Adam Smith, an Enlightenment thinker, thought of humans as fundamentally self-interested as contrasted to Thomas Hobbes. Hobbes thought that selfishness worked as a kind of glue for society. His idea was that people are selfish; fundamentally concerned only with themselves. This meant that each person wanted to thrive based on their personal wants and needs without regard to ideals like the greater good or the plight of others. However, as selfish people, they want security at any cost. In order to obtain security, people subject themselves to the state, to laws. While individuals would freely rape, murder and plunder without concerns of conscience they do not because they do not want to be on the receiving end of their brutish desires. The free subjugation of themselves to the state is called ‘social contract’ theory.
Adam Smith lived hundreds of years after Hobbes. He was also a social contract theorist. He was concerned with how self-interested individuals create commerce. In “The Wealth of Nations”, Smith writes:
“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 self-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.”
He thought that when self-interested individuals compete, the process of competition resulted in the most optimum allocation of resources because competition resulted in the lowest average cost of goods or services. In this way, he thought that self-interest served the greater good. He thought that any time the government or monopolies intervened in this process it prevented the process from working as it should and kept costs artificially higher thus interrupting the normative operation of a free market. It is important to note that Adam Smith’s ideals of the free market only work on the basis of competing individuals not market monopolizing corporations or governments. Market monopolies interfere with competition and defy the ideal of a free market.
“The price of monopoly is upon every occasion the highest that can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion indeed, but for any considerable time together. The one is…the highest which can be squeezed out of the buyers…The other is the lowest which the sellers can commonly afford to take…. The monopoly price is most often sustained by “the exclusive privileges of corporations (65)”
“Smith uses the terms “self-interest” and “private interests” always in opposite ways. For former, his most famous statements are “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 (20),” and, “by directing [his] 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 (351)”. Concerning “private interests,” Smith is not so sanguine; these private interests constitute the “spirit of monopoly (371)” which Smith so much detests. It should be clear by now, from what has been said before, that Smith is well aware of the dangers of avarice and especially so since the interests of capitalists diverge, in Smith’s view, so much from the interests of the general public.”
Capitalism (a term he never uses), as Adam Smith thought, is depended on private property and private ownership. The self-interested individual had complete legal and sole rights to their property. Without private property there would be no motivation for individuals to compete and increase their property ownership, their wealth.
Socialism believes that individual interests are served better when they cooperate with each other and not compete. Socialism believes in social ownership. In effect, this means workers own production (also called the means of production). Production is not owned privately but by a group. There are many forms of socialism. Some forms of socialism believe that the workers in a factory own the factory, but everything else in the economy is ‘free market’ and private property. There is no government ownership is this type of socialism. Some forms of socialism simply pay a social dividend based on factory profitability. Some forms of socialism nationalize factories but still maintain private ownership. Social democrats use a progressive tax system and government regulation within a private market economy. There are also anarchist and libertarian forms of socialism. Socialists tend to believe that when the individual is elevated above the group, normal human interaction and group identities tend to get ignored. Language is a perfect example of how humans are fundamentally collective. People do not have ‘private languages’. Communication is only possible by sharing a language that we individually did not make up. People are not hermits. We form governments, churches and social communities.
“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the laborer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the license to gather them; and must give up to the landlord a portion of what his labor either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land, and in the price of the greater part of commodities makes a third component part.
The real value of all the different component parts of price, it must be observed, is measured by the quantity of labor which they can, each of them, purchase or command. Labor measures the value not only of that part of price which resolves itself into labor, but of that which resolves itself into rent, and of that which resolves itself into profit.” -Adam Smith
It is important to note that a ‘pure’ socialism or capitalism has never existed on any large scale. Every world historical economy has always been a mixture. For example, consider the notion of rent in capitalism.
