Guest Post: What Would Adam Smith Think of the Idea of “Job Creators”?

This is a guest post from friend-of-the-blog John Paul Rollert, who is a doctoral student at the Committee on Social Thought at the University of Chicago.  His essay, “Does the Top Really Support the Bottom? – Adam Smith and the Problem of the Commercial Pyramid,” from which this is adapted, was recently published by The Business and Society Review.  You can catch his blogging at the Huffington Post and Harvard Business Review.

To hear the Republicans tell it, even more than paying down the national debt, the key to solving our current economic woes is to make way for the “job creators,” a motley crew of Americans who appear to share no more in common than their membership in the top tax bracket.

The reasoning is relatively straightforward and was summed up recently by Texas Governor Rick Perry: “America is not going to move forward until we remove restrictions of over-taxation, over-regulation and over-litigation on the job creators and free them so the jobs can be created.” This is a familiar refrain, one that makes progressives shake their heads at a seeming indifference to hard choices and economic history. Still, by now it should be clear that the refrain is far more than convenient rhetoric. It is founded on a bedrock belief about the free market, one that answers What makes capitalism work? by addressing a different question: Who? For that is what is at stake in the term “job creators,” a vision of capitalism’s essential players, one very different from the original account provided by Adam Smith. His account of who makes capitalism work is at odds with the one we are used to. The essential players are found at the base, not the apex, of the economic pyramid.

Near the beginning of The Wealth of Nations, Smith calls our attention to what, for him, is one of the fundamental qualities of human experience: helplessness. “[M]an has almost constant need for the help of his brethren,” he says, for unlike animals, we cannot tend to even our most basic needs on our own. How exactly do we gain the help of others? The answer, says Smith, lies somewhere between the fawning cocker spaniel and the commands of an all-powerful king.

Let’s hold the king aside for a moment. When a cocker spaniel wants to be fed, Smith says, “it has no other means of persuasion but to gain the favour of those whose service it requires.” It wags its tails, licks its master’s hand, and appeals to him with puppy dog eyes. The cocker spaniel will occasionally succeed, and so too will the fawning beggar, but such an approach is obviously not an optimal way to get what you want. Indeed, most times people will simply pass by you, leaving you hat in hand.

Thankfully, says Smith, human beings have a natural propensity to negotiate or, as he describes it, to truck, barter, and exchange. “Give me that which I want, and you shall have this which you want” is not only the manner in which we acquire most things in this world, but it is the building block for an economically advanced society. Thus, Smith declares in his most famous passage:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

People who read this passage and nothing else of Smith tend to regard it as an affirmation of the virtue and efficacy of selfishness over and against the relative impotence of altruism. But that isn’t its significance for Smith. Yes, our personal interests act as a sharper spur to action than the interests of others, but the same may be said for the cocker spaniel. The difference is not that we have selfish interests, but that only by understanding the interests of others are we able to fulfill our own.

Indeed, the passage attests to the human capacity for empathy, the focus of Smith’s other great work, The Theory of Moral Sentiments. It is because of our natural tendency to stand in the shoes of others and see the world through their eyes that we can appeal to their interests. The commercial effect of this practice is that we individually learn how to make the kinds of exchanges that, in the aggregate, lead to the wealth of a nation.

This brings us back to the all-powerful king. Fundamentally, he is no different from the rest of us. Regardless of the scepter and pomp, set him down on a deserted island and he would be just as helpless. Still, when he is seated on the throne he can remedy his helplessness by ordering others to attend to his needs. He can also force them to attend to the needs of one another. In this respect, he provides an alternative way of thinking about how we might distribute the resources of society apart from relying on the dull instinct of altruism or the even the organizational force of self-interest guided by empathy.

And yet, says Smith, if we consider those cases where, because of assumed wisdom and/or threatened force, a single person directs considerable resources, we will soon see that this third way fails to match the decentralized power of truck, barter, and exchange. Reflecting on the creature comforts that even the meanest person enjoys in a developed society, Smith says, if we

consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilized country could not be provided, even according to, what we very falsely imagine, the easy and simple manner in which he is commonly accommodated. Compared, indeed, with the more extravagant luxury of the great, his accommodation must no doubt appear extremely simple and easy; and yet it may be true, perhaps, that the accommodation of an European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages.

