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The Modern Poetic Justice Warrior Who Brings Adam Smith and Friedrich Hayek to Life – Russ Roberts

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A primary attribute of poetic justice is spontaneity, and it confirms the Law of Causality – one state or process contributes to another state or process. This law of reality also leads to emergence – the creation of an entity whose attributes (states or processes) interact with each other to become a complex system with its own identity. Examples of emergent complex systems that people interact with every day include earth’s climate, spoken language, common law, and market economics. Two of these, climate and economics, are the targets of computer modeling techniques whose users try to predict and control future outcomes. They have always been wrong, by a lot.

While most rational people feel fortunate to control the climate and cleanliness in their homes, and enjoy or manage the ever-changing weather outside, almost no one understands or appreciates the spontaneous order or emergent nature of complex economic systems. At the same time, government economic planners and progressive public policy think tanks deny it exists. It would make them irrelevant. Fortunately for enlightened civilization, Poetic Justice Warrior Russ Roberts is hastening their irrelevance.

It is always best to explain complexity by starting with the basic, essential elements. In other words, simplicity, and no one is better at using audio, video, books, articles, acting, and digital media to simplify complex economic systems for the benefit of anyone with an appetite to learn the so-called dismal science.

Complexity Worship

Our postmodern world is dominated by the idea that everyday life is too complex for most people to understand, navigate and provide for themselves. To make their point, the peddlers of complexity cite the explosion in technology, unlimited choice in retail, spiraling health costs, trade deficits, climate threats, inequality, and looming economic recession. The remedy for these imagined or government-induced calamities is always new government intervention, taxation, subsidies, tariffs, and greater control over education to indoctrinate more public servants. This is the political way.

By contrast, Russ Roberts is at the vanguard of the economic way. A basic distinction between the two is that the political way requires hierarchies of concentrated power; the economic way organizes itself into decentralized networks. An economics professor, Roberts is also a research fellow at the Hoover Institution, a commentator on NPR radio, regular blogger, and the author of several books including two novels and many published articles. However, Roberts is probably best known for his weekly podcast Econ Talk, which has a new episode every Monday, is downloaded by 80,000 listeners every week, and is hosted by another great repository of wisdom, The Library of Economics and Liberty.

For a charming depiction of the spontaneous order of the economic way, Russ Roberts produced the short video It’s a Wonderful Loaf.  Integrating poetry, music, animation, and his gift for simplicity, Russ illustrates what happens when the state of self-interest, as taught by classical economist Adam Smith, is combined with the process of division of labor, and emerges as The Invisible Hand of the economic order. While this phrase is only used three times in Smith’s writing, and is widely attributed to his 1776 classic, An Inquiry into the Nature and Causes of the Wealth of Nations, he used it first in his lesser-known 1759 scientific breakthrough, The Theory of Moral Sentiments. This earlier book is Smith’s (and Roberts’s) favorite among the two, and Roberts dedicated his own book, How Adam Smith Can Change Your Life, to it in a witty and candid analysis of Smith’s discoveries about human nature.

In a live performance, Russ Roberts dons the costume of Adam Smith and compares the precise order of the universe with the imprecise temperament of human nature. He explains how civilized society achieves harmony, “the choreography of our peaceful existence,” and how it is akin to the force of gravity choreographing the movements of heavenly bodies. Here Smith and Roberts share a scientifically-derived, divinely inspired, and optimistic attitude about human nature. This is the essential difference between the economic way and the political way. The patron saint of complexity and the political way, John Maynard Keynes, maintains in his book General Theory, that people resort to their “animal spirits” when faced with uncertainty and volatility. To him, only dispassioned “experts” can maintain economic order.

Emergent Order

As poetic justice would have it, Roberts also has his not so invisible hand in the production of a very successful video series featuring Keynes and the patron saint of spontaneous economic order, Friedrich Hayek. The co-founder and CEO of the creative studio Emergent Order, John Papola, teamed up with Roberts “to be the first people to bring classical liberal ideas to life in a way that was entertaining, scholarly, and uncompromising while remaining even-handed.” Their Keynes vs. Hayek rap videos, Fear the Boom and Bust and Fight of the Century have become viral internet hits.

To communicate abstract concepts, explain significant economic values and ideas to mass audiences, and present it in a way that causes people to pay attention, is no small feat. Fear the Boom and Bust is a defense of the Austrian Business Cycle Theory, and a warning about the unintended consequences of government manipulation of money and credit. The financial meltdown of 2007 – 2008 is a prime example. The Fight of the Century condemns the ineptitude of top-down economic planners and highlights the wide dispersal of all relevant knowledge among all market participants. It is impossible for any group of “experts” to possess but a small part of the information contained in the prices of commodities and marketable securities. Price discovery is the indispensable process and the price mechanism is an unassailable state of spontaneous market economies.

