Knowing something about economics does not alter the fact that economics is unknowable. Economists cannot predict the future any better than Jennifer Aniston and Donald Rumsfeld could predict Brad Pitt and Iraq.
Adam Smith arguably knew almost everything that could be known about economics in the late eighteenth century, but he failed to foresee the importance of the 'joint stock company' or corporation. Modern capitalism's mentor didn't believe that the institution central to modern capitalism could work. Smith described corporations as having 'an immense capital divided among an immense number of proprietors'37 and wrote, 'It was naturally to be expected, therefore, that folly, negligence, and profusion should prevail in the whole management of their affairs.'38 Of course, as it turns out, Smith was right oftener than investors in common stock would like.
More tellingly, Smith failed to predict the Industrial Revolution. Not only did Smith fail to predict the Industrial Revolution, he did so while being friends with the inventor of the steam engine, James Watt. Smith helped Watt find workspace at Glasgow University after the local ironmongers guild (doing all it could to prove, by negative example, Smith's thesis on market freedoms) refused to let Watt set up shop in town. Smith socialized with Watt at meetings of the Glasgow Dining Club, and, while writing The Wealth of Nations, invested in a machine for industrial duplication that Watt had developed. Plus Smith fully appreciated the genius of Watt. In an early draft of Wealth, Smith wrote, 'It was a real philosopher only who could invent the fire engine.'39 (Giving that name to a device for steam propulsion makes us think of men with helmets, hoses, and dalmatians trying to take the train to our house when the roof is ablaze. But, in fairness, it's an accurate term.)
Adam Smith didn't forecast the Industrial Revolution for the simple reason that he thought it had already happened. Smith held that there were three ways to increase the 'annual produce', the GDP, of a nation. Population could grow, which doesn't do much for GDP per capita. Division of labor could advance, which has its obvious limits. (That is, I could write verbs and nouns, subcontract adverbs and adjectives, and get a minimum wage worker to insert prepositions and conjunctions.) The third way to increase GDP was 'some addition and improvement to those machines and instruments which facilitate and abridge labour'.40 Smith felt that this last method was so self-evidently the most important that he didn't bother to expound upon it. In the first chapter of the first book of Wealth he wrote that 'every body must be sensible how much labour is facilitated and abridged by the application of proper machinery. It is unnecessary to give any example.'41
What Smith guessed wrong about was not the qualitative nature of the Industrial Revolution but the huge, world-shattering quantity of the thing. Smith opposed the predictive pretensions of economic planning and proved himself right with his own failure as an economic fortune-teller.
The fact that Smith was missing some letters from his Ouija board is to be remembered when we hear experts pontificate on the Computer Revolution. Its results may turn out to be a dozen times greater than we expect (a dozen being about the number by which western European GDP per capita was multiplied between the 1820s and the 1990s). Or its results may be nearly over and done with, and the Computer Revolution may be remembered mostly as a period during which individuals wearing unfashionable eyeglasses, relaxed-fit Levis, and GOOGLE ME T-shirts were briefly thought dateworthy.
CHAPTER 7
The Wealth of Nations, Book 3 'Of the different Progress of Opulence in different Nations' and How We Have the Stupidity of the Powerful to Thank for It
The first two books of The Wealth of Nations are Adam Smith's creed of economic progress. Smith placed his faith not in the belief that man is good or that God is great but in the logic of common sense. We are required to care for ourselves. We act upon this requirement. Our actions are demonstrably beneficial to others. The economy progresses, QED. Or it would, Smith wrote, 'if human institutions had never thwarted those natural inclinations'.1
Book 3 of Wealth is Smith's examination of institutions that thwart and how their unthwarting is achieved. The title is misleading. Smith compares opulence at different times, rather than different places, in a capsule economic history of western Europe from the fall of the Roman Empire until the end of feudalism. This summary, the gist of which is little more than thirty pages long, contains perhaps the most brilliant (and definitely the most succinct) of all Smith's analyses.
