"The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is ... capable of carrying on the society to wealth and prosperity."
These were the lines from Smith's classic "The Wealth of Nations," published in 1776, quoted by Greenspan at the beginning of his speech Tuesday. Yet, as Greenspan said, the success of the effort of individuals to better their own condition varies widely around the world. Why is that?
"Today Smith's reputation rests on his explanation of how rational self-interest in a free-market economy leads to economic well-being" writes "The Library of Economics and Liberty."
Yet many doubt that free markets are the means of spreading economic well-being and recent crises are tending to reinforce the doubts. "If privatizations are the answer, why is Argentina in agony?" this correspondent saw scrawled recently on a wall in Mexico City. And the greed of extraordinarily well-paid executives in companies such as Enron which has left workers in the company without pensions, and the very low wage rates paid by many huge corporations around the world have tended to give strength to the argument that free markets produce not wealth for all but wealth for some and exploitation for many.
Let us digress a little. An anecdote will give us an example of Mexico's labor market at work. Then we will return to some of Smith's views on labor markets: views which may surprise many readers.
Taking my two youngest children for a short ride this week on my wife's Dutch bicycle with its child seats, I encountered a woman leaving a field where she and others had been picking raspberries. We got into conversation. She was working from eight in the morning to five in the afternoon Monday to Saturday with an hour's break for lunch. Her pay for the six days' work would be 450 pesos, a little less than $45. You could work Sunday as well, she said, for an additional 75 pesos ($7.50.) The Sunday rate, I duly observed -- to adopt a phrase with a ring of Smith's 18th-century prose -- was no better than that paid during the rest of the week.
The woman said it was better to work in factories. (There are quite a lot of plants, many of them the fruit of U.S. investment, in San Juan del Rio and Queretaro.)
"Do factories pay more?" I asked. "No, they pay the same," she said, "but you're out of the sun and you get insurance." By "insurance" she meant inscription in social security which would mean cheap (and good) health care for herself and her children. The temporary work at the farm did not provide that.
The woman told me that she has four sons of school age and had come to this area of the country recently having left her violent husband behind. Though many goods and services -- cars, gasoline, consumer goods, telephone service -- are far more expensive in Mexico than in the United States, $45 does go a little further here. But it is still very little on which to bring up a family of four children. So there we are: a woman and a family not starving, but living nonetheless from hand to mouth. How would Smith see this? As nothing more than the correct functioning of the market?
"The produce of labour constitutes the natural recompence (sic) or wages of labour," begins the eighth chapter of "The Wealth of Nations," which is entitled "Of the wages of labour." The division of labor into different tasks raises productivity and workers' output and therefore their wealth, Smith argues. But, as he explains in his precise way, most workmen "stand in need of a master to advance them the materials of their work, and their wages and maintenance." This gives rise to conflict for "The workmen desire to get as much, the masters to give as little as possible."
How should the conflict be resolved? Labor organizes; so do the "masters."
Smith writes, "The masters, being fewer in number, can combine much more easily; and the law, besides, authorises, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer ... Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment."
Smith, the classical economist and champion of free markets, sounds here like a trade unionist. This is because he was clear-headed and a realist. The market for labor, like any other market, is open to abuse. Equity cannot be enforced. The communist attempt to do so produced tyranny and economic failure. Smith could find no better system than free markets but was aware of human failings and failings in the working of free markets. Yet his faith in free market economics was strong; it was still the means "to carry society to greater wealth and prosperity."
Why has it not done so more successfully in Mexico (and in many other countries)? The answer is complex but can be simplified. On the one hand, government has an important role in providing safety and a justice system that helps to prevent corruption. In Mexico government has not been successful in doing that. There is much insecurity.
Education and health, most people would judge, are also important responsibilities of government. Again, Mexican government has not succeeded. State schools are appallingly poor. Therefore most Mexicans are denied the opportunity to learn and to acquire skills that will make them more productive. Picking raspberries, opening and closing a gate, washing a car: these are not activities by which workers can produce much wealth. Accordingly the income earned by labor will be low.
One or two men using machines can farm an area of land in a developed country on which a hundred men might once have worked. That is why the standard of living in the West has risen so much since the industrial revolution. Ultimately it is productivity that makes us wealthier.
But even if education and training are lacking, why, if Mexico is a free market country, is it not richer? The truth is that Mexico is a country in which markets are far from free. The oil sector is controlled by one state-run company, Pemex; the electricity sector is dominated by state-run CFE; telephone service is almost a private monopoly of Telmex, the former state-run company; half the country's agricultural land is communally owned.
Mexico is a country full of obstacles. There is social prejudice, dividing a generally lighter-skinned upper class from a generally darker-skinned lower one. There is Kafkaesque government bureaucracy. There is a justice system that works poorly, leaving disputes unresolved and debts unpaid. This is one reason why the banks, though almost all private now and foreign-owned, have not expanded credit for years. They are afraid to lend. The market is not working.
Institutions and social customs in Mexico have developed in a way that restricts markets rather than liberating them. A stratified society has resulted. And by far the biggest strata is the poor majority, of whom the woman I spoke to this week is one.
What Greenspan praised in Mexico, the country's involvement in the North American Free Trade Agreement since 1994, its soaring exports, its floating exchange rate (which the central bank is unwisely trying to keep stronger than it should be), its greater openness to trade are advances, but isolated ones.
Mexico, a country of two revolutions already, could do with another peaceful but radical one: a free market revolution that sweeps aside the multiplicity of barriers, racial, economic, political, that deny the vast majority of Mexicans the chance to attain Smith's "wealth and prosperity."
(Inside Mexico is a weekly column, scheduled henceforth to appear on Wednesdays, in which our international economics correspondent reflects on the country in which he lives some of the time. Comments to email@example.com.)