The Invisible Handcuffs of Capitalism: How Market Tyranny Stifles the Economy by Stunting Workers (27 page)

Such sentiments may have given Smith more of a reputation as a humanitarian than he deserved, but this part of Smith’s legacy quickly disappeared.

The Making of a Pseudo-Science

Before Adam Smith, the prevailing metaphors for society were largely biological, picturing society as a body in which each part made a special contribution to the whole. Each “caste” (class) had its predestined role to play and none could prosper without the other. Just as a foot could never replace a brain, a peasant could never expect to rise to the level of an aristocrat.

Breaking with the biological metaphor had an obvious attraction for the socially rising portion of the middle class. This group had already partially escaped the confines of feudal castes and now longed for the opportunity to rise further, but an aristocratic elite still occupied many of the high positions in society and looked down with contempt at the pretensions of the rising middle class. This aspiring group, in turn, was naturally somewhat antagonistic to and/or jealous of the inherited privileges of the British gentry.

The social context of Smith’s theory of history is relevant here, in the sense that he used his four stages theory to explain how social forces exert powerful influences on people. Once the fourth stage arrives, making the aristocracy superfluous, the resulting social forces would make people more individualistic.

At the same time, physics appeared to offer an ideal metaphor to replace biology. The crowning achievement of physics at the time of Adam Smith was Isaac Newton’s work on planetary motion. Long before he embarked on his study of political economy, Smith concluded an essay,
The Principles which Lead and Direct Philosophical Enquiries; Illustrated by the History of Astronomy
, by praising Newton’s system “as the greatest discovery that was ever made by man.”
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One appeal of the method of physics was that one object (person) could easily substitute for another, regardless of class origins. Ignoring for the moment the fact that the force of gravity meant that no single body can move in isolation from others, Newton’s method seemed capable of analyzing the world as discrete units, which acted independently of one another. Extending the physics metaphor to society, people also interacted as individual atoms. An appeal to the work of Newton even lent a touch of theological support for economics since the great physicist wanted to demonstrate the rationality of God’s handiwork.
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Smith initiated an approach to political economy that seemed to conveniently combine class interests with scientific legitimacy—exactly what Macleod was aiming for a century later with his coining of the expression “economics.” Backed up by both science and theology, Smith could argue that within the context of the market, middle-class people who prospered must have done so because of their own hard work.

Smith’s Newtonian economics naturally appealed to the middle class in a modern commercial society, especially after the French Revolution. Smith was never as explicit in making the ties between economic theory and physics as Macleod and the other economists discussed previously. Yet, by building his theory around a network of commercial transactions, Smith did lay the foundation for his successors. These later economists did change the basis of value from the simple adding up of wages, profits, and rents to the abstraction of utility, which was even further removed from production.

In the words of one scholar of political economy, physics permitted British economists to study “man as an individual and as a social
being in the same way that the physicist studies other matters, and here again to apply the Newtonian method with a view to determining the smallest possible number of general simple laws which, once discovered, will enable all the detail of phenomena to be explained by a synthetic and deductive method.”
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Later economists pushed the physics analogy further, presuming that adopting the method of physics promised a scientific method for prediction.
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In stable times, such predictions could be relatively accurate, but they give an unwarranted confidence to those who accepted the expertise of economists, leaving them unprepared to dangers that lay ahead.

At least until after the Second World War, the Newtonian heritage never took root as strongly in the economics practiced in Continental Europe. Even today, attitudes toward the poor are still colder in the Anglo-Saxon countries than in Continental Europe.
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An increasing number of economists in Europe did follow the English style, but many still attempted to understand the economy in a way that took account of the social context in which people lived.

Summing Up

Looking back to Adam Smith serves a useful purpose. Although many people today have unconsciously absorbed parts of Smith’s perspective, seeing how Smith’s thinking evolved can allow one to take a more objective view of his mindset, especially when considering the intellectual climate of the time.

Smith’s discussion of the division of labor seemed as if it might allow him to describe the economy with simple laws, without acknowledging the conflict between labor and capital, but on closer examination this approach was a dead end. For Smith, progress, fueled by the division of labor, comes from a master organizing passive workers into separate tasks.

Once the master has created the division of labor in the workshop, nothing more can be done because Smith ignored both technical
change and increasing workers’ potential (other than the acquisition of the necessary manual dexterity for the job). Smith’s repeated denigrations of workers suggests that he probably agreed with Ferguson’s judgment that the mechanical arts “require no capacity; they succeed best under a total suppression of sentiment and reason.”

As a result, Smith suggested that progress was only possible by extending the market, which could allow a more refined division of labor. But then how would a market grow? Britain was rapidly increasing its markets by expanding its empire. Smith denied the value of this method of increasing the division of labor because it depended on the state rather than the market, invalidating his voluntaristic scheme. Instead, he presumed that each nation would choose to specialize—Britain in manufacturing and the colonies in raw material production.

Yet, according to Smith’s theory, agriculture, unlike manufacturing, does not offer many opportunities for much of a division of labor. One might expect that colonies would be ill advised to specialize in raw materials. In fact, much of Britain’s dispute with the North American colonies revolved around the mother country’s efforts to force the colonists to accept Britain’s monopoly in manufacturing.

