Since so much faith, much of it blind, has been placed in the invisible hand of the free market to guide us and the ability of government only to impede economic progress, it's helpful to return, as always, to the source, in this case to the work that gave us these ideas and spawned some of the counter-intuitive ideas of liberal (free market) economic theory. The Tea Party has been offering a watered-down version of what Smith actually wrote, but his work makes clear a few major points the Tea Party in its corporation-loving, government-hating rhetoric often ignores. What follows are some choice excerpts from the 1775 work.
Note that Smith rails against corporations throughout the book, although to be fair the use of the term has drifted over time, and he was as concerned about the cornering of labor markets through guilds (which were also called corporations in his time) and local laws that artificially limited the supply of skilled laborers (by mandating long apprenticeships, for example, and quotas of numbers of apprentices per business), but the idea is the same. Smith believed that whenever two businessmen got together, self-interest would compel them to collude to artificially drive up prices and keep out competition.
Smith also did not share the anti-government rhetoric of the Tea Party and nowhere suggests much less advocates the abolition of government. Rather, he argues that some taxes can unfairly harm the poor (such as a window tax that would harm a lower income country inn owner much more than a higher income London landlord who might pay lower taxes because he has fewer windows (this is a stone's throw from advocating an income tax, something Smith does not explicitly do, but he argues against flat taxes that all must pay even though some would pay much more proportional to their income and property.
In fact, Smith often argues that government has a critical role to play in free markets. Without the security provided by government, the rich few could never sleep at night knowing that the vastly greater many might be provoked into confiscating their property. The only societies that do not need governments are poor ones, or ones in which the accumulation of wealth is trivial, only a few days' worth of labor. In Smith's view, without government, there could be no secure accumulation of wealth.
Smith also makes clear that he feels government has a role in helping to shape the ethical, moral, and physical development of its citizens, especially the poor workers, who through the mindless repetition of their labor could become as "stupid as men can be."
Finally, in Smith's descriptions of ancient Rome, the many poor who became indebted to the rich few with massive debts that they could never hope to pay off lost their independence and ended up having to vote for whatever candidate the creditor dictated, a situation eerily reminiscent of today's over-leveraged American consumer. Put another way: wealth inequality and manipulation of this situation for the benefit of the wealthy few can make the idea of a democracy a joke since the wealthy few can essentially by needed votes if the poor become indebted to them financially.
Excerpts:
Corporation laws drive up prices which must be paid by everyone else
Corporation laws enable the inhabitants of towns to raise their prices, without fearing to be undersold by the free competition of their own countrymen. Those other regulations secure them equally against that of foreigners. The enhancement of price occasioned by both is everywhere finally paid by the landlords, farmers, and labourers, of the country, who have seldom opposed the establishment of such monopolies. They have commonly neither inclination nor fitness to enter into combinations; and the clamour and sophistry of merchants and manufacturers easily persuade them, that the private interest of a part, and of a subordinate part, of the society, is the general interest of the whole.
An incorporation not only renders them necessary, but makes the act of the majority binding upon the whole. In a free trade, an effectual combination cannot be established but by the unanimous consent of every single trader, and it cannot last longer than every single trader continues of the same mind. The majority of a corporation can enact a bye-law, with proper penalties, which will limit the competition more effectually and more durably than any voluntary combination whatever. The pretence that corporations are necessary for the better government of the trade, is without any foundation. The real and effectual discipline which is exercised over a workman, is not that of his corporation, but that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence. An exclusive corporation necessarily weakens the force of this discipline. A particular set of workmen must then be employed, let them behave well or ill. It is upon this account that, in many large incorporated towns, no tolerable workmen are to be found, even in some of the most necessary trades. If you would have your work tolerably executed, it must be done in the suburbs, where the workmen, having no exclusive privilege, have nothing but their character to depend upon, and you must then smuggle it into the town as well as you can.
