A New Theory of the Wealth of Nations

Adam Smith reasoned that it is not through the benevolence of the butcher by which customers obtained their meat, but through the butcher’s self interest. The butcher is not altruistic, he is a smart operator, but because of his motivation to make money  customers benefit from shopping in well stocked stores. Adam Smith concluded that what is good for business is good for customers too. He judged that, with a few provisos, an economy relying on the motivation to make a profit out of things, by and large, acts in the best interests of everyone.

These principles were outlined in 1776 in Adam Smith’s opus magnum “An Inquiry into the Nature and Causes of the Wealth of Nations”. Henceforth these principles have been at the root of the justification for the accumulation of immense personal wealth. The model says that if you are intelligent and industrious, and you spot a market opportunity and take advantage of it, you may become immensely rich. That, according to the theory, is how the world works and everyone gains from the ‘invisible hand’ and the ‘greedy’ motivations that guide the  working of a thriving economic system. The question then is whether this model describes what is happening out there in the real world.

Even in Adam Smith’s day the idea of a rapidly rising national output spontaneously emerging out of competitive market forces, resulting in lifestyle improvements for all, was a myth. The extraordinary rate of industrial development and economic growth in Britain during the industrial revolution stemmed very largely from government backed expansionism and military might paid for by taxes. This was an era not just of ‘little shopkeepers’, but also of ‘big government’.

It was also an era of subjugation, subordination and enslavement of peoples across the globe. Appalling conditions of employment resulted in very low life expectancy for huge swathes of society at home and abroad. The mansions of the prosperous, lucky few grace our countryside, but it should not be forgotten that this was also an era of floggings, enclosures, starvation and poorhouses. We should not be deceived by Adam Smith’s economic idyll into believing in elysian fields of gold for all.

It was also true, and it remains true, that not everyone has equal access to the opportunity to become rich. Most wealth derives from wealth and status that one inherits, and not from industry or intelligence, as Piketty outlines in his book ‘Capital in the Twenty-first Century’. Without a massive redistribution of wealth the income distribution becomes more and more unequal because the return on wealth exceeds the return on labour.

Fast forward more than three hundred years and we no longer have anything even remotely like Adam Smith’s picture of ‘small shopkeepers’ overseen by ‘big governments’. The picture today is one of international conglomerates dictating terms of engagement, price givers not price takers, and of relatively weak governments clinging onto the coat-tails of monolithically large businesses.

Capital is internationally mobile and it seeks out the most favourable terms of engagement. It seeks to operate in countries where damage to the environment is the least regulated. It seeks out low tax regimes, lax enforcement of regulations and secretive banking systems, and it is powerful enough to lobby governments to achieve business objectives.

The self interest of business does not merely respond to our desire for goods and services.  It is capable of dangerously manipulating our preferences, through  sophisticated, sometimes virtually undetectable, subliminal advertising. It can sell us products that make us sick and then more products that promise to make us well.

Because of the sheer size of modern day corporations we find that private money directs itself to buying up schools, universities, charities, researchers, politicians and the media. Multinationals compete for profits not by responding to consumer preferences and getting on with producing goods and services of good quality at a competitive price, but by targeting  our legal systems and our tax rates, and by controlling information.

Globalisation and the high concentration of industry into the hands of a small number of very large producers has fundamentally altered the mechanics of how the modern international economy operates. We need a new theory to make sense of ‘the nature and causes of the wealth of nations’ in the twenty-first century. In the meantime we must throw out the old reliance on the theory of perfect competition and get rid of any notion of an optimal market equilibrium. Greed is greed. It is as self-serving as it portends to be, and it can be very ugly. It is no longer, even if it ever was, some kind of panacea or benevolent omnipresent force.

 

 

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