The Essential Galbraith by John Kenneth Galbraith

Author:John Kenneth Galbraith
Language: eng
Format: epub, pdf
Publisher: Mariner Books

II

Smith’s economic contribution to his own time can be thought of as falling into three categories—method, system and advice. The second, overflowing onto the third, is by far the most important.

As to method, Smith gave to political economy, later to become economics, the basic structure that was to survive almost intact at least for the next hundred and fifty years. This structure begins with the problem of value—how prices are set. Then comes the question of how the proceeds are shared—how the participants in production are rewarded. These latter are the great trinity of labor, capital and land. Along the way is the role of money. Thereafter come banking, international trade, taxation, public works, defense and the other functions of the state. Other writers, notably the Physiocrats, had previously given political economy a fairly systematic frame, although, as Alexander Gray, a later Glasgow professor, observed, they had “embellished it with strange frills.” But it was Smith who, for the English-speaking world, provided the enduring structure.

The framework, in turn, was more important than what it enclosed. Although Smith’s treatment of value, wages, profits and rents suggested what was to follow, it was, in all respects, a beginning and not an end. Thus, as one example, Smith held that the supply of workers would increase, pari passu, with an increase in the sustenance available for their support. David Ricardo translated this thought into the iron law of wages—the rule that wages would tend always to fall to the bare minimum necessary to sustain life. And Thomas Robert Malthus, going a step further, adduced his immortal conclusion that people everywhere would proliferate to the point of starvation. Subsequent scholars—the marginal utility theorists, Alfred Marshall, others—added further modifications to the theory of prices, wages, interest, profits and rent, and yet further transmutations were, of course, to follow. Smith was left far behind.

But the structure he gave to economics and the explanation of economic behavior that it contained were, for Smith, only steps in the creation of his larger system—his complete view of how economic life should be arranged and governed. This was his central achievement. It provided a set of guiding rules for economic policy that were comprehensive and consistent without being arbitrary or dogmatic.

In the Smithian system the individual, suitably educated, is left free to pursue his own interest. In doing so, he serves not perfectly but better than by any alternative arrangement the common public purpose. Self-interest or selfishness guides men, as though by the influence of “an invisible hand,” to the exercise of the diligence and intelligence that maximize productive effort and thus the public good. Private vice becomes a public virtue, which has been considered ever since a most convenient thing.

In pursuit of private interest, producers exploit the opportunities inherent in the division of labor—in, broadly speaking, the specialized development of skill for the performance of each small part of a total task of production. Combined with the division of labor is the natural propensity of man “to truck, barter or exchange.

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