Moral and economic conflicts in Adam Smith

1. Moral and economic conflicts in Adam Smith Daniel Diatkine Université d’Evry, Phare 13th Summer school on Economic History, Philosophy, and History of Economic Thought Acqui Terme, 1-8 September 2010

2. Introduction, Smith’s struggles Smith writes that WON is a « violent attack” … “made upon the whole commercial system of Great Britain”. (Letter to Andreas Holt, october 26 1780, in Correspondence of Adam Smith. Of course attacks against the commercial society were not uncommon in the eighteenth century. They were made by the adversaries of luxuries, for example by the neo republicans studied by Pocock and Skinner (as Ferguson), and also by Rousseau, to quote only the more famous. Of course, Smith is neither a neo republican nor a rousseauist. Smith’s enemy was more precisely what he calls, after Quesnay and Mirabeau, the mercantile system. What is Mercantile System? For Smith, it is one of the two forms of the commercial society (or capitalist society). The other form is the System of Natural Liberty. One of the many characteristics of the WON lies on the fact that Commercial society is a capitalist society, where a class, the class of merchant and manufacturers, or employers (to -day, I think that we can speak of capitalists as Turgot uses this term), plays an important, even eminent role. Actually, conflicts in WON do not concern individuals, they concern social classes. Notice that Smith’s question is very different from Marx’s one.

3. PLAN • My first part will attempt to precise what we can understand by the notion of classes in WON. We will see that the conflict between classes was certainly not a new idea, and also that classes are not a mere aggregate of individuals pursuing the same objective. Classes evidently suppose common income, but also some specific institution which transforms a collection of individuals into a little political body. • My second point will show one example of benign conflicts: the conflict between employers and workers. • My third point will show the malignant conflict between the capitalist cIass and the general interest. • I will conclude by showing that Smith supposes that those conflicts disappear in the system of natural liberty, which is the second form of commercial society.

4. Part one, Social ClassesLocke and social classes • “If one Third of the Money imployed in Trade were lock'd up, or gone out of England”…”People not perceiving the Money to be gone, are apt to be jealous one of another ; and each suspecting anothers inequality of Gain to rob him of his share, every one will be imploying his skill, and power, the best he can, to retrieve it again, and to bring Money into his Pocket in the same plenty as formerly. But this is but scrambling amongst our selves, and helps no more against our want, than the pulling of a short Coverlet will, amongst Children, that lye together, preserve them all from the Cold. Some will starve, unless the Father of the Family provide better, and enlarge the scanty Covering.This pulling and contest is usually between the Landed-man and the Merchant. For the Labourer's share, being seldom more than a bare subsistence, never allows that body of Men time or opportunity to raise their Thoughts above that, or struggle with the Richer for theirs, (as one common Interest,) unless when some common and great Distress, uniting them in one universal Ferment, makes them forget Respect, and emboldens them to carve to their Wants with armed force: And then sometimes they break in upon the Rich, and sweep all like a deluge. But this rarely happens but in the mal-administration of neglected or mis-manag'd Government.”

5. Part 1, Social Classes Two comments on Locke • 1° The usual conflict is between the landed man and the merchant, and also the moneyed interest. It is not, ordinarily, between labourers and rich men. Because the latter have neither time nor opportunity to unite as a common interest. This point is very important one. For Locke, the father of political liberalism, social classes are not some representative agent, they are something more which requires “time and opportunity to become a common interest”, a political body. This point is also important because classes are intermediate bodies between individuals and the State. This makes a great difference with Hobbes’s approach, • 2° It is money which is a stake in this story. Locke’s text is a very good summary of the mercantile thesis which is exactly the enemy of the WON. Locke affirms here that an economic policy had to “enlarge the scanty coverlet”. Smith will affirm that this coverlet is an illusion, for what is buoght by money is bought by labour.

6. Part 1, Social classesMarket economy and capitalist economy in WON WON begins by opposing two societies, one without social classes and the other with social classes and social conflicts. The society without social classes is called the primitive and rude state of societies. Smith supposes that American Indians are a good illustration of this state of societies, but it easy to show (Marouby 2004) that this state is purely a theoretical one, and much more familiar to economists. It is an economy with independent workers. There is division of labour, exchange and money. It is a market economy. Of course workers perceive wage, from themselves, they use tools and more generally stocks, but those tools and stocks are not capital. For Smith, stocks are not capital per se. Labourers may save and accumulate stocks for future consumption, and they don’t accumulate capital. On the other hand, stocks become capital when, and only when, they are acquired by agents who want to accumulate in order to accumulate and not in order to consume to day or to morrow. In other words, it is the capitalists point of view, more precisely it is their want of accumulation without ending, which transforms tools and stocks into capital. For Ricardo, it seems that this point of view is the rational and therefore unique point of view. It is not the case for Smith. So, in the advanced state, capitalists exist. It is why it is a capitalist economy.

