Monday, October 27, 2008

A Step in The Right Direction

David C. Korten writes in (‘signs of the times’) (7 October), HERE:

The Betrayal of Adam Smith”

“Smith strongly disliked both governments and corporations. He viewed government primarily as an instrument for extracting taxes to subsidize elites and intervening in the market to protect corporate monopolies. In his words,

"Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.''

Smith never suggested that government should not intervene to set and enforce minimum social, health, worker safety, and environmental standards in the common interest or to protect the poor and nature from the rich. Given that most governments of his day were monarchies, the possibility probably never occurred to him.

Indeed, these same conditions are fundamental to Adam Smith's famous assertion in The Wealth of Nations that the invisible hand of the market translates the pursuit of self-interest into a public benefit. Note that the following is the only mention of the famous invisible hand in the entire 1,000 pages of The Wealth of Nations.

By preferring the support of domestic to that of foreign industry, he [the entrepreneur] intends only his own security, and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Smith assumed a natural preference on the part of the entrepreneur to invest at home where he could keep a close eye on his holdings. Of course, this was long before jet travel, telephones, fax machines, and the Internet. Because local investment provides local employment and produces local goods for local consumption using local resources, the entrepreneur's natural inclination contributes to the vitality of the local economy. And because the owner and the enterprise are both local they are more readily held to local standards.

Even on pure business logic, Smith firmly opposed the absentee ownership of companies:

The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own .... Negligence and profusion, therefore, must always prevail, more or less in the management of the affairs of such a company?

If corporate libertarians had a serious allegiance to market principles and human rights, they would be calling for policies aimed at achieving the conditions under which markets function in a democratic fashion in the public interest. They would be calling for an end to corporate welfare, the breakup of corporate monopolies, the equitable distribution of property ownership, the internalization of social and environmental costs, local ownership, a living wage for working people, rooted capital, and a progressive tax system.

Corporate libertarianism is not about creating the conditions that market theory argues will optimize the public interest, because its real concern is with private, not public, interests

David C. Korten is almost on the right track, but his quotations deprived of their context leave them open to enough misinterpretation to weaken some part of his conclusions.

extracting taxes to subsidize elites’

Hardly the whole story. The use of taxation to ‘maintain the dignity of the sovereign’ was a small part of the purpose of taxation, just as the splendid buildings in Washington DC are part of maintaining the dignity of the United States. Of course, splendid palaces can become burdensome and their maintenance and repair can be objectionable amidst a country’s mass poverty (think Iraq under Hussein).

But the main purposes of taxation were to fund the first duty of the sovereign, the defence of the citizens from invasions, defence being more ‘important than opulence’; the maintenance of justice, without which society ‘would crumble to atoms’, the erection and maintenance of public works that facilitate commerce; and public institutions such as education of all ranks of the people through a system of’ little schools’ in every parish on the Scottish model. Smith's reference to public support for health measures was confined to palliative care for victims of ‘loathsome diseases’ like leprosy and supported specific interventions in certain fields – banking being one – where the conduct of individuals threatened the entire society.

He never saw a role of government as having an appropriate role in “intervening in the market to protect corporate monopolies”. The exact reverse, in fact; Book IV of Wealth Of Nations is a detailed critique of misguided policies imposed by legislators to pass laws protecting monopolies, forming Guilds, pursuing trade policies of protectionism and misguided mercantile political economy.

Civil government was originally established “for the defense of the rich against the poor, or of those who have some property against those who have none at all”.

But this was not its permanent feature. Without families who set up the first experiments in herding animals and farming the land having security in their property, there would have been no movements from the hunter-gatherer mode of subsistence. That was Adam Smith’s point in the quoted passage, from his Lectures in Jurisprudence delivered in Glasgow University in 1762.

Anarchists, libertarians and Marxists who pounce on these remarks in justification cannot create an alternative history of how a section of the dispersed human race moved from hunter-gathering to commerce without the establishment of property 8-11,000 years ago.

Smith believed that the surest way to “protect the poor and nature from the rich” (accepting for the moment that this is a way to express it) was by the institutions of Natural Liberty and by the poor becoming richer from their participation in the world of commerce. As opulence spread across all ranks of society and liberty was assured, the poor would be major beneficiaries. He did not speculate as to what might happen if those conditions were realised.

David C. Korten’s recognition that the invisible hand appears only once in Wealth Of Nations (Book IV in fact) is welcome but he presents the context as the ‘famous assertion in The Wealth of Nations that the invisible hand of the market translates the pursuit of self-interest into a public benefit’.

Yet Smith never presented the ‘invisible hand’, even in the single instance where he cites the metaphor, as anything to do with ‘the market’ (all covered in Books I and II of Wealth Of Nations) nor as a general ‘law’ that it ‘translates the pursuit of self-interest into a public benefit’. That least is a fiction added to modern economics from the 1950s, completely transforming economic theory into a branch of religion.

Smith firmly opposed the absentee ownership of companies”.

Not quite. His strictures against ‘companies’ were directed at the experience of the Royal Chartered trading companies, in particular the East India Company, the directors of which were in London and officers of the Company, and the underling managers, were in India, a year’s sailing away (two years there and back) and who operated in an awful manner that disgraced them and those nominally in control. It was difficult enough to manage the Royal Chartered British Colonies in North America – only weeks away in sailing time – let along a group of grasping buccaneers out of sight, out of reach, and out of any sense of common decency and humanity “long before jet travel, telephones, fax machines, and the Internet.”

As for ‘corporate libertarians’, I have much sympathy for David Korten’s description of them, bearing in mind that modern economies are a long way from the commercial economies that Adam Smith knew and wrote about.

One thing has not changed though – human nature and its corruptibility – and an affliction shared by all sides of the argument from Left to Right.

Smith understood this, which is why he never predicted the future, nor argued that if legislators and those who influenced them read Wealth Of Nations and Moral Sentiments and adopted his analyses and associated policies the world would change into a utopia.

He was no ideologue, nor was he an idealist. He was a philosopher and he saw his life’s work as ‘doing nothing and observing everything’. As it happens, those he wrote for in the 18th century did not take heed; his legacy was emasculated in the 19th century and in the 20th century it was turned on its head, with little change expected in the 21st.


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