Thursday, April 30, 2009

Don't Trust Anybody From Chicago on Adam Smith

Froma Harrop writes in Real Clear Politics Chicago, Illinois HERE:

In a Q&A last year with the Pittsburgh Tribune-Review, former Pennsylvania Rep. Pat Toomey was asked what book he wanted Barack Obama to read. The Republican quickly recommended the work of Adam Smith, the 18th century economist and philosopher who held that individuals promote the good of society when they pursue their self-interest.”

The rest of her article is a report on the intricacies of Republican inner-party politics, about which I know little and which also comes under my self-denying ordinance of not commenting on the politics of a country other than the one I vote in.

The question is whether Real Clear Politics in general, and Rep. Pat Toomey in particular will advance their cause with complete a misunderstanding of Adam Smith’s actual observations about the role of self-interest and its impact on society, for good or ill.

The way Pat Toomey is quoted, ‘individuals promote the good of society when they pursue their self-interest’, it is clear from the evidence of human societies that there is no smooth, or even bumpy, relationship between individuals pursuing their ‘self-interest’ and the good of society. No society works, or has ever worked, like that.

Experiments with utopian-inspired communes show conclusively that they are not what some call today sustainable, despite the good intentions of those who shun normal society and found their ideal societies for ideal people. Variously, the next generation becomes bored and willfully disrupt their parents' expectations, or some of the parents fall out, and the little society withers in disillusionment.

But the more telling problem is that real societies do not function as model beneficiaries of the self-interested behaviors of individuals. This should be no surprise to observers of the societies they live in. Adam Smith was one such careful observer. He never said what Pat Toomey, allegedly alleged (I only have Froma Harrop’s word that Toomey did so allege that the words paraphrased as reported, were attributed to Adam Smith (admittedly, a common enough delusion of academics in Chicago and elsewhere).

Now, the fate of Pat Toomey is of little consequence in the big scheme of things, but that it is often alleged that Adam Smith was of a mind to have uttered something similar about self-interested actions, it is this assertion that I wish to correct.

The idea comes from a partial reading of the infamous passage, which for want of a better shorthand, let’s call it the 'invisible hand' paragraph in Wealth Of Nations (Book IV, chapter 2, paragraph 7-9: 455-56). Smith discusses the behaviours of some, but not all, merchants, who from their concerns for the ‘security’ of their trading capital, prefer to invest locally rather than in foreign trade. Their self-interest drives them to choose to employ their capital so as to generate the ‘greatest possible value’, which ‘necessarily’ gives ‘revenue’ and ‘employment’ to the greatest number of people in their ‘own country’, which in turn renders the annual revenue of the local society ‘as great as he can’.

It is this statement that some readers (or more likely, readers of quotes) of Wealth Of Nations draw the incredible idea that Adam Smith believed ‘that individuals promote the good of society when they pursue their self-interest’.

As a statement of the connection between those traders which Smith discusses in the paragraph and the general interest of society, it is of course, true, but whether it applies in all cases, all the time, that is another matter, as a reading of the whole chapter clearly shows. They may do so, but then they may not.

Indeed, Smith was suspicious to put it mildly, all through Wealth Of Nations, of the motives and behaviours of ‘merchants and manufacturers’. A little example, again from Smith, illustrates my assertion.

Consider the motive of the home trader, identified by Smith in the paragraph, but rarely noted by those who quote it:

By preferring the support of domestick to that of foreign industry, he intends only his own security [and ] his own gain …’ (WN IV.ii.9: 456)

So far so good, but some merchants and manufacturers easily note a chance to enhance their ‘own gain’, and simultaneously their ‘own security’, driven by their self-interest. Suppose, they may muse, it was possible to persuade legislators and people who influence them that by imposing tariff protection on foreign goods entering our domestic markets, this would raise our revenue (and profits) by the higher prices we could charge in the absence of foreign competition.

Instead of exporting local jobs to foreigners, we could increase local employment. That’s got to be good for the local economy (and, our profits). It is not so good, however, for local consumers who pay higher prices, nor for labourers seeking work, because the increase in tariff-protected employment is not likely to be proportionate (Smith makes this point too; he suggests that it is what we could call an ‘empirical question’).

Yet, Pat Toomey, taking just a part of a particular case, generalises a conclusion from that case and applies it to all expressions of self-interest, and concludes that ‘individuals promote the good of society when they pursue their self-interest’, and, worse, claims that Adam Smith said so.

No Sir! It is Pat Toomey who says so, not Adam Smith, and distinguished as Rep. Pat Toomey no doubt is, his name does not carry the authority of Adam Smith in economic matters, hence he is comfortable to use Adam Smith’s name with impunity.

However, Lost Legacy is dedicated to the restoration of Adam Smith’s legacy; and, as in the Wild West movies, I ‘call him out’. He should withdraw his slur on Adam Smith and present his own ideas in his own name.

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