Smith, Adam, Edwin Cannan, and Max Lerner. An Inquiry into the Nature and Causes of the Wealth of Nations. New York: The Modern library, 1937.
Question: How do we apply Smith’s notions of regulation in a globalizing era?
Claim: Reading Smith in the context of his English and Scottish nationalism reveals de-regulation works only in reference to the domestic market, that there is always a type of regulation, and that the invisible hand serves in the interests of home.
After gaining great reputation as a moral philosopher, in 1776, the Scottish Enlightenment figure Adam Smith published The Wealth of Nations, the second in what was meant to be a trilogy of great philosophical/policy books (the third in political economy). Smith was much misunderstood in his own time, and perhaps even further misunderstood in the contemporary era, when colorful ties express selfishness as a virtue and Left leaning liberals use the metaphor of the invisible hand as a useful straw man to discredit Smiths(xx) rationalism and the privatization of the market.
Perhaps Smiths(xx) most non-applicable ideas are that ;every individual naturally inclines to employ his capital in the manner in which it is likely to afford the greatest support to domestic industry, and to give revenue and employment to the greatest number of people of his own country;(xx 27) To Smith, every individual in an unregulated maritime commerce naturally employs their capital in support of the domestic industry, specifically the industry of the country. It is this proposal that begins the paragraph where the invisible hand first appears, where the individual engaged in commerce ;led by an invisible hand to promote an end which was no part of his intention;(xx) Yet this advantage is always towards the domestic sphere.
As the Chair of Moral Philosophy in Glasgow, Smiths interests were especially aligned with the moral character and interest of his homeland. His attention to jurisprudence and economics during the height of the English East Indian Company and the great agricultural achievements of the North American colonies also places him as a national subject in service of discovering effective means of deriving the most output from the input of the overseas colonies.
Furthermore, Smiths(xx) invocation of the invisible hand come with two conditionals, the first that monopolies be imposed when the defense of the country comes into question, and when a tax is imposed to even out competitions. Yet all of the examples that Smith cites are examples that favor Britain rather than its colonies or other European nations. Naturally, in the monoeconomies of the colonies, the many communities and towns that rely solely on a single resource whether it be cotton, tobacco, textiles, oil, silver, rubber, steel, etc. may not see the same invisible hand that naturally adjusts to the shifting dynamics of commerce. If another resource or technology is introduced, monoeconomies become devastated by these fluctuating waves, as has been the case in the monoeconomies of Africa. Britian and the United States, with immense diversification of resources, find it in their self-interest to promote the invisible hand as a policy of free trade that engages in creative destruction for the benefit of the nation, where, as Smith puts it, being cast out of ;their ordinary employment and common method of subsistence, it would by no means follow that they would thereby be deprived either of employment or subsistence.; naturally, only in a diversified economy might this shifting of employment be quick, easy and trivial.
It is of little importance to say that Adam Smith has grown irrelevant since the Wealth of Nations, his wish to entirely restore freedom of trade was stymied by the American Revolution and the uprisings in India that resulted in the total takeover of the British East India Company by the state. In other words, de-regulation and laizze faire economics seems to have dissipated in Smiths(xx) standards. The imposition of the state of economic means came in response to uprisings from within free market maritime trade within a system whose invisible hand privileges Great Britain but not its constituent parts.
So how do we think of Adam Smith in a globalizing world? Does situating him within a nationalist interest call for a new theory of economics situated with a global interest? Or rather, is it more commonplace to utilize Smiths(xx) ideas to justify neoliberal policies and conditional loans? In The Wealth of Nations, free trade and the use of private capital is legitimated through the metaphor of the invisible hand to prove that foreign commerce always directs funds back to the homeland. Yet this context seems lost to history, as the invisible hand that self-regulates the market continues to work for the homeland, not the monoeconomies of Africa, not the resource rich countries in Latin America and in some cases the middle East, and certainly not for the East Asian tigers, who, after the IMF crisis in 1997, have failed to reach comparable substantial growth after ingesting IMF policies compared to their mainly state-regulated policies before the IMF. Whether correct or not, Adam Smiths legitimization of self-interest in commerce and the exchange of capital cannot be separated from its nationalist context and its value upon improving the homeland.
