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Adam Smith on CSR
August 8, 2008
I’ve mentioned the Bill Gates/Mike Kinsley/Conor Clarke creative capitalism project before. A new highlight on the site is a piece by my esteemed colleague Martin Wolf. (This is what Martin does on his holidays.) I’m not entirely sure what Martin’s note has to do with “creative capitalism”–the idea is mentioned and dismissed in the last paragraph–but he has written the best short essay on the political preconditions for capitalism I have ever read.
Consider a society in which everybody was a profit-maximizer. What would it be like? It would be one in which rulers, soldiers, judges, bureaucrats would take whatever they could. It would be one in which bribery and corruption were the norms. It would be one in which market capitalism of the kind Professor Landsburg (and I) extol would be impossible. It would be one in which almost everybody would be poor. And because it would be one in which almost everybody was very poor, it would also be one in which the only way to obtain wealth would be to join in the race for political power. This would be all too natural. It would also be a negative-sum society, in which life tended to be nasty brutish and short.
Profit-maximization is not a generalizable norm for a successful capitalist society. Indeed, it is not an ethical principle at all, for it violates Kant’s categorical imperative — that one should “act only according to that maxim whereby you can at the same time will that it should become a universal law.” Profit-maximization is a situational ethic, applicable only to economic activity — that is, activity carried out under competitive conditions. Monopoly providers of public goods — security, justice and so forth — must not act under profit maximization.
We do not even want people engaged in private business to be profit-maximizers tout court. Let us suppose, for example, that a business knows of an undetectable way of dumping poisonous waste, thereby saving itself vast sums of money. Do we believe that it ‘ought’ to do this? I certainly do not. Do we believe businesses ought to create cartels? No, again. Do we regard it as right for business leaders to manipulate their pay — by back-dating stock options, for example — in order to steal as much as possible from their shareholders? No, yet again. Yet all these people are doing is maximizing their personal profits, as individuals in the market economy supposedly should
…
So the big problem with competitive capitalism is not that it is uncreative. It is certainly highly creative. The problem is that it is unnatural. There have to be rules, ethical norms and institutional constraints governing profit-maximizing behavior, to ensure that the maximization operates for the social good. Of course, pure libertarians would deny this. They believe that a society could be constructed on the basis of voluntary exchange, with no coercion. I think that would last until the first well-organized gang came over the hill, as Thomas Hobbes argued. We need the Leviathan. The question is how we tame it.
Reluctant as I am to follow that performance, it so happens I have posted a new contribution too. Mike and Conor asked me earlier for some thoughts on what Adam Smith would make of creative capitalism. If you’re interested, and with all due diffidence, I’ll post what I sent them after the jump. Adam Smith on creative capitalism
In his speech at Davos, Bill Gates quoted the opening lines of Adam Smith’s Theory of Moral Sentiments:
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.
Bill doubtless meant this as a reply to those fond of quoting selectively from the other Adam Smith, author of Wealth of Nations. People who say they admire that book are especially keen on this sentence:
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.
Bill is telling us that even Smith—“the father of capitalism…who believed strongly in the value of self-interest for society”—praised the impulse to altruism. Society needs both, and this is where creative capitalism comes in. Its aim is to marry sentiment and self-interest; to unite, as it were, the two Adam Smiths.
I agree that Smith is badly served by many of his supposed followers. The idea that “greed is good”, which one often sees attributed to him, is a travesty. He was no libertarian either. His idea of “natural liberty” was almost the opposite of what it is usually taken to mean (namely, “do as you wish”). He was at pains in both books to emphasize the importance of self-control, of regard for the opinions of others, and of an expansive role of government in providing security, rule of law, and economic infrastructure. Way ahead of his time, he was even in favor of compulsory schooling.
But I think it is wrong to regard Moral Sentiments as somehow at odds with Wealth of Nations, which seems to be the prevailing view. You quote one or the other, according to taste, but never both. Smith certainly saw no rift. The two books, though written with different purposes (Wealth of Nations to sway legislators, Moral Sentiments more to guide and inform a wider educated public) were a single intellectual project and fit together comfortably. Of the two, by the way, Wealth Of Nations takes the dimmer view of “merchants”—paradoxically, since this is the title favored by free-enterprise types. Moral Sentiments, name-dropped mainly by the left, is more kindly towards men of business, because it wants to establish the civilizing effects of commerce. What a difference it would make if anybody actually read these books.
