Sunday, July 10, 2011

'Neoliberalism' and Adam Smith

James Morrell and Nikki Larder (HERE):
present the abstract of their new paper:

Invisible Hands: A Critique of Neoliberal Development

Neoliberal development theories are based on the classical economic theories
of Adam Smith and free market economics. In his book “An Inquiry into the Nature and Causes of the Wealth of Nations” published in 1776, Adam Smith outlined the detrimental effects that government intervention had on economic growth. Smith argued that the most conducive approach to economic growth was to de-regulate trade and allow the “invisible hand of the market” to set prices and guide resource use. By removing government regulation and creating “free” markets, competition amongst firms would ensure the best prices for labour and goods which would in turn positively contribute to greater wealth for all citizens (Willis, 2005 p.33). In the early 20th century, the classical approach to economic
development was challenged by some theorists, who argued that some forms of government regulation and intervention were good for the economy. John Maynard Keynes argued that government spending on infrastructure and intervention in markets to promote investment, would positively contribute to economic growth and would avoid large market crashes such as the 1929 Wall Street crash. However, this understanding of national economies lead to large, unmanageable governments which were largely abandoned in the late 1970‟s in favour reverting back to free-markets and de-regulated economies. Today, the neoliberal ideology has gained substantial traction globally, with many nations adopting it in
their approach to development.

Where exactly in his book, “An Inquiry into the Nature and Causes of the Wealth of Nations” published in 1776’ did Smith argue ‘that the most conducive approach to economic growth was to de-regulate trade and allow the “invisible hand of the market” to set prices and guide resource use’?

Adam Smith never argued that there was an ‘invisible hand of the market’. That is a myth from the post-war decades following on an oral tradition in Cambridge (England and Chicago, perhaps Harvard too) and the popular textbook by Paul Samuelson, ‘Economics: an introductory analysis’ (1948). It had nothing to do with Adam Smith. He used the IH metaphor to describe ‘in a more striking and interesting manner’ the ‘insecurity’ of some, but not all merchant traders, who considered the ‘foreign trade of consumption’ too risky for their capital and preferred ‘domestick industry’, while others positively relished foreign trade, and the rest invested locally for other reasons. He did not mention markets.

Is it correct to say that Smith was opposed to ALL ‘government regulation? That too is a gross exaggeration. He favoured regulation of aspects of the banking system and banks (much as there were regulatory ‘firewalls’ in buildings to protect the public; government regulation and controls of the mint, the post, local government services, the creation of partially publicly-funded natuional education of labourers’ children in the ‘little schools’ system in England in every parish (that had worked fairly well in Scotland since the late 16th century), he favoured government regulation of the weights and measures used in daily market transactions, and government regulation of ‘quality stamping’ of certain products, including the assay offices. And he also favoured government investment for larger-scale projects (bridges, roads, harbours, street lighting, pavements, town refuse and safety) too expensive for private capital, but which improved commercial facilities and also had personal benefits.
He even suggested that governments fund and act to deal with ‘loathsome’ diseases like leprosy (the beginning of public health regulations?). Lastly, he even favoured organized physical exerices and competition to improve the health – and military capabilities of the general population. These are all explained in Book V of Wealth Of Nations.

Of course, he had no views of the 1929 slump or ‘Keynes’ ideas or ‘neoliberalism’. Smith died in 1790.

Morrel and Larder appear to have linked Adam Smith to their views of Neoliberalism' more from ideology than historical facts.

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Blogger Unknown said...

It is not the first time that neoliberals use false information to promote their cause. The most recent instance is the push for punitive austerity measures (to bring a nation and its people to their knees so that neoliberal elites can come in and exploit and own everything and everyone) based on the outrageously flawed but unfortunately influential "Growth in a Time of Debt" study by Reinhart and Rogoff.

7:06 pm  
Blogger Gavin Kennedy said...

DEE vee

10:44 am  

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