Adam Smith on Corruption

CORRUPTION

Hal Pepinsky, pepinsky@indiana.edu, pepinsky.blogspot.com

December 3, 2011

I’ve been thinking about the lesson Adam Smith taught me about the limits of freeing trade and allowing the invisible hand to serve the common good. In book 4, chapter 2, Smith introduces the invisible hand, and then at paragraph, explains that free trade will never happen:

To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain is as absurd as to expect that an Oceana or Utopia*64 should ever be established in it. Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it. Were the officers of the army to oppose with the same zeal and unanimity any reduction in the numbers of forces with which master manufacturers set themselves against every law that is likely to increase the number of their rivals in the home-market; were the former to animate their soldiers in the same manner as the latter enflame their workmen to attack with violence and outrage the proposers of any such regulation, to attempt to reduce the army would be as dangerous as it has now become to attempt to diminish in any respect the monopoly which our manufacturers have obtained against us. This monopoly has so much increased the number of some particular tribes of them that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature. The Member of Parliament who supports every proposal for strengthening this monopoly is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists. (quoting from http://www.econlib.org/library/Smith/smWN13.html#B.IV,%20Ch.2,%20Of%20Restraints%20upon%20the%20Importation%20from%20Foreign%20Countries ).

Smith was writing about the effect of government-granted deals where to encourage private investment, the liability of investors was limited. If the enterprise folded, investors were legally shielded from losing more than the money they paid for shares. The East India Company was a leading place to invest at no personal risk in an enterprise where to encourage investment beginning with Queen Elizabeth in 1600, where English corporate monopolization of markets was encouraged by tax incentives: Your tea gains exclusive exemption from import taxes to stimulate tea drinking.

Smith noticed that the privilege of incorporation corrupted legislators. Now in the US where the supreme court has given corporations all the constitutional rights of just plain people, legislators who amass mightier campaign funds become indebted to for-profit corporate forces that drown out constituent initiatives. When legislators introduce legislation written for them by lobbyists, when they make external blanket pledges as on taxation, I join Adam Smith in observing that domestic practices are as corrupt as practices in any country US politicians and media point fingers toward. Why pretend to have risen above crime and corruption? Love and peace--hal