Sunday, March 16, 2008

Adam Smith on Self Interest and 'Good' Outcomes for Society

John Reiniers writes(16 March) in Hernando Today in The Tampa Tribune (here)

At the time of our founding we were consumed by the Protestant ethic which was both fundamentalist and worldly at the same time. It was the ideal environment to foster the development of capitalism. We were not encumbered by an economically stagnant feudal "business" model, cluttered with monarchs and lords of the manor. We were jump started by a coincidence of history - the publication in 1776 of the Wealth of Nations by Adam Smith - the father of economics and native of Scotland.
Smith introduced the notion of an individual guided by his own self-interest promoting the greater good "of the society more effectively than when he really intends to promote it which was no part of his intention." (The immutable law of unintended consequences.) And the funny thing is that Smith, like our founders, advanced an economic system grounded in "natural law" (more of a self-regulating economy), which was based in part upon the wisdom of God as perceived by man, and ironically best expressed earlier by that practical colonial sage Ben Franklin who observed: "God helps them that help themselves." (But, thought Smith, not to the point of selfishness.)


It would naturally follow for Smith to see government as an impediment to economic success: "Natural law implies a restriction on the functions of government, in the interests of the liberty of the individual." That sure sounds like the mindset of our founders too.’

Comment
This is an interesting argument, but if the American colonies were not ‘encumbered by an economically stagnant feudal "business" model, cluttered with monarchs and lords of the manor’, it is a fact that Britain certainly was so ‘encumbered’, and the commercialization of the declining feudal economy began amidst the ‘feudal business model’ and Britain led the way well into the 19th century.

Adam Smith pointed to the absence of primogeniture and entails in colonial land law (in contrast to Spanish and Portuguese South America), inherited from the British administration that most of its colonies enjoyed, as the decisive influence on the agricultural boom operating in most of them that showed dramatic positive results before and after the 1776-83 rebellion. The fact that primogeniture and entails continued in Britain remained inhibitors of UK economic growth.

‘The immutable law of unintended consequences’ operates both ways. It may be the case that the notion of ‘an individual guided by his own self-interest promoting the greater good of the society more effectively than when he really intends to promote it which was no part of his intention’ can be true in some cases; it is also true that individuals ‘guided by their own self interest’ may not be ‘promoting the greater good’, whatever their intentions.

Adam Smith gives over 50 examples of self interest also having unintended consequences that do not promote the ‘greater good’ of society (in Books I and II of Wealth Of Nations), (not the least of them being the legal institutions of primogeniture and entrails operating widely in the UK!). The connection for self-interest to do ‘good’ for society is not automatic, nor inevitable. Monopolists, protectionists, and purveyors of a host of self-interested behaviours are at least as numerous as those instances that that do ‘good’.

Natural law depends on a system of justice, without which society would ‘crumble into atoms’ (Moral Sentiments), and justice depends on the existence of government. Natural law and liberty were not conceived as being applicable to commercial society only; they were the jurisprudent principles of all societies, and it did not imply ‘a restriction on the functions of government, in the interests of the liberty of the individual’. That notion is a post-Smithian creation.

Adam Smith’s account of the duties of government (Book V, Wealth Of Nations) sets out an extensive agenda for governments in commercial society. His critique of government interventions in Book IV of Wealth Of Nations was directed at some government policies and fallacies, engendered by interested parties, who influenced legislators, and was not a blanket condemnation of government intervention in general.

Many phoney 'free-market' politicians, and those who influence them, favour non-intervention in their indulgences in their self-interest selectively, and they pay large sums to persuade governments to intervene to ‘narrow the competition’, legalise their restrictive practices, and maintain destructive tariffs.

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