectly anticipates the modern day cult around Z list celebrities. He argues that a fascination with others who are loved is part of our natural desire to be loved ourselves. So a natural obsession with celebrities is funneled toward managers, regardless of their virtue.

In great empires the people who live in the capital, and in the provinces remote from the scene of action, feel, many of them scarce any inconveniency from the war; but enjoy, at their ease, the amusement of reading in the newspapers the exploits of their own fleets and armies. To them this amusement compensates the small difference between the taxes which they pay on account of the war, and those which they had been accustomed to pay in time of peace. They are commonly dissatisfied with the return of peace, which puts an end to their amusement, and to a thousand visionary hopes of conquest and national glory, from a longer continuance of the war.

For Burke, almost everything that makes life worthwhile is a result of society, its inherited codes, knowledge, and institutions. These goods are fragile, and when they are destroyed, the result is human misery.... Among the greatest of man's needs, according to Burke, was the need for society and government to provide "a sufficient restraint upon their passions." As far back as his Vindication of Natural Society, Burke had argued that the destruction of inherited institutions and cultural practices would result not in natural harmony, but in barbarism. For Burke, as for Adam Smith, man is preeminently social man who realizes himself morally only under the tutelage of society. (p. 131)

If...capital is divided between two different grocers, their competition will tend to make both of them sell cheaper, than if it were in the hands of one only; and if it were divided among twenty, their competition would be just so much the greater, and the chance of their combining together, in order to raise the price, just so much the less. Their competition might perhaps ruin some of themselves; but to take care of this is the business of the parties concerned, and it may safely be trusted to their discretion. It can never hurt either the consumer, or the producer; on the contrary, it must tend to make the retailers both sell cheaper and buy dearer, than if the whole trade was monopolized by one or two persons.

How do you cause people to believe in an imagined order such as Christianity, democracy or capitalism? First, you never admit that the order is imagined. You always insist that the order sustaining society is an objective reality created by the great gods or by the laws of nature. People are unequal, not because Hammurabi said so, but because Enlil and Marduk decreed it. People are equal, not because Thomas Jefferson said so, but because God created them that way. Free markets are the best economic system, not because Adam Smith said so, but because these are the immutable laws of nature. You also educate people thoroughly. From the moment they are born, you constantly remind them of the principles of the imagined order, which are incorporated into anything and everything. They are incorporated into fairy tales, dramas, paintings, songs, etiquette, political propaganda, architecture, recipes and fashions.

A highway, a bridge, a navigable canal, for example, may in most cases be both made and maintained by a small toll upon the carriages which make use of them: a harbour, by moderate port-duty upon the tonnage of the shipping which load or unload in it. The coinage, another institution for facilitating commerce, in many countries, not only defrays its own expense, but affords a small revenue or seignorage to the sovereign. The post-office, another institution for the same purpose, over and above defraying its own expense, affords in almost all countries a very considerable revenue to the sovereign. When the carriages which pass over a highway or a bridge, and the lighters which sail upon a navigable canal, pay toll in proportion to their weight or their tonnage, they pay for the maintenance of those public works exactly in proportion to the wear and tear which they occasion of them. It seems scarce possible to invent a more equitable way of maintaining such works.

And even though he’s the father of capitalism and wrote the most famous and maybe the best book ever on why some nations are rich and others are poor, Adam Smith in The Theory of Moral Sentiments wrote as eloquently as anyone ever has on the futility of pursuing money with the hope of finding happiness. How do you reconcile that with the fact that no one did more than Adam Smith to make capitalism and self-interest respectable? That is a puzzle I try to unravel toward the end of this book. Besides the emptiness of excessive materialism, Smith understood the potential we have for self-deception, the danger of unintended consequences, the seductive lure of fame and power, the limitations of human reason, and the unseen sources of what makes our lives both so complex and yet at times so orderly. The Theory of Moral Sentiments is a book of observations about what makes us tick. As a bonus, almost in passing, Smith tells us how to lead the good life in the fullest sense of that phrase.

Most people in the Great Britain of (Adam) Smith's day lived in what most of us would regard as poverty. Hundreds of thousands were willing to risk the possibility of death in transit and years in indentured servitude for the chance to escape to the New World. Yet the population of Britain was probably better off economically than that of any major nation on the globe. To put relative poverty and wealth in perspective, let us take the standards of apparel considered necessary by ordinary day laborers, the lowest of the working poor, as recounted in The Wealth of Nations. In England, Smith reports, the poorest day laborer of either sex would be ashamed to appear in public without leather shoes. In Scotland, a rung lower on the ladder of national wealth, it was considered inappropriate for men of this class to appear without shoes, but not for women. In France, a rung rower still, custom held that both men and women laborers could appear shoeless in public. Below France there were many rungs in Europe. And below Europe there were many more rungs still. (p. 56)

There is a tendency among regulators to act like Adam Smith’s “Man of System,” moving objects around on a chess board. The man of system … is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it.… He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles … are opposite or different, the game will go on miserably. (Smith, 1759; pp. 233-234) The “game” may be hockey or public policy; the insight is the same. Unintended consequences may reduce, or even eliminate, the good you expect to result from a policy change. People aren’t chess pieces.

To give the monopoly of the home market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful. It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbours, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for

This self-deceit, this fatal weakness of mankind, is the source of half the disorders of human life. If we saw ourselves in the light in which others see us, or in which they would see us if they knew all, a reformation would generally be unavoidable. We could not otherwise endure the sight. Nature, however, has not left this weakness, which is of so much importance, altogether without a remedy; nor has she abandoned us entirely to the delusions of self-love. Our continual observations upon the conduct of others, insensibly lead us to form to ourselves certain general rules concerning what is fit and proper either to be done or to be avoided. Some of their actions shock all our natural sentiments. We hear every body about us express the like detestation against them. This still further confirms, and even exasperates our natural sense of their deformity. It satisfies us that we view them in the proper light, when we see other people view them in the same light. We resolve never to be guilty of the like, nor ever, upon any account, to render ourselves in this manner the objects of universal disapprobation. We thus naturally lay down to ourselves a general rule, that all such actions are to be avoided, as tending to render us odious, contemptible, or punishable, the objects of all those sentiments for which we have the greatest dread and aversion. Other actions, on the contrary, call forth our approbation, and we hear every body around us express the same favourable opinion concerning them. Every body is eager to honour and reward them. They excite all those sentiments for which we have by nature the strongest desire; the love, the gratitude, the admiration of mankind. We become ambitious of performing the like; and thus naturally lay down to ourselves a rule of another kind, that every opportunity of acting in this manner is carefully to be sought after. It is thus that the general rules of morality are formed. They are ultimately founded upon experience of what, in particular instances, our moral faculties, our natural sense of merit and propriety, approve, or disapprove of. We do not originally approve or condemn particular actions; because, upon examination, they appear to be agreeable or inconsistent with a certain general rule. The general rule, on the contrary, is formed, by finding from experience, that all actions of a certain kind, or circumstanced in a certain manner, are approved or disapproved of.

