Why Profit Needn’t Mean Wealth Creation

Adam Smith on Productive Labour

By Gwydion M. Williams

Productive And Unproductive

Smith defines the root and heart of New Right Doctrine when he says:

“There is one sort of labour which adds to the value of the subject upon which it is bestowed: There is another which has no such effect. The former, as it produces a value, may be called productive; the latter, unproductive labour. Thus the labour of a manufacturer [worker] adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master’s profit. The labour of a menial servant, on the contrary, adds to the value of nothing…

“A man grows rich by employing a mass of manufacturers [workers]: he grows poor by maintaining a multitude of menial servants…” (The Wealth Of Nations, Book II, Chapter III., III. iv. 20.)

Wealth is deemed to be produced by capital accumulation, because that is how Smith chooses to define wealth.   Beyond that, one finds nothing.

Smith deems wealth to come from capitalism, just as a lawyer deems his client to be innocent, however guilty they seem to be.  Evidence does not come into it.  Smith’s apparently simple remarks about productive labour and wealth smuggle in a whole range of concepts that would have aroused many questions and disputes if introduced in some more open fashion.

Smith makes no distinction between different sorts of value, the distinct though overlapping ideas of use-value and exchange value.  A well of pure water has great use-value or usefulness to those who need to drink from it.  The usefulness is hardly increased if someone starts charging for the water, giving it an exchange value.

If some benevolent local gentlemen has a servant look after the well, along with other helpful tasks for the needy traveller, this is ‘unproductive work’ by Smith’s definition.  If the well is fenced off and denied to those who cannot pay, only then is the work productive.

Smith is saying that labour is only productive if it is directed towards producing a cash income for the rich.  Wealth that is not also a contribution to the wealth of rich individuals is deemed not to be wealth at all, even if those ignorant of economics might suppose that it was.  Smith anticipated and helped to promote the general destruction of all non-capitalist social forms that had begun in his day, and which intensified greatly  in the 19th century.

In the 18th century there was a huge range of endeavours directed, not towards the market, but directly for consumption.  Much cloth was homespun, beer and cider produced at home from basic ingredients.  ‘Housecraft’ was a complex affair in which each household provided for its own consumption.

Entertainment, too, was normally a non-market activity.  People might have a very good way of life without much cash, satisfying their own wants without making a profit for others.  Smith does not venture to directly condemn such a way of living.  It was not even static or incapable of change, there was much technical progress by people who were outside of the market.  Indeed the whole of science has continued to be organised this way, with commercial interests having just a secondary role in adapting pure science to their own particular needs.   But the slur of ‘unproductive’ remains, whereas to call it non-market or non-profit-making would have been much more accurate.

Accuracy in describing the non-market sectors of the economy would have weakened the case for replacing them with the cash nexus.  This area of life has been carefully written out of history, with all progress ascribed to market forces.  Even Marx gives mixed messages, recognising that these forms existed, but accepting without question that they were obstacles to progress.

Smith and his successors ignore all the use-values which serve to make life comfortable without providing a profit.  There are no real economic measures that can tell you the benefit of a health service, the positive influence of good public leisure facilities and the usefulness to society of a competent state infrastructure.

If a health service is operated ‘rationally’ as a source of exchange values, it would pay to give patients treatments they do not really need, and to always go for the most expensive options.  It isn’t just outsiders who see the US medical system as having just those faults; US culture makes the same judgement.  And this despite all of the dedicated idealists who try to make it a service for health rather than money.  It remains twice as expensive for each member of the society as the British NHS, while giving a rather worse service to the society as a whole.

Economic comparisons look at profit-making commodities and ignore non-market social benefits.  Outside of the cash nexus, there is supposed to be nothing.  Nothing except perhaps God or ‘spiritual values’, and God and ‘spirituality’ are never allowed to get in the way of market forces.

Commerce favours a gelded god and empty spiritual values.  Not all religions in the USA are like that, but a great many of them are, including the Southern Baptists and other right-wing Christian traditions, which are Christian in the same sense that tigers are fishes.  (Tigers and all other mammals have remote ancestors that were indeed fish, but the link is obscure and remote, as is that between the anti-commercial and non-violent teachings of Jesus and the rubbish that currently passes itself off as ‘fundamentalism’.)

It is this approach which justifies breaking up the social structures of pre-capitalist societies in the name of progress.  Domestic servants, characterised as unproductive by Smith, produced use-values for their employers – and also for sundry guests and fellow servants.  When rich people spent their surplus on home consumption by employing servants, as opposed to foreign imports, they encouraged the development of the home economy.  A society can be more easily impoverished by the export of capital than by ‘unproductive’ expenditure of the rich at home.

Smith focuses on the budding capitalist relationships in 18th century British society, to the exclusion

of all other factors.  In particular, he ignores the features of the state that allowed the market form to flourish.

