TWoN Book 4 Chapter 2

Here we begin what seems to be Smith’s major campaign: to prove that anything that restrains trade (with a very few exceptions) is bad for society as a whole.  The difficulty with this proposition appears in the very formulation: society “as a whole” consists of divisions whose interests are opposed to each other; thus to prove that something is bad for society “as a whole” is, to say the least, ambitious.  Let’s see how he does.

This chapter focuses on laws that restrict the importation into a country of goods that can be produced in that country.  He makes the point, on page 349, that “The general industry of the society never can exceed what the capital of the society can employ.”  This is obviously true, though it is worth bearing in mind that this amount of capital is constantly changing–to be precise, it is generally growing–so we ought not to treat it as a fixed sum.  Further down the page, he observes that anyone with capital to invest is always looking for the most profitable way to invest it.  “But the study of his own advantage, naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.”  He then goes on state that home-trade is more profitable than foreign trade of consumption, and that the latter is more profitable than the carrying trade (ie, investing in ships, rather than in their cargo).

On page 350 he observes that those in the carrying trade, in order to have greater control over the goods they transport, tend to establish markets in their home ports.  “…and it is in this manner that every country which has any considerable share of the carrying trade, becomes always the emporium, or general market, for the goods of all the different countries whose trade it carries on.”  This makes sense; I wonder to what extent it is still true.

Page 351: “But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value.”  And so each person attempts to maximize the profit of his capital.  “…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 no part of  his intention.”  And here we find the famous “invisible hand” which, I have no doubt, Mr. Smith would have preferred to amputate if he knew the use to which it would later be put.

How true is it?  I think there is certainly an element of truth here–human beings are forced by their own self-interest to move in certain directions that will have a profound effect on the nature of their society; this is part of what Marx meant when he said, “Men make history, but not just as they please.”  I think Smith’s confusion comes, in part, from failing to understand the nature of the State as the servant of a definite class.  When he objects to government passing laws in the interest of manufacturers at the expense of  “society as a whole” he is not seeing that this government is, in fact, the representative of the manufacturers, and thus the laws in the interest of manufacturers are in fact a very part of that same “invisible hand” that he opposes to them.

Page 353: “The industry of the society can augment only in proportion as its capital augments, and its capital can augment only in proportion to what can be gradually saved out of its revenue.”  Unless I’m missing something, he is observing that the development of capital comes from a portion of the surplus value created by production.  If so, it seems hard to argue with.

My argument above, about Smith failing to understand the nature of the State(which, really, he couldn’t given that he lived in a period where the State was in the process of transition), is bolstered by a comment on 358, comparing the country gentlemen to the manufacturers: “Country gentlemen and farmers, dispersed in different parts of the country, cannot so easily combine as merchants and manufacturers, who being collected into towns, and accustomed to that exclusive corporation spirit which prevails in them, naturally endeavor to obtain against all their countrymen, the same exclusive privilege which they generally possess against the inhabitants of their respective towns.  They accordingly seem to have been the original inventors of those restraints upon the importation of foreign good which secure to them the monopoly of the home-market.”  The point is, after cutting off the head of Charles I and politically emasculating Charles  II (in spite of promises to the contrary), the bourgeoisie had gone a long way toward taking power from the landed aristocracy.  To be sure, not fully: the corn-laws weren’t settled for most of another century, and the House of Lords retained some power even later than that; but the balance had been tipped.

On page 361-62 he contends that taxes on the necessities of life, by raising the cost of labor, raise the cost of all commodities.  He is correct, I think, in objecting to taxes upon necessities of life because they hurt the most those who can least afford them; but they do not raise the cost of labor; at least, not in the direct manner he implies.  The cost of labor is determined socially, in the constant struggle between employer and employee for how much of the surplus value each will get; it doesn’t simply rise (unfortunately!) as the cost of living rises.

I rather enjoyed seeing M. Colbert discussed on page 364, as he’s in important character in The Vicomte de Bragalonne by Dumas.

