Wednesday, March 11, 2009

Amartya Sen's Two Brilliant Essays on the Relevance of Adam Smith Today

Amartya Sen writes two great articles of current relevance on Adam Smith. The shorter one is in the Financial Times HERE and the longer one is in the New York Review of Books HERE.

I recommend them both to you (following correspondents asking if I had read them, and, presumably, looking for my comments on Lost Legacy). As I have been busy completing my paper on ‘Adam Smith’s Alleged Religiosity’, I chose not to post a comment last week, but to generate more publicity for an approach with which I agree and I am pleased now to recommend them and I provide links to the two articles and a very short extract:

‘Adam Smith’s market never stood alone’

“For example, the pioneering works of Adam Smith in the eighteenth century showed the usefulness and dynamism of the market economy, and why—and particularly how—that dynamism worked. Smith's investigation provided an illuminating diagnosis of the workings of the market just when that dynamism was powerfully emerging. The contribution that The Wealth of Nations, published in 1776, made to the understanding of what came to be called capitalism was monumental. Smith showed how the freeing of trade can very often be extremely helpful in generating economic prosperity through specialization in production and division of labor and in making good use of economies of large scale.

Those lessons remain deeply relevant even today (it is interesting that the impressive and highly sophisticated analytical work on international trade for which Paul Krugman received the latest Nobel award in economics was closely linked to Smith's far-reaching insights of more than 230 years ago). The economic analyses that followed those early expositions of markets and the use of capital in the eighteenth century have succeeded in solidly establishing the market system in the corpus of mainstream economics.

But Smith's defense of private trade only took the form of disputing the belief that stopping trade in food would reduce the burden of hunger. That does not deny in any way the need for state action to supplement the operations of the market by creating jobs and incomes (e.g., through work programs). If unemployment were to increase sharply thanks to bad economic circumstances or bad public policy, the market would not, on its own, recreate the incomes of those who have lost their jobs. The new unemployed, Smith wrote, "would either starve, or be driven to seek a subsistence either by begging, or by the perpetration perhaps of the greatest enormities," and "want, famine, and mortality would immediately prevail...."

Smith rejects interventions that exclude the market — but not interventions that include the market while aiming to do those important things that the market may leave undone.

Despite all Smith did to explain and defend the constructive role of the market, he was deeply concerned about the incidence of poverty, illiteracy and relative deprivation that might remain despite a well-functioning market economy. He wanted institutional diversity and motivational variety, not monolithic markets and singular dominance of the profit motive. Smith was not only a defender of the role of the state in doing things that the market might fail to do, such as universal education and poverty relief (he also wanted greater freedom for the state-supported indigent than the Poor Laws of his day provided); he argued, in general, for institutional choices to fit the problems that arise rather than anchoring institutions to some fixed formula, such as leaving things to the market.”

Amartya Sen received the 1998 Nobel Prize in economics; he teaches economics and philosophy at Harvard University and he has written an introduction for the anniversary edition of ‘The Theory of Moral Sentiments’ (Penguin Books, 2009) in which he discusses the contemporary relevance of Smith’s ideas.

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Blogger Andres said...

Both essays are brilliant, and should be highly welcome, in times when so many ignorants go around claiming that Smith thought markets were self-regulating, and that Keynes pleaded to help the poor, the weak and the elderly.

What I like the most about these essays (particularly the one in the New York Review of Books), is Sen's insistence on the normative and cultural framework that shapes any form of social, political and economic organization. I also liked his point that the actual good performance of what we call capitalism is due, in fact, to public institutions such as healthcare and public education. This reminded me of a very clever note by Viner, who warned that no economic system, however powerful in theory, would survive if it allwed the persistence of extreme inequality ("The Intellectual History of Laissez-Faire"). Needless to say, Sen's comments on the diversity of human motivations are not only correct: they are, in my opinion, an excellent interpretation of Smith.

There's only one minor point where I'm not sure I agree with Sen: his claim that, according to Smith, people seek trade because of self-interest. In my opinion, Smith doesn't postulate a causal relationship of this sort, one that would allow us to identify self-interest as the cause of man's propenstity to trade. My own reading is that he sees in humans a natural propensity to trade, and self-interest appears, not as the cause of the propensity as such, but as the specific cause of the majority of instances where humans engage in exchange. But again, I'm not sure on this, and it would be anyway a very secondaty point on what is, from any point of view, a very lucid essay.

2:50 pm  
Blogger Gavin Kennedy said...

Andres, you are quite correct in your assessment of Sen's articles. They have achieved wide publication and are timely challenges to current scholarly orthodoxy. Viner's point is particularly strong.

Trade grew from exchange and you are absoltely right to spot this. Many scholars, from memory I think Karl Polanyi made this mistake, by asserting that Smith's propensity to 'truck, barter, and exchange' was to 'truck, barter, and trade'.

I hope many more people read Sen's article. He is speaking at the Glasgow Commemoration of Moral Sentiments 2-3 April (which I shall attend) and to which I look forward with happy enthusiasm.

6:57 am  
Blogger Strider said...

From Sen's article

"Even though people seek trade because of self-interest (nothing more than self-interest is needed, as Smith famously put it, in explaining why bakers, brewers, butchers, and consumers seek trade), nevertheless an economy can operate effectively only on the basis of trust among different parties."

I wold add a note to clarify the above statement. In the beginning when societies progressed from subsistence existence to more recent capitalism. I propose that people traded with their neighbor to get what they wanted and did not have (either at all of enough). Self interest is in a category above this basic motivation. The people involved were not aware of the concept self interest, they operated at a much more pragmatic level. The term "self interest" is not a motivator; the requirement to trade excess turnips for a fresh rabbit is. This rabbit is what I want!.

This, I think helps clarify the point Andres is making. If we re-interperate Smith and say "people trade to get what they want (need)" we do get the casual relationship Andres refers to.

I also take exception the the impreciseness of the word "trust" in economic discussion. My experience is that it causes more fog then light.

If we substitute the word "predictiblity" for "trust" we get somewhat closer to a scientific approach to interactions between people and organisations.

I would appreciate your comments on this view.

11:55 pm  

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