Smith believed that most people are self-interested, sympathetic, and wish to be well thought of. Successful commercial societies, he argued, are built on these traits. The question is, how can they best be combined? In modern terms, how can institutions and incentives shape, channel, and balance these sometimes conflicting instincts to promote greater peace and prosperity? This is the subject of both books.
In Wealth of Nations, addressed to rulers, Smith exalts competition as the way to keep self-interest in check, and to subordinate producers to consumers. That is why the book is so opposed to protected monopolies and, above all, barriers to trade. In Moral Sentiments, he puts less weight on public policy and more on the wellsprings of virtue. He underlines the need for the approval of others, not just as an end in itself but also as a requirement for flourishing in commercial society. In short, competition disciplines producers (Wealth of Nations); commercial interaction nurtures propriety and prudence (Moral Sentiments). These are different perspectives, but by no means contradictory.
What would Smith, cited so freely by both sides, have made of the modern CSR debate? Hard to say, and pointless to speculate—but let’s do so anyway. I am sure about one thing. He would have disagreed with Bill that a new kind of capitalism is needed to marry sentiment and self-interest. This is exactly what ordinary profit-seeking commerce achieves, in Smith’s telling. This is the over-arching idea in both books.
Of course you can reject the cod-philosophical gestures of the Davos speech and still conclude that CSR is a good thing. Smith might well have done so. He was ever a pragmatist, suspicious of thinkers who like their principles cut, dried and few in number. I cannot imagine him saying that CSR is always a good thing, or always bad. That would be very unSmithian. He would say it depends. It usually does.
As a general matter, it would be true to the spirit of Moral Sentiments to say that owners of businesses should attune their conduct to the good opinion of mankind. But note that I say “owners”, not managers. Who knows what Smith would have thought of 21st century corporate governance? The modern corporation is a form he could barely have envisaged.
As a relentless advocate of ethical conduct, he might say that managers are trustees, and owe their first duty to the owners of the assets under their control. In that case, doing good works at the expense of profits to seek “recognition” (as Bill advocates) would be straightforwardly unethical. On the other hand, he might observe that modern shareholders are not really “owners” at all: they have limited liability and accept little or no responsibility for the firm’s conduct. Managers carry that burden, and their concerns for “stakeholders” (over and above what maximum profits require) are therefore, arguably, ethically legitimate.
The debate over the rights and wrongs of CSR is usually cast as a question about the duties of the corporation. But a lot of our disagreement, I think, boils down to a narrower question: what are, or should be, the duties of managers with respect to shareholders? Do we prosper best if we oblige managers to act strictly as agents, or if we indulge their desire to act as owners? I say the first. I don’t know what Smith would say.
The creative capitalism will need the creative brains in different professional fields to contribute to the national prosperity. However, the creative people don’t like the societies, which are engaged in the international military conflicts, security operations and bureaucracy, where everybody is a profit-maximizer. Therefore, the main treat to the developed nations comes from the side of the emerging economies nations, which create much more better conditions of life for the acknowledged contributors to the national wealth creation. It is clear that the wealth will continue to disappear in the nations, which don’t like the creative capitalism and creative people.
Posted by: Viktor O. Ledenyov | August 8th, 2008 at 9:59 am | Report this commentI thank Clive for his kind remarks. I do intend to post this on the FT’s economists’ forum at some point. The piece is not really about creative capitalism, as Clive noted. But capitalism cannot be creative if it does not even exist. Many proponents of capitalism fail to understand how extraordinary that is and how difficult it also is to sustain. In particular, a capitalist system can only thrive if there exist ethics, norms and institutions external to it. It is not a self-contained system.
