How National Economies Really Grow

Friedrich List – superior to Adam Smith

By Gwydion M. Williams

With Or Without Nations?

In the third chapter of The Wealth of Nations, Smith argues that the division of labour is helped by the formation of very large economic units. From the point of view of net production, the larger the better, obviously. If one coal mine boosts production and puts another out of business, the same overall result is achieved with less total work.

But supposing the large economic unit contains several separate sovereign states? Smith does not ask this question. It may not have occurred to him: people do make false assumptions about the naturalness and stability of the world they grow up in. But he may also have intentionally chosen to deceive. He was a North Briton, a Scot who cared enough for his country to live there most of his life, but also a man who felt that the union with Britain had been a great blessing. Did he also foresee an eventual union of Europe being brought about by trade?

The early 19th century German economist Friedrich List correctly noted that Smith drew on systems of thought that were ‘Cosmopolitical’.  Smith was part of the informal international network of thinkers, literati and scientists who saw national differences as a relic of the Dark Ages: a leftover that enlightened politics would eventually overcome. But List realised that there would be problems. He recognised that Napoleon’s ‘Continental System’, aimed just at damaging Britain during a bitter long-term war, had in fact been quite good for German industry. Real-world economics had done the direct opposite of what AdamSmithite theory asserted:

“I perceived that the popular theory took no account of nations, but simply of the entire human race on the one hand, or of the single individual on the other. I saw clearly that free competition between two nations which are highly civilised can only be mutually beneficial in case both of them are in a nearly equal position of industrial development, and that any nation which owing to misfortunes is behind others in industry, commerce, and navigation… must first of all strengthen her own individual powers, in order to fit herself to enter into free competition with more advanced nations. In a word, I perceived the distinction between cosmopolitical and political economy.” (The National System Of Political Economy, by Friedrich List, translated by Sampson S. Lloyd MP, 1885 edition, Author’s Preface, Page xxvi.)

Unlike later German nationalists, List had no notion of Deutschland Uber Alles. He merely asked that Germany should follow actual English practice rather than the abstractions of Smith’s doctrines:

“Had the English left everything to itself – ‘ Laissie faire et Laissie aller’, as the popular economical school recommends – the [German] merchants of the Steelyard would be still carrying on their trade in London, the Belgians would be still manufacturing cloth for the English, England would have still continued to be the sheep-farm of the Hansards, just as Portugal became the vineyard of England, and has remained so till our days, owing to the stratagem of a cunning diplomatist. Indeed, it is more than probable that without her [highly protectionist] commercial policy England would never have attained to such a large measure of municipal and individual freedom as she now possesses, for such freedom is the daughter of industry and wealth.

“In view of such historical considerations, how has it happened that Adam Smith has never attempted to follow the history of the industrial and commercial rivalry between the [mediaeval North German] Hanseatic League and England from its origin until its close? Yet some passages in his work show clearly that he was not unacquainted with the causes of the fall of the League and its results.” (Ibid., p 25.)

“The theorists have since contended that England has attained to wealth and power not by means of, but in spite of, her commercial policy. As well might they argue that trees have grown to vigour and fruitfulness, not by means of, but in spite of, the props and fences with which they had been supported when they were first planted.” (Ibid., p 40.)

A Visible Hand – The State

List shows more realism than Smith, as regards the benefits of universal self-interest as a mode of life.  He was aware that both nations and individuals may find it in their own particular interest to damage the general interest.

A single strong government existed in Georgian Britain.  This government allowed for sophisticated production and exchange within its area of political control. Trade outside of the area of political control was always treated as a more complex matter.  It was rightly seen as a process as likely to be harmful as useful.  The removal of trade barriers needed to be agreed carefully with other states so that both gained rather than one exploiting the other.  Internal and external controls are always needed:

“Robbers, thieves, smugglers, and cheats know their own local and personal circumstances and conditions extremely well, and pay the most active attention to their business; but it by no means follows therefrom, that society is in the best condition where such individuals are least restrained in the exercise of their private industry.

“In a thousand cases the power of the State is compelled to impose restrictions on private industry. It prevents the ship owner from taking on board slaves on the west coast of Africa, and taking them over to America. It imposes regulations as to the building of steamers and the rules of navigation at sea, in order that passengers and sailors may not be sacrificed to the avarice and caprice of the captains… Everywhere does the State consider it to be its duty to guard the public against danger and loss, as in the sale of the necessaries of life, so also in the sale of medicines, &c. ” (Ibid., p 166).

In any human society, it will be found that no two people take quite the same view of what public welfare is.  And most of them have to balance between this perceived good and their own private interests, often doing things they later regret.

Destroying trade protection should be viewed like any other destruction of something that has worked well in the past.  Can we definitely improve on it?  Also which interests are served, and who benefits?  Dropping all trade barriers between a manufacturing nation and an agricultural nation would definitely hurt farmers in the manufacturing nation and manufacturers in the agricultural nation. It might also be for the net benefit of both nations, but that is moot.  Governments will in most cases carefully consider who would be hurt and who should be protected or compensated, before removing barriers to trade.

