Friday, 6 January 2012

Recovering Adam Smith's ethical economics

While some men are born small and some achieve smallness, it is clear that Adam Smith has had much smallness thrust upon him. (Amartya Sen)
Adam Smith is famous for founding economics as an independent field of study by synthesising and systemizing classical economics in The Wealth of Nations. But he was also a significant moral philosopher in his own right who deserves to be recognised alongside his close friend David Hume as a key figure in the Scottish Enlightenment. Smith saw economics as a branch of moral philosophy, and he saw capitalism as an ethical project whose success required political commitment to justice and freedom, not merely an understanding of economic logistics. 



These days Adam Smith is most familiar to us as an economist, and specifically as the defender of the famous Invisible Hand of free-market economics, wherein the private self-interested actions of private individuals, mediated through free markets, generate results that are good for all. The market-system comprehends the true level of demand for any good and provides the appropriate incentives – profits – for producers to adjust their output to match. No external intervention or guidance is necessary. A great deal of contemporary (neo-classical) economics can be understood in terms of translating Smith’s Invisible Hand metaphor into a systematic theoretical form, with a particular emphasis on the economic efficiency of perfectly competitive markets.

However the popular view of Smith that has resulted from this emphasis is twice distorted. Firstly, it is based on the narrow foundations of a few select quotations from The Wealth of Nations (WN) that are taken in isolation as summing up his work (Smith only mentions the 'all important' Invisible Hand once), and secondly these quotations have been analyzed in a particularly narrow way. Both selection and interpretation have been driven by contemporary economists’ interest in justifying orthodox economic methodology and their peculiar (Mandevillian) assumption of the selfish utility maximising homo economicus. The Chicago School economist George Stigler once famously declaimed, "I bring you greetings from Adam Smith, who is alive and well and living in Chicago". What such 'historians' have achieved is the diminution of Smith’s economics to those bits which can be claimed to be early (and flawed) fore-runners of contemporary economic concepts and techniques.

But anyone who cares to read Smith’s Wealth of Nations for themselves will find an economics discussed and justified in explicitly moral terms, in which markets, and the division of labour they allow, are shown to both depend upon and produce not only prosperity but also justice and freedom, particularly for the poor. With those concerns in mind, it should not be surprising that Smith was a staunch and vehement critic of those particularly grotesque sins associated with early capitalism: European empires and the slave trade.

Smith’s defence of capitalism (or, in his terminology, ‘commercial society’) is unambiguous but qualified. There is no inconsistency here. Smith’s commitment to a realistic liberalism led him to endorse commercial society over any previous socio-economic system as a social order in which the most people possible could live decent lives. But he was not the blind zealot for the market he is now portrayed as. Smith was acutely aware of the possible ethical shortcomings of commercial society and for example carefully read and responded to Rousseau’s powerful critiques of its materialism, inequality, and inauthenticity. While the structural features of commercial society set the terms of its main opportunities and challenges, they did not determine the outcome. Commercial society was for Smith an ethical project whose greatest potential benefits had to be struggled for, and which could and should be much better than it was.

The Enlightenment concern for perfecting social order was both the background to Smith’s thinking and a goal Smith eschewed. As Rousseau put it in The Social Contract (I.6),
The problem is to find a form of association which will defend and protect with the whole common force the person and goods of each associate, and in which each, while uniting himself with all, may still obey himself alone, and remain as free as before.
While Rousseau sought a perfect and absolute solution to the problem through his famous social contract, Smith argued that, under conditions of freedom and justice, society could endogenously produce a decent social order for co-ordinating moral and economic conduct without centralised direction or coercive moral policing by religious or secular authorities. In this sense his project can be seen as a working out of Locke’s liberal political philosophy at the institutional level. Smith was not interested in what a perfect society might look like, but rather with understanding the world as it was and how it might be improved. So instead of analysing the requirements of a perfectly just society he analysed the new socio-economic order of commercial society, characterized by an enormously increased division of labour, dependence on strangers, formal property rights, and individual mobility. And he saw that commercial society had enormous potential for enhancing general prosperity, justice, and freedom

Prosperity

Smith analysed the wealth of a nation as the ability of its ordinary citizens to command goods to satisfy their wants, i.e. not only the total wealth but also its distribution. Smith noted that a European peasant was now materially better off than an African king, but he attributed this not to any innate European superiority (as all too many 19th century political economists did) but to changes in the political economy. The recent increase in the wealth of certain nations was due to the increasing role of markets in their economies, which made possible and rewarded the technical innovations and efficient organisation of labour that dramatically increase productivity. 

