The Hesitant Hand by Steve Medema, Part 3: Chapter 2:

[Posting is a trifle slow this week due to matters related to our sudden return from France]

This is where Steve’s book begins to look new (to me) and very interesting. He is beginning to enter into his theme (‘Taming Self-Interest in History of Economic Ideas’).

Steve writes a brisk but purposeful account of the evolution of political economy towards economics in the 19th century. Apart from the residual dominance of Adam Smith, present but not necessarily in charge, there is that enigma called Jeremy Bentham, of whom, I for one have never been comfortable around people with their feet firmly planted in the clouds.

Bentham's utilitarian approach was itself utopian in its pewrspective of how people behave (a way too improbable a calculus for the bulk of people to abide by) and the institutional arrangements of his proposed schemes in society were just as utopian. Nowhere is just about as close as you can get to finding a society that would incorporate his imaginative ideas.

The 19th-century enduring illusion of laissez-faire, wrongly attributed (still!) to Adam Smith, pervades popular discourse throughout but most serious economists controlled themselves, so to speak, in their appreciation of its unrealistic applicability. Market competition, yes, but blind faith in laissez-faire, no. It was more of a phrase embedded in political agitation and journalism (The Economist) than other than a limited panacea among serious economists.

Steve quotes J. E. Cairns asserting that ‘the maxim laissez-faire … has no scientific basis whatever’ (31), which seems appropriate for a phrase first uttered in 1680 by a ‘plain spoken’ merchant, M. le Gendre, when asked by the French Finance Minister, Colbert, what he wanted from the government (‘leave us alone!’). A thin reed, surely, on which to analyse society and later promote it to a principle of economic policy, echoed on the streets of France by the French political agitator, Pierre Poujade in the 1950s.

Steve gently guides readers from the streets to the constructive perspectives of how to draw the mercantile state from policies favouring special interest groups towards those that would benefit the general population. This meant becoming realistic about government activity – necessary not overly interventionist in creating monopolies

Primarily, he is concerned with the ideas of John Stuart Mill and Henry Sidgwick on self-interest in the context of growing realisation of the possibilities of local market failure, a relatively new idea among 19th-century economists. The commercial society of which Adam Smith wrote had changed, and would continue to change, throughout the 19th century, and with the changes came changing concerns of what was agenda for economics.

Steve wanders slightly into a Venn diagram in an attempt to illustrate Mill’s view of overlapping interests where self-interest is superseded by morality, and the slide to welfare economics begins in pursuit of the legitimate functions of government, particularly that of law making, where the appropriate solution to certain conflicts of interest is not obvious. There is no easy rule that resolves all conflicts where there are clear beneficiaries and clear losers. Mill, typically, seeks a ‘solution’ in ‘expediency’, which boils down to the arrangement that can be imposed (or left alone) causing the least disturbance.

Mill’s views of government – its ‘natural tendency towards collective mediocrity’ (41) – did not lead to ‘government by the brightest’ because if too many ‘bright people’ leave non-government, the quality of an outside check on the errors of government would be weakened. Even then, ‘government by the brightest’ would not be better than ‘government by the mediocre’.

Mill returned to the mystique of ‘laissez-faire’ (with its unsubstantiated superiority to other arrangements) and warned against departing from it (42). I always think that while we know what M. le Gendre wanted from M. Colbert, we don’t know what M. le Gendre’s customers wanted – as usual the consumers’ interests are trumped by the producer’s, and probably worsened by the government’s. Laissez-faire is the cry of producers; Adam Smith spoke up for consumers. Advocates of laissez-faire (which did not include Smith, but did include Mill) should avoid confusing laissez-faire with liberty for all.

Steve moves on to Henry Sidgwick, Mill’s contemporary, and author of Methods of Ethics (1874) and Principles of Political Economy (1901), thus spanning Marginalist and Marshallian thinking.

For Sidgwick, self-interest was the central assumption upon which ethics and economics could be founded, but Natural Liberty could be ‘dismantled’. He considered that ‘extreme laissez-faire’ and the assumption that self-interest is ‘universally beneficent’ and ‘harmonious’, ‘should be banished to the remotest available planet’ (43), which message could be validly expressed today in some circles given the widespread misunderstanding of those who wildly misquote (indeed, often make up) Adam Smith’s views on these subjects.

I found this section of the chapter most valuable, not being familiar with Sidgwick’s thinking. He spotted errors in laissez-faire, particularly its non-conformity with actual practice. It had negative spillover effects in one party’s ‘use’ of a finite resource, in certain contracts that harmed a third party, and, of course, where monopolies were present(44).

With government, too far then the scale of interventions, narrowed the sphere appropriate for private enterprise; too little government exposed the community to higher risks of disagreeable outcomes. The ‘Goldilocks’ solution is self-evident, but realising it not, nor easy.

This seems typical of Sidgwick from what Steve says about him, and probably in the category of ‘motherhood and apple-pie’ - he may be too intellectual to be practical. Perhaps he recognised this by asserting that ‘in human affairs we have often only a choice of evils’. (45)

[Part 4 is on ‘Marginalizing the Market’]