Tuesday, April 19, 2005

One of the Better Guys on Adam Smith

I am impressed by Professor Edward Younkins' exposition of Adam Smith’s philosophy and economics, as expressed in his essay, "ADAM SMITH'S MORAL AND ECONOMIC SYSTEM" in Le Quebecois Libre, Montreal, 15 April, no 151, (http://www.quebecoislibre.org/05/050415-16.htm). I recommend that you read it because it gets quite close to an accurate representation of Smith's moral philosophy and his political economy.

However, I would comment on one aspect of his essay because it summarises the gap between me and Professor Younkins' interpretations of the same theme. He ascribes to Ayn Rand (a prominent philosopher who expounded the theory of "Objectivism" in defenc of Capitalism, the untried ideal, writing in the 1960s-70s in the US) a more accurate status on the philosophy of markets than Adam Smith, though given he wrote in the 18th century and she wrote in 20th, it might be expected that she would benefit from two hundred years of further thought than what was available to him. I read several of her books as an economics student in the 60s (who didn’t?) and I still have copies of her books and novels in my library.

Professor Younkins wrote, while stating Adam Smith's economics:

"When individuals pursue their own private interests in the economic sphere, society will be best served. From a person's desire to seek his own advantages and improve his conditions, wealth arises and an unintended or spontaneous order results. A free economy in which people seek their own private interests is said to be lead by an "invisible hand" in directions that benefit all."

This is one interpretation of Smith’s points and it is the majority interpretation too. It contains, however, what I call a 'fundamental error' ascribed to Smith by his successors rather than implied by him in what he wrote. I discuss this fundamental error in my book, "Adam Smith’s Lost Legacy" (Palgrave Macmillan, March 2005).

Most people see "Wealth of Nations" as Smith describing the transaction of ‘truck, barter and exchange’ as being driven by the mechanism is ‘self interest’ (WN, Book 1, chapter 2). In appealing to the ‘butcher, baker or brewer’ for their dinner in his famous example readers are enjoined by Smith specifically not to appeal to their own self-interest but to appeal to self-interest of the providers of their dinner. In short, they serve their own self-interest best by proposing to serve the self-interest of the providers.

This is quite the opposite interpretation to that normally given by many philosophers and economists, mainly, I think, because they have not thought about the process of negotiation that is involved in the act of 'truck, barter and exchange' closely enough. They leap over the actual process and go straight to the outcome, yet the process of negotiation is where the self-interest of each party is mediated - each must consider the self-interest of the other by trading what he or she wants for what the other person wants. This 'neutralises' selfishness at the moment of the transaction into an act of voluntary exchange, where instead of doing what is best for self, the negotiators do what is best for both of them.

This significant fact, emphasised by Smith in "Wealth of Nations", and in the various versions of the same passage in "Jurisprudence", appears to have been missed by readers 'in a hurry'. I unravelled it because of my long acquaintance with teaching managers how to negotiate (www.negotiate.co.uk), which I based on Smith’s exchange model ("Give me some of what I want and I will give you some of what you want").

Negotiation is about obtaining what we want from someone who wants something from us. When this passage is looked at closely it is not a self-interest model rooted in ‘Give me what I want’ (selfish), but an exchange based on each getting what each wants from the other based on each serving each other’s interest ("Adam Smith's Lost Legacy", chapters 22-24).

Secondly, Smith’s metaphor of the "invisible hand" has been generalised into an all embracing maxim to the entire society, which he never intended (he only mentioned it once in "Moral Sentiments" and once in "Wealth of Nations", both in an economic context, and only once in his 'juvenile' essay "History of Astronomy", , written mainly in 1743-48, in a comment he makes on pagan superstition).

In both TMS and WN his reference is to specific situations to illustrate ‘unintended consequences’, which clearly could be benign (the cause of the decline of feudal power and the consequence of 'merchants and manufacturers prefering to invest in the home and not foreign markets), but could also be malign in other contexts and circumstances (contrary to justice, inimical to the best interests of economic growth, and always from the establishment of monopolies, etc.,). As I have commented on many an occasion, I have never yet met a capitalist who preferred competition to enjoying his own monopoly.

When the metaphor of the 'invisible hand' is stretched to imply that all actions of modern day capitalists (a phenomenon that post-dated Smith’s life) are necessarily beneficial, it is an avoidable error of interpretation of his economic; the actions of men in society are not always benign, unintentionally or otherwise.

This is more clearly expressed in "Adam Smith’s Lost Legacy" and in this companion web site.

However, reading Professor Younkins' essay carefully and his book ('Capitalism and Commerce') will take you some some time, but they are well worth it for the clarity of his explanations.


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