Capitalism in the 21st century has been characterized by some as “savage capitalism.” That term elicits visions of a dog-eat-dog world, of a Hobbesian war of all against all. If one believes that capitalism need not be so vicious, one might start by demythologizing Adam Smith’s thinking about markets and how free they should be.
In his famous work, the father of capitalism analyzed how to increase the wealth of nations. But what he meant by the nation was not only the rich; he included everyone. (In Wealth of Nations he wrote about universal opulence, including even the poorest class.) His recipe for such wealth was the division of labor in a system of natural liberty with justice. (Justice is a crucial aspect of Smith’s thought that most commentators miss.)
His approach was a subtle one: each individual should strive hard to advance economically, but should do so with justice, fair play, no harm to others. In Wealth of Nations, Smith emphasized individual freedom to compete but qualified that by insisting that competition not violate the rights of others. Economics that avoids harming others requires a social dimension which is diametrically opposite to the individualism of laissez-faire.
In fact, economics cannot be purely individualistic; it requires an enormous amount of cooperation. This social aspect of Smith’s thought is clear in both of his books. One might expect it in Theory of Moral Sentiments, but it is also in Wealth of Nations. In that book, Smith clearly states that the quest for economic advancement cannot be individualistic. He wrote about the cooperative nature of markets: “if 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 person in a civilized country could not be provided, even according to, what we very falsely imagine, the easy and simple manner in which he is commonly accommodated” (Wealth of Nations, p. 13). In short, cooperation by “many thousands” is needed to supply the poorest person with what little he has.
At this point, you may reasonably ask, what does all this have to do with markets and justice? Cooperative market relations require fair play, justice. And administration of justice is a government function, one of three government functions Smith listed in Wealth of Nations.
One would expect justice to be an important aspect of Smith’s book on moral philosophy. Indeed justice, fair play, is emphasized in Theory of Moral Sentiments. But what is interesting is that it is also a major theme in Wealth of Nations. In that more famous of his two books he wrote that government’s role was to protect everyone in the society from injustice by anyone else in society.
Smith also wrote about a laborer’s right to use his abilities however he thought appropriate, as long as he did not harm his neighbor. His harsh criticism of merchants and manufacturers are examples of this emphasis on justice. Several commentators, including his first biographer, Dugald Stuart, have noted this criticism. Stuart noted that such harshness was uncharacteristic of the usually mild-mannered Smith. For instance, he criticized businessmen for monopolistic tendencies which enabled them “?to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens” (Wealth of Nations, pp. 287-288).
Further, in the context of arguing for various types of banking regulation, Smith stated that government should restrain any individuals who used their natural liberty to endanger others. (Isn’t that interesting, given the current sub-prime mortgage crisis, which is only the latest financial crisis in the under-regulated banking sector?)
In short, free market capitalism, which Smith certainly advocated, must include a justice component. I think this could be called a Hippocratic oath for capitalism.
Economic justice is not simply a matter of ethics; Smith argued that it is economically beneficial. For instance, Smith states that administration of justice is crucial for the economic advancement of all the people of a country: “but above all, that equal and impartial administration of justice which renders the rights of the meanest British subject respectable to the greatest, and which, by securing to every man the fruits of his own industry, gives the greatest and most effectual encouragement to every sort of industry” (Wealth of Nations, p. 660).
That beneficial aspect of justice in a market system brings us back to the Hippocratic oath. That oath is not just about abstaining from harmful actions. It is also about benefiting others. In the quotation above, Smith wrote that justice is a “most effectual encouragement to … industry” and thus increases the wealth of the nation.
The United States has been most successful economically when the system has provided justice for all. The United States economy has thrived when workers were well-paid (which Adam Smith advocated), but the savagery of recent capitalism has weakened the economy. Think of the dynamism of the United States economy in the decades immediately after World War II. But, in recent decades, so many studies have documented stagnation in the wages of the middle classes and the poor, while the wealth gap has increased. Would market capitalism with justice reverse these trends and produce a trickle-up effect?