Today we celebrate the birthday of Adam Smith. Born in Scotland in 1723, Smith was far more than the father of modern economics. As well as being a philosopher and public intellectual, Smith was also an early, leading critic of what today is known as corporate welfare.
While 1776 was a key moment in American history, it was also the year Smith published his most famous work, “An Inquiry Into the Nature and Causes of the Wealth of Nations.” In it, Smith set forth the foundations of economics — such as the division of labor, the importance of trade, and the notion of productivity — that still guide our thinking today.
His well-known metaphor of how the free market works is that every individual, working for his or her own gain, is ultimately “led by an invisible hand” to make the world better and more prosperous. “By pursuing his own interest,” Smith writes, the average citizen “frequently promotes that of the society more effectually than when he really intends to promote it.”
Smith contrasts this decentralized approach of individuals pursuing their own interests to a system of centralized planning. In his earlier, seminal work “The Theory of Moral Sentiments,” Smith explained that we should approach top-down social engineering with humility and caution, since what Smith called a “man of system” does not account for the actions of individuals or the incentives they face. The “man of system,” Smith states, “seems to imagine he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board.” Centralized planning, therefore, can quickly go awry and cause a great deal of harm in the process.
While today we might think of this sort of engineering as exclusive to government, Smith realized that private interests can work with government in a similar manner to arrange the chessboard. Though Smith first articulated the “invisible hand” of the free market, he also had a healthy dose of circumspection about human nature, noting that whenever people in the same trade or industry get together, they always end up finding ways to raise prices. This was particularly true for groups trying to prevent or limit competition.
As Smith states, “The proposal of any new law or regulation of commerce which comes from this order (business or labor group), ought always to be listened to with great precaution, and ought never be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”
Limiting competition through government privilege is at the heart of corporate welfare. The most extreme example of corporate welfare and cronyism is the historic East India Company. Smith was highly critical of its monopoly protections and the power it achieved through government privilege.
In 1600, Elizabeth I granted the company the exclusive right to all trade with Asia. Over time, a few competitors emerged, but the East India Company successfully fought them off with shrewd political maneuvering while keeping politicians happy with exotic gifts and money.
In 1757, the company fought and won the Battle of Plassey, defeating its European and Indian rivals. This inaugurated a new form of cronyism, whereby the company exerted considerable political control over significant tracts of India. Voluntary exchange was replaced with conquest. Coercion was used to collect extortionate taxes (a significant source of revenue for the company) in India, leading to famine in the 1760s.
Smith was a strong critic of the East India Company and this kind of government-sponsored privilege. As he noted in “The Wealth of Nations”: “Negligence and profusion must always prevail, more or less, in the management of such a company.” He also stated that a perpetual monopoly was harmful to everyone, especially the least fortunate, because it could lead to high prices and the exclusion of competition.
The crony government privileges of Smith’s time parallel policies today. Whether it is the Jones Act restricting commercial shipping between American ports to domestic shipping firms, vessels and crews or the Export-Import bank providing subsidies to major manufacturers, there are countless examples of modern corporate welfare. We can therefore celebrate Adam Smith’s birthday and life’s work by remaining vigilant in the fight against corporate welfare today.