If you must quote Adam Smith, first understand him

The author of a blog, Decline of the Logos, has commenced a series of critiques of the Adam Smith Institute. His/Her “No 1” quote is unpromising as to whether he/she understands Adam Smith’s Wealth Of Nations, while quoting from it to find a quote “with “which annoy the Adam Smith Institute”. What an ambition!

Logos’s “no 1” quote is from Wealth Of Nations (WN 1.viii.11-12: 83-84):

“What are the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little, as possible. The former are disposed to combine in order to raise, the latter in order to lower, the wages of labour.

“It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily: and the law, besides, authorises, or at least does not prohibit, their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work, but many against combining to raise it. In all such disputes, the masters can hold out much longer. A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks, which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year, without employment. In the long run, the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.”

To Which Logos observes:

Smith is here observing that the freedom of contract between capitalist and worker is, in reality, no such thing. The relative levels of capital each holds distort the negotiation: the capitalist can always afford to hold out for longer. However, within procedural justice libertarianism, freedom of contract is interpreted as absolute: any Government intervention, whether it be through regulation of rights or wages, is an immoral intrusion into a private negotiation.

The above quote appears to indicate that Smith understands that the freedom to make contracts varies between capitalist and worker, in a manner dependent on their relative wealth. This particular freedom appears to be determined less by Government intervention and much more so by possession of capital. Being a strong believer in the power of freedom, I would advocate that some way be found to bring a greater equality of freedom to negotiations between a capitalist and a worker, as an end in itself. I am agnostic as to how this can be achieved, whether it be through the State or through a non-state body, such as a trade union.

The first thing to note here is that Adam Smith, writing in 1763-76, was observing the prevailing system of wage bargaining in the mid-18th century. It was not just a matter of relative “wealth’ that determined the outcome; the powers of local magistrates given them by Acts of Parliament, and the Combination Acts, contributed a great deal too. A lot has changed since then to the current situation in the 21st century. Not only has the law changed to allow wage bargaining (and much else), but also we have accumulated much experience of how trade unions operate in practice, some for the good of their members and some not so good. In so far as the, now defunct, ‘closed shop’ experiences are concerned, it was not freedom to bargain that was sanctioned, so much as restrictive trade union monopolies and, sadly, on occasion localized tyranny against individual employees. Also, the state continued to intervene, sometimes for the good and sometimes less so.

In the 18th century, Adam Smith observed what actually went on across the land. Local magistrates (a social set intimately identical with “merchants and manufacturers” and landowners) set low wage rates for many labourers. Adam Smith tended to despise their partiality. The State also prohibited freedom of assembly and strike-related “outrages”, with flogging though the streets, jail terms and transportation for transgressors (K. J. Logue, 'Popular Disturbances in Scotland, 1780-1815'). These and other examples of judicial outrages were known and commented upon by Smith within the strict and judicious self-censorship of the times. By the post-war decades of the 20th century, these had passed away, replaced by anti-liberty legislation enforcing the extra-judicial powers of trade union leaders (a phenomenon noted in Michel’s ‘Iron Law Of Oligarchy’, earlier in the century) and by the semi-corporate state established by Labourism in the 1960s.

Logos wants “a greater equality of freedom to negotiations between a capitalist and a worker, as an end in itself.” He/she is “agnostic as to how this can be achieved, whether it be through the State or through a non-state body, such as a trade union”. It is not clear exactly which age-group Logos is in, but any knowledge of post-war industrial relations shows that solving the dilemma of “freedom of contract” for firms and employees is a problem for which there have been many efforts, few of them successful.

How close Logos is to running a large (or small) organization is also an experience that might also inform him/her of the daily realities of 21st-century management, for which many reforms have been proposed (and tried), and all have failed. Cop-outs are not one of the workable solutions in the real world.

Logos concludes:

However, the Adam Smith Institute has recently put forward a proposal that runs counter to this aim of securing greater freedom of negotiation, which they have dubbed the ‘Self Employment Option’. This calls for greater use of the self-employed status amongst workers, which “sidesteps the burdens not only of PAYE and NI, but also of unfair dismissal, discrimination suits, maternity and paternity leave, statutory sick pay and holiday pay“. The self-employed, being freed from the ‘burden’ of rights, will have less freedom in negotiation than the employed. It is difficult to interpret this in any other way than the ASI having a very different understanding of freedom of contract to Adam Smith.”

Where a total, all-embracing solution is not viable, we are left with partial tinkering. Where experience shows that what we have is not working, which is certainly the case for many firms and institutions that experience the problems created by, no doubt well-meaning measures, like “PAYE and NI, but also of unfair dismissal, discrimination suits, maternity and paternity leave, statutory sick pay and holiday pay“, it is very Smithian to offer suggestions, if only to experiment at the margin to see what works or doesn’t, and move on from there. Just because we cannot change everything, is no reason to oppose changing something. Blanket faith in all-or-nothing quick changes, with dire predictions of what could, might, or will happen as a consequence, is, with respect, very unSmithian.

ASI, as I understand it, is about pragmatism – including imaginative suggestions, which are what ASI does best – and I suggest, modestly, that Logos has some ways to go before its advice is credible, either in the selection of quotations from Adam Smith or in understanding the problems of 21st-century Britain.

This post originally appeared at Adam Smith's Lost Legacy.