“For the purposes of economics, Smith divides society into three economic classes: the landlords, the laborers, and the merchants and manufacturers (448), or those who live by rent, those who live by wages, and those who live by profit (217). Now the interests of the first two classes are tied to the prosperity of the nation; economic expansion raises the value of land and increases the demand for labor and hence its wages. But exactly the opposite is the case with the third class, those who live by profit:
But the rate of profit does not, like rent and wages, rise with 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 (219).
Thus the interests of the third class run contrary to the interests of the other two; expansion actually raises the cost of labor and rent and increases competition, thereby lowering profits, so much so that the ruination of a country is actually in the best interests of the third class”
It is interesting to note here that economic expansion “raises the value of land” but it is uncertain how long the values of land can go higher and how exactly the profits increase unless the property owner is the sole owner, i.e., already paid for and not obtained by a loan. It would seem that profit is “high in poor countries”. Adam Smith takes this an indicator of “ruination of a country”.
A property owner allows a tenant to live in their property for a fee. The renter does not own the property and if the renter quits paying rent they are not allowed to live in the house. Likewise, a mortgage is ‘ownership’ on paper but the bank allows a mortgagee to live in the house as long as the mortgage is paid. In both cases, ownership is not sole or absolute – it is contingent on paying a periodic fee. So, the landlord or the bank cooperates with the individual in the interest of capitalizing on the financial arrangement. It should also be noted that the bank and the landlord are likely to be indebted themselves to the third class, “those who live by profit”; the financiers, that Adam Smith writes of above.
We can see that the renter or the mortgagee is not a property owner in Adam Smith’s notion of property ownership. However, the aspiration of the renter or mortgagee is for property ownership. Since the aspiration of sole ownership is not reality, a group arrangement is made that allows an individual to have shelter until their aspirations can be obtained. However, it is certainly true that most individuals today will never own their house outright. Therefore, in reality they will live their whole lives working and cooperating in group economic, arrangements.
In finance, leverage is the ability of an investor to increase their ‘paper’ holdings based on loans. Again, a group economic arrangement allows investors to obtain securities that they would normally not be able to afford. As such, the investor is obligated to a group, cooperative arrangement to leverage their holdings. The question of fees and profit is actually an ancient issue. The Bible explicitly forbids interest or profit on loans (Exodus 22:25–27, Leviticus 25:36–37 and Deuteronomy 23:20–21). These passages state that interest is exploitative. In this sense, those that base their faith on these books would be in perfect agreement with the writings of Karl Marx (at least on this specific topic) and Adam Smith. Exploitation with higher and higher fees for loans on rental and mortgaged property are examples of how the wealthy class, the real property owners, has increased their wealth at the expense of those that are not wealthy. This exploitation has been going on from the beginning. Even Adam Smith recognized the exploitation of labor. This excerpt is from an essay on The Wealth of Nations:
“However, in the negotiation of wages, the worker is at a distinct disadvantage. In the first place, the law prevented him from joining with his follows to bargain (71, 151). Further, the law always favors the masters over the workers (151). Workers are prevented from joining in unions to raise wages, but the masters are not forbidden to unite to lower them; indeed, the law encourages them to do so. This legal inequality particularly angered Smith, who noted that, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices (137).” But when the workers attempt to meet, it “generally end[s] in nothing, but the punishment or ruin of the ringleaders (71).” The inequality is so great that:
Whenever the legislature attempts to regulate the differences between masters and their workmen, its counselors are always the masters. When the regulation, therefore, is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favor of the masters (151).” –Adam Smith
Socialism also recognizes the tendency for exploitation of the worker and tries to address it.
