Adam Smith: the birth of the

free market
Mehwish Abid Abaidullah – S4
 Adam Smith and the search for the “laws of
economy”
• Adam Smith lived in a moment when scientists were searching for the
natural laws that guided the universe.

• Adam Smith also wanted to unravel the “natural laws” guiding the
economy (ignoring how human behavior is unpredictable…)

• He saw “savage tribes” in America as an example of human natural

ability to trade and barter. However…
 Did native Americans really know barter?

• In pre-colonial America, animals hunted were cooked in a common pan to be

shared with the whole community.

• That was reciprocity, not barter, which dismisses Smith’s theory that humans
are naturally prone to barter or trade. Communal eating together. (You give
me something – but when you can then you do)

• These tribes didn’t naturally evolve into a market economy: they were
forcefully incorporated to a market economy by colonialism.
 The “disease” of Spanish conquerors

• Unlike Chinese explorers, the Spanish “conquistadores” were:

- Willing to depopulate an entire continent
- Private entrepreneurs
- Mostly indebted (and rapacious)
- Self-entitlement: “we deserve it all!”

• Unlike the Aztecs, the Spanish saw gold as a source of profit, and
not as a ritual object.
Why did Europe did what they did ?
• Western discovery unleashed a different process since they were led
by entrepreneurs
 Communal lands X Enclosures
• Before enclosures: communal lands aimed at subsistence.

• Spanish silver → Growing demand for wool → Enclosures in

England to raise sheep.

• After enclosures:
- Land became a private asset aimed at profits, not at survival.
- “An army of dispossessed” flocked to the industries.
• Small producers vs. large markets
• Independent farmers vs. Big farmers
• Displacement of Peasants – Enclosure
• Churches turned into sheep houses
• Labour Market (disembodied from the society) – Passing laws 1650-
19th century – Criminalizing poverty
• The most historically significant triangular trade was the transatlantic
slave trade which operated between Europe, Africa, and the Americas
from the 16th to 19th centuries.
• Slave ships would leave European ports (such as Bristol and Nantes)
and sail to African ports loaded with goods manufactured in Europe.
 The elephant in the room

• With capitalism came colonialism, with colonialism came slave trade

• Slavery, colonialism, and capitalism walked hand in hand: the money to

purchase slaves came from bankers and investment in stock markets.

• The roots of capitalism are to be found in the shoulders of slaves, not in

Smith’s mind.

• Slavery was “the elephant in the room” of The Wealth of Nations.

Wealth of Nations: a new
gospel?
 The “Newton” of economics
• Smith’s writings were considered the “Newtonian” laws of Economics: free
market, self-interest, and division of labor were keys to understand Economics.

• However, the general understanding of Adam Smith’s work is pervaded by

misconceptions:
- The division of labour is full of dangers – and Smith was aware of them.
- Self-interest is different from selfishness or greed (economy isn’t a zero-sum game)
- The invisible hand appears only once in Smith’s work.
 The [not so free] market

• “Invisible hand” is a buzzword used to suggest there should be no state

interference in economy.

• However, markets are political constructs – and not spontaneous phenomena.

• The state is always present in the markets / economy, even when we don’t realize
it.

• “Free market” was used to justify child labour and slavery, regardless of any
moral constraints.
 The invisible hand of the market

How liberals say it works How it actually works

 The market and the Leviathan are
inseparable
• Liberalism says that the STATE and the MARKET, • A critical approach (such as the documentary)
POLITICS and ECONOMY are separate shows us that POLITICS is EMBEDDED in the
phenomena. economy.
Ricardo and Malthus: did
you say freedom?
 David Ricardo

• Comparative advantages: each

country should specialize in the
activities they perform better.

• Free trade would compensate

countries for what they do not
produce.
 The case of Haiti
• Before 1986: self-sufficient in rice production.

• After 1986: IMF instructed Haitians to cut on import tariffs, thus flooding the
country with imported rice.

• That led to a wide impoverishment of rice growers and rural depopulation.

• Loans given by the IMF are conditioned on opening the country’s economy, thus
ruining local business.
What if Marx was right?
 What the pencil does not show

• Milton Friedman and the pencil: capitalism connects people from

different parts of the world without forcing them.

• Karl Marx: that’s true, but those connections entail relations of

oppression that capitalists try to hide or minimize.

• Hence the importance of knowing where your breakfast, your pen,

your laptop, your clothes, etc. come from.
 The “capitalist revolution”

• Karl Marx: division of labour makes workers perceive the objects they
made as alien / external to themselves.

• The more they believe in this alienation, the more power the world of
objects exerts over the workers.

• Capitalism commodifies everything: land, seeds, time, food, bodies,

knowledge...
 “Bankruptocracy”
• The current situation of capitalism is analogous to the 19th century: slow economic growth and
capital accumulation.

• However, capitalism hasn’t reached its terminal crisis thanks to the insistence of some
governments in saving it.

• And it does so by sacrificing the collective: whenever banks collapse, salaries and social security
are cut down and taxes increased to save

• Capitalism became precisely the opposite of what free-market enthusiasts advocate! It became a
system that rewards the most incompetent (and not the fittest).
Keynes X Hayek: a fake
debate?
 A “rational system”?
• Classic economists (Hayek, Friedman, etc.) have taught us that capitalism is a
rational system, i.e. the one that better suits the human brain.

• Hence, anyone criticizing capitalism was deemed as irrational, unreasonable, and

going against “human nature”.

• For classic economists, people are rational, and so is the economy: it was
believed markets naturally tended to reach a balance or stability.

• And unreasonable outcomes like economic bubbles were ignored because they
were not rational.
 The crash of the stock market (1929)

• Low market regulation and low interest rates = Easier to borrow

money
↓
• More investments and less responsibility in investing
↓
• More companies going bankrupt
↓
• Widespread unemployment
 Post-War economic debates
John Maynard Keynes (Cambridge)
• Increased public expenditure is necessary
to overcome the crisis.
• Public works generate jobs that employ
people and put the economy back on
track.
• Keynesian ideas became mainstream after
1945 (50s-60s).
Friedrich von Hayek (London School of
Economics)
• The priority of states should be to save
money and avoid deficits in public budget.
• Cuts in public expenses are necessary to
overcome crises.
• Hayek’s and Friedman’s ideas prevailed
from the 1970s onward.
Karl Polanyi: the human
factor
 The “elephant in the room”

• Both Hayek and Keynes saw economic crises as an anomaly of

capitalism…. And not as something inherent to capitalism!

• Neither Keynes nor Hayek problematized the capitalist system: both

took capitalism for granted.

• Karl Polanyi: economic theories so far are like a meat grinder – they
only give you hamburger (i.e. market economy).
 Looking back in history…
• Karl Polanyi found out that no civilization has ever separated the
economy from society, politics, religion, moral values, etc..

• Economy has always been embedded in society – and not the other
way around!

• But neoliberals insist that the market/economy is an independent

realm of society, above all norms, laws, and social customs.
 Clap on, clap off…

• If you are a big company (bank, insurance, real estate, etc.) you will
always have a state to bail you out!

• Joschka Fischer: bankers have the privilege to decide whether they

want a minimal or a maximal state.

• Capitalism today enhances the supremacy of rentiers (people who

earn without working) – and that’s something Smith didn’t expect.