J. Rees, ‘Supply-Side Economist Arthur Laffer’, The Review of the News, 6.11.80, pp. 47-49.
11 P. Samuelson, Economics, Tokyo: McGraw-Hill Koga Kusha, 10th edn., 1976, p. 568.
12 Among other emendations, school textbooks — with the approval of the Ministry of Education — were altered so that the Japanese ‘invasion of northern China’ was made to read ‘advance’. The description of how Korean labourers were forcibly sent to Japan was changed to read ‘mobilized’. The diplomatic row that ensued from this reappraisal of history forced the Japanese government to back-track. The new nationalistic mood, however, was firmly established. We cannot predict what this portends for Far Eastern relations. What we do know, however, is that a new 5-year plan for military procurements was adopted, and that there was a proposal to increase the 1983 defence budget by 7.3% (to £6.29 bn.)
13 N. D. Kondratieff, ‘The Long Waves in Economic Life’, Lloyds Bank Review, October 1978.
14 For example, W.W. Rostow, The World Economy, London: Macmillan, 1978.
15 J. B. Schuman and D. Rosenau, The Kondratieff Wave, New York: Delta, 1972, p. viii.
16 W. W. Rostow, ‘The Long Waves in Economic Life’, Lloyds Bank Review, July 1979, p. 53.
17 Ray admits that ‘no more than guesses can be expressed’ in the search for the motive power that might drag the British economy out of the Kondratieff trough and into a new phase of sustained growth. G. Ray, ‘Innovation in the Long Cycle’, Lloyds Bank Review, January 1980, p. 26.
18 W. Rees-Mogg, ‘My resumption of liberty’, The Times, 7.3.81.
2 Laissez Faire: Adam Smith’s Version
Adam Smith believed that he was recommending the economics of the free market when he wrote The Wealth of Nations. He thought that his theoretical system had, as its dynamic principle, the competitive spirit; that, within the framework of natural justice, economic growth would be enjoyed by the three ‘original great orders’ which comprised civilized society — the land-lords, capitalists and labourers. He was wrong.
Smith was not wrong in thinking that theoretically the economics of capitalist competition could function efficiently to the advantage of all. His cr tor arose from the deduction that his specific system provided such an outcome, that it would secure the dual aim of freeing people to pursue private aims while guaranteeing the natural harmony of the total system. For his was not a description of how to construct a free market: he insulated the landlords from the competitive spirit. Until this is appreciated the science of political economy will be severely limited in its influence on public policy.
For two centuries Smith’s book has been the ‘bible’ for the buccaneering entrepreneurs who built factories and mass-produced cheap goods, and for the rational thinkers — the technologists, scientists and engineers and organisational managers — who trampled theological mysticism under foot in favour of science. But when Smith penned The Wealth of Nations he betrayed the spirit of the free market. At the abstract level, his testament promoted a philosophy that relentlessly exposed the special privileges and the monopoly power that politicians and manufacturers tried to invoke to their profitable advantage, but the book also set the seal of approval on an institutional framework that crippled capitalism at its conception. And so Adam Smith’s victims were not just the toiling masses who were subjected to the tortuous economic pressures that reduced so many of them to misery. A death blow was also administered to the very idea of the free market.
Lutissez faire is now discredited because, by popular agreement, it has failed to work to everyone’s satisfaction. It was out of resignation to this ‘failure’ that the philosophy of the New Deal developed: the belief that a mixed economy would do what the free market was incapable of accomplishing. But the interpretation of the history of industrial society ever since publication of The Wealth of Nations has geen grossly defective, which is why the critics have been able to conclude that unrestrained competition is inherently evil. Collective action, collective ownership of capital and centralised bureaucratic planning are now — in degrees varying only according to vested interests — acclaimed as the remedial alternatives.
The analyses have been wrong because the historians and social scientists have taken all the tenets of Adam Smith as necessarily intrinsic to the capitalist market. They have pursued their enquiries into a malfunctioning system without questioning the necessity for those property rights which have underpinned that system; without questioning whether, had a modified configuration of property rights existed, the free market might have achieved its goals without the evil consequences which have beset industrial society. Across the political spectrum, from Marxist left to conservative right, the arguments and counter-arguments have progressed without adequate reflection on whether a reform of the principles of property ownership and the rationale which motivates the owners of these rights might be sufficient to improve the operations of the free market without recourse to those bureaucratic modifications that deny the ‘perfect liberty’ that Smith wished to attain.
The debate about capitalism as a mode of production, therefore, has been in the terms validated by Adam Smith. But contrary to what he thought he was doing — and his readers interpreted him as doing1—Smith developed an economic framework which entailed a fatal element of monopoly power. He wrote about an ‘invisible hand’ guiding the system to the benefit of everyone, but he recommended the preservation of a structure of property rights which by its very nature struck at the heart of individual liberty and economic prosperity.
Critics, then, are opponents of Adam Smith — not of laissez faire. For the freely competitive market system with a capitalistic ethos has yet to be put to trial. Responsibility for the slums of Bolton in the 19th century, and the hunger of the Jarrow marchers in the 20th century, must be laid at the feet of Adam Smith and the politicians and practitioners who happily accepted his values; these tragedies, as we shall see, are not a necessary part of laissez faire capitalism. The search for a system which combines personal freedom and social stability with economic prosperity for everyone is a realisable dream, and its pursuit must start with an analysis of the defects in the philosophical justification advanced to legitimise the history of western industrial society: The Wealth of Nations.
Dr Smith was a careful Scottish scholar. He had taught at the University of Edinburgh, travelled to France where he studied the Physiocratic system of economics, and was an accomplished logician and natural scientist. His great book was not specifically prepared for the Industrial Revolution which was fermenting all around him. He wanted to define the principles of a free and just economic system of relevance to any civilized society. Indeed, surprisingly, he was not well acquainted with the great strides in mechanical inventions which characterised the two decades during which he wrote the book which he published in 1776.2
The clues to Smith’s fatal errors were contained in his first book, The Theory of Moral Sentiments (1759),3 which was a discourse on ethics. In this, he distorted the way in which
