Adam Smith
Muir Portrait of Smith, Unkown, Scottish National Gallery; https://www.nationalgalleries.org/art-and-artists/3787/adam-smith-1723-1790-political-economist
Adam Smith, The Wealth of Nations, and the Theory of Moral Sentiments
Adam Smith was a Scottish economist and philosopher who is widely considered one of the fathers of modern economics, especially classical economics. Free market theories in economics, as well as social psychology, originate from his writings in texts such as The Wealth of Nations and The Theory of Moral Sentiments.
The Theory of Moral Sentiments
In The Theory of Moral Sentiments, Smith argues for the natural feeling of empathy within people. His illustration of this concept is the natural pain one feels when seeing another person who is feeling pain; this compassion, he argues, exists throughout society and also throughout the individual. One of the most notable and famous examples of this phenomenon proposed by Smith is of an earthquake in China; if someone was told about the disaster, they’d immediately react with grief towards their fellow humans, but later would go about their day in the usual way. Using this idea, Smith proposes that humans have active and passive impulses; the active impulse is usually benevolent, but the passive impulse is more often self-serving and disengaged with the world. Humans, because of this concept, would then have a feeling of duty to help their fellow person, even if that feeling is restrained by a passive impulse towards selfishness. Smith brings up several aspects of society that maintain and nourish the active desire to help others, such as religion, which creates a written duty to match the sense of duty that people innately feel. It is fascinating that after his death, Smith’s documents revealed a position on religion far more iconoclastic than his public stance, and more like his contemporary and close friend David Hume.
The Wealth of Nations
In The Wealth of Nations, Smith synthesizes some of the first theories of political economy, progressive history, and free-market capitalism. A key theory for Smith is the division of labor. In a system that has division of labor, tasks become specialized, and workers enter niches of production in order to produce more goods overall. This increase in efficiency, however, is limited by the marketplace it occurs in. When a market is more competitive, with multiple people vying for supremacy in a certain area or product, the division of labor, and subsequently efficiency, become more enhanced. As a result, a free market with little intervention, according to Smith, is the best way to produce maximal efficiency in societal production. Another important concept in The Wealth of Nations is the idea of the “invisible hand,” or the unintended consequences of capitalist competition. According to this theory of economics, capitalists engaging in competition with one another will vie for public support and business, resulting in them producing a socially beneficial quantity to meet demand. As a result, competition in a market is good not only for the division of labor, but also for society at large. Smith used these theories to attack the government of the time, which placed restrictions on trade and commerce through tariffs, taxes and production limits.
Smithian Economics and Airlines
United Airlines was one of the major airlines that came about due to mergers in the 1980s.
Adam Smith, while being an intelligent economist and brilliant author, made a mistake in his analysis of free markets: he trusted the capitalist to take action to make the market most efficient, instead of most profitable. In modern free markets, price controls are not just placed by governments, but also by producers, especially those who form price cartels to engage in fixing prices for valuable commodities. When goods, such as oil, railroads, or water, have relatively inelastic prices, producers of those goods can coordinate price changes to exploit consumers and maximize profits on necessities.
To understand the effects of the deregulation Smith advocated for in a real-world, modern market, one needs only to look at the system of airlines in the United States and beyond. Unlike the mercantilist systems that Smith denounced, the involvement of the American government in airline regulation prior to the late 1970s kept fares relatively stable, ensured airlines would be profitable but not exploitative, and maintained a healthy market such that airlines would easily be able to garner investments for improved travel speeds and consumer safety. However, in the wake of massive deregulation in 1978, airline competition was no longer government-regulated, fares were no longer capped or floored, and profits subsequently dropped catastrophically as every airline began undercutting the others in a ‘race to the bottom’. To prevent this from crushing the industry altogether, airlines began merging en masse, and government regulators in the Reagan Administration practiced a policy of limited intervention and allowed those mergers nearly wholesale. After these mergers were completed, the new airliners had dominance over specific niches of the industry, and as a result faced little to no competition whatsoever. Price-gouging on fares and luggage became common practice shortly after these circumstances presented themselves. Smith’s theories address government regulation, but the operation of large-scale producers in a consumer economy to form price cartels is a difficult question to resolve with the answer of deregulation or laissez-faire policies. On a more general note, the example of airlines brings forward an important truth about owners under capitalism; the most profitable decision in the long run is not to compete with opponents and provide the best product, but to work with opponents and ensure that low-quality products and high profits can be arranged by market manipulation. In this sense, no market that is entirely deregulated is truly free, as it exists under the thumbs of entrepreneurs and industrialists who can greedily exploit the consumer class’s necessities.