This Is the End


Markets, Risk and Human Interaction

February 15, 2012

Adam Smith and Joseph Schumpeter on the Issues of the Day

On the issue of the bifurcation of society and the widening income gap in the U.S., and the strains appearing from the factory system in China that have recently been highlighted, there is useful commentary that comes from a surprising quarter, or perhaps not surprising in itself, but in the view taken on the subject: Both Adam Smith and Joseph Schumpeter, defenders of capitalism as the source of “universal opulence”, see a road leading from capitalism to the disenfranchisement of the worker and the vaulting of the elite.
Adam Smith
Adam Smith is a social philosopher grounded in the search for what is moral and what provides man with the greatest good, with universal opulence. It is to this end that he promotes self-interest as the core of economic exchange, and division of labor as the core of efficient production. But he also admits to unintended consequences of human action and recognizes that government action is required to dampen these negative consequence.
Smith: Political influence
We have no acts of parliament against combining to lower the price of work, but many against combining to raise it. – Adam Smith, The Wealth of Nations

Smith recognizes that workers and employers would jostle for an advantage by using political influence, and he also recognizes that this would be an unfair fight, with the employers having stronger influence and, because they were a far smaller group, being better able to do their lobbying behind closed doors. This was already evident; as he points out, the law prohibited workers from unionizing but allowed employers to organize to keep wages low:

Particular acts of parliament, however, still attempt sometimes to regulate wages in particular trades, and in particular places. Thus the 8th of George III. prohibits, under heavy penalties, all master tailors in London, and five miles round it, from giving, and their workmen from accepting, more than two shillings and sevenpence halfpenny a-day, except in the case of a general mourning. Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.

Competition was stifled through legal restrictions on the freedom to sell commodities and to supply labor. The government legalized monopolies that gave exclusive rights to sell products, and to limit the supply of labor for some occupations through guilds. Smith repeatedly observes that self-interests would be promoted legislatively at the expense of the public whenever and wherever possible, and this would be more successfully accomplished by the wealthy and well-connected “masters” who could peddle their influence largely unseen: Masters...enter into particular combinations to sink the wages of labour....These are always conducted with the utmost silence and secrecy till the moment of execution; and when the workmen yield, as they sometimes do without resistance, though severely felt by them, they are never heard of by other people.

Smith: Regulation
...the clamour and sophistry of merchants and manufacturers easily persuade them, that the private interests of a part, and a subordinate part, of the society, is the general interest of the whole...everywhere finally paid by the landlords, farmers, and labourers.– Adam Smith, The Wealth of Nations

Adam Smith recounts many failings of the market: price fixing (“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.”); trade restrictions and duties extending from towns to international trade; and influence peddling to Parliament.
But it was not the gaming of the economic system, but rather the imposition of the factory system with the resulting long hours of monotonous labor that rose to the issue of greatest concern. Smith holds the view, later expounded by Marx, that men find their individuality and strongest link to society through their labor, and sees in the conditions of the worker a debilitating effect on intellectual and social vitality:
The man whose whole life is spent in performing a few simple operations . . . has no occasion to exert his understanding. . . . He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him, not only incapable of relishing or bearing a part in any conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgement concerning many even of the ordinary duties of private life. . . . It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance, in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.

Here Smith points to the need for government intervention:  the alienation of the masses may be remedied if the “government takes some pains to prevent it”. In particular, Smith proposes universal public schooling, a proposal at variance with the view at the time that education would foment rebellion.

Joseph Schumpeter
Like Adam Smith, Schumpeter views capitalism in positive terms, as a force for improving society and making men better off. And like Smith he sees the emergence of a capitalist elite that will by their economic force ride over the mass of workers. (The growing pains of the Industrial Revolution with farmers and artisans displaced and then engulfed by the factory system was an object lesson that was still only a few generations old when Schumpeter began his academic career). Indeed, his view is that this ultimately will be the demise of capitalism and the rise of socialism. Thus he sees the same end for capitalism as does Marx, but through a path that is largely opposed to Marx's: Not the failure but the success of capitalism, success that is concentrated on the innovative elite, will lead to social revolt.

Schumpeter: The elite
That lambs dislike birds of prey does not seem strange: but that is no reason for blaming the birds of prey for taking the little lambs. And if the lambs say among themselves, "These birds of prey are evil, and whoever is the least like a bird of prey, indeed whoever is its opposite, whoever is like a lamb ―would he not be good?" then there is no reason to find fault with this as an ideal, though the birds of prey may view it with some irony and say to themselves, "We bear no grudge against these good little lambs, we even love them: nothing is more tasty than a tender lamb."  – Nietzsche, On the Genealogy of Morality

Schumpeter's view is rooted in the prevailing social philosophy of his day, a philosophy founded on that of Nietzsche, that supports the role of the elite: Society and capitalism depend on the elite, and the social and political environment should protect the status of the elite, nurture their activities, and even extend their influence in government policy. Schumpeter extolls the elite, the force for capitalist growth, while anticipating the effect of their success on the masses – the implications of the resentment of the many against the wealthy few.

