Adam Smith, the Wealth Gap and How Wealth Monopolies Are Broken

By the time Adam Smith laid out the reason for the decline of the feudal aristocracy in An Inquiry into the Nature and Causes of the Wealth of Nations, the writing was already on the wall.  Smith was a philosopher and one of the founders of a sub-field of philosophy called Political Economy.  Unlike modern pure economics (a fruit of the 19^th Century craze for applying mathematics to every study of human endeavour), political economy relates social, political, historical, legal and even moral trends (the latter being one of Smith’s particular interests) to economic activity.  Even the word “economy” was then interpreted in a way much closer to the Greek original, meaning roughly the equilibrium or mode of life of the national household, and thus encompassed far more than business.   The distribution of wealth was of particular interest to Smith, as it is to us today.

In Wealth of Nations, Smith puts forth a compelling theory of the change from feudal to modern political economy, and it had to do with freeing captive wealth and dissolving the feudal wealth gap.  In the chaos of the post-Roman world, wealth was the land you could defend and the number of followers who supported you.  In the pervasive violence between nobles, nothing else really mattered.  However, as the skilled artisan class slowly recovered under the protection of emergent national states, the nobility suddenly had an abundance of things to buy.  They began to rent out their previously serf-tended land, or even sell it outright in order to raise capital.  As they sacrificed their former sources of power to support conspicuous consumption and keep up with ever-changing fashion, the nobility in effect transferred their wealth in two kinds to two different classes.  Their money went to the rising artisan class.  Their land went to a rising class of free farmers, who for the first time had an incentive to improve their land and methods of production.

This kind of phenomenon, the disappearance of a wealthy class, has occurred throughout history, beyond Britain and beyond the Enlightenment, often with different details.  Louis XIV dislocated his nobility by giving them court positions and enslaving them to opulent fashions, both of which alienated the rural and urban lower orders.  The Prussian state centralised by giving its Junkers military and official positions while inculcating a sense of noblesse oblige, which helped to ensure that Germany would not experience a French-style revolution.  Farther back, Ivan the Terrible wiped out his entire noble class through a system of and installed more compliant replacements, incidentally ensuring that the first steps toward constitutional government would be impossible in Russia.  But these are all essentially the strategies of centralising monarchs. 

What should be more interesting to us are the super-rich classes of history who fell without the aid of a central authority.  The vast wealth of the British Empire dried up in the course of a single generation, owing both to the World Wars and the hubris of British administration.  The Spanish Empire, the greatest cabal of treasure thieves in history, perished because it did not plant sustainable economies in its possessions.  Without more resources, all the extra silver was simply inflation.  The Russian Revolution was the end result of a long and futile attempt of an unbearable landowning aristocracy to hold on to their positions.  The more they held on, the worse the fall they were in for.  Such classes may perish from internal causes, popular dissatisfaction, or a combination of the two.

The problem today is not one of captive capital (if anything, capital is far too mobile for its own good- marginal lending and derivatives are both devices which allow banks and investment companies to create money that simply isn’t there), but of misallocated capital and the social illegitimacy which follows- and this, I think, is a problem that Smith could easily understand.  The half-life of an economic class is arguably proportional to the social legitimacy of the distribution system which creates it.  Capital allocations on the basis of blood and race almost always seem to fail- that is one explanation for the fall of the Babylonian Empire to the more meritocratic Persian Empire, and of course for the end of the European global empires.  By contrast, the Chinese Imperial Examination system established a meritocracy that survived the falls of several dynasties. 

The point is that in today’s system, it is not the entrepreneurs and real economic creators who are begrudged their share.  It is the financial class who profit by moving other people’s money around and are paid obscenely large bonuses and benefit packages regardless of their profitability, and the upper managerial class who likewise recieve compensation disproportionate to their value, and are likely to retire with millions or billions in their pockets regardless of how badly they fail the people dependent on them.

We are trained to look down on economic systems based on patronage.  The only thing worse is a patronage system in which the modern patron completely denies any responsibility for the people affected by their activities.  By doing so, the current economic order is setting the stage for its own obsolescence.  The only question is whether the change will open up new possibilities, as the demise of the feudal aristocracy did, or whether it will drag everyone down.