Adam Smith on Capitalism and the Common Good
In a speech last November at Catholic University,1 Marco Rubio elaborated a program of “common good capitalism.” Drawing on the encyclicals of Pope Leo XIII and John Paul II, Rubio presents a vision of “a system of free enterprise in which workers fulfill their obligation to work and enjoy the benefits of their work, and where businesses enjoy their right to make a profit and reinvest enough of those profits to create dignified work for Americans.” The plan to create “dignified work,” in Rubio’s estimation, calls for an active policy agenda in which government seeks to affect the level, and to some extent the composition, of business investment. “Common good capitalism” echoes themes in other recent conservative thought and is not dissimilar to Donald Trump’s “America First” agenda.

Rubio’s patter touches upon important social and political issues—the collapse of traditional family structures, the changing composition of the American manufacturing sector, trade with China, and the scope of the horizon of opportunities for low-skilled workers. We do well to consider the harmful effects of our current complex of regulations—for example, occupational licensing restrictions, wage laws, and zoning regulations—on American opportunity before stepping towards industrial policy. But I’d like to consider a question elicited by the title of Rubio’s program: What is the relationship between capitalism and the common good?

It is true that our economic arrangements occasionally serve the good of a select few at the cost of the many. But those arrangements are shaped by some wrongheaded policies, regulations, and special interests. Our economic situation is a far cry from the economic freedom advocated by our founders and the luminaries of the classical liberal tradition, such as Adam Smith.

To Smith, “common good capitalism” would seem redundant. Smith of course never used the word “capitalism”—that came with Karl Marx and his followers. But if we think about capitalism simply in terms of the private ownership of property, which includes a person’s ownership of her physical and human capital and the liberty to use that capital as she sees fit, the word can be reasonably mapped onto Smith’s thought. We can view capitalism as broadly synonymous with what Smith called “the liberal plan” or the “system of natural liberty” in which “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.”2

“It is liberty, in Smith’s view, that is at the heart of capitalism, and at the heart of liberty lies commitment to the good of humankind.”

It is liberty, in Smith’s view, that is at the heart of capitalism, and at the heart of liberty lies commitment to the good of humankind. Considering Smith’s position reminds us of a long-standing, but increasingly endangered, American moral sensibility: liberty and the economic freedom it entails serve the common good.

Two cases for liberty

There are many cases for liberty in Smith. One argument he is famous for is that by enabling individuals to use their property to produce and exchange, liberty unleashes a productive synergy through the dividing of tasks. Later economists, following David Ricardo, emphasize the beneficial effects of trade in terms of differences in cost of production (comparative advantage). But Smith shows us that simply increasing the size of the market, even on the assumption of equal production possibilities and endowments, enables specialization and the realization of economies of scale and scope. The tide rises for all as the market extends.

Smith’s focus on the productivity of the market reflects his egalitarianism. From the outset of The Wealth of Nations he emphasizes that the wealth created by the market “extends itself to the lowest ranks of people.”3 Liberty reduces hardship by reducing living costs for the poor, but also enables the poor to develop skills, move about freely, and bring their work into competition with others—abilities impeded by licensing requirements and trade guilds. And it is worth pointing out that Smith was an outspoken critic of slavery.4 He saw slavery as morally repugnant and economically unproductive.

Another case for liberty in Smith pertains to knowledge. Smith holds a presumption of liberty in economic policy partly because he believes that central authorities, however well-intended, normally lack the knowledge needed to beneficially intervene in the market. Government officials do not know enough to effectively direct individual choices:

  • The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and directing it towards the employment most suitable to the interest of society.5

Smith does not say here that individuals freely pursuing their interests will always further the good of society. He is under no delusion that markets are “perfect,” whatever that might mean. But he believes that, by and large, liberty is conducive to the interest of society more effectively than sovereign command because sovereigns lack the God-like knowledge that would be necessary to beneficially intervene into people’s daily lives and businesses. This is not to say, of course, that the sovereign can’t intervene beneficially on behalf of some parties. English brewers in the 18th century were surely glad for the high tariffs on French wines. But such interventions have their costs, most of which are hidden and burden third parties.

Arguments relating to knowledge seem to be missing from many contemporary discussions of economic affairs. But they are essential. In questioning whether we ought to restrict or guide business investment, create tax or reimbursement incentives for American manufacturing companies, or provide interest-free loans for infrastructure projects, we should first ask the question: Do we have the wisdom and knowledge to say that such social engineering will serve the public good? A desire to further the good of our country, of humankind, is laudable. But do we have the knowledge to benefit humankind by departing from the liberal plan of allowing every man to pursue his own interest his own way?

Knowledge and the limits of good will

Smith addresses issues relating to knowledge in The Theory of Moral Sentiments. His analysis there is not formulated overtly for a political context. But the ideas inform his political sensibilities and ultimately support those in The Wealth of Nations.

Smith conceives of different sorts of knowledge. One may have “system knowledge” of how individual parts relate to a larger whole, or one may have “contextual knowledge,”6 which is the concrete, experiential knowledge we acquire through social interaction. When it comes to assessing social situations, we need both sorts of knowledge. We need knowledge of how an individual’s choice affects a broader array of interactions and knowledge of how individuals affected by that choice are specifically impacted.

But our command of both sorts of knowledge is limited and faulty. At a system level, it is impossible for us to “see” the great concatenation of the market order, which, as Smith’s contemporary Adam Ferguson said is a consequence of human action but not of human design. Smith attempts to illustrate a small piece of that concatenation by elucidating the magnificent supply chain of a woolen coat, the production of which requires the metaphorical “assistance and co-operation of many thousands.”7 But our lack of system knowledge makes it difficult to properly understand or even express the effects of interventions into those supply chains.