When we turn the body into human capital, the political consequences of the body disappear. Hands that are raised, legs that move, fingers that point, floors that are mopped, mouths that are fed. Our economy is built on bodies. If the body was taken seriously as a starting point for the economy, it would have far-reaching consequences. A society organized around the shared needs of human bodies would be a very different society from the one we know now. Hunger, cold, sickness, lack of healthcare, and lack of food would be central economic concerns. Not like today: unfortunate by-products of the one and only system. Our economic theories refuse to accept the reality of the body and flee as far from it as they can. That people are born small and die fragile, and that skin cut with a sharp object will bleed no matter who you are, no matter where you come from, no matter what you earn, and no matter where you live. What we have in common starts with the body. We shiver when we are cold, sweat when we run, cry out when we come, and cry out when we give birth. It's through the body that we can reach other people. So, economic man eradicates it. Pretends it doesn't exist. We observe it from the outside as if we were foreign capital. And we are alone.

As he deployed his forces, Newton imposed the same empirical rigor on his new job as he had with his pendulums and prisms. The Mint could not operate any faster than his men could spin their capstans, and every other step had to be timed to match the work of his presses. So Newton watched to “judge of the workmen’s diligence.” He saw how quickly the brutal effort needed to turn the press wore out its team. He observed just how nimble the man loading blanks and pulling finished coins from the press had to be to keep his fingers. Eventually, he identified the perfect pace: if the press thumped just slightly slower than the human heart, striking fifty to fifty-five times a minute, men and machines could stamp out coins for hours at a time. By autumn, Newton had the Mint’s output up to £100,000 every working week—a century ahead of Adam Smith, and more than double again before Henry Ford showed the world just how powerful time-and-motion rigor could be. Newton continued to drive his horses and men for the next two and a half years until the nation’s entire silver money supply had been remade. In all, under his command, the Mint recoined over £6 million—£6,722,970 0s. 2d., to be exact. As that last tuppence indicates, Newton, having spent the whole of his prior life as an essentially solitary thinker, proved to be a truly extraordinary administrator, bringing the effort home with accounts accurate to the penny and stunningly free of corruption.

(i) Social benefits. When we first started writing about higher education, we had a good deal of sympathy for the first justification. We no longer do. In the interim we have tried to induce the people who make this argument to be specific about the alleged social benefits. The answer is almost always simply bad economics. We are told that the nation benefits by having more highly skilled and trained people, that investment in providing such skills is essential for economic growth, that more trained people raise the productivity of the rest of us. These statements are correct. But none is a valid reason for subsidizing higher education. Each statement would be equally correct if made about physical capital (i.e., machines, factory buildings, etc.), yet hardly anyone would conclude that tax money should be used to subsidize the capital investment of General Motors or General Electric. If higher education improves the economic productivity of individuals, they can capture that improvement through higher earnings, so they have a private incentive to get the training. Adam Smith's invisible hand makes their private interest serve the social interest. It is against the social interest to change their private interest by subsidizing schooling. The extra students—those who will only go to college if it is subsidized—are precisely the ones who judge that the benefits they receive are less than the costs. Otherwise they would be willing to pay the costs themselves.

There is an excellent short book (126 pages) by Faustino Ballvè, Essentials of Economics (Irvington-on-Hudson, N.Y.: Foundation for Economic Education), which briefly summarizes principles and policies. A book that does that at somewhat greater length (327 pages) is Understanding the Dollar Crisis by Percy L. Greaves (Belmont, Mass.: Western Islands, 1973). Bettina Bien Greaves has assembled two volumes of readings on Free Market Economics (Foundation for Economic Education). The reader who aims at a thorough understanding, and feels prepared for it, should next read Human Action by Ludwig von Mises (Chicago: Contemporary Books, 1949, 1966, 907 pages). This book extended the logical unity and precision of economics beyond that of any previous work. A two-volume work written thirteen years after Human Action by a student of Mises is Murray N. Rothbard’s Man, Economy, and State (Mission, Kan.: Sheed, Andrews and McMeel, 1962, 987 pages). This contains much original and penetrating material; its exposition is admirably lucid; and its arrangement makes it in some respects more suitable for textbook use than Mises’ great work. Short books that discuss special economic subjects in a simple way are Planning for Freedom by Ludwig von Mises (South Holland, 111.: Libertarian Press, 1952), and Capitalism and Freedom by Milton Friedman (Chicago: University of Chicago Press, 1962). There is an excellent pamphlet by Murray N. Rothbard, What Has Government Done to Our Money? (Santa Ana, Calif.: Rampart College, 1964, 1974, 62 pages). On the urgent subject of inflation, a book by the present author has recently been published, The Inflation Crisis, and How to Resolve It (New Rochelle, N.Y.: Arlington House, 1978). Among recent works which discuss current ideologies and developments from a point of view similar to that of this volume are the present author’s The Failure of the “New Economics”: An Analysis of the Keynesian Fallacies (Arlington House, 1959); F. A. Hayek, The Road to Serfdom (1945) and the same author’s monumental Constitution of Liberty (Chicago: University of Chicago Press, 1960). Ludwig von Mises’ Socialism: An Economic and Sociological Analysis (London: Jonathan Cape, 1936, 1969) is the most thorough and devastating critique of collectivistic doctrines ever written. The reader should not overlook, of course, Frederic Bastiat’s Economic Sophisms (ca. 1844), and particularly his essay on “What Is Seen and What Is Not Seen.” Those who are interested in working through the economic classics might find it most profitable to do this in the reverse of their historical order. Presented in this order, the chief works to be consulted, with the dates of their first editions, are: Philip Wicksteed, The Common Sense of Political Economy, 1911; John Bates Clark, The Distribution of Wealth, 1899; Eugen von Böhm-Bawerk, The Positive Theory of Capital, 1888; Karl Menger, Principles of Economics, 1871; W. Stanley Jevons, The Theory of Political Economy, 1871; John Stuart Mill, Principles of Political Economy, 1848; David Ricardo, Principles of Political Economy and Taxation, 1817; and Adam Smith, The Wealth of Nations, 1776.