The state in Georgian Britain provided the stable framework for economic development – not all of it capitalist.  There can be no generalised system of production without a legal, political and cultural expression, all set within a social framework.  Producing goods for profit is only one of many necessary conditions for a modern society, not necessarily the most important.

Smith kept his morals in one book and his economics in another.  The Theory Of The Moral Sentiments makes allowance for morality and sympathy and accepts the need for a state structure.  Smith was the son of a customs official and spent the last part of his life in government service, he knew the score.  But he could find no way to integrate this practical understanding with his enthusiasm for market forces and capitalist development.

Adam Smith’s remarks about productive labour are as close as he comes to bridging the two.  But the analysis leads only to irrationality – the civil order that guarantees peace and justice is accepted as necessary, even as more honourable than commerce, and yet still unproductive.

As to profitable activity at the individual level, something that profits one person will perhaps benefit everyone else. But not necessarily. Likewise a person may bring great benefits to humanity while getting little personal wealth in return. Profitable activities may be of general benefit, but more often not.  Money making activities may well be empty and sterile like the late  Sir James Goldsmith’s financial pyramids. Non-profit-making activities – particularly the sciences – are often of enormous importance.  Electricity was first studied out of pure scientific interest, with no thought of commercial gain.  And it was only after several decades of patient work that people realised this piece of esoteric science could also be of some relevance to what the ruling class regard as ‘the real world’.

Smith offers no evidence that the increase in personal wealth is the same as the increase in social wealth or social well-being. Nor does he explain why other sorts of activity do not increase social wealth. As with the division of labour, a weak link is not defended but passed over in silence.  The crucial gaps in the chain of reasoning are simply skipped over.

By Smith’s definition, a cook who is a servant in some great household is an unproductive worker, because no cash is exchanged and no profit is produced. If the same cook then opened up a restaurant and the same household paid money to eat the same food there, this would be productive work. This is the nonsense at the heart of the AdamSmithite doctrine.  It is the logic behind such things as the internal market established in the non-profit-making National Health Service in the early 1990s.  And it explains the decision to denationalise a whole series of industries which were crucial to the very British identity that Thatcher thought she was preserving.  They were seen as unproductive, burdensome,  because they produced no profit for the individual capitalist.

Obviously it can happen that someone who was mainly after private profit ends up benefiting the whole community.  George MacDonald Fraser’s Flashman books depend for their humour on a series of coincidences whereby a selfish and cowardly fellow manages both to serve the British Empire and to persuade most people he is an unselfish hero.  In historic fiction, we recognise the humorous improbability.  Yet in economics, we are supposed to believe such a pattern is the real world that the Thatcherites are always lecturing us about.

Most of the ‘economic science’ of the New Right is Flashman without the humour, with a horrible humourless conviction that all of the nonsense is true.  No individual incident in the Flashman books is impossible, the historical context is well researched and informative, but no one would seriously suppose that there were many such characters in the real history of British Imperialism.  Yet the New Right build their theories on a notion that Flashman-type coincidences are not only common but inevitable.

If you ask them for their reasons, they will say that it is rational.  If you ask just what is rational about it, you will not get a straight answer.

Common sense will demand a very high level of proof before one would accept that the profit motive will necessarily, or even commonly, benefit the community as a whole.  Smith does not offer it.  He does not even offer a low level of proof.  He simply says it as if he had proved it

No one has ever applied the strict letter of Smith’s words when it did not suit them. Smith himself did not.  The prophet of Free Trade was quite happy to complete his career of public service as a Commissioner for Customs – unproductive according to the strict letter of his own theory.

AdamSmithite doctrine has little to do with logic. It has everything to do with a world view in which the rich are set up as objects of worship, much as the Pagan Greeks offered prayers and incense to their most notable and successful men.

Smith lived in a much cruder and more selfish age: an age when the poor and unlucky very often did starve to death in front of a largely unconcerned public. He regards this selfishness as necessary and even holy  He pays little attention to the real opinions of the real entrepreneurs who were bringing about industrialisation even as he was finalising The Wealth Of Nations.

Personal Choices

Many of the pioneers of the Industrial Revolution were Quakers. It is significant that a pacifist and radical Nonconformist sect with an above-average sense of social responsibility should be so successful at real wealth creation.  Quakers did not serve their narrow self-interest on the AdamSmith model.  History does not support his view of the world;  people who were as far removed from Adam Smith’s model as you could find within 18th century Britain brought about the changes that are now credited to Adam Smith’s advice.

Smith is not interested in the real world except in as far as it matches his doctrines. He had noted an interesting process which set aside existing (Christian) morality and justified a complete devotion to self-interest.  Virtue without virtue, and with no need for religious enthusiasm. He probably did hold the simple-minded Age of Reason doctrine that people could and should be expected to find a natural harmony. Freed from irrational distortions such as Christianity, they would quite easily be able to find a natural balance by mutually pursuing their self-interest.

