Monday, October 20, 2008

The Utopia of Root and Branch Reform

Benjamin Barber, author of ‘Consumed: How Markets Corrupt Children, Infantilize Adults and Swallow Citizens Whole’ writes in Guardian Unlimited (UK) (HERE):

Decades of eroded trust and democracy did the damage

The roots of the financial turmoil are a democratic deficit. Restoring civic faith is crucial for market economies to function”

“Because the secret of the invisible hand is not economic capital but social capital. Adam Smith knew that moral sentiments no less than capital markets undergird the wealth of nations. The liquidity crisis is a political crisis; the credit deficit is a democratic deficit. For trust is the social capital that permits private capital to be exchanged, contracts to be enforced, promises to be kept, expectations to be realised. Democracy is the common sea in which all those competing market boats and bickering fiscal sailors are kept afloat.
So although it was bad loans and greedy bankers and stupid hedge fund managers and ignorant investors who made the mess, it has been four decades of de-democratisation that has done the real damage.


Comment
Benjamin Barber’s article is a storming piece, of which I have only quoted a sample, that brings in Reagan and Thatcher as villains, and a host of faceless sinners, including real and imaginary governments (the ones we have had and the imaginary ones Benjamin speaks with the assurance of the proselytiser who has all the answers), who are different in an array of qualities as not to have been seen in all history and whom are exceedingly rare as individuals in the world we live in.
However, follow the link to see what I mean.

His assurance that “the secret of the invisible hand” was that Adam Smith was not talking about “economic capital but social capital” because “Adam Smith knew that moral sentiments no less than capital markets undergird the wealth of nations”, is contentious.

It runs two ideas, one wrongly imposed by modern economists on Adam Smith and the other a general thesis of Adam Smith’s about how societies evolve and individuals in them are socialised into the mores of whatever society they grow up in (even one consisting of ‘robbers and murderers’, see TMS II.ii.3.3: p 86).

Whatever else Adam Smith may have meant by his use of the popular 18th-century metaphor of ‘an invisible hand’ in Moral Sentiments and Wealth Of Nations it was not about ‘economic’ or ‘social capital’.

In its only singular use in Moral Sentiments (TMS IV.1.10: p 184) had nothing to do with capital; it was about rich landlords feeding their servants, retainers and tenants from the annual output of their fields because, if they didn’t their power would crumble as their dependents starved in the winter – they had no other choice, whatever their motives (who would labour in their fields and grand houses?).

Its only use in Wealth Of Nations (WN IV.ii.9: 456) had nothing to with capital, but was about the risk-avoidance of some, but by no means all, merchants in choosing between trading in foreign countries, particularly the British colonies in North America, where the perceived risks were higher, or trading locally where the risks were lower, and thereby, unintentionally, raising national investment above what it otherwise would be (by arithmetic, the ‘whole is the sum of its parts’). There was an abundant trade between Britain and its colonies, including India.

In neither case was the metaphor more than a metaphor for readers who did not understand why this happened. It only became a ‘theory’, ‘a paradigm’, or a ‘concept’ from the mid-20th century under the evangelical guise of Chicago-led neoclassical economists who burdened Smith’s reputation with something he never asserted.

Benjamin creates a theory of the ‘democratic deficit’ that also has nothing to do with Adam Smith, who didn’t have a vote in the 18th-century British electoral franchise, and was more concerned with the progress of Liberty in the United Kingdom than with democracy, and with major changes in the dominating political economy of the day.

He didn’t expect much to change in the proclivity of legislators and those who influenced them (the body politic) to act in the interests of ‘merchants and manufacturers’ and was, therefore, not too optimistic that they would dismantle the economic arrangements that they and their allies gained from. (He said that expectations that 'free trade should ever be entirely restored in Great Britain' were 'absurd' and 'Utopian'; WN IV.ii.43: p 471)

Whether what Benjamin advocates so vociferously would come about by replacing the entire democratic system that exists in the USA and elsewhere with something else like ‘social capital’ is not my area of expertise (I don’t vote in the USA).

However, I quote below from one of his anonymous correspondents who is unconvinced:

MoveAnyMountain” writes:

This is an interesting use of the word "democratic". If I choose to invest my money in a company I like, this looks democratic to me. The market is just made up of a billion or so people like me - some directly, some through intermediaries such as pension funds.

What the author seems to be arguing is that the market will be more "democratic" if control of my money is taken from me and those other billion people and entrusted to a small oligarchy of buffoons we have a say about every four or five years.
How is this democratic? It is a demand for a massive level of State control over my life and my assets. Such as they are. It is about as undemocratic a proposal I have seen in a long while.

The author is also flatly wrong about markets. They run on trust. But they also build trust. Societies that trade have higher levels of trust than those that do not. Markets reward trustworthiness and hence there is far more of it in market economies. China has poisoned milk, Denmark does not. Every product you see is the result of thousands of people who have never seen each other co-operating in a capitalist enterprise that relies on and builds trust.

So the solution is to trust me with my money. I know what I want done with it. If I trust my bank (which I picked because it was so boring and trustworthy) then the Government ought to trust me to manage my money myself. The solution is not to let people I do not know and do not trust control it for me. After all, British civil servants are so much more trustworthy with money than the Banks aren't they? Anyone remember the Dome?”


Comment
I suggest readers follow the link and read Benjamin’s article in full for themselves.

2 Comments:

Blogger Arnold T said...

America is forever in Adam Smiths' gratitude for THE most important evolutionary idea of the world. Adam Smith gave us our Representative Government. Adam Smith designed it and it was adopted in full by the Continental Congress.

It was a Government designed to withstand the foibles of man and his nature. Adam Smith was a practical man, utmost and convincingly, to his contemporaries. He pointedly created our government with a cynical attitude of how men behave. The built-in checks and balances of three branches of government, two congressional houses to balance state rights, super-majority votes to protect minority views, etc all spoke to his cynical attitude that men must be monitored and leashed lest they abuse power.

I think if Adam Smith knew how Free Market Capitalism was being implemented today, he would turn over in his grave. Adam Smith would have never accepted the idea that capitalism should be self-regulating and unfettered.

Extrapolating from his cynical views on human nature, you can bet that he would have designed a modern capitalistic system with checks and balances. Unfortunately, during his lifetime, he could provide us with only one miracle, our current form of US government.

My greatest fear is that we will never see a great man again like Adam Smith who can mix ideals with reality and come out with what works best. We need an economic giant who can design a system that is realistic about greed and fear. A system that inherently checks and balances the abuses of power, money and influence.

If only we could write an Economic Constitution that exhibited the enduring strengths of capitalism while it protected the system from the abuses of men that would derail and destroy our economic freedoms.

5:57 am  
Blogger Gavin Kennedy said...

NOTICE

'arnold t' appears to be a troll.

See the previous two posts and the comments, especially the rebuttal of the notion that Adam Smith had anything to do with the writing of the US Constitution.

Gavin

7:05 am  

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