Corporate laws limit the mobility of laborers much more than the circulation of the rich
Corporation laws, however, give less obstruction to the free circulation of stock from one place to another, than to that of labour. It is everywhere much easier for a wealthy merchant to obtain the privilege of trading in a town-corporate, than for a poor artificer to obtain that of working in it. The obstruction which corporation laws give to the free circulation of labour is common, I believe, to every part of Europe. That which is given to it by the poor laws is, so far as I know, peculiar to England. It consists in the difficulty which a poor man finds in obtaining a settlement, or even in being allowed to exercise his industry in any parish but that to which he belongs. It is the labour of artificers and manufacturers only of which the free circulation is obstructed by corporation laws.
The main objective of corporate by-laws is to raise barriers to entry
The object, besides, of the greater part of the bye-laws of all regulated companies, as well as of all other corporations, is not so much to oppress those who are already members, as to discourage others from becoming so; which may be done, not only by a high fine, but by many other contrivances. The constant view of such companies is always to raise the rate of their own profit as high as they can; to keep the market, both for the goods which they export, and for those which they import, as much understocked as they can; which can be done only by restraining the competition, or by discouraging new adventurers from entering into the trade.
But the reverence of the people naturally preserves the established forms and ceremonies of religion long after the circumstances which first introduced and rendered them reasonable, are no more.
On Income Inequality : government is necessary to protect property
Wherever there is a great property, there is great inequality. For one very rich man, there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many. The affluence of the rich excites the indignation of the poor, who are often both driven by want, and prompted by envy to invade his possessions. It is only under the shelter of the civil magistrate, that the owner of that valuable property, which is acquired by the labour of many years, or perhaps of many successive generations, can sleep a single night in security. He is at all times surrounded by unknown enemies, whom, though he never provoked, he can never appease, and from whose injustice he can be protected only by the powerful arm of the civil magistrate, continually held up to chastise it. The acquisition of valuable and extensive property, therefore, necessarily requires the establishment of civil government.
But in every improved and civilized society, this is the state [of neglected moral and physical development] into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.
In several protestant countries, particularly in all the protestant cantons of Switzerland, the revenue which anciently belonged to the Roman catholic church, the tithes and church lands, has been found a fund sufficient, not only to afford competent salaries to the established clergy, but to defray, with little or no addition, all the other expenses of the state. The magistrates of the powerful canton of Berne, in particular, have accumulated, out of the savings from this fund, a very large sum, supposed to amount to several millions; part or which is deposited in a public treasure, and part is placed at interest in what are called the public funds of the different indebted nations of Europe; chiefly in those of France and Great Britain.
The most opulent church in Christendom does not maintain better the uniformity of faith, the fervour of devotion, the spirit of order, regularity, and austere morals, in the great body of the people, than this very poorly endowed church of Scotland.
In Rome, as in all other ancient republics, the poor people were constantly in debt to the rich and the great, who, in order to secure their votes at the annual elections, used to lend them money at exorbitant interest, which, being never paid, soon accumulated into a sum too great either for the debtor to pay, or for any body else to pay for him. The debtor, for fear of a very severe execution, was obliged, without any further gratuity, to vote for the candidate whom the creditor recommended.
Note that Smith rails against corporations throughout the book, although to be fair the use of the term has drifted over time, and he was as concerned about the cornering of labor markets through guilds (which were also called corporations in his time) and local laws that artificially limited the supply of skilled laborers (by mandating long apprenticeships, for example, and quotas of numbers of apprentices per business), but the idea is the same. Smith believed that whenever two businessmen got together, self-interest would compel them to collude to artificially drive up prices and keep out competition.
Smith also did not share the anti-government rhetoric of the Tea Party and nowhere suggests much less advocates the abolition of government. Rather, he argues that some taxes can unfairly harm the poor (such as a window tax that would harm a lower income country inn owner much more than a higher income London landlord who might pay lower taxes because he has fewer windows (this is a stone's throw from advocating an income tax, something Smith does not explicitly do, but he argues against flat taxes that all must pay even though some would pay much more proportional to their income and property.
In fact, Smith often argues that government has a critical role to play in free markets. Without the security provided by government, the rich few could never sleep at night knowing that the vastly greater many might be provoked into confiscating their property. The only societies that do not need governments are poor ones, or ones in which the accumulation of wealth is trivial, only a few days' worth of labor. In Smith's view, without government, there could be no secure accumulation of wealth.