Our man at the desk considering how goes the world, had he been in the City of London in 1913, would have been one of the merchant princes of the world: to him for capital came the Moscow Power and Light Company, the breweries of Bohemia, the trolley lines of Shanghai, the apples of Tasmania, the oil of Mexico, the ranches of Texas and Arizona, the tin mines of Malaya, the hemp of Tanganyika, and the railroads of absolutely everywhere. Half a century later our man was still at his desk and still at work, a bit shabbier,

It is that wealth is inextricably associated with inequality. This is an insight that we get from a most unlikely source, the first of the great philosophers of capitalism, who wrote that “wherever there is great property, there is great inequality. . . . The affluence of the rich supposes the indigence of the many.” It is Adam Smith speaking, not Karl Marx.11

How valid, then, is the progressive critique that “you didn’t build that”? The pitch itself has two parts. The first is that society did it, not business; the second is that workers did most of it, not CEOs and entrepreneurs. Both these arrows strike at the same target: entrepreneurs. Consequently an exposé of the progressive pitch requires a refutation of this dual attack and also a defense of the entrepreneur, an explanation of what it is that entrepreneurs actually do. This explanation is, oddly enough, lacking. Adam Smith didn’t provide it in his Wealth of Nations, and most entrepreneurs, for reasons we will explore, don’t provide it today. One of the few writers to celebrate entrepreneurs was Ayn Rand; she unapologetically defends capitalism, the system, and also capitalists, the people! In my view, the most insightful defender of entrepreneurs was the economist Joseph Schumpeter, and we will be learning a lot from him in this chapter. Ultimately, we will see the progressive pitch for what it is, an ingenious scam aimed at depriving wealth creators of the wealth they have created. Rand calls them the “looters,” and this is basically a clinically accurate term for a group that is very much with us today.

An Inquiry into the Nature and Causes of the Wealth of Nations (Smith, Adam) - Your Highlight on page 1 | location 54-60 | Added on Thursday, 13 November 2014 06:53:21 Whatever be the actual state of the skill, dexterity, and judgment, with which labour is applied in any nation, the abundance or scantiness of its annual supply must depend, during the continuance of that state, upon the proportion between the number of those who are annually employed in useful labour, and that of those who are not so employed. The number of useful and productive labourers, it will hereafter appear, is everywhere in proportion to the quantity of capital stock which is employed in setting them to work, and to the particular way in which it is so employed. The second book, therefore, treats of the nature of capital stock, of the manner in which it is gradually accumulated, and of the different quantities of labour which it puts into motion, according to the different ways in which it is employed.

The Chicago School used Smith to represent a belief in the scientific rationality of markets in opposition to the messy irrationality of politics. That view has since been challenged, predominantly by historians of political thought and political philosophers who have argued that Smith’s distinctiveness lies not just in his economic thought, but in his moral philosophy.

let’s turn to the formula, talking about accumulation: M C C’ M’. M, money, C, input commodities, one cycle; M prime, more money. What happens in this process to allow M to become M prime, which is the whole point? You wouldn’t go through all of this if you ended up at the end with the same money as you started out with at the beginning. M just came out as M. The whole point is to get from M to M prime. To understand this, we have to examine this peculiar commodity of labor power. As an analysis of how more money emerges from the production process than goes in, Marx first rules out any possibilities of cheating or unfairness. In his analysis of the capitalist system, Marx is in a conversation with, and often in argumentation with, the economists, and political economists who came before them, principally the classical political economists. People like David Ricardo, Adam Smith, and a number of others. He wanted to make his analysis within their frame of rules, which presents capital in its best light. So that if in fact he shows it not to produce the advantages that they claim, he will have done it on their terms. One of the things he does is to rule out things like cheating, like buying low and selling high, which is a sort of principal character of mercantilism. The reason he rules this out is, he says, that on balance in society, this doesn’t produce any additional surplus value or wealth. It simply redistributes what value or wealth already exists. That it all averages out; if you cheat somebody, you may have gotten something, but they lost something. It’s a kind of zero-sum thing. He rules that out. Everything in the process as Marx analyzes it trades at its true value. The means of production cannot be the source of the additional value. Remember, he’s trying to figure out in his process how we get from M to M prime. One of the things that capitalists do is buy means of production. He says, those cannot be the source of additional value. The reasons are this. They either transfer part of their value to the new products, or, for example, you depreciate machinery over time. You can calculate how much of the value goes into a production in each cycle of production. Or the means of production actually end up incorporated into the new product itself, but there is no new value there. So, if you make something, if you make bread out of wheat, it becomes incorporated in the bread, but there is no new value there. It’s necessary for the capitalists to find on the market the commodity that produces more value than it itself costs. That’s the trick. This unique commodity is labor power, and is the only element in the process that produces surplus value, which is the source of profit.

We recall that for Hutcheson, human happiness had been about personal liberty, the capacity to live one’s life as one saw fit without harming others. For Kames, it had been about owning property, which gave us our sense of “propriety” and identity as human beings. Now Smith put the two together. By entering and competing in the great interactive dynamic network of modern society, at once impersonal but also indispensable to happiness, we become fully free and human. Independence in this sense becomes the hallmark of modern society, just as dependence on others or “servility” becomes the hallmark of primitive societies and institutions. “Nobody but a beggar,” Smith admonished, “chuses to depend chiefly upon the benevolence of his fellow-citizens.” Yet this has been the essential fate of the vast majority of humankind through most of history, as slaves toiling for their masters, as peasants handing over the harvest to their feudal lords, or as members of the tribe or clan dependent on their chieftains’ command for life or death—hapless creatures whose quality of life rests entirely on whether their chief is “gentle Lochiel” or a brute like Coll MacDonnell. Capitalism breaks that cycle, and offers the conditions under which we forge our own happiness: independence, material affluence, and cooperation with others. Today, more than two hundred years later, three great myths still surround Adam Smith and his Wealth of Nations.

