Where would we be without the market? The stock market, the bond market, the financial markets in general—all of these institutions, journalists tell us, are the ultimate, perhaps only, check on President Trump’s power.
Esteemed scholars reassure us of the same—that the world’s oldest constitution is backstopped by Wall Street and the dollar. Investors, the argument goes, need their investments protected. The courts, independent and powerful, can provide that protection. Threaten the courts, and the markets will tumble, and the dollar will drop. It is capitalism, in other words, and not citizens or politicians, that will force the White House into compliance with the courts and the Constitution.
This faith in capitalism is both novel and strange. Historically, people have feared that capitalism undermines the sovereignty of the state and the people. “Our true monarch is not Victoria,” complained the English writer John Ruskin in 1866, “but Victor Mammon.” Today, the American state is in the hands of a rich man, and behind him, at least until recently, a richer man—the richest man in the world, in fact. Lining up against them is a host of experts, from legal scholars to Harvard professors to financial journalists, hoping that a different group of rich men, the investor class, and the markets they move through, will save us from these two. No one dares, at least not yet, pick up the political tools that people traditionally have wielded against runaway rulers and oligarchs.
How did we get here? Adam Smith and a little-known Marxist from Poland can help answer that question.
Virtually anyone who’s heard of Adam Smith knows about his invisible hand. Though Smith mentions it only once in The Wealth of Nations, the invisible hand is the credo of capitalism. When an individual makes an investment, he thinks only of what will secure him the greatest profit and the least worry. More than likely, he’ll choose to invest at home rather than abroad. That decision, to invest at home, will create jobs for his countrymen and revenues for the state, but he doesn’t make it for reasons of altruism or patriotism. Seeking only his profit and its security, he is “led by an invisible hand to promote an end which was no part of his intention.”
But Smith spoke of another invisible hand, in another book called The Theory of the Moral Sentiments. This hand also pulls the individual toward wealth. But it is pushed by a deeper set of desires than gain or security. Here the “secret motive” is to enjoy the life of “some superior rank of beings”—not because it is materially more satisfying but because it gratifies our “love of distinction.” To be “the object of attention and approbation,” to be “observed by all the world,” is one of the greatest satisfactions of life. Standing at the top of the “oeconomy of greatness,” we get “taken notice of.” It is our vanity, not our venality, that drives our “avarice and ambition” and “the pursuit of wealth, of power, and preheminence.”
Rubbing these two hands together, we get a different image of Smithian capitalism from the one we think we know. Men of money don’t seek or settle for fortune; they’re not satisfied with profit. They want power, position, dominance, supremacy. They don’t build companies. They create worlds. They are possessed, as the economist Joseph Schumpeter put it, by “the dream and the will to found a private kingdom, usually, though not necessarily, also a dynasty.” They seek the “nearest approach to medieval lordship possible to modern man.”
As these metaphors suggest, the capitalist takes his cues from the darker, more ancient parts of the political world, which he seeks to recreate in the modern economy. In the market and the workplace, in the bank and the firm, the capitalist creates a private government. Unlike the political world, this one bears no mark of democracy or deliberation. Here, his word is will. Here, a character in Thomas Mann’s novel Buddenbrooks says, a modern man can “be a Caesar in an old commercial city on the Baltic.”
Smith believed that a combination of elements, in government and the economy, might modulate these ambitions, pressing men of money to lead sober, modest lives. But the recurrent grandiosity of three characters in his drama—the East India Company, the slaveholder, and the entrepreneur—suggests that Smith’s vision was as much pipe dream as it was prescription. Instead of settling for the prudent management of their estate, men of money built empires out of the economy, private regimes of wealth and power that would not only parallel and rival the authority of the state, but would eventually and completely take hold of the state.
In the eighteenth century, the East India Company was the crown jewel of Britain’s mercantile system. Despite his reputation as a defender of all things monied, Smith was a vigorous critic of the company and that system, which included an array of colonies and slave plantations. Backed by charters of the state, and soldiers and sailors of the empire, a class of merchants had suppressed competitors in Europe and its colonies, and plundered, through vicious and violent means, the wealth of indigenous people. If British statesmen could be made to understand that public and private wealth increased more through free trade, open markets, and the end of monopolies and slavery, Smith hoped they might abolish the mercantile system.
Yet Smith had a deeper fear, which could not be resolved by simply ending the mercantile system. Beyond state-sponsored monopolies and distorted markets, beyond violating the rules of justice and economics, the mercantile system intimated a new kind of government under capitalism—not the modern state but a monstrous hybrid of politics and economics, a mixture of merchant and sovereign, that might prove difficult to control.