Posted by: Martin Wolf | August 8th, 2008 at 10:54 am | Report this commentDear Mr. Crook,
Having recently published about Adam Smith’s work and the relationship between “The Theory of Moral Sentiments” and “The Wealth of Nations” I cannot resist stating my agreement with the general line of your argument (and equally with the arguments of Martin Wolf). One might add that respect for the law remains a mainstay of Adam Smith’s vision of society but that beyond that he very much relies on auto-organisation through the preference-shaping reflexivity of the sympathy mechanism, but these are extensions rather than differences. The reason I post this message is the following: we do know what Adam Smith thought about public companies (at least their contemporary form — the joint stock company). The relevant quote is posted below. As with many other economic issues Smith was the first to provide a clear outline of principal-agent problems. In general, Smith abhors anything that complexifies the informational structure of economic (and social) interactions. Smith understood perhaps better than anybody else the extent to which functioning markets rely on the codification and standardisation of information and the concomitant reduction of transaction costs. We might consider this a strength as a much as a weakness, but this is indeed a issue crucial to understanding the deeper strengths and weaknesses of as well as conditions for market economics.
Best regards,
Jan Horst Keppler
Professor of economics
University Paris — Dauphine
“The trade of a joint stock company is always managed by a court of directors. This court, indeed, is frequently subject, in many respects, to the control of a general court of proprietors. But the greater part of those proprietors seldom pretend to understand anything of the business of the company, and when the spirit of faction happens not to prevail among them, give themselves no trouble about it, but receive contentedly such half-yearly or yearly dividend as the directors think proper to make to them. This total exemption from trouble and from risk, beyond a limited sum, encourages many people to become adventurers in joint stock companies, who would, upon no account, hazard their fortunes in any private copartnery. Such companies, therefore, commonly draw to themselves much greater stocks than any private copartnery can boast of. The trading stock of the South Sea Company, at one time, amounted to upwards of thirty-three millions eight hundred thousand pounds.*65 The divided capital of the Bank of England amounts, at present, to ten millions seven hundred and eighty thousand pounds.*66 The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. It is upon this account that joint stock companies for foreign trade have seldom been able to maintain the competition against private adventurers. They have, accordingly, very seldom succeeded without an exclusive privilege, and frequently have not succeeded with one. Without an exclusive privilege they have commonly mismanaged the trade. With an exclusive privilege they have both mismanaged and confined it (Adam Smith, The Wealth of Nations, B.V, Ch.1, Of the Expences of the Sovereign or Commonwealth in paragraph V.1.107).”
Posted by: Jan H. Keppler | August 8th, 2008 at 3:55 pm | Report this commentYour knowledge of Adam Smith and your ability to relate his works to CSR are most welcome. I have attempted to do so in relation to the concept of social entrepreneurship, and I would not have made conclusions that were very different. That said, I am somewhat puzzled by the more neutral stance you adopt here towards CSR. I believe that you were the deputy editor at the Economist when a survey on CSR concluded that the proper business of business is business…no apology required. While I am not a believer in Das Adam Smith problem, might we instead have an emergent Das Clive Crook problem?!
Here are some further thoughts:
(1) As Martin Wolf said, “creative capitalism” is a misnomer insofar as capitalism has harnessed creativity in many ways if not necessarily always. My stock example is of Walt Disney building a global entertainment empire in the image of an irksome household pest. If that isn’t an example of creative genius, then I don’t know what is. The Schumpeterian notion that creative destruction propels capitalism forward also bears mentioning here.
(2) There is nothing necessarily wrong with starting up enterprises with a social venture capital approach as opposed to a philanthropic approach. The assumption with the former is that well-intentioned business activities will be self-sustaining in the future; they are akin to infant industries that eventually grow up.
(3) Critics of creative capitalism such as Richard Posner lump it with corporate philanthropy. This problem is partly of Gates’ making as he sometimes conflates aid with CK Prahalad’s work on the “Fortune at the Bottom of the Pyramid.” Let this be clear to all, especially Bill Gates: Prahalad has said in a WSJ op-ed that “Aid is not the answer.” The key quotes are as follows:
The G-8, led by Tony Blair and supported by Jeffery Sachs and Bono, believe that debt relief and a doubling of aid from rich countries to poor, especially in Africa, is the way to go. A less popular alternative focuses on the involvement of the private sector in poverty alleviation through the development of market-based ecosystems…
To “make poverty history,” leaders in private, public and civil-society organizations need to embrace entrepreneurship and innovation as antidotes to poverty. Wealth-substitution through aid must give way to wealth-creation through entrepreneurship.
