ECONOMICS, POLITICS

Adam Smith: The World’s Greatest Critic of Libertarianism?

One could argue a correlation exists between the conservative outcry for austerity and corporate tax avoidance.  It’s a simple idea: if the United States generated more revenue, the current recession wouldn’t be nearly as acute and the vertiginous arguments whirling around the issue of Spending—yes, with a capital ‘S’—would be rendered, for the most part, moot.  Is creative-but-legal tax dodging evidence of a certain moral slippage, or is it, as libertarians would have us believe, some exercise of one’s independence, a reification of Darwinian economic superiority within a disturbingly mountainous socioeconomic landscape?  If Apple can avoid paying its fair share of taxes and monster corporations like Pepco and GE (among many others) can enjoy negative tax rates of 508 and 4,737 million dollars, respectively, is it unreasonable to assume others might feel entitled (or even compelled) to pursue a similar path?  Isn’t the drive to pay the least amount of taxes, in a certain sense, representative of the other side of the socialist coin?  Imagine a company will pay its workers $10 an hour for eight hours of work, but it will not pay a penny more beyond that eight-hour limit.  It’s not difficult to conclude that every employee will work as little as possible to earn the daily wage.  We might model this behavior with, say, a crude function like

f(x) = -x^3(x-n)^{-1}

(where x – n > 0) , which describes employees trying to earn the full wage as close to n hours as possible—but without ever “going over the limit.”

[Aside: We wouldn’t use this function, however, if the maximum rate could only be achieved at precisely eight hours (i.e., n = 8); that is, imagine you lost ten dollars for clocking out even one second before the 480-minute limit (i.e., x = 8).  At that point, everyone would be standing around waiting to punch the clock at precisely the eight-hour mark, yet our function never gets there: 

\lim_{x\rightarrow8}f(x)=\infty

This socialist design, so we’re told, quells incentives to work, creating a climate where laborers try to gain as much as they can while expending the least amount of effort. But doesn’t that concept represent the underbelly of Adam Smith’s economic theory—specifically, the “invisible hand”?  To wit, from his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations:

Every individual….generally neither intends to promote the public interest, nor knows how much he is promoting it … 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. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

So, if we’re being honest, shouldn’t we defenestrate—or, at least, repackage—capitalism when self-interest fails to buttress a utilitarian end? After all, that was Smith’s glorious utopia: a burgeoning collective as an outgrowth of discrete moments of tendentious market exchange, not the unbounded ascension of the autonomous billionaire to the exclusion and detriment of all else.  There would seem to be a palpable difference between exchanging for the collective and exchanging that benefits the collective.  True socialism rests in the former description, progressivism the latter.  We should wish to reinvent the current state of capitalism toward progressive ends, but, instead, we apply the convenient dysphemism of “socialism” to reference the self-interests of the less affluent, even though that limiting case still falls within the bounds of Smith’s argument. Why do libertarians lean toward such a conceit?  Because they are predisposed, for whatever reason, to equate baleful “self-interest” with welfare and entitlement programs rather than extending the concept, as we should, to yachts and tax avoidance and high-priced consumption and speculative income and rent-seeking behavior, activities which (1) do not create goods or services for consumption and (2) enjoy very restrictive and localized benefits.

The wide chasm of income inequality is—and continues to be—much “worse for society.”  In a very real sense, then, the greatest critic of the libertarian platform resides not in the progressive ideology of the New Deal or neo-Keynesian theory but with Adam Smith, the socioeconomic lodestar for me-first capitalists.

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