The key to the destruction of the old order in Britain’s Industrial Revolution was a free market.  Not free in some abstract libertarian sense: it was well protected against foreign competition, and there were also savage laws against anyone who tried to live a free vagabond life outside of the new world of work.  But any rich man was free to organise poor men as labourers performing a series of tasks according to the rich man’s will.

Not that an existing class of rich men was an absolute necessity. It could just as often happen that one ambitious small producer would start changing things, slowly rising to be a small industrialist, or even a large industrialist. But ‘free’ markets drastically limited the real freedoms of small producers.  It gave them a simple choice – grow larger or go bust. And, in the nature of things, only a minority could succeed in growing larger.

The one small producer who grows rich is said to have deserved to grow rich, having virtues that his fellow small producers lacked.  This in itself is a very doubtful doctrine, since winners and losers do not seem very different and can not often be told apart except by the end result of winning or losing. But even if it were somehow based on merit and inevitable destiny, this would not change the basic fact that free markets undermine small property.

Secure small property would be the choice of most producers. But people also tend to buy the cheapest goods, given a choice, regardless of how they are produced. No one approves of fragmented deskilled work as such. But everyone likes to save money by buying cheap goods. Only a very few will hold out for ethical reasons. Given free trade, work is bound to be transformed and fragmented.

The system that Smith so admires, the fragmentation and combination of labour, arises when power shifts to new forms of production. If we accept the figures Smith gives us, then pins produced by individual craftsmen would cost fully one hundred and twenty times as much as those produced by a collective of ten or more semiskilled labourers. Even if the difference were much more modest than that, people would still opt for the cheaper product.

It was machines and free trade – trade free of the social concerns that the Guilds had once imposed – that allowed the concentration of ownership and the deskilling of work. When a market is free from social responsibility, the social forms will begin to decay.

Most people in the 18th century were against the undermining of craft skills and the creation of a mass of dependent labourers. But it was the natural outcome of a system in which the main thing that counts is the price of a product. Free exchange of goods led to the factory system and the undermining of the centuries-old system of Guilds and small production.

And who benefits from this change? According to Smith:

“It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. Every workman has a great quantity of his own work to dispose of beyond what he himself has occasion for… He supplies them abundantly with what they have occasion for, and a general plenty diffuses itself through all the different ranks of society.” (Ibid., I.i)

Note the qualification in a well-governed society. The economic theory says nothing about who will get the extra wealth – a point first noted by Ricardo. Good little British bourgeois like Adam Smith and Thomas Malthus managed always not to notice that wealth might be carved up almost any way between workers, capitalist and the landed interest.  It was left to Ricardo – a rich stockbroker cut off from his Jewish roots and not much connected to anything else – to notice that the division of incomes between capital and labour is arbitrary and could be anything.

It should be obvious that a rich man with plentiful reserves will be in a much stronger position than a poor and landless man who must work to eat. Until the rise of the trade unions, most of the new wealth went to factory owners, with considerable ‘trickle-down’ to a rising and very opulent middle class. The ordinary workers may well have lost ground, become poorer than their parents had been.

Workers in a skilled trade have a common interest in securing a decent living for themselves. They have a common interest in refusing to sell their goods below a price that will secure them the sort of living that they feel entitled to. But capitalists employing a mass of semiskilled or unskilled workers can undercut independent tradesmen. And, when there is a pool of unemployed, they can pay their own workers as little as they can get away with, which is often a wage only just above starvation level.

If Adam Smith had secretly desired the abolition of small private property, he would not have written much differently. Had he argued directly for the merits of a society divided between wage labourers and capitalists, he would not have been listened to.  The society of well-divided small property that existed in his time was persuaded to abolish itself by his false assurances that no special protection was necessary for its preservation

Whether Smith was a cunning trickster or a self-deceiving enthusiast is a moot point.  The British Isles in his day had been disrupted by 200 years of political turmoil and religious dispute.  Left alone, it might well have managed to settle down.  But the lack of certainty made it attractive to try out a new system, the system later known as the Industrial Revolution.  This meant the extension of the rather rare fragmentation of work that Smith observed in pin-making, as well as the domination of manufactures by a few rich men, which was spreading in his day, destroying the older pattern of small workshops and independent crafts people.

What Smith intended may never be known.  We do know the actual result of what he helped set in motion.  The world of well-divided small property was ripped up and destroyed by factories run on capitalist lines.

Personally I see the change to wage labour as an improvement, albeit one that was carried through at enormous human cost and quite appalling destructiveness. But then, I also recognise that I am an individual product of a society utterly reshaped and defined by the forces of modern industry.  Forces that were justified and promoted by William Petty and Adam Smith, and then curbed and changed by the work of Trade Unionists and Socialists.

I am not nostalgic for a world in which my ancestors were exploited and kept down. Whether you regard me as middle class or working class, I am definitely someone who makes a living selling my labour-power to some employer. I do not see the change as a disaster, though I do understand the viewpoint of the objectors.

I suspect also that Adam Smith himself would have been appalled by early Victorian capitalism.  It was not a world of greed, narrowness and aggressively insincere Christian morality that he was after.  But his expectations proved false, just as the world of the future is bound to be different – perhaps better and perhaps worse – from the expectations of the present day New Right.

This is from my book Adam Smith: Wealth Without Nations, published in the year 2000.  Available from Athol Books