If Gates wants to keep citing Prahalad’s work, then it would be good for him not to conflate this body of work with calls for yet more aid by his celebrity associates like Bono.
As Gates has mentioned, there is a $5 trillion opportunity at the bottom of the pyramid according to studies done by the IFC/World Resources Institute. While creative means of serving the poor with beneficial products and services are welcome, how aid fits in is not necessarily obvious and is better done away with to lessen semantic confusion.
Actually, the UNDP has a far better term in its work on “inclusive markets.” While I am not necessarily keen on tying the effort with the Millennium Development Goals, the former is more straightforward in conception.
(4) Samuel Fleischacker’s book on the WON clearly illustrates why there is no purported Das Adam Smith problem. As with many other instances of simply quoting passages from Smith without understanding the context in which they are said, confusion is possible:
Unlike the beggar, or the puppy, a little earlier in the paragraph, that “fawns upon its dam,” the butcher’s customer can appeal to someone else’s needs rather than bleating self-pityingly about its own. Thus, regardless of whether the butcher is self-interested, the argument of the passage depends on the butcher’s customer being able to perceive, and address himself to other people’s interests. Instead of an almost Ayn Randian exaltation of self-love, we may now see these famous lines as focusing on our capacity to be other-directed (pp.90-91).
(5) Gavin Kennedy’s Adam Smith’s Lost Legacy provides the best-informed blog commentary on Smithian matters.
Posted by: Emmanuel Yujuico | August 8th, 2008 at 4:36 pm | Report this commentI’ve been following your columns regularly but only occasionally the blog - however over the last few weeks, you’ve quickly become one of my preferred commentators, with usually very relevant and in my view insightful (and probably on the money) comments. This one is no exception.
Posted by: anon | August 8th, 2008 at 5:08 pm | Report this comment(while many are on leave - trhx for keeping posting!)
I don’t really buy the argument that seeking profits somehow defeats capitalism.
Would a company that seeks to lose money be a better corporate citizen than one that seeks to earn money? Aren’t the companies pouring poisons into the lakes and rivers much more likely to be in bankruptcy than thriving financially?
If the best example Wolf can come up with is restating options pricing (which, while ethically dubious, has 0 net effect on shareholders and a corporation), I think this needs more investigation.
JBP
Posted by: John Powers | August 8th, 2008 at 5:14 pm | Report this commentThinking about it: of course we know what Adam Smith thought about CSR. His celebrated passage on the invisible and, states very clearly that those who “affect to trade for the public good” hinder rather than further the wotking of the invisible hand (please find the relevant quote below). Of course, this is entirely consistent with Adam Smith’s preference for simple, well defined goods, in order to allow for competitive markets and reap the benefits of the workings of the invisible hand.
Best regard,
Jan H. Keppler
“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. 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. I have never known much good done by those who affected to trade for the public good (Adam Smith, The Wealth of Nations, B.IV, Ch.2, Of Restraints upon the Importation from Foreign Countries in paragraph IV.2.9).”
Posted by: Jan H. Keppler | August 8th, 2008 at 5:41 pm | Report this commentWould Professor Keppler be willing to explain for the benefit of people like me who know nothing about economics how Enron, for example, promoted the public interest by seeking its own gain? Of course, everyone would have to agree that at least one part of Adam Smith’s above quoted “invisible hand” statement applied to Enron: that company certainly had no intention of promoting the public interest.
Posted by: algasema | August 8th, 2008 at 7:43 pm | Report this commentFurther to my above comment, whenever the landlord of the apartment where I live raises the rent in pursuit of gain, I suppose that I am supposed to understand that according to Adam Smith, the public (of which I am a member, of course) will benefit.