In practice, people’s different self-interests keep colliding.  Even if one ignored social factors, it would be quite easy for one small stratum to prosper while the rest of the society did badly – or to lose out while the rest of the society was doing fine.  Seven per cent of 100 is better than five per cent of 120 – the cake has got bigger, but the diminished share of the larger cake is not such a good compensation.

The classic parody of GNP-based economics is to point out that if every housewife was paid for cooking dinner for the house next door, this would appear as a vast increase in national wealth. Such lunatic conclusions are inherent in AdamSmithery.

Cooking dinner for yourself and for your family or friends is unproductive. Cooking dinner as a paid service for strangers is productive. Looking after your own children is unproductive. Acting as a paid nanny or child minder to someone else’s children is productive.

Smith also sometimes sees what we would now call the ‘service sector’ as unproductive: the gunsmith is useful but the surgeon is not.  All commodities must have been produced with a view to some activity. Gun for shooting. Pork pie for eating. Oil painting for creating a given impression on the minds of those who see it – perhaps ‘this is a rich man with good taste’, or perhaps something less polite – or even for the appreciation of beauty.

All value comes from work. Even a diamond is an uninteresting pebble without someone to cut and polish it. But on the other hand, if one person builds a machine that allows four men to do the work that ten men previously did, this is an obvious step forward.  Provided some other sort of work can be found for the six men who have been displaced.

In a real society, the net wealth of the society may be growing, shrinking or standing still.  Up until the 19th century, growth was quite slow at the best of times, and long declines were common.  There was a general diminution of population and level of civilisation in the later Roman Empire and in the Dark Ages.  Across the centuries, different parts of Europe had several surges and declines.  England got poorer as a society when a huge chunk of the population died in the mediaeval Black Death.  But the shortage of labour also strengthened the surviving farmers and labourers against the surviving nobles.

Within each society, the fate of the individual is not wholly bound up with the fate of the whole.  A rising tide need not lift all boats.  Various individuals will be either building up or running down their own share of that net wealth.  Sometimes they act without much regard for anyone else, as with a family farm that gives little and asks little from the outside world.  But also sometimes they ruin themselves to try to stop a decline.  Or they may be doing very nicely out of socially destructive trends.

In the abstract, nine possible relationships might exist:

  1.  Personal wealth increasing and social wealth increasing.
  2.  Personal wealth increasing and social wealth static.
  3.  Personal wealth increasing and social wealth decreasing.
  4. Personal wealth static and social wealth increasing.
  5. Personal wealth static and social wealth static.
  6. Personal wealth static and social wealth decreasing.
  7. Personal wealth decreasing and social wealth increasing.
  8. Personal wealth decreasing and social wealth static.
  9. Personal wealth decreasing and social wealth decreasing.

Smith believes that only relationships (1) and (9) are real (though (5) should also be acceptable).  Now where is the logic to this view?  Common sense would say that people often ruin themselves for the public benefit, also that business people may very often enrich themselves at no profit to the public – or even at the cost of destroying public wealth.

The AdamSmithites claim that Adam Smith has proved that individual capital accumulation and social wealth must necessarily rise together. Yet Smith proves nothing. He merely asserts.  Smith’s simplistic generalisations do not allow for the substance of real economic life, where it is almost always the case that any decision will hurt some people and help others.

There are plenty of examples from real industrial life where schemes for new inventions brought no immediate profit but were of vast long-term benefit. Xerox and IBM between them invented all of the essential elements of the modern Personal Computer. But Xerox Corporation got nothing from it, with its own icon-based machine selling badly.  Xerox created the ‘desk top’ look that was later promoted by the Apple Macintosh and then Microsoft Windows.  Yet it got no financial advantage from it, just a lesson to stick to its own area of expertise.

IBM was at one time the dominant force in the new industry of computing.  Much of the pioneering work came from them, including the floppy disk.  Yet IBM was almost killed by the industry standard for Personal Computers that it helped to create with the aid of a tiny little outfit called Microsoft.

Churchmen And Buffoons

‘Productive labour’ is a deeply misleading term. In Smith’s view, you are not productive because you produce useful goods, worthwhile things that others can share and enjoy. You are productive because you succeed in a competitive marketplace, even if what you produce is not worthwhile as a thing in itself. You can also be productive if you are employed by a capitalist who uses the fruit of your labour to build up his capital. But if you produce exactly the same goods in exactly the same way but without any cash exchange, you are unproductive. This is Smith’s doctrine, in which life is seen as an unreasonable burden upon money.  As Marx put it:

“… cooks and waiters in a public hotel are productive labourers, in so far as their labour is transformed into capital for the proprietor of the hotel. These same persons are unproductive labourers as menial servants, inasmuch as I do not make capital out of their services, but spend revenues on them.” (Theories Of Surplus Value (Volume IV of Capital), Part 1, p 159. Progress Publishing edition 1978.)

