Group 5: The Development of Exploitation: Capitalism

Adam Smith’s Approach to Classical Economics

Introduction:

Smith comprehended and analyzed the deepest levels of the developing industrial economy. By doing so he provided a solution to the problem of the organization and control of the economic system. Through numerous works and specifically through the Wealth of Nations he inquires into the significance for economic policy. His work has been used through the ages and continues to be critiqued and followed currently.

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Smith’s Synoptic and Synthetic System:

Smith’s dual vision of a synoptic view intertwined with a synthetic way of thinking led to an extensive comprehension. What many times went under looked and lost significance was the moral philosophical approach Smith possessed. This encompassed four realms of thought and action: Natural theology, ethics, justice and jurisprudence, and expediency. By breaking down the moral, market, and legal orders into distinguishable interacting subprocesses of a larger whole it becomes clearer of their operation and explanation.

His view of the individual and their unique role in a greater society was a synthesis that led to many forces; including, self-love, self-interest, self-command, sympathy, benevolence, moral rules, and legal control. This individual thought and behavior represented that choices in society were both deliberate and non-deliberate. Society’s interaction with the individual and its role in exhibiting tendencies toward both harmony and conflict, with tension between them, clearly exemplified individual choice. It also exemplifies that no society is ever in a fully spontaneous harmony.

This deductive reasoning and his factual inductive arguments lead to an essentially modern, underdeveloped, theory of society. His work emphasizes the importance of recognizing there are inevitable interactions, tensions, and problems which are the characteristics of working out the solutions to the problem of order. These attributes are the most important with his analysis of market and power in their relation to freedom and control. While doing this one must also regard his analysis of moral rules, law, and institutions generally to comprehend his political economic system for all of its value.

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Interdependence and Tensions:

Adam Smith viewed the market as a regulatory system, itself an institution of social control. The invisible hand theory promotes itself to control individual conflicts and the excesses of competition. This led to a safeguard of the public goods through healthy competition. “The market above all is an institutional mechanism to compel men to pursue self-interest in social rather than anti-social ways.” He does understand the self-regulatory character of the market but emphasizes the importance and how the heavier insight should fall on the regulation of self-interest by the market.

He clearly states that it is not in all cases that self-interest is led by an invisible hand to promote public interest, but in many cases. The underlying message being that pursuit of self-interest does not always promote the interest of society, but frequently. This insight led Smith to believe the market, as a regulatory system is a new discovered institution of social control. His scheme preached voluntary exchange and its only place of action being under legal and moral rules as well as the market.

One of the most fundamental argument in which Smith presents is that institutions, including moral and legal rules, function as social control. This analysis leads to deeper insight on institutions governing distribution. This was led by his concern with the social gains and the costs of division of labor, concluding that institutions govern their distribution among classes. Hence, institutions are given the ability to govern whose liberty is to be achieved. It is the combination of morality and law in the market to regulate the detailed realities of freedom and of exposure to freedom.

His model is one of controlled freedom which takes place through socially established norms of conduct. This controlled freedom sets the personal foundation of his individual and moral economic theory. This elevates the individual to be the prime element in the economic system. He does not only operate within a moral and legal framework, but it is also a socialized or moralized individual. His model provides both self-interested behavior and the control of self-interest by moral and legal rules.

Social control is created through the operation of individual conscience and of social conscience as they interact together. The impartial spectator principle sets the moral rules and customs which serve as social bond, but the principle depends for its content on already internalized social control.

Smith’s aspect of social conditioning involves individuals preferences are endogenously determined with the economic system. They serve as the moralizing and socializing processes which help define self-interest, leading to the proper objects of vanity. Institutions help form the incentive and reward system of individuals. These institutions are not inevitable, but as subject to re-design and change, as the product of past choice and subject to revised choices.

The Smithian model “sets the individual as the prime element in the economic system, but the individual exists and acts only within the evolving moral, legal, and institutional framework as a socialized individual;” leading to both individual choice and social force. His complex vision of businessmen versus consumers emphasizes the critical role of the business class in regard to the organization and direction of production and thereby growth.

These points lead to the central topic of the evolution of legal and moral rules and institutions. “Moral and legal rules evolve through the principles of approbation and disapprobation operating through the impartial spectator principle, expressing a refined sympathy and moral sensibility, as part of the larger evolving system.”

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Smith's Main Points:

• The free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods.

• If a product shortage occurs creating a profit margin this creates an incentive for others to enter production, eventually curing the shortage.

• If too many producers enter the market, the increased competition among manufacturers and increased supply would lower the price of the product to its production cost, setting the "natural price.”

• As profits are zeroed out at the "natural price," there would be incentives to produce goods and services, as all costs of production, including compensation for the owner's labor, are also built into the price of the goods.

• If prices dip below a zero profit, producers would drop out of the market; if they were above a zero profit, producers would enter the market.

• Smith believed that while human motives are often through self-interest, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services.

• He was wary of businessmen and argued against the formation of monopolies.

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Smith’s Input on Capitalism:

The theoretical elaboration of the ethical framework of classical capitalism as formulated by Adam Smith in the reaction to the dominant mercantilism of his day is difficult to compare to society today. Over time, the various dysfunctions of a capitalist economy became manifest and the utilitarian ethical basis on the system eroded. Contemporary capitalism, dominated as it is by large corporations, entrenched political interests and persistent social pathologies, and is lacking a resemblance to the system which Smith envisioned would serve the common individual.

Moreover, Smith did not write about ‘competition on capitalist markets’, nor did he deny ‘real consequences of capitalist development’, for the simple reason ‘capitalism’ was a 19th century, not a mid-18th century phenomenon. Smith wrote about market transactions, how they had evolved from the division of labor since pre-history, and how they fitted in with the conditions for social-harmony that he expounded at length in Moral Sentiments.

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Classical Economics Impact on the Exploitation Theory

Introduction:

The Exploitation Theory states that capitalism is a system of virtual slavery, where it focuses on serving the narrow interests of a comparative handful of businessmen and capitalists. Whom in which driven by their own self interest of greed and power only drain and exploit the labor of the masses. Marxists believe that people attribute economic progress to labor unions and social legislation, yet capitalism is not being attributed for the rise in the standard of living, but the infringements which have been made on capitalism are being credited, which is not the case. Many believe classical economics sets the structure for the exploitation theory, which is examined below.

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The Framework of the Exploitation Theory:

Three aspects within classical economics contribute to the exploitation theory. These being the labor theory of value, the iron law of wages, and the third being the conceptual framework within which the exploitation theory is advanced. “This framework is the belief that wages are the original and primary form of income, from which profits and all other non-wage incomes emerge as a deduction with the coming of capitalism and businessmen and capitalists.” The framework is based on the assertion of the wage earner’s right to its full value. This is based on the belief that all income is due to the performance of labor is wages and that all who work are wage earners.

Smith’s primacy of wages doctrine is set in a pre-capitalist economy, in which workers produce and sell commodities and do not buy in order to sell. These incomes the workers receive are the workers wages; therefore wages are the original income according to Smith. All income in a pre-capitalist society is supposed to be wages, where no income is profit; this is because workers are the only recipients of income. Smith does realize the coming of capitalism in his corollary doctrine where profit only emerges with the rise of capitalism, which is a deduction of the natural form, which is wages. From these doctrines the conceptual framework of the exploitation theory is posed.

Profits, then, according to Smith, first come into existence only with capitalism, and are a deduction from what naturally and rightfully belongs to the wage earners. Marx and Böhm-Bawerk use these original doctrines of Smith to form their conceptual framework. But classical economics imply that it is wages that are the original form of income and that profits are a deduction from them.

But Smith is wrong, wages are not the primary form of income in production, and profits are. In order for wages to exist in production there must be capitalists present. Their emergence does not bring into existence the phenomenon of profit; instead profit exists prior to their emergence. Their emergence however does bring the phenomena of wages and money costs of production. Therefore the profits which exist in a capitalist society are a deduction from what was originally laborers wages.

