Adam Smith: markets and sympathies

I just finished reading a couple of articles by Adam Gopnik in the New Yorker. Both articles are about Adam Smith and both were written a few years ago (2010 and 2012).

The two articles are “Market Man” in the New Yorker of October 11, 2010 and “Barack, Mitt and Adam Smith” in the The New Yorker of July 19, 2012

Gopnik says that Adam Smith is not what most people think he is.  When most people think about Adam Smith, what first comes to mind are ideas like individual selfishness leads to prosperity for all, greed is good, the invisible hand must never be interfered with, and deregulated, free markets which should never be tampered with. Most people think that Adam Smith said economic markets are sacred, that they are always right and that thus we should leave them absolutely alone and let only supply and demand operate with no human interference. Most of all governments should never interfere with markets and never, ever regulate them. And, that all of this is right and good and necessary because it allows the rich to take their just rewards which they have earned by being the best of the best, the most intelligent, the hardest working and the most moral. Moral because when the rich get rich, trickle-down makes everyone in that society more prosperous.

Blue mountain majesty in Glacier National Park in Montana.

However, Gopnik says this is not what Smith said at all, in fact almost the exact opposite is true. Smith does say that markets are good things and that they are by far the best way to produce prosperity for everyone in a nation. But he says, if markets are unregulated, they will always produce bubbles which will always pop with catastrophic consequences, ie recessions and depressions. And Smith says that unregulated markets always lead to inequality where only a tiny percent, the producers, make and keep almost all of the profits. For this reason, Smith says, markets must always be regulated and governments are the only ones who can realistically do this. He also says it is one of the main jobs of governments to regulate markets and also to protect public goods and prevent them from being privatized. Smith also says that taxes are absolutely necessary and that the rich producers need to pay their share and even beyond their share to keep inequality in hand.

Actually Smith goes further than saying that government regulation is needed. He says that government regulation is what creates free markets. It is the essence of free markets. That without government regulation, there would be no such thing as free markets. As Gopnik says, “It isn’t just that a free market can survive regulation; it’s that the free market is the product of regulation, regulation designed to protect the public from the kind of arrangement that, let’s say, allows people with undue influence on the government to have a lower tax rate than people who don’t. This makes Smith, as I wrote, a firm believer in public goods: his state has an obligation to build roads and schools, establish an army, build bridges and highways, and do all the other things necessary for a sane polity in which the market can function naturally. Everyone should pay for them, and the rich should always pay more than others. ‘The rich should contribute to the public expense not only in proportion to their revenue,’ Smith writes, ‘but something more than in that proportion.’ (He also thought, Mitt, that taxes should be paid with joy, as a contribution to the well-being of all.)”

In short, Adam Smith was not the apostle of absolutely free markets which are completely free from any regulation, that many think he was.

Gopnik says that Adam Smith is actually a strong supporter of big government, of government regulation and of public goods like National Parks, public lands, sewer systems, railroads and other things that don’t produce enough profit for private investors or which are too expensive and unprofitable for individuals to pay for. Smith says that these things, which are important to every society, must be owned and managed only by the government.

Shrine Pass in Colorado near Breckenridge.

Another thing that Smith believed and wrote about is the fact the very rich didn’t get rich because they are especially intelligent, or especially hard working or especially wonderful in any way. Rich people get that way because they either inherit their money or they get enormous amounts of help from the society and the culture they live in. In our modern society rich people get rich because of the internet which was developed by the government, because of highways and railroads and other infrastructure that are subsidized by the government and because of public education and state universities and scientific research which are entirely or mostly paid for by our government. Smith says that since this is true, rich manufactures and producers should not be allowed to keep all of their profits. He says they should be highly taxed.

In one of the essays I’m looking at, Gopnik quotes part of a speech by President Obama which says rich guys would never have succeeded if not for the fact that the society they live in has given them much for absolutely nothing.

Here is the Obama quote: “Look, if you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something—there are a whole bunch of hardworking people out there. If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business—you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet. The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together.”

Many people think that Smith said that selfishness and greed are not bad but good, since it is selfishness that motivate the producers to build big factories and create big businesses in order to make tons of money and to become super rich. Many people believe the idea that greed is good since when producers make huge fortunes this also makes society prosperous and that much of this prosperity trickles down to everyone.

Well, yes Smith does kind of say this, but he also says that the real glue that makes capitalism and prosperity work and which basically makes the whole world work is not so much greed, but what he calls sentiment. Very simply, Smith’s sentiment is something like “niceness” or maybe empathy or maybe human sympathy. Smith says everyone has a little man inside him who wants to make a profit but who also knows that the guy on the other side of the trade has to do well also. He says that if we were all greedy robbers who cared only for ourselves, nothing would work. He says that for societies to work we all realize that we have to be good guys and not completely greedy or selfish.

