Adam Smith versus the Adam Smith Institute

If Adam Smith has a bad reputation amongst socialists it is not his fault. Marx himself had a high regard for Smith and discussed his views in great detail. It’s the fault of people like those who set up the Adam Smith Institute in 1977 to campaign for governments to give capitalist corporations a free hand to pursue profits as they think fit.

Writing in the middle of the 18th century — he was born in 300 years ago in 1723, published The Wealth of Nations in 1776, and died in 1790 — Smith was a witness to the beginnings of industrial capitalism in Britain. His book was written as a criticism of the policy (known as ‘mercantilism’), pursued by governments in his day, of trying to encourage exports by subsidies and restrict imports by tariffs with a view to building up the amount of gold in the home country. He wanted such government intervention to be ended and advocated instead laissez-faire, with governments letting the market function freely, as the best way to increase a country’s wealth.

Smith believed that he was discovering the natural laws of ‘political economy’ and adopted an objective, scientific approach to the subject. This was what Marx admired in him. He realised that Smith was genuinely trying to understand how capitalism worked, unlike the ‘vulgar economists’ of his own day who were merely ideological apologists for capitalism. His criticism was that Smith thought he was discovering natural laws whereas he was studying those only of one particular, transitory economic system. This was in fact Marx ‘s criticism of the whole school of economic thought that Smith’s book gave rise to, his ‘critique of political economy’ (the sub-title of Capital).

The Wealth of Nations famously begins with Smith’s analysis of the division of labour and how this allows more wealth to be produced, using a pin-making factory as an example (incidentally, a sign of the low level of industrial development in his day). He goes on to examine the concept of ‘value’, distinguishing between ‘value-in-use’ and ‘value-in-exchange’. It is the latter that interests him as a student of economic phenomena. His conclusion as to what measures the exchange-value, or price, of a commodity will come as a shock to some of his modern-day admirers:

‘The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities’ (Book I, chapter V).

This was too much for the Adam Smith Institute and has led Eamonn Butler, the Institute’s Director, in his The Condensed Wealth of Nations on their website, to virtually repudiate it:

‘For many commentators, this looks uncomfortably like a crude labour theory of value, which focuses on production costs and overlooks demand. Some argue that it led Karl Marx into his appalling errors about labour. One could defend Smith as just trying to simplify things by talking about an age before land or capital ownership, where labour was the sole production cost, and temporarily ignoring other factors such as land and capital, and also ignoring demand, all of which he goes into later. At best his words are misleading, at worst they are mistaken: but then he was breaking new ground’ (

The ‘defence’ that Smith was writing of a time before there was ‘land and capital ownership’ does not stand up, as Smith explicitly stated that he was writing of a situation when ‘stock has accumulated in the hands of particular persons’. That the Adam Smith Institute should find Smith’s ideas here ‘uncomfortable’ is easy to understand.

Smith can certainly be called an advocate of capitalism, though not of the corporate capitalism we know today and for which the Adam Smith Institute stands. In Smith’s day, if you were a capitalist employer you risked everything should your business fail, as today’s generalised limited liability did not exist. You were personally responsible for all your business debts, so that if your business failed disastrously you could end up in a debtor’s prison. Capitalists take no such risk today; with limited liability, they are only liable for the amount they have invested.

Such companies did exist in Smith’s day but they had to be set up by Royal Charter or Act of Parliament, such as the East India Company. The irony is — at least for those who try to project Smith as a defender of capitalist corporations — that he didn’t like these, for the same reason that the Adam Smith Institute and other free-marketeers don’t like government-run industries: that the people in charge were managing other people’s money and not their own and so wouldn’t be so concerned about avoiding waste and inefficiency; the famous invisible hand would not necessarily move them to act in the general interest.

The only activities in which Smith accepted that ‘a joint stock company’ was justified were banking, insurance, canals and water supply. This is another sign of how undeveloped capitalism was in his day, as the limited liability company is now the predominant form of business enterprise and essential to modern capitalism. The amount of capital required to run a capitalist enterprise is now too large to be raised by a single person (just as canals were in Smith’s day). Which shows that the era of individual capitalist ownership (where most ideological defenders of capitalism seem to be stuck) is a thing of the past, making the individual capitalist owner economically and socially redundant.

It shows that while in Smith’s day individual, private enterprise was viable this has long since ceased to be the case. Today production is too big for that; it is already socialised from a technological point of view in the sense of involving a vast network of producers to produce something. The problem is that control of production is not. This contradiction between socialised production and non-social ownership and control is the cause of today’s economic and social problems. The corporate ownership that has evolved to replace individual ownership is not the answer; in many ways it makes things worse. Nor is state ownership the answer. Both are still forms of sectional ownership. The contradiction can only be resolved by socialism where the means for producing wealth becomes the common property of society as a whole, under democratic control.


Next article: Adam Smith on the origin of profits ⮞

Leave a Reply