Tuesday, November 06, 2007

A Californian Resident and Adam Smith

Bill Falzett writing in the American Chronicle (5 November) on 'Madness 101: Blaming the Victim II – Causes of Poverty” (here) asserts:

Adam Smith, the economist who is often cited to justify free market economics, said that self interest was best served by human sympathy. He equated moral sentiments and self interest. Big-business acquisitors leave out the sympathy part and focus only on self interest – looking out for number one.

Smith’s conclusion was that the “invisible hand” of free markets cannot lead to beneficial outcomes if people and markets are not operating within a societal context that supports the interests of all of society.

Smith was against the idea of corporations, or "joint stock companies." The irony of the looking-out-for-number-one mindset is that they have to gang up with other “investors” to reduce liability. In a free market, it seems more appropriate that you form your own company, make your own product well, and earn your own profit from your own responsible works. Smith believed that income taxes should be progressive – the more you earn, the more you should pay in taxes. Again, conservative, free marketers leave this part out of their rationale…”

“If we are to have a diverse, prosperous economy, the task is to confront and expose the ideology that breeds “Looking out for number one.” Free market, unregulated, Big Business breeds violence and victimization of the majority of the people. Balance between capitalism and appropriate use of the resources is the ideal. That balance requires government regulation, government transparency, and government responsiveness to the people
.”

Comment
Bill Falzett gives a mixture of plausible fact and implausible fiction in his assessment of Adam Smith. That Smith wrote about sympathy and self interest is true; that he ‘equated’ one with the other is less than true. Though, for the sake of compression in an article we can let that one go, as long as we know how they were different.

In so far as Bill Falzett criticizes how apologists for ‘big business’ misread, misquote and misapply Adam Smith’s works he is on fairly solid ground. His rhetorical simplifications of reading ‘self interest’ as ‘looking out for number one’ is not what Adam Smith meant by the motivation of self interest. He did not mean self interest was selfishness; that was Bernard Mandeville, not Adam Smith, a confusion often made by people who have not read the works of either gentleman.

He did not conclude ‘that the “invisible hand” of free markets cannot lead to beneficial outcomes if people and markets are not operating within a societal context that supports the interests of all of society’. He did not have a theory of markets, nor make assertions about them, which included his single use of the metaphor of ‘an invisible hand’.

Whether ‘people and markets’ ’lead to beneficial outcomes’ if they operate ‘within a societal context that supports the interests of all of society’ is a proposition that Bill may argue for, but it had nothing to do with Adam Smith’s use of the metaphor of ‘an invisible hand’ or with anything he wrote in Wealth Of Nations. That is a notion smuggled into Adam Smith’s ideas from the 20th century.

Adam Smith was not against “the idea of corporations” or "joint stock companies." That is a complete misreading of Book V where he criticizes the Chartered Trading Companies as part of his critique of mercantile political economy in Book IV of Wealth Of Nations.

Readers may scroll down Lost Legacy and find detailed discussions of Adam Smith’s views on joint stock companies. In the 18th century the chartered trading companies operated under Royal Warrants that awarded them monopolies of trade with certain territories, in particular the East India Company that was so far away from supervision from London that it took 12-18 months to communicate with India and receive reply back in London.

He opposed joint stock companies that operated under state approved monopolies and they were inefficient and dishonest as a result. Adam Smith explicitly supported joint stock companies that did not have monopoly powers, such the Bank of England, the Bank of Scotland and the Royal Bank of Scotland, and joint stock companies that had to raise large capitals to complete public works, such as canals, that facilitated commerce.

Bill Falzett concludes: “Balance between capitalism and appropriate use of the resources is the ideal. That balance requires government regulation, government transparency, and government responsiveness to the people.”

Governments are run by people and there are competing solutions to every political problem that exists. ‘The people’ don’t run governments, never have. People who often claim to represent ‘the people’ run governments.

Adam Smith never proposed a plan, a scheme, a ‘system’; he analysed how society got to where it was in the mid-18th century. He was only optimistic about the commercial economy eventually providing the resources so that the majority could share in the opulence they created.

Instead of repeating conflicting interpretations of what Adam Smith offered in his books, essays, correspondence, lecture notes and surviving scraps of paper, I recommend to Bill Falzett that he reads his actual works for himself. He will find a far more complex author than either he, or the apologists for ‘big business’ and government agencies, so far imagine.

He can order low-priced Oxford editions of his Theory of Moral Sentiments, Lectures on Jurisprudence, and Wealth Of Nations, Correspondence and his Philosophical essays from Liberty Fund, Indianapolis.

He can also wait until it is published in 2008 (shameless plug!) for my new book, Adam Smith, in the Great Thinkers series for Palgrave Macmillan, which gives a comprehensive account of Adam Smith’s thinking as he wrote it and intended it to be understood.

1 Comments:

Blogger Bill Falzett said...

Mr. Kennedy,
Thank you for your clarifications. I enjoyed your critique. I found it enlightening and supportive of my basic message. To quote you describing Smith: "He was only optimistic about the commercial economy eventually providing the resources so that the majority could share in the opulence they created."

I agree that the people get left out of the equation in governance and corporate culture today. My assertion about looking out for number one was not intended to describe Adam Smith but the misuse of his work.

I confess I have not read the original Smith and with my schedule, I doubt I will. I do, however, look forward to your book. Again, thanks for the observations and information.

6:26 pm  

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