New Interest in Adam Smith

I was directed, a while back, to an article that discussed Pope Benedict's views on economics.  It touched on Catholic social teaching, and was interesting to read.  What struck me, though, was a commenter's rather uninformed quip that equated Adam Smith with modern capitalism.  This quip can be forgiven, though, because most school textbooks call Smith the father of capitalism, and summarize his famous Wealth of Nations as  basically calling for capitalism.

As I was reading this, a thought came to my mind: how does the Catholic social teaching compare with the writing of Adam Smith?  I decided to undertake a rather daunting task: read Wealth of Nations and compare it with Magesterial writings based on and including Leo XIII's 1891 encyclical Rerum novarum. 

Adam Smith on Wages

Reflecting on Adam Smith's treatment of wages, it is important to begin with a base assumption.  First, it must be established that according to Adam Smith, price is determined by several factors: demand--the more demand there is for a good or service, the higher the price; supply--the more there is of a good or service, the lower the price; value--despite the supply or demand, an item that is deemed valuable or important will have a higher price.  That being said, we can now progress on to wages, more specifically, what wages actually are: the price of labor.

Smith is operating under the definition of wages as the price paid for labor, labor being a service provided by the laborer.With this definition of wages, a number of conclusions can thus be drawn.  First, wages, like price, are subject to fluctuations due to demand, supply, and value.  Second, just like price manipulation is bad, so too is wage manipulation by both employers and laborers.  These two conclusions are the focus on this reflection on Wealth of Nations.

Just like the price of objects is determined by their scarcity, the demand for them, and their perceived value, so too are wages.  In places and industries where labor is scarce (supply is short), laborers are rewarded with higher wages.  Consider physicians.  The amount of schooling, training, interning, and practice that goes into preparing a physician to enter into the medical field diminishes the supply of doctors.  Following the laws of price, physicians, therefore, will get high wages.  Contrast that with most factory workers.  Such positions require little training and skill, so there is a high supply of laborers and thus wages are lower. This pattern is not only true for the macro-economy, but for the micro-economy.  For example, within a certain region, say Silicon Valley, the demand for highly skilled computer technician is much higher than say, Cleveland.  Thus, even though there may be a large amoung of computer technicians in Cleveland in a certain year, wages for computer technicians in Cleveland will not be as high as Silicon Valley. 

If wages are governed by the same principles as prices, then if price manipulations are detrimental to an area's economy, so are wage manipulations.  Smith mentions two types of wage manipulations.  The first is the secretive collusion between employers within a certain industry to set wage ranges within that industry.  Smith seems disgusted by this action, but admits that while we may not know it, it certainly goes on.  The next sort of wage manipulation is on the part of the laborers, when they strike or demonstrate.  Smith is likewise against such behavior (although he recognizes such behavior as the result of desparation: "they are desperate and act with the folly and extravagence of desperate men, who must either starve or frighten their masters into an immediate compliance with their demands.") 

When price is controlled for any length of time, it destroys the labor markets.  Say a monopoly causes prices to rise above their natural levels. This unnatural increase in price goes against the natural demand curve for that good or service, so less people will purchase the item, which utlimately causes the monopoly to lose profit, which causes them to limit overhead spending by virtue of the labor market.  What happens when "masters" and laborers enter into collusion to set prices of labor?  When laborers get together to set the prices of their labor (read: Unions and "collective bargaining agreements"), a common result is what is happening in state public education pension plans and at General Motors.  In both cases, the unions have demanded certain things, which the employers have agreed upon.  Now, many states' pensions will be bankrupt because of these demands, and GM's failings have a lot to do with the outrageous demands of the UAW.  However, the collusion to keep wages down (or even not to raise wages appropriately) creates a cash shortage that ultimately leads to a downward spiral.

