The Invisible Hand and the Pin Factory

As we enter another presidential election year, shopworn shibboleths are sure to be trotted out on the campaign trail. No matter whom the Democrats nominate, Donald Trump will waste no time in labeling that candidate a "socialist" and portraying himself as the defender of capitalism. It is thus worth pausing to examine capitalism by way of assessing the truth or falsehood of aspersions that will be cast and claims that will be staked.

Two great metaphors lie at the heart of The Wealth of Nations, the great theoretical summa of capitalism by Adam Smith published in 1776. The first and most famous is the "invisible hand." As Smith explained:

“Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention.”

The principle at work here was simple but revolutionary: by freeing all individuals to pursue the highest profits from their use of capital, the greater good of society would be achieved, because (following the laws of supply and demand) the highest profits would ultimately be gained from supplying others with what they most need. This was an essential theoretical bulwark for arguments in favor of inalienable rights to "life, liberty, and property" that had been promoted by Enlightenment philosophers since the days of John Locke (1632-1704). Smith was able to demonstrate that shielding individuals' economic freedom from the arbitrary whims of kings, despots, and aristocrats was not merely right and just in the abstract, but served a practical social imperative.  

The other great allegory at the heart of Wealth of Nations was that of the "pin factory," which Smith used to demonstrate his idea of the advantages to be accrued from the division of labor:

 "To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. 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; to make the head requires two or three distinct operations; to put it on is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them ...upwards of forty-eight thousand pins in a day."

Here Smith was observing and documenting the evolving conditions of a world that was rapidly commercializing.  Trade in goods and materials across long distances was becoming increasingly important to the way the world lived and worked, otherwise the production of 48,000 pins/day in a Scottish village of a few hundred people would have been completely absurd. The huge increases in productivity that could be garnered from an intelligent division of labor was another argument in favor of economic freedom: if kings, despots and nobles could be kept from obstructing the movement of people, goods, and materials, the gains in prosperity for all would be enormous. 

The articulation of these principles in the late eighteenth century was both inspired and inspirational. Smith helped animate political upheavals that rocked the globe and broke up empires in the late 1700's and early 1800's. But as many economists have observed, the two great metaphors at the heart of Smith's work are in profound tension with one-another. 

The conflict can be understood by focusing on the seminal categories of "capital" and "labor." The allegory of the "invisible hand" urges us to understand that, in service of the greatest prosperity, the use of capital must be in service of personal profit. If I have some money, land, or valuable material, I should be free to use it in whatever way will bring the most profit to myself. If the laws and institutions of my society are set up to allow me such freedom, the benefit to everyone will be maximized.

The lessons of The Wealth of Nations with respect to labor are very different, however. In the abstract, Smith advocated that the market for labor should be as free as that for capital (he was an adamant opponent, for example, of slavery). But in practical terms, his pin factory example creates a different and opposing set of imperatives for labor as exist for capital. Where the underlying principle motivating the use of capital is personal profit, that driving the use of labor is productivity. Though investors of capital must be left free to use their resources for their own highest benefit, the division of labor embodied by the pin factory creates a set of conditions in which the profits from labor will necessarily be curtailed.

This consequence of the pin factory example is easily understood. In a day before the commercial revolution sent ships laden with barrels of pins and other sundries for sale to ports around the world, a local shopkeeper might have employed one "master pinmaker" to provide all such wares. That person would have needed to know all eighteen different operations in the making of a pin, and would not be easily replaced. She could thus negotiate a fairly high price for her work. In the pin factory, where the eighteen tasks of pin-making were divided between ten people, any one of them that expressed dissatisfaction would be easily replaced. The price they could command for their labor would thus be radically reduced, despite the fact that the shift from one worker to ten had resulted in a massive increase in productivity.

 The invisible hand and the pin factory thus inevitably work at cross-purposes to one-another. The owners of capital, in seeking their own advantage, persistently promote divisions of labor that will suppress the wages of workers and maximize their returns on investment. In doing so, however, they undermine the mechanisms by which the "invisible hand" forms. The forces of supply and demand can only move goods and services where they are needed if demand remains sufficiently robust, thus purchasing power must be distributed broadly enough to sustain the market. In a society in which most people live on the income from labor, and the price of labor has been pushed as low as it will go, purchasing power becomes too concentrated to optimally incentivize and reward productivity, effectively paralyzing "the invisible hand."

This paradox at the heart of capitalism has created a tension that has been apparent since the days immediately following the publication of Smith's work. Though personal freedom and social prosperity depend on one-another, an excess of one will work to the detriment of the other. Though capital and labor are together essential to the creation of wealth, the predominance of one will undermine the productivity of both. It has always been necessary to mediate these tensions between freedom and prosperity, capital and labor, by government intervention. The "invisible hand" of the market would not have spontaneously created child labor laws, trade union protections, or controls on market speculation. Mechanisms such as these, however, have proven key to generating the kind of prosperity that Smith predicted a market economy could achieve when operating at its full potential.  

It is important to keep these facts in mind while listening to the campaign rhetoric in this electoral cycle. Much of what Donald Trump and the Republican Party will decry as "socialism" (increasing the minimum wage, expanding access to education, making healthcare more affordable, reinforcing the bargaining power of unions) are merely government interventions in the market economy that have always been necessary to redress the tensions between capital and labor. Indeed, if there is any dysfunction in our economy now, it does not arise from limiting personal freedom or constraining the power of capital. Capital is operating at an advantage now that has not been seen since the waning days of the nineteenth century. Income inequality is at an all-time high, and the "tax reform" passed in 2017 has shifted the tax burden so that, for the first time in modern memory, the super-rich are paying a smaller percentage of their disposable income to maintain government services than the working poor.