If the contrast Smith makes is not necessarily marked by cultural sensitivity, it underscores his broader point about who makes capitalism work. Not the all-powerful king, however wise and mighty, but “the assistance and co-operation of many thousands.” The butcher, the baker, and the brewer, the countless men and women who support and extend the division the labor — these are the people who ensure the increasing efficiency, growing complexity, and continued development of society. They are the base of the economic pyramid, and their actions ensure the bounty of the Invisible Hand.

So what happened to Smith’s account? Consider Andrew Carnegie’s perspective on who makes capitalism work in his essay “The Gospel of Wealth.” Writing a century after Smith’s death, the steel magnate describes the decisive moment when human beings began to favor a model of free competition that saw the separation of “the drones from the bees,” a process that allowed for the “accumulation of wealth by those who have the ability and energy that produce it.” Carnegie says of such people (who happen to look a lot like him) that they are so essential to society’s development that those who object to the inequalities of a free market system might as well “urge the destruction of the highest existing type of man.”

In the same spirit, roughly 75 years later, Ayn Rand, in her aptly titled “What Is Capitalism?,” focuses on the “the innovators” who promote a society’s development. They are an “exceptional minority,” she says, “who lift the whole of a free society to the level of their own achievements.” What does everyone else contribute? On Rand’s account — nothing. “The man at the top of the intellectual pyramid contributes the most to all those below him,” she says, “but gets nothing except his material payment, receiving no intellectual bonus from others to add to the value of his time. The man at the bottom who, left to himself, would starve in his hopeless ineptitude, contribute nothing to those above him, but receives the bonus of all their brains.”

This is a striking alternative to Smith’s vision. Instead of “the assistance and co-operation of many thousands,” it is an elite caste that provides the vision, brains, and organizational savvy that ensure a thriving economy. They are the Visible Hand of capitalism, and for Carnegie, Rand, and others like them, if you want to know who makes capitalism work, simply stand at the base of the economic pyramid and look up. You’ll find the ‘job creators’ at the very top.

Smith would be highly skeptical of such claims. In the final edition of the Theory of Moral Sentiments, written over a decade after The Wealth of Nations, he added a chapter in which he describes the “disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition.” This disposition, Smith says, colors the way we view the world, leading us to conflate wealth and greatness with virtue and poverty and weakness with vice.

It also leads to confusion in thought. Who makes capitalism work? is a very different question from For whom has capitalism worked best? We should guard against presuming the answers are necessarily one and the same.

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13 Responses to Guest Post: What Would Adam Smith Think of the Idea of “Job Creators”?

  1. Pingback: FT Alphaville » Further further reading

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  3. Ted K says:

    Ayn Rand asks “What Is Capitalism?”. But I ask “What Is Craziness?”……

    I say, “The crazy woman at the top of the craziness pyramid contributes the craziness to all those below her,” and I continue, “but gets nothing except her government subsidies for her ‘crazy farm’ and government subsidies for her husband’s crazy clinic.”
    See here: http://grahambrokethemold.blogspot.com/2011/08/crazy-eyes-meet-crazy-babies.html

  4. Sandi says:

    Ayn Rand and her current crop of acolytes have been looking at the pyramid all wrong; the “useless parasites” are at the top, not the bottom. Unless you’re a retail clerk in a Coach or Tiffany retail store, they aren’t creating a job for you.

  5. Chris says:

    Interesting historical perspective on Smith but the implied conclusion seems myopic at best and extremely destructive in the potential resulting indicated actions at worst. The two major challenges are: 1) whether job creators come from the top, bottom, middle, or wherever, there is so much regulation and noise coming from washington, combined with time consuming processes to follow and virtually unlimited personal liability for small business owners, that those who are focused on building businesses, and as a result creating jobs, are severely hampered in their effort, and developing a siege mentality, which is keeping them from hiring, and 2) the fact is whatever level of society they come from, stepping out on the ledge and starting a business, and being able to grow it successfully, especially in today’s economic and political environment, is not that common a mindset or trait. These people are a relatively rare and special group. One of the factors, i believe, which drove america’s prior success was the fact there was mobility up the economic ladder. The creators, innovators, or whatever you want to call them in fact did move up so when “you looked up” you actually did see them. The challenge today is we are making it very hard and more risky for this group which results in economies of scale outweighing innovation solidifying the group at the top and killing innovation and economic group. Perhaps a simple and telling example is of the young girls in Georgia who were told by the police last month that they could not set up a lemonade stand because they didn’t have a permit. Perhaps a more personally relevant example for me is watching my CEO spend literally 60+ percent of his time dealing with government regulations, discussing if we should cancel our GSA schedule, and other non business building activities. We could hire, we need to hire, but it is just too much work, expense and risk to do so. Change that and you’ll see the job creation you hope for. Focus on “shovel ready” projects and deficit spending and you’ll just get more of what we are seeing and the reckoning will be even worse.

