Thursday, October 13, 2005

Greenspan Still Wrong on Adam Smith

Alan Greenspan speaks to the National Italian American Foundation in Washington, 12 October, repeating some of the points I criticised earlier here (Archives, September 2005):

“In one of the more notable coincidences of history, our Declaration of Independence was signed the same year in which Adam Smith published his Wealth of Nations. Smith's prescription of letting markets prevail with minimal governmental interference became the guiding philosophy of American leadership for much of our history.

With a masterful insight into the workings of the free-market institutions that were then emerging, Smith postulated an "invisible hand" in which competitive behavior drove an economy's resources toward their fullest and most efficient use. Economic growth and prosperity, he argued, would emerge if governments stood aside and allowed markets to work.”

“The free-market paradigm came under more-vigorous attack after the collapse of the world's major economies in the 1930s. As the global depression deepened, the seeming failure of competitive markets to restore full employment perplexed economists until John Maynard Keynes offered an explanation that was to influence policy practitioners for generations to come. He argued that, contrary to the tenets of Smith and his followers, market systems did not always converge to full employment. They often appeared to settle at an equilibrium in which significant segments of the workforce were unable to find jobs. In the place of Smith's laissez-faire approach arose the view that government action was required to restore full employment and to rectify what were seen as other deficiencies of market-driven outcomes.”

“We are also beginning to recognize an international version of Smith's invisible hand in the globalization of economic forces. Whether by intention or by happenstance, many, if not most, governments in recent decades have been relying more and more on the forces of the marketplace and reducing their intervention in market outcomes. We appear to be revisiting Adam Smith's notion that the more flexible an economy, the greater its ability to self-correct after inevitable, often unanticipated disturbances. That greater tendency toward self-correction has made the cyclical stability of the economy less dependent on the actions of macroeconomic policymakers, whose responses often have come too late or have been misguided.”

Comment

For the record, Smith’s use of Shakespeare’s metaphor (Macbeth, 3:2) had nothing to do with ‘competitive behaviour’. Keynes’s criticism of the ‘free market paradigm’ was not ‘contrary’ to Smith’s ‘tenets’ (though it might well have applied to classical economists and to neo-classical economists). As Smith did not have a ‘laissez faire approach’ (a view properly attributed to John S. Mill in 1848 and to some of the 18th century French Physiocrats) any view that Keynes adopted for government intervention could only have directed at the views of 19th century economists born long after Smith had died in 1790. As the invisible hand did not refer to what Greenspan says it does, it is unlikely that he recognises an 'international version' of it.

If by de-regulating aspects of the modern over-regulated economy Greenspan believes that corrections to “unanticipated disturbances” would be completed earlier, most of us can agree with him. Smith’s criticisms of State Regulations, however, referred to fairly long-standing laws (the Settlement Acts, the Poor Laws and Apprenticeships, etc., including policies associated with Mercantile political economy), which are not strictly analogous to post-War regulations of recent vintage. That is not to say he would not have been critical too; it underlines that he was addressing 18th not 21st century problems.

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