In both socialism and capitalism dues must be paid to benefit. For Christianity, capitalism and socialism a main tenant is “He who does not work shall not eat”. Paying your dues is not an option in socialism or in capitalism. Fees are required to participate in the group. The main difference is that in capitalism, according to the ‘theory’ of Adam Smith, individualism as self-interest reigns supreme. The ideal is that the individual worker benefits with private property ownership not the financier. In socialism, the individual worker benefits as well but socialists want to formally recognize ownership of production in a group context – the laborer not the financier. Depending on the type of socialism, the group could mean anything from share holders in a factory to nationalism of a factory. In theory, the individual should benefit in both systems. However, socialism wants to take precautions to ensure that the group of laborers benefit and capitalism viz. Adam Smith acknowledges that in some cases the financiers will benefit at the cost of the laborers. Both systems distribute wealth in one way or another. The fundamental problem that Marx wanted to address with socialism was how the wealthy, the financiers, ended up with all the real private property ownership while the workers, in effect, ended up as indentured slaves barely able to pay their bills. Additionally, in both systems classes are set up in practice.
Karl Marx, the founder of communism, thought there was a higher and lower form of communism. Engels and Lenin called the lower form of communism, socialism. Socialism is not egalitarian. Egalitarianism means everything is shared equally. Marx described socialism like this:
“But one man is superior to another physically or mentally, and so supplies more labor in the same time, or can labor for a longer time; and labor, to serve as a measure, must be defined by its duration or intensity, otherwise it ceases to be a standard of measurement. This equal right is an unequal right for unequal labor. It recognizes no class differences, because everyone is only a worker like everyone else; but it tacitly recognizes unequal individual endowment and thus productive capacity as natural privileges. It is therefore a right of inequality, in its content, like every right. Right by its very nature can consist only in the application of an equal standard; but unequal individuals (and they would not be different individuals if they were not unequal) are measurable only by an equal standard insofar as they are brought under an equal point of view, are taken from one definite side only, for instance, in the present case, are regarded only as workers and nothing more is seen in them, everything else being ignored. Further, one worker is married, another not; one has more children than another, and so on and so forth. Thus, with an equal performance of labor, and hence an equal share in the social consumption fund, one will in fact receive more than another, one will be richer than another, and so on. To avoid all these defects, right instead of being equal would have to be unequal.”
Karl Marx thought that communism would eventually replace socialism not by force but by natural progression. Communism is egalitarian. Communism thinks that wealth should be distributed equally among equals. Individuals should not be singled out according to class, wealth, natural abilities, etc. but should work cooperatively for the greater good of society. Communism does not believe in private property. Private ownership and competition is thought to favor the rich and; necessarily, put less wealthy individuals at a competitive disadvantage. Private property is what gives rise to a class stratified society. In communism the ideal is one of egalitarianism; that all people are equal and should receive the benefit of their labor equally.
For communism, individual ownership is not allowed but that does not restrain class stratification. The administrators of shared wealth, the government, become the de facto upper class. Wealth gets disproportionately distributed according to this class structure in communism as well. In practice, capitalism, socialism and communism cannot claim a classless society nor can they claim that the individual is the sole beneficiary of the toil of their labor as property owners.
What follows from this is that the group or the individual is not normative for these economies but ideals. Class is inevitable for capitalism, socialism and communism – it is utopic to think otherwise. A class is a group comprised of individuals. Mitt Romney is part of a class, a wealthy class. Most of us will realistically never be in his class. However, humans are aspirational – being human is being towards a future. In this way capitalism offers the promise of a possibility – the possibility for success, the chance to be in the wealthy class. For those that extol the virtues of capitalism, it does not seem to matter as much that the vast majority of these aspirations will never be fulfilled. What matters is the place for the dream, the drama of the ideal. As individuals, we need aspiration just after the need for food and shelter. We need to think we are or will be a part of the wealthy class. The goal of this aspiration is for membership in a group, a communal hope shared in capitalism. We are ready to use our collective language, our economic group arrangements, our families, societies and affiliations to aid us in our goals – the envisioned absolute wealth of our freedom. The dream that imagines itself as self-interested individualism is all the while prefaced, perforated and dependent on the other, the group, the community – our shared language. This is what socialism recognized and tried to articulate in its economics. What communism lost was the aspirational; the value we place on the desire for moving towards a future.