List in The National System Of Political Economy had made a similar criticism of the unreasonable nature of Smith’s categories:

“The man who breeds pigs is, according to this school [i.e. that of Smith and his followers], a productive member of the community, but he who educates men is a mere non-productive. The maker of bagpipes or Jews-harps for sale is a productive, while the great composers and virtuosos are non-productive simply because that which they play cannot be brought into the market. The physician who saves the lives of his patients does not belong to the productive class, but on the contrary the chemist’s boy does so, although the values of exchange (viz. the pills) which he produces may exist only for a few minutes before they pass into a valueless condition. A Newton, a Watt, or a Kepler is not so productive as a donkey, a horse or a draught-ox (a class of labourers who have been recently introduced by M’Culloch into the series of the productive members of human society).”

Marx and List are the only commentators on ‘productive labour’ who talk any sort of sense.  They alone clarify rather than confuse the intermingled ideas that Smith sets out in The Wealth Of Nations.

The example of the productive or unproductive piano is Marx’s. (Ibid., p 160). But, as I read him, he was well aware that the difference is only meaningful within a capitalist society. It is not a law of nature or a necessity of human life. Marx sees what Smith chose to ignore: the many possible forms of social organisation.

By Smith’s reckoning, manufacturing china dogs is a productive occupation, but healing the sick is not. It is also ‘unproductive’ to keep a lighthouse that saves both lives and wealth on some dangerous stretch of coast. In Smith’s ‘scientific’ analysis, people may be doing respected and essential jobs and yet be unproductive:

“In the same class must be ranked, both some of the gravest and most important, and some of the most frivolous professions: churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, opera dancers &c.” (The Wealth Of Nations, Book II, Chapter III., section 2).

This is senseless. Depending on your personal beliefs, you might wish to be rid of churchmen and / or buffoons.  And perhaps also lawyers, and even men of letters.  But what about physicians, doctors, people who save lives and reduce pain? It all sounds mad. But though this be madness, yet there is method in it. Unlike Hamlet, Smith believes all the mad things you find him saying, and Smith was no fool. He was repeating back to people things that they genuinely believed in, though in a form that made it look like objective science rather than prejudice. And his work has gone on confusing people ever since. It needed the genius of Marx to clarify the matter:

“Productive and unproductive labour is here throughout conceived from the standpoint of the possessor of money, from the standpoint of the capitalist, not from that of the workman; hence the nonsense written by Ganilh etc., who have so little understanding of the matter that they raise the question whether the labour or service or function of the prostitute, flunkey, etc., brings in returns.

“A writer is a productive labourer not in so far as he produces ideas, but in so far as he enriches the publisher who publishes his works, or if he is a wage-labourer for a capitalist.

“The use-value of the commodity in which the labour of a productive worker is embodied may be of the most futile kind. The material characteristics are in no way linked with its nature which on the contrary is only the expression of a definite social relation of production. It is a definition of labour which is derived not from its content or its results, but from its particular social form.” (Theories Of Surplus Value,  p 158.)

Marx also recognises that Adam Smith uses two different definitions of productive and unproductive labour. One of them is absurd even from a capitalist point of view. The first definition is the one quoted above: productive labour is labour that leads to the accumulation of capital:

“The second, wrong conception of productive labour which Smith develops is so interwoven with the correct one that the two follow each other in rapid succession in the same passage.” (Theories Of Surplus Value, p 155.)

Smith’s second notion is that labour is only productive if it produces a commodity, a material item that may be sold in the market. Immediately following on from his remark about opera singers, he says:

“The labour of the meanest of these has a certain value, regulated by the very same principle which regulates that of every other sort of labour; and that of the noblest and most useful, produces nothing which could afterwards purchase or procure an equal quantity of labour. Like the declamation of the actor, the harangue of the orator, or the tune of the musician, the work of all of them perishes in the very instant of its production.” (The Wealth Of Nations, Book II, Chapter III., section 2.).

If some soldiers dig up, peel and cook a few hundredweight of potatoes for their regiment to eat, this is not productive labour. But if they steal some of the potatoes and sell them to local housewives, this could be considered as performing productive labour, in as much as the potatoes have become commodities. Soldiers of the former Red Army who sell their weapons on the black market have thereby become productive workers, as Adam Smith defines it.  They become virtuous because they are accumulating capital, and never mind what the weapons are then used for.

One could go further. A striptease artist can not be considered a productive labourer, since no commodity is produced by her work, even though the strip-club owner may be accumulating capital very nicely. But if someone takes photos of her act, and sells these photos for money, her undressing is thereby dignified with the status of productive labour.

