Bring Adam Smith out from under the pillow

Born in June 1723, Smith, so the story goes, the first of the great classical economists, was the inspiration for the tax cuts, deregulation, widespread sale of public assets, attacks on unions, the mean spirited reorganization of welfare and the social safety net, and the ratcheting up of the rhetoric of free trade that defined the economic, social and ideological character of not only the Thatcher, Reagan and Mulroney governments, but of their successors as well.

The economic record shows that this policy onslaught increased trade and lowered inflation. However, the 1980s and 1990s as a whole compared poorly with the 1950s and 1960s in terms of macroeconomic performance. This earlier era had higher growth and productivity rates, lower unemployment and inflation, and more equality. Real wages and real incomes were on the rise then.

By contrast, after the conservative counter-revolution, the economic gains of most of the population were decidedly meager.

Statistics Canada reported the earned income of the average Canadian, the so-called median income, was the same in 2004 as in 1982. According to their report, "only the very well-paid -- those above the 90th percentile of the income distribution -- saw any significant increase in earned income, and the higher up the earnings ladder, the greater the growth."

Furthermore, in this period virtually nothing was done about global warming except to make it worse, while speculation drove up the price of food and energy, all in the name of market fundamentalism.

And all of this occurred before the great financial crisis of 2008. Should Adam Smith be indicted as a co-conspirator in these crimes against workers, communities and the environment?

Thatcher and Reagan would have certainly been inspired by the Adam Smith who identified prosperity with economic self-interest. This is one of the central themes of Smith's Wealth of Nations, published in 1776. Some of the best-known passages from the book speak directly to this theme: "It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest."

For Smith, the less savoury aspects of the pursuit of self-interest could, in the market at least, be tempered through competition.

"The real and effectual discipline which is exercised over a workman is that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence."

The pursuit of self-interest under the moderating hand of competition was crucial for enhancing the wealth of the nation.

"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes and a tolerable administration of justice, all the rest being brought about by the natural course of things."

In this reading, deregulation (to increase competition), tax cuts and a celebration of self-interest (greed is good!) are the enduring policy prescriptions. And as for welfare, "The real tragedy of the poor is the poverty of their aspirations."

There is another side to Adam Smith which suggests a much more ambivalent approach to the workings and effects of capitalism. For example, he was aware of the inequality of power between rich and poor and how that inequality affects the character of the state and public administration.

"Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor or of those who have some property against those who have none at all." This is a genuinely Marx-like description of the post-1979 counter-revolution described above.

Smith was sympathetic with the need for workers to combine (unionize) for higher wages.

He recognized that even with a union, workers in general were in a more disadvantaged position than that of their masters (employers) who were also inclined to combine among themselves. Furthermore, Smith pointed out that the law again favoured masters over disadvantaged workers. It is hard to invoke Smith in support of attacks on labour.

"Progressive" nations, for Smith, were those in which real living standards of the masses were in fact rising. Smith would find wanting any set of policies that sharply increased the wealth of the elite while leaving the rest of the population further behind.

In short, Smith may be indicted for the economic and environmental crisis visited upon us by conservative policy, but he would be seen as too decent and thoughtful to convict.

Fletcher Baragar and Robert Chernomas teach Adam Smith among other things in the Department of Economics at the University of Manitoba.

The Learning Curve is an occasional column written by local academics who are experts in their fields. It is open to any educator from Winnipeg's post-secondary institutions. Send 600-word submissions and a mini bio to thelearningcurve@freepress.mb.ca.

Republished from the Winnipeg Free Press print edition July 21, 2009 B2