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Adam Smith Reflection

adam smith

The following is a reflection on the work of Adam Smith for an economics course, which ended up being more of a defense of private property to my professor.

Adam Smith is one of the foundational thinkers, not just of modern economics, but of modern thought in general. His work surrounded the issue of wealth, why it is valuable, how it is produced, how it can be increased, and how it ought to be distributed. Wealth, in this sense, is measured mostly by the growth of economies. For Smith, economics is essentially the science and study of increasing the wellbeing of humanity. Though he is often held up by the most conservative economists as a proponent of free markets and trade in a simple sense, Smith’s political economy is actually substantially more complex and egalitarian than many contemporary readings of him would suggest.
The two main causes of wealth, according to Smith, are trade and the division of labor. The division of labor is prior to trade, with trade having a kind of multiplying effect on the wealth produced by the division of labor in the form of accelerated growth. Whereas conservatives like Gregory Mankiw tend to focus on the role of trade in the production of wealth, Smith’s political economy is especially interested in the place of the division of labor in the creation of the wealth of the community. All wealth, according to Smith’s analysis, is created by the division of labor. (Sackrey, 31) The division of labor creates wealth by making it possible to produce goods which could otherwise never be produced. Individuals, in isolation from others, are incapable of producing most of the goods used by society, therefore they have gone about dividing labor to allow the production of a wider and better array of goods. Because the most useful and valuable goods couldn’t be produced in isolation, much of the value available to society is created via the division of labor, and wealth is thus a product of that labor.
Smith’s understanding of wealth is important because it places the laborer in the position of value-creation, and it recognizes the interdependent nature of members of a community. This runs in direct contradistinction to many economists and thinkers who tend to place trade, and by extension capital, above labor in terms of its importance as a mechanism of value-creation. These more conservative attitudes about value have the possibility of being used to roll back the causes of labor and the gains of egalitarians in the political sphere by serving as an economic and philosophical defense of the status quo. That Adam Smith himself stands on the opposite side of the aisle on this issue shows that the entire subject of economics has the potential to provide a critical stance for the analysis of growth, wealth, and their relationship to societal good.
Gregory Mankiw provides a specific example of a conservative view of wealth as a product of trade. “Trade can make everyone better off,” says Mankiw, a position based on the assumption that it is the trade and use of goods produced by the division of labor, and not the division itself, which produces wealth. This is the basic premise of our current system of wealth, and it can easily be seen as a defense of the capitalist mode of production, a system under which property is privately owned by individuals. Because it is trade, and not simply the division of labor, which creates wealth, and private property is an essential component of trade, the promotion of the current property system becomes possible on the basis of its promotion of trade. Economists like Mankiw would suggest that the current system, or even one which has more extreme laissez-faire elements, is the best system for creating wealth. (Mankiw, Chapter 2) The argument would further run that a society with large amounts of wealth will see that wealth reaching all of its members by way of investment.
The difference between these views lies in certain premises underlying their respective arguments. It essentially comes down to a difference about the origin and cause of wealth, that is they disagree about whether wealth comes from the division of labor or from trade. This difference makes for some important broader philosophical differences as well. If, for example, wealth comes from the division of labor, then wealth could never exist without a community. This logic could be used to argue that all wealth, once created, becomes the wealth of the community, never produced or owned in isolation from others. The alternative, trade-focused philosophy would tend to suggest that wealth is created by those who trade and use goods most effectively, therefore that wealth becomes the property of those individuals. The social and economic implications of each of these positions are vastly different from one another, the former being a system of totally collectively owned wealth, and the latter being a system of private wealth akin to our present one.
Adam Smith’s actual position, in relation to these two, appears to be a moderate position lying between them. Smith, living in the period of the decline of mercantilism, is most interested in critiquing that older system. (Sackrey, 35) He advocates a less heavily regulated, less monopolistic system, because he sees those mechanisms as being too heavily influenced by the old mercantile interests to be beneficial to society. This part of his political economy is of most interest to conservatives. Smith’s concern for the working class, however, especially their relationship to the wealthiest members of society, seems to suggest a much more critical understanding of freedom of trade, exchange, and property. (Sackrey, 35) Smith recognizes that there is a certain level of inequality inherent in the system which must be dealt with. Economics, and political economy by extension, serve to answer the question of how these inequalities might be dealt with, and how dealing with them will affect the broader system and its ability to produce wealth in the future.
If Smith is right, and all wealth is due to our shared division of labor, I don’t think it necessarily follows that all wealth must be collective wealth. Clearly Smith, who saw one of the functions of government to be the protection of one individual against another, recognized some kind of private right of property, at least in one’s person. Additionally, the argument that all wealth is collective because it is produced collectively fails to recognize the actual nature of the relationship between labor, capital, and the division of labor in practice. A just accounting of the ownership of wealth must consider who invested the various factors of production allowing that wealth to be produced, and how much each individual actually invested.
The argument that all collectively produced wealth is collectively owned ignores the fact that the labor of individuals, being the property of individuals, can be sold. If it is assumed that man owns himself and the product of his labor, then it is understood that anything he produces independent of anyone else is his alone. If one owns something, it is usually understood that he has the right to exchange that thing with others at will. This means that the labor of the individual, by way of the product of that labor, can be sold. Supposing one man has enough goods to temporarily buy the labor of ten men, he can buy that labor and its product from the men and make it his to use as he pleases. If the man then organizes the ten other men on the basis of the division of labor, knowing that he can multiply the output of the labor he has purchased, then the resulting wealth and goods are in one sense “collectively produced,” but they are justly the property of the single man since he has purchased the labor and product used to produce them. The product of the division of labor in this case is great wealth, but being the property of the single man through a fair and voluntary exchange, it still is not collective wealth.
The investment of capital, too, presents a problem with the collective ownership of wealth. If three men invest some goods they’ve produced, capital, in building a house, but they invest unequally, a fair accounting of the ownership of that house depends on how much each invested. If one man invests 60% of the necessary capital, but the others invest only 20% apiece, it seems just that the house ought to be 60% the property of the first man, and only 40% the property of the other two. The idea that capital, and the thus the portion of the new wealth which it comprises, ceases to be the property of its original owner after it is contributed to the division of labor seems to result in a kind of injustice. In a just world, these men do not equally own the house they built together, and the wealth they produce is not collective.
Adam Smith’s political economy is an important commentary on the way contemporary economists think about wealth, but it also has certain things to say about the justice of inequality. Smith’s ideas run both in line with, and in opposition to, conservative and capitalist economics, which means that he is an essential source of controversy on the issue of the justice of any economic system. It is important to consider that his views, taken to their extreme, may not be completely consistent with justice, but that taken moderately they are important for criticizing and deconstructing the most harmful parts of the present system.

N. Gregory. Mankiw. Principles of Microeconomics. South Melbourne, Cengage Learning Australia, 2008. Print.

Sackrey, Charles, Geoffrey Schneider, Janet Knoedler, and Hans Jensen. Introduction to Political Economy 8th ed. Dollars and Sense, 2016. Print.

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