Wednesday, February 06, 2008

Charles Handy and His Preferences

Gordon Smith posts “Charles Handy on The market” on Conglomerate (‘Business, Law Economics Society) 5 Feb (here)

‘Charles Handy, founder of the London Business School and currently visiting at Claremont Graduate University's Drucker School of Businesspost on Market Place a commentary (here): "Adam Smith's Great Conundrum":

Adam Smith, the father of economics, 250 years ago, said: "An investment is by all right-minded people to be commended, because it brings comforts and necessities to the citizenry. But, if continued indefinitely, it will lead to the endless pursuit of unnecessary things."

The conundrum is this: All that stuff creates jobs -- making it, promoting it, selling it. It's literally the stuff of growth. What I'd love to ask Peter Drucker is: How do you grow an economy without the jobs and taxes that these unnecessary things produce?

Maybe we should blame Adam Smith, but what I'd love to ask Handy is: how do you know that those things you see in malls are "unnecessary"? What do you mean by that term, anyway?

The market, unfortunately, does not differentiate between good and bad. If the people want junk, the market will provide. So we have to fall back on the conscience of our business leaders.

Notice how Handy separates "the market" from "the people." It's a strange vision of the world in which the market is dictated from the top down rather than bubbling from the bottom up. From that vantage point, it makes sense to blame business leaders for making "unnecessary things," but that clearly was not what Adam Smith had in mind. Smith was worried about the citizenry's "endless pursuit of unnecessary things," not the market forces that would service the pursuers.’

In the comments, a contributor puts his point well:

"What most people really object to when they object to a free market is that it is so hard for them to shape it to their own will. The market gives people what the people want instead of what other people think they ought to want. At the bottom of many criticisms of the market economy is really lack of belief in freedom itself."
~Milton Friedman, Wall Street Journal, May 18, 1961’

I am not so sure that Adam Smith said anything like the implied quotation from Charles Handy:

‘An investment is by all right-minded people to be commended, because it brings comforts and necessities to the citizenry. But, if continued indefinitely, it will lead to the endless pursuit of unnecessary things.’

The language is not quite right. Smith didn’t talk about ‘investment’ in the way modern economists do. He used the term ‘savings’ and spoke of what people spent it upon, whether it be on productive labour which reproduced itself and from growth called into productive work currently unemployed labourers, thus adding to the ‘annual production of the necessaries, conveniences, and amusements of life’, which he called wealth.

Alternatively, they could spend their savings each round on unproductive employment which did not reproduce their costs. If too many did the latter, and not enough on the former, the economy would stop growing, may stagnate, and would eventually decline.

He often mocked spending on trinkets, fripperies, and baubles, but did not complain about producing things that people bought in consumption. Much consumption was ‘necessary’, in a biological sense, and therefore unavoidable; much were ‘conveniences’ in that they made life comfortable; and some were ‘amusements’.
But Adam Smith did not presume to tell people, or comment upon, what they should buy as consumers. His concerns, if he had them, were about the proportion of saved income spent on creating productive work for labourers (an unmitigated ‘good’ for society) and the proportion spent on unproductive employment, much of it ‘necessary’ (defence, justice, education, public works, and so on) and some off it pure prodigality.

Charles Handy presumes to go beyond the macro-economic consequence of dispensing net savings to disapproval of what is available in a rich economy. Adam Smith spoke about a father amusing his children by going ‘to a puppet show’. He went to the theatre and did nothing but study philosophy in his spare time, as well as entertained his fellow philosophers and men of the arts at his dinner table.

As long as the saving to spend on productive labour - goods and services produced for sale in markets to secure future profits - exceeded that wasted on prodigality and by governments, the economy would grow. The more it grew the more people it would employ and this would spread opulence among the poorest sections of the community.

When Charles Handy would prefer that what he considers 'unnecessary' was curtailed, it follows that labourers would be unemployed and suffer real deprivations, and for the poorest, both at home and abroad, this would be a high price they would pay for soothing the aesthetic preferences of a rich and talented man like Charles Handy. On this stark issue, Adam Smith suffered no qualms aboutt amrkets.


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