Adam Smith on socialism

The purpose of this post is to answer the question of what were Adam Smith’s views on Socialism. Some people believe Adam Smith was a socialist. What would Smith think of the world today and the state-run economies? Is it all that bad?

The wonderful world of Adam Smith was not so wonderful. There was slavery, rigid class systems, super wealthy that would make Warren Buffet seem upper middle class and poverty. The real question is why was the book Wealth of Nations written?  He wrote the book because he was a moral philosopher. He wanted to explain not only why certain countries have wealth, but why there is poverty and hinted at ways to end hardship for humanity.  He wanted the world around helped. He was an enlightenment philosopher.

The key point people do not understand about Adam Smith’s capitalism is, it is not a zero-sum game.  That is, just because someone makes a lot of money does not mean you lose. It usually means you win. Economics is a positive sum game.  I hope people in government are enlightened and understand this or the general poverty of the nation will increase.

Adam Smith on Socialism
Socialism is the new feudalism

Taxes and Socialism

What determines the level of socialism in a country? It is the tax levied by the government. Taxes are the defining characteristic of socialism. Government debt is nothing more than a deferred tax.  Therefore, large deficits and debt is a tax.  The level which a government taxes people on productive work is the level in which a country exist on the spectrum of freedom or socialism.

Adam Smith wrote:

Absurd and destructive as such taxes are, however, they take place in many countries.

This is so clear I think there is no dispute that Adam Smith, not a Socialist.  He believed taxes were both ridiculous and draining for a country. He said this in unambiguous terms.

The next time a revisionist historian asks what how does Adam Smith and Socialism fit together, show them the above quote.

Smith also wrote:

There is no art which one government sooner learns of another, than that of draining money from the pockets of the people.

What does this mean to you?

Adam Smith on socialism and its effect on unemployment

In the wealth of nations you will find this quote:

It (profit) is the compensation, and, usually, it is no more than a very moderate compensation for the risk and trouble of employing the stock. The employer must have this compensation, otherwise he cannot, consistently with his own interest, continue the employment.

Smith felt that if government interfere with the market you will have higher levels of unemployment. This exists in the more socialist countries of Europe where the natural full employment rate is 10% compared to 5 % in the USA (when the market is allowed to adjust, unlike the last three years).

Socialism is the new feudalism

Adam Smith wrote:

In the disorderly state of Europe, during the prevalence of the feudal government, the sovereign was obliged to content himself with taxing those who were too weak to refuse to pay taxes.

If you replace a few words and read this quote:

…the social government, was obliged to content himself with taxing those citizens that could not afford good accountants.

It does not change the meaning of the sentence but rather uses a more modern language. The capitalist frees the worker from the feudalism of the government by providing earnings based on freedom and choice.  Modern media tries to portray the capitalist as the villain, but the reality is socialism is the new feudalism.

Economists after Adam Smith were more direct about Socialism

  • Hayek argued that with market distortions from a socialist economy the market could not accurately convey information about prices. Therefore, people could not make rational or ideal decisions. Further, government redistribution of capital would result in greater poverty and inefficiency.
  • Misses argued socialism would not work in the long-run because people make economic choices on non-price rationing
  • I am an American living in a post-communist country and an arch-chair economist.  Based on personal experience and observation there is no way socialism works.  It is something that I have seen with my own eyes. If you have any doubts I invite you to live in Eastern Europe for a while.
  • Adam Smith was a thinker that comes around only once every one hundred years. although Adam Smith did not mention socialism by name is stance was clear.

Although I am personally a fan of Adam Smith as I studied economics and believe the classics have more wisdom than media which plays on emotions, I am not a pure libertarian or Ann Ryan selfish or greedy capitalist. I like Smith believe in enlighten self-interest for reduction of poverty and suffering in the world. I think Smith acknowledged the role of government to keep order and structure so a market economy could function.

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9 responses to “Adam Smith on socialism”

  1. Steppewolf

    I always laugh at the desperate lies against socialism by capitalist apologists of every variety, including bogus “libertarians” (a term stolen from Karl Marx) and alleged “socialists” or “communists” like the Stalinists and their state capitalist prescriptions.

