Monday, January 24, 2011

Adam Smith: Communitarian

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 self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Adam Smith, Scottish philosopher, economist and author

A colleague of mine – a college professor – describes herself as a Communitarian. She quickly quips that her husband says that’s the same as a Communist. But, while some Communists might be Communitarians and some Communitarians might be Communists, they are not the same. Wikipedia defines the term this way: “Communitarianism emphasizes the need to balance individual rights and interests with that of the community as a whole, and argues that individual people (or citizens) are shaped by the cultures and values of their communities”. Sounds pretty far from the common perception of Adam Smith. However, I think it’s fair to say that Smith might buy into that philosophy.

Conservative politicians have promoted the “invisible hand” of the markets quoting Adam Smith from his treatise, the Wealth of Nations. I doubt that many of them have actually read the 1000 page tome. If they had, they would know that Smith believed that efficient markets and general welfare resulted from local business owners bearing the cost of their enterprise and sharing the values of their communities.

Smith strongly disliked both governments and corporations. He viewed government primarily as an instrument for extracting taxes to subsidize elites and for intervening in the market to protect corporate monopolies. In his words, "Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.” Certainly, that was an accurate description of 18th Century colonial America ruled by the British throne.

But, Adam Smith was a Scottish philosopher whose theories were not supported by data. A century and a half later, Friedrich Hayek developed the data to take Adam Smith’s philosophy to a new level. He advanced what would later be called Austrian Economics, a theory of monetarism that was embraced by his colleagues (including Milton Friedman) while he was part of the faculty at the University of Chicago in the 1950’s. Hayek believed that manipulation of interest rates distorted the price of capital leading to the boom and bust cycles we have seen throughout our history. In other words, the way to prevent the bust is to avoid the boom.

Like most students of economics of my generation, I lean toward the supply side theories that have been espoused by conservative economists, Hayek and Friedman. Their progeny like Arthur Laffer influenced Ronald Reagan whose response to an economic crisis was to return control of capital to those that earned the money. Lower taxes meant more money in your pockets, lower capital costs (without monetary distortions) and through the “multiplier effect” an expansion of the economy. He also coined the term “trickle-down economics” to describe the benefit to lower income families.

The expansion of our economy these last 30 years has been extraordinary. However, the promised trickle-down effect isn’t trickling. Over the last decade we have seen global corporations earning more money while the average real income for families has remained flat. Adam Smith would be appalled. Not only is the central government co-opting a significant share of our personal incomes but also it is reallocating our income to corporate interests in the form of subsidies and tax breaks. And, it has done so to the ill effect of the people who have elected that government.

Indeed, I know of no economic theory called trickle-down economics nor of any data to support its promise. It’s a political phrase. That’s all.

So, what would Smith and Hayek have to say about that?

Rarely do we hear of the other views expressed in The Wealth of Nations captured here: “It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.” Nor, do we hear much from his seminal work, The Theory of Moral Sentiments, where he explored the nature of mankind in civil society. How’s this for an Adam Smith quote: “This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments.”

Hayek, who had the advantage of observing governments in action in the 20th Century (Smith lived his entire life in the 18th), also espoused the creation of a “safety net”. In his most read work, The Road to Serfdom, he said: "There is no reason why, in a society which has reached the general level of wealth ours has, the first kind of security should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision."

So, where do we go from here? The threat posed by our national debt and its evil twin, the budget deficit, are real. If current trends continue, 100% of our tax revenue will go to paying interest on the debt within 10 years. That can’t happen. And, when something can’t happen, it won’t.

It is often said that governing is about choosing. We have rarely faced choices as difficult as those we face today.

Tuesday’s State of the Union Address will be interesting on many levels, political and otherwise. The President’s public pronouncements have recently focused on helping business in the name of lowering unemployment. He even took the extraordinary step of authoring an Op Ed piece in the Wall Street Journal. Will he announce that he will introduce the recommendations of his Fiscal Commission to Congress and ask that they make them law? Will he acknowledge the work of Rep. Paul Ryan who is carrying the Republican flag, toward a compromise that will balance our budget within a decade?

Will the next two years be marked by more partisan bickering? Or, to paraphrase my usual closing question, WILL HE LEAD?