Also delightful and interesting is this comment on 364-365: “To judge whether such retaliations are likely to produce such an effect, does not, perhaps, belong so much to the science of the legislator, whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal, vulgarly called a stateman or politician, whose councils are directed by the momentary fluctuations of affairs.”  Now there is a distinction I’ve never come across before.  I wonder if, at one time, there was truth in it.

On page 367 he compares the habits of the soldier with those of the manufacturer (by which I believe he means laborer in this context), which ties in nicely to some of my own theories about peace-time or professional soldiers, but I don’t think has anything to do with this investigation.

Going back to my earlier criticism of Smith, I have to mitigate it at least somewhat because he, himself, clearly recognizes it to at least some degree.  On page 368: “To expect, indeed, that freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it.  Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it.”  True; and it also goes a long way toward undermining the latter-day beliefs (not Smith’s) about the “invisible hand.”   It leaves open the question of whether that mythical beast, completely free trade, is even something to strive for.  In my opinion, it is silly to even address the question before defining what “completely free trade” even means.  It would seem to mean free from interference–but doesn’t every individual “interfere” with free trade according to his own needs and to the extent of his influence?  If what is being traded is private property, then this implies a State controlled by the property owners (there can be no private property without a State to define and defend it), and how can there by a State controlled by property owners without it exerting it’s influence in their behalf; it is as absurd as to suggest that a fish, in order to preserve it’s body of water, refrain from swimming.

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0 thoughts on “TWoN Book 4 Chapter 2”

  1. (I just discovered this discussion and need to try to go back to the beginning. My apologies if this has already been discussed…)
    My immediate thought in regards to how Smith addresses capital with a national identity is that it has become completely moot with the development of postmodern global market capitalism.
    We still have the concept of GDP based on imaginary political boundaries; but in reality capitalism has completely eschewed even head-nodding to those boundaries when you can gave a multi-national that may have an American mailing address, does its banking in the Camens or Dubai, has corporate offices in Germany, has share holders from everywhere, and places its factories and labor in developing countries.

    Just as any idea of an uninfluenced “free” market is a myth, any belief in politically bound national markets has also become a myth. In my very amateur analysis, modern Marxist thought has begun to take this into account (Fredric Jameson, Nedri and Hardt [see their books EMPIRE and MULTITUDE],) but the various pro-capitalism theorists seem, like libertarians, to be locked into this (pre-) industrial age thought.

    Or at least, that’s what the cultural logic demands in order to allow postmodern capitalism to continue unabated in its drive to exploit the cheepest labor from the biggest pool possible.

  2. PNH: Sure. The last real transition in the nature of the state in the USA was over a hundred years ago, when capital took over from the slave oligarchy. You may have read about it; there was a bit of a dust-up over the issue. It is true that, since then, we’ve had other, minor transitions over which capitalists were the most dominant, with finance apparently winning out. But that’s not at all the same thing.

    When Smith was writing, it was “gentry OUT merchants and industrialists IN.” They were right in the middle of that process: the corn laws were becoming a major issue.

    My point is, when you’re right in the middle of that switchover, as Smith was, where a social class had lost power and another social class taken it and the machinery of the state was gradually coming into line with the new arrangement, it would make it more difficult to see the state as the executive committee of the ruling class.

    Liam: Welcome to the discussion; I’ll be interested to hear what you have to say.

  3. Mr. Brust, I was wondering – have you ever looked into the Austrian school of economics? Many of the objections you have raised to this view of capitalism are also raised by the Austrian school, though the conclusions reached go in a completely different direction.

    If you have not, then at some point (after your brain rests from the monumental task of absorbing TWoN) you might look into it, if only to find another reason to solidify your socialist leanings.

    As a sample, one of the fundamental concepts of Austrian economics is that there is no absolute value to anything, whether added by labor, skill, or scarcity. All value is subjective, and only decided by how much an object (or service) is needed or desired. This was a different concept than any economic theory I’d ever been exposed to, but it made sense the more I thought about it. And it certainly seems to hold up in real life.