That benefits the ordinary citizens of a country – i.e. the poor – in two ways. Firstly, when producers compete fairly and freely with each other to supply the public with cheaper (and better) products there is a natural tendency for the market price to fall towards the actual cost of production, meaning less profits for producers and cheaper products for consumers. Secondly, at the other end, the rise in labour productivity means that wage labourers (the bulk of the population) can exchange their labour for a greater command of those goods. The wealth of the nation, the purchasing power of its ordinary citizens, is increased. And Smith cared particularly that the poor benefit from this prosperity. 
No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged. (WN I.viii.36)

Justice

Smith’s concern for fairness over and above economic efficiency  (i.e. equity for the working class) was behind the vehemence of his opposition to mercantilist ('business economics') arguments for policies that would protect or promote producer profits, i.e. crony capitalism. Smith saw such arguments, whether for direct subsidies or competition-restricting regulations, as an intellectually bankrupt, and often morally corrupt, rhetorical veil for what were actually taxes upon the poor (what economists now call rents). Such ‘taxes’ are unjust and outrageous because they violate fair play both in the deceptive rhetoric by which they are advanced and by harming the interests of one group in society (the poor and voiceless) to further the interests of another (the rich and politically connected). Smith explicitly moralised the point,

To hurt in any degree the interest of any one order of citizens, for no other purpose but to promote that of some other, is evidently contrary to that justice and equality of treatment which the sovereign owes to all the different orders of his subjects. (WN IV.viii.30)

Justice was thus central to Smith’s critique of the crony capitalism of his time, and to his alternative proposal of a ‘system of natural liberty’ characterised by a level playing field and commitment to 'fair play'. Smith's use of sporting metaphors for competition is apt. He would reject the redistributive policies of a modern welfare state as akin to a referee changing the results of a game to suit his favoured players. But at the same time Smith introduces a concern that the rules of the game, the institutional arrangements that decide who should get what share of the gains of economic activity, should themselves be fair. If a country's economy creates great wealth but the share going to the workers versus the owners of capital is kept artificially low by unfair institutions (like restrictions on workers' ability to bargain) that is a gross injustice which keeps the country less prosperous than it ought to be. Then, as now, a political commitment to a free society, and a free economy, does not imply simply accepting the existing institutional arrangements of our society without scrutiny.

But Smith's moral condemnation of mercantilism has further relevance to today's business-economics dominated politics. According to Smith’s diagnosis, the mercantilist system’s great success was in nationalising the corporation model of towns in the feudal system, leading to great efficiency gains as the size of the market increased. But in doing so it had also nationalised the “underling” ethics of monopolist tradesmen and manufacturers, who preferred to lobby collectively for self-serving rights and privileges at the political level than to compete on equal terms with others in the market. The “impertinent jealousy of merchants and manufacturers” when coupled to political influence not only led to ridiculous and onerous economic regulations that made everyone else worse off (e.g. the British wool industry). It also fostered a pernicious political ideology: the promotion of a zero-sum view of trade that leads to seeing the prosperity of other nations as your loss. In Smith’s day, it was UK plc versus France ltd; now we are all told to fear the rise of China Inc.

It should be obvious by now that Smith was no cold heartless utilitarian who put his faith in a ghostly Invisible Hand. But he was a professor of rhetoric as well as moral philosophy and was acutely aware of who the likely readers of WN would be. So he supplemented his arguments for the moral priority (even sacredness) of justice with hard-nosed utilitarian arguments about its instrumental role in social order and economic development. For example, when people gain equality before the law and thus security from the predations of the powerful, they have the security they need to make the investments that increase productivity (unsurprisingly also an important theme of contemporary development economics, for example in the work of Hernando de Soto). 

Liberty

Freedom from constraints, freedom from domination, and the freedom of moral autonomy were also central to Smith’s economics. Smith is most associated with the first of these, also called classical or negative liberty, because of his famous endorsement of the “natural system of liberty” in which, 
Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. (WN IV.ix.51).
A great deal of WN is concerned with identifying and criticising the artificial and unjustified obstacles placed in the path of ordinary people trying to get on with their own lives and better their condition. Smith argued forcefully, and in great econometric detail, that England had become richer in spite of and not because of the government’s mercantilist policies (the hard-nosed utilitarian argument).