  6. colinc says:

    Excellent post, Mr. Konczal. However, and please correct me if I am mistaken, but I think any discussion of Adam Smith or his “Wealth of Nations” should include the entire passage which is corrupted and misstated time and again. It has been a long time but I seem to recall that Mr. Smith had actually wrote, “IF there COULD be something like an INVISIBLE HAND to assure markets functioned properly, that would be preferable.” (Or something like that.) He never actually stated that there IS/WAS/WOULD-BE such a mystical mechanism but that myth is repeated over and over to the detriment of us all.

    Of course, Ted K and Sandi are spot-on but with too narrow a focus. When we hear a politician (or CEO, etc.) say “My fellow Americans” or “My friends,” to whom is s/he referring? Could it be the similarly insane, imbecilic “constituents,” in the case of politicians, or “consumers/employees,” in the case of “captains of industry,” who “granted” them the power and the glory they use to bludgeon us all into submission? I’ve met and spoken with the head of every company I’ve worked for and, without exception, found them to be abject morons. (I’m sure you’d recognize some of the company names, but I’m not inclined to invite a lawsuit.) There isn’t a single one who could do even the most mundane task assigned to their subordinates, most of whom being ignorant and incompetent. The ONLY “skill” any of these assholes have is an ability to twist words around to manipulate the easily distracted masses. Very nearly EVERY corporation and certainly every financial institution IS committing outright fraud but they could not accomplish it without their hordes of willing accomplices and, apparently, more-willing victims. Knowing “right” from “wrong” and the matter of “personal responsibility” has disappeared from the cultures of every developed and emerging economy. That is why CEO-compensation has gone from 20-30 times the “average wage” (in 1970) to 300-400 times (or more in the case of hedge-fund managers, 1400-times) in the past 4 decades while that “average wage” has, at best, remained stagnant. When “life” is all about “money,” all other priorities are rescinded.

    I am incessantly amazed at how many people “believe” that the schools, the government, law enforcement and many other institutions “should be run like a business.” Does a CEO ask for the opinions or votes of their employees before making a decision? Of course not. Every “business” is nothing more than a “mini” totalitarian state, “run” by a psychopathic tyrant not far removed from Idi Amin. How does such a system get conflated with “democracy”? For more than a decade I’ve been asking everyone who stands still long enough, “In a society ‘run’ by majority rule/vote, what happens when the bulk of said majority is ignorant, ill-informed and irrational? Do you think we are finding out now?” Sinclair Lewis was right, “When fascism comes to America, it will be wrapped in the flag and carrying a cross.”

    Personally, I find a little “comfort” knowing that catastrophic impacts of global warming are exceedingly more imminent than most people believe and they will have profound effects on the wealthy as surely as on the poor. However, I’d be much more “content” if I could “know” that Betelgeuse went supernova a little more than 639 years ago and we can “look forward” to the 2nd sun of its GRB appearing in the sky “very soon” to ensure that all these parasites are wiped from the planet… permanently!

    • John Paul Rollert says:

      Smith uses the term “invisible hand” only three times in his work, once in his “History of Astronomy,” a short essay that went unpublished during his life, once in The Theory of Moral Sentiments, and once in The Wealth of Nations. His use in Moral Sentiments is as follows:

      The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. 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.

      In The Wealth of Nations, published 17 years after the first edition of Moral Sentiments, he uses the “invisible hand” as follows:

      But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. 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. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

      In both cases, the point is that the selfish actions of individuals, regardless of or even despite their aims, can have beneficial consequences for society. This was a matter of faith for Smith — who, unlike his friend David Hume, was not prepared to live in world without some sense of divine design — however, being a great believer in reason, he would say that such a conviction could and should be evaluated by the science of economics to see whether it was more than merely an article of faith.