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of greatest value… he generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it.… He intends his own security; … he intends only his own gain and he is in this … led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. —Adam Smith,9 18th century political economist

Black Swans being unpredictable, we need to adjust to their existence (rather than naïvely try to predict them). There are so many things we can do if we focus on antiknowledge, or what we do not know. Among many other benefits, you can set yourself up to collect serendipitous Black Swans (of the positive kind) by maximizing your exposure to them. Indeed, in some domains—such as scientific discovery and venture capital investments—there is a disproportionate payoff from the unknown, since you typically have little to lose and plenty to gain from a rare event. We will see that, contrary to social-science wisdom, almost no discovery, no technologies of note, came from design and planning—they were just Black Swans. The strategy for the discoverers and entrepreneurs is to rely less on top-down planning and focus on maximum tinkering and recognizing opportunities when they present themselves. So I disagree with the followers of Marx and those of Adam Smith: the reason free markets work is because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or “incentives” for skill. The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can.

In defense of Madison’s stand, we should recall that his mentality was precapitalist. He assumed that the people who would run the country, those who had the wealth of the nation, would be “enlightened gentlemen,” people who have the good of the society at heart, not their own fortunes. They would be like the mostly mythical Roman noblemen who were an image for the Framers, even providing the names for the pseudonymous pamphlets of the intellectual elite. Adam Smith had a sharper eye. As I quoted last time, he understood that the “masters of mankind,” the merchants and manufacturers, would make sure that their own interests are cared for no matter how grievous the effect on others and would follow their vile maxim: all for ourselves, nothing for anyone else. Madison didn’t see things this way at the time of the Convention, though it didn’t take long for him to gain a more realistic understanding of the world. Already by 1792 he recognized that the Hamiltonian developmental capitalist state would be a social system “substituting the motive of private interest in place of public duty,” leading to “a real domination of the few under an apparent liberty of the many.” In a letter to Jefferson he deplored “the daring depravity of the times [as the] stockjobbers will become the pretorian band of the government—at once its tools and its tyrant; bribed by its largesses, and overawing it by clamors and combinations.” Not an unfamiliar picture.

During the Constitutional Convention, the most respected of the delegates was Benjamin Franklin, who objected to what was going on. He expressed his “dislike of everything that tended to debase the spirit of the common people” and reminded his colleagues that “some of the greatest rogues he was ever acquainted with were the richest rogues” (Klarman, op. cit.)—rather like some of Adam Smith’s reflections. Franklin was a lone voice at the convention. Thomas Jefferson expressed somewhat similar sentiments, but he wasn’t there. He was then ambassador in Paris. In any event, the coup did proceed on course with consequences to the present, though there was plenty of conflict in the country at the time—hence “a coup”—and in the years that followed, to the present. The twentieth century also had important exceptions in elite opinion. The most prominent was John Dewey, the most respected American social philosopher of the twentieth century. Most of his work—and also activism—was devoted to democracy and education, along lines very much opposed to the doctrines of “manufacture of consent” and marginalization of the “bewildered herd.” By democracy, Dewey meant full-blooded democracy, with active participation of an informed public. His democratic theory was linked closely to his educational philosophy, which was designed to nurture creativity and independence of thought, for one reason as preparation for participation in a democratic society. It worked. I was lucky enough to go to a Deweyite school from about age two to twelve, and it was very impressive. Dewey was at first a typical responsible intellectual, joining the self-adulation of intellectuals during World War I for their stellar role in directing the stupid masses to wartime enthusiasm. That was, however, not unusual. The capitulation to power of the intellectual classes during those years, on all sides, is astonishing to behold, and of the few who didn’t swim with the tide, the best known ended up in jail: Bertrand Russell in England, Eugene Debs in the US, Karl Liebknecht and Rosa Luxemburg in Germany.

In earlier days, advocacy of free markets was a progressive doctrine. It was upheld by the rascal multitude and the radicals of the English revolution. The idea was that free markets would eliminate hierarchy and subordination to authority. They would free people from autocratic systems, from state, church, landlords. Free markets would enable them to become self-employed, self-ruled. That was the ideal for John Locke, Adam Smith, Thomas Paine, Abraham Lincoln, other classical liberals. All of that crashed with the Industrial Revolution of the nineteenth century. Everything changed, but it’s very important to understand the classical liberal reasoning, which has considerable resonance right to today. Take Adam Smith again. All people have “an equal right to the earth,” he held, and it’s absurd to claim that land ownership should be restrained by “the fancy of those who died perhaps five hundred years ago.” Great estates should be broken up and sold equitably.

Adam Smith, capitalism's original storyteller, “wrote that the ultimate goal of business is not to make a profit. Profit is just the means. The goal is general welfare” (Wink 1992, 68). Instead, the view of capitalism in play today tends to reduce people to economic beings driven by utilitarian self-interest toward the goal of accumulating wealth. What

Whereas employees contribute time and energy, investors contribute capital (money). Both forms of contribution are valuable and necessary to help a company succeed, so both parties should be fairly rewarded for their contributions. Logically, for a company to get bigger, stronger or better at what they do, executives must ensure that the benefit provided by investors’ money or employees’ hard work should, as Adam Smith pointed out, go first to those who buy from the company. When that happens, it is easier for the company to sell more, charge more, build a more loyal customer base and make more money for the company and its investors alike.

Adam Smith. The eighteenth-century Scottish philosopher and economist is widely accepted as the father of economics and modern capitalism. “Consumption,” he wrote in The Wealth of Nations, “is the sole end and purpose of all production and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” He went on to explain, “The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it.” Put simply, the company’s interests should always be secondary to the interest of the consumer (ironically, a point Smith believed so “self-evident,” he felt it was absurd to try to prove it, and yet here I am writing a whole book about it).