  4. Jess: Yes, I have looked at it a bit. It seems to answer every question about capitalism except why and how it works. The most interesting thing about it (that I’ve never seen discussed) is how nicely it fits in with Heidegger, Faucult, and other philosophers who delight in telling us how we can’t know anything, and that everything depends on thought. As one example, I have yet to hear an explanation from the Austrian school about why there was such a shortage of shoes during the Depression–they were certainly needed and desired!

  5. Well, actually, the answer for that (and for why we were plowing under crops when there were food shortages) was that the government was overly interfering with the market, trying to artificially prop up prices. This led to production of things we didn’t need, shortages of things we did need, unemployment, etc.

    Of course, according to the Austrian school, it wasn’t merely the government interference directly upon the market that caused all of this; it was also (or mainly, even) the government’s role in expanding the money supply in the 1910s and 1920s.

    The needed/desired aspect only works in a free market (which I realize would need to be defined for a more extensive conversation on the topic). When the market is interfered with by a third party, such as the government, the needed/desired/created/acquired channels are thwarted.

    I realize this is probably off-topic, and if you don’t have time or interest, that’s certainly acceptable. But what do you mean that it doesn’t explain the how or why? I may have read different source materials; it seems to explain it to a great degree. Do you mean that it doesn’t lend itself to graphs and charts explaining why people buy the things they do, and in what quantities? I’d certainly agree with that. But I sense you mean something deeper than that.

  6. Actually, there was no government interference with shoe production during the Depression. The trouble was, they cost more to produce then people could afford to pay.

    By not explaining how or why I mean that it leaves the most important questions unanswered. The claim that it is all demand-based begs the question of what causes the demand. And, moreover, leaves out the issue of cost of production (hence my shoe example).

  7. I know there was no interference with shoe production, and I apologize if I came across as saying that. Without having studied this example, I can give two possible causes through Austrian theory, though both come down to basically the same thing.

    One is that by government interference in other industries, the costs of materials and or labor was artificially enhanced to where creating shoes cost more than they could sell for, thus creating a shortage.

    The second is that when the government inflated the money supply, this led to malinvestments that had to be liquidated. This created bottlenecks in supply and demand, as people desired things that couldn’t be readily produced for what they could afford to pay.

    I hate to sound obtuse here, but in my defense, I am blond. What causes demand? I don’t really understand that question. Isn’t it simply people wanting things, more than they mind paying for them? I desire a painting, because I think it is pretty. I desire food, because I like the way it tastes. I desire medical care, because it keeps me healthy (theoretically). Where is the mystery in demand?

    Do you mean why are certain things demanded, and others not? Or why demand sometimes runs into bubbles?

    The cost of production is certainly not left out of Austrian theory, nor is labor, or capital. In a world of infinite demand and finite supply, the question isn’t *what* is desired, it is *how much* it is desired – and that is the crux.

    Demand is what drives it all, but demand is merely a combination of desire vs. cost (and in the credit driven society, you have to factor in time preferences – how much am I willing to pay to have it NOW instead of saving up for it later).

    Or are we using the word “demand” to mean different things? I find semantics to be at the heart of many arguments, as people sometimes mean different things by the same word.

  8. I’m having a little trouble with the idea of either artificially inflated costs or inflated money *during the depression.* Remember? That was when the bottom fell out of the price of everything? In general, in the period leading up to the Depression, there was very little, almost NO governmental interference in the economy. The regulations were instituted after 1029, in an effort to end it and prevent another. Recently, starting with Reagan, the regulations have been gradually removed again. How’d that work out for us?

    What I was getting at by calling into the question the meaning of demand, was a reminder that at the heart of all economics is the need to feed, house, and cloth ourselves, and that we create societies to do that cooperatively. But it seems you don’t need that reminder, so never mind.

  9. I will have to disagree with you about government interference in the economy. The very presence of the Federal Reserve does that with the money supply. And the inflation of the money *supply* is what I referred to in the 1920s. That is an objective fact; the money supple was vastly inflated. Austrian economists say that led to the bust that began the Great Depression. The cause is a matter of opinion, that the Fed inflated the money supply is not.

