Tuesday, September 27, 2005

Punish those Caught With Their Hands in the Till

Uddin Ifeanyi contributes an opinion piece on “Re-Defining Corruption” in “This Day” (AllAfrica.com) Lagos Nigeria (25 September);.

In it he quotes from “Wealth of Nations” (IV.ii.9. page 456; square brackets indicate minor errors in transcription]:

“Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally [, indeed,] neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part [it]. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it”.

While Uddin Ifeanyi makes some excellent points in what follows I am not sure that he has completely expunged the error that links what Smith says here about the invisible hand (using Shakespeare’s metaphor from Macbeth: 3.2) with the working of markets. The invisible hand had to do with motivations, not markets, as I have pointed out her on many occasions. Ifeanyi continues:

“Yet, although Adam Smith did not allude to this detail in creating his “invisible hand” metaphor, the market is indeed a peculiar place. Take the “tragedy of the commons” as but one example of the unintended consequence of self-interest’s free play. And what about “enlightened self interest”? Does this not resolve the blind spots on which the tragedy of the commons subsists?”

Noticing the “tragedy of the commons” is an excellent observation by Uddin Ifeanyi of the error of laissez faire economics – market failure is indeed a problem, though it must be said the real tragedy of the commons is caused by the absence of property rights in the “commons”, which would allow a market solution to operate, and is not really a problem of market failure because markets in these cases do not exist to start with.

I disagree that markets are ‘peculiar places’. They are well understood (and were in Adam Smith’s day, too) and there is nothing mysterious (visible or invisible) about how they work – there is a difference between something being worthy of ‘wonder’ and knowing how it happens - See Adam Smith’s ‘Essay on the History of Astonomy’).

Uddin Ifeanyi continues:

“Arguably, the market works best, when relevant information is available to all market participants at the same time. But most times, markets fail - i.e. when voluntary actions within the market generate a negative result that all involved would regret if they knew of it - on the back of an asymmetry of information. Because one party to the sundry transactions that give markets their vitality comes into useful knowledge ahead of his/her counterparties, s/he is able to take lucrative positions to the disadvantage of others. In other words, due to this information failure, markets fail to direct resources to their most highly valued uses.”

The only markets where all participants know the same information simultaneously are those close to theoretical constructs like “perfect markets”. A well-informed shares market with no ‘insider information’, perhaps, might comply, but that is not really the point. Participants in markets in sophisticated economies (and less sophisticated economies that have sophisticated segments in the economy, such as commodity markets) tend to be well informed, if not perfectly well informed. Specialist analysts, data collectors and researchers trade in supplying information for fees to market players. On a less sophisticated level, trade journals, e-mail newsletters, newspapers and other media earn incomes from supplying information. The extent to which players use the information, are aware of it and can react in time will vary. In short, perfect distribution of information at infinite velocity to those who could benefit from it in any market is unlikely.

Uddin Ifeanyi’s main point in the article is to highlight how the defendant’s family treats corruption when a member of it is ‘caught with his/her hands in the till’ (apparently the case in Nigeria):

“Despite the process of transfer of public funds to private hands that corruption usually gives breadth to, the extent to which corrupt practices further the public good is doubtful. For not only does corruption in public office subvert the very foundation of the state by making it less able to discharge its responsibilities. It increases economic inefficiency by exacerbating income inequality.”

Be clear. An imperative of a Smithian market is that the participants obey the law and are subject to justice if they forget that. Corruption is a crime (including using ‘insider information’) and it can never contribute to the public good. Neither can the ‘tragedy of the commons’; the former need the vigilance of the legal authorities and the full rigour of the courts and the latter needs a market in property rights, not exhortations to curb consuming the ‘commons’.

Uddin Ifeanyi is absolutely correct to conclude: “the imperative that they highlight is the very strong need to align the interests of political office holders and their civil servant cadres with that of the voting public. This way, these servants of the state and the people would watch over corporate Nigeria with the “same anxious vigilance” that they watch over their own endeavours.”

I am sure Adam Smith would have agreed with that sentiment. Electors should always watch the conduct of their elected and paid officials with the closest scrutiny. What they say and do should always have public (and family) support for legal remedies for their market transgressions.


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