Adam Smith, an Enlightenment thinker, thought of humans as fundamentally self-interested as contrasted to Thomas Hobbes. Hobbes thought that selfishness worked as a kind of glue for society. His idea was that people are selfish; fundamentally concerned only with themselves. This meant that each person wanted to thrive based on their personal wants and needs without regard to ideals like the greater good or the plight of others. However, as selfish people, they want security at any cost. In order to obtain security, people subject themselves to the state, to laws. While individuals would freely rape, murder and plunder without concerns of conscience they do not because they do not want to be on the receiving end of their brutish desires. The free subjugation of themselves to the state is called ‘social contract’ theory.
Adam Smith lived hundreds of years after Hobbes. He was also a social contract theorist. He was concerned with how self-interested individuals create commerce. In “The Wealth of Nations”, Smith writes:
“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”[1]
He thought that when self-interested individuals compete, the process of competition resulted in the most optimum allocation of resources because competition resulted in the lowest average cost of goods or services. In this way, he thought that self-interest served the greater good. He thought that any time the government or monopolies intervened in this process it prevented the process from working as it should and kept costs artificially higher thus interrupting the normative operation of a free market. It is important to note that Adam Smith’s ideals of the free market only work on the basis of competing individuals not market monopolizing corporations or governments. Market monopolies interfere with competition and defy the ideal of a free market.
“The price of monopoly is upon every occasion the highest that can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion indeed, but for any considerable time together. The one is…the highest which can be squeezed out of the buyers…The other is the lowest which the sellers can commonly afford to take…. The monopoly price is most often sustained by “the exclusive privileges of corporations (65)”[2]
“Smith uses the terms “self-interest” and “private interests” always in opposite ways. For former, his most famous statements are “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest (20),” and, “by directing [his] industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention (351)”. Concerning “private interests,” Smith is not so sanguine; these private interests constitute the “spirit of monopoly (371)” which Smith so much detests. It should be clear by now, from what has been said before, that Smith is well aware of the dangers of avarice and especially so since the interests of capitalists diverge, in Smith’s view, so much from the interests of the general public.”[3]
Capitalism (a term he never uses), as Adam Smith thought, is depended on private property and private ownership. The self-interested individual had complete legal and sole rights to their property. Without private property there would be no motivation for individuals to compete and increase their property ownership, their wealth.
Socialism believes that individual interests are served better when they cooperate with each other and not compete. Socialism believes in social ownership. In effect, this means workers own production (also called the means of production). Production is not owned privately but by a group. There are many forms of socialism. Some forms of socialism believe that the workers in a factory own the factory, but everything else in the economy is ‘free market’ and private property. There is no government ownership is this type of socialism. Some forms of socialism simply pay a social dividend based on factory profitability. Some forms of socialism nationalize factories but still maintain private ownership. Social democrats use a progressive tax system and government regulation within a private market economy. There are also anarchist and libertarian forms of socialism. Socialists tend to believe that when the individual is elevated above the group, normal human interaction and group identities tend to get ignored. Language[4] is a perfect example of how humans are fundamentally collective. People do not have ‘private languages’. Communication is only possible by sharing a language that we individually did not make up. People are not hermits. We form governments, churches and social communities.
“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the laborer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the license to gather them; and must give up to the landlord a portion of what his labor either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land, and in the price of the greater part of commodities makes a third component part.
The real value of all the different component parts of price, it must be observed, is measured by the quantity of labor which they can, each of them, purchase or command. Labor measures the value not only of that part of price which resolves itself into labor, but of that which resolves itself into rent, and of that which resolves itself into profit.”[5] -Adam Smith
It is important to note that a ‘pure’ socialism or capitalism has never existed on any large scale. Every world historical economy has always been a mixture. For example, consider the notion of rent in capitalism.
“For the purposes of economics, Smith divides society into three economic classes: the landlords, the laborers, and the merchants and manufacturers (448), or those who live by rent, those who live by wages, and those who live by profit (217). Now the interests of the first two classes are tied to the prosperity of the nation; economic expansion raises the value of land and increases the demand for labor and hence its wages. But exactly the opposite is the case with the third class, those who live by profit:
But the rate of profit does not, like rent and wages, rise with prosperity, and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin. The interest of this third order, therefore, has not the same connection with the general interest of the society as that of the other two (219).
Thus the interests of the third class run contrary to the interests of the other two; expansion actually raises the cost of labor and rent and increases competition, thereby lowering profits, so much so that the ruination of a country is actually in the best interests of the third class”[6]
It is interesting to note here that economic expansion “raises the value of land” but it is uncertain how long the values of land can go higher and how exactly the profits increase unless the property owner is the sole owner, i.e., already paid for and not obtained by a loan. It would seem that profit is “high in poor countries”. Adam Smith takes this an indicator of “ruination of a country”.
