"Creed of Greed Not Supported by Adam Smith"

Gavin Kennedy:

A Gem Amidst the Dross, Adam Smith's Lost Legacy: It is a positive sign that not every commentator on current affairs in the current corporate finance crisis purveys the inaccurate nonsense that a source of the problem lies in anything written by Adam Smith...

Eli Cox, Chair, department of Marketing at McCombs School of Business, writes in McCombs Today (‘News from the McCombs School of Business’)...:

Creed of Greed Not Supported by Adam Smith: Ordinary Americans have a deepening mistrust of free-market capitalism as our nation has gone from Enron, WorldCom, Adelphia and Tyco to Bear Sterns, Freddie Mac, Fannie May and Lehman Brothers. Sadly, this mistrust is justified because too many corporate executives have adopted the creed of greed. This creed is based on the false view that Adam Smith believed that that personal greed generates the public virtue of economic growth. In fact, Smith would have been revolted by this misrepresentation of his views, as he actually wrote the following:

“Justice [the human virtue of not harming others]…is the main pillar that supports the whole building. If justice is removed, the great fabric of human society which seems to have been under the darling care of Nature must in a moment crumble into atoms….Men, though naturally sympathetic, feel so little for others with whom they have no particular connection in comparison to what they feel for themselves. The misery of one who is merely their fellow creature is of so little importance to them in comparison to even a small convenience of their own. They have it so much in their power to hurt him and may have so many temptations to do so that if the principle of justice did not stand up within them in his defense and overawe them into a respect for his innocence, they would like wild beasts be ready to fly upon him at all times. Under such circumstances a man would enter an assembly of others as he enters a den of lions.”

...The quote found above ... from The Wealth of Nations states that unbridled greed destroys a free market system.

The pernicious view that “economic man” is selfish and rational and that Smith’s invisible hand will clean up the mess has been perpetuated by the Chicago School of Economics. ...

Comment
How true! At last a sign that some of the vast faculty of economists, trained in the academic world that has long been dominated by Chicago since the early 50s and by those who went onto teaching across the Western World’s universities, colleges, and school, have not lost their critical faculties – they show signs of actually reading what Adam Smith wrote and not what their tutors told them.

[I have long exposed the view that the patron saint of students was Saint Thomas – ‘don’t trust what you are told by tutors – read it for yourself!]

...Professor Eli Cox ... is right to assert that the myths of the majority fed on Chicago’s misappropriation of Adam Smith’s legacy contributes to the popular groundswell of distrust of markets and in consequence strengthens the corporate statists in favour of even bigger government.

Friedman, and the many others, who linked free markets to their myths about invisible hands, laissez faire and the elision of self interest into greed, severely damage the constant struggle for clean markets, open and transparent competition, and tolerable levels of public goods in place of big government in too close an alliance with big corporate interests.

Markets, operating under a regime of justice (and the prosecution of corporate criminals), are part of the solution; they are not the problem.

Comments

[hari]

This is a good essay on the moral imperatives of knowledge and its utility in 21st century. Individuals in their capacity as experts are not invincivable and cannot be regarded as *Gods*. American economists and libertarians, in particular, have taken on the screligious belief in the wisdom of their peers (eg. Chicago Scool of Economics!).

Truth, as we know, is realtive. And there is no way you can skin the system with one or other school of thinking - disrespecting, for example, the emergence of state capitalism as currently practised by the Politburo in Beijing.

Who knows, for God's sake, what the future foretells and how mainland China and its power and influence will impact global markets.

The global hegemony of Anglo-Saxon Capitalism is over and forever! Try to get it and understand its economic and historical raison detre.

[Vitaly Kartsev]

It's worth noting that there is interesting work on the moral dimensions of capitalism going on right under the noses of folks of the Chicago School. Kathryn Tanner, a very well-regarded constructive theologian who teaches in the Divinity School at Chicago, wrote a book a couple of years ago called Economy of Grace that wrestles with some of these questions. It contains some trenchant criticisms of the kind of scorched earth capitalism you're criticizing here, as well as suggestions for envisioning a more cooperative capitalism that does not destroy value in the name of competition.

[ken melvin]

Don't think Milton was about Adam; think Milton was about Ayn. Don't think Adam would have any problem understanding that US capitalism sold out the people, either.

