The Soft Science of Hard Cash
By Gabriel Blanchard
To many people, capitalism is as essentially American as the stars and stripes—but where did it come from?
We’ve all heard of Adam Smith and his famous work on ethical philosophy, The Theory of Moral Sentiments. The Enlightenment had well and truly lit in the Universities of Oxford and Glasgow, where he was educated, and in this book, he placed himself within the Enlightenment tradition of Liberalism, known to us mainly thanks to thinkers like Locke and Rousseau. This school emphasized the inherently equal dignity of all men; as is well known, its political theories built chiefly upon this base. The origin of morality was more debatable to Liberals, even those who were also devout Christians.* Some tried to define morals in æsthetic terms like “harmony” or “proportion”; others, like Smith’s friend and correspondent David Hume, proposed an early form of utilitarianism. Smith proposed that morality originated in empathy, and elaborated a whole theory of the genesis and structure of morality on this basis, with special attention to the distinction between what we must observe as a duty and what is praiseworthy but does not strictly oblige us.
… No? You came here for some “philosophical and historical underpinnings of capitalism”? Oh, alright.
To understand Smith’s importance, we will need to begin by changing the subject. The sixteenth and seventeenth centuries saw the exploration of the New World**; colonies started springing up almost as soon as the Americas were known to exist, but these began as small, specific ventures. Colonial empires were the work of the eighteenth century (France, Britain, Portugal, and Spain being the principal competitors). The leaders of these states pursued an economic policy known today as mercantilism. Mercantilists considered economics an international zero-sum game—whatever one country gains, another must lose—and your country’s wealth was simply synonymous with the amount of gold and silver your country had. The best position possible was a one-sided relationship in which your country was self-sufficient while others relied on it for essential goods, especially finished goods (the most useful and expensive type) as distinct from raw materials.
This translated in practice to extensive state control of the economy. For one thing, you had to discourage your people from buying finished goods from foreign sellers—a purpose achieved by measures like high tariffs on foreign-made goods and banning the export of precious metals. After all, buying English woolens instead of Spanish linen would mean England won that round, and as a good Spaniard you could hardly have that. Colonies were useful not because they gave you a place to put people who had committed crimes or got weird about religion (though that was a fringe benefit), but by both extending the territory from which you could harvest raw materials and giving you a captive market for finished goods. Moreover, colonies did not need to be accorded the same legal status as the realm proper. No rights, all duties (in both the legal and the economic senses!).
And how about the salt-of-the-earth colonists themselves? Well, imagine you are a colonist working as a shepherd; you regularly shear the sheep and sell the wool to the mother country. You could get a better price for it by selling it to your neighbors, but you are bound to sell it to the mother country at the price she sets by law—you would in any case have limited say in that as a commoner, and in fact have none as a colonist. So the wool is taken back to the mother country, where it is made into, say, scarves. These selfsame scarves are shipped back the other way and sold in your town by Mother Country Profits, Ltd., which coincidentally enjoys a monopoly on scarves and sells them at an atrocious markup. But at this point—when you’ve been allowed to serve your country by first sacrificing a profit and then paying money for an object made out of raw materials you collected in the first place—you get it into your head (you ingrate, you) that not being allowed to make your own scarf or sell one to your neighbor without the crown butting in is “unfair,” “weird,” “exploitative,” and “very stupid.”
An Inquiry Into the Nature and Causes of the Wealth of Nations just so happened to be published in the year 1776. In it, Smith dismissed the notion that the amount of precious metals a country had in its coffers constituted its wealth, which was the very basis of mercantilism. Rather, he argued, value is created by labor.† Only labor can take unusable or partly-usable resources—an oak tree, for instance—and turn those resources into a finished good, i.e. something a person can actually use, like a chair. Gold and silver just sit there, no matter how long you leave them right next to the oak tree with all the tools for chair-making they could want. Precious metals (minted by governments into coinage) come into it at all only because they are an exceptionally good material to use as money: they either do not decay at all, like gold, or decay exceedingly slowly or only under rare circumstances, like silver, which makes them an exceptionally good store of value; and they are easy to divide (pure gold is so soft it can be eaten), making them an easy way to partition value and achieve precise equivalencies without losing value in the process. Since the whole point of money is to store and divide value so that we need not rely on barter,‡ using precious metals was an obvious good move; but it was still value as such, not precious metals for their own sake, that were the desideratum.
Smith moved from here to a more general attack upon the mercantilist school of thought. We have no space to explore it in detail here, but one short, popular passage is worth quoting, describing the commonplace laborer or businessman operating without the state interference promoted by mercantilists:
He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. —”Wealth of Nations” IV.2
This argument has since been challenged, and it’s quite possible that Smith considered it generally true under then-current circumstances, as opposed to an ironclad law of human behavior and society. Nonetheless, it remains a standard argument among capitalists, so much so that the expression “the invisible hand” is a stock phrase (sometimes followed by “of the market,” here absent from Smith’s text). Both this opposition to state interference in commerce and this theory of the origin of value would go on to have colossal implications in world history, and bring the world to the brink of nuclear war; but that, as they say, is another story.
*Classical Liberalism often clashed, or seemed to, with Christianity (especially the Catholic Church). In seeking the source of morality, a Christian Liberal—or for that matter a Deist Liberal—was not denying that it came from God, but was seeking the secondary causes of the human sense of morality; in theological terms, they were looking for the means of natural revelation.
**The phrase the New World, i.e., new to Europeans, typically means the Americas, but can include the Pacific and Australasia.
†The labor theory of value is widely associated with Karl Marx in our day, and often erroneously attributed to him. It is in truth the work of Adam Smith.
‡Money is more versatile than barter. Barter relies on both parties having something the other person wants, and also presupposes that the value of the items in question is at least roughly equal, which is difficult to measure when the goods are of different kinds. (Strictly speaking, goods being bartered are always of different kinds, but it is easier to determine an exchange rate between apples and oranges than, e.g., apples and aircraft carriers.)
Gabriel Blanchard is a proud uncle to seven nephews, and CLT’s editor at large. He lives in Baltimore, MD.
If you liked this piece, check out some of our other material here at the Journal: essays on the history of ideas from change to love to necessity and contingency, profiles of authors like Peter Abelard, Mary Shelley, and Henry David Thoreau, and much more. Thanks for reading the Journal, and have a wonderful day.
Published on 12th June, 2023. Page image of the quad at the University of Glasgow, Smith’s alma mater.