Adam Smith and universal opulence

Question

Adam Smith seems to be saying that the goal of governing is "universal opulence which extends itself to the lowest ranks of the people," which he appears to think achievable in capitalism with the minimalist government. Clearly, things did not work out the way he thought, prompting Karl Marx, 90 years later, to assert that state-protected capitalism is the legalization of thievery. What are some defenses economists make on behalf of Smith? References appreciated.

Answer 1

The irony of Marx's criticism is that Communism is just as, if not more, available to become a "legalization of thievery", due to the elimination of the "invisible hand" of the market.

To your question, I would point to the Chicago School's consideration of Antitrust government intervention as a defense of the intuitions of Adam Smith, albeit a modification of strict faith in the ability for the "invisible hand" to unrestrictedly manage the fairness of the markets.

Michael S. Jacobs discusses the rise of the Chicago School's antitrust perspective, in his 1995 article in the North Carolina Law Review, "An Essay on Normative Foundations of Antitrust Economics". For Chicagoans, Antitrust actions are a tool to protect the free market. This is aligned with Adam Smith's concept of economic systems, via the application of the strict guideline that "consumer welfare, narrowly conceived in explicit economic terms, should be the only object of inquiry" in considering antitrust intervention (Jacobs, 1995. e.g. Herbert Hovenkamp, 1985). These tools are only to be used with the strict attention to preserving efficiencies of the market - an allusion to the foundational premises of Smith.

The topic of Antitrust Legislation provides an example of the role of government to intervene in the free market, while respecting the need for it to be enacted in a minimized way.

Additional reference material can be found in the article - it is highly notated.

LINK: "An Essay on Normative Foundations of Antitrust Economics". Michael S. Jacobs, North Carolina Law Review, 1995.

Answer 2

This answer has two parts.

1) Why, from a Marxists point of view, a "benevolent social welfare maximizer" government under capitalism is an illusion.

Smith's view of the minimal Government was in line with his economic liberalism ideology. Maximum social welfare was a consequence of the invisible hand guiding self-interested individuals.

For (orthodox) Marxists, such a view was naive, as the state did not represent the labourers and proletarians of the time but rather was an instrument used by the bourgeoisie (politically organised as the Whigs) and the aristocracy (the Tories), competing among themselves, to advance the interests of their class, which was not the direct improvement of the welfare of the lower and larger classes.

In effect, it was not until workers organised themselves, partly inspired by Marxism, that unions, mutuals, cooperatives, and class action emerged as an attempt to gain more social and political rights. The Labour Party of the UK emerged in 1900, amid this context. It was when workers became represented in power that the government became an instrument in favour of their interests.

Furthermore, it was (mainly) after a huge global catastrophe (World War II), that the Welfare States consolidated in Europe, subduing the class struggle for some decades. From the 50's to the 70's it was a golden age for workers, with increasing median wages across societies. Yet, in the background, the economic liberals and right-wing economists were already envisioning and slowly orchestrating a different society. With the crisis of keynesianism in the 1970's, they took they chance, and put it into practice with Thatcher and Reagan (and Pinochet), pursuing a policy in favour of capitalists (e.g. lowering taxes), and against workers (e.g. attacking unions); neoliberalism had begun. Globalisation was to further lower the leverage of workers in favour of the global elite, consequences which we can still see today.

From this perspective, any defense made on behalf of Smith is flawed, as the government's interests reflects first and foremost that of the party in power, and not that of the "universal opulence which extends itself to the lowest ranks of the people". As indicated, workers life chances have improved mainly with left-wing, interventionists governments, and not with minimal ones.

2) How do economists explain that an era of shrinking government and increasing globalisation (i.e. Smith's economic liberalism, and roughly the political development of the last 30 years) have not contributed toward universal opulence, but have widen inequality?

I want to highlight two issues. First, is technological change. Many have argued that the nature of technological change has benefited some segments of the population. An example of such change is skill biased technical change, or SBTC. This states that new technologies are complementary to high skilled workers, thereby increasing the skill premium and inequality. More recent examples include task-biased technical change, which some argue has lead to job polarisation. This contrast with technological change during most of the XX century, which had the consequence of fostering employment in manufacturing and other good paying jobs. In contrast, new waves of technological change like ICT have induced a great deal of off-shoring, by reducing trade costs. Thus, many jobs have moved from advanced economies to developing ones like China (albeit evidence is not so clear for all countries, e.g. Germany). Finally, how not to mention robots. There is emerging evidence that robots are reducing employment and wages (with some dissident voices though). As firm ownership is unevenly spread among population, such developments are likely to contribute to greater inequality.

Others argue that trade itself is much more complex than what Smith initially thought. Whereas simple Ricardian argument of comparative advantage predict that every partner in trade would benefit, more complex analysis predict differentiated effects within countries. For example, the Stolper-Samuelson theorem states that, as countries engage in bilateral trade, specialisation into certain goods affect return to factors. In particular, in rich countries, which export goods intensive in capital, and import goods intensive in labour, the relative return of capital with respect to labour increases. In consequences, profits/rents for firm owners increase relative to wages. This leads to higher inequality, as the distribution of factor income and personal income are not identical (rich have more financial capital than the poor).

In effect, globalisation meant a massive extension of the labour market in advanced economies. Think of the inclusion of East Asia as a huge labour shock, where suddenly billions of new workers enter the labour market. Unexpectedly, such a big shock meant a strong force against real wages growth for workers in rich countries. Evidence shows that this shock meant off-shoring, deindustrialisation, recomposition of employment toward services, either high skill for the few, or low skill for the many.

Now, as Branko Milanovic has recently highlighted, global inequality (i.e. inequality as if the world were one country) has reduced. His "famous" elephant curve reveals that many people in the developing world have emerged out of poverty, and income of "middle classes" around the world have gone up, at the expenses of workers in advanced economies (consistent with the literature highlighted above). Not everyone agrees with this analysis though. See also a recent article by Dani Rodrik comparing trade versus labour-based globalisation.

In my view, these are two examples in the literature why minimal government, i.e. the invisible hand, liberalism, and globalisation has not benefited the majority of the population.