Donald Trump, a billionaire who has never before held public office, consistently sides with capital over labor and personal profit over shared prosperity. Even his love of trade wars, which on the surface seems "pro-labor," flows from his experience as a rentier (who profits not from production or trade, but from the exclusive control of a piece of capital). Such leadership is dangerously misguided in an age when the power of capital is already distorting markets and eroding productivity (not to mention destroying the planet through climate degradation). Trump and his cohorts will predictably try to distract voters with fears of socialism, but it is the health of capitalism that they should be worried about. If the Democrats are in need of a strategy and in search of a message, they could do worse than this one: "Vote to save capitalism. Vote AGAINST Trump."

The Turley Dilemma

Jonathan Turley, the legal scholar called by Republicans in yesterday's hearing on impeachment before the House Judiciary Committee, gave what was perhaps the best possible defense that the president could have asked for from a credible legal scholar. If we look at the component parts of his argument, we can see the outlines of a dilemma that faces the president, the Republican Party, and by extension the entire country. Broken down, his arguments against impeachment amounted to:

 1)Everyone is angry, including Jonathan Turley's dog. This of course is a classic ad hominem fallacy. The fact that someone is angry does not mean that he or she is wrong. Much of Turley's opening statement dwelt on (what he admitted were) ad hominem irrelevancies, like the fact that he had not voted for Donald Trump. Emotional or ideological bias does not change the state of either the constitution or the facts.

2)The process is rushed. This is a valiant effort at a defense, but is absurd on its face. Much of the appearance of "haste" is generated by the president's unprecedented and clearly unlawful obstruction of Congress. If the White House had honored all of Congress's subpoenas, the investigatory phase of this impeachment might still be underway. The same would be true if Attorney General William Barr had done his duty as an officer of the court in appointing a special prosecutor to pursue this case, rather than acting out of personal allegiance to Donald Trump. Moreover, if (as all of yesterday's scholars affirmed) one of the key purposes of impeachment is to guard the integrity of the electoral process, the time-frame in which impeachment may be effective is necessarily constrained by the electoral calendar. The closer we get to the next election, the more damage a corrupt president may do to the prospects of a free, fair, and valid election. The House thus has every justification to be suspicious of and to forcefully bypass White House efforts at obstruction.

3)More evidence and testimony is needed. This was Turley's strongest argument. Surely everyone would like to hear what John Bolton, Mike Pompeo, Mick Mulvaney, and Rudy Giuliani would have to say under oath. But again, de-legitimizing the impeachment inquiry because of White House obstruction is like setting bank robbers free because they would not hand over the money that would prove their guilt. Turley's argument that the courts must be allowed to weigh in on whether or not the White House is obligated to honor Congressional subpoenas on a case-by-case basis (rather than conceding that the White House's blanket refusal is illegitimate on its face- which is clearly the case) would create a precedent effectively robbing the House of its impeachment power. On that basis any president who was impeached in future could demand that every Congressional subpoena be submitted to judicial review, thus ensuring that hearings would "run out the clock" until the next election. The only reasonable position for a legal scholar to take is that the posture of a White House faced with a Congress exercising its highest Article I power (that of impeachment) must be abject compliance and cooperation- the submission of a subpoena to judicial review under those circumstances should be a "once in a blue moon rarity." Any White House (like the current one) that behaves differently de-legitimizes itself, not Congress.

Most distressingly for the president and the Republican Party, on the substantive issues upon which the witnesses had been called to testify yesterday Turley was in virtual lock-step with the other legal scholars bearing witness. None of the professors had been called to assess the facts of the case, but to explain whether the allegations raised by the Intelligence Committee amounted to an impeachable offense. On this point Turley was clear: if the president did what the report issued by the Intelligence Committee accuses him of doing (attempt to coerce the president of the Ukraine into providing dirt on a political rival), he should be impeached and removed from office.

This is where the country is thrown into a dilemma. The president and the Republican Party do not have a legal leg on which to stand- there is no sense in which anyone can argue that "the facts do not matter in this case." The GOP will not be able to find a credible scholar of constitutional law that will testify under oath that what the president is accused of was not an impeachable offense.

Since the facts are essential, if both sides were operating in good faith, an innocent White House would want total transparency- only a complete and honest accounting of the facts would exonerate the president. The White House would thus scrupulously honor every Congressional subpoena, and hasten the testimony of every witness that could verify the exculpatory evidence clearing the president of this offense.

Because that is not happening, there are only two possibilities. The first is that the president is not innocent, and should be removed from office. The second possibility is that the president is innocent, but is evading investigation because he is faced with a vast conspiracy stretching throughout the Democratic Party, the intelligence services, the news media, the professional bureaucracy, and elements of his own party, dedicated to distorting the facts to fabricate his guilt.

As we listen to the speeches by Republican lawmakers during the course of the impeachment inquiry, we see that this latter charge is precisely the defense of the president toward which they have been compelled. In this respect Professor Turley has done the nation a service, in that he has helped clarify what must be the Republican position if impeachment is to be credibly opposed. The clear principles of the constitution in combination with the raw facts of presidential obstruction leave open only one possible Republican defense: the presidents' accusers are liars, conspirators, (and ultimately, given the degree of contempt for the constitution that such behavior would require) rank traitors to the United States of America.

 We have seen too much evidence of Republican dispositions to doubt whether the GOP will double- and triple down on this defense in the weeks and months ahead. As Republican accusations of perfidy and treason become more strident, it will become increasingly disconcerting to watch duly elected Representatives and Senators accuse their fellow Americans of vicious and unpatriotic conspiracies in ever-more vitriolic and hyperbolic terms. I cannot offer "they know not what they do" as consolation, because that would be a lie. But I can say this- the constitution, and their allegiance to Donald Trump, leaves them no choice.