[Tamas David-Barrett]

The trouble is that all of the above assessment stays within the same national level framework. It is like trying to deal with nuclear proliferation with newtonian mechanics. Some bits will work, but the essence is missed.

[swells]

Feed back loops. They make the case for principles. The current situation can be viewed as a feed back loop that got out of control. Incrementally, adding a few sub-prime mortgages to an MBS pool doesn't do much harm. Law of averages at work. Then the feed back loop kicks in and things spiral out of control.

I'd argue that the current crisis is the small one. The feed back loop to end all feed back loops is the spiraling indebtedness of our government and that one is starting to pick up steam in a major way.

[bakho]

Free Market is an oxymoron.

All markets have rules.

Even burglary has rules.

[The essence]

No. The essence is that man evolved in a primitive environment where forecasting 30 years into the future was not germane to his survival.

Yet, the current value of a stock is predicated on expectations of forecasts well into the future. This is the same dilemma that home owners used when valuing a home, thinking that their home constituted real savings valued at the current or future expected rise in price.

Incidentally, this is the same argument many people used to justify the bailout. "The stock market lost 1.3 trillion the bill is only 700 billion"

One of those was Brad Delong. In his case he should be fired for the Charlatan he is. In the case of home owners who have leveraged up to negative equity they should lose their home.

[Carolyn Kay]

What a shame that liberals and progressives have failed to realize that they needed to be fighting these tenets of right-wingism, such as the notion that greed is good and unregulated greed is even gooder.

If we were fighting these notions, they wouldn't be so prevalent in the heads of ordinary citizens and even the heads of the Democratic leadership.

If we were fighting these notions, I might be able to find a publisher for my book on this topic.

Carolyn Kay
MakeThemAccountable.com

[Scott Ferguson]

I am always amused by the Holy Siffidence paid to Saint Adam Smith. It's as if we only have to interpret his words properly and everything will be okay. What if Smith was wrong?! Not on everything he wrote but on certain details. What if his estimation of human nature is off enough to make monopolies, greed and bubbles inevitable.

I have not found the nerve to read all 600+ pages of Wealth of Nations but the reverence paid to Adam Smith sets off all my warning bells.

[Matt Dubuque]

Matt Dubuque

The interbank lending market remains in a coma threatening us all, irrespective of what the Dow Jones Industrial Average may be doing on a short-term basis.

As Senior Economist Gordon Sellon of the Kansas City Federal Reserve discussed in his seminal paper "Monetary Policy and the Zero Bound: Policy Options When Short-Term Rates Reach Zero" published in the Fourth Quarter 2003 edition of the Kansas City Federal Reserve's "Economic Review", the Federal Reserve should now consider under taking "twist" operations in the open market.

That paper is available here at the bottom of the link:

http://tinyurl.com/4o9a82

A "twist" operation by the Federal Reserve in the current context would consist of the Fed SELLING 3-month Treasury Bills while simultaneously PURCHASING 5-year Treasury Notes. Such operations, applied judiciously, would affect the term structure of various markets in a positive way.

Such "twist" operations are not without precedent. It was performed during the Kennedy Administration:

http://tinyurl.com/524lk5

I urge people to STUDY Sellon's critical paper at the link provided above to grasp some of the subtleties involved here before engaging in uninformed knee-jerk criticism.

This is not a cure-all, but it is clear that it should be on the short list of our policy options.

Matt Dubuque
mdubuque@yahoo.com

[Primum non nocere]

Primum non nocere....first, do no harm is the moral compass that will have to be incorporated into the financial sector moving forward.

Any ideas how this can be incorporated?

[reason]

Scott Ferguson,
sort of what I wanted to say. It may well be that the Chicago have misrepresented Adam Smith, but so what, are they right or are they wrong? I happen to thing they are wrong about many things, but mostly for reasons that have nothing to do with Adam Smith.

[reason]

As for our anonymous thread hijacker - please get a blogger account and post a link.

[Patrick]

It's like any religion. They cling to their ideas regardless of evidence to the contrary. Rational actors? Not so much.

[evagrius]

"says" certainly "said" quite a bit but I don't think was correct about the CRA. Why should it have taken 30 years, or one generation, for it to cause the current situation?

[Ninja Zombie]

"...The quote found above ... from The Wealth of Nations states that unbridled greed destroys a free market system."

I think virtually all libertarians and capitalists (besides perhaps the anarcho-??? guys) would agree with this statement.