So what do I mean by modernity? The modern world derives its distinctive characteristics from the transformation of traditional societies initiated by the rise of modern industrial capitalism in mid-eighteenth-century Protestant Europe and America, which was itself preceded by some 250 to 300 years of witting and unwitting cultural spadework in religion, art, science, commerce, and colonization. One consequence of the rise of industrial capitalism—epitomized by Adam Smith, Karl Marx, and Max Weber, and today de rigueur—has been an acute and increasingly sophisticated attention to economic behavior, indeed to economic interest seen as not only a determinant of human action but in many modern theories as the determinant of human action.

Es curioso que uno de los primeros que entendieron la importancia de la responsabilidad limitada en el desarrollo del capitalismo fuese Karl Marx, supuestamente su mayor enemigo. A diferencia de muchos defensores del libre mercado de la misma época (como el propio Adam Smith), que eran contrarios a la responsabilidad limitada, Marx se dio cuenta de que permitiría movilizar las grandes sumas de capital necesarias para la industria pesada y la industria química, que justo entonces empezaban a despuntar, porque reducían el riesgo para cada inversor. En un texto de 1865, época en que el mercado de valores aún desempeñaba un papel muy secundario en la dramaturgia del capitalismo, Marx tuvo la clarividencia de definir a las sociedades anónimas como «la producción capitalista en su máximo desarrollo». Como sus adversarios defensores del libre mercado, reconocía la tendencia a que la responsabilidad limitada fomentase riesgos excesivos entre los gestores y la criticaba; la diferencia es que él la consideraba un efecto secundario del enorme progreso material que estaba a punto de provocar aquella innovación institucional. También tenía otros motivos para defender al «nuevo» capitalismo de las críticas de los defensores del libre mercado, por supuesto: la sociedad anónima le parecía una «fase de transición» al socialismo, en la medida en que separaba la propiedad de la gestión y, al hacerlo, posibilitaba la eliminación de los capitalistas (que no gestionan la empresa) sin poner en jaque el progreso material alcanzado por el capitalismo.

Adam Smith affirms that the division of labour is less applicable to agriculture than to manufactures. Smith had in view only the separate manufactory and the separate farm. He has, however, neglected to extend his principle over whole districts and provinces. Nowhere has the division of commercial operations and the confederation of the productive powers greater influence than where every district and every province is in a position to devote itself exclusively, or at least chiefly, to those branches of agricultural production for which they are mostly fitted by nature. In one district corn and hops chiefly thrive, in another vines and fruit, in a third timber production and cattle rearing, etc. If every district is devoted to all these branches of production, it is clear that its labour and its land cannot be nearly so productive as if every separate district were devoted mainly to those branches of production for which it is specially adapted by nature, and as if it exchanged the surplus of its own special products for the surplus produce of those provinces which in the production of other necessaries of life and raw materials possess a natural advantage equally peculiar to themsélves. This division of commercial operations, this confederation of the productive forces occupied in agriculture, can only take place in a country which has attained the greatest development of all branches of manufacturing industry; for in such a country only can a great demand for the greatest variety of products exist, or the demand for the surplus of agricultural productions be so certain and considerable that the producer can feel certain of disposing of any quantity of his surplus produce during this or at least during next year at suitable prices; in such a country only can considerable capital be devoted to speculation — in the produce of the country and holding stocks of it, or great improvements in transport, such as canals and railway systems, lines of steamers, improved roads, be carried out profitably; and only by means of thoroughly good means of transport can every district or province convey the surplus of its peculiar products to all other provinces even to the most distant ones, and procure in return supplies of the peculiar products of the latter. Where everybody supplies himself with what he requires, there is but little opportunity for exchange, and therefore no need for costly facilities transport.

Adam Smith reduces the process of the formation of capital in the nation to the operation of a private rentier, whose income is determined by the value of his material capital, and who can only increase his income by savings which he again turns into capital. He does not consider that this theory of savings, which in the merchant’s office is quite correct, if followed by a whole nation must lead to poverty, barbarism, powerlessness, and decay of national progress. Where everyone saves and economises as much as he possibly can, no motive can exist for production. Where everyone merely takes thought for the accumulation of values of exchange, the mental power required for production vanishes. A nation consisting of such insane misers would give up the defence of the nation from fear of the expenses of war, and would only learn the truth after all its property had been sacrificed to foreign extortion, that the wealth of nations is to be attained in a manner different to that of the private rentier.

My friend’s dad was a teacher in the local public schools, a loyal member of the teachers’ union, and a more dedicated liberal than most: not only had he been a staunch supporter of George McGovern, but in the 1980 Democratic primary he had voted for Barbara Jordan, the black U.S. Representative from Texas. My friend, meanwhile, was in those days a high school Republican, a Reagan youth who fancied Adam Smith ties and savored the writing of William F. Buckley. The dad would listen to the son spout off about Milton Friedman and the godliness of free-market capitalism, and he would just shake his head. Someday, kid, you’ll know what a jerk you are. It was the dad, though, who was eventually converted. These days he votes for the farthest-right Republicans he can find on the ballot. The particular issue that brought him over was abortion. A devout Catholic, my friend’s dad was persuaded in the early nineties that the sanctity of the fetus outweighed all of his other concerns, and from there he gradually accepted the whole pantheon of conservative devil-figures: the elite media and the American Civil Liberties Union, contemptuous of our values; the la-di-da feminists; the idea that Christians are vilely persecuted—right here in the U.S. of A. It doesn’t even bother him, really, when his new hero Bill O’Reilly blasts the teachers’ union as a group that “does not love America.

Economists have always recognised that some kind of initial accumulation was necessary for the rise of capitalism. Adam Smith called this ‘previous accumulation’, and claimed that it came about because a few people worked really hard and saved their earnings– an idyllic tale that still gets repeated in economics textbooks. But historians see it as naïve. This was no innocent process of saving. It was a process of plunder.

Adam Smith had a sharper eye. As I quoted last time, he understood that the “masters of mankind,” the merchants and manufacturers, would make sure that their own interests are cared for no matter how grievous the effect on others and would follow their vile maxim: all for ourselves, nothing for anyone else. Madison didn’t see things this way at the time of the Convention, though it didn’t take long for him to gain a more realistic understanding of the world. Already by 1792 he recognized that the Hamiltonian developmental capitalist state would be a social system “substituting the motive of private interest in place of public duty,” leading to “a real domination of the few under an apparent liberty of the many.” In a letter to Jefferson he deplored “the daring depravity of the times [as the] stockjobbers will become the pretorian band of the government—at once its tools and its tyrant; bribed by its largesses, and overawing it by clamors and combinations.