But such mercantilist regulations were wrong not only because they reduced economic efficiency by reducing and distorting competition. They were also wrong because of the insufferable impertinence of a government (or any other body) taking it upon itself to manage people’s affairs on their behalf. This was not only a matter of the freedom of great merchants to engage in high international trade. Smith was particularly exercised about the 18th century English laws that deprived wage-labourers, whose only means of subsistence was to sell their labour, of the right to change occupations, negotiate wages, or even move around the country. Of course that produced an inefficient allocation of economic resources: not enough wheel-wrights in one place, too many in another. But even more importantly it disrespected the natural right of ordinary people to make decisions on matters of the greatest concern to them, which were no-one else’s proper business, and about which they best placed to judge. These policies, justified by chimerical arguments about the public good, reduced and distorted the options available to ordinary people to help themselves and through such artificial helplessness induced real hardship and destitution. 

One should note that liberty was a maxim for Smith rather than a dogma (a goal, not a side-constraint as Nozick might put it), and he was in favour of government interventions and regulations properly justified by the public interest. As to interventions, while Smith's ‘laissez-faire economics' proposed taking government out of the business of micro-managing the economy, it also outlined a clear and extensive government responsibility for ensuring the conditions for a flourishing free and just economic system. That included organising (though not necessarily directly providing) public goods that private market actors did not have the necessary credibility, scale, profit-incentives, or long-term perspective to provide, including legal justice, universal education, and security.

Smith's regulatory proposals were directed at preventing systemic failures and some remain highly pertinent. For example, he proposed banking regulations which though “in some respect a violation of natural liberty” upon a few individuals were justified by the government’s duty to protect “the security of the whole society” (WN II.ii.94). And he argued for fixing the rate of interest at a relatively low level (just above the prime market rate) in order to prevent imprudent “prodigals” (sub-prime borrowers) and “projectors” (speculators with crazy South Sea Bubble type schemes) from getting access to credit and thus diverting it from prudent investment and putting the financial system at risk. Smith saw prudence as a personal virtue, and thought markets were good at teaching it but unfit to substitute for it. The economists who promoted deregulation of banking and lending in recent times on the grounds that 'the market always knows best' may have cited Smith, but they hadn't read him. 

Freedom from domination

Smith also argued that commercial society produced freedom from domination (or ‘Republican freedom’ in modern terminology). The feudal system that Smith describes as preceding commercial society (and whose traces could still be seen in his own time in parts of Scotland) was a society characterised by direct relationships of dependence; a world of great landowners with the absolute power of lords over their tenant farmer subjects and retainers. Communitarians may portray such relationships as the basis for an ‘authentic’ human life (Alasdair MacIntyre) or rhapsodise over the ‘enchanted world’ in which such people lived (Charles Taylor). But Smith saw through the romance and analysed them as master-slave relationships that reduced the humanity of all parties.

The appearance of commercial society changed all that. In commercial society informal webs of mutual obligation are transformed into formal consensual relationships between independent agents because these are far more economically productive (feudalism is out-competed). The division of labour mediated by extensive markets replaces closed relationships of direct dependence, in which some must subordinate themselves to the whims of their masters and curry favour to survive, with open networks of inter-dependence spread among the thousands of people involved in producing and bringing to market the most ordinary essentials of life.



On the production side, this liberates workers to sell their labour without having to sell their souls. If people find the working conditions in one employment oppressive they are free to take their labour elsewhere. In markets themselves the very fact that people interact as relative strangers, and therefore appeal to each other’s self-interest rather than their benevolence (as beggars must), means that they meet in conditions of relative equality where they must endeavour to persuade others of the qualities of their goods by the gentle arts of persuasion. In this sense, markets economise on love, which is a good thing because, as beggars know all too well, love is scarce.

Moral autonomy

Smith believed that personal autonomy – self-determination – could flourish in commercial society, because its circumstances gave the greatest possible number of people access to the basic requirements for moral self-development (what Smith thought this would look like is the subject of another post). The increased wealth and security that followed a proper administration of justice allowed the mass of ordinary people - not only the aristocratic elite - the leisure to reflect about matters beyond their daily subsistence. Freedom from artificial constraints and domination allowed them to control important aspects of their own lives, from religion to employment, while taking greater responsibility for how they lived. The markets themselves could be schools for certain virtues. For example, people who worked for themselves would be more prudent and temperate; people who interacted through markets would be more honest than when trapped in sycophantic relationships with masters. As a result, Smith considered commercial society compatible with the moral autonomy of its ordinary citizens, and believed that such societies would exhibit more moral decency, though less moral greatness, than either classical or contemporary ‘savage’ societies.