Obviously Adam Smith’s second definition is rubbish. By this reckoning, a portrait painter is a productive labourer, but a musician is not. The painter produces a material object that can be sold: the work of the musician “perishes in the very instant of its production”. But modern technology would allow the performance to be recorded and the recording sold to the public, which would make the musician a productive worker, albeit just for the one performance. Whereas a royal portrait painter on a fixed salary is merely a servant, unproductive, even if he should be Raphael or Leonardo.

J. B. S. Haldane observed that a sculptor like Michelangelo does not so much make a statue as remove some stone that happened to be round the finished work. Thus the creation of his statue of David was not productive work. Painting the Sistine Chapel arguably was, in as much as he added something to the building that would have increased its market value. If this view holds, he would have been no less productive if someone had employed him to whitewash the walls of Rome. Painting his statue of David a nice flesh pink would also count as productive work. (Oddly enough, this is exactly what the Ancient Greeks would have expected him to do with it. All Greek statues were originally painted, but the paint wore off during the neglect of the Dark Ages, giving the men of the Renaissance a totally new idea of what constituted Great Art.)

The key question is Smith’s first definition, labour is unproductive when it does not result in the accumulation of capital. The second definition – labour unproductive when it produces no material product – is not taken seriously these days. Shopkeepers and lorry drivers are normally classed as productive labourers, even though they create no material product. A factory might produce the best and cheapest washing machines in the world, and still go bankrupt if the only way to purchase one was for each individual buyer to go the factory gates, cash and carry.

The second definition – nothing is productive unless it yields a cash income for someone – is the one that matters these days.  Common sense says that there is great value in free libraries, free health care, scientific research free from commerce and many other things that we used to be proud of.  But assert the value of these things and the benefits of keeping them free from commerce, and you get lectured at for being ‘ignorant of economics.

I’m not ignorant of economics.  I’ve spent several years familiarizing myself with obscure texts, just to be able to confirm and prove that the commonsense protests were right all along.

Moral or commonsense protesters may or may not be ignorant of ‘economic science’.  But with certainty, economics is ignorant of the world.

The New Right and the New Labour extension are even ignorant of Adam Smith, having a very hazy notion of his doctrines and actual beliefs.  They rely on hazy notions like the ‘invisible hand’, a phrase that Smith used just three times in his very extensive writings and never did clarify.

I leave aside the vexed question of ‘higher spiritual values’, which might be either super-real or a purely human delusion.  If there really were ‘higher spiritual values’, then a commercial society must be seen an offence against them – the view of Jesus of Nazareth and of Buddha and the Jewish prophets of the old testament and indeed almost everyone who’s persuaded the matter seriously. The apparent spiritual offensiveness of commerce is a point that writers like Ruskin and Morris and Tolkien have made very eloquently.  They could be right, also they could be wrong or confused or only part right.  I prefer to rest my case on actual and demonstrable human realities.

In Tolkien, the industrial wasteland created by the main enemy and the subversion of Shire by commerce are related to the actual processes that ruined the actual traditional way of life.  (Destruction casually overseen or even promoted by the sort of parasitic country house that Mervyn Peake idolises in Gormenghast.)  Fantasy can sometimes tell you more about people’s actual views and motivations than realistic novels or supposedly objective sociological studies.

My view is not really the same as Tolkien’s.  But I note that his idealised aristocrats take little and give much.  If real-life aristocrats were commonly like that, one might take a different view of them.  And I value his assertion that real wealth is quite different from wealth as expressed and mobilised by commerce.  Buying and selling has its place, but only a small place.

Gormenghast is in one sense the reverse of what Smith wanted, wasteful and empty and its loss in the real world was a grand improvement in the life of the nation.  Tolkien’s view was hierarchical, but also included a strong sympathy  for ordinary people caught up in history’s storm.  In this he is superior to Michael Moorcock, whose nominal left-anarchism often comes a poor second to an old-fashioned Cockney admiration for loutish and useless aristocrats.

The ‘Age Of Reason’ was an understandable reaction to the abuse of ‘higher spiritual values’ during Western Europe’s wars of religion.  But if the notion of spiritual values is open to abuse, so is the notion of ‘reason’.

Smith’s definitions of ‘unproductive labour’ are very selective. He did seriously believed that landlords were doing working farmers a favour by taking part of their incomes as rent, since this turned their land into a commodity. Ricardo was later to define landlords as an unproductive class, and there are many who would also see stockbrokers like Ricardo as utterly unproductive. All of these views are really rival ideas of what society should be, dressed up in the language of objective analysis.

Smith’s analysis also takes no account of work carried out, with no thought of commerce or profit, in the state sector, or in the subsidised world of academia.  Thus the Internet, now seen as the New Frontier of commerce, was created by people working for the military-industrial complex.  It was then spread by a mix of academics, scientists, libertarian idealists and pornographers, until it finally evolved rules that made it disciplined enough for mainstream commerce.

