In a Democratic primary field that looks like the cast of a Christopher Guest ensemble mockumentary, three candidates have established an early lead — Joe Biden, Bernie Sanders, and Elizabeth Warren. Sanders and Warren represent very distinct visions of the party’s left flank, but not in the way many assume.
Sanders, who proudly wears the badge of socialism and just announced a $16 trillion Green New Deal staggering in its scale and scope, is not the radical candidate. At his core Sanders is a redistributor, fighting along the same big-market/big-government axis on which American politics has focused my entire lifetime. To be sure, Sanders is less shy about pushing things much further toward the big-government end of the spectrum than any mainstream Democratic candidate in decades.
Warren presents herself as a tireless, technocratic savior of capitalism, but her plans give the U.S. government far more control over individual firms, households, and markets than anything proposed in recent memory. Warren, a legal scholar by trade, has moved into the complex realm of a modern economy, where a lawyer’s penchant for sweating the details is usually counterproductive and causes considerably more damage along the way.
Go to the section of Warren’s website entitled “Plans” and at the time of this writing you’ll have a choice between a staggering 43 links. Many of the plans could hugely impact our economy, but one stands above the rest in its potential to overhaul our commercia landscape. Warren calls the reforms she envisions to corporate mandates and governance “accountable capitalism.”
Corporations sometimes do bad things, and Warren’s plan might stop some of them. But accountable capitalism does nothing short of rethinking what it means to be a business in the United States and opens the door to negative consequences so severe that ignoring them involves a sort of magical thinking that would make even Warren’s starry-eyed socialist opponent shake his head in disbelief.
The Perils of Warrenism
So just what is accountable capitalism? It was originally a bill proposed by Senator Warren last year. In a fawning write-up in Vox, Matthew Yglesias inadvertently exposed the idea’s flimsy intellectual foundation:
Warren’s plan starts from the premise that corporations that claim the legal rights of personhood should be legally required to accept the moral obligations of personhood.
The morality that comes from “personhood” is not given to us by law, nor is it forced upon us by the government. Morality emerges and evolves as we interact and empathize with one another. Perhaps Warren and Yglesias should start an Adam Smith book club and begin with The Theory of Moral Sentiments.
What will this legally imposed veneer of corporate morality look like? It’s clear from Warren’s campaign materials that it will involve a new and large bureaucracy, but the rules to be enforced are less clear. In short, accountable capitalism means government mandating that corporations do what Elizabeth Warren wants them to do.
Warren’s plan requires corporations valued at over $1 billion to obtain a special federal charter. This charter exposes corporations to regulation from a new Office of United States Corporations that “tells company directors to consider the interests of all relevant stakeholders — shareholders, but also employees, customers, and the community within which the company operates — when making decisions.”
There are a few specific rules — misguided one-size-fits-all requirements about the number of workers on company boards, how executives can sell stock, and how companies can make political contributions. But it mostly appears to be a means for our elected political leaders to micromanage America’s largest corporations at their own discretion.
Watchful eyes might indeed rein in some amount of corporate excess or wrongdoing. But this abrupt shift in the objective of American corporations would be a potentially cataclysmic shock to the economy, and the means of enforcement would only increase the scope for corporate rent-seeking and cynical politicking that Warren currently condemns on the campaign trail. But her proposals simply wish these fatal flaws away.
Fiddling as Wealth Burns
In Warren’s utopia of technocratic micromanagement, one needn’t worry about the unintended consequences that come with major new government regulations. Accountable capitalism would change the goal of America’s largest corporations from a relatively objective metric, shareholder value, to a subjective balancing of the interests of several stakeholders, with the executive branch peering over management’s shoulders.
This would send shares of the largest companies tumbling overnight. No matter, says Warren, 84 percent of stock is owned by the wealthiest 10 percent of Americans. Under the disturbingly ascendant view that “democracy” sanctifies whatever 51 percent of the population likes, 10 percent isn’t important.
Of course, 73 percent of stocks are owned by Americans 55 and older, meaning the skewed wealth distribution noted by Warren is due in large part to the fact that people at or near retirement have accumulated more savings than younger people. Warren’s vision of capitalism through a funhouse mirror would surely destroy significant amounts of that wealth by diluting corporations’ fiduciary responsibility to shareholders.