Wealth of Nations: Wages-Introduction

Smith's treatment of the wages of labor in Chapter VIII of Book I has several aspects that cannot be discussed or reflected in a single post.  As a result, I will focus on these aspects:

1)  forced wage limits
2)  fair wages and just wages
3)  unions

Wealth of Nations: The American Revolution

Adam Smith penned Wealth of Nations prior to the colonial uprising in British North America.  When the book was going to print, the First Continental Congress had just signed the Declaration of Indepence.  On the surface, then, Smith's literary and economic endeavor had nothing to do with the War for American Independence.  While certainly the leaders of the uprising could not have been influenced by Smith, certain concepts that Smith describes are certainly a cause of colonial discontent.  One could argue that from an economic standpoint alone, the colonies were right to rebel.


Perhaps the most pertinent idea Smith promotes comes from Book 1 Chapter VII concerning monopolies and price.  "The price of monopoly is upon every occasion, the highest that can be got.  The natural price, or the price of free competition, is the lowest which can be taken...for any considerable time together".  Smith had just finished explaining that when left alone, the market price of any good or service gravitates toward the natural price (which is the natural price one would get should they combine the costs of labor, land (resources) and profit).  According to Smith's observations (and this is key...these are predictions, but observations on what truly happens in a market), market price is impacted by effectual demand and effectual supply.  When left alone, demand and supply will cause the market price to alter from its "natural" state.  The market price, then, always reflects the reality of demand, supply, and cost.  Smith ensures the reader that a monopoly is different.  Rather than naturally react to the effectual demand of the consumer, the monopolist ensures that supply remains low, to drive up demand and therefore price.

When we reflect on such a situation, we should be drawn immediately back to the situation in colonial North America.  Smith observations on free competition and market forces could not influence British Parliamentary debates on colonial policy because they came to late.  As early as the 1650s, Parliament began the process of regulating trade in the colonies severely.  The Navigation Acts of 1660 mandated that only trade with British vessels was legal in the colonies.  Thus colonial merchants couldn't sell their wares to French, Dutch, Spanish, Italian, Portuguese, or any other foreign merchants.  This greatly inhibited their ability to get a fair price for their wares.  Likewise, colonists couldn't purchase foreign goods unless they were purchased from an English merchant (who came from England).  This severely limited the ability of colonists to pay a decent price for almost anything.  These acts are clearly monopolistic. A single entity (in this case, the government) is severely restricting supply and artificially regulating price well above its natural rate.  Obviously, the colonists were bearing the brunt of such policies, while the lawmakers in Britain (most of whom had financial interests invested in these mercantile endeavors) benefited.

It is bad enough when one good or service is monopolized, but when every good or service is monopolized, conflict is bound to ensue.  This atmosphere led to arguably the most well-known event in the pre-rebellion era: the Boston Tea Party.  Parliament not only raised the price of tea, but forced all colonists to purchase their tea from one source: the East India Trading Co..  The Company had no significant holdings or presence in the North American colonies.  Rather, to the East India Trading Co., the North American colonies were simply a market to manipulate.  This incensed the colonial inhabitant of Boston, and thus, several men, dressed as American Indians, stormed the tea ship, and dumped the tea (still in its chests), overboard (there is some debate on whether the colonists were going to salvage the tea later, or if it was effectively ruined...that is of no concern here). 

Consider the single phrase of Smith's: "The price of monopoly is upon every occasion, the highest that can be got."  The colonists rightly recognized that their government was purposely limiting their ability to make a living, and purposefully limiting their ability to acquire necessities (and luxuries).   It should have been obvious to the colonists that their government saw them not as individuals, but as mere means to an end.  Parliament wasn't overly concerned with the lives of the people in their North American colonies; colonists were important only as long as they were consumers of British goods made available from British merchants.  Could Parliament and the Crown really have expected anyless from the North American colonies?

Wealth of Nations: Division of Labor and Motivation

Book I Chapter 1 of Wealth of Nations revolves around the concept of the division of labor.  Smith goes to lengths to demonstrate that dividing labor into smaller, more simple tasks results in greater production, and when coupled with specialization, results in higher quality.  He argues that when people are left to their own devices, they will use their specialized knowledge and skills cooperatively and everyone benefits.  This reflects the more accurate view of humanity that man was created "good", and although we are fallen, we are still made in the image of God.  However accurately Smith's ideas of the division of labor reflect human nature, Smith's picture of the division of labor does not completely mesh with human nature.