In reality, there never is an isolated individual that can cleanly be separated from a collectivity. Additionally, the dream of accumulating more and more sole property ownership based on the system of self-interested individuals appears to reach practical limits as a result of the third group Adam Smith writes of, the financiers. None of us are hermits and make up private languages as we go through our daily lives. The notion of an Adam Smith styled individualism is what many philosophers think of as metaphysical (meta-phusis as beyond physics or beyond the physical). The aspiration I have referred to is desire for the metaphysical individual. It does not reflect our lived reality but necessarily participates in our sense of meaning and hope as an ideal. Aspiration is essential for meaning. To aspire is to see beyond the hum drum, the daily grind and meaningless repetition – perchance to dream. How does the state, the government, figure into our aspirations?
For Adam Smith the state is the guarantor of our security. It is responsible for the military. It also is responsible for enforcing the law. It holds the promise of reprisal for violations of law. It is also responsible for public works projects and certain public institutions where profit is not possible.
“According to the system of natural liberty, the sovereign [government] has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understanding: first the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.”
Contrary to popular belief, Adam Smith was not opposed to government regulation. He spent 100 pages in the “Wealth of Nations” discussing banking regulations. As has already been mentioned he knew the financiers in a society had a corrosive effect on society. They had a tendency for exploitation and government regulation was needed to hold them in check.
For Adam Smith, self-interest is good for those that live by ‘rent’ and ‘wages’ but not for those that live by ‘profit’ as previously mentioned. Smith thought those that live by profit had a destructive influence on society. This is why Smith favored regulations for those who live by profit. The government certainly plays an essential role for ensuring a fair market. Of course, he recognized the issues with capricious regulations and the way they interfered with the normal market operation of efficient competition. However, he would have never given financiers carte blanch, deregulated access to the market. Adam Smith would have said, “I told you so” when the Gramm–Leach–Bliley Act of 1999, deregulated financial services. It repealed part of the Glass-Steagall Act of 1933 that prohibited a single institution like a bank from acting as any combination of an investment bank, a commercial bank, and an insurance company. Basically, the repeal allowed banks to use customer deposits for risky financial ventures. It also allowed banks to have conflicts of interest by ‘advising’ its customers to use its financial services and products without regard to more competitive and valuable investments. Additionally, the government was implicated in these risky investments as the Federal Deposit Insurance Corporation (FDIC) backed up customer deposits. The Dodd–Frank Wall Street Reform and Consumer Protection Act tried to restore financial oversight of banks and financial institutions and consumer protections. One thing it did was to allow the government to liquidate these institutions that are covered by the FDIC in order to keep these institutions from having large scale failures that would jeopardize the ability of the U.S. government to bail them out. Regulations not only provide a fair market but also protect the government from bankrupting itself from market excesses. Adam Smith would have understood the need for this and would not be calling for deregulation as modern Republicans have been doing.
The issue here is that when individual self-interest promotes the healthy working of the market place then the government should stay of the way. However, the government exists to make sure it protects “every member of society from the injustice or oppression of every other member of it”. While it may be in the interest of oil companies to “drill baby drill” it may not be in the interest of the environment and therefore, other members of society to let them do it merely to increase their profits. The government’s job is to make sure the market protects other members of society whose self-interest may be damaged by one group’s profit incentive in the market.