    And both Hoover and Roosevelt made it an express part of their plans to try to keep prices and wages from dropping. This also a matter of historical record. Whether you believe they helped or hurt is of course up for debate.

    As for the lack of government regulation both then and now… We’ll have to respectfully disagree on that point. In a land where the government backs mortgages, bails out banks, spends hundreds of billions of dollars putting half a million troops overseas, is responsible for half the health care spending… I really can’t see where we have a free market. You can’t even sell used toys for children because of regulations. I can’t count the number of people I know personally who had to close their small businesses because of government regulations, and high taxes.

    But you certainly don’t have to agree with anything I’ve said. I would recommend Murray N Rothbard’s “The Great Depression.” It’s definitely a different viewpoint than the standard “Roosevelt saved us all” angle generally taught now

  10. I typed that last night on my iPhone when I was offstage between sets, so the last paragraph got a little muddled, I’m afraid.

    What I mean to say was:

    You certainly don’t have to agree with everything I say. And if you already know the cause of the Great Depression and our current economic crisis is lack of government regulation and the excesses of capitalism, then you have no need to look farther. But if you would like to read a different point of view, and an Austrian one that certainly explains all sorts of hows and whys, I would recommend Murray N. Rothbard’s “The Great Depression.” It’s definitely a different perspective that the standard “Roosevelt saved us all” that is gospel now. It actually indicates the opposite, and does so convincingly, in my opinion.

    Basic needs, such as food and clothing, may indeed be the heart of societies and economics. But just as a body needs more than a heart to survive, most societies (and systems of economics) go far beyond these basics. It is the nature of mankind to want more. I think the heart of economics is understanding how to get more.

    In some systems, they advocate simply taking it from others within your society. Some they advocate taking it from those outside your society. And some advocate creating it for yourself. To me, where the wealth (including basic needs) is generated, and how it is distributed is the heart of economics.

  11. In my very non-expert opinion, the concept of “human nature” and what it demands are highly debatable. The cultural logic, of any socio-economic system, defines and nurtures and justifies different “human natures” that best serves those who benefit most from the system.
    I can’t say how much “need” is a part of human nature, but I do think it’s quite clear that whatever amount, if any at all, this esoteric “need” exists, it’s EXTREMELY exploited, exagerated, accelerated, and justified by the cultural hegemony which nurtures us to be wanton and wasteful consumers.
    I think the benefit to the capitalists that the other 95% of us are gross consumers is pretty obvious and doesn’t need the tedium of explanation.
    The point being, if the capitalists feed off our consumption, then our “nature” happens to be needful and greedy. If the royalty want justification, then our “nature” is to be meek worshipers of divine right without any real greed impulse. To be redundant: our nature is defined by what best benefits those with the REAL power.

  12. While it is hard to argue that those in power exploit those who are not, I find it interesting to say that the human desire to have more is highly debatable.

    Can you give an example of a society where the people do not want more than what they have? I can think of a few isolated cultures that are heavily influence by religion… But even in those, there is a constant struggle to be content with what they have, rather than striving for more.

    Isn’t that the promise of capitalism, fascism, socialism, communism, and every other “ism” of economics? Don’t they all promise to give you more than what you currently have? If that doesn’t mean it’s a basic human nature, then what is?

  13. Does anything predict the effect of the distance between producer (supply) and buyer (demand) which was experiencing exponential growth after the industrial revolution? Guys in suits calculating cost of production vs. poverty of general population… wouldn’t have been a factor at the time Smith was postulating, really. Just saying.

    What I really wanted to comment on was the unique (I’m saving it someplace) distinction between “legislator” and “politician.” (Can the distinction exist if one of the objects is obsolete? Sure; dinosaurs.) Yes, I think it’s a valid distinction. So, we just need genetically manipulated breeding to create a new generation of “legislators.”

    (Yes, I see the irony of using Big Power to empower the masses. It’s my favorite downfall… got a name for it???)

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