The Invisible Handcuffs of Capitalism: How Market Tyranny Stifles the Economy by Stunting Workers (20 page)

The bank made these loans without much thought about the ability of Latin America to repay them or without putting adequate
reserves aside to cover potential defaults. As a result, the company became deeply enmeshed in the Latin American debt crisis. By 1991, some Citicorp debt had been reduced to junk-bond status. Public figures as diverse as Representative John Dingell and Ross Perot described Citibank as insolvent.
⁸

Matters became so dire that the president of the New York branch of the Federal Reserve Bank had to fly to Saudi Arabia to arrange for Prince Alwaleed Bin Talal Alsaud to invest an additional $1.2 billion in the bank in late 1990. The Federal Reserve also had to be sure to keep interest rates down long enough to salvage the bank.
⁹
The Electronic Herd did not serve Citicorp very well. The bank, now rebranded as Citigroup, tottered back into insolvency in 2008, surviving only by virtue of massive government bailouts and a Federal Reserve madly pumping liquidity into the economy.

Off with the Golden Straitjacket

Little of the gold in the Golden Straitjacket that Wriston and Friedman propose will accrue to ordinary people. The regime they advocate makes progressive political processes impossible. In this new hyperactive market environment, governments are reduced to merely ratifying corporate desires, including corporate bailouts for the likes of Wriston’s bank.

Many governments forced to cede power to the Golden Straitjacket are corrupt and oppressive. Because of the unpopularity of neoliberal policies, corruption is often necessary to induce leaders to impose neoliberalism on their people. Of course, Procrusteans are less outraged by corruption than by a government that responds to the wishes of its people or, even worse, allows people to give voice to their own desires.

For example, in 2005, after the French people decisively voted down a neoliberal constitution of the European Union, Friedman smugly ridiculed their choice in terms usually reserved for impoverished Third World countries. The French were unrealistic in expecting to preserve their thirty-five-hour workweek, while hardworking
men and women in India were enthusiastically embracing global capitalism.
¹⁰
So much for voluntarism!

From the perspective of Friedman and Wriston, the behavior of the French regarding the length of their workday was proof that common people are incapable of understanding what is in their best interests (in contrast to the rationality ascribed to them in their role as consumers). In the end, markets, and markets alone, are capable of directing behavior in ways that ensure economic progress.

Yet Friedman and the people whose ideas he echoes would be hardpressed to find an example of a country in which a majority of the people benefited from the dismantling of social controls. None of the great economic successes—Great Britain, the United States, Germany, or Japan—were willing to rely solely on markets to fuel their economic development. Industry in the United States developed with the help of protective tariffs, subsidies, and government contracts, not to mention the slaves and the government-subsidized railroads. The Golden Straitjacket might be appropriate apparel for King Midas, but not for a free people.

I should note that even many free market economists, especially after the Asian currency crisis of 1998, now realize that the Electronic Herd is hardly a rational arbiter of human well-being. The recent financial crisis brought that lesson closer to home. Like most herds, Friedman’s Electronic Herd is prone to stampeding, and when it does it is liable to trample whole economies, imposing great harm on a large share of their population.

Yet after a severe crisis, the Procrusteans dogmatically call out for more of the same: if an economy is to restore its profitability, it must make adjustments. Here again, those who pay the price for the mistakes of the Electronic Herd are the common people—especially at the workplace, where they experience lower wages, harsher working conditions, or unemployment. As wages shrink and profits soar, the economy appears to become more productive—at least to the Procrusteans.

Tightening the screws in one country sends shockwaves throughout the world. Other nations must meet the competitive challenge that
these supposedly more productive economies present, making domestic adjustments of the Procrustean bed an international phenomenon. We can see both the recent French effort to increase the workweek and, less dramatically, the steady, decade-long pressure imposed on workers in the United States as examples of the force of international Procrusteanism.

Even if we ignore the historical evidence about the fallibility of the Electronic Herd, why would people behave differently in economic and political venues? Are French voters really irrational in preferring a shorter workday? If people are irrational in the political arena, why are they presumed to be rational in the marketplace?

Are Citicorp’s traders more rational than the rest of the population? If so, why does the great financial operation return to the verge of bankruptcy? Why not put a straitjacket on Friedman’s Electronic Herd instead of on ordinary people?

The recent work in psychology and behavioral economics shows that people—even financial traders—do not make entirely rational decisions. Even so, economists must presume that consumers behave as emotionless geniuses in calculating utilities to make their theories work. Otherwise, they could not justify Procrusteanism.

Now we will explore how economics arrived at such a state by turning to the legacy of Adam Smith.

The Wealth of Nations

It is time now to explore the intellectual roots of Procrustean economics. This chapter will explore the little-known Procrustean side of Adam Smith. Associating Adam Smith with the authoritarianism of the Procrusteans might seem somewhat incongruous. People popularly identify Smith with the invisible hand, not the invisible handcuffs. This favorable interpretation is understandable.

Virtually every contemporary school of economics finds something to admire in Smith. As Jacob Viner, a conservative University of Chicago professor, wrote, “Traces of every conceivable sort of doctrine are to be found in that most catholic book, and an economist must have peculiar theories indeed who cannot quote from
The Wealth of Nations
to support his special purpose.”
¹
Liberals, radicals, and even Marxists have embraced Smith because of his frequent expressions of progressive sentiments.

Adam Smith’s objective was to portray the market as a realm of liberty and justice, devoid of conflict. For Smith, the market would lead toward a world in which nobody was able to take advantage of anybody
else. Once market norms became common, aristocrats would no longer be able to enjoy inherited privileges; businessmen would be unable to take advantages of their connections to win favors from the government; and workers would share in the bounty of their hard work.