Despite its name, the East India Company operated like a state, governing millions of people on the Indian subcontinent. It passed laws, hired and paid police, mounted armies, built jails, and imposed punishments. Smith called it “the worst of all governments for any country whatever.” Like other governments, the company cared about its revenues. Unlike other governments, it showed no interest in the future, in maintaining the sources of that revenue over the long term.
Instead, the company acted like the robber barons of the nineteenth century, corporate raiders of the twentieth, and all the president’s men in the twenty-first. Its officers extracted as much wealth as they could, as quickly as they could, then quit India with their fortunes in tow. “It is a very singular government in which every member of the administration wishes to get out of the country,” Smith archly noted, “as soon as he can,” with no concern whether what he leaves behind is “swallowed up by an earthquake.” Pushing the company’s officers were the company’s shareholders, who played the part then that private equity plays now: “No other sovereigns ever were, or from the nature of things ever could be, so perfectly indifferent about the happiness or misery of their subjects, the improvement or waste of their dominions.”
Like many reformers of capitalism since, Smith hoped that the combination of the persuasive power of his economics and a different regulatory regime of the state would break up monopolies like the East India Company and the mercantile system. Yet his discussions of slavery in the Americas and wage labor in Britain show why the system’s underlying mix of merchant and sovereign, the twinning of the economy and the government, could survive or be recreated in his preferred regime of free trade and open markets.
Like the East India Company, American slavers created private governments—on plantations. Unlike the East India Company, they had no monopoly over the markets in which they bought and sold goods. They were, in fact, committed free traders; they even read and cited Smith. Far from diminishing their hold on power, free trade increased it. Unlike the company, the slavers were in it for the long haul, which made them only want to hold on to their power more.
Though Smith hoped the slavers’ desire for wealth might inspire them to give up their slaves—hiring tenant farmers or agricultural workers would be more profitable, he insisted—he knew that one invisible hand washes the other. The accumulation of wealth serves our “love of distinction,” he had written. What greater distinction could there be, what higher rank could one join, than to always be bidding other human beings to carry out one’s will? Slavery arose from “the love of domination and authority and the pleasure men take in having everything done by their express orders, rather than to condescend to bargain and treat with those whom they look upon as their inferiors.” Slavers would sooner lose some profit than give up power.
Smith believed slavery would persist, particularly in democracies, for another reason: to abolish it, the state would have to “intermeddl[e] in some measure in the management of the private property of the master.” In “a free country,” where slavers control the state or elect the people who do, the state “dare not” interfere with slavery “but with the greatest caution and circumspection.” The flip side of the private government wealthy individuals create within the economy is the public government they superintend in the polity, often in the name of freedom and democracy.
This lethal overlap between the two governments, in the polity and economy, appears in a third Smithian character, the private employer, who would prove to be the most lasting problem of all. Smith believed that workers and employers have different interests. Workers want to earn more, their employers to pay less. In negotiating wages and working conditions, employers have more power. Workers need their wages more than employers need their labor, at least in the short term. Even if workers act collectively, their employers can hold out longer in any dispute. Because there are fewer employers than workers, they also can communicate with each other more easily, act with greater secrecy, and keep each other in line. They consistently “force” the workers “into a compliance with their terms.”
Against that inequality of power, Smith offered two solutions, one political, the other economic. Parliament might limit the ability of employers to coordinate their actions with each other or legislate a floor below which wages could not drop. Though any law “in favour of the workmen … is always just and equitable,” Smith thought it unlikely that any such law would be passed. As was true of the slavers and the East India Company, the “counsellors” of the legislature “are always the masters” of the workplace.
The other solution was an expanding economy, which would increase the public’s demand for more products. To meet that demand, employers would have to hire more workers. Forced to compete for workers, employers would offer higher wages. Though Smith insisted that better-paid workers were “more active, diligent, and expeditious,” employers believed that higher wages encouraged laziness and disobedience, ultimately costing them control of the workforce. They preferred workers “more humble and dependent,” from whom employers could extract “better bargains” in wages and work—even if that entailed a contracting economy and lower profits.
In the twentieth century, liberals, socialists, and leftists designed economies to tame these capitalists gone wild. They created laws, regulations, and agencies that encouraged workers to join unions, increased wages and benefits, and brought the men of money to heel in their private and public pursuits. “All power tends to develop into a government in itself,” wrote Supreme Court justice William Douglas of the economic behemoths that threatened American democracy in the late 1940s. “Power that controls the economy should be in the hands of the elected representatives of the people, not in the hands of an industrial oligarchy.”
