Friday, July 25, 2008

Just What Economics Needs, Someone Who Understands Adam Smith and Writes So Well

If you want a punchy, short piece (under 800 words) on what Adam Smith was about for colleagues, or for introducing young people to economics, then you cannot do better than pass out copies of anything written by Eamonn Butler (and his colleague, Madsen Pirie).

Today there’s an excellent example in The China Post in Tapei, Taiwan (yes, Eamonn gets around), under the headline HERE:

Adam Smith: Economics can set you free”

“The pioneer of modern economics and the most influential thinker Scotland ever produced has at last been honored in his homeland with the first public statue of him in the United Kingdom. His message of freedom has worked wherever it has been tried, but it still needs spreading further.

Adam Smith's great and practical 'An Inquiry into the Nature and Causes of the Wealth Of Nations' (1776), is one of the most influential books ever written. It transformed our understanding of economic life from an ancient to a modern form, based on a completely new understanding of how human society works.
His 10-foot classical bronze statue was unveiled on July 4 (he was a friend of American independence) on the historic Royal Mile in Edinburgh by Nobel Prize-winning economist Vernon Smith (no relation).

Before Adam Smith, people assumed that the measure of a nation's wealth was the gold and silver in its treasury. Imports were bad because this gold and silver must be given up in payment. Exports were good because these precious metals came in. Trade benefited only the seller, not the buyer, and a nation could get richer only if others got poorer.

So countries erected vast trade barriers and controls to prevent money going out of the country -- taxing imports, subsidizing exports and protecting domestic producers (as many still do, hampering the World Trade Organization's troubled Doha Round negotiations).

Over 240 years ago Smith showed this was counterproductive.

He started not with theories, but from the fact that in any free exchange, both sides must benefit. The buyer profits, just as the seller does, because the buyer values the cash less than the goods it buys. That's why you buy things.
Since trade benefits both sides, said Smith, it increases our prosperity just as surely as do agriculture or manufacture. It is not gold and silver that measure a country's wealth, but the total of its production and commerce. Today we call that Gross National Product.

This blew a hole through the trade walls that had persisted for centuries. Leading politicians to read the book. They were convinced, cutting back trade restrictions and subsidies. That led to the great 19th-Century era of free trade and rising world prosperity.

Smith told politicians to get out of the way and let people trade freely: Social and economic harmony did not need to be planned from the center. It emerged naturally as human beings struggled to find ways to live and work with each other. Freedom and self-interest did not lead to chaos but -- as if guided by an "invisible hand" -- to order and concord.

All that was needed was an open society and free markets, with rules to maintain that openness and freedom. But those rules, of justice and morality, would be general and impersonal, not for the benefit of minority cliques.

It was not 'The Wealth Of Nations' which first made Smith's reputation, but a book on ethics, 'The Theory Of Moral Sentiments.' That book argues that the source of human morality is our natural sympathy for others (today we might say empathy). By seeing things from other people's point of view, we learn how best to live happily alongside them.

Some wonder how the self-interest that drives Smith's economic system can be reconciled with the sympathy that drives his ethics. But Smith understood that human nature is complex. The baker does not supply us with bread out of benevolence, but nor is it self-interest that prompts someone to dive into a river to save a drowning stranger. Self-interested human beings can -- and do -- live together, peacefully and productively.

So 'The Wealth Of Nations' is no endorsement of dog-eat-dog capitalism, as sometimes caricatured. Self-interest may drive the economy, but freedom is a force for good. Smith believes in free markets because the poor will benefit most from them. Only the rich and powerful benefit from other systems.

Now Smith dominates the main street of the city where he worked and, in 1790, died. Tourists from all over the world pose for pictures and guides use the prominent monument as a natural assembly point. Many wonder who Adam Smith was and why he deserves such prominence.

In an age when governments claim to be able to solve every problem, people will find his message refreshing: When we reject political interventionism and rely on natural liberty, we find ourselves, unintentionally but surely, in a harmonious, peaceful and efficient society

Try to get anything like that in 800 words that is readable by both lecturers teaching economics and by general readers who know nothing about Adam Smith or economics – and still keep both groups interested and informed.

Dr. Eamonn Butler is director of the Adam Smith Institute think-tank in London, which led the campaign to raise the private funds for the new statue, and he is author of 'Adam Smith -- A Primer' , Institute of Econiomic Affairs and Profile Books, London).

Disclosure: I am a Fellow of the Adam Smith Institute; ameliorating circumstance: I consider Butler's skills in explicating market-preferred economics are uniquely excellent and would deserve praise whether in ASI or elsewhere.

[All credit to The China Post for publishing such an excellent article.]


Blogger Ryan Lanham said...

What an odd sentence:

Self-interest may drive the economy, but freedom is a force for good.

I have read it about nine times and cannot, for the life of me, understand what the author is either saying or stepping over. Is freedom = self-interest? That's the only reading of the sentence I can come up with that doesn't leave it as nonsense or at least ill-formed.

9:34 pm  
Blogger Gavin Kennedy said...

Hi Ryan

Thanks for your thoughtful question. It's not really my role to answer for Eamonn Butler's sentence, but I would interpret it as follows.

Self-interest is one of the drivers of a commercial economy - self-betterment is a prime ingredient of people (even, for example, if sitting in a draft you move out of the draught, let alone save from income to build up capital to add interest to income, perhaps to invest in productive enterprise, etc.,).

In circumstances where such prudent economic activity is 'safe' - the rule of law, degrees of liberty, low incidence of confiscation of incomes, best represented by 'easy' taxation, and above all, competition, not monopoly - there is an associated higher degree of freedom as a consequence.

It's not that 'freedom = self-interest', so much as freedom is a consequence of the environment where self-interest is activated, they feed off of each other.

A general statement illustrating the logic could be: "Rainy weather is a common condition for those living in Scotland, but mild libations of scotch whisky are a positive input to happiness" (for some: I am teetotal, but many friends would testify to the truth of the statement for them).

I hope this helps.


1:02 pm  

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