AdamSmith: Myths and Realities

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Maria Pia Paganelli for AdamSmithWorks

August 3, 2020
Myth 4: The Wealth of Nations is about the harmony of markets.

Often enough one may hear that the Wealth of Nations is about markets, about the marvels of free markets, about how markets are able to harmonize different interests in a peaceful way. 

As much as I wish this were true, I believe it is a myth, possibly based on what people want to hear Smith say rather than on what Smith actually says.

Smith himself tells us what the Wealth of Nations is about: “the very violent attack I had made upon the whole commercial system of Great Britain” (26 October 1780, Letter from Adam Smith to Andreas Holt). It’s not about the harmonization of commerce.

For Smith, this commercial system of Great Britain, which he very violently attacks, is the system created and sustained by the special interest groups of great merchants and manufacturers to enrich themselves at the expense of everybody else. The Wealth of Nations is thus about state capture by special interest groups that favors the few who have enough influence to steer government decisions. 

I will let Smith himself explain why he defines the Wealth of Nations as a very violent attack against mercantilism.
The sneaking arts of underling tradesmen are thus erected into political maxims for the conduct of a great empire. […] By such maxims as these, however, nations have been taught that their interest consisted in beggaring all their neighbours. Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity. […] the impertinent jealousy of merchants and manufacturers […] the mean rapacity, the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be the rulers of mankind […] originally both invented and propagated this doctrine […] and they who first taught it were by no means such fools as they who believed it. Their [merchants and manufacturers] interest is, in this respect, directly opposite to that of the great body of the people.  (WN IV.c.9-10)

How did merchants and manufacturers manage to lobby so effectively? By sophistic persuasion of the ignorant and by intimidation of the dissenters.

Arguments in favor of special interest policies:
were addressed by merchants to parliament, and to the council of princes, to nobles and to country gentlemen, by those who were supposed to understand trade, to those who were conscious to themselves that they knew nothing about the matter. […] The merchants knew perfectly in what manner it enriched themselves. It was their business to know it. But to know in what manner it enriched the country, was no part of their business. (WN IV.i.10) 
Not only the prejudices of the publick, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose [the potential decrease or elimination of the privileges special interests achieved]. Were the officers of the army to oppose with the same zeal and unanimity any reduction in the number of forces, with which master manufacturers set themselves against every law that is likely to increase the number of their rivals in the home market; were the former to animate their soldiers, in the same manner as the latter enflame their workmen, to attack with violence and outrage the proposers of any such regulation; to attempt to reduce the army would be as dangerous as it has now become to attempt to diminish in any respect the monopoly which our manufacturers have obtained against us. This monopoly has so much increased the number of some particular tribes of them, that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature. The member of parliament who supports every proposal for strengthening this monopoly, is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest publick services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists. (WN IV.ii.43)

These words are just some of the many  “very violent attacks” indeed that Smith uses against merchants and manufacturers in the Wealth of Nations

But what about the butcher, the baker, and the brewer, you may say? They don’t “have generally an interest to deceive and even to oppress the publick.” (WN I.xi.p.10). They just sell us dinner. True. But under the right set of incentives they would behave as rapaciously as the members of the interest groups that push and obtain privileges from the government. “It is the system of government, the situation in which they are placed, that I mean to censure; not the character of those which have acted in it” (WN viii.c.107) Smith tells us.

What are those situations then? A few people with the same interests in close contact with each other can more easily collude to conspire against the public than many people dispersed from each other. Having access to power and being asked to design the rules of the game that they themselves will play in does not help either. If this sounds familiar, it is because it is an analysis very similar to James Buchanan and Gordon Tullock’s Public Choice analysis of lobbying. 

Is there no hope? There is, if only a  little. The competition that economic growth induces is a force that counterbalances special interest groups. But Smith is no Pollyanna. He understands too well how difficult it is to break the power of what today we call cronyism. 

And this is what the Wealth of Nations is about: a description and condemnation of cronyism, not an ode to the harmony of markets.     

See our previous #SmithMyths:

Shanon FitzGerald

This is an important conceptual re-framing of a book that many readers of this site probably feel they have more or less figured out--at least on the level of what Smith was up to. But as you point out, his purposes weren't necessarily our own, and the economic paradigm he was writing so "violently" against certainly is alien to us in the modern world. It is important we know that so we may approach Smith with the proper historical humility, recognizing that the past remains for us a foreign country.

One question I'm grappling with regarding the longest quotation is, are private interests still the greatest obstacle to a more sound economic policy, or have public (economic) prejudices come to play a more important role given the spread of democracy since Smith's time?

Amy Willis

Shanon, that's a great question, and one I'm not sure Smith addresses- whether because he thought private interests were more significant or hadn't considered public, I don't know. He has things to say about public opinion elsewhere, particularly in TMS, but I'm not sure how that helps with your question. Anyone else?

Maria Pia Paganelli

Shanon, that is a good question indeed. Democracy is not in Smith's view, as you pointed out.
For Smith, special interests are able to influence and shape those public prejudices. Take WN IV.iii.c.10: "in every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest, that it seems ridiculous to take any pain to prove it; nor could it ever have been called in question, had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind".