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THE BETRAYAL OF ADAM SMITH
Excerpt from
When Corporations Rule the World
2nd Edition
by David C. Korten
It is ironic that corporate libertarians regularly pay homage to Adam Smith as
their intellectual patron saint,
since it is obvious to even the most casual reader of his epic work The Wealth of
Nations that Smith would
have vigorously opposed most of their claims and policy positions. For example,
corporate libertarians
fervently oppose any restraint on corporate size or power. Smith, on the other
hand, opposed any form of
economic concentration on the ground that it distorts the market's natural ability
to establish a price that
provides a fair return on land, labor, and capital; to produce a satisfactory
outcome for both buyers and
sellers; and to optimally allocate society's resources.
Through trade agreements, corporate libertarians press governments to provide
absolute protection for the intellectual
property rights of corporations. Smith was strongly opposed to trade secrets as
contrary to market principles and would
have vigorously opposed governments enforcing a person or corporation's claim to
the right to monopolize a lifesaving drug
or device and to charge whatever the market would bear.
Corporate libertarians maintain that the market turns unrestrained greed into
socially optimal outcomes. Smith would be
outraged by those who attribute this idea to him. He was talking about small
farmers and artisans trying to get the best price
for their products to provide for themselves and their families. That is
self-interest, not greed. Greed is a high-paid
corporate executive firing 10,000 employees and then rewarding himself with a
multimillion-dollar bonus for having saved
the company so much money. Greed is what the economic system being constructed by
the corporate libertarians encourages
and rewards. [See An Economic System Dangerously Out of Control .]
Smith strongly disliked both governments and corporations. He viewed government
primarily as an instrument for extracting
taxes to subsidize elites and intervening in the market to protect corporate
monopolies. In his words, "Civil government, so
far as it is instituted for the security of property, is in reality instituted for
the defense of the rich against the poor, or of those
who have some property against those who have none at all.'' Smith never suggested
that government should not intervene to
set and enforce minimum social, health, worker safety, and environmental standards
in the common interest or to protect the
poor and nature from the rich. Given that most governments of his day were
monarchies, the possibility probably never
occurred to him.
The theory of market economics, in contrast to free-market ideology, specifies a
number of basic conditions needed for a
market to set prices efficiently in the public interest. The greater the deviation
from these conditions, the less socially
efficient the market system becomes. Most basic is the condition that markets must
be competitive. I recall the professor in
my elementary economics course using the example of small wheat farmers selling to
small grain millers to illustrate the
idea of perfect market competition. Today, four companies--Conagra, ADM Milling,
Cargill, and Pillsbury--mill nearly 60
percent of all flour produced in the United States, and two of them--Conagra and
Cargill--control 50 percent of grain
exports.
In the real world of unregulated markets, successful players get larger and, in
many instances, use the resulting economic
power to drive or buy out weaker players to gain control of even larger shares of
the market. In other instances,
"competitors" collude through cartels or strategic alliances to increase profits
by setting market prices above the level of
optimal efficiency. The larger and more collusive individual market players
become, the more difficult it is for newcomers
and small independent firms to survive, the more monopolisitic and less
competitive the market becomes, and the more
political power the biggest firms can wield to demand concessions from governments
that allow them to externalize even
more of their costs to the community.
Given this reality, one might expect the neoliberal economists who claim Smith's
tradition as their own to be outspoken in
arguing for the need to restrict mergers and acquisitions and break up
monopolistic firms to restore market competition.
More often, they argue exactly the opposite position--that to "compete" in today's
global markets, firms must merge into
larger combinations. In other words, they use a theory that assumes small firms to
advocate policies that favor large firms.
Market theory also specifies that for a market to allocate efficiently, the full
costs of each product must be born by the
producer and be included in the selling price. Economists call it cost
internalization. Externalizing some part of a product's
cost to others not a party to the transaction is a form of subsidy that encourages
excessive production and use of the product
at the expense of others. When, for example, a forest products corporation is
allowed to clear-cut government lands at
giveaway prices, it lowers the cost of timber products, thus encouraging their
wasteful use and discouraging their recycling.
While profitable for the company and a bargain for consumers, the public is
forced, without its consent, to bear a host of
costs relating to water shed destruction, loss of natural habitat and recreational
areas, global warming, and diminished future
timber production.
The consequences are similar when a chemical corporation dumps wastes without
adequate treatment, thus passing the
resulting costs of air, water, and soil pollution to the community in the form of
health costs, genetic deformities, discomfort,
lost working days, a need to buy bottled water, and the cost of cleaning up
contamination. If the users of the resulting
chemical products were required to pay the full cost of their production and use,
there would be a lot less chemical
contamination in our environment, our food and water would be cleaner, there would
be fewer cancers and genetic
deformities, and we would have more frogs and songbirds. If the full cost of
producing and driving cars were passed on to
the consumer we would all benefit from a dramatic reduction in urban sprawl,
traffic congestion, the paving over of
productive lands, pollution, global warming, and depletion of finite petroleum
reserves.