Next, Warren seems to believe that her Office of United States Corporations will possess a sort of omniscience usually reserved for the realm of fantasy. Large corporations do things we don’t like all the time, but a centralized office with pushback on the level Warren imagines risks doing greater damage. Smith and especially Hayek stress the importance of local knowledge. How will a centralized office take the several hundred largest corporations in the country and order them to increase their payroll or decrease their stock buybacks? By how much?
We don’t need to keep our corporations safe from the meddling of Elizabeth Warren out of some starry-eyed hero capitalism that reveres big business. We need to do so because these corporations are the arteries through which information pumps in our economy. Some workers may have extra time to serve on company boards, as Warren mandates, after they lose their jobs from the overall economic damage wrought by the government’s attempt to legally impose its notion of good citizenship.
The Red Carpet
Warren has spent much of her career crusading against the harmful and unjust cozy relationships between Wall Street and government, often to her credit. It’s curious that someone with such expertise in the matter doesn’t seem at all concerned that this new “accountability” would multiply the number of meetings, phone calls, and emails between senior regulators and the titans of the private sector.
These billion-dollar corporations already employ armies of lawyers and accountants to navigate regulatory minefields and turn them into weapons against their smaller competitors. Does Warren believe this practice will stop overnight?
If most rent-seeking were a matter of nefarious corporate executives buying off weak or greedy officials, we could just elect better people. The fact that this problem persists over decades is indicative of a more subtle process. Rent-seeking is an inevitable systemic feature in a network with thousands of contact points between business and government.
Unless one ascribes mystical power to Warren’s moral presence, her plan represents a fertile breeding ground for mismanagement and corruption. And then comes the day when the people’s champion leaves the White House.
Candidates with big ideas that increase government power often seem to adopt an implicit fantasy that their election will usher in a golden age where “the people” will no longer make mistakes and elect candidates from the other party. What will happen when the unprecedented power Warren wants to assume over corporations falls into the hands of the next Donald Trump? This alone should give the Left serious pause before supporting game-changing deeply misguided reforms to our system.
Left-Wing Nationalism: Yet Another Threat to Liberty
Elizabeth Warren is smart, tenacious, caring, and catastrophically wrong on a host of issues. She’s running on a left-nationalist platform, where corporations turn away from their natural role serving shareholders and instead serve whatever interest the aspiring president believes is important.
I’ve spent multiple articles and podcasts kvetching about Bernie Sanders’ sky-high taxation and grandiose government programs. Sanders would divert large sums away from a private sector that derives its unique dynamism from the emergent and evolutionary processes that only occur when millions of individuals make decisions using the information they uniquely possess.
I’d take whatever Sanders calls socialism over accountable capitalism any day, because rather than starve the dynamic private sector of resources, Warren’s vision stifles the dynamism itself. One cannot overstate the importance of this point over the next year. Warren has convinced many voters, members of the media, and even herself that she is the Left’s pragmatic option. In this regard, the law professor whose staff is known for their prolific production of white papers is reduced to simply wishing reality away.
Max Gulker is an economist and writer at AIER.org, where this article first appeared.
Born in Scotland in 1723, where he lived most of his life and where he also died in 1790, Adam Smith is a mythical figure who fathered the modern discipline of economics, embraced unbridled self-interest, and fought against the government to promote capitalism and the interest of business and the rich.
Jesse Norman’s goal in his recent biography, Adam Smith: Father of Economics, is to show that the mythical Adam Smith is, well… a myth. His tools are the availability of an immense body of scholarship and an awareness of current events.
But how it is possible? Adam Smith did coin the idea of “invisible hand” and claimed that we don’t get our dinner from the benevolence of the butcher, baker, and brewer, but from their self-interest.
True, we do not get dinner from the benevolence of the butcher, baker, and brewer, but that does not mean they are not benevolent, or that benevolence does not exist (or worse, should not exist), and it does not even mean that morality (or anything other than self-interest) is nowhere to be found in markets. “The reason why humans and not dogs can make ‘fair and deliberate exchange’ of one thing for another is because exchanges presuppose a shared context of fairness… ” (page 181).
In fact, Smith’s first published book, The Theory of Moral Sentiments , is a study on how we humans develop shared ideas of fairness and morality. Our morality is not derived from a divinely inspired moral sense, as Smith’s teacher Francis Hutcheson suggested, nor is it a sham to cover our self-liking as Bernard Mandeville suggested. For Smith, it is the result of a triangulation between an actor, an action, and a viewer (being either real or imaginary). Morality and sociability are thus entangled, natural, and not corrupted by society, as Jean-Jacques Rousseau had claimed instead.