Thus Virginia ceded the vital functions of shipping and trade finance to cities in the North. Functions for trading hubs required the type of work known today as white collar: coordinating logistics, arranging for insurance, negotiating trade terms, extending trade capital, maintaining wholesale facilities, and others. Trading spawned other activity. Trading ports were the prime conduits of information, the aggregate of which Adam Smith would call the “invisible hand” of the market: information used by entrepreneurs and businessmen to adjust their activity to maximize profit. The more dynamic the information flow, the more fluid the opportunities were to profit from the shifting tides of the market. The more fluid the opportunities, the easier it was for new entrants and upstarts to make a name. Eventually this would lead to a far wider and greater set of urban opportunities in the North than in the single-crop colonies of the South.

Remarkably, a friend of James Watt at the University of Glasgow best understood how this phenomenon of labor savings would unfold. Making a wide set of observations and predictions about specialized industrial processes—in which each laborer focused on a particular task rather than creating the whole as craftsmen and artisans did—Adam Smith advanced the idea of “division of labor” as a central concept in his 1776 Wealth of Nations, the treatise that defined the contours of market capitalism. As people specialized and the work needed for a given task decreased, the overall need for human labor would not fall as was feared. Instead, standards of living would increase as more people could afford more, widening the market for all sorts of new goods, which would create new forms of work. To Smith, this endless discovery of efficiency gains was the catalyst for all economic growth. The ability for humanity to collectively rise above a day’s work for a day’s sustenance, by definition, required the economy to get more out of mankind’s collective labor. At the same time, Smith argued that these newly discovered efficiencies that caused men to lose their livelihoods would seem cruel, but were inevitable as new ways replaced old. The interdependencies caused by industrialization, where one man’s effort was tied to that of another and then another, were an abstraction. As people left the self-sufficient village farm, where shelter, food, and clothing were simple domestic responsibilities, the idea of losing one’s place in the specialized economy was a danger that few had been exposed to.

a tool that enabled him to engage in a “patriotic duty to develop vital resources.” And in fairness, there was policy rationale in encouraging capital investment in the American steel industry, with the hope that the nation would develop the competency. Such policies were successful in diversifying and growing the industrial base: America did emerge as the largest steel producer in the world by the end of the century. From here the growth of the American steel industry paved the way for a variety of ancillary and dependent industries over the next few decades. Even military might in the next century would be firmly rooted in steelmaking capacity. But laissez-faire capitalism it was not. The invisible hand of Adam Smith’s free market was accompanied by the guiding hand of government policy.

AND ONCE MODERN American capitalism started its momentum, men who knew how to impose their will conquered markets. To Adam Smith, these emerging industrial artists were “philosophers,” enterprising men whose role in society was “to observe everything” and by so doing become “capable of combining together the powers of the most distant and dissimilar objects.

Today, Adam Smith is famous as the father of capitalism and an advocate of a central tenet of free market thought: that greed is supposedly good and it drives markets. This was an idea pushed by neoliberal economists, inspired by Friedrich Hayeck and Milton Friedman, who had no knowledge of the history of moral philosophy, or of Scotland. What they missed is that no gentleman of his time could ever espouse greed, least of all a professor of moral philosophy. Indeed, Adam Smith recognized greed as an economic driver, and saw it as necessary, but also realized that it was a problem for society. His work was not an espousal of greed, but rather a response to it. His work was an attempt to find a way to reign in commercial greed to support the agrarian order, which he believed to be inherently more productive than business.

...the idea that Smith can somehow be seen as representative of modern capitalism is a stretch. He was a man of his time, in the very particular society of oligarchic, 18th century Scotland. It was a world in which he thrived precisely by not fighting the status quo, but rather by making a proposal for harnessing greed, while keeping merchants in their social place and celebrating the ruling class of the time, and trying to envision a way in which it could play a part in a modernizing economy. In many ways, he got it right. While capitalism flourished in 18th century Scotland, the landed elite remained firmly in place and has managed to do so to this very day. In that aspect, Smith was quite visionary.

It is worth remembering that Adam Smith, the founder of classical economics, was first and foremost a philosopher. He strove to be a moralist and, in doing so, became an economist. When he published The Theory of Moral Sentiments in 1759, modern capitalism was just getting under way. Smith was entranced by the sweeping changes wrought by this new force, but it wasn’t just the numbers that interested him.

would become a foundation for both Adam Smith’s capitalism and Karl Marx’s socialism.

His definition of property as a product of someone’s labour would become a foundation for both Adam Smith’s capitalism and Karl Marx’s socialism.

This sordid exercise has a soothing, if mystifying name: ‘dividend recapitalisation’ – though to call it that would be akin to relabelling a bank robbery as ‘asset redistribution’. The private equity firm that cost Gillian her job has practised straightforward asset-stripping, with financialisation providing the necessary smoke and mirrors. Looters, who have created no new value, have simply ransacked a pre-existing care provider. To use the language of early economists like Adam Smith, it is a classic case of feudal rent defeating capitalist profit; of wealth extraction by those who already have it triumphing over the creation of new wealth by entrepreneurs. And the key point to note is that the success of such a scheme depends on these looters being able to sell subsidiaries like PropCom at high enough prices once the original company has been destroyed.