There is good reason why cost internalization is one of the most basic principles
of market theory. Yet in the name of the
market, corporate libertarians actively advocate eliminating government regulation
and point to the private cost savings for
consumers while ignoring the social and environmental consequences for the broader
society. Indeed, in the name of being
internationally competitive, corporate libertarians urge nations and communities
to increase market distorting
subsidies--including resource giveaways, low wage labor, lax environmental
regulation, and tax breaks--to attract the jobs
of footloose corporations. An unregulated market invariably encourages the
externalization of costs because the resulting
public costs become private gains. In the end it seems that corporate libertarians
are more interested in increasing corporate
profits than in defending market principles.
The larger the corporation and the "freer" the market, the greater the
corporation's ability to force others to bear its costs and
thereby subsidize its profits. Some call this theft. Economists call it "economies
of scale."
Neva Goodwin, ecological economist, head of the Global Development and Environment
Institute at Tufts University, and an
advocate of cost internalization, puts it bluntly. "Power is largely what
externalities are about. What's the point of having
power, if you can't use it to externalize your costs--to make them fall on someone
else?"
Corporate libertarians tirelessly inform us of the benefits of trade based on the
theories of Adam Smith and David Ricardo.
What they don't mention is that the benefits the trade theories predict assume the
local or national ownership of capital by
persons directly engaged in its management. Indeed, these same conditions are
fundamental to Adam Smith's famous
assertion in The Wealth of Nations that the invisible hand of the market
translates the pursuit of self-interest into a public
benefit. Note that the following is the only mention of the famous invisible hand
in the entire 1,000 pages of The Wealth of
Nations.
By preferring the support of domestic to that of foreign industry, he [the
entrepreneur] intends only his
own security, and by directing that 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.
Smith assumed a natural preference on the part of the entrepreneur to invest at
home where he could keep a close eye on his
holdings. Of course, this was long before jet travel, telephones, fax machines,
and the Internet. Because local investment
provides local employment and produces local goods for local consumption using
local resources, the entrepreneur's natural
inclination contributes to the vitality of the local economy. And because the
owner and the enterprise are both local they are
more readily held to local standards. Even on pure business logic, Smith firmly
opposed the absentee ownership of
companies.
The directors of such companies, however, being the managers rather of
other people's money than of
their own, it cannot well be expected, that they should watch over it with
the same anxious vigilance
with which the partners in a private copartnery frequently watch over their
own .... Negligence and
profusion, therefore, must always prevail, more or less in the management
of the affairs of such a
ompany?
Smith believed the efficient market is composed of small, owner-managed
enterprises located in the communities where the
owners reside. Such owners normally share in the community's values and have a
personal stake in the future of both the
community and the enterprise. In the global corporate economy, footloose money
moves across national borders at the speed
of light, society's assets are entrusted to massive corporations lacking any local
or national allegiance, and management is
removed from real owners by layers of investment institutions and holding
companies.
It seems a common practice for corporate libertarians to justify their actions
based on theories that apply only in the world
that by their actions they seek to dismantle. Economist Neva Goodwin suggests that
neoclassical economists have invited
this distortion and misuse of economic theory by drawing narrow boundaries around
their field that exclude most political
and institutional reality. She characterizes the neoclassical school of economics
as the political economy of Adam Smith
minus the political and institutional analysis of Karl Marx:
The classical political economy of Adam Smith was a much broader, more
humane subject than the
economics that is taught in universities today.... For at least a century
it has been virtually taboo to talk
about economic power in the capitalist context; that was a communist
(Marxist) idea. The concept of
class was similarly banned from discussion.
Adam Smith was as acutely aware of issues of power and class as he was of the
dynamics of competitive markets.
However, the neoclassical economists and the neo-Marxist economists bifurcated his
holistic perspective on the political
economy, one taking those portions of the analysis that favored the owners of
property, and the other taking those that
favored the sellers of labor. Thus, the neoclassical economists left out Smith's
considerations of the destructive role of
power and class, and the neo-Marxists left out the beneficial functions of the
market. Both advanced extremist social
experiments on a massive scale that embodied a partial vision of society, with
disastrous consequences.
If corporate libertarians had a serious allegiance to market principles and human
rights, they would be calling for policies
aimed at achieving the conditions under which markets function in a democratic
fashion in the public interest. They would be
calling for an end to corporate welfare, the breakup of corporate monopolies, the
equitable distribution of property
ownership, the internalization of social and environmental costs, local ownership,
a living wage for working people, rooted
capital, and a progressive tax system. Corporate libertarianism is not about
creating the conditions that market theory argues
will optimize the public interest, because its real concern is with private, not
public, interests.