As a matter of fact, the more society advances, the more commercial it becomes, that is, the more customs and mores refine and soften, rather than corrupt. Brutality and violence decrease. Women are better treated and increasingly recognized as equal. If in the past they were legally discriminated against, it was because men were the ones making the laws. (We still have a long way to go, given that in 2014 in the United States only 12% of the economists in academia were women). Slavery is also increasingly condemned. It faces the upward battle against our desire to domineer, but its inefficiency and the growing recognition of human equality that commercial societies foster brings hope.
“Smith’s attacks against crony-capitalism are even more remarkable when we think they were written before what we today call capitalism.”
But Smith is not Pollyanna. He recognizes the “pathologies” of commercial societies. Our tendency to admire the rich and powerful may blind our judgment. And our desire to better our condition may create powerful special interests that successfully lobby to create and maintain benefits for themselves at the expense of society. The entire “mercantile system” is an example of this pathology. The British built the system of tariffs and subsidies, as well as the entire colonial apparatus, to benefit themselves at the expense of a higher universal opulence which would have been present in their absence. Smith’s attacks against crony-capitalism are even more remarkable when we think they were written before what we today call capitalism.
The problem with mercantile special interests is that they also have asymmetric bargaining power compared to the working poor. The merchants and manufacturers can hold out for a long time, while the working poor can hold out only for a few days at best. The masters can and do maintain exceeding low wages and poor working conditions, and manage to do so with the backing of the law. The working poor, on the other hand, work from a very young age for long hours at repetitive tasks so much so that they eventually experience a sort of “mental mutilation.”
So while it is true that Smith loudly calls for government non-interference in the economy, when that interference is dictated by cronyism and special interests, it is also true that he does not hesitate to call for government intervention to favor the working poor. Compulsory education, with possible provision for building schools, and support for public diversions are examples to offer remedies to the possible deformation or destruction of the moral imagination and judgment of the working poor. Not to mention a series of public works—mostly of infrastructure but also a ban on small denomination notes and a cap on interest rates—that would facilitate commerce and thus bring that universal opulence that benefits mostly the poor (among whom child mortality was still astonishingly high).
Even the mythical invisible hand of the elegant mathematical general equilibrium or of the promoters of laissez-faire is not to be found in Smith. Smith’s invisible hand is more of a complex evolutionary phenomenon of historical markets, embedded in a political society which co-evolve with institutions, laws, and manners. Commerce, and the competition within it, not laissez-faire, does bring about both universal opulence and freedom. Global inequality is decreasing indeed. But the pathologies are not to be ignored, as the rising inequality within the most developed countries indicates. The “science of the legislator”, rather than the actions of “that insidious and crafty animal, vulgarly called… politician” (page 334, citing Smith) is thus a possible solution to contain the pathologies of commercial societies while keeping them flourishing and bringing all their unintentional and unplanned benefits.
Norman’s book is a remarkable analysis that shows both the complexity of an 18th century intellectual and his relevance for today. Even more so, given that this author is not a formal Smith scholar, but a British politician. Or shall we say, a legislator?
Norman’s prose is accessible to non-specialists and offers a fairly rounded and balanced picture of Smith. Specialists will not find any ground-breaking analysis. Yet they may find the book a valuable and complete general account of the state of the literature on Smith today as well as its continuous relevance. Even if the references in the text are extremely sparse, the bibliography is rich. And given the amount of secondary literature produced even just in the last decade, Norman had to pick his battle: he focuses on books, rather than articles, probably a wise choice as the number of articles is in the thousands. A stimulating book, worth reading.
Jesse Norman. Adam Smith: Father of Economics. Basic Books, 2018.
Maria Pia Paganelli is associate professor of economics at Trinity University.
Adam Smith wrote, “Man naturally desires, not only to be loved, but to be lovely.” That may strike you as an odd sort of language for an economist to use, but it is not. Smith was a system builder, and the system he was exploring was what Enlightenment scholars called The Science Of Man. In Theory Of Moral Sentiments, he was making the case that moral relations between human beings can emerge naturally from collaboration. In any society, people are engaged in exchange – exchanging words, exchanging morals, exchanging relationships. We quickly realize that the greatest good for all is achieved when those relationships are based on mutually acceptable and beneficial moral values. The goals we seek are to be loved – to be seen by others as morally worthwhile – and to be lovely – to deserve and earn the praise of others.
