February 22, 2009

Purchasing Power

Wealth, as Mr Hobbes says, is power. But the person who either acquires or succeeds to a great fortune, does not necessarily acquire or succeed to any political power, either civil or military. His fortune may perhaps afford him the means of acquiring both, but the mere possession of that fortune does not necessarily convey to him either. The power which that possession immediately and directly conveys to him is the power of purchasing; a certain command over all the labour, or over all the produce of the labour, which is then in the market. His fortune is greater or lesser, precisely in proportion to this power; or the quantity either of other men's labour or, what is the same thing, of the produce of other men's labour which it enables him to purchase or command. (Smith Wealth of Nations, Chap V, p. 26-7 Everyman 1991 ed.)

I find this passage from Smith's Wealth of Nations fascinating on many levels. It demonstrates his clarity- Smith was one of the masters of expressing complicated ideas clearly and lucidly. He is eminently readable. It also reflects though on the subtlety of his ideas about wealth. For what Smith attempts here is a definition of wealth- building on a key earlier insight from Thomas Hobbes- that seeks to explain what he considers to be that power that wealth wields. Hobbes defined wealth as the power to do something- his key interest was in political power and the wealthiest men in a Kingdom might easily destabilise or threaten the realm's internal security (as for example Hobbes's great contemporary James Harrington argued wealthy classes had threatened the security of first the Norman, then the Lancastrian and later the Tudor state). What Smith does is refine Hobbes's analysis and do it in such a way that the political consequences within his own day would be obvious, but are unstated.

Smith agrees with Hobbes that wealth constitutes a power- but whereas the political philosopher left the definition of wealth to others whilst he constructed his Leviathan- the Scottish moral philosopher turns immediately to define exactly what that power consists of. Smith immediately moves the attention of his readers away from the static form of wealth, to a dynamic social form- purchasing. Purchasing rests of course upon the consent of others to your definition of your own wealth- a point that Smith makes later in the Wealth of Nations when he discusses the fact that money has a rising and a falling value. Perhaps even more interestingly though thinking about purchasing leads to an inevitable question- what kind of power is purchasing? What kind of leverage is the ability to buy? Smith who beleived that the ultimate source of value was Labour can answer that the purchaser purchases the labour of others- he is able to exercise command over labour in proportion to his wealth in the market. That distinction immediately creates a solidity within Smith's speculation that Hobbes's did not have: here we have the root of the power of wealth, it is the power to purchase, to purchase the services that others agree to sell.

What consequences does this intellectual move have? What I think it does is make even more explicit the dependence of wealth on the social structure that reinforces it. If we think of wealth as the ability to make transactions, to extract services, then we realise that it is dependent on the social structures that allow you to make transactions. In that sense what Smith does is change the nature of the discussion- his insight that wealth is about the ability to make transactions makes wealth a dynamic thing (and one of the fascinations about the Wealth of Nations as a book is that it is a phenomenal acheivement of economic history as well as of economics) and it relates wealth to politics. Smith in this sense is not merely an economist but a political economist- understanding that economics, the study of wealth, not merely underpins, as Hobbes would agree, political stability and instability, but that it also depends upon political community. Without that community, the wealthy would be unable to exercise their power to make transactions.