His delineation of causes and effects is especially brilliant for us, the lucky inheritors of western European economic progress. Luck is always rare, but having access to the mechanism by which luck is produced is almost unheard of. To read book 3 is to get a rabbit's foot that hops around on a Wall Street Journal page picking hot stocks.
What happened to the Roman provinces of Europe in the fifth century AD can be compared to an invasion of those aldermen's wives whom Smith described in The Theory of Moral Sentiments. The 'great object' of the barbarians was, precisely, 'place … the cause of all the tumult and bustle, all the rapine and injustice'.2
Smith wrote that the 'rapine and violence which the barbarians exercised' left western Europe 'sunk into the lowest state of poverty'.3 Commerce was destroyed, towns were deserted, fields were left uncultivated. But although the rule of law and the legal title to property that goes with it were destroyed, the result was not 'Imagine no possessions / I wonder if you can.' Nothing in the ruined Roman Empire was, Smith reminded us, 'left without a proprietor'.4 A vacuum of power is not filled with pop idol musings, nor with anarcho-syndicalists either. A vacuum of power is filled with more and worse power. The petty tribal chieftains who stole western Europe made Mikhail Bakunin look as tame and middle class as an alderman's wife's husband.
Barbarian leaders did not grab land in order to become rich. They were rich. Shopping is easy and convenient when you do it with a large band of armed men. Albeit there wasn't much to shop for in the Dark Ages. What the barbarian proprietors did with the produce of their domains was give it away.
They didn't do this because they were generous. They did it because they were greedy for yet more power. 'A great proprietor,' Smith wrote, 'having nothing for which he can exchange the greater part of the produce of his lands … consumes the whole in rustic hospitality at home.'5 This did not mean jesters and jousts and throwing chicken bones on the floor at the Medieval Times restaurant chain. It meant feeding thugs. The more thugs a chieftain could feed, the more powerful he was. Smith pointed out that in the time of William Rufus, son of William the Conqueror, Westminster Hall was not a seat of Parliament; it was a dining room. 'Land was considered as the means, not of subsistence merely,' wrote Smith, 'but of power and protection …6 Authority … flowed from the state of property.'7
That property equals power was a concept leftists were quick to seize upon. But it was capitalism that expanded the definition of property and weakened the equation. Power used to rest in a limited commodity. There was a finite amount of power because there was a finite amount of land. Any power that I could get was power I took from you when I stole your backyard. By turning power into money instead of real estate, capitalism made power infinite and began the process of separating economic power from the power to dominate fellow humans: 'A person who either acquires, or succeeds to a great fortune, does not necessarily acquire or succeed to any political power.'8 It is the socialists who would be the new feudal overlords, the fortressed thugs. They would return the source of power to the limited commodity that is politics. Any power that I can get is power I take from you when I steal an election.
Feudalism is now a bandy-about word that we use to disparage any type of authority that we don't particularly like. But Adam Smith had a politically informed animus against feudalism. When he was a young man, studying at Oxford's Balliol College, the feudal Highland clans rose in the Jacobite Rebellion of 1745. Then, as now, the personal was political. The English students at Balliol were both Jacobite and bigoted against Scots. Smith was a Scot and an anti-Jacobite.
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Not only were Smith's feelings hurt at school, the Highlanders threatened his hometown of Kirkcaldy and extorted money from its citizens, among whom was Smith's mother. Glasgow, where Smith had gone to the university, was overrun. And Smith's friend, the dramatist John Home, led a band of student volunteers in a vain attempt to keep the invaders out of Edinburgh.
Another friend of Smith's, the liberal Presbyterian minister Alexander Carlyle, called the Highlanders who occupied Edinburgh 'short and dirty, and of a contemptible appearance'.9 It is a description that can be used for the entire feudal nobility of western Europe from Alaric to the time when aristocrats started marrying American movie stars. The more so if we apply 'short' to tempers and attention spans, 'dirty' to morals, and 'contemptible appearance' to the fact that the feudal nobility appeared in western Europe at all.