Adam Smith went on to study another aspect of exchange between people, the one today we call economics. To enjoy the fruits and benefits of economic life, people also engage in exchange. We exchange our skills, our labor, and the products of our work. For this exchange to be mutually beneficial it must be not only moral but also a source of value for both parties. Each one feels that they got more out of the exchange than they gave. They feel loved (their offer was accepted) and lovely (they did a good job).
One form of economic exchange is giving labor in exchange for wages, in the arrangement we call employment. When we do this, we have in mind the creation of a future stream of value. We anticipate that, if we continue to exert valuable effort for our employer, we will receive a flow of money wages extending into the long term future. We might also anticipate some promotions and wage increases, especially if we increase our valuable skills through experience (learning-by-doing) and incremental educations (qualifications and certifications).
If we choose the entrepreneurial route, we anticipate the creation of two future streams of value. First, we must create value for others – that means, making them more valuable. If an entrepreneur sells a service to a customer, the customer enters into the exchange because they believe they’ll be more valuable after the exchange. The customer buys marketing services because they feel they’ll create more consumer awareness or conversion as a result. Or buys legal services because they feel they’ll write better contacts or avoid some anticipated problems of litigation. Or buys technical services because they feel they will operate with greater efficiency.
Similarly, with the sale of products to consumers. The consumer, of course, buys the product because they would rather experience its benefits than retain the dollars they spend to acquire it. The consumer becomes more valuable to their kids as a mom as a result of their purchase decisions on their behalf. A father becomes more valuable when he buys a baseball bat in order to introduce his son to a sport, and all the learning that accompanies participation and team play. A tax accountant might help parents retain more of their income for the good of their family. A car dealer helps workers with their daily commute. A yoga trainer helps people with their physical and mental health.
Moreover, the entrepreneur’s taking the product to market where it can be purchased makes many more economic actors more valuable. The entrepreneur who sells products through Walmart or amazon.com helps all the workers at those firms to earn their wages, feel stability and feel useful in the economy. Another entrepreneur who sells plumbing services helps fellow entrepreneurs who sell tools or accounting or tires or gasoline or phone service.
Viewed in this way, capitalism is a system in which people try to make each other more valuable and are rewarded for doing so. They don’t have to feel charitable. To quote Adam Smith again, “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”. If they know what others need in order to feel more valuable, entrepreneurs can design and offer products and services to meet that need, and find out quickly, through the market feedback of customers buying or not buying, whether they got it right or not. If the signals are negative, or not so good, the entrepreneur adjusts to improve the product, until the market indicates that it’s right. How does the entrepreneur read the mind of the consumer? Through empathy. Adam Smith called it Sympathy. It’s the natural fellow-feeling that we all have for each other, and we feel better – more loved – when we exercise it effectively.
Adam Smith wrote over 200 years ago. Since then, we have had more time and multiple market cycles to hone the science of making each other more valuable. And we’ve succeeded, as measured by GDP per capita or other measures of individual value.
There are many calling for an end, or a drastic change to this system, imposed from the top down, through government programs and government regulation. The problem with these top-down solutions is that the capitalist system of each of us helping our fellow man in the pursuit of our own self-interest is a self-governing system. It’s spontaneous. Every constraint renders it less effective and productive. Every subsidy and every entitlement gives someone permission not to try as hard as they otherwise would to help his or her fellow. Why should they, when their own income is secured by an entitlement, rather than by the rewards of the market? Or when their special interest group is subsidized so that they don’t have to try so hard to help others?
Untrammeled entrepreneurial capitalism makes everyone more valuable.
The left wants young people to believe that free market capitalism is an exploitative and corrupting system. This despite the fact that capitalism has dramatically and universally raised living standards for the economic citizens of developed countries. Today, everyone enjoys comforts and conveniences that are far more elevated than the life of kings in the past. Pshaw! says the left. Comfort is beside the point. Capitalism makes us bad people: winners and losers, exploiters and exploited in a moral war of all against all.
That argument is 400 years old, articulated by Thomas Hobbes, who got his politics right (the political class has always been immoral and exploitative and still is) but his economics wrong. We look to Adam Smith for the right economic perspective, which he achieved by combining interpersonal morality and economic self-interest, an insightful synthesis that the left still doesn’t understand, and never will. Smith shows us how capitalism ennobles human nature and makes us better people.
