Monday, December 11, 2006

Adam Smith on Self-Interest and Laissez-Faire

The public image of corporations is not good in general, partly due to the prejudice against corporate capitalism in the media spewed out bluntly and sometimes subtly, including from Hollywood and tv script writers, plus a clutch of novelists, with their pathological, near unanimous, prejudice against cardboard characters ‘doing their evil things for profit’, with ‘their evil things’ meaning anything scurrilous, underhand, or criminal, that the main actor is opposed to or the people he represents are victims of, and which the scripts goad the watchers or readers to sympathise with. It’s also partly to do with the behaviour of some corporate capitalists in the matter of being anti-competitive, given to trade protection and the well documented history of environmental damage by ‘dirty’ industries.

An editorial in today’s Daily Telegraph (UK) discusses public perceptions of corporate capitalists:

“In truth, Monsanto, like other companies, is neither good nor wicked. It has contributed greatly to the sum of human happiness by, for example, creating strains of crop that do not require pesticides and whose increased yields fill hungry mouths. Yet it has done so, to paraphrase Adam Smith, not from benevolence, but from regard to its self-interest. This same self-interest makes companies reluctant to poison their clients. They hire scientists such as Sir Richard partly to ensure that their products are not toxic. True, they sometimes fund tendentious research; but so do green pressure groups, government agencies and UN bodies, all of which have a vested interest in frightening the rest of us so as to keep their funds flowing — an interest that they, too, often fail to declare. There are, in short, few wholly disinterested parties. But, as long as businesses need customers, they will try to behave. Sir Richard and Monsanto are as entitled to the presumption of innocence as anyone else.”


I chose these paragraphs because they bring out an important dimension of self-interest: it can lead to benign or malign (or some combination of both). Too often the distinction slips from acknowledgement of possible variations in outcomes, especially at the aggregate level. Smith discussed in Book IV how individual self-interest could in aggregate benefit society. His illustration was the case of individual merchants whose motives led them to prefer to invest in domestic and local markets as opposed to sending their capital out of sight to foreign countries and distant parts. Despite their lack of interest in societies’ gains, their self-interested actions benefit society. Smith wrapped this process in the metaphor of ‘an invisible hand’.
It is widely believed, and preached, that self-interest necessarily benefits society, though that is not what Smith concluded. Self-interest may benefit wider society, but it may not. Those who believe this error smuggle in (unintentionally) that the individual’s (now the corporation’s) self-interest is always benign.

‘Leave them alone’ translates as ‘laissez-faire’, which is another widely held view in the environs of Chicago University that is attributed to Adam Smith. That Smith never used this phrase is ignored, though he knew and corresponded with French economists who used the phrase. He chose not to use it because he could see its weakness an extreme condition.

Wealth of Nations is replete with instances of where the self-interests of 'merchants and manufacturers’ led them to operate under Guild restrictions, the apprenticeship statutes, various monopoly prices, international trade protection tariffs, quotas and restrictions, and ‘combinations’ of employers to cut wages and resist increases. Adam Smith’s name is often bandied about in support of these self-interested policies, which is a travesty of his true legacy.

Of course, not all corporations, nor all individuals, operate in such an anti-social manner. The issue for economists is whether the self-interests of merchants and manufacturers lead to individual actions that are mainly beneficial for society. Can we generalise from the example given in Book IV of when individual actions do benefit society, namely when local trading leads to higher national output, or the whole is the sum of its parts. Intentions drive individuals which could be beneficial, but they could also be less than optimal in that intentions could result in other sets of outcomes besides being wholly beneficial to society at large. Forgetting this distinction is fatal to the attribution of universal benign outcomes to any and all actions. It is the outcome that decides the beneficence of actions (intentional or unintentional). Individuals and corporations cannot safely be ‘left alone’ across all possible sets of their behaviours. But nor must it be inevitable that a modern society would ‘solve’ this problem by going to the other extreme of total intervention in the daily, hourly, affairs of a business.

Society does and should set down the ‘rules’ by which individual and corporations must operate; it’s called law and justice. Smith outlines many examples of malign self-interest, particular under Mercantile political economy in Book IV. He included among his antidotes to malign self-interest the institution of competition, a natural phenomenon that evolved socially over many millennia. Monopoly practices exist under the protection of the law and he favoured their abolition, believing that competition prevents the appearance of monopolies and cartels. He favoured the abolition of trade restriction, the sweeping away of the Statutes of Apprenticeship and the Acts of Settlement (18th century problems), and the privileges of the Guild corporations.

He advised on the benefits of frugality over prodigality, productive over non-productive labour, the avoidance of foreign wars, gradual withdrawal from defence expenditures in the American colonies, and the restraining of national expenditures to bring them into line with the ‘mediocrity of [Britain’s] mediocrity’ (something not yet learned in the 21st century.
He advised of the need to use public funds for the education of children, for the palliation of dangerous diseases, for the funding of public works that befitted commerce, and the setting of ‘quality’ standards, running a national mint. He also advised on the appropriate rules for spreading the burden of taxation. Overall these measures, he favoured the separation of powers, the independence of the judiciary and a system of justice, and the prudent practice of virtues that encouraged harmonious societal relations.

All these items, and more, are contained in Moral Sentiments, Lectures on Jurisprudence, and Wealth of Nations. They are incompatible with attributing to Smith misleading notions of uninhibited reign to individual self-interest (let alone the notions of selfishness and greed) and laissez-faire. Adam Smith’s philosophy and political economy has far more nuance within them than Chicago has taught its students.


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