Adam Smith: is democracy always better for the poor?

Who has read Adam Smith’s Chapter 7, Book IV in The Wealth of Nations? It is an unusual chapter, located towards the end of book (Book IV) that deals with the systems of political economy, more exactly with mercantilism (and physiocracy briefly at the end), and discusses at great length mercantilist trade policies of European empires from Portugal to England. It is no surprise that Adam Smith has very few nice words for imperial policies, including ban on production of goods that may compete with metropoles’ production (like the famous case of steel in North America), prohibition of direct exports to other markets than metropole’s, and obligation to carry trade using metropoles’ ships (the Navigation Act). Smith is even more scathing about merchant companies, the two famous East India Companies, the Dutch and the English (“The government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatever”).

The chapter “On colonies” is the second longest chapter in the Wealth of Nations. In the edition I was using, it has more than 100 pages which is about 8% of the entire book (the whole book is about 1200 pages long in the same edition). Having been written in 1774, it spends considerable time on North America  and the “disturbances” that were brewing there. As is well known, Smith was right in both seeing the inevitability of American secession and in forecasting the great future for the continent.

But he also presented a ledger where the British expenses on behalf of American colonists were much greater than what Britain received in return (“under the present system of management, therefore, Great Britain derives nothing but loss from the dominion which she assumes over her colonies”)--and this despite discriminatory trade policies mentioned in the previous paragraph. He explained British stubbornness in not granting independence by pride (“No nation ever voluntarily gave up the dominion of any province, how troublesome soever it might be to govern it, and how small soever the revenue which it afforded might be in proportion to the expense which it occasioned”) but also, and importantly, by the economic interests of the English elite that, unlike ordinary people, did benefit from colonies: “[granting of independence] is always contrary to the private interest of the governing part of [a nation], who would thereby be deprived of the disposal of many places of trust and profit, of many opportunities of acquiring wealth and distinction, which the possession of the most turbulent, and, to the great body of the people, the most unprofitable province seldom fails to afford”.

This Smithian sharp distinction within the metropole between the interests of the elite and the rest of the population is something that Thomas Hauner, Suresh Naiduand I use in the forthcoming paper on the world prior to 1914 to argue that the imperialist expansion in the 19^th century was driven by the narrow interests of the metropoles’ rich, that is, by the people who disproportionally owned colonial assets which provided them with returns superior to what they could have obtained at home. Now, we can “rope” in Adam Smith to our case, in a foundational book on political economy written more than a century before the period we discuss. (We do not quote Smith in the current version of the paper but might decide to do so in the next.)

Overall, Smith comes to the conclusion that British colonies are treated better than any others,  but in one very important respect he qualifies this statement.  It is in relation to the treatment of slaves. There he makes an interesting, and I think not sufficiently appreciated (at least I have not seen it mentioned), observation. More democratically-governed colonies (like the British) treat slaves worse because the elite which, in a system of oligarchic republicanism, controls the levels of power is reluctant to punish its own members who are particularly brutal towards slaves. An authoritarian or autocratic state however has less compunction about punishing members of the elite whose behavior is especially outrageous (even if the state does not care much for the welfare of slaves as such). Here is the full quote from Smith:

In every country where the unfortunate law of slavery is established, the magistrate, when he protects the slave, intermeddles in some measure in the management of the private property of the master; and, in a free country, where the master is perhaps either a member of the colony assembly, or an elector of such a member, he dare not do this but with the greatest caution and circumspection. The respect which he is obliged to pay to the master renders it more difficult for him to protect the slave. But in a country where the government is in a great measure arbitrary, where it is usual for the magistrate to intermeddle even in the management of the private property of individuals, and to send them, perhaps, a lettre de cachet if they do not manage it according to his liking, it is much easier for him to give some protection to the slave; and common humanity naturally disposes him to do so. The protection of the magistrate renders the slave less contemptible in the eyes of his master, who is thereby induced to consider him with more regard, and to treat him with more gentleness.

That the condition of a slave is better under an arbitrary than under a free government is, I believe, supported by the history of all ages and nations.