Smith sidestepped this limitation of a division of labor approach by deftly shifting the role of production into the background, as the economy came to be pictured as a system of commercial transactions, which were measurable in terms of market prices. Accordingly, Smith altered his theory of value from one based on the labor used in production to a simple sum of the transactions involved in the payment of wages, profits, and rents.

Work, workers, and working conditions disappeared from view. At the same time, Smith was able to avoid any hint that the rise of modern industry demanded stronger and more repressive forms of control.

This transaction-based representation of the world homogenized people by recasting almost everybody—merchants, capitalists, or workers—as merchants, except those who existed with minimal transactions in the market. Smith’s marginalized group included the aristocracy and those who directly worked, along with “churchmen, lawyers, physicians, men of letters of all kinds: players, buffoons, musicians,
opera-singers, opera dancers, &c.”
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Smith classified such people as unproductive labor. After all, everyone is supposed to act as a merchant.

The following chapter will turn to the construction of the Gross Domestic Product (GDP). At first glance, this shift might seem abrupt, but, in reality, the GDP frames the economy just as Adam Smith did. Adding up commercial transactions—even imaginary transactions—while excluding work, workers, and working conditions.

The Gross Domestic Product

The concept of the Gross Domestic Product might seem unrelated to Procrusteanism. However, in imitation of Procrusteanism, it emphasizes commercial values while ignoring a plethora of human costs and benefits, including work, workers, and working conditions.

An old adage suggests the relevance of this defect of the GDP: “What gets measured, gets managed.” In other words, so long as the public accepts the GDP as a reasonable measure of economic performance, Procrustean policies can flourish with little or no concern for those things missing from it, such as work, workers, and working conditions.

The individualistic perspective of Adam Smith, as well as that of later economists, provided a convenient ideological framework for explaining the economy, but little useful policy guidance, except for people who dogmatically insist that nothing interfere with the function of markets. For the purpose of making policy, economists needed a measure of the wealth of nations, something Adam Smith never offered, despite the title of his book.

For centuries, economists had been groping for a measure that could give them a handle on the performance of the national economy. William Petty, writing in the seventeenth century, was trying to win favor from the king by promoting a war with France. To make his case, Petty suggested that victory would be easy because his data showed that Britain was more powerful than its rival. In the process, Petty pioneered in the calculation of national statistics.

Because governments did not publish any statistics, Petty had to resort to guesswork. His method of improvisation occasionally invited satire, including a rousing treatment by Jonathan Swift in his
Modest Proposal
, as well as in
Gulliver’s Travels
. Guy Routh, a modern economist, humorously described Petty’s crude methods:

In comparing wealth of Holland and Zealand to that of France, he takes guesses by two other people, does not like the results and ends up with a guess of his own. He estimates the population of France from a book that says that it has 27,000 parishes and another book that says that it would be extraordinary if a parish had 600 people. So he supposes the average to be 500 and arrives at a population of 13 1/2 million. And so it goes.
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Despite his fanciful predictions and wild guesses, Sir William managed to set economics on the course it was to follow for the next three centuries. Although Petty’s successors had a far superior statistical database with which to work, even as late as the First World War, economists still had to rely on guesses and vague estimates to gauge the size of the economy.
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During the early part of the Great Depression, the Department of Commerce called upon Simon Kuznets to begin what became a decades-long effort to create a better measure of the economy. Kuznets was a meticulous researcher, who later won the Nobel Prize for his efforts. Kuznets’s pioneering estimation of the national income eventually led to his work on the GDP (then called the Gross National Product), which followed the path laid out by Adam Smith—emphasizing exchange rather than production.

If we use exchange as the basis for our calculation, a tree has no value until it is sold for producing lumber. In addition, the fact that
wealth and power are concentrated in the hands of a few is unimportant. And, questions of the quality of life are irrelevant. This last point is especially important as far as working conditions are concerned.

Kuznets clearly saw the limits of his work. In his first report to Congress in 1934, he publicly expressed his reservations about the national accounts that he helped to create. Data limitations made Kuznets construct his estimates from commercial transactions.
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He wrote:

The present study’s measures of national income, like all such studies, estimates the value of commodities and direct services sector market prices. But market valuation of commodities, especially of direct services, depends upon the personal distribution of income within the nation. Thus in a nation with a rich upper-class, the personal services to the rich are likely to be valued at a much higher level than the very same services in another nation, characterized by a more equal personal distribution of income.
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As a result of limiting the measure to commercial transactions, work done within the household was not included in the calculations. A few later economists, discussed below, recognized this shortcoming, but none understood that any effort to estimate economic welfare would also have to take into account what goes on in the workplace. As Kuznets recognized:

No income measurement undertakes to estimate the reverse side of your income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of the nation can, therefore, scarcely be inferred from the measurement of national income as defined above.
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The Gross Domestic Product Goes to War

Because Kuznets wanted to create a more inclusive measure of economic well-being, he broke with the Department of Commerce. After the outbreak of the Second World War, the government called Kuznets
back to service. The military was worried that it could undermine the war effort if it consumed too much, starving the domestic economy. In the words of one of Kuznets’s former students: “To ask for too little was to prolong the conflict; to ask for too much was to inflate costs without producing significantly more.”
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With the stakes so high, Kuznets’s reservations about the GDP as a measure of welfare had to be put aside for the moment.