Why the Marketplace Fails
In The Wealth of Nations,
Adam Smith argued that labor is "the only universal, as well as the only accurate
measure of value, or the only standard by which we can compare the values of different
commodities at all times and at all places."1 However, he added, "the whole
produce of labour does not always belong to the labourer."2 According to Smith, the laborer
shares his produce with the employer, in the form of profits of stock; and with the
landlord, in the form of rent. To complicate matters, the market price of a
commodity is not necessarily the same as its natural price. The market price
depends on supply and demand; but, since supply can be controlled, regulated, or
manipulated, the consumer suffers.
Here are some of the
problems identified by Smith:
- Landlords "like all
other men, love to reap where they never sowed."3
improvements" can seldom be expected from "great proprietors," but the "work
done by slaves . . . is in the end the dearest of any"4 [my emphasis].
- Corporations keep prices up.5
- Industry benefits the rich
- Merchants and manufacturers
extort legislation in support of "their own absurd and oppressive monopolies."7
- The crown extorts money.8
- Where they are defective, laws
"put all borrowers nearly upon the same footing with bankrupts or people of
doubtful credit . . . "9 [my emphasis].
What were some of Smith's
conclusions regarding the MERCANTILE SYSTEM?
- " . . . [I]n the
mercantile system, the interest of the consumer is almost constantly sacrificed to that of
the producer . . . "10
- "Commerce . . . has
become the most fertile source of discord and animosity."11
- The management of the
American colonies: " . . . in the system of laws . . . the interest of the home
consumer has been sacrificed to that of the producer with a more extravagant profusion
than in all other commercial regulations."12 Not only was the consumer burdened
with inflated prices, the national economy was burdened with massive "new debt."13
It is evident, that,
despite free trade, such as NAFTA, many of the absurdities and oppressions of
today's Mercantile System bear considerable resemblance to those of England in 1776, the
year The Wealth of Nations was first published.
Hayek, and other supporters
of the marketplace, have contended that the price system is the best mechanism for
conveying information -- about the value of goods and services and about
profitable or favorable opportunities.14 But, if price conveys information,
then, what of price when it conveys false information? or disinformation? Recently,
the prices of commercial properties and houses in Canada and elsewhere melted down. Did
their value really melt down? Or, did the price system melt down? Let me examine
this question for a moment.
- Adam Smith argued that money
is "the instrument of commerce" and "the measure of value."15 The fact that money is used to
measure value does not mean that what cannot be measured has no value. Therefore, value
cannot be measured by money alone. Smith distinguished between value in use and
value in exchange. Air and water have value in use but little value in
exchange. Could this have been the sufficient justification for industrialists
to pollute or poison both air and water -- two commodities which, in David Ricardo's words
"are indeed indispensable to existence"?
Smith distinguished between two meanings of the word Value: value in use and value
in exchange. According to Smith, the first meaning refers to "the utility of some
particular object"; the second to "the power of purchasing other goods, which
the possession of that object conveys."16 Most interestingly: "The
things which have the greatest value in use [e.g., air and water], have frequently little
or no value in exchange"17 -- and vice versa.
David Ricardo on Value. David Ricardo pondered intensely the
question of price and value. According to Pierro Sraffa and Maurice Dobb, Ricardo
puzzled "beyond measure" over the "law of price."18 For Ricardo, a commodity must
possess utility to have an exchangeable value. The exchangeable value
generally derives from the commodity's scarcity and from the quantity of labor
required to produce it. However, the value of some commodities, such as "rare statues
and pictures, scarce books and coins, wines of a particular quantity . . . " is
derived exclusively from their "scarcity" -- "and varies with the varying
wealth and inclinations of those who are desirous to possess it."19 Ultimately, the price of a
commodity is regulated by its cost of production, which is determined by costs such
as those of capital, machinery, and quantity of labor.
between value, riches, labor, and capital. By increasing the
facility of production (or productivity), a capitalist can use the same amount of labor to
produce more commodities. In other words, he can use the same value (quantity of labor) to
produce greater riches (a greater abundance of commodities).20
- Power derived from
traditional sources of wealth, such as real property, is increasingly being challenged by
a new source of power -- intangible intellectual capital, held in grey matter.
Monetary Authorities can increase the money stock, banks can create credit, but neither
the central bank nor its member-banks can alienate a free mind. The rich can buy, or, as
creditors, can physically seize, real estate or a manufacturer's patent; but they cannot
seize intangible intellect in grey matter. In a world where more and more labor can be
replaced by intelligence and knowledge, money alone cannot be a measure of value.
IN TRUTH, HOWEVER, THE
USURER, WHOSE BUSINESS IS THE INTANGIBLE, CAN POSE A DANGER.