In his depiction of the efficiency of the division of labor, Smith mentions two phenomenon which would put a bitter taste in some one's mouth.  For one, Smith refers to "making this business into some one simple operation, and by making this operation the sole employment of his life."  I understand completely what Smith is referring to: taking a complex task (like making cabinets), and breaking it down into simpler operations.  One person will be dedicated to running each operation, and that is all they are responsible for.  But this is what that boils down to: instead of making the whole of the cabinet, one person is responsible for cutting the wood for the doors, another for assembling the doors, and another for assembling the whole thing.  How can such an operation be good for the human person?  Your sole means of employ is doing a single, simple task.  While a worker may take pride in their work initially, how long before they begin to get bored with cutting wood, day in and day out?  A dissatisfied worker is an unproductive or poor worker, so while the number of products produced increase, the quality will diminish, as the worker puts in his time and goes home. 

Immediately preceding that phrase, Smith talks about a hypothetical country farmer who also weaves.  He mentions that as a weaver, his farming hinders how much weaving gets done, and as a farmer, his weaving hinders his farm's functioning.  Those are good points: a weaver who likes to work the ground and grow things hinders his ability to make a living from his trade. But what about the farmer who simply enjoys weaving, or the weaver who enjoys farming?  Perhaps their excursions into "side activities" isn't really for economic production, but to do something they enjoy. 

These two points go together.  As the division of labor turns complex jobs into a series of simple tasks, there will be those laborers who maintain a "side profession" to maintain their happiness.  It could be postulated that this is how craftsmen endure.  There are still craftsmen who exist not for the profit, but for the pure enjoyment of the task.  As an example, exploring the homes of Victorian America, one will find certain features that are all but extinct on modern houses.  For example, it was customary for the porches of Victorian homes to be decorated with ginger breading, and the arches between rooms would have bent trim around them.  Such practices require skill and time, to be sure, but even the domiciles of well-to-do Americans in the late 20th and 21st Centuries are lacking such examples of craftsmanship.  However, there still exist craftsmen who operate solely for two motivations: their love of Victorian architecture and the their love of quality craftsmanship.  Some, including a few I have talked to, are turned off by "assembly line production", and would rather put their own personal stamp on each piece they produce.

Herein lies another problem with Smith's depiction of the division of labor: Smith is focusing on the communal aspect, which is important because it is part of the human condition: humans are not simply individuals, but are part of a larger whole (or several larger wholes).  However, humans are simply collective: they exist individually, and never can it be said that the whole is more important or greater than the individual.  This focusing on the whole to the neglect of the individual is what brings up the problems noted above. 

Wealth of Nations Division of Labor and Human Nature

Nature has a way of taking revenge on those who mess with it.  For example, in Egypt and China, for millenia the major rivers of these nations have seasonally flooded, creating flood basins that were incredibly rich in soil and provided the people a consistent source of food.  In the 20th Century, "modern" leaders attempted to control nature by building dams.  Now, those countries are in crisis, most notably Egypt, because the people haven't stopped farming on the banks of the rivers, but the rivers aren't providing the soil they once did.  Thus food supplies are diminishing.  Thus, it can be stated that when humans work with nature (including natural moral law), their endeavors will have a greater rate of success than when they attempt to change or control nature.  Using this maxim, then, when we undertake actions that are inline with human nature, we can be reasonably assured that our endeavors will be relatively successful.

