Saturday, February 9, 2013

The Third Order

I have presented this story before. It is not my story, but Adam Smith's -- and he related it more than once himself. When I presented it before, I took it from Book One, Chapter VI of The Wealth of Nations. This time it comes from the Conclusion of Book One, Chapter XI, and it has a different ending.

Smith's paragraph that begins "His employers constitute the third order" I have broken into five paragraphs and shortened (as noted by "..."), but otherwise changed not a word.

The title here is mine:

The Invisible Hand Picks Your Pocket, by Adam Smith
The whole annual produce of the land and labour of every country, or what comes to the same thing, the whole price of that annual produce, naturally divides itself, it has already been observed, into three parts; the rent of land, the wages of labour, and the profits of stock; and constitutes a revenue to three different orders of people; to those who live by rent, to those who live by wages, and to those who live by profit. These are the three great, original and constituent orders of every civilized society, from whose revenue that of every other order is ultimately derived.

The interest of the first of those three great orders, it appears from what has been just now said, is strictly and inseparably connected with the general interest of the society. Whatever either promotes or obstructs the one, necessarily promotes or obstructs the other. When the public deliberates concerning any regulation of commerce or police, the proprietors of land never can mislead it, with a view to promote the interest of their own particular order; at least, if they have any tolerable knowledge of that interest...

The interest of the second order, that of those who live by wages, is as strictly connected with the interest of the society as that of the first. The wages of the labourer, it has already been shewn, are never so high as when the demand for labour is continually rising, or when the quantity employed is every year increasing considerably. When this real wealth of the society becomes stationary, his wages are soon reduced to what is barely enough to enable him to bring up a family, or to continue the race of labourers. When the society declines, they fall even below this...

His employers constitute the third order, that of those who live by profit. It is the stock that is employed for the sake of profit, which puts into motion the greater part of the useful labour of every society. The plans and projects of the employers of stock regulate and direct all the most important operations of labour, and profit is the end proposed by all those plans and projects.

But the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin. The interest of this third order, therefore, has not the same connection with the general interest of the society as that of the other two.

Merchants and master manufacturers are, in this order, the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the public consideration... Their superiority over the country gentleman is, not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his. It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction, that their interest, and not his, was the interest of the public.

The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.

The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.


jbpeebles said...

Fantastic quote, Arthur.

The interests of the moneyed elite and their everpresent need for more profits isn't compatible with the interests of the general population, or the building of a sound economy.

Clearly, the Fed and banking cartel have become the means by which "those who seek profit" keep the system going, basing it on the issuance of new liabilities at interest. They've gone to direct purchases of Treasuries and MBSs in vast quantities--monetizing the debt all so the market doesn't correct as it needs to.

In the longer term, the debasement of our currency will mean that the general population and their frozen real wages can't keep up. Smith anticipates this scenario and more importantly its cause.

General American ignorance and docility figure into this system increasingly built on a serf-lord-style relationship--a wholly unAmerican situation. The lowering of educational standards means most Americans are unaware of how their future are being robbed by the overproduction of debt. This ignorance prevents emissaries of truth from being understood ("though they have ears, they do not hear...")

Another key facet is the value of rents, the first economic necessity. Right now, outside of major urban areas, it's not profitable to fix homes up. So the work isn't there for the middle class and only slumlords prosper. This situation was of course brought on by an overabundance of houses, with flattening demand. Those circumstances were contrived through those who live by profit, as they endorsed liar's loans, and packaged risky MBSs as AAA.

And now we have the Fed moving the goalposts, largely by chronically understating unemployment so as to benefit the political class in power. Deception increasingly seems the method by which they rule. If the people were to figure out how "those who live by profit" were controlling their economic futures, there'd be "revolution by morning."

Luke Smith said...

Way to go, Art. That is an excellent excerpt.