  1. It is popular these days to repeat the mantra that trickle down economics doesn't work but that is not really accurate. Yes, obsecene Wall Street profits have obscured the picture (and may dwarf the benefits of trickle down economics) but I need only look to anecdotal evidence around me to know that trickle down economics DOES work. In these trying economic times I have seen many cleaning ladies and yard men fired. Fewer women get their hair and nails done (or cut down on the frequency). People eat out less and go to the dry cleaners less. People buy cheaper booze. Many, many jobs in the service sector are affected.

    Obama is correct to focus on spending that is an "investment" as opposed to war spending and spending on entitlements. However, regardless of the purpose, spending is spending. There will have to be cuts to defense and entitlements. Anything else and we are just kidding ourselves.

  2. We are definitely not in a "Leader Deficit", however we are in a "Leadership Crisis". We have too many Leaders, or so called Leaders that either do not know how to Lead or who are in my estimation Leading us in the wrong direction. We have men and women leading us whose morale compass is broken. Power corrupts and in the case of Washington DC, the corruption is rampant.

    Personal agendas and not the Will or Good of the People is what is steering the path of our country. What exactly does obama want to accomplish? What is his agenda? He says one thing yet his actions certainly do not support his stated objectives.

    I agree that "Trickle Down" Economics is in a state of disarray, because government intervention and regulation has placed a dam in the aqueducts whereby the monies are suppose to trickle down. The Problem with any Economic Crisis in my mind is too much Government, and too much Government Regulation. Trickle Down Economics can only work if governmental interference is removed, big business is not given favor over small business, and taxation does not retard the growth of innovators and job creators. All that is present in this economy and government. Hence we are in the midst of this economic malaise that is crippling our nation.

    Will He Lead? My bet is YES! However, we or our economy will not benefit from his leadership. He is beholding to his Masters and they only benefit from the crippling of our economy. That is where the trickle is going. The flow and the economy has been diverted into the pockets of the Liberal Elite.

  3. Chiming in very late on this...but.

    The trickle down theory doesn't work, never worked and will never work. It's not in a state of disarray. (And that the Liberal Elite is benefitting from the current administration's policies is not only laughable, but patently false.)

    Demand is what drives the economy and demand trickles up, not down.

    No company or corporation, large or small, ever hired people simply because they had the money to do so. Moreover, they never invested in their infrastucture purely because they had the money to do so.

    Think of it: If company 'x' received a tax break from the government, would they turn around and hire someone simply because they had more money in their pocket? Would they add another product line because they had the money to do so?

    Of course they wouldn't.

    But if an upper-middle, middle, or lower-class wage earner receive a sizeable tax break, they'd likely go out and spend it on something they need or have wanted. Maybe a flat screen monitor, maybe enjoy a few nice dinners out, maybe buy a new car or add another bathroom to their home.

    Those are the things that create demand. The applicance store hires a new salesman, the restaurant hires a another cook or adds to their waitstaff, the sink manufacturer hires more help. The added workforce contributes more taxes from their payroll, more tax dollars helps fund education, infrastructure repairs and development...and so it goes.

    DEMAND CREATES JOBS. JOBS CREATE INCOME. INCOME FUNDS TAXES. TAXES PAY FOR SUPPORT SYSTEMS (Police, roads, defense, etc.). This is as true today as it was 200 years ago.

    Signed: Bruce Scottow

  4. I don't think supply-side or demand-side work. I think they're "magic", and I don't think Hayek or Smith really promoted either. Supply-side / trickle down equates to spurring the economy by reducing the tax burden on producers. It will (temporarily, and partially) work b/c competent firms will allocate their unexpected capital to the next un-financed project on their list of value added projects. In some instances, these projects may increase employment until the project is complete. They may also result in new or cheaper products to consumers. The problem is supply-side stimulation is essentially economic fascism or corporatism. Politicians inevitably point the stimulation towards preferred industries, cronies, etc. Looking at the mechanics of demand-side stimulation, you end up with a similar short burst. Everybody gets a check for $300 (I think that was Bush Jr's demand-side strategy). What do they do with it? Buy a new LG TV, pay down their credit card, etc. Maybe a few temporary workers get jobs in a Korean factory, but it's not a sustainable growth strategy. What Hayek and Smith wanted were consistency and for individuals, not politicians to decide how resources are allocated. Hayek hints at, and Friedman promoted, a kind of minimum income or negative income tax type of model. It's assurance that your not going to starve or freeze to death b/c you get a check every week or month, but it's also not fraught with bureaucracy and cronyism. It allows people to decide what they need. The downside is it doesn't give politicians anything to grandstand about.