The Classical Liberal Political Tradition: Adam Smith v. Karl Marx James R. Otteson Department of Philosophy University of Alabama

Part I: What is political philosophy? Fundamentally, it is the attempt to answer one question: What kind of government should we have? There are lots of choices: Democracy, aristocracy, monarchy, constitutional republic. Classical liberal, socialist. What criteria are there by which to judge competing candidates?

Here is one criterion: expediency. Niccolò Machiavelli (1469-1527): beginning of ‘modern’ political thought. The state as power and as means. Which state more effectively gets you what you want?

A second criterion: appropriateness. Thomas Hobbes (1588-1679): the ‘social contract’ tradition. Humans are inherently competitive, distrustful, and vainglorious—and therefore violent. We should contract for peace by enacting an all-powerful “leviathan” to keep us in line.

A third criterion: legitimacy. John Locke (1632-1704): the ‘principled’ case for classical liberalism. Freedom and equality. Natural rights to life, liberty, and property. No slavery! The American founding.

A fourth criterion: prosperity. Adam Smith (1723-90): the father of economics. The ‘economic’ or ‘consequentialist’ case for classical liberalism. Markets and trade lead to prosperity.

Part II: “Classical Liberalism” Pre-political individuality. Individual’s priority over the state. Natural freedoms and natural rights. Private property. Consent. Limited government. Revolution.

Smith’s Inquiry into the Nature and Causes of the Wealth of Nations (1776) Division of labor: Increases dexterity by focusing attention. Saves time. Promotes invention of time- and labor-saving “machines.” Key: The division of labor exploits local knowledge.

Other central elements of WN: “universal opulence.” “It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people.” Specialization leads to surplus. Increasing goods = decreasing prices. Everyone can afford more. Smith: “a general plenty diffuses itself through all the different ranks of the society.”

Trade: mutual cooperation and benefit. “In a civilized society [man] stands at all times in need of the co-operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.” “[Man] has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them.” “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.”

Markets: the more, the better. Markets “encourage every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess.” In markets, “the most dissimilar geniuses are of use to one another; the different produces of their respective talents […] being brought, as it were, into a common stock, where every man may purchase whatever part of the produce of other men’s talents he has occasion for.” Markets = choices = freedom & diversity.

Local knowledge and the “invisible hand.” “As every individual, therefore, endeavours as much as he can …to direct [his] industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can.” “. . . 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.”

Part III: Adam Smith v. Karl Marx In 1848, Karl Marx and Friedrich Engels published their Manifesto of the Communist Party.

Here are Marx (1818-1883) and Engels (1820-1895):

Marx’s Predictions from the Manifesto: 1. Adam Smithian-style “political economy” will concentrate power and property in the hands of a few and eventually create a society of only two classes—the propertied and the propertyless. 2. Under the “ideologies” of “free trade” and “free competition,” it will enslave the worker; workers will have few or no rights or powers against employers.

Marx’s predictions (cont’d.): 3. Over time workers’ wages will steadily decline to “subsistence” levels, and their standard of living will hence also decline. 4. We will be better off if, instead of leaving matters to greed-driven and alienating “market forces,” the “most advanced and resolute” intellectuals “wrest” in a “despotic” fashion “all capital from the bourgeoisie” and “centralise all instruments of production in the hands of the state.”

Smith makes the opposite prediction in each case: 1. The “obvious and simple system of liberty” will enable more and more people to ascend out of poverty, creating a large and thriving middle class. 2. Free trade, free competition, and the abolition of special privileges (like state-enforced monopolies) allow increasing economic prosperity for everyone, including workers.

Smith’s predictions (cont’d.): 3. Over time, employer competition will lead to steadily increasing wages, benefits, and overall standards of living. 4. Because prosperity depends on people exploiting their local knowledge, decentralized or “free” markets will precipitate greater prosperity than centrally-planned economies will.

So . . . Who’s Right? Smith or Marx? Smith is. On every count.