In the introduction to the volume of Wealth of Nations I am reading, the editor says that Smith's economic theories reflected a concept of man that was foreign to  the "longstanding traditions of absolutism and trancendentalism with their view of human beings as inherently wayward, sinful and therefore in constant need of strong secular and ecclesiasiastical authority."  I am almost instantly drawn to Jean Calvin's depiction of man as "totally depraved" and Martin Luther's assumption that we are as dung-heaps when the editor claims this.  Certainly he is not referring to the millenia-old cry of Pope St. Leo the Great: "Christians, remember your dignity!"  St. Leo based his exhortation on two facts: man is created in the image and likeness of God, and God chose to become fully man.  According to St. Leo's logic (which is indicative of the Christian Tradition, up until the time of Luther), God is inherently Good, and if we are made in the image and likeness of that which is Good, we cannot be inherently bad (which is what Luther and Calvin claim).  In addition, God chose to become one of us, thus raising our fallen dignity even more.  What is at issue here is an accurate understanding of human nature.  Are humans totally depraved, as Adam Smith's contemporaries believed, or are they inherently good, as Adam Smith presupposed?
Remember that Smith "calls it as he sees it."  His depiction of the fruits of division of labor is not simply philosophical or speculative, but through observation.  Through these observations, he is keenly aware that when "manufatures" are broken into simpler tasks (which are then called peculiar businesses), the quantity and quality of everything that is produced increases tremendously.  He uses several easy examples, for instance, a smith is used to making many things out of iron.  However, due to circumstances, many smiths excel at making, say, hammers, but don't make many nails.  If asked to make nails, they could do it, but their nail production, because of a lack of experience, would make say a couple hundred in a day.  Another smith, due to circumstances, has extensive experience in making nails, and indeed has it down to a science, and therefore makes a couple thousand a day.  Smith argues that if we simply let the hammer-producing smith make hammers and the nail producing smith make nails, there are more hammers and more nails to go around than if every smith had to make both items.  This is an easy observation to make, and is, quite simply, common sense.  What is most compelling for our purposes, here and now, is the implication this has for human nature.

Smith goes from simple manufacturing to philosophy, and from philosophy to the rest of society.  He says, "Each individual becomes an expert in his own peculiar branch [of philosophy], more work is done on the whole, and the quantity of science is increased by it."  So, if division of labor and specialization can work for industry, it stands to reason, then, that it would work for other things as well: arts, sciences, politics, even religion.  St. Paul talks about the different roles and different gifts that the Faithful have.  In his body analogy, he makes it quite clear that when each member of the Church assumes the responsibilities of his/her roles/gifts, then the Body as a whole is made stronger, and Christ is glorified.  This is akin to what Smith is saying, and he says it explicitly at the end of Book I Chapter 1: when everyone completes their specialized tasks in a cooperative manner, everyone benefits, from the peasant to the prince.  Smith is not simply referring to material benefits here, but to arts, sciences, architecture, etc.  The principal of using one's gifts in a cooperative manner (as opposed to purely selfish manner) means that society as a whole benefits.

Smith's admonition that people could, on their own devices and without coercion by the state or the ecclesiatical authority, work together for the betterment of all harkened back to the view of mankind held by St. Leo the Great and St. Anselm.  His observation that people will cooperate on their own volition (without coercion by the state or church) is directly opposite to the contemporary practice of creating government-sponsored monopolies (which restrict free cooperation among individuals).  This is why, I believe that the English and Americans were able to quite quickly create wealthy societies without the use of government sponsored monopolies.  Their economic policies were based on an accurate understanding of human nature, and because of that, they succeeded.  When we contrast the economic policies of say, Spain, with those of 19th Century England, we see some remarkable differences.  While Spain was a Catholic nation, and as such was no stranger to Pope Leo the Great's understanding of humanity, its political structure embraced the ideas of Hobbes and the de facto his assumptions of human nature, especially when it came to non-Catholics and natives in their colonies.   By 1830, England's national wealth far surpassed that of Spain's.

When the Reformers assumptions of a totally depraved and dung-heap humanity are put into action, people are oppressed, and, at least economically, people's standard of living are poor.  When Catholic assumptions of an inherently good, but fallen humanity are put into action, people are free, and at least economically, people's standard of living are higher.  If we accept the earlier postulation that adherence to nature will reflect in "success", then we can assume that Calvin's and Luther's assumptions of mankind are flawed, and while Smith's (and by extension, those of St. Leo the Great) assumptions are more accurate.