Adam Smith even recognized that the ‘free market’ was not a panacea that could solve all social ills. He stated that a primary function of government was to take care of public works and public institutions where the “profit could never repay the expense” of doing the project. It is certainly arguable that health care insurance providers and education could come under this rubric. It is not the profit interest of health care insurance providers to cover certain risky population groups or chronic illnesses. In order to maximize their profits it is in their interest to ‘cherry pick’ their clientele and drop clients that are a drain on the system. It would be hard to believe that anyone could seriously argue that health care insurance providers have not had quite a long history that illustrates this point. Additionally, while a very good private education is certainly feasible, the cost would prohibit many classes of society from being able to obtain an education. Education for a profit certainly works for those that can pay but simply ignoring the others that cannot pay is not in the long term interest of a society. Adam Smith argued that education is a public work when he we wrote:
“The same thing may be said of the gross ignorance and stupidity which, in a civilized society, seem so frequently to benumb the understandings of all the inferior ranks of people. A man without the proper use of the intellectual faculties of a man, is, if possible, more contemptible than even a coward, and seems to be mutilated and deformed in a still more essential part of the character of human nature. Though the state was to derive no advantage from the instruction of the inferior ranks of people, it would still deserve its attention that they should not be altogether uninstructed. The state, however, derives no inconsiderable advantage from their instruction. The more they are instructed the less liable they are to the delusions of enthusiasm and superstition, which, among ignorant nations, frequently occasion the most dreadful disorders. An instructed and intelligent people, besides, are always more decent and orderly than an ignorant and stupid one. They feel themselves, each individually, more respectable and more likely to obtain the respect of their lawful superiors, and they are therefore more disposed to respect those superiors. They are more disposed to examine, and more capable of seeing through, the interested complaints of faction and sedition, and they are, upon that account, less apt to be misled into any wanton or unnecessary opposition to the measures of government. In free countries, where the safety of government depends very much upon the favorable judgment which the people may form of its conduct, it must surely be of the highest importance that they should not be disposed to judge rashly or capriciously concerning it.”
While this may seem to promote a certain kind of equality, it is really “the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual or small number of individuals, to erect and maintain”.
The government is not a cancerous growth of society but just as essential as referees and rules are to games of sport. Getting rid of government is cutting off your nose to spite your face. It ignores the need for a market framework where fairness and protections are ensured. It should restrain monopolies and market bubbles that would cause cost to be “the highest which can be squeezed out of the buyers”. It is also responsible for filling in gaps that self-interest and profit cannot address. Karl Marx and Adam Smith both addressed the inherent exploitation built into an economy. Protecting individuals from economic exploitation is vital for an economy as socialism and Adam Smith understood. Karl Marx went further with trying to embody elements of protections for ‘self-interested’ individuals into an economy. Adam Smith understood the human need for aspiration, the need to dream, and tried to embody this in the economy of capitalism.
What is dreamed must pertain to me and not to an abstraction about the state or egalitarianism. An ‘aspiration of the state’ is too abstract from the self-interested point of view. However, the abstract notion of an ‘aspiration for the state’ is not inconsequential – it is the aim of morality or what Adam Smith termed sympathy (more like what we think of as empathy). Morality aims at egalitarianism in that it places oneself in the place of the other for Adam Smith.
“However selfish man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though they derive nothing from it except the pleasure of seeing it.”
When I refer to morality, I am speaking specifically about the natural empathy that many people have for the suffering of others. There are very few people that proclaim outright that if you do not work just go ahead and starve to death. For most of us, we may think that those who do not work will not eat but few are willing to let children, elderly, handicapped or even lazy people die before our eyes. The same holds true for health care. We do not want to pay for others health care but the idea of just letting people die without it is abhorrent. This is why we are willing to pay more for emergency room health care than to address the issues systemically and at a lower cost. Most of us will not overtly proclaim that if you do not have health insurance go off somewhere and die. Few will proudly state that if you do not have shelter go live on the street (just not my street). While there is a certain chest beating, cathartic youthfulness about these proclamations it offends most people’s sense of responsiveness to these situations. It may help some to think that suffering is the fault of the person suffering (as certainly may be the case for some) but pushing this very far starts to look like ‘protesting too much’ and really serves only to show that the pull of morality is felt only reacted to negatively and defensively.