IF HE CANNOT DOMINATE MAN AS MIND, HE CAN AT LEAST TRY TO INDENTURE THE MIND'S OWNER. THIS
IS PRECISELY WHY SO MANY USURERS NOW OFFER STUDENT LOANS. THE FRONTIER MARKETPLACE OF THE
USURER IS THE ONE THAT WILL INDENTURE WHOLE NEW GENERATIONS OF MINDS.
on Reason. In
his meditations on reason and knowledge, Kahlil Gibran held that "[r]eason is not
like the goods sold in the marketplaces -- the more plentiful they are, the less they are
- For Hayek, money may be
"one of the greatest instruments of freedom ever invented by man."22 But the fact still remains that
money has also been an instrument of subjugation, coercion, and
control. We must extend Adam Smith's categories of values accordingly.
THE POTENTIAL EVILS OF THE
- MONOPOLY, AS UNNATURAL
CONCENTRATION OF POWER
- REAL OR TACIT COLLUSION
- MISDIRECTED RESOURCES
- COERCIVE CORPORATE
- PROPAGANDA AND PSYCHOLOGICAL
- BIASED NET ADVANTAGES,
MASQUERADING AS RULE OF LAW
- LOW MORAL OR ETHICAL
STANDARDS, MASQUERADING AS HIGH VIRTUE
- ECONOMIC DIRIGISME,
MASQUERADING AS SPONTANEOUS MARKET ORDER
- MARKET DESPOTISM,
MASQUERADING AS FREE TRADE
- ECONOMIC OPPRESSION,
USURPATION, AND EXTORTION
- WICKED EXPLOITATION
- DECEIT, FRAUD, ETC. --
MUST BE EXPLICITLY
INCORPORATED IN ALL SERIOUS CALCULATIONS OF NET PRESENT VALUE. THE ECONOMIC
VICISSITUDES ARE A FUNCTION OF THE RELATIVE EXPECTED COERCION IN, OF, FROM, AND THROUGH
on Money. The
First Epistle of Paul to Timothy provides the fundamental insight: "For the love of
money is the root of all evil . . ." [Timothy 6:10].
Adam Smith, The Wealth of Nations (1776), edited by Edwin Cannan, with a
Preface by George J. Stigler, 1976, Vol. 1, at 41-42 (labor -- the only universal standard
of value), 33 (market price and natural price), and 54 (wages and profit).
2 Ibid., Vol. 1, at 55
(sharing of the produce of labor).
3 Ibid., Vol.
1, at 56 (landlords).
4 Ibid., Vol.
1, at 411-412 (slave labor).
5 Ibid., Vol.
1, at 138 (corporations).
6 Ibid., Vol.
2, at 161 (industry, for the benefit of the rich and powerful).
7 Ibid., Vol.
2, at 165 ("absurd and oppressive monopolies").
8 Ibid., Vol.
1, at 138 (prerogative of the crown: extorting money).
9 Ibid., Vol.
1, at 107 (when contracts cannot be enforced).
10 Ibid., Vol.
2, at 179 (the mercantile system).
11 Ibid., Vol.
1, at 518-519 ("the sneaking arts of underling tradesmen").
12 Adam Smith, The
Wealth of Nations, Vol. 2, 1976, at 180-181 (system of laws for managing the American
and West Indian colonies).
13 Ibid., Vol.
2, at 180.
14 See Friedrich A.
Hayek, Law, Legislation and Liberty, Vol. 2, 1976, at 116-121; and The Road to
Serfdom, 1944, 1972, and 1994, at 55-56 ("price system"), and 103.
15 Adam Smith, The
Wealth of Nations, Vol. 1, 1976, at 450 (wealth and money).
16 Ibid., Vol.
1, at 32-33 (value).
18 See David Ricardo,
On The Principles of Political Economy and Taxation (1817), edited by Piero Sraffa
with the collaboration of M.H. Dobb, Vol. 1, published for The Royal Economic Society,
1951, by the Press Syndicate of the University of Cambridge, at xv-xvi.
19 See David
Ricardo, On The Principles of Political Economy and Taxation, Vol. 1, 1951, 11-20
(On Value), especially 12.
20 Ibid., Vol.
1., at 273-288 (Value and Riches, Their Distinctive Properties).
21 Kahlil Gibran, Secrets
of the Heart, Meditations of Kahlil Gibran, selected and with a Narration by Stanley
Hendricks, with an Introduction by Manoocher Aryanpur, 1968, at 36.
22 Friedrich A.
Hayek, The Road to Serfdom, 1944, 1972, and 1994, at 98-99.