The Unproductive State

Defining profit-making activities as ‘productive’ is an absurdity. Such a definition smuggles in the unproven assertion that all activities that return more revenue than the initial investment are productive, and that everything else is unproductive. This slides plausibly into the notion that the bulk of the society are parasites on the rich and the owners of capital. The commonsense notion that the rich would be quite ineffective without the rest of society is lost sight of.

The genuine logic behind Smith’s absurdities is that much of the ruling class in his day was ‘wasting’ its wealth on conspicuous consumption. Some people were indeed throwing away that portion of the social wealth that was under their control, as had almost every ruling class since the Bronze Age. Others invested in hopeful new industries that tapped into the new knowledge that had been accumulating over the past few centuries, aided by the unprecedented Scientific Revolution that had occurred.

Smith’s distinction between productive and unproductive is fair enough if you presuppose the private ownership of social wealth and the concentration of wealth in an idealised capitalist society; and if you are quite sure to ignore this principle when it comes to necessary state activities which were the actual conditions of the economic takeoff of the later 18th and early 19th centuries.

Adam Smith’s theory of productive and unproductive wealth amounts to little more than an exhortation on the monied classes to make themselves and their country rich by investing their wealth directly in capitalist industries, rather than indirectly on personal services.  As indeed happened, but no one looking at early 19th century industrial society would say that it had been good for everyone.

Smith begins with a valid technical description of the production of pins.  He then asserts that this is the product of unregulated market forces, which is untrue. History as Smith thinks it should have happened, replaces the messy process of history as it actually was.

The complex problems of producing useful goods are shoved aside as an incidental. The important thing is seen as the production or multiplication of money.

Smith helped confirm the typical British error whereby ownership and control of existing wealth is seen as nobler and more important than the skills that produce the wealth itself.  Lawyers are part of the select band of Top People, along with country gentry and the top stratum of military officers and clergy.  Financiers and accountants are acceptable.  Both scientists and artists are regarded as a curios, displaced ‘Top People’.  Engineers and the like are a middling stratum, more than mere workers but not a respectable profession.  White-collar staff are privileged over blue-collar, and the superior white-collar people are those very remote from actual production.

From an individual capitalist’s point of view, the production or multiplication of money is obviously quite crucial. Free-enterprise production of currency notes (forgery) is highly attractive to those individuals who take part in it. So too are the legal or illegal financial games whereby entrepreneurs can juggle with ‘financial instruments’ and perhaps grow rich

But – what does the money really mean?   The basic meaning of money is a share in the stock of marketable goods in a society. It is not more ‘real’ if it is gold rather than paper, and just as valid if it is a credit card or a payment card.  It remains just the same if reduced to a computer system that will deduct the appropriate number from a total sum that is credited to the spender’s account on some computer somewhere.

Money is a set of agreed social relationships.  Human social relationships can run into any degree of complexity.  And so too can money.

Gold to a man on a desert island is perfectly useless for securing personal survival. Gold would only be useful to the castaway if he can reconnect with some advanced social system where the value of gold is recognised. If he encounters some peaceful but callous natives for whom wealth is cowry shells, he may starve to death with a fortune of gold on his person.  But if these same natives discover that some strange visitors will give beautiful glass beads in exchange for this useless soft metal, the gold-rich castaway will suddenly be saved.  Unless of course the glass-bead traders are also crooks who will track him down to rob and kill him.

Currencies have a value in normal life because you can buy things with them.  Money markets swap money as an end in itself, and are a burden on the normal exchange of money for tourism and international trade.  But following Adam Smith’s understanding of ‘productive work’, these characters are seen as useful, whereas doctors and teachers and scientists are a drain on the national wealth.

The advantage of gold is that its value is backed by the opinions of the vast majority of the human race. Gold is hardly likely to suddenly become worthless. The theoretical possibility of producing it from other elements is not important: the known laws of physics suggest that a determined nuclear physicist could just possibly turn gold into lead, but not vice versa. Transmuting gold from iron, which is how it happens in nature, requires the rather extreme conditions of a supernova, an exploding star much larger than the sun that shines down on us.

On the other hand, the physical usefulness of gold is limited. Money is not ‘really’ gold, which is just a useful commodity. Gold has not in fact held its value as the world has moved over to various sorts of credit. To properly discuss the matter would take me far away from the present task of assessing Smith.  But it is worth noting that the philosopher David Hume had the matter well worked out in his own economic writings.

Hume and Smith were writing in a society where money flowed through small channels in a society that was mostly defined in traditional forms, without regard for commerce.  When more and more of the society was drawn into the cash nexus, everything became fluid and a new logic started to apply.

Money is not only a means of circulating goods, it is also an instrument of social engineering in the hands of the state.  It has been found that social benefit can be delivered by putting the idle resources of a country to work by means of state manipulation of credit.  In Britain, Keynes theorised an acceptable form of state-manipulated public inflation in the 1920s, a scheme that would almost certainly have prevented the miseries and horrors of the 1930s had it been accepted at the time.  It was put into effect in the non-communist world in the post Second World War period, at a time when the survival of a non-communist world seemed rather doubtful.  Keynesianism was the weapon that really won the Cold War.

