Adam Smith Offering a Critique of Free-Market Capitalism - Essay Example

?To what extent did Adam Smith offer a critique of free market capitalism? Introduction about Adam Smith’s Theory: Adam Smith's belief that competition, the market's invisible hand, would lead to proper pricing played a large role in his economic policy recommendations. He therefore strongly opposed any government intervention into business affairs. Trade restrictions, minimum wage laws, and product regulation were all viewed as detrimental to a nation's economic health. This laissez-faire policy of government non-intervention remained popular throughout the Victorian Era and still plays an important part in present-day economic policy. Capitalists, in particular, supported Smith's policies and often twisted his words to justify mistreatment of workers. They suggested that child labor laws, maximum working hours, and factory health codes constituted a violation of their rights and Smith's golden rule. Similar attempts by factory owners to use Smith's teaching in order to further their own ends continued well into the twentieth century. Historical Framework of Adam Smith’s Theory: The image of the nation state as we know it in the present day has started a long time ago in Europe when individual countries started to think of their legitimacy and control over the political and economical lives of the people (Hindle). During the seventeenth century, the most dominant theory is that which describe the role of the state as a legitimate authority that governs all the aspects of the people's lives. During that period, many thinkers and politicians started to think of the state as the governing body and the ruler as the highest authority that should have all the power in his hands to control his country (Hindle). One of the great advocates of this theory of the role of the state is Machiavelli, who sees the rule as the ultimate power and the state as the highest governing authority. In addition, other theories that describe the role of the state looks at it as an organizer of people's lives with minimum amounts of interference in the political and economic lives. This led to the existence of liberal democratic societies in many places of the world, especially in most of the European countries (Sidgwick). One of the main characteristics of this theory of the role of the state is the emergence of some trends such as industrialization, capitalism, and mercantilism. Such new trends have left important impacts on the role of the state in people's lives. For example, the period during which the role of the state started to be minimized has been characterized by the domination of markets over state policies, climaxed in the initiation of the concept of laissez-faire, as popularized by Adam Smith (Sidgwick). Political economy for most of the twentieth century has defined a particular field of study - the relationship between the state and the economy. As defined by Karl Marx, political economy is a branch of science concerned with the production of commodities and the accumulation of wealth' ("Political Economy"). This involved both different visions of its ideal institutional form as well as theoretical and empirical analysis of agencies and structures, and debates on the principles and substance of public policy. It was accordingly marked by fierce ideological, methodological and theoretical disputes. The different schools of political economy were sharply divided by their methods of analysis and by their ideological preferences. The rival camps agreed, however, that the main concern of political economy was the relationship between the public and the private spheres, although they disagreed about the nature of that relationship. In the public sphere, the arena of politics, the dominant institution was defined as the nation-state, while in the private sphere, the arena of economics, the dominant institution was defined as the national market. On this basis a further set of distinctions between the national and the international, and between the developed and the developing world, were constructed ("Studies in Political Economy"). Some theories, such as the Keynesian theory, opposed Adam Smith’s theorization, which is built on the classical concept of “Lazier-faire.” This doctrine states that the economic affairs of society are best guided by the free and autonomous decisions of individuals in the marketplace, to the near exclusion of government interference in economic matters. That is, according to this doctrine, the government should almost always leave people alone and let them do as they please, so long as they respect the personal and property rights of others. In that context, Keynes opposed the classical liberal notion of political economy, which was based on the free competition of individuals. That is, individual pursuit of self-interest increases social well being for everyone. This is because the free competition of individuals leads to the maximization of efficiency, the resulting economic growth is automatically diffused, and it eventually benefits all. In this respect, the primary motivating force in the liberal economy is the competitive interaction between individuals, who are assumed to be rational to the extent that they maximize their utility or satisfaction, especially through the social institution of the market. The foundation of the liberal economic structural arrangement is the market place. Liberalism is committed to the free market and the price mechanism as the means of optimum use of resources and maximizing economic growth. Consequently, from the above analysis, it can be easily said that the evolution of political economy has been greatly impacted by the scientific revolution, both in theory and in practice. Although many of the economic theories have been emerged long before the scientific revolution, there is no doubt that the appearance of such scientific theories has provided new ways of perception for the traditional economic methodologies. Adam Smith’s Critique of Free Market Capitalism: Central to the concepts of liberalism are the ideas and principles advocated by Adam Smith; mainly the economic doctrine, which is called “Lazier-faire.” This doctrine states that the economic affairs of society are best guided by the free and autonomous decisions of individuals in the marketplace, to the near exclusion of government interference in economic matters. That is, according to this doctrine, the government should almost always leave people alone and let them do as they please, so long as they respect the personal and property rights of others. Contrary to popular belief, however, Smith was not an apologist for the capitalist class. One of his least repeated statements warned that a group of capitalists rarely gather together under one roof without the talk turning towards collusion against the public. For this reason Smith firmly favored anti-monopoly laws. Furthermore, his support of competition remained contingent on the fact that it encouraged economic growth, something Smith felt would benefit all members of society. He proposed that as long as markets grew, an increased demand for labor would prevent owners from exploiting their workers. But he failed to consider that the