Smith also makes clear that he feels government has a role in helping to shape the ethical, moral, and physical development of its citizens, especially the poor workers, who through the mindless repetition of their labor could become as "stupid as men can be."
Finally, in Smith's descriptions of ancient Rome, the many poor who became indebted to the rich few with massive debts that they could never hope to pay off lost their independence and ended up having to vote for whatever candidate the creditor dictated, a situation eerily reminiscent of today's over-leveraged American consumer. Put another way: wealth inequality and manipulation of this situation for the benefit of the wealthy few can make the idea of a democracy a joke since the wealthy few can essentially by needed votes if the poor become indebted to them financially.
Excerpts:
Corporations … are a sort of enlarged monopolies
The exclusive privileges of corporations, statutes of apprenticeship, and all those laws which restrain in particular employments, the competition to a smaller number than might otherwise go into them, have the same tendency, though in a less degree. They are a sort of enlarged monopolies, and may frequently, for ages together, and in whole classes of employments, keep up the market price of particular commodities above the natural price.
The exclusive privileges of corporations, statutes of apprenticeship, and all those laws which restrain in particular employments, the competition to a smaller number than might otherwise go into them, have the same tendency, though in a less degree. They are a sort of enlarged monopolies, and may frequently, for ages together, and in whole classes of employments, keep up the market price of particular commodities above the natural price.
Smith, Adam (2002-06-01). An Inquiry into the Nature and Causes of the Wealth of Nations (Kindle Locations 908-911). Public Domain Books. Kindle Edition.
Corporation laws drive up prices which must be paid by everyone else
Corporation laws enable the inhabitants of towns to raise their prices, without fearing to be undersold by the free competition of their own countrymen. Those other regulations secure them equally against that of foreigners. The enhancement of price occasioned by both is everywhere finally paid by the landlords, farmers, and labourers, of the country, who have seldom opposed the establishment of such monopolies. They have commonly neither inclination nor fitness to enter into combinations; and the clamour and sophistry of merchants and manufacturers easily persuade them, that the private interest of a part, and of a subordinate part, of the society, is the general interest of the whole.
Smith, Adam (2002-06-01). An Inquiry into the Nature and Causes of the Wealth of Nations (Kindle Locations 1953-1957). Public Domain Books. Kindle Edition.
An incorporation not only renders them necessary, but makes the act of the majority binding upon the whole. In a free trade, an effectual combination cannot be established but by the unanimous consent of every single trader, and it cannot last longer than every single trader continues of the same mind. The majority of a corporation can enact a bye-law, with proper penalties, which will limit the competition more effectually and more durably than any voluntary combination whatever. The pretence that corporations are necessary for the better government of the trade, is without any foundation. The real and effectual discipline which is exercised over a workman, is not that of his corporation, but that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence. An exclusive corporation necessarily weakens the force of this discipline. A particular set of workmen must then be employed, let them behave well or ill. It is upon this account that, in many large incorporated towns, no tolerable workmen are to be found, even in some of the most necessary trades. If you would have your work tolerably executed, it must be done in the suburbs, where the workmen, having no exclusive privilege, have nothing but their character to depend upon, and you must then smuggle it into the town as well as you can.
Smith, Adam (2002-06-01). An Inquiry into the Nature and Causes of the Wealth of Nations (Kindle Locations 1983-1987). Public Domain Books. Kindle Edition.
Corporate laws limit the mobility of laborers much more than the circulation of the rich
Corporation laws, however, give less obstruction to the free circulation of stock from one place to another, than to that of labour. It is everywhere much easier for a wealthy merchant to obtain the privilege of trading in a town-corporate, than for a poor artificer to obtain that of working in it. The obstruction which corporation laws give to the free circulation of labour is common, I believe, to every part of Europe. That which is given to it by the poor laws is, so far as I know, peculiar to England. It consists in the difficulty which a poor man finds in obtaining a settlement, or even in being allowed to exercise his industry in any parish but that to which he belongs. It is the labour of artificers and manufacturers only of which the free circulation is obstructed by corporation laws.