Take the case of America: The middle class dominates American economics. Think Wal-Mart and Ford vs. Cartier’s and Jaguar. Over the last two centuries, working conditions in America have steadily improved. These conditions are now at previously unimaginable levels—and dramatically better than that of most other countries today.

Some evidence of improvement over time: A 3-minute phone call from New York to San Francisco cost 90 hours of labor in 1915; in 1999 it cost 1.5 minutes. Three hearty meals in 1919, 9.5 hours; today, 1.6. Housing cost 7.8 hours of work psf in 1920; today, 5.5—and with much higher quality and better amenities (including indoor plumbing, central heating, etc.). In 1900: scissors, $67; baby carriage, $913; bicycle, $2,222; telephone, $1,202.

In America (cont’d.): Markets and competition have led to unprecedented economic growth, steadily falling prices, and substantially higher standards of living. Think of computer prices and indoor plumbing. Freud, soap, and civilization. Workers’ wages, benefits, and standards of living are arguably better here than anywhere else in the world—and certainly better than most places in the world.

More generally: Free-market-based economies have dwarfed centrally-planned economies in productive power. We now know, for example, that the impressive numbers produced during the Cold War by the Soviet Union were often pure fabrications or gross distortions. How many tanks were built does not equal economic prosperity, especially if they’re just sitting around rusting. Free economies have led to prosperity for everyone—including especially the poor, who are far better off in market-based economies than in centrally-planned economies.

Consider: In the early 1900s, only the super-rich had automobiles. Today, over 90% of American households have cars; 60% have two or more. America may soon be the first nation with more automobiles than people. The same holds true with most necessities, especially food, clothing, and shelter: they have gotten cheaper, and their quality has increased.

Another fact: Americans today have more leisure time than any generation of Americans has ever had. One principal indicator of this: Americans spend on average 35 hours per week just watching TV! And don’t forget: one of the main health problems facing the poorest part of America’s population today is not lack of food but . . . Obesity!

Conclusion: Markets and competition have enabled us to work far less for our necessities and yet afford far more. Thus our standard of living is far higher than that of previous generations—and getting better all the time.

Now, an Objection: America’s increasing prosperity seems correlated with increasing economic regulation by the government. Might it be, then, that the prosperity is due to government intervention in markets, rather than just to markets?

Answer: It would appear not. A wide array of evidence suggests that government control of markets is inversely correlated with economic prosperity: the more regulation, the less prosperity; and vice-versa. Evidence: the freer the markets in a country, the more it protects private property, and the lower its trade barriers and taxes, the higher its overall prosperity. Thus: classical liberalism = prosperity.

From the Economic Freedom Index 2003 (Gwartney, Lawson, et. al.) Economists have studied the correlation between economic freedom and economic prosperity in 123 countries worldwide over the course of several decades. “Economic freedom” = approximating Smith’s recommendations of protecting private property; maintaining low taxes, tariffs, and duties; and minimal interference in economic markets. There are striking, statistically significant correlations.

The economic freedom rankings of selected countries:

Economic freedom and monetary prosperity. The correlation between regulation and per-capita income. Notice: the difference between the bottom and top quintiles is nearly a ten-fold factor.

Economic freedom and growth. A striking correlation between government regulation and economic growth (as % rate of GDP increase or decrease):

Economic freedom and overall quality of life. The correlation between economic freedom and UN’s “Development Index,” a combined measurement of: life expectancy, adult literacy rates, school enrollment, and per-capita incomes.

Quality of life, take two. This represents life expectancy as correlated with economic freedom. Note: the difference between the top and bottom quintiles is a full twenty years.

Quality of life, take three. Levels of child malnutrition (as % of children underweight) measured against economic freedom.

Quality of life, take four. This is economic freedom rated against access to health care.

Food Economic freedom against cereal yield in kg/hectare (hectare = 10,000 sq. m. ≈ 2.47 acres). Implication: freer countries tend to produce more food.