Unbridled greed is bad, since it will lead to theft. As a greedy individual, I'm going to take your sandwich because I want to eat it. Then you have no sandwich.

Greed constrained by "justice"/"rule of law"/etc becomes a force for good: the only way I can get your sandwich is if I give you something in return (e.g. cookies) which you like more than sandwiches. Then we have moved into positive sum economics, and all the traditional ideas apply.

I think someone is arguing against a straw man.

[me]

man, this topic just makes people disgorge everything in their skulls doesn't it?

"So what?" and "who cares" seems the right question.

Look, economists, the Adam Smith stuff is merely an excuse.

If you took him seriously you wouldn't just criticize the Chicago School of Economics.

You'd burn it.

[Roger Chittum]

More defense of Adam Smith against the distortions of his self-proclaimed acolytes.

Smith pointed out that self interest in the economic sphere has socially beneficial collateral effects. He did not say there was a need to take the existing level of greed and "kick it up a notch." To the contrary, Smith thought the level of greed among capitalists was so high they could not be trusted. These are the last two sentences of Book I of Wealth of Nations:

"The proposal of any new law or regulation of commerce which comes from this order [profit takers], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it."

Makes you wonder about TARP, doesn’t it.

And this quotation from Book I, chapter VIII, at 83 suggests he had a more communitarian outlook than that of many of his modern self-proclaimed acolytes:

"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."

[paine]

i agree

justice justice and more justice

HANG EM HIGH

[kthomas]

JUSTICE! Remember that word well, ye greedy sons of #$%^&.

[ECONOMISTA NON GRATA]

The term "invisible hands", has been misappropriated in the sense that one may believe that these so called "invisible hands" have only one function which is to give. "The invisible hand giveth and the invisible hand taketh away...." And, sometimes it will form into a wet fist and "break your face...."

Listen to your genes, they know more about everything than all the PHDs in the universe put together.

What is our collective impulse....?

Best regards,

Econolicious

[paine]

if the spontaneous workings of the system
produce players --plutocrats ---
that can effectively
operate about the rules of the game

then enforcement of the rules
on the rest of the players
is part of the injustice
an injustice
built right into the system

as we prepare to rescue these tottering titans
this pack of vamphires
ought we not pause to reflect
recall what they are now and what they once were

examine their flacks claims

are they necessary ???

b4 we pull out
the stakes they buried in each others hearts

maybe we oughta consider letting em expire
by passing their web works of comand and control
run the show for a while thru uncle's direct
and costless powers of credit ceation
refocus our social funds on direct real resource mobilizatin
real economic revival
not paper tower resurrections

pick a grand productive goal for the whole nation

like FDR's the arsenal of democracy
after war began again
in europe

the choice is equally obvious today
in a time of brown out crisis

build a giant green house of production

[kthomas]

says...

Whoever you are, you get a Gold Star for writing so much.

CRA? C'mon.....I dn't like the program myself, but that CRA was not the cause of every one and thier aunt and uncle wanting thier own McMansion with 4-car garage. And to what extent was Lehmans, Merrill Lynch, etc. involved with CRA?

I can't stand it when people post anonymously, BTW. Makes me think you're scared, and judging from your intellgence and your writing accumen, you don't strike me as a coward.

[a]

I have a general problem with arguments that so-and-so can't be blamed for X because he said Y, which contradicts X. There is the underlying supposition that so-and-so's world outlook is consistent, which, for any complex outlook, strikes me as a rather large assumption. Maybe Adam Smith can't be blamed for greed; but it's not because he said he was against it that he can't be blamed for it. There may be other things in his philosophy (Horatio...) or economic theory which advances the cause of greed.

[swells]

As for burning the Chicago School of Economics. I don't much care for Schopenauer's philosophy but I read it because there were some truths there I couldn't deny. George Will has a thought provoking column today at: http://www.realclearpolitics.com/articles/2008/10/publics_fury_noted_now_is_time.html

Here's the first paragraph or so:

"We are waist deep in evasions because one cannot talk sense about the cultural roots of the financial crisis without transgressing this cardinal principle of politics: Never shall be heard a discouraging word about the public.

Concerning which, a timeless political trope is: Government should budget the way households supposedly do, conforming outlays to income. But the crisis came partly because so many households decided that it would be jolly fun to budget the way government does, hitching outlays to appetites. "

It won't be a popular message here. That doesn't mean he doesn't make an important point.

