Real-World Economics Review Blog

There’s an old story about post-Renaissance music that goes like this. Bach created it, Beethoven perfected it, Stravinsky destroyed it. Capitalism has a similar history. Adam Smith’s 1776 “Wealth of Nations” was the first systematic description of a group of economic arrangements that had been around for over 100 years. Capitalism began by being about money, invested or lent and later assets such as money, monetary values, commercial paper, commodities, and manufacturing plant, always only in regard to the profit that they should yield, instead of being consumed or hoarded (saved). Adams explained and justified this focus. Capitalism emerged out of the Enlightenment, or rather out of war fought to stop or support changes coming out of the Enlightenment. Supporters of the Enlightenment are concerned with human rights, freedom, peace, and prosperity. Governments during the Enlightenment opposed and fought against all of these. Montesquieu, among others suggested instead that trade was an alternative route to these goals. Trade was considered a civilizing force that contributed to overcoming barbarism, calming aggression, and refining manners. Others soon chimed in arguing that the common good is promoted by the reasonable pursuit of self-interest. Markets displaced the war of passions with the advocacy of commercial interest. Commerce promotes societal virtues such as diligence, discipline, persistence, and up-rightness. Capitalism (markets) would increase prosperity and help create societies with better cooperation, without arbitrary government intervention, with more respect for liberty and individual responsibility, as well as more focus on resolving conflicts through compromise instead of war. Smith’s book was one of the key elements in moving capitalism to the consensus position in England and much Northern Europe.

Smith’s ideal never happened. First, from the start there has been a direct relationship between capitalism and violence. Capitalism needed resources and money to “make their profits.” They often handled opposition to getting these violently. Privatization of common land and the capitalist takeover of privately-owned land and resources are central here. And here is where capitalists made the deals for governments to be their “strong-arm men” to push through such transactions. A relationship that continues today. Early on it became clear that wherever there was a massive assertion of capitalism, social inequality increased, even if living standards overall also rose. But Smith’s greatest error was that he created an economic order that fit near perfectly with a society of reasonable individuals, as imagined by Montesquieu and other spokespersons for the Enlightenment. Smith was convinced single individuals would best evaluate their interests for themselves. That reasonable order was possible without patronizing from an authoritarian state. From his own experience he denied and distrusted the wisdom of governing authorities and the reliability of tradition. In this Smith was indeed an Enlightenment scholar. For Smith, capitalism was created by the masses for the masses. It was not imposed on them by a narrow group of elites. Capitalism was also a practical critique and rebellion against very old economic and social injustices, and a promise of just reward for successful effort. As a creator of prosperity as well as liberty, capitalism would help and appeal to everyone – merchants, entrepreneurs, intellectuals, and of course all us “ordinary” people.

And for a time, this sort of worked as described by Smith. That is, until industrial capitalism arose (like Stravinsky) in the 19th century and destroyed it completely. And today financial capitalism has ended any hope of the return of Smith’s capitalism. Capitalism plays no part in the world’s economic arrangements today. Thus, citing Smith to defend what’s happening today or has happened since 1815 is not just wrong, it’s either a deliberate effort to deceive or a sign of the analyst’s ignorance.