But, in my own shortsighted way, I always experience these increases as a function of unequal power relations between myself, as an individual, and the multi-billion dollar company that owns my building.
Adam Smith’s invisible hand seems at those times to be as far distant, and irrelevant, as any other metaphysical concept. I suppose this is why I was wise not to take up economics, a subject for which I obviously have no ability.
Posted by: algasema | August 8th, 2008 at 8:10 pm | Report this commentalgasema: Don’t worry, you understand economics as well as anybody. Years of study and degrees to my name have shown me that it’s nothing more than intuitively obvious concepts packaged in specialist terminology.
John Powers: Do you *really* see no middle ground between total and absolute self interest and making an active effort to lose money? “Aren’t the companies pouring poisons into the lakes and rivers much more likely to be in bankruptcy than thriving financially?” No. Proper responsible disposal costs money, and in a theoretical pure capitalist world where the only role of government was to enforce contracts, they’d skate off with that much more in the bank.
Posted by: Joe | August 8th, 2008 at 8:35 pm | Report this comment“Intuitively obvious concepts packaged in specialist terminology”, Joe? I thought for a moment that you were talking about the legal profession (a/k/a law business).
Posted by: algasema | August 8th, 2008 at 10:03 pm | Report this commentI find it curious their notion of profit only factors monetary equivalents, while overtly using the phrase “nasty brutish and short”. I don’t think these fools understand what the public sees constituting the the full spectrum of value.
This piece speaks more about where their headspace is at than anything else.
Posted by: Tony | August 8th, 2008 at 10:24 pm | Report this commentCapitalism and creative capitalism is not a cause, but rather an effect of democratic governments that uphold liberty of thought and action.
In this democratic system are to be found checks upon those liberties, some worthy, some not.
No one desires riotous neighbors constantly offending the peace of a small community. No one desires a local garbage company carelessly disposing of harmful material and endangering the area drinking water for a lucrative return.
But should everyone pay an exorbitant financial premium, the result of political favour to local producers, for internationally made goods that compete too well?
Political power derives from government, an organization that confiscates property and generally behaves with veritable impunity. And what if this potent hand of government swells to such turgidity that it moves ever nearer despotism, that it increasingly acts not in the interests of those it supposedly serves, but of those who administer it?
Then the days of a benevolent capitalism founded upon worthy competition and innovation will disappear, if they have not already done so. In its stead will flourish a narrow capitalism for an elite, for a privileged few.
The only way to combat this alarming prospect, which everyday becomes less remote in the western world, is to control government and its obnoxious machinery. To control government, one must control the source of all its power: Taxation.
So, in pursuit of a solution to encroaching tyranny and to all the harm it will bring to a benign capitalism, I shall ask a question of all those learned people that read and contribute to these pages:
What are the financial costs and the financial benefits for the nation of a government using taxation as the primary means of raising capital for public expenditures?
The answer is as simple as it is revolutionary.
Regards,
Posted by: Gary Marshall | August 9th, 2008 at 7:41 am | Report this commentGary Marshall
Joe,
In theory, one might think that it is profitable to poison rivers, but in practice, in Chicago for example, BP cautiously runs a refinery with well reported and controlled lake dumping, while an army of “bankrupt” companies pours industrial waste and sewage into the Chicago river and Lake Michigan.
I can certainly understand the need to regulate polluting the water supply, despite the unintended consequences. But I cannot understand the logical leap that protecting myself from poisoning somehow obligates the government to control the number and value of stock options issued by corporations.
JBP
Posted by: John Powers | August 9th, 2008 at 12:44 pm | Report this commentGary
I suspect the learned will skate over your question for two reasons, the first being that you would discuss government while this topic is concerned with the private sector. The second reason is that it is a workaday question with a dreary economic answer – simple but not revolutionary.
Not being learned myself, I hope that the FT will some time to discuss the impression, which you and I seem to share, that our economy suffers much less from the greed and ruthlessness of our capitalists than from the earnest wastefulness of our political and official rulers.