[swells]

Sorry the link got cut off: Here it is again

http://www.realclearpolitics.com/articles/2008/10/publics_fury_noted_now_is_time.html

[RW]

I once did a word search for "invisible hand" (and several variants of the phrase) in an electronic edition of Wealth of Nations and found only one instance, just one, and that was in Smith's discussion of the unintended consequence(s) of selfishness and those disposed to act selfishly; he generally seems to have held such people in rather low regard but did see utility in their actions.

[Callahan]

A million a month and more for some of our bestest financial wizards of Wallstreet, is, ... well, ... probably on the greedy side. Interest rates on some of our credit cards and mortgages, yup, greedy. Three and four dollars to withdraw from an ATM, greedy? Yup.

Where is the maifia when we need them? Bet I could get a better deal from them than those offered at the corner payday advance store.

Don't bail em out, let em crash and burn.

[Richard H. Serlin]

Another esteemed economist who shows "signs of actually reading what Adam Smith wrote" is Robert Frank of Cornell. He notes in his New York Times Economic Scene article of May 25, 2008:

ADAM SMITH’S modern disciples are far more enthusiastic about his celebrated invisible-hand idea than he ever was. In their account, Smith’s assertion was that purely selfish individuals are led by an invisible hand to produce the greatest good for all. Yet Smith himself was under no such illusion.

On the contrary, the relevant quotation from his “Wealth of Nations,” which describes a profit-seeking business owner, is far more circumspect. It says that this owner “is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” It continues: “Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

In short, Smith understood that the invisible hand is often benign, but not always.

(at: http://www.nytimes.com/2008/05/25/business/25view.html)

[im1dc]

"Creed of Greed Not Supported by Adam Smith"

Who cares?

[Doug]

Chicago School = bread lines and soup kitchens. At least we'll re-learn the moral of our 1930s ancestors..

[John V]

Ninja,

I think someone is arguing against a straw man.

You took the words right out of my mouth. "Straw man" sums it up perfectly. NOBODY who is supposed to be the target of this blog entry would ever agree with simplistic characterization being laid at that their feet.

It's a shame.

says...

Ah, did somebody hurt your libby feelings?

If you clowns knew the history of the invisible hand rhetoric, you wouldn't say that. Knee jerk defensiveness is cute, sometimes, but very wrong in this case.

Go read Kenedy on this. Or do you think you are a bigger expert than he is? Ha.

The emphatic nature of the comment above makes it even more laughable. I'm wrong and I'm going to put it in italics amd CAPS so everyone will be sure to see it!!!

[John V]

"says",

what on earth are you talking about?

says...

I will explain s--l--o--w--l--y for you.

The only straw around here came from your head.

[John V]

says,

you explained nothing. sorry.

[Patricia Shannon]

im1dc says...

"Creed of Greed Not Supported by Adam Smith"

Who cares?

I'm with you. "Wealth of Nations" was published in 1776. Surely we have had some real-world experience since then. Why all this fuss about whether a 232-year-old theory was true or not?.

[me]

Well there's a reason why.

Not a _good_ reason.

Not a _thoughtful_ reason.

But a common reason. Founder worship. It's the confusion of science (even the 'dismal' attempt at one) with religion.

Difference? Religion has a founder. If the founder turns out to be wrong, the whole subsequent structure is cast into doubt.

Science has early work. It's always wrong. It's often productive. Later work improves on it.

Those who pretend to be doing the work of the Founder -- and yes, that's the Chicago School, at least as of a few decades ago -- have to believe Adam Smith said greed is good, or that somebody said Adam Smith said that. Gordon Gecko?

Either way, they worship the myth they use to excuse their behavior and can't easily transfer their faith to a new foundation.

Well, they can just run up the pirate flag and take ....

Oh, wait ...

[CL-Oregon Girl]

For all the folks saying who cares?

Don't you think it is mildly interesting when the popular interpretation of an icon is turned on its head?

The fact that he wrote 232 years ago means that what he said was uninteresting?

Perhaps you should all get back to watching your cartoons.

[BJ Feng]

People will act in their best interests. Some of you define greed in this way, fine, but be consistent with your meaning, don't expand greed to mean something else later on because the two are not the same.

