Tuesday, April 22, 2008

Dani Rodrik Wins April's Lost Legacy Prize

Dani Rodrik in his Dani Rodrik’s Blog (‘Unconventional thoughts on economic development and globalization’) (HERE) 21 April, writes a most interesting piece around a quotation from Wealth Of Nations:

Adam Smith, the finance skeptic”:

“Was Adam Smith a finance skeptic? The following passage from the Wealth of Nations, written in connection with a banking collapse in Scotland, suggests so:
To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law, not to infringe, but to support. Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.”
(From Book 2, Chapter 2, paragraph 94.) Thanks to Frank Levy for the pointer

[Small quibble: I have restored the punctuation to how Adam Smith wrote it, as published in the definitive Glasgow Edition of the Works and Correspondence of Adam Smith, Wealth Of Nations, II.ii.94: p 324.]

Dani Rodrik also defines a libertarian stance on finance (in Guns, Drugs, and Financial Markets: in Project Syndicate: www.project-syndicate.org):

‘First are the libertarians, for whom anything that comes between two consenting adults is akin to a crime. If you are selling a piece of paper that I want to buy, it is my responsibility to know what I am buying and be aware of any possible adverse consequences. If my purchase harms me, I have nobody to blame but myself. I cannot plead for a government bailout.’

And the counter-argument:

Non-libertarians recognize the fatal flaw in this argument: financial blow-ups entail what economists call a “systemic risk” – everyone pays a price. As the rescue of Bear Stearns shows, the government may need to bail out private institutions to prevent a panic that would lead to worse consequences elsewhere. Thus, many financial institutions, especially the largest, operate with an implicit government guarantee. This justifies government regulation of lending and investment practices.’

I always recommend the above quotation from Wealth Of Nations to those who assert that Adam Smith was in favour of laissez faire and, though he never used the words, often confuse references to Adam Smith’s assertions of Natural Liberty as ‘proof’ of his ‘libertarian’ views, showing simultaneously that they neither understand Smith’s aversion to laissez faire, taken literally, nor to the philosophical content of Natural Rights theory, which Smith learned from Francis Hutcheson, and through him, from Carmichael, Pufendorf and Grotius.

The chapter in Wealth Of Nations to which Dani Rodrick refers demonstrates the authentic Adam Smith who was never an ideologue of any kind. What worked was more important than what fitted a ‘theory’ of what ought to work.

The problem of bank paper (currency notes) was compounded by the behaviours of individuals – not all expressions of self-interest lead to socially beneficial outcomes, as students of Adam Smith know, but Nobel Prize winners in economics sometimes don’t, let alone legions of ‘top’ academics who pontificate on ‘his’ alleged theories with all the arrogant certainties of what Smith called ‘men of system’.

Dani Rodrik exposes the silliness of the so-called libertarian: ‘If my purchase harms me, I have nobody to blame but myself. I cannot plead for a government bailout’.

They ignore the fact that a banking crisis does not just harm the individual; it harms many others who were not party to the individual’s transaction. Justice in society, said Adam Smith (and similarly, said David Hume) is essential, otherwise it would ‘crumble into atoms’, and justice is not just about apportioning ‘blame’ to individuals who contribute to the problem, it is also about protecting other individuals who are affected by such actions.

I shall award Dani Rodrik the Lost Legacy Adam Smith Prize for April on the basis of his posting above (with a commendation to Frank Levy who drew Dani’s attention to it).

Regular readers will note the monthly prize has not been awarded recently because there has been a steady run of misrepresentations of Adam Smith across Blogland and the maintstream media. Thank you Dani Rodrik.


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