New Dealers and social democrats also used government to build full-employment economies. They lowered interest rates, to encourage private investment in jobs-creating industries, and increased public spending, even deficit spending, to stimulate demand and create jobs. Though John Maynard Keynes made the tools, Smith provided the inspiration: in economies where every worker had a job, workers could strike better bargains with capital.
But here the old Smithian specter of the merchant sovereign reared its head. Revived by a most unlikely resurrectionist—the Polish Marxist Michał Kalecki—this scourge of Smith appeared in a 1943 volume of the journal The Political Quarterly. In an article titled “Political Aspects of Full Employment,” Kalecki argued that even if full employment generated higher profits for capitalists—as Smith had claimed free labor would do for employers—businessmen would still oppose it for reasons Smith would have understood all too well.
According to Kalecki, full employment gave workers “self-assurance.” They knew that if they were fired or quit, they could easily find as good or better a job elsewhere. Businessmen knew it, too. They feared that, with full employment, “the ‘sack’ would cease to play its role as a disciplinary measure” and workers “would ‘get out of hand.’” More than higher profits, businessmen cared about “the social position of the boss” and “discipline in the factories.” They opposed full employment for the same reason slavers opposed abolition: to hold on to their power and authority, even at the cost of lower profits.
Beyond losing control of the workplace, businessmen feared that full employment—specifically, the deficit spending it often required—weakened their grip on government. Under capitalism, employment levels reflect the “state of confidence” of the business class. Upbeat investors put their money into expanding industries. Anxious investors hold on to their money, limiting or contracting production. When businessmen get nervous, workers get fired or don’t get hired. Because their nerves put a damper on the economy, capitalists exert “a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.”
With deficit spending, government officials discovered a way to free themselves from the jitters of the business class. By spending money, without raising taxes, on public works or buying goods, government could increase demand and boost employment without the consent or cooperation of the capitalist class. Businessmen saw the challenge to their control. “Once the government learns the trick of increasing employment by its own purchases,” wrote Kalecki, it would no longer be forced to take the businessman’s calls.
Capitalists devised a workaround. Whenever the economy began improving, they would summon an alliance of respected economists and government officials to alert politicians and the public to the dangers of profligate spending. Claiming that the confidence of the business class was shaken, they would push the government to slash spending. That had happened in 1937, when the New Dealers cut the deficit, and the result was a return to recession. It would happen again, said Kalecki.
Despite being vastly outnumbered by workers and citizens, businessmen could still control the state, just as the East India Company controlled Parliament. Unless “new social and political institutions” were created to “reflect the increased power of the working class,” workers would never get the kind of economy in which they could flourish and be free. The merchant sovereign would always return and prevail. As soon as full employment neared, he would trigger a “political business cycle”—a wonderful formulation of Kalecki that brings together those forces of economy and polity whose combination Smith so desperately feared. Thus would the capitalist class maintain control over the workplace, the market, and the state.
The challenge we face today is not whether we can summon the political will to reform or abolish capitalism, as has been tried dozens of times. It is finding the instruments and institutions to do either.
Smith counted on a coterie of wise and well-read statesmen. Socialists counted on a mobilized public of citizen workers. Both would use the levers of government to keep regimes of private power in check.
In the last half-century, however, these private regimes have not only expanded; they’ve gone public. Where the business class once may have settled for pulling political strings from afar, it now has seized direct and almost complete control of the state. In the words of Dartmouth sociologist Brooke Harrington, Trump has effectively told the oligarchs in his ruling coalition, “You bought it. Do what you want.” And they have, with little effective counter from within or without the government. (According to a recent report from Senator Elizabeth Warren, in his 130 days in power as a “special government employee,” Elon Musk used his position to benefit him, his companies, and his family members in 130 specific ways.) Hence the hope that the markets—not any one member of the business class but the abstract mechanism of their collective movement—might save us.
Smith knew of situations where all power, political and economic, lay in the no-longer-invisible hands of one group. In such situations—he was thinking of the European conquest of indigenous peoples—the only hope would be that all groups would “arrive at that equality of courage and force which, by inspiring mutual fear,” could awaken “some sort of respect for the rights of one another.” Smith was fuzzy on the details, and cagey about what would produce that equality of force and fear. That’s what we’ve been left to figure out.