Nietzsche's theme of the elite he thus naturally pairs with another, that of “Ressentiment”: the resentfulness of the inferior for the superior, and the tendency of the many to devalue and even revolt against the successful. (A revolt that in its least disruptive and passive form Nietzsche sees taking the route of Christian faith – Nietzsche argues that Christian meekness and humility is a means for the weak and inferior to feel comfortable in their lot, even to feel morally superior to the elite).  Schumpeter portrays Ressentiment as having an inescapable result; the success of the elite, especially levered by the capitalist system, leading to an increasing disparity with the masses still stuck in the status quo with their condition perhaps improving in absolute terms, but not, as is most important for the survivability of capitalism, in relative terms.

Thus, like Marx, Schumpeter argues that capitalism creates its own opposition. But according to Schumpeter, that opposition comes not from the existential impoverishment and alienation of the worker but from the resentment created by the successes of the very wealthy. It is in this way that Schumpeter, though through an argument in opposition to that made by Marx, comes to same conclusion, that capitalism sows the seeds of its own destruction:

Every social system is sensitive to revolt and in every social system stirring up revolt is a business that pays in case of success and hence always attracts both brain and brawn. It did in feudal times—very much so. But warrior nobles who revolted against their superiors attacked individual persons or positions. They did not attack the feudal system as such. And feudal society as a whole displayed no tendencies to encourage—intentionally or unintentionally—attacks upon its own social system as a whole.
Schumpeter: Education

Broadly speaking, conditions favorable to general hostility to a social system or specific attack upon it will in any case tend to call forth groups that will exploit them. But in the case of capitalist society there is a further fact to be noted: unlike any other type of society, capitalism inevitably and by virtue of the very logic of its civilization creates, educates and subsidizes a vested interest in social unrest.  – Schumpeter, Capitalism, Socialism and Democracy

In contrast to Adam Smith, who advocated for universal education at the expense of the state as a means of lifting up those alienated by the enclosures movement in agriculture and the factory system in industry, Schumpeter sees non-vocational education as a spur to resentment and a threat to capitalism.  “The man who has gone through a college or university easily becomes psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work.” University education “may create unemployability of a particularly disconcerting type” with graduates that are not well trained for any vocation, and end up with jobs and at salaries that they find beneath them. They become discontented, and “discontent breeds resentment” that in turn can lead to revolt. Schumpeter's observations echo those of Voltaire and others in Adam Smith's time who were concerned that education would lay bear their lot and thus magnify the discontent of the lower classes.

Note: This post heavily draws from The Mind of the Market.


  1. Rick, there are other bifurcations that correlate to this one. One of these goes back to the old Cain and Abel story and further. Of course, there are many more (such as, CEOs as a special breed - in their own mind -- some of us see that these types need to awaken to their infantile-ness).

    The thing is that the modern variations on these themes of conflict threaten all of us over a much larger scope than ever before, even to the point of potential harm to the planet's well-being.

    One thing common to these intellectual overlays of our reality is their real lack of power, except that they do trash people (what is labor? I've labored, as a male - and, exalt in my abilities to do so even though I possess what is measured as a superior+ IQ), squish Being (and our selves), and more. By the way, trashing and squishing do demonstrate some ability, but power? No.

    That being said, love your blog. I hope that you keep it up.

  2. I posted this....

    Absolutely! We are a heavily indebted society why not print money? Our dollar would fall so would our levels of debt and we may even see consistent trade surpluses just like the Chinese.

    I do think that this sort of intervention could be a good idea however we may face similar risks to the Chinese. Rather than inflation the risk is likely mal investment.

    The other risk is increasing wealth disparity. Overall inflation may appear low but house price inflation would almost certainly occur and in general inflation robs the poor in favor of the rich. This little fact is not widely spoken but in my view is key to understanding wealth disparity.

    Put simply if you know that some sort of inflation is likely you borrow as much as you can and buy physical assets or shears in physical assets. This obviously heavily favors those with first access to capital. The rich. Continue this policy for decades and those in the know end up with all the stuff. That is where we are now.

    Quite possibly, just like bush fires in Australia an important component of sustainable capitalism is regular washouts. Perhaps not as severe as the great depression but certainly periods of significantly uncertainty and high interest rates would be useful to maintain faith in currency and purpose in investment.

    In addition to what is written above with respect to upwards wealth transfer from the poor to the rich I would like to add that wage earners are in a weak position when it comes to adjusting to inflation and each delay is costly to them. Together, reduced or delayed access to capital and weak and delayed wage adjustment to inflation are a substantial burden for the poor and become effectively a significant subsidy to the rich.

    One can argue that the rich deserve it because of the initiative and creativity they employed to become that way. If they did. However wealth does have somewhat of a tendency to perpetuate itself and does not exist in a vacuum. It is only worthwhile in the greater context of society and it is beholden on society to consider inefficiencies and inequalities that burden its diverse parts.


    And I think it has some relevance.

    Often people, (the rich or members of the elite...), think of themselves as uniquely qualified to be in the desirable position they are in. The reality can be significantly otherwise. They may well have significantly discounted pure luck or a system that is biased heavily in their favor. Malcolm Gladwell described some of this is his book Outliers.

    Arguably the form of capitalism currently employed around the glob is heavily biased towards maintaining the status quo and taxpayers are given little choice but to support it. This is socialism for the Rich. So not only do the rich have the natural advantages this gives them as described above they are supported by the self interest of the banks and the banks clearly have a powerful lobbying force.

  3. Rick, just want to thank you for highlighting the Mind and the Market book. I picked it up after reading your post, and it was excellent.


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