Unlike the classical philosophers with their metaphysical elitism, Smith was an enlightenment liberal who firmly believed in the fundamental equality of human beings, and attributed differences in status and achievement far more to the effects of circumstances than to innate qualities. “The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education.” (WN I.2.4). No matter how far you rise, you are still fundamentally equal to others. Even philosophers. With these liberal commitments in mind it is not surprising that Smith celebrated the possibility for ordinary people to have the degree of leisure, freedom, and education to reflect on their moral lives and decide for themselves who they should be. Nor that he thought the 'boring' bourgeois decency they would tend to attain was a social achievement that was worth the loss of aristocratic-romantic virtues like magnanimity, courage, or 'authenticity'.

Conclusion

Smith’s economic analysis was thoroughly entangled with a deeply humanistic ethical perspective. The picture of the real Adam Smith this reveals is of a true ‘friend of commerce’, supporting the project because of its achievements and its even greater potential, but constructively critical about both the shortcomings of the mercantilist society he lived in and commerce in general. He justified commercial society for its tremendous contribution to the prosperity, justice, and freedom of its members, and most particularly for the poor and powerless in society. But he was no naive ideologue for free markets and profits. He criticised the political machinations and moral character of the very merchants and manufacturers who, he acknowledged, were driving economic development, and not only told them they should act better, but also argued for institutional measures to restrict their worst proclivities (particularly by getting government out of the business of economic micro-management). Though its promise was great, the rise of commercial society also meant the loss of valuable old ways and posed new challenges of its own. Its success was not predetermined, but had to be worked for. That is a lesson modern economists, and politicians, would do well to relearn.


34 comments:

  1. The technical study of economics with graphs, formulas and rules of thumb more directly engages with the real human world of life out there than economics as a moral science and therefore is more fundamental- just like Newtonian physics is more fundamental than Aristotelian or modern chemistry more fundamental than alchemy because it acts on the world it describes and thereby matches what it governs- or if it is an effective tool, if it works, it is true

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    1. Well, it really depends on what you mean by fundamental....are Shillers ideas fundamental...?

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  2. HB I'm afraid I don't get your point. If Smith could do ethical economics why can't we?

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  3. Economics as we know it is practical and in touch with everyday realities; my assumption is that it is more in touch with these realities than ethics. My father is a businessman; when I told him an argument of yours from an earlier post his reaction was, it's irrelevant because it has nothing to do with the reality of being a business man ie economic reality.
    Ethics doesn't tell us how the economy works; in that sense it may as well be Aristotelian physics, which isn't that bad as Aristotle modeled to some extent empirical reality

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    1. Perhaps your father needs to consider the practical reality that business is not just about short term profitability; but also about long term sustainability. That is where many contemporary business strategies err, becoming Ponzi schemes rather than legitimate business ventures. Short term interests and values tend to conflict while long term interests and values tend to converge. Sustainable economies involve a achieving a balance between a reasonable return on financial capital with social capital and the responsible use of natural capital.

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  4. Very well said, thanks for the post. I think real capitalism (in line with Adam Smith as you properly describe) is a huge benefit to humanity. The cronyism that we now have claiming to be capitalism is not only a huge drain on society today it risks people turning against the benefits of capitalism as they accept the claim that cronyism is capitalism and rightly conclude they don't want that.

    http://investing.curiouscatblog.net/2011/12/05/we-need-to-be-more-capitalist-and-less-cronyist/

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  5. HB Then I must disagree. Economics has a engineering (logistical) aspect which has been very heavily developed in the last century. All that General Equilibrium stuff. But it has always also had an ethical aspect concerned with how rightly to understand, manage and fulfil the heterogeneous and often conflicting values, interests, and capacities of large numbers of individuals operating within the constraints of limited resources. There's nothing 'unreal' or impractical about that. It's just been neglected for so long that it seems to belong to another academic department.

    JH. Thanks! I liked your post. We need to recover capitalism as an ethical project that has nothing to do with Ayn Randian greed, selfishness and freedom from government.

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  6. Then why can't general ethics apply rather than a special branch of ethics?

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  7. Is the ethics you have in mind meant to prevent bad outcomes or to assure positive outcomes?
    Is it negative or positive?

