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."
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."
No comments:
Post a Comment