Sunday, July 13, 2008

Adam Smith Not a Laissez-Faire Ideologue

Carl Luna, Professor of Political Science, San Diego Mesa College, writes in Political Lunacy (HERE)

The War Between the States (of corporate desperation) and a Short History of American Economic Time (and if this title was any longer it could never make it as a bumper sticker)” (12 July):

In economics only two things matter: supply and demand. Government policy can try to affect one over the other—it can’t really effectively and successfully influence both significantly at the same time. When one of these paradigms dominates but, then, crashes and burns, government can only—and must—shift to the other.
American economic history can be divided into three great epochs. From the 19th Century—particularly after the Civil War—to 1932 that policy was Laissez-Faire industrialism. Laissez –Faire has never meant “hands off” the economy, as many simplistically believe. Adam Smith never wrote that it did nor believed it should. Laissez-Faire means government hands of the decisions of supply and demand in the economy but it also, for Smith, meant active government in maintaining an efficient and—most importantly—fair free market. Smith, a dower, Scottish moral philosopher, understood that people are people and, given the chance, they cheat. Hence his famous admonition that “People of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” The role of government was to prevent such “conspiracy” and “contrivance.”

In practice, however, whenever you hear someone advocating so called Laissez Faire policies for government, they are calling for pro-supplyside policies: anti-labor, anti-consumer, pro-capital and a pro-producer. These were the policies of the industrial revolution—and the gilded age. This model crashed and burned in the ravages of the Great Depression, ushering in the Keynesian, demand-side, New Deal model.”

Apart from the hyperbolic language in the last paragraph, I comment on Professor Luna’s supporting arguments (not that I necessarily disagree with his broad characterisations of US history).

Laissez –Faire has never meant “hands off” the economy, as many simplistically believe. Adam Smith never wrote that it did nor believed it should.”

Adam Smith never mentioned the words ‘laissez-faire’ at all; not once in anything he wrote. The sole source for laissez-faire was, not surprisingly, in France and among several of the French Physiocrats, whom Smith met, conversed, and read.

His association with ‘Laissez-faire’ is by attribution from his 19th-century successors (particularly among advocates against the factory Acts who resisted reforms to correct abuses in the employment of young children). The most active people characterising Adam Smith’s association with laissez-faire were found in the Manchester School and among Political Economists (J. S. Mill, etc.,). Modern 20th-century economists have embedded the false association of Smith with laissez-faire in academe and the media.

for Smith, [he] meant active government in maintaining an efficient and—most importantly—fair free market.”

In so far as this means competition in markets, it meant repeal of all laws that allowed restrictions on competition (the Settlement Acts, the Apprenticeship Statutes, the Incorporated trades). He found the Navigation Acts necessary for defence, but was critical of the British monopoly on its colonies’ trade, and was critical of the absurdity of some of the tariff laws slipped into legislation by vested interests, but recognised the need for revenue from customs and excise to meet necessary government expenditure. In short, Smith’s policies were far more nuanced than they are often presented.

“Hence his famous admonition that “People of the same trade seldom meet together,…”.

This is often presented as Smith's general comment on business. It was, in fact, a reference to the incorporated towns where the members of each ‘trade’ – clockmakers, mechanics, drapers, weavers, butchers, printers, carriage makers, wheel makers, bakers, builders, matalworkers, and such like and so on, held a local monopoly over the sale of their designated products and prevented, legally, anybody not a member from setting up their business. It was major remnant of the old Guilds of the time, and choked competition such that members of different trades agreed not to buy from other sources, such as in nearby towns or imports, and thereby paid higher prices, but kept out competition which was a mutual benefit to all of them - but, alas, not their consumers.

The modern day equivalent is not the corporation of today; they are found in the professional guilds of employees, who have cornered markets for their skills (prominently evidenced in a town not too far from San Diego – yes, the one with it iconic name on the hills above it).

Moreover, Smith did not ‘understand’ that ‘people are people and, given the chance, they cheat’.

He had a much more subtle understanding of people – they did what was in their interests, as they saw them, and according to the norms of those around them. A community of robbers and murderers would refrain from robbing and murdering each other (Moral Sentiments) and most people will behave according to the mores of their time and place under the fairly effective tutelage of their ‘impartial spectator’.

It is true that where someone’s self interest was overwhelming, and where restraints, legal and moral were loosened (for example, the absence of competition) some of them would likely behave ‘rapaciously’), hence the need for the negative virtue of justice. Whether this required government, beyond the laws in place, to be active in administering laws and regulations to cover every eventuality, was a matter of practicality, not principle.

Professor Carl Luna’s recommended policies or the histories of them in respect of the New Deal and Keynesian policies as applied in the USA may have merits or otherwise, but I am not qualified to judge, not knowing enough about recent US economic history. My comments are confined to his representation of Adam Smith and his ideas.



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