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  8. May I speculate as to how ethics has managed to be eclipsed in economics?
    The social contract which is at the basis of economics has been reduced to individual relations and personal gain; so that people think that it is good if it has utility and that profit is their God given right.
    I haven't figured out how much of Hobbes and how much of Locke come into play; but it has to do with the fact that the foundation of our social order is in fact economic.
    I'm not 100% with your position; but these thoughts might jibe with your gist

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  9. Good post, and I heartily agree with the spirit of it. I've seen a lot of "recovering Adam Smith" stuff out there recently, which seems appropriate in these troubling economic times. You didn't mention which economists you meant when you referred to apologists for the invisible hand, etc. In my experience, I've found a lot of so-called "apologists" receive unfair treatment by people mistaking their work for blind dogmatism. Particularly I am thinking of F. A. Hayek, Milton Friedman, et al. I think these guys were really expounding a lot of the same ideas you are here--of course the devil is in the details--but unfortunately conservative movements in the U.S. have co-opted these guys in very destructive ways. Anyway, as I said, you didn't mention any of this, but it immediately came to mind as I read.

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  10. @Howard Berman: Anyone making decisions based on economics is taking an ethical position, whether they’re explicit about it or not.

    Technical economics tells us how economies work: what is possible, how these things can be achieved.

    But ethical economics tells us what to do with this knowledge. The ethical side without the practical side would be impotent. But the technical side without the ethical is mere theory; any time someone puts it into practice, uses it to make decisions, they’re doing so with some goals in mind. And ethical economics is just the discussion of these goals, informed by the practicalities that technical economics has taught us.

    Good ethical economics shouldn’t be out of touch with the practicalites; but no practical economics exists without some kind of ethics.

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  11. @ Anonymous
    A moral choice may be necessary but not possible
    That is we might be unable to avoid choices while supporting it definitively with logic may not be humanly possible
    Good point however

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  12. With all due respect, Mr Berman -- which is to say not a whole lot -- certain subsets of theoretical economics can and do avoid moral choices, but neither the real world nor economics as a whole does. The mathematical basis for the efficiency meme is exactly the same as the mathematical basis for Maxwell's Daemon... and has exactly as much relationship to the real world, in either a limited reference-frame or a broad one.

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  13. Dear C.E Petit
    You have no reason to feel threatened by my opinions on economics. I just enjoy discussion even on things at which I have only a general knowledge.It is my style of learning
    So you can save your respect- however much it is worth-for yourself. And I am willing to learn from anyone, no matter how much respect they show me or themselves

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  14. Love the post - but the comments bother me. I think it is a mistake to think that there is a subject we can call "Economics". In my view, how commerce functions in a particiular society at a particular time is a field we can study. But there is no underlying reality called "Economics". Example - remember Gene Burdick's book "The Ugly American"? To increase rice production they told govt of developing country to raise price of rice. Did so and prodn went down. Surveyed and found "Thank god price of rice up - now I can raise less rice and thus work less and spend more time with my family". ergo - "Economics" is different from culture to culture and from time to time. There are no defining rules like you have in physics.

    Consequently math modeling economics is excellent at predicting the past. (I have made my living doing modeling - have some understanding of the field).

    Specific and overly narrow Example - charts for hot stocks all look the same - until someone discovers the flaw in a particular firm. It then breaks off of this path. Yesterday their chart was identical to Microsoft. Today they look like hades. Hades was totally unpredictable in the prior pattern.

    All in this old man's humble opinion.

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  15. I'm not sure we can create an "ethical economics." Even in Smith, ethics is an exogenous variable - albeit one that he (correctly) notes is vital for all the rest to operate properly.

    An economy in which trust is destroyed and cronyism rules won't behave according to strict economic rules, and the engineering tools of economics will be less useful or accurate than would otherwise be the case.

    There's also an interaction with culture, as rmknox notes.

    I think the most important steps for the realization of the idea of "ethical economics" is that:

    * The field of economics must openly acknowledge its dependence on both ethical/trust-based societies, and culture, as underpinnings that greatly influence the whole. That is, instead of expanding to include ethics, it must publicly limit itself, while offering some contributions via sub-genres like Game Theory.

    * Capitalism's defenders must step back from "anything goes," but do so in a way that sets clear boundaries within which laissez faire should operate. Failure to step back, or failure to clearly set the box, will lead to a cronyist system. Both failures have, in fact, contributed to our present crisis.

    * Culture needs to be a discussable subject. They are not all created equal.

