Tuesday, August 30, 2005

The Menace of Hyjacking Adam Smith





Gavin Kennedy

The menace of hijacked capitalism”
An economist argues that to vanquish terrorism, poverty and crime, dirty money must be reined in

By Cecil Johnson, a Fort Worth-based free-lance writer. I review the review and should say at the start hat its general thesis is correct: Criminal activities undermine free markets, but the remedy already exists: it’s called justice.

To make his points the author, Raymond Baker, a 40-year business veteran and guest scholar at Brookings in Washington, DC, picks on Adam Smith, or at least the public’s version of him, to add support to his case.

The reviewer, Cecil Johnson, a free-lance writer from Fort Worth Texas, writes

“Adam Smith has to be whirling in his grave because of what dirty money dealing is doing to capitalism, says the author of Capitalism's Achilles Heel in his illuminating and disturbing new book.”

For a start, Adam Smith would not know what capitalism is, either the word or the phenomenon. He lived (1723-90) long before capitalism became a reality in the 19th century. He lived in a world of mainly small markets, peopled by small traders and local farmers. The former sold simple agricultural implements made of manufacturers (artisans, tradesmen), likely to be bought by farmers and simple household utensils and small specialty goods, cloth and trinkets; the latter sold farm produce to consumers and cattle, sheep, goats, pigs, and chickens to each other. This is a long way from the large joint stock companies and global companies of today.

Quoting the book, the reviewer says:

"Adam Smith today would be appalled to see that the pursuit of fraudulent transactions and illegal profits has become utterly routine, unencumbered by the moral safeguards he envisioned, generated by people lacking the traits of character he knew were necessary for effective conduct of the free market system," Brookings Institution guest scholar Raymond W. Baker writes.

The idea that Smith would be innocently ‘appalled’ at the behaviour of the owners of land and businesses is quite wrong. He knew all about the mischevious behaviour of ‘merchants and manufacturers’. In fact he spent pages detailing their conspiracies and cheating ways. He was not an idealist who saw markets and the people running them as saints. He advised the greatest suspicion of anything they did and knew all about corruption at all levels. He was, after all, living in 18th century Britain at a time noted for it large scale corruption, socially, politically and commercially. He wrote harshly about the great joint stock companies operating in India and elsewhere for their criminal ways. Why should today’s corruption ‘appall’ him particularly? Using Smith’s name to lend a bit of drama to Baker’s message is unnecessary and gives the wrong impression of the worldly sense of the author of “Wealth of Nations”.

Cecil Johnson continues:
“The author, who spent more than 40 years in international business and is a senior fellow at the Center for International Policy, imagines that if Smith were to return today he would be "heartbroken" to find that distortion of his economic thesis has simultaneously generated great wealth and huge economic gaps that have stranded three times more people in poverty as there were living in the world when he wrote The Wealth of Nations.”

This concedes the false point that capitalism creates poverty, which is nonsense. The absence of capitalism creates poverty. Markets create wealth, the only antidote to poverty that works. The poor have not been ‘stranded in poverty’ by anything Smith advised; indeed, the adoption of market forms, even under communist dictatorships in China and Vietnam, the extention of markets in India, Asia and Central and South America, removes people from poverty far quicker and more certainly than alternative attempts at state managed interventions. Markets that are closed or closing (Cuba, North Korea, Iran, Venezuela, and much of sub-saharan Africa, including I am sorry to see the creeping intervention of the State in South Africa) are creating and maintaining poverty on a grand and sickening scale. This would appall Adam Smith.

The follows a disappointing sentence (from Baker, not the reviewer):
"If he [Smith] chose to remark on the invisible hand, he would identify it now with international pickpockets lifting the purses of the poor for deposit into the far-flung accounts of the rich," Baker writes.

Oh dear! Smith only mentioned the invisible hand three times in his long career and on each occasion it had nothing to do with markets. He never meant it as an all purpose metaphor to claim that pursuing one’s self interests always, or necessarily, benefited society. Smith was not stupid. He knew, and wrote about, self interest having malign outcomes, as it must when a person chooses to do a criminal act. That was true in the 18th century (and every other century before and since). Some outcomes are benign; others are malign.

The reviewer, Cecil Johnson, paraphrases Baker:
“It is a picture that would, indeed, make Adam Smith weep. He believed that capitalism would spread the wealth to all sectors of all societies. Of Course, Smith's version of capitalism, as Baker points out, was based upon a presumption of honesty and compassion for others.”

As above, Smith certainly practiced ‘honest and compassion for others’ but was not naïve to presume it in others. His “Theory of Moral Sentiments” detailed what is necessary to live a moral life – he was optimistic that many others would behave in such a manner – but was equally conscious of the ‘vileness’ and ‘mendacity’ of people if allowed to do whatever they wanted in the course of harming others. Hence, Smith persistent and loud clamour for justice – the negative virtue absolutely essential in a market economy, without which society would ‘crumble into atoms’. And that is the remedy for the criminal acts of anybody in a market system and in a decent society.

Cecil Johnson makes this clear in his last point:

“Baker makes it clear that the survival of freedom is inextricably linked to the survival of capitalism. He makes a case for curbing the abuses of dirty money to curb poverty, reduce crime and defeat terrorism.”

Adam Smith would say ‘Amen’ to that sentiment.

The book:

Capitalism's Achilles Heel: Dirty Money and How to Renew the Free-Market System By Raymond W. Baker, John Wiley & Sons 438 pages $27.95


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