Revisiting Mr Smith

I want to go back to trying to find some sense of the connections between economic theory and western ethics (both Christian and trans-Christian flavours).   As a young adult during the reigns of Lady T and Mr Reagan I found the economic and political world me around dominated by the language of the free market. As a suburban Londoner, I was shielded from the bitter realities of the removal of state protection from older industries and the destruction of local communities over two decades.   Nevertheless, even to someone as unaware as me, there seemed to be something cruel and inhuman about the process, which I would want to label wrong or flawed, because it hurts my fellow citizens.   The eighties in particular felt like an era in which a post-war sense of solidarity amongst Britons of all classes was systematically undermined. But what if it worked? What if this was indeed the only way to guarantee longer-term prosperity for all – including the descendants of the battered post-industrial communities?   How then would we evaluate what was really for the common good?

Similar questions can be put globally as nations struggle with debt and exploitation. A dominant strand of answers, apparently supported by leaders in finance and industry, suggests that the freer the markets, the less the regulation, the less the interference of the state, the more profit, and ultimately the more profit and better living-standard for all.   ‘Ultimately’ for a very large number of people around the world may of course be a very long-term goal, but we are asked to trust the system, which appears to be the only serious game in town. If this is so, where does that leave much of traditional religious and philosophical ethics, with its appeal to the rights of the poor, its disapproval of greed and avarice and the notion that the members of a polis might have mutual obligations of protection and support.

John Rawls painstakingly articulated a somewhat abstract response in A Theory of Justice. With the aid of a thought experiment and a veil of ignorance, he argued that reasonable people would choose to live in a society in which economic progress would only be allowed if the least well off benefited as well. Here was a brave attempt to accept the depressing (but difficult to challenge) idea that the only serious political and economic choices are fundamentally to do with rational self-interest – and still get a good outcome for poor people.

Yet how could this abstract reason for niceness compete with the alternative position that markets need only to be truly free for self-interest to produce (paradoxically) the optimal outcome for all? The seeds of the idea are found in Adam Smith’s picture of the rich man (discussed below) who, because he cannot, humanly, consume everything himself, is bound to enrich those around him.   We also find in him the remark that those who focused on trading for themselves generally did far more for the common good than those who traded ‘for their country’.   Here is the invisible hand at work. Take this to its conclusion and the most ethical thing to do appears to be to pursue personal wealth in the free market without worrying about anyone else, and you’ll be doing them good anyway. If some happen to get hurt on the way (like miners or steel workers and their families) that is a fortiori a necessary sacrifice for the long-term greater good.   This seems appalling – and that sort of sense of outrage lies behind some of the language of the Pope’s encyclical excoriating the pursuit of profit irrespective of human or other ecological cost. But is it mistaken?   Is the whole thrust of Catholic Social teaching, and its appeal to solidarity and fairness one vast economically naïve mistake?

I have found John Kay’s book The Truth About Markets very helpful for putting some of these things into perspective.   He describes in the third part of the book how the concept of the invisible hand guiding the markets to the best outcome was given mathematical rigour in the twentieth century, providing an apparently objective basis for claims that the best welfare outcomes (in the allocation of limited resources) are best guaranteed by perfectly efficient, competitive markets.

We have already seen that Smith, though indeed arguing against tariffs and subsidies (or bounties) in favour of free international trade does so within an ethical and political framework. He has no hesitation in using ethical language to criticize the behaviour of some rich people. Though he talks about ‘natural price’, when it comes to wages he balances any natural downward thrust in wages with an appeal to common humanity. Though he preaches an end to bounties, he allows that governments might have to phase them out slowly in order to give those dependent on subsidized industries for their livelihood to adjust.   He even speculates that a completely free market is an impossible goal.

Kay has this to say about Smith:

‘The passage containing the invisible hand metaphor is not about general equilibrium theory: its purpose is to explain why merchants would continue to buy British products even if tariffs were removed… While it is unlikely that Smith held the views popularly attributed to him, speculation as to what exactly he did think is not helpful in arriving at the truth about markets. Our purpose now is to explain economic systems which Adam Smith could not conceivably have imagined.’ (184)

Nevertheless a particular distillation of a reading of Smith, a theory of rational self-interest and the reflections of mathematically rooted twentieth century thinkers lead to the neo-classical economics that underlie the American Business Model.

‘The Arrow-Debreu [mathematical models for market equilibrium] are the culmination of a long tradition in economics which emphasizes supply and demand, perfectly competitive markets and the search for market equilibrium, conducted by independent, self-regarding agents.’ (189)

The point of Kay’s book is to explain why such models and insights while interesting and at times enlightening cannot give a complete account of the economic order, because they do not capture everything that is true about behaviour and motivation – let alone the social structures in which the markets are embedded and which provide reasons why ‘Some markets are perfectly competitive, but most are not.’

He goes on, for instance, to challenge effectively the assumption of rational choice based on self-regarding materialism – and the motivation economists have for preferring this assumption against the evidence:

‘Self-regarding materialism is predictable; the actions of those who balance multiple objectives are more difficult to analyse… a further attraction… is that conclusions can be drawn from wholly a priori reasoning. No empirical investigation is required.’

Much later in the book, after analysis of the real significance of cooperation in making pluralist markets benign contributors to collective wealth, he has this to say about the 1980s consensus:

‘It is difficult to overstate the damage done by those who have claimed that self-regarding materialism is the dominant value of a successful market economy. They have set back the cause of economic development in the East and undermined the legitimacy and performance of the market economies of the West… We shall only gradually learn how much the competitive advantages of businesses in rich states have been eroded in the pursuit of unsustainable reported growth in earnings: banks which have lost the loyalty of their employees; pharmaceutical companies whose pipelines are increasingly thin; media companies which have alienated their creative talent; insurance companies which no longer have the confidence of their customers.’ (368)

In other words, there are important features of human economic activity that include collaboration, co-operation, mutuality and value that cannot be erased from the script without doing damage to the whole enterprise. Here then, it seems, is a point d’appui for discussing economic decision-making for the good of the polis which naturally and properly considers the welfare of the weakest in the context of a fundamentally collaborative enterprise.

That’s as far as I’ve got, to be continued.

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