The Invisible Hand: Intellectuals’ Reaction to Adam Smith’s Values and Ideals Specified in The Wealth of Nations before 1848

The Invisible Hand: Intellectuals’ Reaction to Adam Smith’s Values and Ideals Specified in The Wealth of Nations before 1848

The Wealth of Nations since its first publication in 1776 has been the most read economic text and is considered the foundation of modern economy. His views on the economic system and its function were revolutionary against the traditional values of mercantilism. This fostered a second enlightenment era of practicality in which numerous interest groups are created. Thus, since different interest groups advocated for different purpose, numerous groups of intellectuals reacted differently toward Smith’s view. Many intellectuals’ ideas were aligned with Smith’s view; however, there were voices that both doubted and criticized his ideology.

Many economic philosophers were in agreement with Adam Smith’s idea regarding governmental interference in economic activities. Smith stated that for any commodity there is a natural price and a market price. Natural price is the cost of producing a certain good. It includes everything from the cost of the raw material to the wage of the workers working to produce the commodity. Market price is the price that a commodity is sold. It depends on two more variable, the demand for the commodity and the will of the supplier to sell the merchandise at a specific price. A consumer will buy a product at the lowest price possible when a vendor will sell the product at the highest price possible. Thus, for a good to be sold, both consumer and vendor have to come to an agreement where both parties are satisfied with the price. This is the price that the commodity is traded in, the market price. One acknowledgment has to be made that in the process of price determination only supply and demand function as the variable. This leads to the concept of ‘individual hand’ of free market Laissez-Faire principle. Adam Smith explains that without external force that determines the price, free market will adjust itself to make mutual agreements between supply and demand, fixing the price. Adam Smith expands this concept to explain wage. Wage too consists of natural wage and market wage. Natural wage is the minimum amount of money that the worker needs to sustain life. Thus, it will vary depending on the price of the worker’s necessities such as food, clothes, shelter and conveniences. Market wage is the actual wage given to the worker. As the demand for worker increases the wage would rise and if the worker population increases the wage would decrease. The principle of Laissez-Faire also applies in the case of wage for it behaves similarly to price. Influenced by the theories of Adam Smith, David Ricardo argues that for any labor, the market wage will tend toward the natural wage, which he calls the iron law of wages. Ricardo admits the fact that market wage can fluctuate if the supply and demand for labor is not met: it can stay either above or below the natural wage. If the market wage is above the natural wage, the workers will have extra money to consider health care and also family enlargement which will increase the population of the workers, decreasing the market wage. The high market wage will counterbalance with the decrease to get closer to the natural wage. On the contrary, when market wage is below natural wage, the workers will not be able to pay for their necessities which will result in starvation. This will decrease the worker population bringing the market price up to match the natural price. Ricardo’s law shows that Smith’s view of ‘Invisible Hand’ holds true for labors as well. This expanded to a popular belief that wages should not be intervened by governmental legislation but has to be left solely to the competition in market. It also leads to ideas that state that despite the original purpose of the law, governmental interference will just end up “[deteriorating] the condition of both poor and rich” (Ricardo).  This is proven by the Pamphlet: In Defense of Laissez-Faire. The author of the pamphlet, similar to Ricardo, states that “in [the legislative body’s] attempts to improve… the condition of the poor, [they] have not only multiplied the number, but reduced them to a state of degradation…” (Pamphlet: In Defense of Laissez-Faire). The author logically supports his claim by giving historical examples and showing that each laws passed in attempt to improve the condition of the poor were repealed and were substituted by other laws. He starts with the bill of Sir Robert Peel and continues to bill of Sir John Holiouse which shows how selective welfare does not work at all. Additionally, the author outlines how the trend of legislation changes from targeting specific industry to enforcing general welfare of society. To introduce Adam Smith’s views on universal improvement on condition, in The Wealth of Nations, he mentions that through governmental subsidies to teachers, primary education became more available which enabled potential economic growth but more importantly, general social wellbeing. The Pamphlet continues to say that as the legislation reached its final stages with Mr. Sadler, laws started to support universal improvement rather than industry-specific regulations. To analyze the history after Mr. Sadler’s legislation, numerous laws helped women grow in power as well as children be educated and fostered in a safer environment. These trends on new regulations passed show that industry-specific regulations in attempt of improving quality of living for the poor did not help them at all but worsened their situation that new laws had to be passed to maintain the level of social and economic discriminations. These then prove that governmental interference were indeed a worsening factor of polarization of the rich and poor which holds to the beliefs of Laissez-Faire thus Adam Smith. Hence, intellects such as Ricardo and the author of the Pamphlet are in full agreement with Smith in terms of governmental interference.