His starting point is that people are innately collaborative. He uses the word “sympathy” to describe the common understanding we all have of each other’s needs and wants, and the sensitivity we feel to others’ successes and disappointments. The first line of The Theory Of Moral Sentiments, although expressed in 18th Century language that sounds strange to our ears, is mind-opening:
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.
He recognizes the cynicism of the left (“How selfish soever man may be supposed”) and substitutes the happier perspective of empathy.
From the foundation of natural empathy, Smith builds, in Theory of Moral Sentiments and his later work, Wealth Of Nations, a system of moral capitalism that improves not just standards of living, but also the quality of life. There are four pillars to his argument that capitalism ennobles our nature:
- Empathy develops a social conscience – what Smith calls “the impartial spectator, a guardian of correct individual behavior – within each of us, and capitalism universalizes the impartial spectator in the structure of the market.
- Capitalism simultaneously develops self-command and humanity within us.
- Capitalism nurtures virtue in people, and Smith provides plenty of examples.
- Capitalism develops a set of general rules of conduct – the kind that F.A. Hayek later called for us all to focus on – that lead to moral activity.
Smith’s capitalism is a society of entrepreneurship, non-violence, voluntary exchange, limited government, collaboration, interconnectedness and spontaneous order. It rests on just property rights and the right to be free from aggression by other people, including other people in the guise of government. It is a society of contract, because the right of ownership includes the right to exchange, and the free market system is the sum total of all voluntary, and therefore mutually beneficial, exchanges. The only way to get ahead is by economic means: production and exchange in accordance with the needs of other people. The more value other people place on an individual’s productive activity, the greater that individual’s monetary gain. This income allows him or her to expand production and co-operate with more people in exchange. Individuals earn higher income when they are more productive to others. In capitalism, wealth is created and, once in existence, it is channeled into more of the activities that are most highly valued by society.
The opposite society, according to Smith, is the society of status. In such a society, all people are not extended equal rights. Some – including those who call themselves the State or the Government – are given superior rights, leaving all others with inferior rights. The former gain wealth by the political means.
How does capitalism produce a society of empathy, humanity and virtue? Smith explains the concept of the impartial spectator to guide us.
The impartial spectator is the creature of the entrepreneur’s greatest attribute: what Smith calls sympathy and we call empathy – the sense of fellow-feeling that gives us the ability to understand, share and respond to the needs of others. It’s a kind of imagined switching of roles. We put ourselves in the other’s case, as Smith phrases it. This sympathy has its greatest strength when it is mutual. It forms bonds between people. It gives rise to virtuous actions. It promotes the “harmony of society”.
Each of us has an impartial spectator inside. This spectator does the role-switching for us, and guides us to gain the voluntary co-operation of the other party with whom we are exchanging. Buyers and sellers come together on an agreed exchange at an agreed price such that each feels a benefit, and each feels good that the other has benefited.
The market is the sum of all participants’ evaluation of all others’ activities. It is the external impartial spectator – not the one that’s inside each one of us, but a summation 0f the empathy in all economic exchanges. The market guides us all, impartially, to the right behavior. Any intervention in this impartial guidance – by governments for example – produces disorder and prevents the impartial spectator from developing.
The impartial spectator, both internal and external, results in what Smith called “amiable virtues” such as self-command and humanity. Empathy gives rise to:
“that great discipline….: a regard to the sentiments of the real or supposed spectator of our conduct.”
Those engaged in business, says Smith, “never dare to forget for one moment the judgment which the impartial spectator would pass upon his sentiments and conduct”.
Capitalism provides the environment necessary for the development of the empathic virtues. These virtues are unique to capitalism: the system where an individual can further his or her goals by furthering the goals of others. Each exchange in the system of free voluntary markets gives benefit to both parties. The individual engaged in exchange must exercise the self-command that results in trust and respect, to enable exchange to continue into the future. Kindness is a mutual advantage, so capitalism tends to spread beneficence. Capitalism develops virtue. Virtue produces prosperity. Wealth goes to the virtuous, and others, aspiring to wealth, follow the virtuous example of the capitalist.
To read more, see this paper by Dr. Jeffery Herbener, Chairman of the Economics Department at Grove City College: An Integration of The Wealth of Nations with The Theory of Moral Sentiments.
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