Adam Smith: The Most Misquoted Economist of Our Time

Note: I was discussing with a colleague how frustrated I was when socialists took Adam Smith quotes out of context. He replied that the right had equally used Smith to support its dogmas. To be clear, Smith was not a dogmatist, but a pragmatist. I wish to clarify the context in which he said all these things.

Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all. – Adam Smith, Wealth of Nations, Book V, Chapter I, Part II On the Expence of Justice

Smith was talking about the origins of civil government here and how no effective institutions for the regulation of property were put in place without significant corruption. Further in the chapter, Smith elaborates on the necessity of a separation of powers to ensure fair judgment of the Rule of Law to promote egalitarian treatment. A fair justice system will ensure that both the rich and the poor have property rights.

“The rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.” – Adam Smith, Book V, Chapter II, Article I: Taxes upon the Rent of House

Note that Adam Smith is talking about house rents here. Smith points out earlier in the chapter: “Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state”. So why does Smith think that house rents are the best means of taxing people? “In every country the greatest number of rich competitors is in the capital, and it is there accordingly that the highest ground-rents are always to be found. As the wealth of those competitors would in no respect be increased by a tax upon ground-rents, they would not probably be disposed to pay more for the use of the ground.” In other words, the rich will be paying more for property in the urban capital anyway according to the market, such that a tax would not inconvenience them. Poorer people will find more affordable land which will not be taxed so high. The inequality in types of properties has already predetermined what the rich and poor can afford, such that levying a tax can be done more fairly.

A final note on taxes: Smith thinks that taxes on labour wages are the worst form of taxation, simply because wages are more inelastic when the tax burden falls on them. Taxes should instead fall upon the rent of the land and on commodities themselves. He writes: “In all cases, a direct tax upon the wages of labour must, in the long run, occasion both a greater reduction in the rent of land, and a greater rise in the price of manufactured goods, than would have followed from a proper assessment of a sum equal to the produce of the tax, [levied] partly upon the rent of land, and partly upon consumable comodities.”

“In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life… But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.” – Adam Smith, The Wealth of Nations, Book V, Chapter 1, Part III On the Expense of the Institutions for the Education of Youth

Here, Marxists have argued that Smith presents an alternate division of labour and indicates government responsibility for the welfare of its people. However, the improvement of human capital is still consistent with Smith’s first presentation of the division of labour as an increase in productivity as individuals specialize. Furthermore, Smith lays out some very specific instances of government intervention: namely, military training and the education of the youth (and women!).  Adam Smith gives the government the role of providing a very basic level of education in the interest of improving each individual’s “invention” and labour competitiveness, arguably setting down a base set of skills that are still superior to those of barbarous societies.

I personally have never subscribed to this idea that nations are “barbarous”; however, I do subscribe to the Ricardian idea (or even the Diamondian Guns, Germs, and Steel hypothesis) that some countries have higher skill sets than others, which will contribute to continual inequality. At the same time, it would be foolish to say that low skilled nations have somehow fallen behind in terms of civilization, since they are better off now (thanks to globalization – access to markets of modern goods and services) than they were ten, twenty, or fifty years ago.

As for the quote itself, it misses a significant chunk of the paragraph, which follows: “Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expense of his intellectual, social, and martial virtues.” Smith is not arguing for an alternate division of labour in an economic sense, but he is making a philosophical argument of holism, where the individual must not allow labour to take up his whole life. It is interesting to see that Smith sees the poor individual primarily as a source of military recruitment, which is really what the Marxists should have highlighted in this quote and not solely identifying the responsibility of the government to make the individual “holistic”, in the sense of education and military training.

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