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  16. jkatzman: My hero Mancur Olsen wrote a book on the subject under discussion - "Power and Prosperity" - in which he develops his ideas about market-enhancing government - where people feel secure to enter into long term and long distance transactions and thus are able to invest. This is the pre condition for prosperity. He explains the types of transactions that can occur in failed situations and why certain cultural and legal standards are required and thus why the cultures that have these wtandards are those with high propsperity.

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  17. Jkatzman,

    I'd suggest reading Mises' Human Action. I think you will find a kindred spirit.

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  18. I think Michel Foucault's biopower essays sketch out (I think a bit incorrectly) how economics as ethics and economics as natural science peel away from one another.

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  19. It's important to note that the following passage:

    "To hurt in any degree the interest of any one order of citizens, for no other purpose but to promote that of some other, is evidently contrary to that justice and equality of treatment which the sovereign owes to all the different orders of his subjects. (WN IV.viii.30)"

    rules out all forms of redistribution predicated solely on helping out the poor for their own sake. Our host wants to conscript Smith into a welfare-state liberalism, I suspect, but that isn't consistent with his system of thought.

    Richard Epstein's update of this principle, which he sees enshrined in the U.S. Constitution's Fifth Amendment prohibiting the taking of private property except for public purpose and with just compensation, basically says all government expenditures and regulations that are not true public goods and which do not benefit everyone are either illegitimate or require compensation to those taxed or regulated.

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    1. I think it's completely reasonable to conscript Smith into redistribution inasmuch as he recognized both the ethical and the economic arguments for promoting the interests of all groups equally.

      The rich as a class have benefitted from the sovereign (so to speak) promoting their interests in a manner that goes against the notions of justice and equality of treatment. If an economic system is designed such that the poor become increasingly poor over time, despite increases in productivity and overall GDP, as is indisputably the case in this nation over the past 30 years, while the rich take all of that economic increase, then you cannot make the argument that all classes have been equally or justly treated.

      Because our economy has become not just unequal, but has in fact become *increasingly* unequal, and due to Smith's expressly stated position on the importance of applying an even hand to the interests of the different economic classes, it is almost indisputable that Smith would therefore support government regulatory action to push the economy into equilibrium regarding the relative shares of all future productivity gains. I think it's a reasonable conclusion to say that Smith would go further, to recommend redistributing the unfair gains of the rich from the past few decades via taxation, spending it on investment in infrastructure improvements such as energy efficiency, environmental protection, science, and education, as well as the health, food, and housing security programs that are necessary to ensure that all members of our society are in a position where they have adequate opportunity to do the best work they are capable of, according to our best understanding of human development.

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  20. Welcome back, srp. Of course you're right that Smith was no welfare state liberal. I never meant to suggest so.

    Smith was for fairness, not equality, but as I think I showed, that still has some bite. It's not redistribution to insist, with Smith, that the people who do the work shouldn't get screwed out of a fair share of the result. The rules of the game have to be determined in accordance with fairness (in the sense of natural law justice), not by and for politically connected crony capitalists. Otherwise it's not proper capitalism.

    Fairness can also sometimes require deviations from equality. For example Smith proposed taxing people to support public goods like roads in proportion to their ability to pay (again, this is not redistribution).

    Not sure what to make of your Epstein.

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  21. Sure, but the anti-redistribution part of this message is far more radical in a modern context than the anti-crony-capitalism part. You can find lots of economists on left, right, and center who will cheerfully argue against the Ex-Im bank, TARP, anti-dumping laws, occupational licensing for florists and hair braiders, etc. You will find many fewer who will go as far as Smith and say that Medicare and Medicaid, for example, are immoral and illiberal.

    The basic idea of the Epstein position is that if I tax you for national defense, that is provision of a non-rival, non-excludable public good from which you benefit. But if I tax you to pay for your grandmother's artificial hip operation, that public-good argument cannot be made without distorting the concept of public good beyond all recognition. Hence, the Fifth Amendment of the U.S. Constitution, which states that private property shall not be taken except 1) for public use and 2) with compensation, renders Medicare unconstitutional.

    THe standard "centrist" argument against Smith and Epstein is that the large U.S. entitlement programs really aren't redistributive but instead provide a public good of "social insurance" in the face of alleged "market failures" in the insurance and annuity markets. But no one who looks at these programs can miss their gigantic redistributive impact; if they were truly run on the basis of this public-good rationale, they would give much more of the benefits to the highest income categories, who pay much more into the system. Means-testing of the programs would also be verboten under the espoused rationale.

