Wednesday, June 01, 2011

A Libel on Adam Smith's Legacy

Lynn Parramore (editor of New Deal.20 and co-founder of Recessionwire) interviews Jeff Madrick on Huffington Post (HERE):

Jeff Madrick is a Roosevelt Institute Senior Fellow. He recently sat down with ND20 Editor Lynn Parramore to discuss his latest book, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present, which hits stands today.

‘‘Conversation with Jeff Madrick, Author of Age of Greed (Part One)’

‘JM: He was the leading edge of the culture. Few people were quite as crude as Boesky. They disguised it. They didn't brag about it that much. But they were very aggressive in their own way and Ivan occasionally talked about that famous line from Adam Smith that greed is healthy. He thought he was emulating Smith. By greed he meant self-interest.’

Boesky may have been more than ‘crude’ (on which I have no information) but he was certainly absolutely wrong about Adam Smith having a ‘famous line’ that ‘greed was healthy’.

He most certainly did not. Boetsky is misinformed and for this I blame modern economists who started inventing myths about Adam Smith endorsing ‘selfishness’ and a so-called ‘invisible hand’ that miraculously led people in markets to create public benefits. The myth bid not solely begin with Paul Samuelson, but certainly the myth was widely spread by his popular first-year textbook, ‘Economics: an introductory analysis’ (McGraw Hill, 1948 and 19 editions later to 2010).

Worse, the infection from the myth also struck widely into the upper reaches of economic theory with top scholars repeating it on the frontiers of welfare economics and among the more rarified mathematical theorists who pioneered General Equilibrium theory (all of the major proponents received Nobel Prizes, thus adding great prestige to the libel on Adam Smith’s legacy).

In a short time, Samuelson’s major error that Smith’s ‘self-interest’ was synonymous with ‘selfishness’, elided into him praising ‘greed’, which led to the likes of Boetsky (no doubt a fine fellow of impeccably good intentions) manufacturing a line in ‘casual conversation’ that Smith thought ‘greed was healthy’. He most certainly did not. He considered such ideas as ‘licentious’. They belonged to Bernard Mandeville’s ‘Fable of the Bees: private vice, public virtue’(1724).

Few have heard of Bernard Mandeville; almost everybody has heard of Adam Smith; hence ‘Bernard Mandeville’s famous line that greed is healthy’ does not have quite the same resonance that attributing it to Adam Smith has. However, Smith was wholly innocent, but the libel blames him for the sins of those who apply its sentiments in good faith, rather than its real author, Mandeville.



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