With over five hundred Econ Talk podcasts, Roberts has covered many aspects of the human experience including the economics of education, trade, climate, and health care – all government planning sacred cows. He has also exposed the shortcomings of using complex empirical data sets and computer modeling for making public policy decisions. The data cannot measure or anticipate dynamic variables such as innovation and changing human preferences.

One of his finest examples is one of the most recent podcasts, Free Market Health Care, and his conversation last month with entrepreneur and anesthesiologist Keith Smith of the Surgery Center of Oklahoma. What Dr. Smith found in his experience with traditional health care institutions is that an inordinate amount of their resources are spent on administration and infrastructure instead of patient care. Patients have no idea what the exorbitant charges for their health care services will be, and management tells the doctors how much they are worth. This is universal among all government planned and subsidized industries (see education). Fed up with the lack of price transparency, lack of self-determination on their value, and a bloated bureaucracy, he and his partners opened their independent surgery center in 1997. Their prices are posted online, have not changed in twenty years, and they only take cash. This is radical, life-affirming, and predictable to people who have learned the economic way.

Poetic Justice Warrior Russ Roberts has achieved something remarkable. Roberts has taken the dismal science, so dubbed by a socialist bureaucrat who foresaw his looming irrelevance at the invisible hand of free markets, and transformed economics into something comprehensible, interesting, and fun.

 

 

The Sharing Economy Increases Human Wealth While Decreasing GDP. Let’s Try To Measure The Right Things.

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Human wealth should be defined by the widely shared ability to use things that help us flourish. It’s hard to aggregate these “things” in any shared measure, since wealth includes owning a nice car or being able to use Wikipedia immediately and for free. If I buy, or even rent, the car, it counts toward GDP; using Wikipedia counts for nothing in the National Income Accounts, but it’s pretty useful in terms of increasing my utility.
One thing that this means, of course, is that the idea that price-based “standards of living” have been stagnating is just misguided. New measures of GDP would help, but the larger problem is that any purely market-focused metric will miss the ability, and in fact the desire, of human beings to cooperate in groups.To paraphrase Adam Smith, the diversity of things that can be shared is limited by the extent of the cooperation horizon. In the case of Wikipedia, this means that the community working on providing informative entries should be worldwide, to encompass as much expertise as possible.
But that is not always the case, because larger “cooperation horizons” may be associated with higher transaction costs. In the case of sharing physical products or tools rather than information, there is a problem of delivery and return of the physical items.But there are still possibilities for sharing.
For one thing, the software or app that makes the platform work can be shared. It can be “open source,” in fact, with systems of access to editing and credit for improvements that work for Wikipedia. Ironically, investigating the history of open source illustrates some of the problems and paradoxes at work. One of the ur-texts of the history is “Computers: Software Is for Sharing,” published by Time magazine on July 30, 1984. If you can get access to it, you’ll see that the article describes the problem of splitting software from the physical electronic platform for which it was created.The irony is that this article about how information wants to be free is itself trapped behind Time’s paywall. The notion of “open source” is generally associated with software, but observers in a variety of fields have recognized the underlying problem: economic efficiency would seem to dictate that price equals marginal cost, but for software and other kinds of information the marginal cost is essentially zero. In economic terms, information “wants” to be free.“Free” could mean libre, or exempt from restrictions, meaning that there are no restrictions on publication or dissemination. But “free” also has the literal meaning of gratis, being available without charge, and available for adaptation to contexts quite different from its creation or original use. One advantage of making information free is that it connects with “permissionless innovation,” by making it possible for entrepreneurs, inventors, and people who have a problem to take something someone has devised for use in one setting and use it for their own purposes. Cooperation is useful, because we can’t know what innovations will be useful, either in their first form or in their subsequent forms.All of this is clearly an argument for using “open source” conventions, wherever that’s possible. The phrase “open source,” and the sentiment it embodies, is ancient. But the modern use in the context of software and widely disseminated information is usually dated to 1984, when Stewart Brand told Steve Wozniak:

It seems like there’s a couple of interesting paradoxes that we’re working here… On the one hand information wants to be expensive, because it’s so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other.

Wozniak replied, “Information should be free but your time should not.”

Brand reportedly responded: “But then, at what point of amplification is your time being so well rewarded that it’s getting strange or so under-rewarded that it’s strange? There’s problems there with the market.”

Open source software is freely available, freely reproducible, freely editable, and technology neutral. Where does it come from? Clearly, society needs inventors to discover new information and programmers to create new software. We must cover the average costs of this valuable service. But once that new information exists and is available to anyone, the cost of sharing is negligible.

