Re-understanding the Capitalism of Adam Smith

On December 2007, the Graduate School of GMU library held a monthly discussion about “the great thinkers”. The topic was “Re-understanding the Capitalism of Adam Smith”. The key speaker was Dr. Denni Puspa Purbasari, a lecturer at GMU, Business and Economic Faculty. The moderator was Arqom Kuswanjono, M.Hum.

Wealth of Nation

In her early explanation, Dr. Denni explained that if we read and observed deeply, we would see that Adam Smith’s book “Wealth of Nation” did not talk about capitalism. However, many people trapped in their think that this book talks about capitalism. The book consists of 5 parts. Firstly, the factors that cause the productivity of labor increase and how production will be distributed (division of labor, market as a boundary of labor division and price. Second, the using and stock accumulation process (stock division, money as a part of stock, capital accumulation and stock which is borrowed and interest. Third, economic growth which is different among states (rule of trade, town and decrease of agriculture rule). Forth, economic system (protection and mercantilism), and fifth, state income (public goods and debt).

Futher, Dr Denni explained that division of labor causes increasing productivity of labor. Specifically, division of labor can increase expertise, short time of labor, and puss innovation and machine. Division of labor happens more in manufacture than agriculture. Therefore developed countries are often marked by progress in the manufacturing sector. The increasing of production puss merchants appear and transportation progress.

Vigorously, Dr. Denni continued his lecture that the basic divisions of labor are:

  1. Division of labor emerges from human motivation to increase utility and engage in transfer.
  2. Division of labor is based on the take and give (self inters) principle, not based on the benevolence principle. Smith said that only beggars who lean fault at benevolence.
  3. If the characteristic of two countries is more different, the trade will increase profit because one can buy others production.
Although the labor division can create many advantages, labors is limited by the market. Reasons of demarcation are:
  1. Because transfer dribbles to the labor division, the labor division is limited. The limitation happens because if the market is small, it is not economic if labor division is done.
  2. There are some industries which can only be done in a metropolis. Therefore the role of water transportation is very important to connect areas in the world. This way, now we see many metropolises that are always close to seashore for example Jakarta, Surabaya, Batam etc.
  3. If there is no inter island trade, the production will fit with earnings and the number of the county's residents.

Misunderstanding about capitalism

When explaining capitalism, Dr. Denni said that until now, there is a misunderstanding in society who thinks that capitalism is always related to big companies or big entrepreneurs who have many businesses or companies. However, there is no exact explanation about the essence of capitalism. Capitalism is like a netherworld (illusory world, a world that is not reality) which embosoms business activities. The illusory world is sometimes called the invisible hand, market mechanism etc., which aims for growth. Adam Smith said that the end of the capitalism process is social beneficial paths where ones do not realize that s/he collect material wealth.

For example, Dr. Denni assumes if A is a very rich entrepreneur who has only one business and s/he deposits his/her billion Rupiah in bank, s/he is not capitalist because his/her money doesn't rotate, only lodges in the bank. However, if there is a small worker turning around his/her capital for his/her other business, hence the small worker is called a capitalist, because a capitalist is a man who always turns around his/her capital for next the business. Capital is continuous transformation from MCM ( Money-commodity-money). So, capitalism is a process which is continuing and expensive. Frankly speaking, the dangers of capitalism is domination of capitalism. Domination of capitalism is aman who has all capital but refuses to sell his/her product or refuses to employ workers. Domination of capital can cause unemployment, hunger and death. The critical aspect from money or capital does not lie in the right to use it, but in the right to arrest it. This right has made capitalism the dominant form of trade win the world and production where capitalists have the authority to make an expansion. Domination of capitalism can influence and increase prize by arresting products.

The Role of State

To overcome the domination of capitalism, hence the roles of state are hardly required. The roles of state are:

  1. Providing public/public works including information, guaranteeing property right, and providing dubious.
  2. The role of state in capital regime is as a defender and promoter in the economic realms.

In responding to the role of the government in world trade, Dr. Denni hardly regretted government actions that make policy, which harm the state. For example, when government give authority to foreign companies to manage petroleum or mining products, the prize which the government over to the company is below the market prize. However when the government buys something from other countries, like tanker or helicopter, the prize is expensive, up to market price. These phenomenon indicate that corruption and collusion always happen in government organizations.

Furthermore, Dr. Denni affirms that even with out the government’s limitation, entrepreneurs still need government as supervisor in world trade. Therefore, a government that is clean, healthy and far from corruption is needed to build Indonesian economics.