process of urbanization would break havoc on the labor market, and his optimism about growth seemingly ignored the possibility that capitalists might disproportionately consume the benefits of expansion. The inability of growth to substantially increase general living conditions became the primary concern of Smith's intellectual descendants. During the twentieth century, the performance of corporations has been shaped by either capitalist or communist theories. For capitalism, Adam Smith's ideology of laissez-faire is the core concept, according to which corporations are guided only by the rules and forces of the market with one final goal only, which is profit maximization. Smith coined the term 'the invisible hand,' which demonstrates "how self-interest guides the most efficient use of resources in a nation's economy" ("Adam Smith: Economist and Philosopher"). On the contrary, for communism, corporations are guided primarily by their social roles and responsibilities in order to achieve a major big aim, which is to serve the community. According to this ideology, governments should strictly control, economies, markets, and corporations in order to ensure that the social goals are observed. However, since communism collapsed in the former Soviet Union, the communist experiment did not exactly solidify itself in that country. So, by the end of the twentieth century, capitalist ideologies and profit maximization have dominated the performance of corporations. With the emerging trend of globalization, most corporations are concerned primarily with making profit, with minimal concern about the benefit of the community or the society. In the field of management, Adam Smith came up with his theory of free market, coined as 'laissez faire.' According to this concept, business corporations should be government and controlled only by the laws of the market, not by any other government regulations. Although Adam Smith's theory remained applicable till the present day in capitalist societies, the socialist societies still oppose Smith's theory by imposing a stiff control over the market. Recent Drawbacks to Smith’s Theory: Since the era of Adam Smith, the concept of free market has been highly evaluated and respected in capitalist societies. According to this concept, it is believed that markets should be left unregulated and uncontrolled as much as possible to achieve success for corporations and individuals. The only law that frames the economy of any capitalist society, according to Smith, is the forces of the market. With the increase in the number of scandals in corporations in the current world, there has been an emerging trend towards adopting corporations social responsibilities beside profit making. For example, in the case of Enron, managers deliberately hid sensitive financial information about the performance of the company in order to deceive stakeholders and forfeit the ill-performance of the company. Hence, Enron-like scandals could be extremely dangerous for societies and economies. Accordingly, greater awareness gives rise to the public about the social responsibilities and roles of corporations. More and more customers have started to weigh the performance of corporations according to the degree of their participation in social activities. The observance of a corporation's social responsibility has become vital for the success or failure of corporations. In that context, governmental roles and regulations are not the only means through which corporations are forced to pay more attention to their social responsibility. Instead, corporations are self-motivated to observe many social responsibilities in order to serve the community and win more customers. The scandal of Enron highlights the illegal approaches followed by some corporations to deceive stakeholders and earn more money. After experiencing more than a decade of corporate success and profit making, Enron Corporation faced a period of deterioration and loss. To hide its deteriorating status in the market, Enron adopted many illegal measures, such as fraudulent accounting practices, in order not to inform the public about its loss. As stated in the Corporate Scandal Sheet, Enron "boosted profits and hid debts totaling over $1 billion by improperly using off-the-books partnerships; manipulated the Texas power market; bribed foreign governments to win contracts abroad; manipulated California energy market ("The Corporate Scandal Sheet"). When all these illegal activities by Enron were revealed, the general public, as well as government officials, began to think of ways that could make corporations more socially responsible. Specifically, US officials started to question the effectiveness of the laws that enforce corporations not to adopt any policies that aim to deceive the public or harm the society. Many politicians and economists believe that the US law, which set up the Public Company Accounting Oversight Board, is completely ineffective. According to political analyst Gary Weiss, the law, "whose purpose is to keep watch over the corporate auditors failed so miserably to detect the book cooking at Enron" (Weiss). Weiss believes that the main problem with corporate scandals is that managers and CEOs "have a more pragmatic view of corporate responsibility -- they feel they don't have any" (Weiss). Hence, this belief in the social roles of corporations recalls the old concept of laissez- faire, which was adopted by Adam Smith, advocating that the only concern of companies should be their profit making regardless of their roles in the community. Consequently, the Enron scandal was extremely significant in focusing our attention towards the importance of forcing corporations to adopt policies of social responsibility. In fact, corporations should adopt policies of corporate and social responsibility in order to minimize corporate scandals, benefit the society, and strengthen the existence of the corporation in the market by introducing themselves as concerned about social matters in an attempt to maximize their profits. Conclusion: With the advent of theories such as that of evolution and spontaneous natural order, the idea of leaving things, including economic markets, to a natural order began to seem more sensible and humane. As a result, the economic concept of a free market, adopted by Adam Smith long before Darwin, started to be appealing to thinkers and economists, such as Friedrich von Hayek. In conclusion, the impact of the scientific revolution of the evolution of political economy is undeniable. At the end, it can be said that there is a strong relation between economy and the state, and sometimes this relation is double-aged, as presented earlier. This relation constitutes, what is referred to as “Political Economy.” Works Cited "Adam Smith: Economist and Philosopher." 01 Jun. 2006. 01 Dec. 2011. Hindle, Steve. "States, Markets and Entitlements in Early Modern Europe." 30 Nov. 2011. "Keynesian economics." Wikipedia, the Free Encyclopedia. 02 Dec. 2011. "Political Economy." 01 Dec. 2011. Sidgwick, Henry. "The Principles of Political Economy." Chapter 2. 02 Dec. 2011. "The Corporate Scandal Sheet." 26 Aug. 2002. 03 Dec. 2011. Weiss, Gary. "Enron Changed Nothing." 31 May 2006. 02 Dec. 2011. Read More