Smith, Adam (2002-06-01). An Inquiry into the Nature and Causes of the Wealth of Nations (Kindle Locations 2083-2089). Public Domain Books. Kindle Edition.
The main objective of corporate by-laws is to raise barriers to entry
The object, besides, of the greater part of the bye-laws of all regulated companies, as well as of all other corporations, is not so much to oppress those who are already members, as to discourage others from becoming so; which may be done, not only by a high fine, but by many other contrivances. The constant view of such companies is always to raise the rate of their own profit as high as they can; to keep the market, both for the goods which they export, and for those which they import, as much understocked as they can; which can be done only by restraining the competition, or by discouraging new adventurers from entering into the trade.
Smith, Adam (2002-06-01). An Inquiry into the Nature and Causes of the Wealth of Nations (Kindle Locations 11255-11259). Public Domain Books. Kindle Edition.
But the reverence of the people naturally preserves the established forms and ceremonies of religion long after the circumstances which first introduced and rendered them reasonable, are no more.
Smith, Adam (2002-06-01). An Inquiry into the Nature and Causes of the Wealth of Nations (Kindle Locations 11727-11728). Public Domain Books. Kindle Edition.
On Income Inequality : government is necessary to protect property
Wherever there is a great property, there is great inequality. For one very rich man, there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many. The affluence of the rich excites the indignation of the poor, who are often both driven by want, and prompted by envy to invade his possessions. It is only under the shelter of the civil magistrate, that the owner of that valuable property, which is acquired by the labour of many years, or perhaps of many successive generations, can sleep a single night in security. He is at all times surrounded by unknown enemies, whom, though he never provoked, he can never appease, and from whose injustice he can be protected only by the powerful arm of the civil magistrate, continually held up to chastise it. The acquisition of valuable and extensive property, therefore, necessarily requires the establishment of civil government.
Smith, Adam (2002-06-01). An Inquiry into the Nature and Causes of the Wealth of Nations (Kindle Locations 10831-10836). Public Domain Books. Kindle Edition.
But in every improved and civilized society, this is the state [of neglected moral and physical development] into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.
Smith, Adam (2002-06-01). An Inquiry into the Nature and Causes of the Wealth of Nations (Kindle Locations 11954-11955). Public Domain Books. Kindle Edition.
In several protestant countries, particularly in all the protestant cantons of Switzerland, the revenue which anciently belonged to the Roman catholic church, the tithes and church lands, has been found a fund sufficient, not only to afford competent salaries to the established clergy, but to defray, with little or no addition, all the other expenses of the state. The magistrates of the powerful canton of Berne, in particular, have accumulated, out of the savings from this fund, a very large sum, supposed to amount to several millions; part or which is deposited in a public treasure, and part is placed at interest in what are called the public funds of the different indebted nations of Europe; chiefly in those of France and Great Britain.
Smith, Adam (2002-06-01). An Inquiry into the Nature and Causes of the Wealth of Nations (Kindle Locations 12490-12495). Public Domain Books. Kindle Edition.
The most opulent church in Christendom does not maintain better the uniformity of faith, the fervour of devotion, the spirit of order, regularity, and austere morals, in the great body of the people, than this very poorly endowed church of Scotland.
Smith, Adam (2002-06-01). An Inquiry into the Nature and Causes of the Wealth of Nations (Kindle Locations 12501-12502). Public Domain Books. Kindle Edition.
In Rome, as in all other ancient republics, the poor people were constantly in debt to the rich and the great, who, in order to secure their votes at the annual elections, used to lend them money at exorbitant interest, which, being never paid, soon accumulated into a sum too great either for the debtor to pay, or for any body else to pay for him. The debtor, for fear of a very severe execution, was obliged, without any further gratuity, to vote for the candidate whom the creditor recommended.
Smith, Adam (2002-06-01). An Inquiry into the Nature and Causes of the Wealth of Nations (Kindle Locations 14515-14519). Public Domain Books. Kindle Edition.
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