We are bound to be subject to government and to (its fuel) taxation. A true democracy should establish a free market in government, like any economic good; we should have an unlimited choice of would-be rulers. That is theoretical only – what we are used to is at best oligopoly. In our current situation, the political providers of government are edging towards monopoly. The parties of Blair and Cameron (taking the Brown government as some sort of bizarre interregnum) are combining to our disadvantage, as ready-mix concrete companies are prone to do. We citizens are getting insufficient choice and paying too much for the utility on offer.
A utility is of course a natural monopoly. At the official level, our government is inescapably such a monopoly. We need the politicians to temper its monopolistic excesses and they are failing us. Many of our officials are energetic and efficient. The ones who see their duty to be no less than to add to the universal law, are just the profit-maximisers that Martin Wolf excoriates. Do we regard it as right for civil servants to manipulate their pay — by making common cause with their opposite numbers in the private sector, or even by claiming pensions that the private sector cannot pay its own workers — in order to take (to steal ?) as much as possible from the citizenry ? Martin might have said No and yet he might have observed that all that these people are doing is maximizing their personal profits, as they presume individuals in the market economy are already doing. Again, what our civil servants do is often highly creative. The problem is that it is unnatural. Essentially they must devise for themselves, in response to demand from tiny segments of society, a social good and force it upon society en masse – and do so again and again.
They, who make nothing, are progressively reshaping the rest of our lives and our means of livelihood in the form that only they know, diminishing the nation’s productive capacity without realising it.
They own and make the law, which we cannot do without.
You talk of tyranny and revolution because you know how much better our government could be. If you would lead the revolution, you have no following because the fault is our fault. The tyranny is not unbearable, because it is imposed by mistake and is essentially well-meant. Moreover, with every form we fill in, with every fine we pay and with every post office / cottage hospital / day care centre we let them take away, we are party to it.
Posted by: Rupert Butler | August 9th, 2008 at 10:16 pm | Report this commentHello Mr. Butler,
I read your analysis and I have really nothing to argue with save the absence of a solution to voracious and squandering government.
Government will have a weighty influence upon the capitalist tendencies and success of its citizens and corporations. Rotten and rank government with heavy impositions will have noxious influence. So, capitalism and dictatorial government are deeply related.
Everyone shares in the blame for the hideous creation of modern government. It is an agency that will institute any program or measure without regard to the cost and to the profit it may bear upon those supplying the funds. The private sector has yardsticks. The government is devoid of them and the economists seem shamelessly ignorant of the fact.
Yes, government could be a far better operation than it is now if one of those many and garrulous political economists had bothered to devise those yardsticks.
I do not need a following to compel such advances. All I need do is find an ally in science
Science is progressive. Old and obsolete practices and habits fade with the introduction of novel conveniences. What was once passably bearable no longer is. Few in the west tote water from the well because of the innovations in plumbing and transportation. Rather than possessing a stationary phone at home, everyone now appears to carry one with them.
The spirit and impulse of innovation also touches the archaic practices and beliefs that so profoundly mark economic theory and doctrine.
The nation raises capital for public expenditures by taking it from itself and giving it over to a delegated agency managed by a bunch of arrogant wastrels whose desire for ever greater funds and resources has never been sated. From these compulsory contributions come a host of services, some of value, most worthless.
This is the problem. Where is the solution?
I shall ask the question that no one has really asked before, “What are the financial costs and the financial benefits of a nation using taxation as the primary means of raising capital for public expenditures?”
I am not speaking here about the existence of government. I am merely concentrating upon one element in its operation, that is how the government fills up its money bag to pay for its expenditures.
What are the financial costs and benefits to the nation inherent in the collection of money by taxation?
The short answer is that the financial costs to the nation are immense and the benefits are nil.
Regards,
Posted by: Gary Marshall | August 10th, 2008 at 12:41 am | Report this commentGary Marshall
Dear Mr Marshall
I am disappointed that, for all your evident fury, you are not to lead the necessary revolution. Literature tells us how difficult it is to challenge the delinquent world with too few supporters. However, for what it is worth, I have the name of a scientist who may be induced to help – one Professor Dr S Panza.
