Thursday, December 29, 2011

Adam Smith

At one point I used to be a huge advocate for re-examining Adam Smith's theories in the wealth of nations.  I was perplexed at how the words in the text did not seem to match the theories derived from it.  In particular, it seemed that nobody paid a lot of attention to his concerns with the actions of corporations.  I was reminded of this hobby of my youth will reading a comment by Dan Hirschman in Jodi Begg's blog:
Second, and more critically, be careful with Smith! Do you read historian of economic thought Gavin Kennedy’s blog, Adam Smith’s Lost Legacy? Kennedy devotes most of the blog to trying to fight the abuse of the idea that Adam Smith had some ‘theory of the invisible hand’. Kennedy has an excellent paper on the metaphor and how it became a myth (mostly blaming Samuelson’s influential textbook), Adam Smith and the Invisible Hand: From Metaphor to Myth. Long story short, that metaphor comes in the middle of the Wealth of Nations, and refers specifically to merchants who (because they are risk-averse) put their money in lower-yielding, but less risky, domestic investments and thus unintentionally stimulate local commerce. The “invisible hand” simply refers to an unintended consequence, not to some overarching thesis that self-interest leads to socially beneficial outcomes (a position held by an earlier author, Mandeville, and that Smith and his contemporaries ridiculed). For example, Smith himself lists 60 ways in which the government ought to intervene to produce better outcomes, from providing public education to regulating bank money creation. Smith also distrusted merchants, and thought they would (acting on their self-interest) readily conspire against the public (hence why he especially disliked trusts and large corporations, see Emma Rothschild’s Economic Sentiments: Adam Smith, Condorcet and the Enlightenment).
One of the interesting features of Adam Smith was how he focused on local and responsive government.  In a time with a lot less mobility, it made sense to pay close attention to local politics.  He had an excellent example of how lamp lighting in London was a public good, but that it would likely be done less well if it was done by a higher level of government than the city.

So I often get confused when he is cited by modern neo-conservatives.  The main thrust of the book seems to suggest a decentralized mixed economy rather than a scene out of an Ayn Rand novel.  

No comments:

Post a Comment