The cost of dissemination is a few keystrokes, an internet connection, and space to store the digital content. Information needs to be libre, but it can’t be gratis. Open source software, managed by a cooperative system that solves problems of triangulation, transfer, and trust, is one answer. Wikipedia, for example, doesn’t pay anyone, but it can provide incentives through giving public credit for doing good work.

Economists call this “voluntary provision of public goods.” The mystery, in traditional neoclassical economics, is not why there is so little of this kind of cooperation, but why there is so much. To be fair, Adam Smith and other “founders” of political economy were quite aware of the diversity of human cooperative capacity, but we have lost sight of this sphere of activity in favor of a narrow focus on markets.

Alexis de Tocqueville famously highlighted this general capacity for cooperation by forming voluntary groups, for humans in general but with a focus on the USA in particular. Tocqueville was no fan of using majority rule for everything. The problem with political democracy, he said, is that citizens are isolated and “enfeebled.” They can do hardly anything by themselves, and they can’t force others to help them. He admired the American solution to this problem: Organize into private groups, and leave government out of it. As Tocqueville put it:

The political associations which exist in the United States are only a single feature in the midst of the immense assemblage of associations in that country. Americans of all ages, all conditions, and all dispositions constantly form associations. They have not only commercial and manufacturing companies, in which all take part, but associations of a thousand other kinds — religious, moral, serious, futile, extensive, or restricted, enormous or diminutive. The Americans make associations to give entertainments, to found establishments for education, to build inns, to construct churches, to diffuse books, to send missionaries to the antipodes; and in this manner they found hospitals, prisons, and schools. If it be proposed to advance some truth, or to foster some feeling by the encouragement of a great example, they form a society. Wherever, at the head of some new undertaking, you see the government in France, or a man of rank in England, in the United States you will be sure to find an association….

[The people] all, therefore, become powerless if they do not learn voluntarily to help one another. If men living in democratic countries had no right and no inclination to associate for political purposes, their independence would be in great jeopardy, but they might long preserve their wealth and their cultivation: whereas if they never acquired the habit of forming associations in ordinary life, civilization itself would be endangered.

An interesting recent example, one that is largely operating at a level below public recognition, but which is nonetheless quite widespread, is “tool libraries.” It’s not pure ownership, it’s not renting, but it is cooperative sharing. And it doesn’t appear at all in GDP, even though voluntary private associations like this dramatically increase our wealth.

Suppose there are 30 of us, all of whom live in a small neighborhood, or even in a single block of a densely populated city. What we share is that each of us has a tool, a different tool, for woodworking or car repair, or some specialized activity we are all very interested in. Then the 30 of us collectively have an extensive tool “shop,” though the shop doesn’t exist in any one place. LocalTools.org provides software for groups of people to use to share tools, and to do it in a way that dramatically reduces the cost of having a well-stocked workshop.

After all, good tools, especially specialized tools, are expensive, and it is the nature of highly specialized tools that most of us don’t need them very often. But the right tool, exactly the right tool, is often indispensable for doing a task well. Maybe that tool is a compound miter saw, and maybe that tool is open source software to adapt to local conditions for sharing a compound miter saw; many things are now possible.

If a local group can solve the problems of finding each other, registering which tools are available and when, making it possible to reserve one or several tools, effecting the delivery and return of the tool, and using sensors connected to software that measures abuse or damage to the tool, with a time stamp to attribute responsibility, then a group of people can each have better tools than any of them could have afforded individually. This kind of organized sharing is enormously beneficial, because it also reduces storage costs dramatically. There are problems to be solved, but rapid progress is being made in solving sharing problems.

Centralized ownership with sharing, or distributed ownership with sharing, simultaneously increases wealth and decreases measured GDP. We shouldn’t let our inability to measure increased wealth convince us that we aren’t making progress. Because if there are opportunities to cooperate, people who are allowed to help each other will find ways to do it. The misguided focus on outdated metrics based on price rather than cooperation is leading to concerns about a “growth recession,” when we are actually in a golden age of rapidly increasing wealth.

Michael Munger is Professor of Economics at Duke University and Senior Fellow of the American Institute for Economic Research. This article appeared at aier.org.

Accountable Capitalism: Corporations Must Do What Elizabeth Warren Tells Them To Do.

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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.

Adam Smith Conceived A Complex Synthesis Of Morality, Sociability and Economics. Sympathy And Fellow Feeling Motivate Us All.

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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 [1759], 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.

Entrepreneurship Is The Science Of Making People More Valuable To Each Other.

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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 Four Ways Capitalism Makes Us All Better People.

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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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