These theories lead Karl Marx into seeing all of world history and economics as a being driven by various forms of class exploitation, in sometimes better and sometimes worse contexts. The exploitation theory shows that if one were to compare Marx's "alienated labor" and "capital", for example, one would see a definite change in his perspective on the way in which capitalism works upon the laboring class. However, one central idea remains relatively consistent through his writings, which being a firm belief in the capitalist's exploitation of the working class stemming from the inherent inequality between the worker's wage and the selling price of his product, which became the profit of the capitalist. Therefore the capitalist system is one of the exploitation of labor.

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A Radical Perspective of Capitalism

Capitalism affects Liberty

• Private property is like a private form of state
• Owner determines what goes on with the area he/she owns, exercises monopoly power over it
• When power exercised over oneself source of freedom, in capitalism is the source of coercive authority (Bob black)
• “A worker is like a part-time slave. The boss says when to show up, when to leave, and what to do in the meantime. He tells you how much work to do and how fast.”
• Democratic state unlike company can be influenced by citizens, who can some ways limit the power of the ruling elite
  1. Which is why wealthy dislike democratic aspects of the state
• Contempt for democracy does not mean capitalists are anti-state
  1. Capitalists depend on the state
  2. Capitalists call upon and support the state when it acts in their interest and supports their authority

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Capitalism is based on Freedom?

• Capitalist workplace profoundly undemocratic
• Psychological traits most desirable for average citizens and employees who want to survive in corporate hierarchy
  1. Efficiency, conformity, emotional detachment, insensitivity
• For “non average” citizens (ie. boses, managers etc) authoritarian traits are required

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Wage Labor voluntary?

• Milton Friedman a Free market capitalist economist believes “individuals are effectively free to enter and to not enter into any particular exchange so every transaction is strictly voluntary…The employee is protected from coercion by the employers because of other employers for whom he can work.”
• Friedman compares Capitalism with simple exchange economy, and states that in a simple exchange economy each household “has the alternative of producing directly for itself and will not enter into exchange unless it benefits from it. Hence no exchange will take place unless both parties do benefit from it.”
• Capitalism however is not based on strictly voluntary transactions as Friedman claims
• Capitalism is based on existence of labor force without its own sufficient capital
  1. The labor force therefore has little choice whether to put its labor in the market or not
  2. Since there is no choice, then there is coercion and wage labor therefore unjust
• Some proponents of Capitalism claim capitalism based on freedom because workers can always quit
  1. However one cannot avoid having a job and freedom means more than the right to change jobs
  2. Under Capitalism workers have only the Hobson’s choice of being governed/exploited or living on the street
  3. For choice to be real, free agreements and associations must be based on social equality of those who enter into them and both must receive roughly equivalent benefit
  4. In Capitalism private ownership over the means of production creates a social hierarchy, coercive authority
  5. Bargaining power that the laborer has is therefore extremely weak

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Disparity of Power and Wealth

• Disparity of power and wealth between the capitalist class and working class shows benefits of “agreements” are far from equal
  1. Walter Block, leading Fraser Institute ideologue takes example of sexual harassment in workplace to illustrate this point
     • Continual sexual harassment between boss and secretary in workplace, is part of the package deal when secretary agrees to take the job, especially when agrees to keep job.
     • This illustrates that all other rights must be subordinated to the right to enjoy wealth in the laboring class
     • Block argues that under private property, only bosses have the freedom to act in this manner
• Capitalists talk about “liberty” provided by capitalism they are alluding to state protected freedom to exploit and oppress workers through ownership of property
• Leads to disparity of wealth and grants the capitalist class power and privilege

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Capitalism and Self Ownership