7. Part 1, Social classesFirst theoretical question in WON “Among the savage nations of hunters and fishers, every individual who is able to work, is more or less employed in useful labour,”” … “Such nations, however, are” … “miserably poor”...“Among civilised and thriving nations, on the contrary, though a great number of people do not labour at all, many of whom consume the produce” …”of a hundred times more labour than the greater part of those who work; yet the produce of the whole labour of the society is so great that all are often abundantly supplied, and a workman, even of the lowest and poorest order, if he is frugal and industrious, may enjoy a greater share of the necessaries and conveniences of life than it is possible for any savage to acquire.” (Italicsare mine)

8. Part 1, Social classesSecond theoretical question in WON • Smith describes a positive link between capital accumulation and the rate of increase of wages and employment, yet accumulation of wealth without limit is not so far from the chrematistic. Actually accumulation of capital is a threat for the city. More precisely, as I will show soon, Smith thinks that capitalists are dangerous for the polybian constitution of Great Britain. This polybian constitution is the constitution inherited from the Glorious Revolution which associates monarchy, aristocracy and democracy, as the Roman Republic did and which differentiates Great Britain from absolute monarchies. So there is another important theoretical issue: under what conditions capital accumulation is compatible with a pacific City, in other words with a non despotic City? In my opinion this issue is the second very important question posed by the WON. This issue explains the distinction between Mercantile system and System of Natural Liberty. The first one is partial, conflicts split it and it tends to despotism; the second one is impartial, pacific and preserves political freedom.

9. Part 2, Benign conflict Employers and worker, a bargain or a riot (1)? • “The common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.” • “It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it.”

10. Part 2, Benign conflict: employers and worker, a bargain or a riot (2)? • “Whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate. To violate this combination is everywhere a most unpopular action, and a sort of reproach to a master among his neighbours and equals. We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things, which nobody ever hears of.” • Notice that this is a very simple and clear definition of the class of employers: it is not a mere aggregation of agents on the demand side of the labour market. This “constant and uniform” combination implies commons rules between “neighbours and equals”. It is those rules and their acceptation which constitutes the class of employers.

11. Part 2, Benign conflict: employers and worker, a bargain or a riot (3)? • “Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy, Such combinations, however, are frequently resisted by a contrary defensive combination of the workmen” … which …”are always abundantly heard of. In order to bring the point to a speedy decision, they have always recourse to the loudest clamour, and sometimes to the most shocking violence and outrage. They are desperate, and act with the folly and extravagance of desperate men, who must either starve, or frighten their masters into an immediate compliance with their demands. The masters upon these occasions are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen.

12. Part 2, Benign conflictSubordination and contract • For Smith a continuum exists between the condition of a slave and the condition of a dependant worker, even if the condition of the latter is evidently preferable to the condition of the former. Slave, manial servant, workers are all subordinate to the employer. • “Every one abhors naturally the subjected and mean condition of a menial servant, liable to the caprice and extravagance of a master; he will work for days wages much more willingly than become your servant.” “The maid servant who had been employed at spinning sets up for herself, though before she could not have lived by her own labour. All therefore withdraw from service, and they will also do more work for themselves than they did when in service”. (Lectures of Jurisprudence) • Moralists (and not only moralists) always find it difficult to understand how you can freely choose to lose freedom. To day, the existence of labour law is the expression of the peculiarity of labour contract. In the eighteenth century subordination of the worker to his employer was not very different from the subordination of the servant to his master, of protection and subordination between lords and peasant in all Europe. Subordination was hard to make compatible with freedom. If you want an example, compare the situation of Figaro in Le Barbier de Seville and in the Mariage de Figaro.

13. Part 3, Malignant conflict I will show you that the attack against “commercial system’ is explained by the dangers of the mercantile system. And, by the way, I will show you that conflicts between employers and workers disappear in the system of natural liberty The objectives of the Book I of the WON are simple: 1) To give an answer to the question of the compatibility between the growing of inequalities and the general improvement of conditions, the first theoretical problem, as I have mentioned. 2) To explicit the relations between interest of the social classes and general interest. On this last matter the conclusion of the Book I is simple.

14. Part 3, Malignant conflict The “Trinitarian formula” (1) “Those who live by rent, to those who live by wages, and to those who live by profit.”…” are the three great, original, and constituent orders of every civilised society, from whose revenue that of every other order is ultimately derived.” “The interest of the first of those three great orders”… “is strictly and inseparably connected with the general interest of the society.”… “ When the public deliberates concerning any regulation of commerce or police, the proprietors of land never can mislead it,” … “at least, if they have any tolerable knowledge of that interest. They are, indeed, too often defective in this tolerable knowledge” “The interest of the second order, that of those who live by wages, is as strictly connected with the interest of the society as that of the first” … “But though the interest of the labourer is strictly connected with that of the society, he is incapable either of comprehending that interest or of understanding its connection with his own. His condition leaves him no time to receive the necessary information, and his education and habits are commonly such as to render him unfit to judge even though he was fully informed. In the public deliberations, therefore, his voice is little heard and less regarded, except upon some particular occasions, when his clamour is animated, set on and supported by his employers, not for his, but their own particular purposes.”