Up until the 1970s, left-wingers accused the Keynesian system of still being capitalist, while its defenders denied this.  The reality was that Keynesianism  was a  mix of capitalist, state and non-profit-making elements, with capitalism rather less important than it had been in the pre-Keynesian system.

Keynesianism with its limited capitalism had been the most successful economic system the world had ever seen.  By the 1970s, it stood in need of radical reform.  Reform was indeed attempted, but defeated in British politics by a weird alliance of the pro-market right and the pro-state ‘hard left’, each hoping to profit from the crisis of Keynesianism.

In the event, it was the pro-market right that won out.  There were sound left-wing alternatives to Thatcher, but the left weakened itself by internal conflicts and lost to a government dedicated to stronger market forces.  In Thatcherite Britain, unemployment rose in tandem with the deregulation of money-accumulation.  And there has been a huge increase in social inequalities as the wealthy escaped from Keynesian social controls.

Deregulation was originally sold on the pretext of ‘trickle-down’.  If the rich were left free to increase their own wealth, this wealth would then trickle down and enrich the rest of society.  Exactly as Adam Smith had predicted.  And exactly as did not happen in the real economy.

Under Keynesianism, the economy grew fast and all parts of the society profited with it, with existing inequalities being diminished a little.  Under Thatcherism, growth has been no faster, but the rich have taken most of what the less well off would have got under the old system.

In America under Reagan and Bush, it was much more extreme, with nine tenths of the society getting no benefit at from all of the economic growth that has occurred since the 1970s.  Clinton has stopped further tax ‘reforms’ that would be give small tax cuts to middle income groups and enormous tax cuts to the rich.  But he shows no interest in reversing what was done under Reagan and Bush.

Wealth Equals Commodities?

To use Marx’s terminology, Smith defines productive labour as labour that results in the production of commodities. Other forms of organising human work to meet human need are smeared with the nasty word ‘unproductive’. By a neat trick, Smith defines necessary and unavoidable tasks as if they were superfluous.

In a capitalist system, the capitalist who introduces a new machine need not worry about the fate of those men he no longer needs. They are only hired hands: they can find other work, or emigrate, or starve, depending on factors that the capitalist need not be concerned with and has no control over. Possibly they will be taken on by the machine builder – but machines only make economic sense if they can replace more labour than it takes to build and run them.

The great problem of capitalist industrialisation is how to realise the wealth which the new ways of organising production will yield.  The wealth of goods produced by the methods of mass production have to find buyers to enable the entrepreneurs to realise the profit inherent in the production process.

The cycle of industrial capitalism is money invested in commodity production, followed by the sale of those same commodities, resulting in an increased sum of money on the initial outlay.  And while it is possible for individual enterprises to grow in a static or even a declining economy, there is always a very strong pressure for markets to grow, and equally strong pressure for industrial capitalists to introduce new methods and to create new commodities.

In earlier times, a small producer might sell commodities produced and buy other commodities with the proceeds.  Such a way of life was compatible with a stable society, even with a modest growth in overall wealth, but was restrained within an overall social context.  Whereas modern capitalism, wealth without restraint, must disrupt society in search of the expanded market which will feed back a superior return on the investment on capital in production, and fully realise the profits of production.

Life without capitalism is not, however, life doomed to eternal stasis and repetition.  Imperial China had a sophisticated commodity exchange and even paper money centuries before it appeared in Europe; its general sophistication impressed European visitors in the 16th and 17th century.  Adam Smith in the late 18th century was expressing a widespread opinion when he said that China was richer than any part of Europe.  He also noted that it was not noticeably richer than when Marco Polo had visited it, whereas Europe had closed most of the gap.

We now know that China had grown rather richer and more populous, and that East Asia as a whole was rising in prosperity.  But Europe since the time of Marco Polo had undoubtedly closed the gap on East Asian societies where trade and production were required to fit into the existing social order.

Similar stabilising factors did exist in Europe.  An abbot running a monastery might be all in favour of the fragmentation of work.  He might see great advantages in setting ten of the monks to pin-making; and then selling the pins to earn money to buy vellum for making illuminated manuscripts. But he would be hesitant about buying a pin-making machine, which would take money he had planned to use for buying vellum, and would leave him with six unemployed monks who would have to be found some other task.

In mediaeval Europe, monasteries very often were economic pioneers, introducing new forms of production and more efficient methods. But the central purpose was always to expand the institution, build a bigger church, send out some more daughter-houses, or else dish out bribes to get one of the brothers appointed a bishop. Money as such was hardly ever the main aim. This is very different from the individual accumulation of fortunes that was typical of capitalism in the time of Adam Smith.

