Monday, March 19, 2007

A Literate Banker Writes

What a nice change to read a literary piece from a banker who knows something about Adam Smith and Music that is worth reading.

Stephen King, managing director of economics at HSBC (“the world’s local bank”) writes “In praise of Adam Smith, Mozart of money” in today’s Independent (19 March). The occasion is the replacement of the image of Elgar, British musician, by Adam Smith on the UK’s £20 note today (announced by Mervyn King in Kirkcaldy last year and reported on Lost Legacy – I was in the audience).

Elgar should never have been on British banknotes. His appearance represents a peculiar celebration of mediocrity.

[T]hink of Elgar's position in the pantheon of great composers. What if Mozart, Beethoven or Verdi had been British? Would Elgar then have found his way on to a banknote of any description? Might he have displaced a British Bach, or challenged a Scottish Schubert? I somehow doubt it. Elgar should never have been on British banknotes in the first place. His appearance represents a peculiar celebration of mediocrity, the equivalent of choosing Noel Coward rather than Shakespeare to highlight Britain's cultural heritage.

Mediocrity is not a word you would ever associate with Adam Smith. He is genuinely the father of economics. He's one of the economic greats, the Bach, Mozart or Beethoven of his discipline. Edward Elgar, thankfully, he is not. His ideas may have been hijacked by Margaret Thatcher and the Tory right in the 1980s, but few politicians these days would argue that Smith was wrong, or representative of a particular political view. He just happened to be one of the very best economists the world has ever produced. He was British to boot.”

Smith is often, unfairly, portrayed as a man who argued in favour of selfish behaviour. His supporters may occasionally have given this impression (Mrs Thatcher once famously claimed "there is no such thing as society") and his words are sometimes misquoted to support this view ("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. 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."). Yet, throughout his works, he offers a sophisticated view of what, precisely, makes economies tick.

He is, of course, most famous for the invisible hand and the division of labour. Smith recognised the importance of the price mechanism. The invisible hand proved much better at resource allocation than any number of state planners, an observation sadly lost on those Soviet leaders who led Russia and its satellites into economic stagnation. As for the division of labour, his famous description of the pin factory stands the test of time.”

"These arguments all appeared in his The Wealth of Nations, the first major book on economics and, mercifully, a book bereft of mathematical formulae. It was first published in 1776. He also, though, wrote The Theory of Moral Sentiments (1759). There, he established some of the ground rules for modern societies. He distinguished between self-interest and selfishness. For most of us, it's in our self-interest to have a system of justice in which each of us can expect to be treated fairly. From time to time, we might choose to cheat the system, thereby acting selfishly, but, were we all to act in this manner, the system would eventually crumble."

"A system of justice, in turn, can underpin property rights. Smith's insights in this area were remarkable. He understood the need for legal "rules of the game", recognising that, otherwise, markets would fall apart. How could there be division of labour, for example, if workers didn't know, from one week to the next, whether they'd receive any wages for their pin-making efforts? The invisible hand might seem like a remote and rather cold concept, but Smith knew that, at the end of the day, the invisible hand would only work in a society where self-interest included showing sympathy for the interests of others, expressed through a binding set of legal rules.

I wouldn’t equate the invisible hand with the division of labour, or with his ideas about growth, but Stephen King’s understanding of how Wealth of Nations fits into his Moral Sentiments (and Lectures on Jurisprudence) is entirely refreshing, especially from a working and literate economist.

[Read it for yourself at:]


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