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Tuesday, March 10, 2009

"Adam Smith’s Market Never Stood Alone"

Amartya Sen explains how Adam Smith has been misinterpreted, and how the beliefs associated with that misinterpretation lead to a form of capitalism that Smith would not have approved of. In fact, Smith would not have been surprised that the type of capitalism we have seen in recent decades would lead to the difficulties we are having today:

Adam Smith’s market never stood alone, by Amartya Sen, Commentary, Financial Times: ...[T]he market economy has been exceptionally dynamic, generating unprecedented expansion of the global economy over the past 60 years. Not any more, at least not right now. .... The question that arises most forcefully now is not so much about the end of capitalism as about the nature of capitalism and the need for change. ...

Do we really need a “new capitalism”...? ... What exactly is capitalism? The standard definition seems to take reliance on markets for economic transactions as a necessary qualification... In a similar way, dependence on the profit motive, and on ... private ownership, are seen as archetypal features of capitalism. However,... All the affluent countries in the world – those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Taiwan, Australia and others – have depended for some time on transactions that occur largely outside the markets, such as unemployment benefits, public pensions and other features of social security, and the public provision of school education and healthcare. The creditable performance of the allegedly capitalist systems in the days when there were real achievements drew on a combination of institutions that went much beyond relying only on a profit-maximising market economy. ...

Smith did not take the pure market mechanism to be a free-standing performer of excellence, nor did he take the profit motive to be all that is needed. ...[A]n economy needs other values and commitments such as mutual trust and confidence to work efficiently. ...

Even though the champions of the ... Smith enshrined in many economics books may be at a loss to understand the present crisis..., the far-reaching consequences of mistrust and lack of confidence in others which have contributed to ... this crisis ... would not have puzzled him. ... The need for supervision and regulation has become much stronger over recent years. And yet the supervisory role of the government in the US in particular has been ... sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance has grown, the provision of the needed supervision has shrunk.

[There is] ... a tendency towards over-speculation that, as Smith argued, tends to grip many human beings in their breathless search for profits. Smith called these promoters of excessive risk in search of profits “prodigals and projectors” – which, by the way, is quite a good description of the entrepreneurs of subprime mortgages over the recent past. The implicit faith in the wisdom of the stand-alone market economy, which is largely responsible for the removal of the established regulations in the US, tended to assume away the activities of prodigals and projectors in a way that would have shocked the pioneering exponent of the rationale of the market economy.

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. ... 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 argued, in general, for institutional choices to fit the problems that arise rather than ... leaving things to the market.

The economic difficulties of today do not ... call for some “new capitalism”, but they do demand an open-minded understanding of older ideas about the reach and limits of the market economy. What is needed above all is a clear-headed appreciation of how different institutions work, along with an understanding of how a variety of organisations – from the market to the institutions of state – can together contribute to producing a more decent economic world.

    Posted by on Tuesday, March 10, 2009 at 05:40 PM in Economics, History of Thought | Permalink  TrackBack (0)  Comments (21)

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