    First, only liars and ignoramuses associate socialism (or communism) with state capitalism and state-run economies. the truth is, as history everywhere shows, socialism means the democratic ownership and control of business, the economy, wealth and their governance by the working people who create both the wealth and markets via their labour and trade, and their communities; where each person is rewarded the full value of their labour (not having part of it stolen for profit, interest and other forced separation of capital from labour), and where individual needs and wants are met via cooperation, mutual satisfaction of personal interest and equal rights for all.

    Second, While Smith can’t be considered an actual socialist, it’s clear that both the writings and practical efforts of early 17th and 18th century socialist movements (in particular the fight for political democracy and development of free cooperative self-reliant communities–where the term communism comes from–as well as labour union/guild organizing) had a degree of influence on, as they obviously had on Marx, Engels and other more scientific socialist economists.

    Third, part of this includes the fact that Smith realized, as Marx did later, that a true free market could not exist under any form of capitalism, because of its dictatorial class master-servant (employer-over-employee, etc.) business regimens, exploitation of labour (profit, interest, taxes, etc.), coercive demand-vs-supply pricing (instead of full-value trade) and reducing everyone and everything to a commodity to be used and thrown away. This is why there are rich and poor–because the former are formed by the theft of wealth of those who become the latter.

    Fourth, the biggest hypocrisy of capitalist apologists is that they claim to be against “big government” and the state, when in fact they support all of the very same oppressive state measures that are essential for keeping capitalism and its dictatorial exploitative regimens in place–police, courts, military, spying, war, etc. The only time capitalist apologists whine about “big government” is when working people effectively organize as unions, co-ops, community and citizens movements, etc., and push the state as much as they can to act in their interests, such as democracy and personal liberty, social justice and public infrastructure and guarantees, etc., which curtails the otherwise totalitarian power of capitalists, bosses, banks, bureaucracies, etc. over and at the expense of the working class general public that involuntarily pays for them all.

    1. Mark Biernat

      Freedom is a basic if not the basic human right. This includes economic freedom. Let the markets work. When there is a free movement of labor and capital and the burden and I mean burden of government is less people have more freedom to help each other out and create a better society based on enlightened self interest. The above comment about socialism and sharing can only be written by someone who has not lived in a socialist or post socialist state. I live much of my life in Eastern Europe and you compare two ideas of government and economics one that aspires freedom and one that aspires, what do you call it, a democratic ownership of business you would find you live in some sort of non real world setting. I guess my question is have you have been to or lived in a socialist country? What do you do for work? Do you think the government and the masses should control more of your free time and money?

      1. Courtenay (Linuxtarian Socialist)

        You really need to research the topic of socialism more instead of troting out the same tired out slogans by statists.

        Libertarian Socialism and Anarchism are good starting points. Also looking into Free Market Socialism and the works of Kevin Carson (I recommend his essay “the Iron fist behind the Invisible Hand”).

        1. Mark Biernat

          I read most of the essay you recommended and I can say it is not rigious theory but more intellectual ramblings. I did not finish it because I got bored. Kevin Carson is well intentioned, idealistic but confuses visions of a utopia with sound economic ideas.

          Look the ideas are simple. If I grow organic herbs in my backyard and want to sell this, why not? If I create intellectual property which others find of value like an app where people get moments of happiness by playing, why should I not be rewarded by society as a whole? It is a free market. ‘Let the markets work’ is not a slogan is uncommon common sense. However, freedom is not an ultimate societal good. You can not yell fire in a movie house falsely for example. The ultimate social good and it applies to the dismal science is justice. You can never have too much justice. The question is where do the limits to personal freedom come in when it comes to the market? I would tend to say, someone who has lived a good part of their life in an Eastern European social/post communist country as well as the USA, I would rather be on the maximize personal liberties side of the the spectrum as society as a whole benefits.
          Libertarian socialism and anarchism are not realistic models and they never will be. More left to the rehlm of interesting philosphical speculation or science fiction, but not serious economic theory.

          If you want to debate me on the specifics I am will to discuss this.

    2. Courtenay (Linuxtarian Socialist)

      I find your statement on libertarian and its origin coming from marx to be interesting.

      The term “Libertarian” comes from the Anarcho-Communist Joseph Déjacque.

