It is taken for granted even by the most progressive and contentious calls for high taxation on the top income earners, which aim to mitigate its effects. But why has inequality been naturalized? This is where influential master-narratives of the market are so consequential in shaping public beliefs—from the s anti-tax narratives that frame government intervention as a violation of free market principles to the original text that defined market discourse, the Wealth of Nations itself.
Adam Smith is assumed even by his most progressive interpreters to have accepted inequality as the necessary trade-off for a more prosperous economy. This is, in fact, the default assumption. But the assumption is wrong.
Yet high firm profits, for instance, are treated as a sign of economic success that have to be sustained over time. These tensions have never been conclusively settled in economics.
It remains a programmatic position, however, a prescription of how the market should be structured to ensure more equal outcomes. It could thus easily be identified as purely a normative position with an egalitarian goal—two elements, however, that non-progressives will reflexively reject.
Once we put the building blocks of his system together, concentration of wealth simply cannot emerge. Doing so encourages us to question why steep inequality is accepted as a fact, instead of a pathology that the market economy was not supposed to generate in the first place.
First, Smith thought high profits denoted economic pathology. This pathology was not simply a symptom of mercantilism, but resulted from the incentives on the economic groups living by profit alone. Accordingly, when the economy is sound, wealth concentration should not occur. Only when profit-seekers have rigged the system through legislation do concentrations occur. Throughout, as I show, Smith states his expectation that fortunes would, indeed, not be high and that in any case they were prone to dissipation.
Such a system cannot generate steep inequality. Wages, at the same time, should rise with increased wealth. This baseline appears minimal, yet it provides for more than is covered by the contemporary minimum wage.
Moreover, high wage levels should occur naturally. Wages are only lowered artificially, through state intervention, because of the sophistry of merchants and manufacturers who are much more adroit in manipulating legislatures to pass laws in their favor. Moreover, employers enjoy a bargaining advantage over workers and can coerce them to accept worse terms, because they need individual workers less than individual workers need employment.
It is no surprise Marx was an admirer. Wages are not the simple product of supply and demand in Smith; bargaining asymmetries are key. Taxation is perhaps the most contentious topic today, with prescriptions of punitive levels as the main instrument applied to reverse inequality. Smith did not prescribe punitive taxation, but what is missed is that he praised the British tax system though it imposed double per capita taxes than the French.
Because taxes were less equitably distributed, falling disproportionately on the poor. A fair distribution of taxation was key to the soundness of the English economy in Smith. Bad taxes were simply bad economics.
Taxes on necessaries, first of all, afflicted hardship on the poor, but burdened far more the misguided employer who demanded them, as he would inevitably have to raise wages for workers to afford those staples. But taxation should be used to discourage unproductive economic activities. Landlords, for instance, charged tenants large fines for lease renewals, rather than raise the monthly rent. So it should be taxed at a higher rate.
And when Smith advocated against a tax, it was for pragmatic reasons, as with taxing capital: capital holdings could never be verified and could always flee the country, so taxing them was counter-productive. So who was to blame for bad taxes and bad policies? They were also responsible for convincing gullible parliaments that high wages were bad. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.
Much like many progressive critics of current inequality, like Stiglitz, Krugman, Hacker and Pierson and others, Smith targets rentier practices by the rich and powerful as distorting economic outcomes. And although he strongly criticizes some regulation, I show that it is regulation favoring the rich and powerful that he attacks.
The concern with the welfare of the laboring poor is palpable throughout the book. Progressive concerns are therefore neither a departure nor a distortion of the original classical liberal vision and nor is the latter conservative: in fact, Smith encourages us to ask even more forcefully why inequality is accepted as inevitable, not out of concern with equality, but to secure the economic growth of nations, not just groups.
Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting.
Her PhD is from the University of Chicago. Her interests lie in the historical and theoretical foundations of liberalism. Division of Labor Promotes Skilled Labor. And Skilled Labor is more Productive. This Productivity brings better quality outomes and hence better realization of wages for the Labor. Division of Labor directly promoted equality. Unless, corrupt practices creates barriers, that does not allow this productivity to fetch fair wages to the skilled labor.
Thank you for this great article. When one actually takes the time to read the works of Adam Smith, one finds that he has indeed been widely misinterpreted and misrepresented. Thomas Jefferson, one of the founding fathers of the USA, was an admirer of Adam Smith, and research and writings such as yours show why. And I think he would probably be dismayed at some of the uses his work has been put to. Thank you again. It is a great mistake to think that wealth is unlimited.
It is not. If wealth were unlimited there would be no poverty. Because wealth IS limited that is why excessively wealthy people should be taxed accordingly as a means to put their excess wealth back into circulation so those who need it can obtain it and spend it into circulation which then creates a healthy economy and society.
The author ought to have come to grips of Adams fundamental idea of law of value measured by labor time imbedded in commodity and the components of such value and appropriated by the each owner of factor of production of such value resulting out of social division of labor.
The taxes to state is its legitimate share for providing the necessary infrastructure such as law and order and legal system and and defence of its people etc for production and realisation of value imbedded in commodities. This function of state is to be separated from public policy issues such as maintaining a fair and equitable free market competitive mechanism in private and public contracting field by helping the people who fall behind competition due to technological advancements for the time being and old aged as well people suffering from disabilities including children and by suppression of fraud coersion and misrepresentations aganist public or to create monopoly or oligopoly or similar situation only as illustrative.
These functions of public policy including taxation and state help to disabled are as old as origin of state and society except in for and degree. Therefore any intervention of state in social and economic life to confined to act as catalyst to private and public free competitive economy which will not allow the cancerous growth of greater chronic inequality.
Inequality is an index of anti free capitalism and needs introspection for plugging the loopholes. Is everyone here missing the obvious? Rather, their affluence puts them in a position in which they do not have to behave morally in order to earn the esteem of others, most of whom are dazzled and enchanted by their riches. Smith also believed that the tendency to sympathize with the rich more easily than the poor makes people less happy.
Happiness consists largely of tranquility, and there is little tranquility to be found in a life of toiling and striving to keep up with the Joneses.
Why, then, do the vast majority of people spend the vast majority of their lives longing for and pursuing wealth? It is true that on the political right the wealthy are often lauded as innovators and job creators.
Indeed, personal wealth is the main perhaps sole qualification of the presumptive Republican presidential nominee. It is doubtful that many hedge-fund managers suffer from a surfeit of uncritical approval. Further, even if people do not always admire the wealthy either as individuals or as a group, there is little question that they are disposed to admire and pursue wealth itself with every bit of the fervor and doggedness that Smith expected.
Given his reputation, however, it is striking that Smith had more profound and original things to say in opposition to inequality than in its defense. Skip to content Site Navigation The Atlantic. Popular Latest. The Atlantic Crossword. Sign In Subscribe.
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