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The free market observed by Adam Smith had little resemblance to what
is called the free market today. Additionally, capitalism as promoted
by Adam Smith is very different from what we call capitalism today.
Smith was a man of the 18th century, a time when humans in Europe
were just beginning to use the tool of science to uncover the mysteries
of nature and human behavior. His understanding of economics was akin
to Newton's understanding of physics. Like Newton he brilliantly
uncovered certain truths but he did not get everything right.
Smith wrote about both human psychology: "The Theory of Moral
Sentiments", and Economics: ..."Wealth of Nations"
One fundamental truth Smith identified was that wealth is only
created through transformation of raw materials into products which
may be sold at a profit. In addition, he developed his free market theories on the basies of a common contract for the exhcange of goods at a price between parties of respectability and moral convictions that were true to their word. Prices would be determined without any need for any external manipulation of the market by any third entity. As well he understood that any activity other than manufacturing, farming, and mining, do not create wealth. This is as
immutable as Newton's laws of gravity and motion. Smith already knew
that financial markets and banking only supported the creation of
wealth by supporting the 3 aforementioned activities by providing
capital. In and of themselves financial markets and banking are
parasites on the creation of wealth because they take a cut without
actually producing anything they become an external third party that mainpulate the free market exchanges. Still Smith recognized these activities are essential to a vibrant economy because they provide a means for wealth creating enterprises to be created and expanded. This is the
ultimate benefit of capitalism. Being of the age of enlightenment, Smith saw what happened when wealth was too highly concentrated. It lead to stagnation, so he advocated
that wealth be recycled (my term) lest it become stagnate and the overall economy slowed down as a consequence. ( The best method we have found for recycling wealth is taxation.) On the other hand Smith's observation of the free market was in an age before mass communication and an understanding of motivational psychology. It was a time when consumers compared relative utility
side by side in the market, and competition was based upon this relative utility versus cost. Very different than what we have today.
It was also a time when the power of royalty to control markets was diminishing. Smith 's problems with regulation were based upon regulation which benefited a few individuals (the royals) and
regulation designed to benefit society as a whole.
Today the marketplace has little to no basis for relative utility. A cousin of Sigmund Freud began applying Freud's theory to the marketing of products in the 1920's. It quickly became apparent that
humans could be sold products with lower or even negative utility by appealing to the consumer on a deeper emotional level. ( Economists of the rationalist, Great Lakes, camp, jump through some real hoops to explain this behavior (and they are wrong)) This discovery along with
mass advertising enabled by mass communication effectively destroyed the free market observed by Adam Smith. Another problem with the idea of the free market is that humans make decisions based upon the short term rather than the long term. This enables shrewd individuals or groups to manipulate markets and exploit individuals for their own gain. The invisible hand Smith described is either to slow or becomes too entangled to effectively make corrections to the market in sufficient time to prevent real, long term, harm for occurring. Today a "Free Market" has come to mean an economic environment free from regulation or mechanisms which limit the concentration of wealth.
This is not the capitalism envisioned by Smith. This concept returns to an earlier era, when the distribution of wealth became highly stratified and those who were best at accumulating wealth through whatever means, theft, exploitation, fraud, became the most This wealth enabled them to become politically powerful as well, and the feudal system developed.
The United Sates was founded by people who understood the concentration
of wealth and power was not the best system for all of society. They were, to a man, adherents of the philosophy of John Locke and his concept of a social contract. It is stated in the preamble to the constitution of the United States as a fundamental purpose of our government: "We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare,
and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America."
If you look at what the framers understood promoting general
welfare to mean, you will see that it was first to protect society
from economic and business forces which could do harm, and to
create an environment which promoted prosperity for all members of
society. This runs very contrary to the current concept of the free
market. In short our Founding Fathers saw the need to balance prosperity with failure and with the human vision of protecting those for whom the social contract failed them.
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