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  22. While I agree with you that Smith shouldn't be co-opted to the party of contemporary welfare state liberalism I equally oppose his being co-opted into contemporary libertarianism.

    As I said, liberty was a maxim for Smith, not a side-constraint. He advocated a massive expansion in the responsibility of government - to provide the background conditions for a thriving society and economy - at the same time that he argued so vehemently that government shouldn't micro-manage people's lives. While he ruled out 'redistribution' as a primary goal of government policy, the fact that such public goods as universal education might turn out to benefit some individuals more than others was a foreseeable and acceptable ‘unintended consequence’. (Aren’t all public goods ‘redistributive’ to some degree? Certainly all insurance systems are by definition, since they redistribute premiums from people who don’t crash their cars, hearts, etc to those who do.)

    Your definition of public goods seems like a moralised version of Samuelson’s. Smith thought about this more intuitively. There are some efficiency gains to society as a whole that are lost because private market actors do not have the necessary credibility, scale, profit-incentives, or long-term perspective to provide. They present collective action problems, which the state has a particular power and interest to address (though that doesn’t mean the state should necessarily try to do it themselves). And yes, social security is one of those things, in principle (though Medicare/Medicaid are not particularly successful examples). Countries without it, such as China, have a massive savings rate because each individual family needs to maintain its own reserves against unexpected costs or catastrophe. That distorts the entire economy and keeps people poorer than they would otherwise be.

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  23. 1. Education will surely benefit some more than others. The alleged public benefits of marginal subsidies to education, however--the advantages of dealing with an educated populace--are at least as equally shared as national defense.

    2. True insurance systems aren't really public goods at all. That's why they arose in private markets and require no justification, since participation is voluntary.

    3. "Social" insurance systems that try to overcome costly collective action coordination problems, such as unemployment insurance and workman's compensation, need not be redistributive at all. Actuarially fair insurance systems charge people premia equal to their expected burden on the system, and the net utility of insured parties is ideally unchanged by the event triggering insurance payments (so that the distribution of post-insurance utilities would be unchanged from its pre-insurance state). Many of the largest social "insurance" systems we have, however, are really covert income-transfer programs, often from the prudent to the impecunious.

    4. My definition of public goods is not moralized at all. It's pretty much the technical one from the textbooks. In truth, I think the whole concept as presented is confused, although not as badly as the notion of "externalities."

    5. Claims of market failure in social insurance are somewhat ahistorical. The United States had a rather large private safety net forming before the Progressives and New Dealers drove it mostly out of business with compulsory programs. Mutual aid has a long history, as does private charity.

    6. High savings rates are not a problem for an economy per se. There is no optimal savings rate, and there is nothing "distorted" about individuals saving for a rainy day. Collective saving for a rainy day is in no way more efficient, and given the public choice problems and inefficiencies of taxation and spending, likely far less efficient. (China's savings problems have mostly to do with government policy a) diverting much of those savings into questionable low-return investments and b) preventing individual savers from capturing much of the return that does accrue to those savings.)

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    1. srp. Many of your critical points relate to facts, which it is not really worth debating here. All I would say is that Smith also cared about facts, which made him pragmatic rather than dogmatic about whether government should directly provide or, as he preferred, merely organise or support the provisioning of goods like education and unemployment insurance.

      One conceptual issue I would raise concerns your understanding of properly functioning insurance markets as ones where "the distribution of post-insurance utilities would be unchanged from its pre-insurance state". I understand that your focus is disguised redistribution, but this nevertheless seems to misconceive how insurance works. Insurance pools risks and thereby reduces the variance of risk faced by any particular individual. i.e. by paying a premium individuals, through the law of large numbers, can protect themselves against the risk of being completely wiped out. That obviously increases their utility (otherwise, why would they bother). If you're interested in that point, take a look at Joseph Heath's excellent 2006 paper on The Benefits of Cooperation (Ungated version)

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    2. No, that's not my point about post- versus pre-incident utilities. My point is straight out of the textbook: risk-averse individuals would prefer to eliminate differences in their utility across states of the world, all else equal. That's called complete insurance. It is rarely attained because of constraints due to moral hazard and adverse selection, but it is the logical goal of any insurance system. The social method by which this equalization across states of the world is accomplished (e.g. through risk pooling across the population) is besides the point; the individual receiving insurance wouldn't care if he got it from a rich benefactor, self-insurance, or a space alien.

