Monday, March 30, 2015

Adam Smith, income inequality and the rich

Perhaps under the influence of Amartya Sen who has written extensively about Adam Smith (and including here: an article I like a lot), I had the impression that the contrast between “The Theory of Moral Sentiments” (TMS) and “The Wealth of Nations” (WoN) was the one between a “softer”, more philosophical,  version of Smith and a “harsher”, more economistic  one.

But after recently reading TMS (of which earlier I might have read just a few pages), I think differently. I read TMS with an eye towards Smith’s treatment of income inequality, the rich and the poor. And my impression of Smith’s treatment of the rich in TMS is that of a clergyman of his time:  slight, and at times even strong, contempt for the rich and their moral failings, but an equally strong acceptance of the immutable order of the world. To the rich, this world; for the next, we shall see. To the poor, the message of meekness and acceptance. Their moral fortitude is never questioned, while that of the rich is. But there is no attempt to change the position of the poor here below, nor any attempt to expose the origin of the wealth of the ethically-challenged rich.  It is as if, after Russian privatization, we would deride the taste and the spending pattern of the oligarchs, but never question the way they acquired oil fields.

Moreover, in a Smithian fashion that has since become his trademark, the very moral weakness of the rich, their attempts to show off, lead them, as if by “an  invisible hand” to equalize economic outcomes of themselves and the poor. In a remarkable passage, where the “invisible hand” is mentioned for the first out of two times ever, Smith writes:

They  [the big proprietors] are led by an invisible hand [through their spending] to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned  those who seemed to have been left out  in partition. “ (TMS, part IV.I.10). 

The story is a bit thick: unequal ownership of land does not really matter because the rich have to spend their income one way or another, they have to hire cooks, gardeners, farmers to raise cattle etc.  and are thus as if by “an invisible hand” led to an outcome that in terms of distribution of consumption looks similar to what it would have been if the land were divided in equal parcels.  Obviously, Smith must have known that this is a joke: me, ordering waiters around and eating best food, is not the same as me, being a waiter, producing that food and  serving it.

Overall, Smith’s tone towards the rich and the poor in TMS is both patronizing and fatalistic. The rich may be despised, but the order of the world must not be disturbed.

But  the tone in “The Wealth of Nations” is very different. Here, not only are the rich taken to task for their vanity, conceit, and concern with “trinkets, baubles and trifles”, as they were in “The Theory of Moral Sentiments”, but in a much more hard-hitting way, the origins of their fortunes are exposed and often found in spoliation, monopoly and “conspiracy against the public”, as in the famous passage:

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.  It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary. (WoN, Book I, Chapter X)

Just think of Davos, Bilderberg and the Trilateral Commission. 

Similarly, the rich civil servants never forget to overpay themselves,

The emoluments of offices are not…regulated by the free competition of the market, and do not, therefore always bear a just proportion to what the nature of the employment requires. They are, perhaps in most countries, higher than it requires; the persons who have the administration of government being generally disposed to reward both themselves and their immediate  dependents rather more than enough. (WoN, Book V, Chapter 2)

Now think of many governments across the world, from Azerbaijan to Zimbabwe, and international organizations from the World Bank to World Trade Organization.

And what is government?

Civil government…is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all. (WoN, Book V, Chapter 1)

The last statement, although made in the context of Smith’s discussion of pastoral societies where the first differences in incomes,  according to him, appeared, does clearly apply  to all property-owning societies. The statement is so similar to Marx and Engels’ one from the “Communist Manifesto” (government as “a committee for managing the common affairs of the bourgeoisie”) to be  practically undistinguishable.

Why was Smith much tougher on income inequality and the rich in the “Wealth of Nations” than in the “Theory of  Moral Sentiments”? I think that there are two possibilities. The subject matters of the two books are different. TMS deals with ethical matters and the rich can be, in that context, rightly criticized only for their moral turpitude. In the “Wealth of Nations”, we deal with economics, and the attention is naturally directed towards more mundane matters: how were fortunes acquired and how are they preserved.

A different possibility is that there was an evolution in Smith’s own thinking. While earlier he took social stratification as given, perhaps “God-ordained”, once he started analyzing more carefully where it really came from,  he became much more critical.

I am not a Smith specialist, nor do I know Smith biography well enough, to be able to tell which of the two hypotheses  is more likely. But I do think that there is a clear difference in his attitude toward income and wealth inequality and especially the rich in the two books, and the difference is, in my opinion, exactly the reverse from the one that I understood from Sen.

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