It is equally difficult for us to envision the effects of social changes on those we don’t know. Contextual knowledge by nature is diffuse. We need lived experience to acquire it. If we don’t habituate ourselves to entering into others’ affections, we will be hard-pressed to comprehend their world. I have virtually no sense of how a particular person in China might be concretely affected by an American obstruction of Chinese goods and services.

Smith, following his teacher Francis Hutcheson, affirms what he calls “universal benevolence” as the highest ethical good. Universal benevolence is shorthand for actions and policies which a super-knowledgeable, beneficial, God-like spectator of human affairs would approve of. Such a spectator presumably approves of actions and, in the realm of government, public policies that increase the overall well-being or happiness of humankind. The question is, given our limited knowledge, how do we serve universal benevolence?

Building on arguments made by Hutcheson, the Anglican Bishop Joseph Butler, Henry Home Lord Kames, and others, Smith recommends that we take the conscious focus of our everyday activities and habits off of universal benevolence for the sake of universal benevolence. We indeed have a duty to serve universal benevolence. But given the limits of our knowledge, Smith perceives that duty as an obligation to serve our focal social relations—to tend to our own happiness, the happiness of those we live with, and the needs of those with whom we interact on a regular basis. Honing in on these focal relations taps into our natural contextual knowledge and enables effective beneficence. Smith writes, “the great society of mankind [is] best promoted by direct the principal attention of each individual to that particular portion of it, which was most within the sphere both of his abilities and of his understanding.”8

Focusing on the spheres within our knowledge implies that we are also not focusing on spheres outside of our knowledge. In addition to serving humankind by caring for the happiness of those within our sphere of influence, we also serve humankind by dropping the pretence that we can always beneficially intervene into complex social spaces of which we have neither sufficient system knowledge nor contextual knowledge. Our task is, in Smith’s conception, not the grandiose, romantic one of directly striving to care for the universe. Our task lies in “a much humbler department, but one much more suitable to the weakness of [our] powers, and to the narrowness of [our] comprehension; the care [in this order] of [our] own happiness, of that of [our] family, [our] friends, [our] country.”9 But by immersing ourselves in the everyday duties, even our duty to care for our own happiness, we are doing what lies in our power to serve universal benevolence.

Liberty serves the common good

Smith’s case for liberty on the basis of the positive effects of extending the division of labor interrelates with his sensibilities about knowledge and the duties of universal benevolence. His view that we ought to tend to our focal social relations because of our limited knowledge is reinforced by his sense of the wonders of the market order. His view of the synergy of the division of labor reinforces the paradoxical idea that by shifting our attention off of universal benevolence and towards our local spheres, we actually serve universal benevolence.

Smith famously writes, “it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from regard to their own interest.”10 But in taking into account Smith’s perspective on knowledge, and in catching a glimpse of the marvels underlying the unplanned order beneath production of, say, a woolen coat, we see that the honest pursuit of interest on the part of the butcher, the brewer, and the baker contributes to a social order that serves the good of humankind. The activities of the butcher, the brewer, and the baker contribute to what we might metaphorically call our “common stock of goods.” Through the activities of commerce “different produces of their respective talents, by the general disposition to truck, barter, and exchange [are] brought into a common stock, where every man may purchase whatever part of the produce of other men’s talents he has occasion for.”11

Smith’s perspective does not imply that we should adopt political quietism. Government plays a role in Smith’s liberal system in providing for national defense, administering and protecting commutative justice, and delivering a select number of public services. He admits of several additional exceptions to liberty in his politics—e.g., restrictions on small-denomination bank notes, forbidding certain bank practices, and usury regulation.

Smith does, however, challenge us in our political aspirations to consider closely whether we have sufficient knowledge to affect the change that we seek. He shows us the tremendous cooperative potential of humankind within a framework of free enterprise under limited government. He reminds us that liberty serves universal benevolence. And that is why he propounds a presumption in favor of free markets.


Footnotes

[1] “Catholic Social Doctrine and the Dignity of Work”. Rubio.Senate.gov, November 5, 2019. Catholic University of America [CUA] speech. PDF file.

[2] Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, ed. R.H. Campbell and A.S. Skinner (Indianapolis: Liberty Fund, 1981), 687. Also available online: An Inquiry into the Nature and Causes of the Wealth of Nations, Cannan edition.

[3] Smith, The Wealth of Nations, 22.

[4] See Daniel B. Klein, “Adam Smith’s 1759 Rebuke of the Slave Trade,” The Independent Review (forthcoming).

[5] Smith, The Wealth of Nations, 687.

[6] Knud Haakonssen, The Science of a Legislator: The Natural Jurisprudence of David Hume and Adam Smith (Cambridge: Cambridge University Press, 1981), 79.

[7] Smith, Wealth of Nations, 23.

[8] Adam Smith, The Theory of Moral Sentiments, ed. D.D Raphael and A.L. Macfie (Indianapolis: Liberty Fund, 1982), 229. Also available online: The Theory of Moral Sentiments.

[9] Smith, Theory of Moral Sentiments, 237.

[10] Smith, Wealth of Nations, 27.

[11] Smith, Wealth of Nations, 30.


*Erik W. Matson is a Senior Research Fellow, Mercatus Center at George Mason University and Deputy Director of Adam Smith Program at GMU Department of Economics.


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