According to the United Nations(xx) Department of Economic and Social Affairs, ;the growth record has been uneven and the macroeconomic environment increasingly unbalanced. The one ubiquitous trend has been sharply rising inequalities.; (1). The Department puts one of the mechanisms for these inequalities in the myth of the self-regulating market, but rather than ;unregulated markets were more prone to self-destruction than self-regulation;(xx2). Yet this insight seems ineffectual in radically shifting the direction of conditional loaning programs imposed by the IMF and the Washington Consensus. The policies of globalization do not fall in line with the unregulated/regulated bind very easily. On the one hand, such organizations are regulating economies through the very imposition of conditional loans, their ;suggestions; are meant to produce a watchdog effect over national economies, naming other economies so-called ;transition economies; or not-yet a Western economy, promising rapid and positive growth through shock therapies. On the other hand, globalizing organizations such as the IMF are also deregulating institutions, in that the very conditions for the loans that are given are a deregulated economy, more free trade and massive privatization. In other words, such neoliberal organizations can wear multiple masks, unconstrained by the regulated-deregulated binary, imposing the deregulation of the state for the regulation of a world organization, opening up ports that favor Western diversified economies but not the struggling monoeconomies of the third world.
Appearing ineffective towards analyzing global mechanisms and institutions, the polarizations between regulation and de-regulation perhaps invoke the need to think of different types of regulation. Many countries can provide a plethora of examples of different modes of regulation, but in being typified as ;transitional economies;, these economies are rarely seen as proper economies in their own right. Transitional Economies are economies which are changing from a centrally planned economy to a free market, undergoing economic liberalization by letting market forces set prices and lowering trade barriers, progressing through macroeconomic stabilization where immediate high inflation is brought under control, and restructuring its privatization in order to create a financial sector to move from public to private ownership of resources. By forcing a binary between state-centered and free market, ;transitional economies; in their very definition of ;transitional; are seen as always on the path towards a Western style privatization, progressing on full deregulation as an ideal economic situation, which, as in the case of Britain, is simply stymied by insurrection and the need for intervening state power. Yet, it is in this very transitional period from state-economies to free economies that we can find incredible amounts of growth. In Japan, the move from the Meiji period to deregulated capitalism saw vast amounts of growth, but in the 1990s, having reached an ideal deregulated capitalism with the übercapitalist Keiretsu companies, real growth in GDP decreased to a stagnant 1.5% a year. In South Korea, the greatest amount of growth came also in the so-called ;transitional; period from the vast influence and state-power of President Park Chung-hee, whose rule began in a Coup d’état, ended in assassination and whose cabinet was rightly accused of corruption and vast abuse of state power. Though he was democratically elected, President Park used a state of emergency from the Korean war to dissolve parliament, suspend the constitution and, for our purposes, took a step from the American-imposed free trade market, back to a more state-regulated Korean economy, privileging certain companies and organizations far over others, and overtaxing the populous at times to fund large infrastructure projects dictated by the state, displacing thousands and invoking student protests in Korea as well as in the West. Yet despite all these shortcomings, President Parks(xx) step away from American economical pursuits and steps towards state regulated institutions by coercing Korean businesses into letting in capital from Japan, per capita income increased twentyfold, while South Korea’s rural, undeveloped economy was transformed into an industrial powerhouse.
President Park’s step back from a deregulated economy shows two things. First, that Smith’s notion of a fully free market economy as the ideal endpoint which is only stymied by insurrection, war and tyranny, is not only false, but perpetuates a myth that taking these necessary steps back from de-regulation are only stymied by war and the need for national defense. Second, South Korea’s spur of economic growth during Park shows not only the ineffectiveness of the regulation/deregulation binary, but the ideological implications of naming countries like South Korea and Japan as transitional economies, suggesting that they are ;not-yet; a Western economy. South Korea along with the other Asian Tigers has shown that transitional economies should be seen as economies in their own right, and that the invisible-hand imposed by the IMF in 1997 was truly a hand grown from a Western nationalist impulse, a hand serving the IMF’s ;home,; a hand meant to protect domestic growth, as Adam Smith says explicitly. The country of Malaysia proves this historically, being the only Asian country to directly refuse IMF imposed policies, and whose growth did not stagnate in the post-IMF era. Indeed, it was not the regulation of the state that has left much of Asia ravished by the 1997 crisis, but the regulation of the IMF serving in the interests of the foreign bankers who run it.
Finally, I would like to end with a reformulation of Smith’s theory for a type of new globalization, implicitly demanded by the Department of Economic and Social Affairs, but one that must be directly materialized through a new Brettonwood with new mechanisms meant to make global capitalism work. The DESA proposes a new facility for automatic response to disasters and economic crises, rather than through the conditional loans of the IMF. Yet this seems to be a somewhat disappointing response to our current global economic crisis. Rather, a new Brettonwoods would mean new organizations not centered in the United States, but trusting in the regionalism of institutions like ASEAN to deal effectively with their own areas—in other words, an organization that understands Smith’s idea of free market as withholding a bias towards the nation, the domestic and the home. If the invisible hand serves in the interests of home, then the type of regulation by foreign economies must utilize this invisible hand in the interests of its own home.