Thursday, May 21, 2009

Adam Smith on What Needed to be Done

‘sposton’, a commentator, responds to Paul Krugman, Nobel Prize winner, in a column on the recession and when it will end (recovery in the summer, and ending in 2014, says, Krugman), in the Huffington Post HERE.

‘Sposton’ broadens the discussion:

My friend, you know very little about moral philosophy and its history. Did you know that Adam Smith was first and foremost a moral philosopher? And so were many other early liberal economists. Smith's never reduced himself to a mere economist in your sense of the word. Your statements are the end result of modern reductionism than liberal economists. Our current situation is precisely the result of this kind of thinking where one discipline is utterly divorced from another and all divorced from any moral or ethical anchor. Without such an anchor our knowledge is utterly devoid of any wisdom and that is what our world need now more anything else. This methodology may have brought some good results in science but on the other hand it has diminished us all.

In its own little thought universe all you have said makes some sense. The problem lies in the nature of your universe. It belongs more to the domain of our problems and less so to the domain of solutions


I have no idea who ‘Sposton’ is or what else he/she stands for. Another commentator lists all of Krugman’s impressive awards beside a Nobel Prize, but while I acknowledge them and Krugman’s achievements, I am sceptical of their relevance when precise dates are given for a global event of the current magnitude.

If Krugman is correct, we shall stand in awe; if his precision is wrong, we can expect concurrent explanations from him about ‘surprises’, ‘lags’ and such like. We certainly will not hear his silent retirement from the prediction business.

This partly is why I noted ‘Sposton’s’ comment. Moral philosophy in Smith’s day encompassed many areas of science beyond political economy, or ‘police’ as it was known in the 18th century.

In Smith’s case, it included jurisprudence (how civil societies ‘ought’ to be governed – he wrote but did not publish a book on the subject; it was burned on his order in 1790), but he saved the philosophical method, published posthumously in 1795, and known as his ‘History of Astronomy’). He also wrote on history and the history of politics, and how the range of human behaviour influenced events in all their complexity.

Above all, Adam Smith did not make predictions about the future; his was a backward-looking appreciation of the past and a studied analysis of the present.

He did not say that everybody pursuing their self interest would necessarily produce an outcome beneficial to society; a ludicrous proposition as any acquaintance with history – of the present! – would confirm. It was human intervention, for good or ill intentions, that creates the very situation that policy makers, and individuals following their self interests, try to improve (often making them worse in the process too).

Adam Smith did not recommend sitting back and doing nothing – the logical advice if he had the views attributed to him by modern economists. Wealth Of Nations was a critique of the then political economy of the governments of Britain since the 16th century, know to Smith as mercantile political economy (‘mercantilism’ is a word, also attributed to Smith, first applied in the late 19th century; Smith died in 1790).

If he had believed that self-interest was enough he would have had no need to spend 12 years writing Wealth Of Nations!

Smith’s critique was aimed at the high policy levels of legislators, and those who influenced them, trying to persuade them to desist from policies that slowed down the growth path to the spread of opulence.

In these policies, ‘merchants and manufacturers’, were complicit; indeed, their self interests made them so; by narrowing the competition they widened the market for their goods and raised prices against consumers, many already on the bread line. Their self-interests did not benefit society; Smith knew this and said so, explicitly.

Only modern economists, Krugman included, teach a model of society without humans, who supposedly are rational maximisers, harmoniously creating an optimum output; or, in the sophisticated version (I am being a touch sarcastic) would be doing so if only government did not intervene at all.

It is the moral corruption of the players, legislators and influencers, producers and consumers, alike that leads to a far less sub-optimal outcome, precisely because self-interest, while the powerful driving force behind human endeavour, is best not left completely alone.

If moral teaching is not enough, which was the subject of Adam Smith’s earlier work, The Theory of Moral Sentiments (though its ideas were taught by Smith alongside his lectures on ‘police’ and civil government at Glasgow University in 1751-64), as Smith believed it was not, then a strong system of justice was essential, as well as a culture of Liberty, enforced by law.

Smith was not a utopian. He did not believe that there was a ‘master plan’, which if adopted would change the world towards perfection. Far from it; he denounced such ‘plans’ as the dangerous illusions of ‘men of system’, arrogant in their approach to society.

Smith took human nature as it was, pointed out several major areas where what was going on was deleterious to society (protectionism, monopolies, ‘jealousy of trade’, wars beyond the needs of defence against invasion, legal restraints on labouring people ‘combining' to raise wages or stop them being cut, while employers could ‘combine’ to resist their employees, laws preventing anybody but members of ancient Guild monopolies from exercising applying their labour as they wished, laws preventing working men seeking employment elsewhere than in the parish they lived in, and national policies that failed to educated children in ‘reading, writing, and account’ (girls were not educated at all, except in the middle class and above), and the absence of palliative care for persons afflicted with leprosy and ‘other loathsome diseases’.

In all this, Smith did not expect sweeping changes or any immediate changes. He set out only to persuade; not to impose. He did not believe that international free trade would ever be enacted, nor that slavery would ever be abolished (it’s still operating today in some countries), nor that the world would become full of ‘sweetness and light’. But it could be improved, at the margin, if legislators and those who influenced them were persuaded to do so.

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Blogger Ed said...

"Only modern economists, Krugman included, teach a model of society without humans, who supposedly are rational maximisers, harmoniously creating an optimum utput"....Many years ago I was working on my MBA and I had an economics professor who tried to tell the class some of the same nonsense you talked about. I challenged him that he had no idea what he was talking about. I asked him if he ever was in business (the answer was no). I told him that I knew of many instances where people made irrational business decisions based on hate, fear, etc. The problem that many of these people have is that they don't have experience outside the class room. These people live in static worlds. For example, they are shocked when taxes don't generate the amount of money they expected. That is because they never expect people to react (e.g. find alternatives) to these policies.

11:22 pm  
Blogger Gavin Kennedy said...

While many academic economists (and almost all British MPs who reach the level of government)have no real-world experience of business, some have such experience, or have looked out of their windows at what is going on. I was re-reading an article by Ronald Coase, yesterday, from 1976, and he showed clear understanding of the real world and of the fallacies of the 'harmonious' model, when set against the behaviours of human beings.

Your experience is replicated by most of us who think about the problems. By observation of university faculty at work, their behaviours do not conform to what they teach about individuals and harmony!

All attempts (I used to tell colleagues as a younger academic) to improve the world from the top by what Adam Smith called 'men of system', make it worse. Sadly, I see not reason to change my then expressed view.

5:54 am  
Blogger Ed said...

Professor Kennedy...I'll try and find that article you mentioned.

As an aside, I plan to get to your part of the world in the near future. My dad's grandfather came from Scotland and eventually landed in Boston via Nova Scotia.

1:42 am  

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