As Gopnik puts it, “Where can you find a sympathetic community, people working in uncanny harmony, each aware of the desires of the other and responding to them with grace and reciprocal charm? Forget the shepherds in Arcadia. Ignore the poets in Parnassus. Visit a mall. For Adam Smith, the plain-seeing Scot, the market may not be the most elegant instance of human sympathy, but it’s the most insistent: everybody has skin in the game. It can proceed peaceably only because of all those moral sentiments, those imaginary internal judges. That’s what keeps the mob from rushing the Victoria’s Secret and stealing knives from the Hoffritz and looting the Gap. Shopping, which for the church moralist is a straight path to sin, is for Smith a shortcut to sympathy. Money is the surest medium of exchange.”

An old barn in upstate New York

I started thinking about all this and remembered all of those years when I was a potter and photographer doing art shows. In those days when I went to an art show to sell my wares, I was part of of very simple and direct economic market.  And I started wondering exactly how I felt doing those shows and exactly what I thought I was doing. Was I only trying to make a bunch of money or were other things going on as well.

So, what was going thru my mind when I was doing shows. I definitely wanted to sell expensive pictures and make as much money as I could,  but I wanted the customer to feel good too.  I wanted him to know that he got a good deal, that he got something of real value.  And why did I think this, for one thing it made me feel good but I also didn’t want him return an expensive picture in two days or two months or two years.   I wanted all of my sales to be something we could both be happy about.  And I instinctively knew that it had to work this way or I wouldn’t be selling pictures and making good money at shows for very long. 

Only idiots don’t realize this.  There are some artists who try to cheat people and those guys never last long on the art show circuit.  It the show promoter’s don’t kick them out, the customers soon realized that this guy is not to be trusted and refused to deal with him.   Customers talk to each other and to show promoters. I was always conscious this could happen to me and so I was always careful to treat my customers fairly and well.

And I also really did wanted to come away from an art show feeling good about myself. I didn’t want to feel in any way that I was a cheat or a crook. And I think the vast majority of artists out there on the show road, making a living selling art day after day, feel this way. And Adam Smith argued that the vast majority of humans feel this way.

But not everyone out there on this show road feels this way. And this lack of sympathy for their fellow humans always seemed to catch up with them.

There was once a potter on the show circuit who only pretended he made his own intricately carved Indian pottery, instead he bought all his pots from an Indian and paid him very minimally.  Then he made sure that everyone around him knew that he was selling these pots for enormous amounts anywhere from $10,000 to $20,000 to $30,000 a pot.  He would always rush over to his neighboring artist and bragg about the big money he just made in his last sale. But after five years of so of this it finally became known that he didn’t make his own pots and that he also was running a sophisticated money laundering scheme for some shady underworld figures.  (Which is why he bragged so openly about his huge sales.) As soon as all this was known, he was instantly gone from the show circuit, never to sell a pot again and never to get into another show.  True story.

And it seems to me that art shows and all kinds of economic markets from tiny to huge, mostly work because most people actually do believe in a society of trust.  The customer trusts me that the picture will not fade or turn icky colors in a couple of years.  And he also knows he can get his money back for any reason if he really wants it back.  And I trust him not to return the picture in 6 months and I also trust that his credit card is good because I can check it in our market system.  And the customer knows the credit card company will refund his money anytime he asks.  This is all built into the show market system and all market systems.  

In fact the whole global market system is embedded in a system of trust and reciprocity and fairness.  Sure there are smart operators out there but that is all part of the game and expected. What you don’t have is entrepreneurs with machine guns robbing other entrepreneurs .

If I as a seller of art am not trusted to be fair and honest, I will never be able to sell pictures again.   If a car manufacturer builds junk, he will lose out in the global market.  Toyota proved this conclusively a couple of decades back. 

 I know all of this and my customers know all  this.  

And all of this is backed up by the system of government we live in.  There are fair and equal courts to resolve disputes for the most part, not always but mostly.  There are police to enforce the laws of fair and honest markets.  But it seems to me that mostly the rules of markets enforce themselves. People know that if they want to maximize sales they have to be decent, not just bandits.

The last remaining crumbs of what was once one of the most magnificent of the glaciers in Glacier National Park.

I realize how innocent and naive all of this sounds. But there have been times when societies and nations have actually lived like this. For instance in the twenty or thirty years after World War II in the US. And not coincidently, this was almost the one time in the history of the US when common, ordinary people in the US were very prosperous. Every one had their own home, their own car in their driveway, almost everyone had good paying jobs and there was far more equality than there is today. And the big corporations did well also. They, and their CEOs, made handsome profits, not the ridiculously huge profits make today, but they did very well. And rich people were rich but not the in the hugely rich way many of them are today. Today something like 40 families hold 80% of the worlds wealth. Which is totally obscene.

