Are free-market theories obsolete?

July 01, 2011|By ALLAN POWELL

One might be accused of insanity for attempting to tackle the likes of Adam Smith in their “sunset years.” Still, it seemed worth a try and, on reflection, it was worth the effort. Smith’s monumentally famous, “An Inquiry Into the Nature and Causes of the Wealth of Nations,” is considered to be one of the most remarkable books ever written. It has been in demand since first written and has been translated into many languages.

Adam Smith was well-prepared to author what has been called “the Bible of capitalism.” He is described as a polymath who lectured in logic, science and moral philosophy at the University of Glasgow. When he published his impressive (500-plus pages) defense of free trade, it was evident that he was comfortable in the fields of law, economics, history and government. He was also a realist in his judgment of human nature.

Very early in his treatise on the need to move away from the current use of mercantilist doctrines and all of the government’s involvement in market affairs, Smith warned his readers that his subject was “in some degree obscure.” He then added, “I am always willing to run some hazard of being tedious in order to be sure that I am perspicuous, and after taking the utmost pains that I can to be perspicuous, some obscurity may still appear to remain upon a subject in its own nature extremely abstracted.”

Regardless of his warning, Smith continued to be tedious and obscure. Fortunately, others have shortened and clarified his basic message. The French have reduced his theme to “laissez faire” (allow to act). President Reagan declared, “Government is not a solution to our problem — government is the problem.” Most economists simply write that Smith proposed the view that self-interested pursuit of gain, unregulated by law, ensures the greatest benefit to society.

In order to see the significance of this simple politico-economic thought, it is necessary to recreate the time, place and circumstance which agitated the mind of young Smith. His hefty volume was published March 9, 1776, only several months before our Declaration of Independence was offered to the world. In some respect, the Declaration was a protest against the policy of mercantilism utilized by Great Britain and other European powers of the day.

Their economies were regulated throughout to benefit the empire. Colonies were founded to benefit the mother country. These colonies were expected to supply vital raw materials to be consumed or processed into finished products. Our huge pine trees provided the British Navy with masts, while other trees provided wood for barrels. The government also subsidized the production of other goods needed at home.

Smith then appeared and was absolutely convinced that this whole economic system was inefficient, counterproductive and a violation of natural rights and natural liberty. Thus, at base, Smith was proposing that mercantilism, with its intrusions into the private business affairs of citizens, was unjust.

Smith then raises the question: What will replace this outdated system and yet maintain order in the marketplace? It takes him 225 pages of economic history to eventually suggest one of the most famous terms of economic causation: “an invisible hand.” Surely, Smith should have anticipated some skepticism at the notion that equilibrium in the marketplace could result from the random transactions of millions of businessmen governed by self-interest.

But Smith was undaunted and argued that each “economic man ... intends only his own security, and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. 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.”

Smith was successful beyond his fondest dreams in convincing others of the rightness of his new doctrine. Its influence gradually spread until it was regarded as sheer lunacy to question his assumptions. Nonetheless, after a career of periodic ups and downs, and a major depression, a new kid on the block, John M. Keynes, has tugged and pulled at Smith’s economic holy writ until his most devout disciples must pay attention.

What is surprising about Keynes is his return to some of the old ideas about the role of government — especially when government leadership was needed to steer the country out of economic and financial crisis created by a laissez-faire approach to the management of the economy. This has sometimes been called “neo-mercantilism.” What a turn of events in America: The ideas of one British thinker have all but replaced the ideas of another British thinker. An “unseen hand” has been replaced by a hand that can be seen.

Allan Powell is a professor emeritus of philosophy at Hagerstown Community College.

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