Your short answer is too short for me. I know of no other means than by taxation for a government to operate. We might borrow, we might sell what taxation has previously bought but it comes down to the people paying up in the long run. You might seek comfort in the idea that We, rather than They, have the buying programme that taxation pays for – that government is a huge version of the street Christmas Club. The cost to us is only immense because there are many of us; the benefits are that we get the Christmas hamper every year.
The problem is in the management - not an economic problem, not a scientific one, strictly one of choosing the right management. We must break out of the anal completism that is bogging our country down. The solution is easy. Find an honest, energetic, modest, clear-minded, incorruptible politician. Make him (or her) Prime Minister before he can pick up the bad habits and distorted perspectives of his fellow politicians. Easy.
Posted by: Rupert Butler | August 10th, 2008 at 4:13 am | Report this commentHello Mr. Butler,
Many people have challenged the prevailing view of the world. Several have succeeded and not because a battalion stood beside them. These rare few came armed with ideas, knowledge, and proofs that ruptured the tired lore of their day.
Copernicus is the exemplary.
The problem of swelling government is not the lack of an eligible director, a person of excellent morals and prodigious energy. To achieve, one must have the consent of all those he leads. No matter how renowned a leader he may be, he cannot be everywhere to ensure his gloried principles are respected in every transaction.
Even if he were, how long would it last before some lazy, corrupt, or faithless man takes control once again?
Your solution is a hope that will forever remain so.
Again, the answer is to be found in science, and, in this matter, in deep changes to the theory and doctrine of political economy.
You say, “It comes down to the people paying in the long run.”
How very right you are, Mr. Butler!
In the analysis of taxation, one has invariably and erroneously looked at this from the angle of the Government’s finances.
Government does not pay tax. It funds nothing. When government borrows, it is not the one to repay the interest nor the debt. Its deficit is not the amount of its expenditures that must be funded by borrowing. It is the whole of its expenditures.
In fact, it is the nation that funds public expenditures. The government is merely the designated agent to collect the funds and undertake the expenditures.
So in examining the question of financial cost and benefit in taxation, one must look at how it affect the nation’s finances, not the government’s.
It is well known that the costs of taxation are immense, but what is the financial benefit that surpasses all costs? What is the payoff for the nation that taxation affords?
A person may borrow or use his own funds to purchase a home. By using his own funds, he avoids interest charges that borrowing entails.
So the benefit in using one’s own funds is interest savings.
It is no different with a nation. It may use its own funds or borrow. By using its own funds or taxing, the nation avoids the interest charged on borrowed funds.
In conclusion, the financial benefit of taxation, the payoff, is interest savings.
But what if the nation borrows, only from its own resident citizens and only in the nation’s currency? What happens to this financial benefit?
It disappears.
When the nation incurs a debt, the nation through its bondholding citizens acquires a financial asset. The incurred debt is perfectly balanced by a created asset. If the nation, through its government, borrows money to pay interest to its initial bondholders, further debts are incurred, just as are further assets acquired by resident lenders, hence the nation.
There is the answer: perpetual borrowing. Yes, the debts of the nation will rise, but always with a perfectly matched augmentation of the nation’s assets.
If a government must always face its petulant banker for funds, how soon before it greatly amends its sordid and extravagant ways?
Not long, I would wager!
Now you will argue that the government, bereaved of its beloved taxation , can never repay the funds. This is partially true.
How does a bank operate? It accepts money from depositors and loans out the money, living on the margins between the cost of funds and interest charged. But does it ever repay the depositor?
It does repay the individual depositor, but not the collective depositor. Every year, the amount on deposit and the amount loaned grows. Such a lending enterprise is greatly esteemed the world over.
The nation, through its government would not operate any differently.
I think it best to stop there for the moment to let those interested digest what has been written.
Regards,
Posted by: Gary Marshall | August 10th, 2008 at 8:17 am | Report this commentGary Marshall
Questions about whether Moral Sentiments and Wealth Of Nations are at odds with each other arise from time to time, even among scholars, and the idea is without plausibility once you look behind the assertion and apply a time-line to when both books were in preparation. In these respects the publication dates (1759 and 1776) are misleading.
