Thursday, January 01, 2009

Markets and Morals

Mike Masnick writes on the market in techdirt (HERE):

Free Market Capitalism, Moral Character And Doing Good All Work Hand In Hand” - from the can-we-get-over-this-already? Dept."

“I've never quite understood the complaints of some that free market capitalism somehow goes against morality or good deeds. As we've discussed in the past, moral questions shouldn't even come up at all in scenarios where everyone is better off. Moral questions only arise in scenarios where some are worse off and some are better off, and a decision needs to be made about who is worse off and who is better off. The nice thing about free market capitalism is that it tends to increase the overall pie, allowing a much larger number of people to be better off, and tends to do so in a more efficient manner than other systems…

… But, still, there are some who suddenly question whether or not the free market takes away a moral backbone -- but the only situations in which that would clearly be true are in cases of either outright fraud, or where you're dealing with a zero-sum game. In an economy that has the potential for growth, then one should encourage more growth to increase opportunities for everyone. There may be additional moral questions later concerning overall allocation, but increasing the wider opportunity, which is exactly what free market capitalism does, seems ridiculous to question.

In the end, it seems that some have this odd guilt associated with money -- as if because one person has made a lot of it that it somehow takes away from others. That's simply not true. Adam Smith, who wrote the original book on free market capitalism, The Wealth of Nations, only did so after first writing a book on morality, called The Theory of Moral Sentiment. Free market economics and morality go hand in hand. To think that they're mutually exclusive shows both a misunderstanding of morality and economics

I quoted from the piece because it encapsulates ideas that are going the rounds at present, though the confusion about ‘profit’ is of long lineage.

Wealth Of Nations is not about “free market capitalism”, except to those who have never read it.

It is critique of an 18th-century state-managed commercial society, governed by major landowners, and provides an historical analysis of how a growing commercial economy operates in that milieu.

The separate dates of their publication, Moral Sentiments, 1759, and Wealth of Nations, 1776, mislead many commentators, who are unaware that both of Smith’s books were based on his lectures on ‘Ethics’, ‘Rhetoric’ and ‘Jurisprudence’ to students at Glasgow University in the years 1751-64 (and previously mainly to University of Edinburgh students, off-campus in a winter series of public lectures from 1748-51).

Their main ideas were developed and delivered together (and definitely “go hand in hand”) to the same students each session [Adam Smith, Lectures in Jurisprudence, 1762-3, including ‘Early Draft of Wealth Of Nations’, 1763; Adam Smith, Lectures in Rhetoric and Belles Lettres 1763, Oxford University Press/ Liberty Fund].

Adam Smith wrote about how markets worked and was not confined to only writing about ‘free markets’. In fact, he criticized the French Physiocrats, whose economic models required and assumed ‘a state of perfect liberty’ (which nowhere existed, and certainly didn’t exist in absolutist France in the 1760s):

Mr. Quesnai, who was himself a physician, and a very speculative physician, seems to have entertained a notion of the same kind concerning the political body, and to have imagined that it would thrive and prosper only under a certain precise regimen, the exact regimen of perfect liberty and perfect justice. He seems not to have considered that, in the political body, the natural effort which every man is continually making to better his own condition is a principle of preservation capable of preventing and correcting, in many respects, the bad effects of a political œconomy, in some degree, both partial and oppressive. Such a political œconomy, though it no doubt retards more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of the bad effects of the folly and injustice of man, in the same manner as it has done in the natural body for remedying those of his sloth and intemperance.” [WN IV.ix.28: p 674; Canaan, ed 1937, Random House, p 638]

Smith did not write a treatise on a free-market economy; he did write on human behaviour – his theory of moral sentiments – but he had no illusions about the ‘perfectibility’ of men or society. He was no ideologue; no man with a mission to solve all problems.

He wrote frankly about ‘merchants and manufacturers’ (and the need never to legislate in their interests without the most careful scrutiny of their proposals), and about the limitations of the majority of the population (the labourers and their families), for as long as they remained uneducated (‘unless government take some pains to prevent it’ WN V.i.f.50: p 782), and about the landowners, who owned much and ran everything, and ‘like all other men’ (this part is often overlooked by those who quote the sentence), ‘love to reap where they never sowed’ [WN p 67; Canaan ed. 1937 p 49, Random House].

Adam Smith was not writing about ‘free market capitalism’ and nothing that has happened to the governance and political economy of all societies, since his time, suggests that it would be worthwhile to pontificate on moral sentiments and modern markets as if something fundamental had changed.

People are no more nor less ‘moral’ than in Smith’s day (or in any other previous age or place) and economies are no ‘freer’ than they were in the 18th century.
If anything the State has grown from powerful governments into bigger and more powerful Governments, and they are susceptible, as they ever were, to the blandishments, false theories, and blatant sectional interests of powerful legislators and those who influence them.

That the discourse of public life is dominated by ideological assaults on the idea of freer markets, and the supposed blessings of ‘regulation’ by bureaucracies, instead of by the justice system, is a symptom of the misjudged tendency to blame markets, which are not free, for the failings from political interventions that are not capable.

Throwing good money after bad is a weakness of poor management; ever tighter regulation to cover the deficiencies of regulations that don’t work as intended is congenital to micro-regulators.

In business markets, incompetence is terminated by losses; in political regulation, incompetence is cushioned by the public purse.

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Blogger Beezer said...

"In business markets, incompetence is terminated by losses; in political regulation, incompetence is cushioned by the public purse."

I'm pretty sure that's not what happened recently. Business incompetence did result in massive losses, however those incompetents who caused the losses reaped great wealth. And their incompetence is being cushioned by the public purse.

That would mean that the business world now runs, totally and completely, government.

We just kicked out that crowd, although they will apparently keep their loot. Hope the new crowd is less voracious.

2:09 pm  
Blogger michael said...

“I've never quite understood the complaints of some that free market capitalism somehow goes against morality or good deeds. As we've discussed in the past, moral questions shouldn't even come up at all in scenarios where everyone is better off....

I could imagine a comment like this during the rise of Lenin and Stalin only insert communism in place of free market. One has to be careful with words as they can become nasty things in practice.
I remember some young kids on KPFA radio saying that the crazy hurtful things they were saying were "only words" and therefor harmless. "Seig Heil" quikly jumped into my mind.

4:39 pm  
Blogger Gavin Kennedy said...

My point is a more general one. Businesses that are loss making go out of business by the ordinary mechanism within them whatever the owners might want.

Government departments and agencies are able to carryon for political reasons. There is no mechanism for governments to close their failed operations.

Currently, the aid to unprofitable business and to failed government departments is ordained by politicians fearful of the consequences of their failings.

Government from the 18th century (and before) always has played an enormous role in business (East India Company, trade with the British colonies in America, merchant navy, municipal infra-structure, state-managed economic activities, postal services, and so on.

State capitalism is the norm.I have little faith in any 'new crowd'.

4:50 pm  
Blogger Gavin Kennedy said...

That's why I am sceptical of 'new crowds'.

Words are not harmless and those who excuse their use of words are usually quick to react when other ssay things about them.

However, I am not so sure that the 'early days of Lenin and Stalin' were ones where everybody, or even a majority were 'better off'.

People comment all the time. They draw all kinds of unmerited conclusions.

4:59 pm  

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