To identify the abolition of the monasteries as the foundation of English capitalism – as G. K. Chesterton did in The Servile State – is to simplify a slow and complex development.  But it is certainly true that monasteries had to show some respect for the Christian requirement to look after the poor, much more than the landlords who took over Church property, who first displaced workers by reorganising agriculture and then condemned them for being ‘sturdy beggars’.

The steps from abolishing religious property to squeezing out most small property through market forces were gradual and intermittent, but do have a certain logic.

People can have a way of life that involves producing occasional surpluses that may be taken and sold in a market.  There may even be a regular pattern of producing some surplus goods – for instance more honey than you can eat, because you can then perhaps buy better cloth than you can spin at home.  But though markets come into it, this is not at all the same as a capitalist investing in honey-making with a view to getting back even more money at the end of the day.

In 18th century Britain, there were plenty of people who could live well without regard for the ups and downs of even British commerce.  These days, most of us are at the mercy of whatever the global economy may do next.

Marx defines the difference between simple and advanced commodity production in Volume One of Capital. You can have money as a means of exchanging goods, or goods as a means of accumulating money. These he called the C/M/C cycle and the M/C/M cycle, commodity via money to other commodities, as with a baker selling bread to buy meat and vegetables, or money via commodities to other money – buying grain you have no need for, in the hope the price will rise.

The shift is as much social as economic.  Traditional societies disliked the free-floating wealth of the M/C/M cycle, and tried to trap it in some more regular form.  This was usually land – it was common for successful industrialists to buy landed estates, which were thereafter treated as a heritage, not a commodity and definitely not something that could be sold if the price was right.  This was the norm in Britain during the 19th century, and in many other parts of Europe, but not really in the United States of America.  It was ‘gentry capitalism’ that was Adam Smith’s own vision of what the future would be, but it was not how the future actually worked out.

The US pattern of money-power is now becoming the norm, with the upper-class British prejudice against being ‘in trade’ no longer regarded as meaningful.

Adam Smith may have preached an abstract accumulation, but he was also a supporter of the aristocrats of his day, even in their struggles against the ‘revolted Americans’ who created the United States.  He would most likely have approved of the 19th century British hybrid, whereby industrial capitalism was merely a means by which a clever and ambitious individual could found a family of landed gentry or aristocrats.

Political economy, as the subject was known in Adam Smith’s day and well beyond, was far more social than modern economics. Modern economics tries to copy physics, but the forecasts of the physicists are generally accurate. Physicists routinely and correctly make predictions that are equivalent to forecasting next year’s money supply to the nearest ten pence.

New Right economics makes lunatic assumptions and produces economic models that are obviously different from the real economy. They ‘prove’ the perfection of the market system by making a dogmatic assumption that it is perfect. Human values are assumed to be exactly expressible in terms of cash. And it is also assumed that they balance perfectly in a free market.

Some of the AdamSmithites will deny that literally believe in the perfect balance of a free market.  The doctrine is only true in as far as it implies conclusions that suit them.  In as far as it suggests unwelcome conclusions, or in as far as it starts predicting things that obviously do not happen, it can be classed as untrue.  When they say ‘chalk’ they mean ‘cheese’ and when they say ‘cheese’ they mean Alfred Lord Tennyson.

Economical With Nobel Laurels

Everything that mainstream economists do is deceptive, including and most especially their claim to Nobel laurels. Alfred Bernhard Nobel created three famous and well-respected science prizes; for physics, for chemistry and for medicine or physiology.  There are also two more prizes, for literature and for peace, which wander unpredictably between the sublime and the ridiculous.

The Nobel Prize for Economics is not part of the original system.  It is a prize given by economists to economists for being economists and for flattering the prejudices held by those economists.  Strictly, it has nothing at all to do with Nobel.  Yet in this as in much else, economists have proved cunningly deceptive without having to resort to any outright lies.

Economists have always resented the fact that scientists reject their claim to be scientific.  Having links to the rich and powerful, they were able to laurel themselves with a dignity no other prize could give them.

Lots of other groups might feel that Nobel was unfair to them – psychologists, linguists, historians etc. In the sciences, there is no provision for geologists, astronomers or mathematicians. Few people other than economists have felt that the exclusion of economics was particularly unfair. But they alone had friendly connections with people with lots of money. They were able to dignify their work with ‘Nobel laureates’ of their own devising.

In one respect only could the economists be said to be in tune with Alfred Bernhard Nobel.  He was the inventor of dynamite, a cheap convenient means for death and destruction.  His own Nobel Prizes might have been deliberately designed to draw attention away from his own life.  But the work of the typical winner of the Nobel Memorial Prize in Economics is wonderfully in tune with the actual life’s work of the man himself.

 

This is from my book Adam Smith: Wealth Without Nations, published in the year 2000.  Available from Athol Books