The basic issue was formulated quite clearly by Thomas Jefferson. That was before the Industrial Revolution had really taken roots in the former colonies. In his later years, Jefferson lived until 1826, and towards the end of his life, he was observing what was happening, and he had rather serious concerns about the fate of the democratic experiment for which he was the leading intellectual spokesman and a major Enlightenment figure. He feared that the rise of a new form of absolutism, which he considered as being more ominous than the form of absolutism that the American Revolution, 50 years earlier, had overthrown. And in writing about this in his last years, he distinguished between what he called "aristocrats" and "democrats." "Aristocrats," he said, are those who "fear and distrust the people and wish to draw all powers from them into the hands of the higher classes," in particular, the "banking institutions and moneyed incorporations." What we would nowadays call corporations. That was just on the future, and he warned specifically against that. So, that's the "aristocrats." The "democrats," in contrast, in his words, "identify with the people, have confidence in them, cherish and consider them as the honest and safe depository of the public interest, even if not always the most wise." Well, the "aristocrats" of his day were the advocates of the rising capitalist state, and he recognized the perfectly obvious contradiction between democracy and capitalism. And it just increased as corporate structures were granted increasing powers, primarily early in this century, not by democratic procedures but by courts and lawyers, who turned these "banking institutions and moneyed incorporations," of which Jefferson warned, into immortal persons with powers and rights beyond the worst nightmares of pre-capitalist thinkers like Adam Smith or Thomas Jefferson.

The historical antecedent of neoclassical economics is what Marx referred to as “classical” political economy. Classical theorists like Adam Smith and David Ricardo were very much mouthpieces for the ascendant bourgeois class. This is not to say that their explorations of the political economy of the day did not produce important knowledge upon which critics like Marx built. After all, it was only after Smith and Ricardo that Marx began referring to “vulgar” economics. The problem resided in their bourgeois class blind faith that pursuit of abstract mercantile wealth in impersonal markets was somehow the “natural” way of organizing human material affairs. With bourgeois tinted glasses coloring their vision, so to speak, classical political economy began to read all human history in bourgeois terms.

After every one of these profit frenzies come the promises: next time, there will be firm laws in place before a country's assets are sold off, and the entire process will be watched over by eagle-eyed regulators and investigators with unimpeachable ethics. Next time there will be "institution building" before privatization (to use the post-Russia parlance). But calling for law and order after the profits have all been moved offshore is really just a way of legalizing the theft ex post facto, much as the European colonizers locked in their land grabs with treaties. Lawlessness on the frontier, as Adam Smith understood, is not the problem but the point, as much a part of the game as the contrite hand-wringing and pledges to do better next time.

As the modern era came into being, the avarice of the usurer was supplanted by interest in the broader and more abstract sense of a share or stake. This new concept of interest was ethically wide-ranging: it ‘came to cover virtually the entire range of human actions, from the narrowly self-centered to the sacrificially altruistic, and from the prudently calculated to the passionately compulsive’.49 The seventeenth-century English statesman and philosopher Lord Shaftesbury summed up the new thinking with his comment that ‘Interest governs the World.’50 In his Fable of the Bees (1714), Bernard Mandeville exposed the paradox at the heart of the modern world, namely that private vices brought public benefits. Adam Smith incorporated Mandeville’s wicked insights into his political economy. In The Wealth of Nations, Smith describes the individual as one who ‘By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.’51 A similar thought is expressed in another famous line, in which Smith writes that ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.’ The spirit of capitalism was transmitted across networks of credit that connected lenders and borrowers through bonds of mutual self-interest.52 Daniel Defoe described credit as a ‘stock’, synonymous with capital, while the French in Defoe’s day referred to capital as ‘interest’, in the sense of taking a stake.fn6 From a technical viewpoint, capital consists of a stream of future income discounted to its present value. Without interest, there can be no capital. Without capital, no capitalism. Turgot, a contemporary of Adam Smith’s, understood this very well: ‘the capitalist lender of money,’ he wrote, ‘ought to be considered as a dealer in a commodity which is absolutely necessary for the production of wealth, and which cannot be at too low a price.’53 (Turgot exaggerated. As we shall see, interest at ‘too low a price’ is the source of many evils.)

A worker in Adam Smith’s pin factory, or Henry Ford’s automobile factory, performed a single repetitive task with no real connection, emotional or intellectual, to the overall product. Nor—unlike those old-time craftsmen—did factory workers have much of a connection to the economics of the business. Although factory workers did much better economically than peasant farmers had done, their share of the proceeds was trivial compared to that of the people who financed and ran these large capital-intensive operations— people who became known as “capitalists.

Los Angeles—the dream-making capital of the world—serves as the backdrop for a number of the stories I recount. Some readers who cut their teeth in the urban centers of Europe or on the East Coast of America may prefer to dismiss what happens in Los Angeles as from a place apart, the aberrations of a migrant’s city within a migrant land. Such sentiments are understandable. Awash in the solar energy of a subtropical paradise, Los Angelinos engage life in the moment. The pace is fast, the music loud, and money is on display. Part of me, too, would prefer to dismiss such an existence as a mythmaker’s parody. But the place is real. In its immediacy and in its magnification of the familiar, Los Angeles creates its own reality and in so doing offers a “fast-forward” simulation of our collective future as a migrant culture. As Americans we must now decide whether such a future is of our choice, and whether it is sustainable. In the pages that follow, it is my goal to help inform that choice. Will we learn as a people to constructively channel the opportunities and individual enticements of the Fast New World toward an equitable social order, as Adam Smith had envisioned, or will the material demand for economic growth continue to erode the microcultures and intimate social bonds that are the hallmark of our humanity and the keys to health and personal happiness? Have the goals of America’s original social experiment been hijacked by its commercial success, threatening the delicate dance between individual desire and social responsibility, or will the nation in its migrant wisdom effectively apply its market and military dominance to remain a “beacon of hope,” enhancing the well-being of all the world’s peoples? This is a critical time in America, a time for careful thought and diligent action, for we have discovered in our commercial success that in an open society the real enemy is the self-interest that begins with a healthy appetite for life and mushrooms into manic excess during affluent times. Americans are again in the vanguard of human experience, and the world is watching. It is again a time for choosing.

Yet economics purports to be strangely exempt from this fact of life. From Adam Smith's day to our own, the chief concern of the discipline has been to render economic events unsurprising...The discernment of orderly rules governing the apparent chaos of life was a remarkable achievement and continues to amaze.

