Adam Smith and Capitalism for Beginners

One of the books the Scottish philosopher Adam Smith (1723-1790) wrote, The Wealth of Nations (1776), theorizes about the nature of capitalism. The word “capitalism” derives from the word capital, itself deriving from the Latin word caput, meaning head (as in a head of cattle or chattel; a unit of movable wealth). In capitalism, money takes the place of cattle as the unit of movable wealth, and that wealth’s use and circulation through acts of exchange are privately determined by individuals, not the government. Capitalism is thus a system of social organization by which private money-making (the build-up of capital, of “herds” of money) is its chief end. Adam Smith defended this way of organizing human affairs, not just on pragmatic terms, but on moral ones, upending millennia of religion-based admonitions that one should aver selfishness. In Smith’s view, pursuing one’s interests to the general indifference of what happens to strangers is actually central to national prosperity. Free and mutually beneficial trade does a better job of assuring the general welfare than either selfless sharing or charity does:

[M]an has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, . . . It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. (638)

The millions of people that make up a nation, each one industriously busy in the pursuit of his or her “greatest value” (as privately and selfishly determined) is thus “led by an invisible hand to promote an end which was no part of his intention,” that being “the publick good” (the general prosperity and happiness of society’s members as a whole). “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it” (646-647).

For Smith, then, selfishness is natural (an aspect of human nature; of a piece with our essence). But if selfishness is natural, so is our sociality and desire to “truck, barter, and exchange one thing for another”—that is, to trade: “Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures, and natural cries signify to another, this is mine, that yours; I am willing to give this for that” (638). No animal, that is, except us.

But how does it come about that each of us has different things to trade in the first place? Why don’t we all have the same basic things? This, Smith contends, is an artifact of human diversity and specialization: each of us is in different circumstances and in possession of different interests, and these direct our focus upon work of a particular kind—a single job which we adopt and become good at to achieve our purposes—and so we participate in the general division of labor:

In a tribe of hunters or shepherds a particular person makes bows and arrows, for example, with more readiness and dexterity than any other. He frequently exchanges them for cattle or venison with his companions; and he finds at last that he can in this manner get more cattle and venison, than if he himself went to the field to catch them. From a regard to his own interest, therefore, the making of bows and arrows grows to be his chief business, and he becomes a sort of armourer. (639)

Thus necessity, individual temperament and talent, and a desire for trade “encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.” Fortunately, this diversity of human talent is useful to all: “Among men, . . . the most dissimilar geniuses are of use to one another; the different produces of their respective talents, . . . every man may purchase,” and of “whatever part of the produce of other men’s talents he has occasion for,” he or she can obtain by trade (639-640).

The division of labor also makes, not just for the diversity of goods and services on offer, but for efficiency in production. Smith’s famous example is that of pin manufacturing: “One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head” and so on. Smith counts eighteen distinct jobs associated with pin making in the eighteenth century, and they required at least ten laborers to carry them out. But by the division of labor, a decent-sized workhouse could make “upwards of forty-eight thousand pins” in a single day whereas a single person attempting to conduct a similar task (even on the assumption he or she had the know-how) might make no more than “twenty, perhaps not one pin in a day” (635).

Thus capitalism, though based in selfishness and specialization, also has the curious (if unintended) effect of uniting human beings in a vast web of cooperative and mutually beneficial enterprises:

The woolen coat, for example, which covers the day-labourer, . . . is the produce of the joint labour of a great multitude of workmen. The shepherd, the sorter of wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! How much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! . . . [I]f we examine, I say, all these things, and consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest [poorest] person in a civilized country could not be provided [with even the simplest things]. (637)

But then, how does a nation’s wealth accumulate? Smith’s answer: by successful individuals herding or hoarding of capital and then risking it on new ventures. “As soon as stock [“livestock”; capital; money in the bank] has accumulated in the hands of particular persons,” writes Smith, “some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by sale of their work, or by what their labor adds to the value of the materials.” Ventured capital, placed into circulation in the economy, is therefore good for many: money is made by the suppliers of materials; the employees hired to assist the new enterprise; those charging rent for office, store-front, or factory space; and—if the project proves profitable—the investor “who hazards his stock” in the “adventure.”

This constant hazarding of “livestock” or “stock” by those around whom it has herded or accumulated is, of course, subject to competition, which is another stimulus to expanding the wealth of nations: “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” (647). This competition serves to increase efficiency and establish price-ranges for things that both willing sellers and willing buyers can mutually live with (“The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it”).

Capitalism, according to Smith, is also rational. That is, it discovers “employments most suitable to the interest of society” through distributed, local, and self-interested decision-making. If a government, by centralized planning, tried to set the course of economic activity, Smith is quite sure it would fail to accomplish all that capitalism accomplishes organically via the “invisible hand” (its ever-active feedback mechanisms moving toward greater overall happiness). Through, for example, competition and the constant measuring of profit and loss, capitalism naturally finds good directions for society to organize its energies around and so relieves the government of having to manage the economy: “The sovereign [the king] 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, . . .” In other words, distributed markets are smarter than any central planner.

If capitalism is the answer to expanding the wealth of nations, what is government’s role in society? Smith sees a number of strictly circumscribed jobs: (1) “protecting the society from the violence and invasion of other independent societies”; (2) protecting “every member of society from the injustice or oppression of every other members of it”; (3) maintaining a predictable court system for “exact administration of justice”; (4) maintaining public institutions and public works, such as public roads; (5) “supporting institutions for education and religious instruction”; (6) predictable and non-onerous taxation, affecting “the pockets of people as little as possible”; and (7) temperance in deficit spending (“Nations, like private men, have generally begun to borrow upon what may be called personal credit” and the result is “enormous debts which . . . will in the long-run probably ruin, all the great nations of Europe”) (647-649). But wherever governments fail in these minimal duties, the wealth of a nation suffers:

Commerce and manufacturers can seldom flourish long in any state which does not enjoy a regular administration of justice, in which the people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported by law, and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts from all those who are able to pay. Commerce and manufactures, in short, can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government.

This, therefore, is Smith’s theory and vision for a merchant-oriented society, where every person “lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly called a commercial society” (640).

Resource:

  •  Steven M. Cahn. Classics of Political and Moral Philosophy (Oxford 2002). Key selections from The Wealth of Nations begin on page 633 of this book.

About Santi Tafarella

I teach writing and literature at Antelope Valley College in California.
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5 Responses to Adam Smith and Capitalism for Beginners

  1. colinhutton says:

    Proof of his influence is that much of what he says sounds today like self-evident common sense. And one of the reasons for that influence is that he writes so clearly. Eat your heart out Karl Marx.

  2. Paradigm says:

    One difference is of course that capitalism is found in one form or another all over the world whereas all attempt to implement some form of marxism have ended in disaster and is now limited to a few dictatorships. Unless you count the general idea of spreading the wealth as marxism.

  3. i dont know about you guys but i like the pic at the top of the page if you know what i mean ;3

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