Friday, October 03, 2008

Markets Remain Better Than The Alternative On Most Occasions

M.K.’ in the Mauritius Times opens his/her apparent ‘solution’ to the current turmoil in global finance with an example of muddled knowledge about Adam Smith, HERE:

So much talk about good governance: how about putting it into practice?”

“Adam Smith, a Scotsman and founder of modern economics, is reputed to have advocated the laissez-faire doctrine of free markets in 1776. It is not quite certain whether he also advocated that governments should not interfere at all with the working of markets. However, free market capitalism, following in his wake, has imposed the view over centuries that the markets operate most efficiently if left to themselves without government interference. If we consider the havoc that the working of the free capitalist markets of the United States and Europe is currently wreaking on global markets, we would think twice before accepting wholesale this kind of laissez-faire doctrine. We must at least learn a lesson

Yes, Adam Smith was a Scotsman, but anointing him as the ‘founder of modern economics’ may be going too far.

Certainly he was a great thinker, certainly he synthesized a great deal that is important in modern economics still, and certainly his historical importance is in the front rank, but modern economics of the neoclassical variety – the dominant consensus – hardly owes much to Adam Smith’s Wealth Of Nations.

Except as a presentation volume given to retiring academics, Smith’s Wealth Of Nations, which they almost certainly never read as a student nor as an tutor, and almost as certainly they will leave on their bookshelf, unread too, it remains almost unread among the profession that allegedly owes its foundation to him.

If they did read it they would conclude that Adam Smith was not an advocate of laissez faire; he never used the words at all, anywhere in all of his one million words. The laissez-faire notion was first put forward in France by some of the Physiocrats in mid-18th century France, and Smith was very familiar with the men and their ideas, so there can be no question that his non-use of the words was other than deliberate.

Smith was too familiar with the actual behaviour of ‘merchants and manufacturers’ to have been as trusting of their working fairly and with other than grievous suspicion of their motives, as the words laissez-faire (‘leave alone’) imply. Indeed, Wealth Of Nations is full of his critical assessments of the merchants and manufacturers and their doings, unless curbed by both the vigilance of the law and the scepticism of legislators. MK can be assured that we are certain, beyond reasonable doubt, that Adam Smith never advocated ‘that governments should not interfere at all with the working of markets’. He made many statements quite to the contrary of such notions.

The notion ‘that the markets operate most efficiently if left to themselves without government interference’ would depend for credibility on what is meant by ‘without interference’. If we mean without the interference of individual legislators, then there is no doubt that such people are totally incapable of improving on free markets.

Day-to-day management of markets, and in their absence, management by state politicians and civil servants, has always proved to be less efficient – and incidentally, less fair - than creating the appropriate conditions by which the working of markets are as free as possible. Nobody, except extreme unreconstructed statists, advocates seriously the replacement of markets with Soviet- style socialism, or post-war nationalisation of the ‘commanding heights’ of the economy.
There is bound to be some degree of intervention by state agencies (defence, justice, public works, financial and banking regulations, the mint, the central bank, and such things as weights and measures education and health.

This does not mean that the current state arrangements are optimal – far from it – or that publicly funded services must be managed and delivered only by public employees and that there is no room for such services to be delivered in private and voluntary non-state personnel.

Visit for a detailed exposition of many ideas that would improve the distribution of publicly funded services in current economic circumstances. Whereas, reverting to old notions of wholesale nationalisation programmes would only make everything worse, drab and tatty along all dimensions.

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