      Libertarian means Socialist and Anarchist.

    3. Eric Wickes

      I think Steppenwolf makes a similar point to mine, that I argue as well. Excluding the debate on the origins of libertarianism. Arguments can be made that true libertarianism reflects the essence of socialism or vice versa. How can one self-govern and be truly free in a capitalist hierarchy? Socialism and libertarianism requires individuality within a cooperative collective. A more horizontal rather than vertical management structure.

      The Lexicon has been seriously readjusted for neo-liberal economists, or “faux”-Libertarians. I think his Moral Sentiments are important to consider when using the Wealth of Nations as a reference to support unregulated capitalism.

      “The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.” (TMS IV.1.10)

      I’m not sure we see this happening at all. Wealth disparity is increasing, not declining. I’m also seeing what some might consider sentiments of communism coming out of this paragraph:

      “They are led by an ‘invisible hand’ to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants…” [equal distribution of resources or wealth? No, in reality – not in some far-fetched (Americanized version) Libertarian Utopia] – what we got is “trickle down” economics, with much less “equality of opportunity” which forces more “equality of condition”. This is a view seldom entered into the debate of the virtues of Capitalism vs the evils of Socialism. Right now, I’d almost prefer a little honest socialism to the crony state-capitalist system (outright revolving door and collusion between business and state) we have today.

  2. Captain of Industry

    I don’t think you’ve really read Adam Smith. Adam Smith espouses the labor theory of value — and guess what, the defining characteristic of Marx’s theory was the labor theory of value. And Adam Smith and Marx reach similar conclusions regarding class warfare on the basis of the labor theory of value.

    Indeed, Adam Smith talked about three social classes:

    1) the rentiers, who “earn” income merely on the basis of owning land. They do literally nothing with it, except rent it out to farmers and factories. (Ricardo’s famous example is of an aristocrat putting a chain across a river and demanding a toll to cross it)
    2) the capitalists, who “earn” income merely on the basis of owning capital. They typically hire managers to run their property.
    3) labor, which is much larger than both the rentier and capitalist classes, and which is effectively competing against itself.

    The social dynamic between the three is the cornerstone of Adam Smith’s economics — and also of Marx’s, who reached similar conclusions to Smith.

    So here’s the deal: there were relatively few capitalists, and relatively many laborers. The relatively few capitalists could coordinate and fix the price of labor, relatively easily. And believe it, this happened again and again and again in history. On the other hand, labor was forced to compete for jobs, and found itself unable to coordinate to improve their bargaining position. This effectively means that a portion of the capitalist class’s profits are economic rent (because the labor market is NOT competitive)

    So what does Adam Smith have to say about taxation? He focuses specifically rentiers here. But that said, he is clearly talking about “excess profits” (i.e., the economic rent that both rentiers and the capitalist class “earn” in virtue of their economic and political power):

    > “Ground rents are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Ground rents are, therefore, perhaps a species of revenue which best bear to have a particular tax imposed upon them.”

    > “As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed and demand a rent even for its natural produce.”

    > “A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground.”

    So, Adam Smith literally wants to tax all excess profits away. For Smith, competitive markets were the ideal to which all other markets were compared. But Smith wasn’t an idiot. He knew that lots of markets were far from being competitive, and that the distortions they cause (because of economic rent flowing into the rent-seeking classes) hurt everybody’s welfare.

    Adam Smith understood something that the Right has forgotten. Monopolies are bad. They abuse people. If a monopoly needs to exist to serve some economic function, its excess profits should be used in the service of the people.

    By the terms of the Right, this is socialism. But that should not surprise us — the Right has always yearned to go back to feudalism.

  3. W. Berry

    Mark- I dont think you have studied philosophy or Adam Smith with rigor. He isnt a capitalist. He is an 18th century enlightenment writer. Capitalism is an 19th century concept. Go look at how Smith defines the invisible hand in Moral Sentiments. Its not what you think it is. He would be appalled by Ayn Rand.

    1. Mark Biernat

      I actually make the point all over my blog and Youtube channel that Adam Smith was an enlightenment thinker and not an Ayn Rand type capitalist. Ayn Rand is not what I subscribe to. Rather enlightened self interest.

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