A property owner allows a tenant to live in their property for a fee. The renter does not own the property and if the renter quits paying rent they are not allowed to live in the house. Likewise, a mortgage is ‘ownership’ on paper but the bank allows a mortgagee to live in the house as long as the mortgage is paid. In both cases, ownership is not sole or absolute – it is contingent on paying a periodic fee. So, the landlord or the bank cooperates with the individual in the interest of capitalizing on the financial arrangement. It should also be noted that the bank and the landlord are likely to be indebted themselves to the third class, “those who live by profit”; the financiers, that Adam Smith writes of above.
We can see that the renter or the mortgagee is not a property owner in Adam Smith’s notion of property ownership. However, the aspiration of the renter or mortgagee is for property ownership. Since the aspiration of sole ownership is not reality, a group arrangement is made that allows an individual to have shelter until their aspirations can be obtained. However, it is certainly true that most individuals today will never own their house outright. Therefore, in reality they will live their whole lives working and cooperating in group economic, arrangements.
In finance, leverage is the ability of an investor to increase their ‘paper’ holdings based on loans. Again, a group economic arrangement allows investors to obtain securities that they would normally not be able to afford. As such, the investor is obligated to a group, cooperative arrangement to leverage their holdings. The question of fees and profit is actually an ancient issue. The Bible explicitly forbids interest or profit on loans (Exodus 22:25–27, Leviticus 25:36–37 and Deuteronomy 23:20–21). These passages state that interest is exploitative. In this sense, those that base their faith on these books would be in perfect agreement with the writings of Karl Marx (at least on this specific topic) and Adam Smith. Exploitation with higher and higher fees for loans on rental and mortgaged property are examples of how the wealthy class, the real property owners, has increased their wealth at the expense of those that are not wealthy. This exploitation has been going on from the beginning. Even Adam Smith recognized the exploitation of labor. This excerpt is from an essay on The Wealth of Nations:
“However, in the negotiation of wages, the worker is at a distinct disadvantage. In the first place, the law prevented him from joining with his follows to bargain (71, 151). Further, the law always favors the masters over the workers (151). Workers are prevented from joining in unions to raise wages, but the masters are not forbidden to unite to lower them; indeed, the law encourages them to do so. This legal inequality particularly angered Smith, who noted that, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices (137).” But when the workers attempt to meet, it “generally end[s] in nothing, but the punishment or ruin of the ringleaders (71).” The inequality is so great that:
Whenever the legislature attempts to regulate the differences between masters and their workmen, its counselors are always the masters. When the regulation, therefore, is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favor of the masters (151).”[7] –Adam Smith
Socialism also recognizes the tendency for exploitation of the worker and tries to address it.
In both socialism and capitalism dues must be paid to benefit. For Christianity[8], capitalism and socialism[9] a main tenant is “He who does not work shall not eat”. Paying your dues is not an option in socialism or in capitalism. Fees are required to participate in the group. The main difference is that in capitalism, according to the ‘theory’ of Adam Smith, individualism as self-interest reigns supreme. The ideal is that the individual worker benefits with private property ownership not the financier. In socialism, the individual worker benefits as well but socialists want to formally recognize ownership of production in a group context – the laborer not the financier. Depending on the type of socialism, the group could mean anything from share holders in a factory to nationalism of a factory. In theory, the individual should benefit in both systems. However, socialism wants to take precautions to ensure that the group of laborers benefit and capitalism viz. Adam Smith acknowledges that in some cases the financiers will benefit at the cost of the laborers. Both systems distribute wealth in one way or another. The fundamental problem that Marx wanted to address with socialism was how the wealthy, the financiers, ended up with all the real private property ownership while the workers, in effect, ended up as indentured slaves barely able to pay their bills. Additionally, in both systems classes are set up in practice.
[1] Adam Smith, Wealth Of Nations, [WN I.ii.2)
[2] The Forgotten Agrarian: Re-Reading Adam Smith, John C. Médaille, http://www.medaille.com/newadamsmith.htm, parenthetical numbers refer to section numbers in the cited Adam Smith work
[3] ibid
[4] Alas, you too young, free-market libertines who rail against the socialists in your rabid individualism – you too are a product of ‘group-think’ – it is called language – you just don’t know your indebtedness yet…
[5] Adam Smith, Wealth Of Nations, [WN I.vi.7-8: p 67]
[6] The Forgotten Agrarian: Re-Reading Adam Smith, John C. Médaille
[7] ibid
[8] II Thessalonians 3:10
[9] In accordance with Lenin’s understanding of the socialist state, article twelve of the 1936 Soviet Constitution states:
In the USSR work is a duty and a matter of honor for every able-bodied citizen, in accordance with the principle: “He who does not work, neither shall he eat.”
In Lenin’s writing, this was not so much directed at lazy or unproductive workers, but rather the bourgeoisie. (Marxist theory defines the bourgeoisie as the group of those who buy the labor-power of workers and engage it in the process of production, deriving profits from the surplus value thus expropriated. Once communism was realized, that is, after the abolition of property and the law of value, no-one would live off the labor of others.)
http://en.wikipedia.org/wiki/He_who_does_not_work,_neither_shall_he_eat