Response to objection: Economic freedom is not all or nothing: it admits of degrees. The countries that fall along the spectrum of economic freedom track prosperity with a high degree of statistical significance. The more government economic regulation, the less prosperity; and vice-versa. This holds true for a number of variables:

Economic freedom tracks positively with increases in: Money, both as per-capita income and real economic growth Life expectancy Infant survival Child nutrition Literacy Food production Health care Access to safe water Percentage of GDP dedicated to research and development Political stability

Another Potential Problem: Poverty. How do markets affect the poor? According to a March 2001 study by the World Bank, which looked at data from 137 countries: “Private property rights, fiscal discipline, macro stability, and openness to trade increases the income of the poor to the same extent that it increases the income of other households in society” (emphasis added). The report specifically adds that this is not a “trickle-down” process: the benefits for rich and poor are created “contemporaneously.”

Capitalism and poverty, take two. World Bank: Smithian policies correlate with rising income among the poor more than do “government social spending, formal democratic institutions, primary school enrollment rates, and agricultural productivity.”

Capitalism and poverty, take three. World Bank: “Reducing government consumption and stabilizing inflation are examples of policies that are ‘super-pro-poor.’” They disproportionately benefit the poorest quintile in a country. That means that reducing government spending, not increasing it, helps the poor.

Government consumption and poverty. The following graph represents the economic effects of various policies on the poor. Note that government spending negatively affects them.

From the World Bank (2001):

Capitalism and poverty, take four. The World Bank report continues: “Social spending as a share of total spending has a negative relationship to income share of the poor that is close to statistical significance” (emphasis in the original).

Evidence from the Economic Freedom Index supports the same conclusion: The first graph shows that the share of income going to the poorest 10% of the population is unrelated to economic freedom. The second graph shows that the poorest 10% earn much more in economically free countries.

Capitalism and poverty, final take. Since 1965, the United States has spent $5.4 trillion in its War on Poverty. $20,000 for every man, woman, and child. According to World Bank study, it has been no significant benefit to the poor. U.S. poverty statistics. A negative effect? $5.4 trillion that would have been in the private sector, stimulating economic growth that might have helped the poor?

From the World Bank (2001):

Smith v. Marx: Both Smith and Marx have had great influence on the subsequent history of the world. Smith’s influence has been almost universally beneficial, especially for the poor. In the U.S.: both “rich” and “poor” are getting richer; “poor” at faster rate (Dallas Federal Reserve, 1995). Marx’s influence, however, has not been so beneficial . . .

Part IV: Marx’s influence: All the places where Marxian economic ideas have been implemented have suffered terrible consequences. They are all at or near the bottom of the economic freedom ranking, and they are all exceedingly poor. Consider the former USSR, Cambodia, Angola, North Korea, Cuba, Mongolia, or India.

Actual Results: Compare North Korea vs. South Korea.

Actual results, cont’d. Compare China vs. Hong Kong. Compare China vs. Taiwan. Compare Cuba vs. “Little Havana” (Miami). And that is not even considering the approximately one hundred million innocents killed during the twentieth century by their own governments in the name of Marxian ideals.

Consider: Lenin and Stalin. Lenin, 1917-24: 4,017,000 dead. Stalin, 1929-53: 42,672,000 dead. The Soviet slave-labor system under Lenin and Stalin killed almost 40 million people in about 70 years—more than twice as many as killed by 400 years of brutal African slave trade.

Mao Tse-tung. 1927-76: 37,828,000 dead. Higher? Not all records are open to the public yet. Some scholars suspect the final tally will have Mao surpassing Stalin.

Pol Pot. 1968-87: 2,397,000 dead. The most lethal murderer in the twentieth century: 1975-79: killed 8% of his population annually. In under four years, his Khmer Rouge killed 31% of all men, women, and children in Cambodia. The odds of surviving was only 2.2 to 1.

The Cheong Ek mass grave in Cambodia, exhumed in 1980: the “Killing Fields.”

Final Lesson The classical liberal tradition and Adam Smith have a great deal to offer: prosperity and liberty. Indeed, its offerings may literally mean the difference between life and death. A Smithian society will not be perfect—no society ever will be—but the evidence suggests that it is superior to any other known alternative.

The twentieth century was a one-hundred-year contest between Smith and Marx.

Smith wins by a knock-out.