Book Cover

Capitalism,  The Way to a World of Peace and Plenty


Adam Smith: A World of Plenty  

Students from the earliest age should know the meaning of “free markets” and Adam Smith’s conditions for their success. They will learn that he was a friend of the worker and not an apologist for greed.

Adam Smith (1723-1790) was born in Kirkaldy, Scotland. He studied at Oxford and then lectured in Edinburgh until he was appointed professor of moral philosophy at the University of Glasgow. Smith spent the first part of his life studying and writing about the human instinct for trust and cooperation, reflected in his book The Theory of Moral Sentiments (1759). Hoow selfish soever man may be supposed there are evidently some principles in his nature, which interest him in the fortune of others, and renders their happiness necessay to him. Though he derives nothing formit, except the pleasure of seeing it.”  He then spent the second part of his life studying and writing about how economic freedom could improve all lives if money was a simple medium of exchange, and speculators (“prodigals and projectors,” as Smith called them) had limits on borrowed money.

On a tour of the Continent in 1764, Smith met with the French Enlightenment, including the physiocrats who had written on decentralized economic theory, Jacques Turgot who had written on wealth creation and distribution, and Voltaire who had earlier brought back from his banishment to England the contributions of Francis Bacon. Newton, and Locke. Smith then returned to Great Britain where he spent ten years writing An Inquiry into the Nature and Causes of the Wealth of Nations, in which he  presented humans with the first understanding of an economic system that could provide adequate food, shelter, clothing, education, and good health.

Smith described an economic perpetual motion machine in which motivated workers were coupled with the technology of the Industrial Revolution to reduce cost; competition would drive the price down to a level affordable by new consumers; increased demand would generate more jobs; wages of additional workers would add to demand for products; the rising volume would produce another iteration of cost reduction through economies of scale, and the wealth-spreading cycle would continue:

Little else is required to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.

Smith’s dynamic depended on wages high enough to motivate workers and sufficient for purchases beyond mere subsistence.
Where wages are high we shall always find the workman more active, diligent and expeditious, than when they are low.  

Smith knew that the privileged would write rules for personal gain at the expense of the public good:

The proposal of any new law or regulation of commerce from this order ought to be listened to with great precaution It comes from an order of men, who have generally an interest to deceive and even oppress the public.

Smith, the friend or the worker and critic of corporations, was still described as a person who “gives new dignity to greed and glorifies economic irresponsibility.” 

This exploitive capitalism continued to be the public face of capitalism while the participative mode struggled to grow on its own economic logic. Because of lack of understanding of Smith’s conditions, the government has persistently allowed speculation with borrowed money cause asset inflation, recessions, and concentrated wealth. The worst violations of Smith’s conditions, however, came in the last quarter of the 20th century when much of the financial function was moved from the regulated banks to the unregulated brokerages firms. The “ideologues of the liberalization of capital markets” both Democrats and Republicans, successfully resisted regulation of this non-bank lending and also rescinded regulations such as Glass Steagall. In 2008, Citi bank paid $1.6 billion to settle a law suit because their commercial bankers had loaded Enron with borrowed money in order for their investment bankers to get lucrative deals, exactly what Glass Steagall in the 1930s was designed to prevent.

America entered into a “financialization” phase in which finance capitalism dominates rather then supports the economy. For example, credit derivatives shifted the loan risk to parties too far removed to judge the quality. These new instruments of finance grew from  $5 trillion in ‘01, to an estimated $33 trillion in ‘08.

In 2003 the Wall Street Journal in an editorial attacked Warren Buffett’s calling  derivatives “time bombs both for the parties who deal in them and for the economy.” The WSJ called them “little miracles of financial engineering,” with benefits including shifting risk, adding liquidity, and a “reduction of the risk of failure at one or more major institutions.” Don’t tell that to the ex-employees of Bear Stearns or other victims of the recession and credit crisis.  

In 2008, some politicians argue that if the government is going to bail out brokerage firms, like banks, then the same preventive regulations should be applied. Others still treat deregulation as an ideological goal. The fundamental error is a misapplication of Smith’s free market theory that leave it alone and it will seek equilibrium.
This I true in commerce where the interaction of prices, costs, and volume will modify the cycles. It is not true in financial services nor was it ever expected to be. Financial services need regulation they do not respond to cycles.

Ray CareyRay Carey

Ray Carey learned through managing companies for 33 years how to change the work culture to provide employees with their best opportunities to develop and contribute. This experience began as a 28 year old plant manager and later president of an electric motor company, and concluded with eighteen years as president , chairman, and CEO of ADT, Inc.

See Carey's autobiography of his work career in chapter two of his first book,

Democratic Capitalism, The Way to a World of Peace and Plenty.

For more information about Ray Carey and his advocacy of democratic capitalism, visit the pages of this website.