      Naturally it is correct that insurance raises agents' ex ante utility if the premium is low enough relative to the risk reduction. But your earlier point--that insurance is inherently redistributive--is false, in both ex ante (before uncertainty is resolved) and ex post (after uncertainty is resolved) terms. It is false ex ante, because actuarially fair premia would affect all the participants of the pool equally in terms of expected income (although as with any good some might get more consumer surplus than others). It is false ex post, because complete insurance, for example, leaves holders indifferent between having the bad event happen and not having it happen. Of course, real-world insurance is neither exactly actuarially fair to all parties nor complete. The conceptual point you advanced is still erroneous.

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    3. I don't know if we really disagree here. The functioning of an insurance system is to redistribute money from people who are healthy/employed/not on fire to people who are sick/unemployed/on fire. If you follow the money, that's what you will see. But, as you point out, it's not redistributive in its purpose since the premiums are indexed to risk in advance and pay-outs are compensation for losses (not 'winnings'). My only point there was that if you see unemployed people receiving unemployment insurance you see redistibutive flows of money but not necessarily a redistributive system in action.

      Let me make a wider point. We have a peculiar picture of the role of the state and the market these days that is generally accepted on both right and left. Markets generate wealth through gains of trade, and the state's role is to support that, and then redistribute some fraction of the resulting surplus to make up for market failures, compensate excessive losers, and maintain some miminimal level of welfare for all that decency requires. Obviously the right focuses on the supporting the market aspect and the left on the redistribution aspect and then the argument is about the appropriate balance between the two. But this picture is actually a rather strange and limited one.

      As I pointed out, Smith called attention to how the market was set up to favour certain players at the expense of the rest: the rules of the game have to be fair in the first place (rather than compensated for afterwards).

      Aside from that, there are a number of benefits to cooperation that do not come from gains of trade and are poorly analysed in that framework (Heath). E.g. risk pooling (insurance), but also economies of scale (why we have corporations and teams) and providing trustworthy information. When the state supports these, it is not for egalitarian ('redistributive') reasons. i.e. not everthing the state does or should do is about redistribution.

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  24. Good, so we agree that insurance programs--even ones run by the government on an involuntary basis--need not be redistributive "systems in action." But in practice, in the U.S., they are, illegitimately in my view. A transfer of wealth from favored to disfavored groups is effected under the cover of neutral provision of a public good. That was my original point.

    And of course, my view and Epstein's view of the Fifth Amendment emphatically agrees that government action need not be redistributive (e.g. national defense). It goes on to say that it ought not to be redistributive, either--that it is the government's role to provide certain public goods, not to reward some and punish others. And of course that proscription of forcible transfers applies in spades to rigging the rules of commerce to favor some actors over others ("crony capitalism" or mercantilism).

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  25. Not only Adam Smith, but generations of thinkers have been taught by the classics in the practice of epimeleia seauton, that is the culture of the self.
    This is by no means a 100% perfect way of enabling a fair society, but it is profound in the sense, that it demands a constant gardening of consciousness, feeling and action based on a set of practices and heuristic fingertips, where in life there are dangers, necessities, where dignity and where compassion, humour and intelligence are demanded.

    Such a library of everyday life tactics does not tell you how to handle your Iphone, but still it is far from being outdated as it is soaked with the wit of urban intellect, street wiseness, mythical narratives, energetic allusions, academical scepticism, fearlessness and a good sense of humour.

    If there only was a way to reconnect to this lineage, which all economic thinking is based on at core, but obviously to-days economic practice often fails to apprehend a broader understanding of the implications and interconnections of life.
    Individual excess is of course part of the liberal tradition and training, but if one fails to connect the dots of the lifestream, no good will arise from this...

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  26. I stumbled upon this article when I searched "Ethical Economics". I am a Business Banking Manager. 30 years at the same employer. Not University educated. Even though I don't understand or a familiar with a lot of your references, I feel exhilarated by the article and all the comments. I work in one area of the capitalist system and can see the influence that some market players have. Even if my organisation wanted to be more ethical and fair and transparent, the market would hammer them. Sentiment has a lot to answer for. Anyway keep up the posts. I will be saving this link as a favourite.

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  27. Thanks for that. Since my interest in economics has grown recently, I read Wealth of Nations and was surprised at how much different it was from what I had been taught as a kid. The idea that market forces generally act in ways that benefit society, but need a watchful eye to prevent abuses, seems like just the thing we need more of now, 200 years later. I'm happy to see this info being spread around. I can only hope it helps take some of the starch out of our current crop of libertarians, who I would probably like if they would just lighten up a bit.

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