      • colinc says:

        Thank you, Mr. Rollert, for the erudite clarification!😀 Alas, such enlightenment, that the “IH” was assumed as a matter of “faith,” seems to lend “evidence” that it does not (can not?) exist. Especially so over the past 2 decades or so as more and more evidence mounts (particularly in the last 5 years) of egregious market manipulations by an abject few to satisfy their own avarice. Of course, given that Lloyd B. is on record proclaiming he “is doing God’s work,” perhaps that can be construed as said invisible hand. :)) Anyway, thanks again.

  7. One of the great innovative strengths of capitalism is that many, many solutions can be tried out on a small scale, and the best will succeed and be replicated — and those that fail won’t cause too much damage when they do. When more and more resources are concentrated in fewer and fewer hands, this innovative dynamic is choked off and activity stagnates. And mistakes by the few in control of the resources have much farther reaching consequences.

  8. Altoid says:

    This progression of expressions needs to be read in the context of Taylorism, with its mixed motives of efficiency, worker welfare, and contempt for manual labor. Smith’s picture is of a world of independent actors, even as the dark satanic mills were arising, and was rooted in his commitment to civilization as social interdependence, and vice versa. Carnegie helped create a world where the wielder of capital could use interchangeable labor within a system of his own devising and under his control, and on a scale only possible earlier for princelings and potentates. But AC wasn’t a Taylorist in that he left the actual shop floor (and hiring) to the foremen and the works manager (Bill Jones being the most famous and also responsible for a lot of Carnegie Steel’s most profitable developments). Equipment was designed to make the process function and people were thrown at it to make it work; definitely not ergonomic. And he knew very, very few of the people who worked for him, likely not something Smith envisioned.

    But Carnegie was a little more than a caricature. He hated doing manual labor and probably had some contempt for people who did it. His family were Chartists, though, and until the 1890s he paid comparatively very well. He might have felt that since Americans had the vote, which is what Chartists wanted, all was right with the world on this side of the ocean and he had no other responsibilities as an employer. He skedaddled to Scotland in order to let Frick destroy the union. That was in the 1890s, when Taylor was touring the country consulting about efficiency.

    Rand’s world was a Taylorist one. Not only did the wielder of capital use interchangeable labor within a system of his/her own devising, but defined precisely what each interchangeable laborer was to do and how it was to be done. Part of what Taylor had intended was that efficiency would allow employers to pay more. But for so many employers, control of the shop floor meant they could give full reign to their contempt for manual labor and manual laborers. Setting up a kind of double-bind, they could require their interchangeable workers to do jobs exactly as they’re told they must, and at the same time think, those people don’t know how to do anything unless I tell them how to do it. Galt and Taggart? Been a long, long time since I read any Rand, but it wouldn’t surprise me a bit if that was their line.

    And at the same time, their social thinking could become a parody of Smith. Where Smith said people have to know what other people think is in their own interest, and study other people to learn what really is in their interest, in order to make civilizing interchanges possible, the Randian employer says I know those people need money, and that’s all I need to know. Not the sympathy of the moral sense, but the caricature view remarkably similar to what slaveholders held. They could designate which people had real individuality.

    It’s easy for people to pick and choose a few snippets of Smith and other dead writers that seem to confirm what they already think, and useful to invoke an authoritative name or two. Unfortunately the kind of people who like to do that don’t like to be reminded that Smith didn’t say what they want him to have said. They seem not to like complexity.

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  10. Misaki says:

    I don’t think any of the millions of small business owners take seriously any claim that they do not create jobs.

    Then again, the “small business owner” is already a popular political justification for various actions.

    Also I think this is funny and appropriate given economists’ obsession with “low consumer demand”. Because the people of the US seem to be in agreement, given so many of the goods in certain categories (like clothing, furniture, electronics) are made in China, that what the US needs most right now is for people to buy less.🙂

    http://www.theatlantic.com/business/archive/2011/08/the-consumption-economy-is-dying-let-it-die/243628/

    (I will mention that this is actually a reasonable goal, with the very important condition that people also need to be prepared to spend less time working as well so lower consumption does not prevent people from getting jobs: http://pastebin.com/Wy8B0hK9)

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