So does the above automatically mean that someone will dump toxic waste into the ocean for one dollar? No. That person could prefer a clean ocean to one dollar, he acts in his best interests and says the clean ocean is worth more to me than a mere dollar. However you could increase the dollar amount, and maybe at some point, he prefers X dollars over a clean ocean. There will be people who would never pour toxic waste in the ocean regardless of how many dollars are offered.

This is what is meant by act in our own interests. We all have preferences, we place different values on different objects, so our preferences can be revealed by the price we are willing to pay for some item or service. I like yellow peaches much more than white peaches, I would pay up to $2.99 a pound for yellow peaches, but only $0.49 a pound for white ones. A farmer who has a choice of producing white or yellow and doesn't prefers each equally, would grow yellow peaches because he can get more money from me.

Now is this greed? Only if you define greed as acting in one's best interest. Would it be better for him to grow white peaches and sell them to me for $0.49 a pound? No! I don't like white peaches very much, I told you that, eating a white peach for $0.49 a pound would give me the same amount of pleasure as eating a yellow peach for $2.99 a pound. The farmer isn't doing me any harm by growing yellow peaches and selling them for a higher price.

Some of you will be angry, the farmer is making a large profit, you might think he is "exploiting" me by getting so much more for a yellow peach. But look, I don't have to buy! And why am I willing to purchase peaches for $2.99? Because it would cost me a lot more to grow them myself, I don't have the equipment or time, I would have to work less hours at my jobs which pays $10/hour to be able to produce peaches let's say. It would cost me $3.99 a pound to do it myself.

So the farmer who is making a windfall profit is still helping me out. He's saved me $1 by selling yellow peaches to me. I'd rather eat a pound of peaches rather than have $2.99! In this situation, WE ALL WIN!

Yes, that's something many people just can't get, that capitalism produces outcomes where everyone wins and is better off. Now one person might get the majority of the gains, but regardless, everyone gets something more. And if one side is getting a lot more, then other people will be drawn in and start producing or providing whatever it is that can fetch more.

If people are willing to pay a lot for it, the seller is providing something very valuable and doing a great service. Let's say I discover a potion that cures cancer, I can make this potion for $1 but people are willing to pay a whole lot more for it. So I sell it for $5000, is this an evil greedy act? Am I exploiting and ripping off my customers? Or have I done them a service? Only those who value the cancer potion more than $5000 will buy from me. In fact, a person could be willing to pay a whole lot more for treatment. Without me, that person would go to the hospital which would cost $10,000. So they buy from me instead. I've saved them $5000, that's $5000 more for him to use in any way he wants. So even though I sold him the potion that cost me $1 to make for $5000, he still is able to benefit from the transaction. Yes, we still both win. You people who focus on profits don't focus on the other side, how much is being saved by the buyer. It could cost McDonalds $.40 to make their double cheeseburger, but just because they're making a profit double their cost doesn't mean that they aren't helping me by selling me it for $.99. It would cost me a lot more to make myself, thank you McDonalds, yes, we both win. Such is capitalism in an ideal setting, it's a win win situation for all participants and that's why it continues to endure.

[Real Person from the Real World]

October 2, 2008
Op-Ed Columnist
Save the Fat Cats
By NICHOLAS D. KRISTOF

The Institute for Policy Studies in Washington estimates that U.S. taxpayers every year provide more than $20 billion in tax subsidies for executive pay.

Among the strongest critics of inflated executive pay have been Warren Buffett and the late management guru, Peter Drucker, who argued that C.E.O. salaries should peak at no more than 20 or 25 times those of the average worker. (Last year, C.E.O.’s got an average of 344 times the wages of the typical worker.)

The truth is that with the complicity of boards of directors, C.E.O.’s hijack shareholder wealth in ways that are unconscionable. As The Wall Street Journal reported in June, if Eugene Isenberg, the 78-year-old C.E.O. of Nabors Industries, were to drop dead one of these days, his estate would be entitled to a “severance payment” of at least $263 million — more than the firm’s first-quarter net earnings.

With such greed oozing out of the corporate suite, and with financial companies enjoying the confidence of only 10 percent of Americans today (down from 36 percent in 2000), it’s no wonder that voters are repulsed by the idea of helping banks. Wall Street urgently needs to undertake its own housecleaning, for the public revulsion toward it undermines its own long-term interests.

[Jane]

[I have long exposed the view that the patron saint of students was Saint Thomas – ‘don’t trust what you are told by tutors – read it for yourself!]

Don't you mean "espoused"?

Thanks for your blog!