Sunday, October 16, 2005

Brilliant Article, Shame About One Paragraph

“In Praise of Profiteering” by Chris Leithner (Quebec Libre, Quebecois) is a forceful and accurate analysis of the positive role of prices and the relationships between the quantities supplied and demanded in competitive markets, especially in times of emergencies, like hurricanes, floods, and other disasters. I would not fault his analysis. However, Chris Leither (a Canadian living in Brisbane, Australia) refers to Adam Smith, quite unnecessarily, and does so in a manner that exposes the usual errors about his legacy.

“Entrepreneurs, arbitrageurs, businessmen and employees – in short, human beings incentivised by "greed" – typically expose themselves to inconvenience, hardship and danger in order to earn these profits. Adam Smith demonstrated in A Theory of Moral Sentiments (1759) that a variety of powerful emotions, including altruism, motivate people. Importantly, however, if you wish to induce somebody to furnish a good or service in a great hurry, then a monetary incentive tends to be a reliable motivator. In the material world, in other words, people tend to do at least as much for themselves as for strangers. The glory of freely fluctuating prices and laissez-faire capitalism – the "system of perfect natural liberty" as Smith called it – is that it relies upon co-operation rather than coercion. Accordingly, the supplier prospers only to the extent that the consumer benefits.”

It is the sentence: “The glory of freely fluctuating prices and laissez-faire capitalism – the "system of perfect natural liberty" as Smith called it – is that it relies upon co-operation rather than coercion”, that causes my difficulty.

‘Laissez-faire capitalism’ is a redundant expression when referring to markets – they worked perfectly well in commercial societies (e.g., Roman Empire, Euro-China trade), which predated by millennia the advent of capitalism in the 19th century. This error is compounded when Chris adds that ‘laissez-faire capitalism’ is ‘the “system of perfect natural liberty" as Smith called it’.

Interestingly, Smith at not time used the words ‘laissez faire’, nor ‘capitalism’ (I offer 100 US dollars to anybody who can show where he used them either on their own or together). Smith’s system of natural liberty was certainly written by him, but not in connection with laissez faire (an expression used by some of the French economistes but not by all, and never by Smith), or in connection with ‘capitalism’, a word not invented until 1854 (Oxford English Dictionary), sixty-four years after Smith died in 1790.

I recommend that you read and keep a copy of Chris Leither's article (from www.quebecoislibre.org) , minus the offending passage, because it really is a masterly demolition of the notion of imposing price controls (including wages) in such occasions when the immediate need is to bring the quantities demanded (and not mere demand) closer into line with the quantities supplied as quickly as possible.

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