Wednesday, March 07, 2007

Adam Smith was a Pragmatist Not an Ideologue

Larry Beinhart, writes in ‘The Huffington Post’ Blog a piece ‘Capitalism 104, Part II’ (I missed the rest of the series), which makes six points mildly critical of markets includes two paragraphs below:

“Second, although Adam Smith's idea that individuals working for their own economic self interest will produce positive results that they're not even thinking of is true, it does not mean that they will produce all the possible good results that we want and need. Or, in many case, even the best results we would like. A lot of them come because of other reasons.

So the next time a guy from the Heritage Foundation, or some other shill from the insurance companies and pharmaceutical industry, talks about free markets as the best way to provide health care, you can be confident when you say that's not true. It's not historically true, it's not currently.”

It’s common in political circles to take extreme stances on the social phenomenon we call markets. Some consider them the perfect answer to every problem of production and distribution; others consider them the embodiment of everything ‘immoral’, even ‘evil’. And with the extremer wings of the environmental ‘movement’ pouring scorn on the higher living standards of the common labourers of the market-driven world compared to the remaining vestiges of the ‘command economies’ and their truly ‘downtrodden masses’ (what a reversal of roles that brings to mind!), the case for markets is weakened into apologising for their successes.

Adam Smith took a more relaxed, pragmatic attitude to markets, neither declaring them the answer to every problem a society could have, nor dismissing all ‘public spirited’ people and quite large roles for government funding of activities that could assist markets to work and to make life better for those who had no chance of doing for themselves what they needed to have done. And that is a problem for those who try to fit him into one or other of the stereotypes devised to fit the pigeon holes they have designed for him.

Wealth Of Nations covers in Books I and II the derivation of markets from human kind’s natural propensities to ‘truck, barter, and exchange’ and the consequent ‘division of labour’ that created commercial activities within primitive economies, until they emerged eventually into commercial societies. Within these explanations, he developed his analysis of how markets worked, how commercial activities produced, painfully slowly and despite many set backs occasioned by the ‘vile rulers of mankind’ and the follies of humans driven to desperate measures to survive.

But Smith’s contribution to analysis using concepts of productive and unproductive labour related solely to whether they contributed to their costs, and the costs of materials that they worked upon, plus net profits, or whether they consumed without returning their costs in the ‘great wheel’ of capital circulation. From the net profits, that proportion that went to hire new labour and generate new resources, constituted what we call growth today. All the rest was revenue that went on consumption (and taxes). No matter how minute the rate of growth, even a minor positive proportion of a small percentage, had the effect, slowly and gradually, of adding to the annual output of the real wealth of society (the products of land and labour). Over time, initially measured in millennia, and later in centuries, the real incomes of the poorest majority improved, the middling orders improved more and the rich landowners and others gained yet more. But, and this is critical in a developing economy, absolute poverty declined.

Book III described the long interregnum that lasted in Western Europe for a thousand years from the Fall of Rome and the destruction of its commercial and agricultural economy. Towards the end of that millennia, China opted out of social, technical and trade development, and, despite its advanced science, innovation and discovery, it lapsed almost coterminous with the slow and gradual revival of the economies of Western Europe, some countries of which leapt ahead of others, and while China at the time potentially the world’s leading economy stagnated, India declined absolutely and was finished off by the depredations of ‘vile adventurers’ of the East India Company and the ineptitude of local Indian ‘vile leaders’.

Book IV is a polemic against mercantile political economy, a loose set of ideas based on false notions of what constituted wealth, what moral codes were appropriate in the new economies slowly emerging out of feudal agricultural (basically a form of slavery), and what institutional norms were appropriate to manage the emergence of markets, unfortunately centred on legislation to create monopolies, enforce trade restrictions, limit the movement of labour, and curb the benefits of markets, plus the usual wars over trivial ends.

This is partly the source for notions that Smith opposed government interference in markets, when in fact he opposed government intervention based on false premises about how gold and silver bullion surpluses benefited and deficits endangered the ‘nation’ (much as trade deficits are alleged to endanger nations today). He favoured property rights to reward those inclined to ‘better themselves’ in whatever labour or exchange roles they chose (Perfect Liberty); justice to protect people against criminality (Natural Rights); the harmonising influence of moral sentiments and free exchange (the Great School of Self-command) and took the long view on patient reforms of institutions to change things, slowly and gradually, without disrupting individual rights and social harmony (Distinction of ranks).

Book V sets out the appropriate role of government in a constitutional monarchy with the separation of powers, which roles are quite extensive, though limited in scope, and which bring together his thinking covered in the previous four books of Wealth Of Nations. Defence was more important than opulence, for without defence against invasions and depredations of neighbours (the awesome lesson from the fall of Rome), opulence was fragile; justice was most essential to avoid society ‘crumbling to atoms’; public works and institutions that facilitated commerce, including mass education of children and people of ‘all ages’, measures against ‘loathsome diseases’, and lastly, maintaining the ‘dignity of the sovereign’ (instruments and ceremonials of government). Expenditure on these necessary ends, taxation was to be raised to pay for it according to the benefits to citizens of living in society.

Having nothing to do with the Heritage Foundation, I have nothing for or against it, but I would not dismiss any views from any source out of hand until I read (slowly what they proposed. Markets have a role in health care, so does public provision. It is the balance surely that is debateable. Poor people and their families need health provision and treatment; so do the affluent. No matter what system is used, I can bet my pension that every system can, and should be improved.

Reforms are best undertaken, slowly and gradually (to use a common phrase of Adam Smith’s) and are never likely to be satisfactory when implemented by ideologues and ‘men of system’. That at least is Adam Smith’s legacy.

[Read Larry Beinhart at:]


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