Amartya Sen's Two Brilliant Essays on the Relevance of Adam Smith Today

Amartya Sen writes two great articles of current relevance on Adam Smith. The shorter one is in the Financial Times HERE and the longer one is in the New York Review of Books HERE.

I recommend them both to you (following correspondents asking if I had read them, and, presumably, looking for my comments on Lost Legacy). As I have been busy completing my paper on ‘Adam Smith’s Alleged Religiosity’, I chose not to post a comment last week, but to generate more publicity for an approach with which I agree and I am pleased now to recommend them and I provide links to the two articles and a very short extract:

‘Adam Smith’s market never stood alone’

“For example, the pioneering works of Adam Smith in the eighteenth century showed the usefulness and dynamism of the market economy, and why—and particularly how—that dynamism worked. Smith's investigation provided an illuminating diagnosis of the workings of the market just when that dynamism was powerfully emerging. The contribution that The Wealth of Nations, published in 1776, made to the understanding of what came to be called capitalism was monumental. Smith showed how the freeing of trade can very often be extremely helpful in generating economic prosperity through specialization in production and division of labor and in making good use of economies of large scale.

Those lessons remain deeply relevant even today (it is interesting that the impressive and highly sophisticated analytical work on international trade for which Paul Krugman received the latest Nobel award in economics was closely linked to Smith's far-reaching insights of more than 230 years ago). The economic analyses that followed those early expositions of markets and the use of capital in the eighteenth century have succeeded in solidly establishing the market system in the corpus of mainstream economics.

But Smith's defense of private trade only took the form of disputing the belief that stopping trade in food would reduce the burden of hunger. That does not deny in any way the need for state action to supplement the operations of the market by creating jobs and incomes (e.g., through work programs). If unemployment were to increase sharply thanks to bad economic circumstances or bad public policy, the market would not, on its own, recreate the incomes of those who have lost their jobs. The new unemployed, Smith wrote, "would either starve, or be driven to seek a subsistence either by begging, or by the perpetration perhaps of the greatest enormities," and "want, famine, and mortality would immediately prevail...."

Smith rejects interventions that exclude the market — but not interventions that include the market while aiming to do those important things that the market may leave undone.

Despite all Smith did to explain and defend the constructive role of the market, he was deeply concerned about the incidence of poverty, illiteracy and relative deprivation that might remain despite a well-functioning market economy. He wanted institutional diversity and motivational variety, not monolithic markets and singular dominance of the profit motive. Smith was not only a defender of the role of the state in doing things that the market might fail to do, such as universal education and poverty relief (he also wanted greater freedom for the state-supported indigent than the Poor Laws of his day provided); he argued, in general, for institutional choices to fit the problems that arise rather than anchoring institutions to some fixed formula, such as leaving things to the market.”

Amartya Sen received the 1998 Nobel Prize in economics; he teaches economics and philosophy at Harvard University and he has written an introduction for the anniversary edition of ‘The Theory of Moral Sentiments’ (Penguin Books, 2009) in which he discusses the contemporary relevance of Smith’s ideas.

The State is Not a Solution - it is Only a Tool

Philip Stephens writes in the Financial Times (London: 28 November) HERE:

“Broken banks put the state back in the driving seat”

“We are watching a bonfire of the old orthodoxies as well as of the vanities. This week Barack Obama promised to spend hundreds of billions of taxpayers' dollars to prop up the sinking US economy. Gordon Brown's British government announced it would soak the rich to pay for an economic rescue package.

In between times, the Bush administration all but nationalised Citigroup, the world's largest bank. For good measure it threw another, yes another, $800bn into the effort to thaw US credit markets. Everywhere you look, Keynes' demand management is replacing Adam Smith's invisible hand; printing money, a mortal sin under the fracturing Washington consensus, is the new prudence.”

“Still, the markets remain frozen, starving business of the oxygen of credit. Unless things change soon, the politicians will have little choice but to take direct control, and quite possibly, ownership, of the banks.”

“The risk is that the recalibration will go too far: that innovators and entrepreneurs will be put in the stocks with investment bankers; and that fettered markers at home will be accompanied by protectionism abroad. Lest we forget, for all its manifest flaws, a liberal trading system has delivered hundred of millions of people from abject poverty.”

“What matters is the political symbolism: for Mr Brown, fairness now trumps aspiration.”

Comment
There are few quick fixes in political economy. The belief that there are quick fixes bedevils both those who see the market as the cure for everything and those who have great faith in the State to achieve what ever legislators decide is ‘best’ for everybody they govern.

State believers carry the additional burden that they have control of resources – many tens of billions worth – and the power to enforce their writ, however disagreeable or inconvenient, over the rest of us.

When States makes mistakes the damage they do is irreversible in the short to medium term and is corrected (assuming the state chooses the appropriate corrective behaviour) at an even slower pace than markets can take to self-correct its mistakes. The problem arises when States make decisions that cause long-term damage (albeit unintended) and the do not, or will not, introduce corrective measures, despite the evidence of failure.

Thus, the current spate of glee among slaves to ‘States-are-better’ (at least the ones run by them) about the current monetary crisis as a propaganda tool against markets, often with side-swipes at the supposed responsibility for the crisis attributed to Adam Smith.

The Labour government is educated enough than to place all their bets on State management, but they are following a line that drags towards ever greater involvement of the State in economic decisions. They have the defining example of the Soviet experiment in total State control as background and they have the awesome examples of State control (plus Kleptomanic mismanagement) of puny economies among the developing countries as foreground (with Zimbabwe’s hopeless monetary madness to the side).

Markets are better at generating economic activities than States. They are better at sustaining growing economic activities than States. They are also better at correcting faults in economies than States. But States have a role too.

Adam Smith saw their roles as defending the population from invasion (defence) and the trespasses of citizens on each other’s rights (justice). He also saw the State from its taxation revenues as the instigator of those public works that would facilitate commerce.

In his day the priority was the construction of a road transport system, canals, bridges, and harbours, which would not pay an individual, even a group of them, to undertake (add to which total there was the cost of erecting pavements in towns, street lighting, and sewage disposal. This amounted to a massive national expenditure, against which he considered the £176 millions spent in conducting the seven-years was a wasted opportunity.

Smith also saw the need for a massive investment cost in education. A ‘little school’ in every parish was ambitious and expensive. The majority of parents were poor in 18th-century Britain and, except for the very poorest, he felt they should contribute a few pennies for the salaries of the teachers. Today, we have moved on with two-hundred years of rising incomes and, to be frank, public education facilities are sub-standard. With the built – and to be built – public school estate, we need to move on and introduce the ‘voucher’ system to raise educational standards steadily.

The same reform agenda could be offered for health and welfare, two massive items in state expenditure (and taxation). On that other line expenditure in the State’s budget, defence, the last paragraph in Wealth Of Nations (WN V.iii.92: p 947; Canaan, p 900) said it well:

Britain should “endeavour to accommodate her future views and designs to the real mediocrity of her circumstances”.

What people ignore at their peril, the brute course of events will remind them - eventually.