And maybe I am being naive. Maybe there is something to what Republicans are always reminding us, that all men are basically evil and that if we didn’t have armies and police we would all live in a state of nature where the bad guys always ruled. But more and more, it is becoming apparent that it just isn’t that simple. If we are honest with ourselves, it seems obvious to me that no one is only good or only bad. It’s more that all men are both good and bad. It seems to me that all humans are a complex mix of badness and goodness all the time. One of the basic tenets of liberalism is that nothing is all one thing or the other. Everything is shades of gray and nothing is ever black and white. We all know people who are both great guys and also absolute shit-heads. And if we are honest, we know that this is true of ourselves also. This is just the way it is, nothing is ever simple and nothing is ever black and white.

Whatever you think about this, we also all know that the good times never last for long. Unfortunately the golden age of America after WWII began breaking down in the mid 1960s thru the mid 1970s. This was the time that the big corporations and the very rich began to realize that if they shorted the little guy, that if they could somehow end government regulation, that if they could control the government they could be a lot richer than they were now. This was the time when Regan said that  “Government is not the solution to our problem,  government is the problem.”  And this the time when the very rich began to promulgate the idea that “selfishness is good.” What a great way to cover up the rape and plunder they have been involved in ever since Regan made it OK for the rich to grab everything they could.

One consequence for this shift away from sympathy to naked greed in much of American business, is that (not counting inflation) the median wage of American workers, has been almost completely flat between 1973 and today while in the same period the incomes of CEOs and other wealthy Americans have increased by hundreds of percentage points.

As Adam Smith pointed out, government regulation is always necessary to keep markets really free and fair, but the rich always try to buy government and the regulators.  And often they succeed.  At this point the rich have purchased the regulators and the biggest companies have eliminated all competition and they have paid government enormous sums to not bother them. 

But, it may be that the pendulum is now beginning to swing the other way. We are beginning to see a few legislators and government agencies who are beginning to examine the almost total monopolies that Google, Amazon, Facebook and Apple and many other big corporations enjoy.  A few in our government are beginning to realize that a total lack of competition in some fields has been very bad for America, very bad for everyone except the .01% who are making out like the bandits they are. And that regulation is in fact necessary.

I think that this is beginning to happen because when the system of trust and fairness and sympathy breaks down, that system or society, sooner or later, becomes less and less prosperous, and when that happen the lives of individuals are no longer prosperous or happy or safe or fulfilling.  And sooner of later that goes for everyone in the social system, the very rich and powerful included.  Sometimes it takes a long time for the ruses of the cheaters to be uncovered, and sometimes we blame the wrong people for our problems, but sooner or later unjust systems tend to come crashing down on everyones heads.  And unfortunately, it often happens that everyone gets hurt, victims, victimizers, and innocent bystanders.

Sage, blue peaks and sky in Teton National Park in Wyoming

Is this really true? Do cruel regimes without a grain of sympathy actually self destruct or can victimizers and cheats go on forever if they are clever enough?  It seems to me very possible that the idea that sympathetic, fair and regulated markets can become a reality, at least for some of the time.  The victimizers and the corruptors are always out there waiting for another opportunity to control markets and governments and consumers.  They never go away, but sometimes a good government or even a few honest people manage to beat them back, for awhile anyway.

I think it’s very possible that economic fairness and decency can become realities again, even in America. Maybe even especially in America. Maybe Adam Smith was right and there is a basic decency in most humans and there is always a chance that it will again become a reality in our daily lives.

If you are interested in reading more about all of this, Adam Gopnik, the author of the two articles that are the basis of this piece is a good place to begin.   He is a very intelligent and dedicated liberal.  Gopnik writes regularly in the New Yorker and also publishes some very good books like his latest, A Thousand Small Sanities: The Moral Adventure of Liberalism. I highly recommend this book.

I leave you with two more quotations from Adam Gopnik’s articles about the real philosophy of Adam Smith.

“Our faith . . . that our fellow-man is like us and will seek to bargain and wheedle as we do—fiercely but fairly—is primary. The narrow animal instinct is not to trade and exchange and invest; it is to hoard and guard and pillage. The acquired human trait is the market trait, and it depends on trust, sympathy. To see what happens in the absence of trust, one need only consider the recent history of the developing world; if there is not civic capital, a network of trust, already in place, “privatization” just produces kleptocracy.”

“Smith, at least, lived to have high hopes for the new country. He thought that it was normal for human beings to want to live in a prosperous society, but that it was also normal for them to live in a broadly just society. Their desire for self-improvement was in many ways mysterious, but in the end it was inherently social, rooted not only in the love of acquiring but in the love of haggling, bargaining, interacting—the whole work of building worlds out of wishes. What moved men to make markets was ultimately their love of pleasure and happiness, and who, Smith wondered, could live happily in a society where all the wealth has been confiscated and kept in a few hands? He believed not that markets make men free but that free men move toward markets. The difference is small but decisive; it is most of what we mean by humanism. “

White trunks and Red Maple leaves along the Swift River in New Hampshire

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