Smith detested the customs of primogeniture and entail that kept feudal estates in one piece. The nobles forbade themselves to sell or give away any land, willing it all to a single heir. They did so, Smith wrote, 'upon the most absurd of all suppositions … that every successive generation of men have not an equal right to the earth, and to all that it possesses'.10 The restrictions on land conveyance allowed the nobility to make sure that everyone's livelihood depended on them, the welfare state politicians of their day.
There was another reason that self-sufficiency of ordinary people on small freeholds had to be prevented. Yeomen were better farmers than jerks in armor. 'It seldom happens,' Smith wrote, 'that a great proprietor is a great improver.'11 Primogeniture and entail were needed to prevent the peasants from getting the economic upper hand. The ruling class, Smith noted, was too busy to be productive. 'In the disorderly times which gave birth to those barbarous institutions, the great proprietor was sufficiently employed in defending his own territories, or in extending his jurisdiction.'12 And when the ruling class wasn't too busy, it was incompetent. 'To improve land with profit,' Smith wrote, 'requires an exact attention to small savings and small gains, of which a man born to a great fortune … is very seldom capable.'13 Let the villains own land and pretty soon Mary Dairymaid with her muddy plot and five cows is able to feed more thugs than Charlemagne.
Smith was outraged 'that the property of the present generation should be restrained and regulated according to the fancy of those who died perhaps five hundred years ago'.14 It was an outrage that persisted with the landed gentry of Smith's time. And it persists today when we are told by ecological activists that we don't really 'own' land because 'it belongs to future generations' – the property of the present generation to be restrained and regulated according to the fancy of those who haven't been born yet. Maybe Jane Austen, in Pride and Prejudice, meant silly Mrs Bennet to speak unintended wisdom: 'There is no knowing how estates will go when once they come to be entailed.'15
How life itself went on the estates of the feudal era is easy to imagine – or see, if you take an 'adventure tour' to certain parts of Africa, Asia, and Latin America. In the Dark Ages everyone was a child laborer in a Guatemalan sneaker factory (without the sneakers). 'They were,' Smith wrote, 'all or almost all slaves.'16 Slaves don't have private property rights. But feudal slaves didn't even have the right to be the private property of someone else. 'They were,' Smith wrote, 'supposed to belong more directly to the land than to their masters.'17 Masters, at least, would have some selfish interest in the well-being of their slaves. The feudal nobility had none. As a result the nobility's land never yielded much. 'If great improvements are seldom to be expected from great proprietors,' Smith continued, 'they are least of all to be expected when they employ slaves for their workmen.'18
Here Smith took an opportunity to make his economic argument against slavery: 'The experience of all ages and nations, I believe, demonstrates that the work done by slaves, though it appears to cost only their maintenance, is in the end the dearest of any. A person who can acquire no property, can have no other interest but to eat as much, and to labour as little as possible.'19 This wouldn't be much of a slogan for abolitionists. But cold calculation has done more for mankind than William Wilberforce, Harriet Beecher Stowe, or John Brown.
Feudal serfs may have been inclined to sit around eating (when there was anything to eat), but they weren't fools. They took advantage of the nobility's hectic rapine and violence schedule to keep a bit of trade going on their own account. Besides, some trade is necessary to even the most squalid and basic existence.
Unable to stop trade, the nobility instituted a protection racket. 'In those days,' Smith wrote, 'protection was seldom granted without a valuable consideration.'20 Or in these days either. Thus, 'taxes used to be levied upon the persons and goods of travellers.'21 The serfs were shaken down when they crossed a nobleman's land, went over his bridge, carried a load of goods to a market, or set up a trading booth. According to Smith the English names for these exactions were 'passage, pontage, lastage, and stallage',22 an excellent law firm by the sound of it.