• Capitalists do not pay employees for “vital activities” unless firm requires workers to undertake in these activities to increase company profits
• “Vital activities” – learning, valuing, choosing ends and means
• When workers engage in vital activities during company time are hampered by coercive molestation
• Wage labor therefore denies rights associated with self ownership
• As Michael Bakunin expresses “worker sells his person and his liberty for a given time under capitalism
• In a society of relative equals, private property would not be a source of power
• In system of wage labor like Capitalism, private property is a source of institutionalized power through hierarchy
• When property is purely a possession it is not a source of power (something that you use)
• “Property rights” no longer coincide with these use rights, so they therefore become a denial of freedom and a source of authority
• Only workers’ self management of production not capitalism, can make ownership a reality
• To sell labor time and right to appropriate product its product violates Ellerman’s “juridical principle of imputation,” which states that people should always be responsible of the results of their actions
• Wage labor goes against this theory because it allows the capitalist to be the last owner of the workers time and therefore makes the worker the legal instrument of the capitalist
• Capability theory of justice by Nussbaum further illustrates the injustice of wage labor as it judges capitalism on not happiness but to its ability to create a fully realized human nature
  1. In capitalism workers do not appropriate the output their labor helps to create they are not legally responsible for their actions. Therefore capitalist production is inconsistent with a fully realized human nature.

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Effects of Wealth Disparity

• Disparity of wealth leaves a handful in control of the vast majority of wealth depriving others of a means of life
• Existence of labor market depends on worker being separated from means of production
  1. Vast majority sell their labor to those who own the means of production (capitalist class)
  2. In advanced capitalist countries less than 10% of population is self employed

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Power Dynamic of the Capitalist Class

• Some argue that the threat of unemployment is not that great because workers will eventually find work, and that unemployment is not long term
• However in times of economic misfortune, workers often must redeploy fast or starve, causing them to take lower wages then they would usually
• This action often leads to a worsening of a recession as well as increasing the length
• Capitalist have three distinct advantages on the on the free labor market
  1. Property owners have the backing of the law and state
     • Ex. When workers go on strike or use other forms of direct action (even when try to form a union) capitalist has full backing up state to
       1. Employ scabs, break picket lines, fire the ring leaders
       2. Gives employers the greater bargaining power and stifles workers likelihood to stand up and lobby for their rights
  2. Structural Unemployment
     • Existence of unemployment over most of business cycle gives capitalist class structural advantage in the labor market
       1. Generally more candidates than jobs available
     • “Competition in the labor markets is typically skewed in favor of employers: It is a buyers market and in a buyers market it is the sellers who compromise” (Juliet B. Schor, The Overworked American, p. 71)
     • This great threat of unemployment and hardships that come along with it cause workers to accept jobs where wages are less than fair, and submit to their bosses power while employed
     • Unemployment rate raises cost of losing a job which makes a worker less likely for workers to strike, join unions, lobby for their rights
  3. Wealth
     • Capitalist has more resources to fall back on during strikes and while waiting to find employees
       1. Large companies with many factories can swap production to other factories
       2. Capitalists therefore can hold out longer than the worker during a strike, placing them in a higher bargaining position

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Conclusion

• Strong Critique to capitalism however does not provide a better system
• Labor managed Firms
  1. Provide an alternative, however seem to be not feasible as a widespread occurrence
  2. However success in some of labor managed firms in Europe provides some hope (Mondragon in Spain)

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Created by: Matthew Kurteson & Paolo Boero

Sources

• Black, Bob "The Abolition of Work." Loompantics Unlimited 1985
• Burczak, Theodore R. "Socialism After Hayek." University of Michigan Press (15 Nov 2006)
• Friedman, Milton "Capitalism and Freedom." University of Chicago 1982
• Carson, Kevin A. "The Iron First Behind the Invisible Hand." Red Lion Press 2001
• Korten, David C. "When Corporations Rule the World." 2nd Edition
• Reisman, George "Classical Economics vs. The Exploitation Theory." 1/24/05
• Samuels, Warren J. "The Political Economy of Adam Smith." Ethics, Vol. 87, No. 3, Apr.1977, 189-207