Wednesday, September 19, 2007

Labour MP Quits Aussie Parliament Quoting Adam Smith

‘Valedictory’ speech by Carmen Lawrence MP, an occasional Webdiary columnist for much of Webdiary’s existence is published today in Webdiary (‘patron power’) an Australian Blog. It contains this paragraph:

The contemporary position of many governments, including this one, is that Adam Smith’s ‘invisible hand’ should be allowed almost unfettered operation to allocate goods and services in our community, including health and education. What that view of the world fails to understand is that Adam Smith himself was a very strong proponent of the need for institutional controls and the insertion of humane values into the operation of the economy because he recognised the limitations of market forces. The marketplace, competition, efficiency—such concepts underestimate the necessary human dimension to our lives. We continue to allow this agenda to dominate our policies at the cost of our humanity, our inventiveness and equality in our society.”

She is of course referring to the Australian Government, of which, to put it mildly, she is a trenchant and relentless critic (as she is entitled to be in a free society). Of her political agenda for Australia I shall say nothing; that is the business of the voting citizens of Australia.

I am concerned with Adam Smith’s ideas. Carmen Lawrence notes correctly that “Adam Smith himself was a very strong proponent of the need for institutional controls and the insertion of humane values into the operation of the economy because he recognised the limitations of market forces”. However, she has added a twist on her attribution of human values to Adam Smith that is not quite correct.

Adam Smith ‘recognised the limitations of market forces’ in the sense that in 18th century Britain he didn’t think individuals or groups of individuals would risk their small capitals in large ventures that would not produce a return, which is actually the ‘market forces’ at work.

Bear in mind that failed ventures, from incorrect business decisions, were every bit as unwelcome to Smith as prodigality of revenues in unproductive consumption, because they detracted from the important role of productive labour in creating the net revenues for the growth of employment and the increase in wealth (the ‘necessaries, convenience, and amusements of life’).

Therefore, those ‘public works and public institutions’ he advised that were too large for individuals to undertake, but which were of benefit for a commercial society, such as roads, harbours, canals, and sanitation, and institutions such a education and health expenditures to combat ‘noxious diseases’ (leprosy, etc.,), should be financed by taxation (though not necessarily undertaken solely by public bodies, a point that is often forgotten).

In mid-18th century Britain, capital was scarce compared to 21st century Australia. The tax base was also fairly limited compared to today. Smith was at best sceptical of governments borrowing to fund wars, and the idea of social security spending was not agenda in his days. Governments since Smith’s time have borrowed money for much wider purposes than fighting wars and while Carmen Lawrence may be comfortable with her country not being engaged in any wars, she may not be so circumspect about borrowing much more money for her social agenda. The extent of borrowing and its purposes are a matter for the Australian electorate, which may not coincide with Carmen Lawrence’s preferred policies.

From denouncing those who make the ‘market’ the sole answer to all problems of government failures, she has to be careful in a rich society like Australia (it used to call itself the ‘lucky country’) that she does not conclude the government is the sole, or best, answer to what she believes are ‘market failures’.

That some people who attribute to Adam Smith the notion that everything should be decided by market forces, a view he did not express in Wealth Of Nations, while he did express on many occasions deep suspicions of governments influenced by ‘shop keepers’ and ‘merchants and manufacturers’. But neither was he comfortable with politicians and governments decided the minutia of what people should do with their capital and how they should decide on their preferences.

Also, he never expressed any notion that 'an invisible hand' operated nor should operate 'unfettered ... to allocate goods and services in our community'. In fact, the metaphor of the invisible hand did not refer to markets at all; it was about 'risk aversion' to investing abroad (WN IV.ii.9: p 456, and Lost Legacy posts passim).

He also warned against ‘men of system’ who, in their conceit, believed they knew what was good for everybody; who saw society as a giant chessboard with wooden prices on it called ‘people’, whom they believed they could move about by dictating their movements for their own version of what was good for them. But, alas, for their pretentions people have 'motions' of their own. He wrote this in Moral Sentiments (TMS VI.ii.2.16-18: pp 233-4), his book on humanity, morality and social harmony.

If Carmen Lawrence has not read Moral Sentiments, she might find it interesting for a truer perspective on Adam Smith’s philosophy. I do not think that Carmen, and others who espouse the same agenda, have a monopoly of the human virtues, neither do the modern conservative epigones have a monopoly of their claimed affinities to the moral philosophy and political economy of Adam Smith.

It is a safe bet that they haven’t read Adam Smith’s works, apart from isolated quotations, and as my memories of Australia include a fairly strong labourers’ predilection for gambling on horses, ‘tommo’s two-up’ and slot machines), I’ll chance a quid of two on such a bet.


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