15. Part 3, Malignant conflict The “Trinitarian formula” (2) • “His employers constitute the third order, that of those who live by profit. It is the stock that is employed for the sake of profit which puts into motion the greater part of the useful labour of every society.” … “As during their whole lives they” (the merchants and manufacturers) “are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen”…“ by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction that their interest, and not his, was the interest of the public”. …” The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution,” …”not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”

16. Part 3 The malignant conflict Partiality, the mercantile system • Book four of the WON, the most important in volume, is written to criticize the regulations of commerce which come from the capitalist class. Those regulations were generally voted by landowners who were present in great number in Parliament and in government. These regulations confuse the interest of merchants and manufacturers and the general interest. This confusion is the mark of the partiality of the mercantile system and it is maximal when a Company of merchant is completely identified with the government. This extraordinary situation is exactly the one of Bengal since the East India Company conquered the power.The distance between the merchants and the legislator is equal to zero.

17. Part 3, Malignant conflict The essence of Mercantile System: The East India Company • “No two characters seem more inconsistent than those of trader and sovereign. If the trading spirit of the English East India company renders them very bad sovereigns, the spirit of sovereignty seems to have rendered them equally bad traders. While they were traders only they managed their trade successfully, and were able to pay from their profits a moderate dividend to the proprietors of their stock. Since they became sovereigns, with a revenue, it si said, was originally more than three millions sterling, they have been obliged to bag extraordinary assistance of government in order to avoid immediate bankruptcy” • Smith states that the rate of growth is negative in Bengal, as a result of the East India Company sovereignty, which was no more than a despotic system of government. The great starvation of 1770 caused the death of perhaps 10 000 000 inhabitants. Smith thinks that the East India Company is responsible for this starvation.

18. Part 3, Malignant conflict A proxy for the System of Natural Liberty: the English Colonies of North America (1) • At the opposite side of the British Empire, in the English Colonies of North America, the situation is completely different. The rate of growth is the highest. • First, because “according to the natural course of things… the greater part of the capital of every growing society is, first, directed to agriculture, afterwards to the manufactures, and last of all to foreign commerce”. At the end of Book II of the WON, Smith attempts to demonstrate that this order in investments contributes to maximizing the rate of growth. However, Smith wants deduce from this theory that this order has been reversed in Europe, since the fall of the Roman Empire, and that it is this inversion which explains the mercantile system. So the rate of growth in the Mercantile system is weaker than it would be if the natural course of things hqd been respected, as it was in North America, free from the inheritance of medieval ages.

19. Part 3, Malignant conflictA proxy of System of Natural Liberty: the English Colonies of North America (2) Secondly, and Smith insists on this point, the rate of growth is high in the North American colonies because “In everything except their foreign trade, the liberty of the English colonists to manage their own affairs their own way is complete.” Smith describes colonial institutions, and emphasizes the fact that there is no hereditary nobility. Again, American colonies are free from feudal past. “There is more equality, therefore, among English colonists than among the inhabitants of their mother country. Their manners are more republican”. In North America, wages are very high and land is cheap. So workers don’t remain dependent of a master for a very long time . They can establish themselves and became independent workers. So the conflicts between employers and workers are absent in North America. Does this very idealistic view of North America imply that the system of natural liberty is achieved there? Clearly the response is No. Why?

20. To conclude, Utopia ? The legislators are too far from North America. Colonists are not represented in the Commons, and it is, as it is well known the first reason of “the present disturbances in North America”. The thirteen colonies act as thirteen little republic, and little republic are divided into virulent factions. For this reason Smith concludes WON by a constitutional project, presented as an Utopia. The first effect of his plan concerns the generalisation of the British system of taxation to the all parts of the Empire. “This, however, could scarce, perhaps, be done, consistently with the principles of the British constitution, without admitting into the British Parliament, or if you will into the states general of the British empire, a fair and equal representation of all those different provinces,”

21. To conclude, Utopia ? Some pages after, Smith concludes his expose: Colonies “however, would, in point of happiness and tranquillity, gain considerably by a union with Great Britain. It would, at least, deliver them from those rancorous and virulent factions which are inseparable from small democracies, and which have so frequently divided the affections of their people, and disturbed the tranquillity of their governments, in their form so nearly democratical. In the case of a total separation from Great Britain, which, unless prevented by a union of this kind, seems very likely to take place, those factions would be ten times more virulent than ever.” …” In all great countries which are united under one uniform government, the spirit of party commonly prevails less in the remote provinces than in the centre of the empire. The distance of those provinces from the capital, from the principal seat of the great scramble of faction and ambition, makes them enter less into the views of any of the contending parties, and renders them more indifferent and impartial spectators of the conduct of all.” (Italics are mine)

22. To conclude, the map of Utopia, from East to West Impartiality, Distances, Rate of Growth