Monday, October 30, 2006

Mervyn King and Gordon Brown Celebrate Adam Smith

Mervyn King, Governor of the Bank of England, delivered a paper last night at the Adam Smith Lecture, sponsored by the Bank of Scotland (1697), to a audience of about 200 people in St Bryce Kirk, Kirkcaldy (opposite Adam Smith College). I was in the audience to hear Gordon Brown, British Chancellor of the Exchequer, and Mervyn King’s talks, which were both of a high standard.

Gordon brown made one of his typically good speeches, mixing Adam Smith with contemporary political issues, and introducing Mervyn King. He made some slight elisions of the facts, but his delivery style is always splendid. For example, he referred to Adam Smith’s student years as ‘including a few years at Oxford University’; it was six years in fact, twice as long as his 3 years at Glasgow. He correctly reported that Smith did not think much of the educational standards at Oxford, but, in characteristic knockabout form, said that he was glad to welcome Mervyn King because he went to Cambridge.

Mervyn King’s paper was just about right for the audience (I noted another economist present, Gavin Reid, Professor of Economics at St Andrews University, but most others were unlikely to be familiar with Adam Smith’s economics and moral philosophy). This did not prevent King covering elements of Smith’s ‘Moral Philosophy’ – sympathy, impartial spectators, and self-interest – with what Smith would have called, ‘perspicuity’ and a fair portion of sympathy for his audience. He must have been an erudite professor before he became a banker.

With characteristic modesty, King asserted he would leave the question of whether Adam Smith contradicted himself in Moral Sentiments (1759) with his later book, Wealth of Nations (1776), on grounds of the division of labour (his exposition of the division of labour, and the evolution of the role of money, trust, and social institutions necessary for the support of commerce, to put it mildly, was masterly). Coming from a former Professor of Harvard, Cambridge and LSE, this was self-effacing indeed – he was not out to compete with his audience by being obscure.

On one aspect of his talk I was uncomfortable. He seemed to me to be conventionally hazy on the role of self-interest in Wealth of Nations. He alluded to the famous ‘butcher, brewer, baker’ quotation and made the obligatory emphasis of the unreliability of 'benevolence’ compared to the self-interests of the trio of worthy dinner providers. Like most readers, King stopped there and diverted into self-interest being capable of serving society, in my view a wholly inadequate diversion that contributes to the myths of the so-called ‘Das Adam Smith problem’.

Smith’s advice was for the person in search of his dinner to rely on the self-interest of the ‘butcher, brewer, and baker’. Most readers leave it hanging there. The question ought to be put to readers, including Mervyn King: ‘what advice would Smith have given to the ‘butcher, baker, and brewer’ in the same transaction?

The first response I get normally is: ‘Why, exactly the same, they should rely on the customer’s self-interest, too. That’s why self-interest drives these transactions.’

This is not quite half-true, because Smith makes an additional point in the much quoted paragraph, usually ignored by readers. He draws the reader’s attention to the need not to address his own needs or circumstances in the transaction but to ‘address’ the self-interests of the ‘butcher, brewer, baker’:

‘We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages’ (WN I.ii.2: page 27).

I ask again: ‘What is Smith’s advice to the ‘butcher, brewer, and baker’?

It must be the very same as he advices the reader who wants his dinner! The butcher, the brewer and the baker’ are told: “don’t discuss your problems with clothing and sheltering your family, or any of your ‘own necessities’, nor talk to the customer about their ‘humanity’, nor expect them to buy your meat, beer, and bread’ out of their benevolence. Stick to their ‘advantages’ from buying their dinner from you, as your customer talks of you advantages from selling him your products.”

In short, ‘address’ your customers’ self-interests.

Generalising, the advice is that addressing the self-interests of others is the driver of exchange transactions, not the self-interest of self! We serve our self-interest best by addressing the self-interests of others, and that is the harmonising force in societies which ehd iscusses in Moral Sentiments.

This principle in Wealth of Nations is mirrored in Moral Sentiments in the sentence about the ‘mercenary exchange of good offices according to an agreed valuation’ which keeps even fractious soceities together (TMS II.ii.3.2: page 86).

If this is understood, then Mervyn King’s, and most other economists' misunderstanding of the driving force of self-interest, would cease to be a problem, and hesitation over dealing with the myth of ‘Das Adam Smith problem’ would disappear (as would regular and convoluted tomes arguing back and forth about nothing).

That is what I came away thinking about after the lecture – and the excellent dinner put on the Adam Smith College. It seemed clear to me. Lost legacy wants to make it clear to its readers (and to Mervyn King).


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