Smith’s lesson here has broader applicability. An oligarchic democracy may be worse for the poor than an arbitrary government. A state, relatively autonomous from the elite, may care more about the “general interest” than an ostensibly democratic government that is in reality the government of the rich.  Smith highlights, I think, in both his discussion of social cleavage in interests when it comes to colonies and in his discussion of slavery, the ambivalence of the connection between the state and class. In more democratic (but exclusivist) settings the state may be less autonomous and more directly “hitched” to the interests of the ruling class. In an autocracy, the state may be less subject to the power of moneyed interests, and more concerned with the position of the poor. Our facile and somewhat lazy approach that more democracy implies a greater concern or improvement for the poor is shown here, by the founder of political economy, to be possibly—at times—wrong.

      

The illusion of degrowth: Part II

I read Jason Hickel reply to my post on degrowth carefully, and I think that I can report some progress in the sense that, on some issues, Jason and I seem to agree.

In his reply Jason acknowledges that, if the present distribution of global income and thus absolute poverty of a quarter of humankind, is not to be maintained, and the overall GDP must not increase, then a significant reduction of Western incomes is inevitable. This was exactly what I stated in my original post.

But Jason does not believe that the reduction of rich countries’ incomes is  a big deal because people in Costa Rica are happy with an income level only one-fifth of the United States, and West European countries are no less prosperous and happy despite the fact that their per capita incomes are 40 percent lower than American. In other words, we can reduce Western incomes a lot and change the type of goods being produced (universal health care and nationalized housing instead of cars and airplanes) without major loss of welfare. Perhaps even with a gain as the new economy would make people work less and lead more interesting lives. For good measure, Jason would also cancel all debts, and (it seems) abolish all lending and fractional banking.

I do not think that this program is illogical. It is just so enormous, outside of anything that we normally can expect to implement, that it verges, I am afraid, on absurdity. It is simply impossible to put in practice, not only in democracies, but probably in North Korea either. I do not want to be impolite or insulting, but I think that only Kampuchea came up with anything similar. Many countries have lost large fractions of their overall income through wars or civil strife, but none has impoverished itself voluntarily. If put to test in real life, rather than at conferences and blogs, Jason’s program would receive support from almost no one.  

Capitalist societies, after several centuries of exposure to market ideology and way of life, are structured in such a way that populations have fully accepted, and reaffirm in their daily lives, the objectives that make capitalism thrive. We want more and newer “stuff” every year. The ideology of commodification and commercialization has never been stronger: it is as present in the UK and the United States as in China, Nigeria, Congo, Russia or Brazil. We are not only working for a wage, we are cheerfully renting our homes and cars for money, networking at our children’s birthdays, and having kids who beat each other to grab a new model of smart phone or shoes. In other words, we have global capitalism with a population that has internalized the objectives needed for capitalism to reproduce itself and to expand, by requiring an ever greater amount of saving, investment and output.

It is irrelevant whether I like or dislike this situation (as Jason seems to believe). It is just that I observe how the world functions while Jason appears to me to live in an unreal world. If he looked at the real world he would have seen that up to 50 immigrants from Sudan are often found squeezed in the tiny electric compartments of French trains while crossing the border in order to live better lives and buy more “stuff”; he would have noticed that people, as they will doubtlessly do on this Thanksgiving too, get up at 4 in the morning to line up in front of Walmart’s and engage in fistfights so that they can buy the new model of “stuff”; he would have noticed that professors at many, and probably his own, universities fight endless battles over 1 or 2 percent salary increases; he would have noticed that families go into debt just to show off with a new model of a car etc. etc.

So his program may in words be accepted by those who would have travelled 10,000 miles to attend the conference where the program is presented; who would use AC while sitting in the conference hall and eat meat during the conferences meals, but they too would not vote for it.  

For if the proponents of such a program really believed in it, they should start (or should have already started) a political movement that would promise to implement it and save the planet. They should explicitly promise continuous annual income declines of several percentage points, lower wages, pensions and social transfers, a work week of 20 hours or fewer, closure of most gas stations and many airports, home production of key food items, picketing of factories that work longer hours or supermarkets that sell meat. They should put this program on their flag and see how many people will vote for it.

The illusion of “degrowth” in a poor and unequal world

I have recently had Twitter and email discussions with a couple of people who are strong proponents of “degrowth”. From these exchanges I got the  impression that there were unaware of just how unequal and poor (yes, poor) the world is today and what would be the trade-offs if we really were to decide to fix the volume of goods and services produced and consumed in the world at the current level.

This is just an attempt to present some back-of the-envelope calculations that should be improved very much in a serious attempt to examine the alternatives.

