Monday, August 24, 2009

Adam Smith's Legacy Understood at the Top

Coincidentally, two correspondents of Lost Legacy both sent me emails this morning about the same article that appeared in The New York Times (19 August) by David Leonhardt: “Theory and Morality in the New EconomyHERE:

Leonhardt’s theme begins conventionally, judging by recent spates of articles assessing Keynes’s solution to depression versus the alleged views of Adam Smith, usually wrapped in nonsense about his supposed preference for ‘laissez-faire’ (a policy phrase he never mentioned), and absurd proposition that the US economy has pursued such a policy for several decades leading to the ‘credit’ (more likely ‘debt’) crunch.

But then, Leonhardt changes gears:

Yet here is where the story becomes a little complicated. Six years ago, Bantam Classic published a mass-market volume of Smith’s 1776 masterwork, “The Wealth of Nations,” with an introduction by Alan B. Krueger, an economics professor at Princeton. Krueger argued that Smith’s modern image had become unhinged from his actual writings. “Smith was a nuanced thinker. He was not nearly as doctrinaire a defender of unfettered free enterprise as many of his late-20th-century followers have made him out to be,” Krueger wrote. “He recognized that human judgment was not infallible.”

Here is where I sat up and paid attention, and I was rewarded with the first article that I can remember these past months that demolished the myth that Adam Smith’s ideas were followed by US (and UK) governments in events leading to our present sorry condition. Alan Krueger plays his role in what follows.

Smith was indeed a champion of individual liberty and worried about how governments might muck up an economy. But he also wrote that the goal of employers, “always and everywhere,” was to keep wages as low as possible. “When the regulation, therefore, is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favor of the masters,” he concluded. He supported a tax on luxury carriages and taxes on alcohol, sugar and tobacco. He said that “negligence and profusion” inevitably occur when corporate managers control shareholders’ money. And as the historian Emma Rothschild has noted, “The Wealth of Nations” uses the phrase “invisible hand” precisely once. In the 1,231-page Bantam edition, it appears on Page 572.”

Having set the scene, Leonhardt explores current commentary in the context of Adam Smith with which readers of Lost Legacy ought to be familiar. Here is a sample:

The principles of laissez-faire capitalism were elevated to the status of religious scripture, with Alan Greenspan as high priest. In “The Cost of Capitalism,” Robert J. Barbera, a longtime Wall Street economist, notes that Greenspan and others confused the fact that market capitalism was the best economic system with the misguided notion that it was the perfect system.”

Read the full article in the New York Times for more examples, especially Leonhardt’s quotation from an interview he did with President Obama, who replied to a question by introducing Adam Smith into his answer:

Adam Smith, at the same time as he was writing about the invisible hand, he was also writing about that moral sense — that human ecology — that allows a market to work: the sense that if I bring my goods into the market, someone is not going to hit me over the head; the sense that because I am trading with this guy often enough, that I know that the scales aren’t tampered with,” Obama said. “That compact that we make is not just legalistic. It has to do also with our politics and our culture, and when that starts eroding it inhibits economic growth as well.”

If the top understands the issues like that, supported, I hope, by diligent staff- work by those who influence the top and construct the policy options, then I for one find it encouraging.



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