Tuesday, October 23, 2012

Do Such People Understand Adam Smith?

Scott Cooney writes, Adjunct Professor of Sustainability at the University of Hawaii,Inspired EconomistHERE 
Where conservative capitalism breaks down: Three primary sources of free market failure”
Many people criticize policies and elected officials based on strong support for what they believe to be free market capitalism. But do these people actually understand capitalism? What they believe to be capitalism: getting the government off the back of the private sector, is not true free market capitalism. …
Adam Smith, the man many in the conservative arena espouse to be the father of modern capitalism, was an 18th century economist who wrote an influential book called The Wealth of Nations. In it, he argues three main tenets. These principles have become the standards by which capitalism, as we know it (and many peoples’ level of acceptance of it) is measured.
The first is the invisible hand. Smith argued that there is an invisible force at play in the market that guides production. ... The second principle Smith espoused is that the free market alone should determine the types and quantities of goods and services (meaning that government should never make those decisions)…
… His third principle was that, if all individuals were striving for their own self-interest, that cumulatively, those efforts would have the greatest overall good for society. By working really hard, these folks would create economic opportunities for themselves and others, and that provided the best overall benefit.”
Scot Cooney continues:”
“ If Smith lived today, his theories would likely have taken into account three main sources of free market failure:
Externalities. Externalities are costs associated with something that are not paid for by that something. … Tragedy of the Commons. This is a phenomenon where, if no one is governing the use of a common resource, then what is to stop companies from exploiting it to its fullest? … Information asymmetry. Adam Smith’s theories only hold water if everyone involved has equal access to information on which to make decisions relevant to the market.                       
“About Scott Cooney Scott Cooney (twitter: scottcooney) is a green business startup coach, author of Build a Green Small Business: Profitable Ways to Become an Ecopreneur (McGraw-Hill), and developer of the sustainability board game GBO Hawai'i. Scott is a vegetarian, an avid cyclist, and an organic gardener.” Follow the Link.
What a travesty of Adam Smith’s economics and his moral philosophy!  One without the other is like a carriage without a horse (a simile!).
Adam Smith never said there was an “invisible force” at work.  He used a metaphor of “an invisible hand” (popular in the 18th century and used widely, mainly by theologians) on two occasions only to “describe in a more striking and interesting manner” (Smith, "Lectures on Rhetoric", 1762, 1983, p 29), two instances in two quite separate instances, separated by centuries, where the individuals concerned – “a proud and unfeeling landlord” forget he shared his crop, and an18th-century “merchant” - worried about the security of his capital if he sent it abroad in “foreign trade”, acted to protect their interests.
 The landlord was forced by circumstances to provide food for “the thousands they employed”, because without food they could not labour on his lands, and the merchant was led by his insecurity to avoid foreign trade and invest domestically.  The unintended outcome of their privately motivated behaviour was that they and their peasants had a means to live and thrive through successive the generations, thus propagating “the multiplication of the species” (Moral Sentiments, IV.i.10: 183) (Smith clearly disapproved of the landlords’ arrogance generally).  The merchant’s contribution to domestic industry helped to increase “domestick revenue and employment” (Wealth Of Nations, IV.ii.9: 456).
Smith said nothing about a general “invisible force” at work; the metaphor could be used in other instances where unintended consequences were occasioned and where the invisible-hand metaphor may be appropriate.  But beyond doubt,  general “self-interested” actions need not benefit society at all. Indeed, 18th century society was afflicted by mercantile general self-interests promoted by merchants, manufacturers and governments that were directly and indirectly contrary to the interests of consumers, through intentional tariffs and prohibitions, which in no sense “benefitted” a society.  The claim that self-interests, sometimes even claimed to include “selfish” actions (Paul Samuelson, 1948) benefitted society is a false proposition, widely used by people ignorant (not too strong a word) of the actual writings of Adam Smith, who project onto Adam Smith their own ideas or simply mimic "prestigious" others.
It is factually inaccurate to pretend that Adam Smith thought the “the free market alone should determine the types and quantities of goods and services (meaning that government should never make those decisions)”.  He gave several examples of the government’s appropriate role in deciding which types of goods and services should be decided by government (see Wealth Of Nations: on the Navigation Acts (WN, 464); (Sterling Marks on plate and bullion (WN 138-9); regulations of paper money in banking (WN437); obligations to build party walls to prevent the spread of fire (WN324); erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours) (WN723); ‘Premiums and other encouragements to advance the linen and woollen industries’ (TMS185); coinage and the mint (WN478; 1724); post office (WN724); registration of mortgages for land, houses and boats over two tons (WN861, 863); laws against banks issuing low-denomination promissory notes (WN324) and sixteen other instances.  He agreed that these regulations “interfered” with “natural liberty”, but they were necessary for an economy to function for the public good.
The assertion that by “working really hard, these folks would create economic opportunities for themselves and others, and that provided the best overall benefit” is counter-factual as shown by Adam Smith’s “violent” (his word) attack on mercantile political economy operating in 18th-century Britain.
As for Scott Cooney’s thoughts on “externalities”, the “tragedy of the Commons”, and “information asymmetry”, his glaring misunderstanding of economics is worrying.  It is the absence of property rights, not their presence that is the main cause of the problems created by these issues. Nobody “owns” pollution, therefore included in the remedy is the legal compulsion of those creating the pollution to “own” it and clean it up.  Nobody “owns” the commons, therefore assign/sell/auction license ownership and therefore allow the owners to charge for usage, thus reducing over-exploitation of the “free” good. Markets are the best means of reducing “asymmetry’ through competition among suppliers, which, of course, takes time, but attempts to force social exchanges usually make things worse as much as the absence of markets always makes things worse in perpetuity. Elementary Economics 101! 


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