Smith believed that market forces would naturally erode the power of the aristocrats and well-connected businessmen. However, Smith seemed at a loss to show how market forces would make workers accept the rules of the market as just, given workers’ antagonism to market forces.

Smith tried to find a way out of this morass by sweeping any hint of class conflict under the rug, portraying the market as a system of voluntary transactions. Toward this end, he turned his readers’ attention away from the point of production, where employers had the authority to directly command their workers.

Smith was very effective in providing a powerful justification of the market. He had certain advantages in this project. He was a knowledgeable scholar with a sparkling writing style, and he occasionally presented a compassionate face, sprinkling his book with a few expressions of humanistic sentiments. Rather than undermining his ideological position, these sympathetic words made his ideology seem less antagonistic toward the working class.

Smith called for workers to prosper. He acknowledged that “Masters are always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate.”
²

But how serious were such sentiments? Beneath Smith’s sometimes humanistic surface was a large reservoir of authoritarianism. The prosperity he wished for workers was intended only for people who worked hard and never questioned the ground rules of Procrusteanism. Smith was hardly as gracious to the many, perhaps the majority, of the working class, who protested against the system. This side of Smith has gone largely unnoticed because Smith went to great lengths to distort his picture of the world. In the process, he helped to initiate economists’ long tradition of obscuring the role of work, workers, and working conditions.

The context of such passages, which gave Smith his humanitarian reputation, suggests that they were not at all at odds with his overall ideology. In fact, the humanitarian sentiments often backed up his market ideology. For example, Smith was opposed to colonialism. In the case of the European entry into the Americas, he wrote:

The savage injustice of the Europeans rendered an event, which ought to have been beneficial to all, ruinous and destructive to several of those unfortunate countries.
³

Smith was no more supportive of the business of the East India Company, arguing that corrupt and clumsy colonial policies were an inefficient means of extracting wealth from the periphery and that market forces alone would force these lands to do Britain’s bidding.

Over time, Smith’s legacy further hardened into ideology that was far more rigid and simplistic. This legacy helped economists to convince themselves that their neglect of work, workers, and working conditions represented the height of scientific analysis.

The Growing Appreciation of Adam Smith

The great lengths Smith went to obscure workers’ class relationship is remarkable. Especially in his more theoretical discussions in the first part of
The Wealth of Nations
, the absence of class from his work is virtually complete. Later, in dealing with more practical matters, Smith’s views occasionally crop up. These episodic treatments are consistent with what Smith said or wrote in more private settings.

Smith’s reticence to address questions of class allowed him to present a kindly picture of capitalism, while parading his own progressive sentiments. At the same time, by painting such an attractive vision of capitalism as a mutually beneficial system for all participants, Smith became an important figure for the contemporary world. During the Reagan administration, more than two centuries after the publication of
Wealth of Nations
, government officials began wearing neckties with
Adam Smith’s portrait, as if to justify their Procrustean policies by association with the humanistic reputation of Adam Smith.

Initially, Smith’s
Wealth of Nations
did not make much of an impression. Although his earlier book, the now less-known
Theory of Moral Sentiments
, was a sensation, his more famous work seemed as if it had missed its mark. Yet unlike most ancient writers, whose importance recedes into the distant past, Smith’s influence rapidly grew.

The book went through five editions, but each of the first two editions sold only 500 copies—a substantial number, but far from a roaring success.
⁴
In Parliament, where the members frequently quoted important political economists, Charles James Fox made the first reference to
Wealth of Nations
on November 11, 1783, six years after the book first appeared.
⁵
Still another ten years passed before two of Smith’s friends, Alexander Wedderburn and William Petty’s great-grandson and former prime minister, the Marquess of Lansdowne, mentioned the book in the House of Lords.
⁶

Even in 1789 when Thomas Robert Malthus signed out the 1784 edition of
Wealth of Nations
from his college library, he was just the third person to do so.
⁷
Up to the year 1800, only a few Cambridge colleges had acquired the book. Emma Rothschild notes with some irony that when Adam Smith died in 1790, the influential
Annual Register
devoted but twelve lines to Smith compared with sixty-five for Major Ray, a deputy quartermaster general with an interest in barometers. The
Scots Magazine
gave Smith a scant nine lines.
⁸

Only after the French Revolution of 1789 made British property owners fearful, did Smith take on an air of importance. Thereafter, the rich and powerful appreciated Smith’s ideological influence. For example, Francis Horner, editor of the
Edinburgh Review
, rejected a request to prepare a set of notes for a new edition of
The Wealth of Nations
. He explained his refusal in a letter to Thomas Thomson, written on August 15, 1803:

I should be reluctant to expose S’s errors before his work had operated its full effect. We owe much at present to the superstitious worship of S’s name; and we must not impair that feeling, till the victory is more complete
…. Until we can give a correct and precise theory of the origin of wealth, his popular and plausible and loose hypothesis is as good for the vulgar as any others.
⁹

As one current Smith scholar observed, “There were more new editions of
The Wealth of Nations
published in the 1990s than in the 1890s, and more in the 1890s than in the 1790s.”
¹⁰

Advocates of unregulated markets praise
The Wealth of Nations
for its strong opposition to government meddling, conveniently overlooking the more interventionist stance that appears in the later chapters. In particular, they appreciate Smith’s stance in the early chapters that unregulated markets are the key to promoting human progress.