There were also views that agreed with the general definition of the Smithian concept but desired to expand the characteristics of it. Adam Smith defined rent as the payment for using land. As one of the three variables that define price, rent was considered as an important quantity to be tested upon. However, unlike the price or wage that depended on supply and demand present in market, rent is independent of supply and demand. Firstly, the amount of land is limited. This shows how oversupply of land is impossible. Thus, no matter how much land is available or how many people desire land, the rent is not hindered. Instead, rent is innate within the land. This means that with the innate qualities of the land itself, the rent is determined. Thus, regardless of what the tenant does with the land, rent has to be paid. Also, although the tenant has failed to produce, the rent has to be paid. The minimum rent is determined by the maximum profit that the landowner can make out of the land. This is because if the rent was to be below the maximum profit that the landowner can make, he would cultivate the land for himself. In general, because grains as a staple crop are considered to have a constant if not increasing demand, the profit that the landowner would yield by growing grain in his field would equal the minimum rent. However, rent may rise in respect to additional qualities that the land possesses. Those qualities are the potential produce that the land can yield. They are largely divided into three categories: the potential usage of land, natural resources available in the land, and the utilities that are available in or around the land regardless of the utility’s owner. However, despite the existence of factors of increase in rent, there isn’t a numerical calculation to determine how the factors would affect rent. Thus, all the calculation is done solely in favor of the landowner. Even so because land is limited, rent hinders depending on the landowner. In this sense, rent is like monopoly. Intellectuals who find interest in the topic such as Thomas Malthus does agree on the basics of Adam Smith’s statement. However, Malthus questions the extents on Smith’s claim that rent is monopoly. In his book, An Inquiry into the Nature and Progress of Rent, Malthus claims that rent exists because price of raw material produced from the land is higher than the cost of producing it. He then asks what causes for the high price of raw materials. He further researches on different books regarding rent and claims that although many views on rent do have raw material as a component of rent, they do not consider the price of raw material leading to a logical fallacy: rent can be calculated without the price of raw material produced when the raw material is what gives value to rent. To account for the problems, Malthus gives his own interpretation on what the price of raw material is dependent on. According to him price depends on the quality of the soil as well as other natural reasons. These natural reasons unlike the prior notion on rent cannot be controlled by the landowners. Through this argument, Malthus claims that rent can be considered monopoly except that rent is not entirely up to the landowner to be decided. The example of Malthus and his views on rent show that some intellectuals responded to Adam Smith’s idea with agreement and doubt.

However, unlike the popular response to Adam Smith’s views of free trade between individuals, some reactions toward Smith criticizes the faults and assumptions of his views on market and instead calls for a different society. In capitalistic society, the major driving force of human being is the individual interest. One may have their interest lie on basic supplies such as food and clothing where others’ may lie on luxury goods. Their pursuit of individual interest leads them to make interactions in the common place, market. The food demander may provide service to others in order to earn enough money to buy food. The luxury demander, usually of the higher class, would use other means such as factory running or rent collecting to earn money to buy luxury goods. However, history proves that, at any circumstance, an individual will maximize their profit. This has become the general assumption of capitalism: people think rationally to maximize their wealth. However, assessing the assumption once more, human being’s innate greed can be easily spotted. A person tends to be greedier the more luxury he or she can enjoy. Thus, the person demanding luxury goods will tend to strangle the workers in his or her factory to generate benefit for oneself as much. Charles Fourier gives historical examples on how human greed has negatively impacted society as well as the economy in his work, On Economic Liberalism. He first says that the Dutch East India once burned the cinnamon in public to raise its price and continues to say that if a merchant was to get hold of grain during a terrible famine, he would be able to sell all his supply despite of the ridiculous price that he would ask for the grain because all supply of grain would be within him while the demand continues to grow. Fourier addresses this issue not as a failure of the system but as a moral problem related to human greed. Also, even after the agricultural revolution and the industrial revolution, the Irish Potato Famine illustrates this problem with great depth. Ireland was a potato-dependent country where most of the social participants regarded potato as their staple crop. This led to most of the Irish farmers harvesting potato in order to reduce import from foreign countries. In the late 1840s, a potato disease arrived in Ireland to hinder potato production. This led to huge starvation which led to increased deaths. England on the counterpart observed the situation. When the famine crisis occurred, the English merchants and legislature blocked all imports to Ireland and bought the remaining grains in Ireland. When Ireland was blocked from all sources of food, England sold their grain extremely expensively. Many economics as well politicians criticize this event as the failure of general morality of the English bourgeoisie. This view aligns with Fourier’s view in that they encounter economic issues with moral understandings. Fourier counters these problems regarding human greed with alternative types of system. He calls for a system in which merchants are held “subordinated to the welfare of the mass of society.” He compares merchants to doctors to say that merchants cannot ignore the social wellbeing and polarized economic standards like how doctors cannot abandon a sick patient to be left dead. However, interestingly enough, although he supports restricted merchant authorities, he does not mention government as the decider of limitation. Fourier believes that morality and basic human ethics of individual merchants should be the primary source of regulation on themselves. This is evident in his work On Economic Liberalism since he emphasizes the necessity of restrictions on merchants simultaneous to public’s dependence on them by comparing the “infallibility of the pope” to of the merchants. Fourier, now categorized as a Utopian Socialist, urged for communities such as phalanstery. Phalanstery refers to a sustainable society which is founded upon the value of universal equality. His reaction against the faults of capitalism as well as the ideas related to moral based restrictions on merchants influenced future works on both socialism and anarchism.

In conclusion, according to what different intellectuals emphasized, their agreement with Smithian values differed. David Ricardo and the author of Pamphlet: In Defense of Laissez-Faire valued the free market ideas which very much aligned with Adam smith where Charles Fourier emphasized equality and morality resulting in criticisms toward Adam Smith. Although their views were different, it cannot be disputed that Adam Smith’s ideas written in The Wealth of Nations has shaped the world today and will continue to influence the future generations to come with different reactions as it did for intellectuals before 1848.

 

For the actual document… click here economic-liberalism-dbq

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