This feeling of responsibility for the suffering for others is what I mean by morality. From the point of view of ‘my aspirations’, the suffering of the other is irrelevant. From the ideal of pure self-interestedness there is no place for this feeling. If the self is thought as the absolute metaphysic of individualism, the sole property owner, it does not serve the absolute interest of the self to care about the suffering of others; much less do anything about it that will not directly benefit the self. While morality is an abstraction from the point of view of self-interestedness, it is nevertheless a notion that most are not willing to depart with. Our self-interestedness tells us not to pay for anyone other than ourselves but the pull of morality will not let us ignore the suffering of the other. Morality is the ghost of our group involvement. It is the basis for the inevitability and indispensability of the state.
As I have discussed while our metaphysics of individualism compels us towards an aspirational future, our realistic, daily involvements are fundamentally based on language, community and group. The capitalistic goal for moving into the upper class is itself a self-interested aspiration that embodies the notion of class, the group. All this shows us that individualism is perforated with group involvement and community. We are indebted to the other whether we acknowledge it or not. While chest beating individualism may be fun for some, individualism, the sole property owner, is essentially a dream, a drama that gives us meaning in our ‘me-only’ self-centeredness. However, individualism ignores the real ways in which we participate with others and are always already indebted to the other.
Karl Marx went further than leaving the option of morality up to every self-interested individual. Adam Smith as well understood the role of government in achieving the affluence and security of individuals in an economy, protecting them from exploitation and providing public works projects. The communist notion of equalitarianism failed to make everything equal in terms of labor and preventing exploitation. However, socialism attempts legal protections of groups and individuals that aim at fairness, equal opportunity, an equal playing field and protections in an economy. It is important to note that ‘equal’ here is not some absolute ideal of equalitarianism as in communism but should be thought under the rubric of fairness. Marx fleshed out possibilities for how this could work more than Adam Smith but Adam Smith would probably have more in common with the objectives of Karl Marx’ than many of the modern Republican, the neo-conservative, advocates of capitalism.
In any case, we are neither socialists nor capitalist; we are both. The ideal of either is not where we live. This is why there never has been a pure capitalism or a pure socialism. All great economies have essential elements of both. Beating others over the head with these labels may make some feel good but it is only a silly drama that fuels an inflated ego. These kinds of accusations can also be used to manipulate less aware people but it is really only empty rhetoric. The outcome of such practices is a chronic condition called hate and only hurts the hater in the long run. I believe it is better to ‘see’ how we live and try to ‘understand’ our drives and aspirations as they show themselves without metaphysical hermeneutics, pre-cognitive dispositions and assumptions, working below the surface. There is value in letting ourselves see and understand ourselves as we are and not in the service of some head game we play on ourselves. In all great economies, socialism and capitalism are really only two different historical ways of thinking about the same thing – an economy that works.
 Adam Smith, Wealth Of Nations, [WN I.ii.2)
 Alas, you too young, free-market libertines who rail against the socialists in your rabid individualism – you too are a product of ‘group-think’ – it is called language – you just don’t know your indebtedness yet…
 Adam Smith, Wealth Of Nations, [WN I.vi.7-8: p 67]
 The Forgotten Agrarian: Re-Reading Adam Smith, John C. Médaille
 II Thessalonians 3:10
 In accordance with Lenin’s understanding of the socialist state, article twelve of the 1936 Soviet Constitution states:
In the USSR work is a duty and a matter of honor for every able-bodied citizen, in accordance with the principle: “He who does not work, neither shall he eat.”
In Lenin’s writing, this was not so much directed at lazy or unproductive workers, but rather the bourgeoisie. (Marxist theory defines the bourgeoisie as the group of those who buy the labor-power of workers and engage it in the process of production, deriving profits from the surplus value thus expropriated. Once communism was realized, that is, after the abolition of property and the law of value, no-one would live off the labor of others.)
 Capital, Vol. I, Chapter 1, Section 4 (p. 78); Also see http://www.lrp-cofi.org/book/chapter3_transitiontosocialism.pdf
 Adam Smith, Wealth Of Nations, ( 1976, 687–88)
 Ibid, (WN V.i.f.61: 788)
 The Theory of Moral Sentiments, Adam Smith (TMS I.i.1.1)