Clive Crook is aware of the similarities, connectedness and purpose of each of Adam Smith’s books and this alone makes his article worth reading.
The ‘debate’ seems to assume that the two books are quite different. Moral Sentiments is about the history of ethics and Wealth Of Nations is a about the history of economic ideas and offers a critique of political economy, as it was understood in the 18th century.
First, Moral Sentiments was not a manifesto of Smith’s ideas. Its contents came from the ethics course he gave at Glasgow University between 1751 and 1764 to young students preparing themselves for the ‘AM’ degree. Hence, before jumping to conclusions about its author’s views on morality, we ought to recognise that preparing a basic course in moral philosophy for 14 to 17-year olds requires that the lecturer cover the whole subject and not just his own views. Some of those who read into Moral Sentiments a strong strain of Christianity/Deism in Smith’s thinking, may be fooling themselves by attributing to Smith their selective interpretations of the views belonging to the authors he cites, which are not necessarily his own.
It helps in this respect to read Book VII of Moral Sentiments first and then read I-VI, which is the order in which he gave his lectures. Book VII reviews ideas on moral philosophy since Greco-Roman times. Smith taught the subject as it stood up to mid-18th century, and he did so in an institution in which the prevailing orthodoxy expected its students to become competent in the history of the subject by the time they graduated. This meant covering the ‘names’ and their ideas, with some leeway leftover for the professor to make available his own ideas, as long as they were muted and were no direct challenge to orthodox Calvinism.
However, he also taught Jurisprudence to the same class, a subject that contained a fair amount that re-appeared verbatim in Wealth Of Nations, including noticeably the sections that covered the ‘Butcher, Brewer, and Baker’ passage which are so popular with those who see mistakenly that it extols the virtues of self-interest. It doesn’t actually do that, because read carefully in its context (a rare occurrence), the entire chapter is about addressing the other party’s interests and not your own.
Quick quote grabbers conclude that ‘its-all-about self interest’, which elides into ‘selfishness’ and then ‘greed’, when it is about neither. Smith was saying, ‘stop thinking about your own needs; think about the other persons’ and persuade them that the exchange of what you have for what you want from them, gets them what they want from you what they give to you, and makes you both better off.
It wasn’t that Smith changed his mind when he came to write Wealth Of Nations in 1764 (he already had a written draft in 1763), 5 years after he published Moral Sentiments in 1759 (but not, note, 17 years later in 1776 when he published Wealth Of Nations). He was giving the substance of both his Moral Sentiments and Wealth Of Nations lectures simultaneously in the same classroom to the same students for 11 years.
If there was a glaring contradiction in the two sets of lectures he (and his brighter students) would have noticed it. The two books are not at odds at all. Clive Crook is right in that respect.
Posted by: Professor Gavin Kennedy | August 10th, 2008 at 11:09 am | Report this commentA rewarding comment thread. Many thanks to all.
Emmanuel: I was the writer of that Economist survey in fact, and don’t believe I have changed my mind. I still regard myself as a Friedmanite sceptic, as my other posts on the creative capitalism site make clear. I will link here to a final post I have submitted when they put it up. This reprises the argument I made in the survey about four kinds of CSR: win-win (but what is so new or surprising about that?), borrowed virtue, delusional CSR and pernicious CSR.
In this note about Smith I was trying to infer what he might have made of the debate, with particular reference to the supposed contrast between WoN and MS. I did not want to press him, as it were, to endorse my view, and although I’m sure he would repudiate the idea that ordinary capitalism ignores or suppresses “sentiment”, I’m not sure exactly what he would have said about CSR in practice.
As Professor Keppler says, Smith was sceptical about those “affect to trade for the public good”, as am I. But I concede (now, as in the survey) that not all CSR is mere affectation. Surely Smith would have conceded the same. That makes it hard to say where he would have come out on CSR as a practical matter (as opposed to CSR as a bogus critique of capitalism).
Posted by: Clive Crook | August 10th, 2008 at 4:03 pm | Report this comment