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Adam Smith as Philanthropist

by Rudolf Walther Friday, Feb. 23, 2018 at 2:43 PM

The market can only fulfill its technical function when its rules and mechanisms are politically fixed and governmentally monitored...Adam Smith's theory has nothing to do with neoliberals and market radicals who preach the sleek state, low taxes for businesses and low wages.


By Rudolf Walther

[This article published on 5/12/2017 is translated abridged from the German on the Internet.]

How the ingenious thinker Adam Smith and his works were intellectually misused by neoliberals for two centuries – a reconstruction by Rudolf Walther

Managers, politicians, and academics like to appeal to Adam Smith to justify the reigning capitalism with its excesses. He showed convincingly everyone benefits when every person only follows his own interests. He praised the market as "the invisible hand" that gives everyone an advantage. The baker sells bread out of egoism, not out of goodwill. Even in our day, very pointed quotations of this brilliant thinker are misused for dubious goals…

The "invisible hand" is part of the standard repertoire in the speeches of the German president. This supposedly beneficial invisible hand of the market and the egoism of individuals that should be the foundation for the well-being of everyone even trickle into everyday language.

The instrumentalization and trivializations of Smith's theory for market radical-neoliberal policy became increasingly rare in the last years thanks to new serious research. The dissertation by Bastian Ronge on The Adam Smith Project (2015) is an example. He emphasizes the connection between ethics, politics and the economy and the political and moral substantiation of economic theory and did not divide up the economist and moral philosopher Smith as happened in the past… "In gross distortion, Smith is often seen as that economist who assumed very realistically that the individual egoism in social coexistence on the market triggers general well-being by the works of an "invisible hand," wrote Karen Horn to the alliance of Catholic entrepreneurs in 2010.

A bestseller with its own strange life

Adam Smith, economist and enlightened person (1730-1790) was a professor of moral philosophy in Glasgow for twelve years from 1751… His masterpiece, An Inquiry into the Nature and Causes of the Wealth of Nations, was published in 1776. This book made Smith well-known and famous. It made him the founder and classical author of political economics. The book was quickly translated into all European languages…

The economy needs a moral foundation and published The Theory of Moral Sentiments in 1759. In this complex work, Smith tried to explain the anthropological foundations of human life together and to empirically demonstrate the paradoxical teamwork of self-interest and sympathy. The book about The Wealth of Nations published 17 years later focused on prosperity, profit, wages and other economic themes, not sympathy and moral judgments. A "sudden change" with Adam Smith occurred particularly in his German reception from the ethics book of 1759 to the economy book of 1776. The description of the two-faced Smith circulated: the philanthropist and the calculating economist.

This thesis turned out to be untenable upon a critical reading of both works by Smith – The Theory of Moral Sentiments and The Wealth of Nations. This began with the translation. In the Theory of Moral Sentiments, sentiment meant moral judgment, not feeling. Sympathy, the emotional basis for human communication, determines our way of making moral judgments. Sympathy is deeply anchored in human nature. According to Smith, the claim to equality and equal treatment of all persons is lodged in this natural disposition. Smith did not develop his thesis normatively but empirically and practically from his observations of the daily routine.

The first sentence of Theory of Moral Sentiments reads: "A person may be regarded as egoistic. However, certain principles in his nature obviously lead to sharing in the fate of others."

Smith started from a "harmony of sentiments" that is a gift of nature for all persons, not from an equality of interests between two actors. Persons act humanly with each other and with sympathy for the other. This argumentation is circular and is based on the principle of the mutual dependence of persons – as genuine social beings, not on an egocentric or self-centered principle.

Smith also argues on this basis in Wealth of Nations. He did not rely on narrow-minded, egoistic interests and profit calculations. His basic insight is "We do not expect our meals from the goodwill of the butcher, brewer or baker but from their regard to their own interest. We turn to their self-love, not to their humanity and speak of their advantages and never of our needs." These two sentences are mostly interpreted in an abridged and distorted way – namely in the horizon of ego-capitalism or market radicalism.

The falsification consists in that ideologies short-circuit this passage quoted a million times. From their view, Smith considers self-love, self-interest or egoistic selfishness as the first and only motive and as the crucial driving force of economic conduct. That was not Smith's perspective in any passage of his 1000 page book. Smith focused on the anthropological basis of human conduct and never on motives. In the sociable life together, sympathy leads people to exchange sentiments and feelings with each other. "The inclination to barter and exchange one thing for another" is part of their economic conduct. The key to understanding the central passage quoted above is the existential prerequisite of every life: self-preservation, not the interest or motive of the butcher or baker. "Give me what I want and you shall have what you want," Smith said. The civilizing improvement in a division of labor exchange society is that everyone need not and cannot produce what he and they need for survival. The pressure for cooperation and mutual aid is the shared basis of exchange societies and does not arise from egoistic calculations.