Let us suppose, for the sake of the argument, that we interpret “degrowth” as the decision to fix global GDP at its current level (assuming for the time being  that the amount of emissions is also fixed at the current level). Then, unless we change the distribution of income, we are condemning to permanent abject poverty some 15 percent of world population that currently earn less than $1.90 per day and some quarter of humankind who earn less than $2.50 per day. (All dollar amount here are in PPP terms, that is in dollars of equal purchasing power across the world, based on the 2011 International Comparison Project.)

Keeping so many people in abject poverty so that the rich can continue to enjoy their current standard of living is obviously something that the proponents of degrowth would not condone.  One of my correspondents explicitly rejected that scenario. So, what are we to do then? We can of course, they say, increase incomes of the poor and reduce incomes of the rich so that we stay within the envelope of the current global GDP. So, let’s suppose that we decide to “allow” everybody to reach the level of median income currently existing in Western countries, and as people who are below that level move toward the target, we gradually reduce incomes of the rich (which for simplicity I shall assume to be all living in the West).  

The “problem” is that the median after-tax income in the West (about $14,600 per person per year) is at the 91^st percentile of the global income distribution. Clearly, if we let 90 percent of people increase their incomes to that level, this would “burst” our GDP envelope several times over  (2.7 times to be exact).  We cannot be this “generous”. Let us suppose next that we let everybody reach only the income level that is slightly higher than the Western 10^th percentile, exactly that of the 13^th Western percentile ($5,500 per person per year).  Now, by a “lucky accident”, Western 13^th percentile coincides with the global mean income, which is at the 73^rd global percentile. We could bring up all the bottom 72 percent,  but we also have to reduce incomes of everybody above so that the entire world lives at the global mean.

How much of a reduction would this imply for the global top 27% (those with incomes above the global mean)? Their incomes would have to be cut by almost two-thirds. Most of them, as we have said, live in the West. The immizeration of the West would not take place through transfers to the poor: we have “allowed” them to produce and earn more. The immizeration of the West would take place through gradual and sustained reduction of production and income until everybody who is “rich” loses sufficiently so that they drop to the level of the global mean. On average, as have seen, this is about two-thirds, but the very rich would have to lose more: the global top decile would have to lose 80%; the global top ventile (richest 5%) would have to lose 84%: and so on. Factories, trains, airports, schools would work one-third of their normal time; electricity, heating and hot water would be available for 8 hours a day; cars may be driven one day out of three; we would work only 13 hours per week (to make Keynes happy to have guessed correctly in his “Economic possibilities for our  grandchildren”)  etc.—all in order to produce only a third as many goods and services that the West is producing now.

Stop for a moment to consider the enormity of what is being proposed here. The global Gini should go to zero, from the current value of 65. The world would have to move from an inequality level that is higher than that of South Africa to complete equality that has never existed in any recorded society. Countries have difficulties implementing policies that reduce Gini by 2-3 points, and we are proposing here to shave off 65 Gini points.

On top of this, world population is projected to increase by several billion. Our envelope which is fixed in the absolute amount will have to sustain more people; in other words, the mean income will have to drop.

On the positive side, however, such a dramatic squeeze of income distribution will change consumption patterns. We know that the rich have higher average emission per dollar spent (AED) than the poor. This is because they consume emission-intensive services and goods like airplane trips and meat much more than the poor. Squeezing everybody to the same level would mean that the total emissions produced by the new GDP (that would remain the same in value but whose composition would change) would be less. There would be thus some “slack” in our envelope which might allow us to either let some people be a bit better off than the rest, or move everybody to a mean income slightly above that of the Western 13^th percentile.

Say that the increase in population and the decline in AED just offset each other: we are then back to the original scenario described before when everybody would  have to live at the point of the current Western 13^th percentile and the rich world have to lose about two-thirds of their income.

It does not seem to me that this outcome, however much we may tweak the assumptions, is something that is even vaguely likely to find any political support anywhere including from the proponents of degrowth themselves many of whom would have to cut their consumption by perhaps 80 to 90 percent. It would make more sense, if we want to think seriously about how to reduce emissions, not to engage in the illusions of degrowth in a very poor and unequal world but to think how the most emission-intensive goods and services could be taxed in order to reduce their consumption.  The increase in their relative prices would cut real income of the rich (who consume them) and would reduce, even if slightly, global inequality. Obviously, we need to think about how new technologies can be harnessed to make the world more environment-friendly. But degrowing is not the way to go.