The Bayesian Invisible Hand … free-market capitalism and Bayes’ theorem come out of something of the same intellectual tradition. Adam Smith and Thomas Bayes were contemporaries, and both were educated in Scotland and were heavily influenced by the philosopher David Hume. Smith’s 'Invisible hand' might be thought of as a Bayesian process, in which prices are gradually updated in response to changes in supply and demand, eventually reaching some equilibrium. Or, Bayesian reasoning might be thought of as an 'invisible hand' wherein we gradually update and improve our beliefs as we debate our ideas, sometimes placing bets on them when we can’t agree. Both are consensus-seeking processes that take advantage of the wisdom of crowds. It might follow, then, that markets are an especially good way to make predictions. That’s really what the stock market is: a series of predictions about the future earnings and dividends of a company. My view is that this notion is 'mostly' right 'most' of the time. I advocate the use of betting markets for forecasting economic variables like GDP, for instance. One might expect these markets to improve predictions for the simple reason that they force us to put our money where our mouth is, and create an incentive for our forecasts to be accurate. Another viewpoint, the efficient-market hypothesis, makes this point much more forcefully: it holds that it is 'impossible' under certain conditions to outpredict markets. This view, which was the orthodoxy in economics departments for several decades, has become unpopular given the recent bubbles and busts in the market, some of which seemed predictable after the fact. But, the theory is more robust than you might think. And yet, a central premise of this book is that we must accept the fallibility of our judgment if we want to come to more accurate predictions. To the extent that markets are reflections of our collective judgment, they are fallible too. In fact, a market that makes perfect predictions is a logical impossibility.

If you actually read The Wealth of Nations, you’d know that’s what capitalism is all about. Competition on a level playing field. Not one megacorporation crushing the competition.” “So how do you stop the megacorporation?” “That’s what government is for.” “Good luck with that. You’ve got a big chunk of the country trained to think that government is bad. They have no idea that Adam Smith meant for government to intercede.” “That’s because of those megacorporations—the ones your generation let get out of hand. They’ve brainwashed people into hating the government.” “Can’t argue with that.” I basically agreed with his assessment of capitalism, that it had gone off the rails, and I was proud that he could articulate his point of view. “Good,” he said. “Now that we’ve got that squared away, exactly what are you doing for your new corporate overlord?” The good times had ended,

The view has been gaining widespread acceptance that corporate officials and labor leaders have a “social responsibility” that goes beyond serving the interest of their stockholders or their members. This view shows a fundamental misconception of the character and nature of a free economy. In such an economy, there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud….It is the responsibility of the rest of us to establish a framework of law such that an individual in pursuing his own interest is, to quote Adam Smith again, “led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.” Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine. If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self-selected private individuals decide what the social interest is? Can they decide how great a burden they are justified in placing on themselves or their stockholders to serve that social interest? Is it tolerable that these public functions of taxation, expenditure, and control be exercised by the people who happen at the moment to be in charge of particular enterprises, chosen for those posts by strictly private groups? If businessmen are civil servants rather than the employees of their stockholders then in a democracy they will, sooner or later, be chosen by the public techniques of election and appointment.

In a class I teach on political economy, I illustrate the concept of gains from trade by doing an in-class experiment. As students enter, I give each of them a different candy bar. I ask them to rate the candy they received on a scale of 1–10, with 1 meaning they hate the candy and 10 meaning they love the candy. I then add up their scores. (For instance, in a fall 2013 seminar with 19 students, the total was 103.) After, I tell them they are free to make trades with any willing partner they wish. Most students make a trade, and everyone who trades is happier with her new candy than she was with the old. After all trading is ceased, I ask them to rate the candy they now have. Usually, the total value of the candy goes up 30–50%. (For instance, in the fall 2013 seminar, the final total was 149.) I then ask students, is there some way we could have made it possible to have even higher gains from trade? Usually, they conclude that if we had even more students trading a greater variety of candy bars (or even things other than candy bars), the gains would have been even higher. And so, in 10 minutes, the students discover first hand what Adam Smith explained in the first few pages of the Wealth of Nations (1981): the greater the size of the market, the greater the potential prosperity we can all enjoy.

Yan Fu was convinced that since ‘the wealth and power of modern Europe are attributed by experts to the science of economics’ and that ‘Economics began with Adam Smith, who developed the great principle … that in serving the greater interest, the interest of both sides must be served’, then China had to learn from Adam Smith.96 The West, explained Yan Fu, exalted dynamism, and assertiveness; its commitment to liberty released the potential of individuals. That’s why the West was rich and powerful. China should turn her back on ‘the way of the Sages’ and the traditionalism that kept her people weak and ignorant.97

When we turn the body into human capital, the political consequences of the body disappear. Hands that are raised, legs that move, fingers that point, floors that are mopped, mouths that are fed. Our economy is built on bodies. If the body was taken seriously as a starting point for the economy, it would have far-reaching consequences. A society organized around the shared needs of human bodies would be a very different society from the one we know now. Hunger, cold, sickness, lack of healthcare and lack of food would be central economic concerns. Not like today: unfortunate by-products of the one and only system. Our economic theories refuse to accept the reality of the body and flee as far from it as they can. That people are born small and die fragile, and that skin cut with a sharp object will bleed no matter who you are, no matter where you come from, no matter what you earn and no matter where you live. What we have in common starts with the body. We shiver when we are cold, sweat when we run, cry out when we come and cry out when we give birth. It’s through the body that we can reach other people. So, economic man eradicates it. Pretends it doesn’t exist. We observe it from the outside as if it were foreign capital. And we are alone.

As one economist explained, it should be in the public interest “in every country” to let the people “buy whatever they want from those who sell it cheapest…The proposition is so very manifest that it seems ridiculous to take any pains to prove it.” This wasn’t a recent observation. It was the father of capitalism, Adam Smith, writing in the 1700s. His point is more relevant than ever.

Human beings have always been infatuated with gambling because it puts us head-to-head against the fates, with no holds barred. We enter this daunting battle because we are convinced that we have a powerful ally: Lady Luck will interpose herself between us and the fates (or the odds) to bring victory to our side. Adam Smith, a masterful student of human nature, defined the motivation: “The overweening conceit which the greater part of men have of their own abilities [and] their absurd presumption in their own good fortune.”1 Although Smith was keenly aware that the human propensity to take risk propelled economic progress, he feared that society would suffer when that propensity ran amuck. So he was careful to balance moral sentiments against the benefits of a free market. A hundred and sixty years later, another great English economist, John Maynard Keynes, agreed: “When the capital development of a country becomes the by-product of the activities of a casino, the job is likely to be ill-done.