With so many thugs to feed, the nobility was always broke. It wasn't long before canny serfs figured out that noblemen liked a lump sum payment better than an unpredictable take from the random skinning of wayfarers. And the serfs were probably more clever than the nobles at computing the advantage of this flat tax. They hadn't had their counting fingers cut off in sword fights.
The traders who made set payments to someone in authority, and therefore were liberated from minor tariffs and imposts, were known as 'free-traders' or, since they traded in market towns, 'free-burghers'. The market towns grew until there were enough burghers to band together – not to defy the nobles but to bribe them more efficiently. The burghers formed themselves into corporations. The corporation made a guarantee to the feudal overlord that he would receive the tribute due from each free-trader, all at once, in an even larger lump sum (minus handling fees, of course). And the corporation would take care of all the fuss and bother of collecting the money. This left the feudal overlords with more time for fighting.
By undertaking to levy their own taxes on themselves, the burghers escaped visits from bailiffs collecting payoffs and from other feudal interferences. With money and guile, Smith argued, the burghers began to gain a measure of control over their own affairs, 'that they might give away their own daughters in marriage, that their children should succeed to them, and that they might dispose of their own effects by will … The principle attributes of villanage and slavery being thus taken away from them, they now … became really free in our present sense of the word Freedom.'23
It turns out that wealthy corporations, rather than perverting private property rights, are a source of them. And, although freedom may be an inherent human right, we know where we really got our freedom. We bought it.
As for the price that we paid, it was a steal. The liberties that the burghers purchased from the feudal rulers were almost universally granted, not for a percentage of free-trader business, but for a fixed annual price in gold. The lordly descendants of short, dirty barbarians didn't understand economic growth or inflation. They didn't understand anything but violence. One can almost hear Adam Smith's satisfaction:
But it must seem extraordinary that the sovereigns of all the different countries of Europe, should have exchanged in this manner for a rent certain, never more to be augmented, that branch of their revenue, which was, perhaps, of all others the most likely to be improved by the natural course of things, without either expence or attention of their own.24
A good head for business is a middle-class invention. The ancient Greeks and Romans, for all their genius, didn't have it. Otherwise they would have abandoned slave labor with its health benefit and pension plan burdens. They would have freed the slaves, turned them into customers, and outsourced the unskilled jobs to Sogdiana and Gaul. The medieval burghers, besides becoming really free, became really smart in our present sense of the word. 'The habits,' Smith wrote, 'of order, conomy and attention, to which mercantile business naturally forms a merchant, render him much fitter to
execute, with profit and success, any project of improvement.'25
Good government is another middle-class invention. Political savvy was necessary to the survival of the towns. The burghers were geese laying golden eggs for the feudal powers, and we know how that story ended. To keep themselves from being figuratively – and perhaps literally – gutted, the townsmen played the feudal powers against each other.
Adam Smith didn't allow himself to be lured into the historical thicket of how kingships arose and nation-states coalesced. But the invading barbarians had been impressed by the grand, sweeping Roman concept of emperor. The most powerful of the feudal nobles were always professing suzerainty over lesser lords and claiming to be king of this or that.
'The lords despised the burghers,' Smith wrote, 'whom they considered … a parcel of emancipated slaves … The burghers naturally hated and feared the lords. The king hated and feared them too; but … he had no reason either to hate or fear the burghers.'26 Who could hate a helpless source of revenue? Meanwhile the king's bullies were usually farther away than the local landlord's bullies, so the burghers liked the king better. 'Mutual interest … disposed them to support the king, and the king to support them against the lords.'27 (And there remains an affinity between prosperous city dwellers and strong central government. This is evident in the political opinions of urban elites. Likewise, the tradition of helplessness still forms urban elite opinions about gun control.)
In order for the burghers to operate with political savvy they had to have their own politics in hand. Factious towns couldn't manage the balance of king against nobles and would fall prey to both. 'Commerce and manufactures,' Smith wrote, 'gradually introduced order and good government, and with them, the liberty and security of individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbours, and of servile dependency upon their superiors.'28
On the Wealth of Nations Page 8