The market needs political rules

The second field on which Smith's theory was trivialized and distorted – particularly by propagandists of the social market economy and liberalism after 1945 – is the understanding of the market. That Smith wanted to free the economy from the corset of state tutelage and from the feudal tradition that granted economic privileges to the aristocracy is uncontested. However, contrary to the liberal and neoliberal market radicalism, Smith only wanted to take away the privileges from "courtiers, landowners and rich persons." "In his theory of the `commercial society,' the market should not govern in contrast to the ideas of apologists who praised the market as a "spontaneous order" (Friedrich A. Hayek). According to Smith's ideas, "everyone is liberated by exchange and is a trader in a certain way in the commercial society liberated from crass forms of oppression and rule." On top of everything, Smith was clear that a pure market economy cannot ensure a just distribution since "there was never a fair and equal distribution of labor power in a big society." For Smith, societies could not survive where the large part of the population is poor. The state must intervene in a balancing way and provide for education since the forced division of labor ensures that persons who do simple work remain "dumb and restricted."

With good reasons, Smith was an engaged advocate of free trade and pleaded for a "natural system of liberty" ("a natural system of economic freedom"). He said little about its functioning but was very critical about its deficits. In one passage, Smith spoke about "an invisible hand" ensuring that goals are fulfilled by the market mechanism.

These goals were not intended by the actors themselves but correspond to both self-interest and general interest. The market can only fulfill its technical function of coordination – and this is the second point – when its rules and mechanisms are politically established and governmentally monitored…

Let's return to the invisible hand. For over 200 years, "the invisible hand" was cited to confiscate the thinker Adam Smith for a policy that devalues the state and sets the market above all things. The current thesis is that the market automatically produces optimal results only when it is not regulated by the state and not disturbed by union demands. With the former chancellor Ludwig Erhard (time in office 1963 to 1966), the father of the "German economic miracle," the "invisible hand," assured the "pre-stabilized harmony" between private and general interests, as he wrote in 1939!

While present-day economics understands the economy as a chaotic system standing above society, detached from society and ideally functioning according to its own rules, the economy for Smith was a political economy bound in a moral- and legal system.

His "natural system of economic freedom" was part of the larger system of public administration" that gave an authority to the "natural striving for justice" against the "natural selfishness and rapacity" of the rich.

Free trade may not decay to laissez-faire

Smith defended free trade but not the propaganda for physiocratic theory under the slogan of "laissez-faire" that demanded all freedom for grain merchants and landowners. "The interest of the merchants opposes the public interest." He also defended private property. "The property that everyone has in his own labor is the original foundation for all other ownership and so is "the most sacred and inviolable." Smith added: "Hindering the worker from using his strength and skillfulness without hurting his neighbor is a violation of this most sacred property." "Wherever there is massive property, there is a violation of this most sacred property." Wherever there is sacred property, there is much inequality." But he had little in common with those apologists who transfigured capitalism as a market economy and denounced the social state as a "comfortable stall feeding" like Wilhelm Ropke (1899-1966), one of the intellectual founding fathers of the so-called social market economy. In his opinion, the political economy did not have the task of offering prescriptions on how the rich can become richer and the poor poorer. Rather "ample income for people is the first necessity and raising sufficient revenue for the state to fund public services is the second necessity." Adam Smith's theory has nothing to do with neoliberals and market radicals who preach the "sleek state," low taxes for businesses, low wages, and market, market, market. Quite the contrary!!

Background: Development of Division of Labor

Adam Smith (1723-1790), the founder of political economy, was the first to understand the importance of the division of labor and describe it in all its facets in the first chapter of his 1000 page book on the Wealth of Nations from 1776. A worker not familiar with modern machinery could "make one needle daily and certainly not 20 needles." In detail, he then described the division of labor production of pins. "The important trade of manufacturing pins is divided into 18 different steps." In this divided work cycle, 48,000 needles could be manufactured daily by ten workers.

Smith focused on technical and economic progress and its social costs that are notoriously omitted by today's speakers and managers. "A person who spends his whole life executing a few simple operations […] has no opportunity to exercise his intelligence and stimulate his inventiveness […]. The ossification and paralysis of his spirit prevent any free noble or tender sentiment and makes him unable to join in a rational communication." Adam Smith said that in 1776.

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