Wednesday, October 19, 2005

Errors at The Economist via the Herald

Writing in the Herald (Glasgow, 18 October) Alf Young reports on recent controversies on Corporate Social Responsibility (CSR), using an article in The Economist as the lead in. He reports:

“It went back to Adam Smith for its main conclusion”, and then repeated what The Economist said: "It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest," wrote Smith, famously, in The Wealth of Nations. That regard, Smith believed, centred above all else on making a profit.”

Comment

This is the problem with using quotations from “Wealth of Nations” (1776), which usually refer to a different world to 21st century Britain. While the quotation about the “Butcher, the Brewer and the Baker” is among the most important in Smith’s book it was not strictly (even loosely) about profit or, indeed, about Smith’s alleged views on profit. It was about the propensity of humans to bargain, exchange on thing for another, though the criticism first applies to The Economist, and for the comment immediately behind it, criticism applies to Alf Young (a talented journalist with more than a smattering of acquaintance with economics, and I should say, an acquaintance with myself too).

The propensity to ‘bargain’ (the gist of the quotation and the chapter it is taken from), is about the exchange between the consumer looking to acquire ingredients for his family’s dinner (his self-interest) and the three traders whose self interest is to sell those ingredients. The issue is how they reconcile their different self-interest by the act of bargaining. This is shown conclusively from the earlier versions of this passage in Smith’s “Lectures in Jurisprudence” (as discussed in my “Adam Smith’s Lost Legacy”, Palgrave Macmillan, 2005).

The main conclusion is that buyers serve their own interests best by serving the interests of the sellers, and vice versa, and to achieve this outcome they must both modify their own self interests (offer low; demand high), analogously to an individual in high dudgeon about something, modifying their reactions by lowering its violence to the level that the Impartial Spectator can go along with (Smith’s “Theory of Mortal Sentiments”).

Alf Young continues:

"The Economist leader writer agreed. "The standard of living people in the west enjoy today is due to little else but the selfish pursuit of profit," he wrote, before concluding: "All things considered, there is much to be said for leaving social and economic policy to governments. They, at least, are accountable to voters."

Comment

If businesses are purely concerned with their ‘selfish pursuit of profit’ to the disregard of the self interests of their customers they may end up not making sales and not making profits.

Alf Young:

“But neither Adam Smith nor the Economist have stopped the cause of corporate social responsibility in its tracks. Indeed the CSR bandwagon, as its critics see it, rolls on.”

Comment

Adam Smith did not have a view on corporate responsibility (except perhaps a negative one in that he was suspicious of the motives of ‘merchants and manufacturers’ when left alone to pursue their own interests without restraint). The commercial sector in Smith’s time was a smaller proportion of the UK economy (agriculture and the State took up most of it) and in terms of GDP, it was in total not a large amount compared to the size it is today. Smith was more concerned with businesses being frugal to ensure continuing capital accumulation. We can only guess (wildly) about what he would have prescribed (and proscribed!) in terms of CSR.

Alf Young continues:

“For his part, Adam Smith wasn't arguing against profit-seekers promoting the wider public interest. Rather he was observing that, in the mid-18th century, the tradesman who single-mindedly pursued his own gain would be "led by an invisible hand to promote an end which was no part of his intention".

Smith saw these wider social dividends as the unintended consequence of personal profit-seeking.”

Comment

Smith did not make the invisible hand a general proposition. He mentioned the invisible hand only once in “Wealth of Nations” (Book IV.ii.9: p. 456) in respect of a specific incident: a business preferring to invest locally than abroad, thus adding to domestic capital accumulation which allowed the national economy to grow more quickly. Such self interest could also cause (and did!) monopolistic cartels and restraints on competition and, in turn, cause a slower rate of capital accumulation (his main concern was the growth in ‘wealth’, by which he meant real output, not box loads of money).

Alf Young ends:

“The proper business of business, as the Economist argues, may indeed be business. But times and society have changed. At the start of the 21st century it may well be that, to achieve that greater public good, Smith's invisible hand has to show itself in action on occasion.” Comment If this means CSR needs to be shown in the 21st century, fine. If Smith’s invisible hand (actually, Shakespeare’s: Macbeth, 3:2!) is required too, I cannot agree. This makes a passing metaphor into a major prescription, something not among the intentions of Adam Smith.

1 Comments:

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