At DKos this morning, Mark Sumner (aka Devilstower) has a pretty good piece, "The free market is anti-American". It's actually excellent in one respect--it historically corrects the notion that America was founded on free market market principles. In fact, as Mark notes:
Those who worry that we've wandered too far from the vision of the founding fathers might want to remember that in George Washington's first term, the government was involved in:
selectively restricting imports
bailing out debts of states
being the majority owner of a private company
clamping down on fiscal speculation
executing a "stimulus plan" of infrastructure projects
And all of this goodness was paid for by new taxes.
The American school of economics was founded on these ideas: selective tariffs, government regulation of banks, and strong investment in infrastructure. Under later presidents a fourth plank was added to this platform -- investment in public education.
I downgrade it to "pretty good" because it oversimplifies, which we can see quite clearly in in this passage:
The American economic system -- the system defined by George Washington and Alexander Hamilton -- came directly out of the challenges faced by our nation. America, as a new country, was at a huge disadvantage to Europe when it came to the ability to produce manufactured goods. American-made goods at the time were often lesser quality, more expensive, or both when compared to products coming from European factories. Both men were well aware of free market principles (On the Wealth of Nations was published in 1776) and there were those among the founders that pushed Washington to run the country along a purely market-driven philosophy. An unregulated free market backed up by the gold standard was the basis of the "English System," and the British had enjoyed more than a little success.
There are two problems with this passage. First is that the "English system" in 1776--or even the 1790s--was definitely not free market. When Smith wrote The Wealth of Nations he was considered a radical, and he was writing as a critic of the existing English system (as well as the rest of Europe) that was dominated by royal charters and grants of monopoly. Remember the Boston Tea Party? The British East India Company? That was a royal charter company--the most important in British history, to be precise.
As explained quite wonderfully by Emma Rothschild in Economic Sentiments: Adam Smith, Condorcet, and the Enlightenment, Smith and Condorcet were proponents of the free market as part of a broader vision of much wider human freedom. It wasn't until 50 years later, after the Napoleonic Wars, that the British trading class--buoyed by Britain's indisputable naval superiority--emerged as politically dominant, and rediscovered Smith's work as a legitimating ideology for its trade-based ambitions. The irony of the state power backing up this rediscovered--and reinvented--"free trade" philosophy should not be neglected. But it was not the "English System" as it existed when the United States was being established.
The other problem with the passage above is that it described the Federalists' Northern, trade and manufacturing-based economic vision, which was generally--often bitterly--opposed by the Democratic Republicans, for reasons both good and bad. While my own view is that the federalist policies were generally good for the country, they certainly weren't good for a lot of less prosperous folks trying to gain a foothold. Jefferson and Jackson spoke for those folks--and, directly or indirectly, for slavery and the genocide of Native Americans as well. Neither economic vision was anywhere near as pure as it claimed.
In short, our history is morally conflicted in a multitude of ways, and there is no single clear and shining pristine past for us to appeal to. Our politics, economics and democratic ideals have always been deeply contested, and we cannot understands ourselves and/or our history if we do not acknowledge that contradiction and struggle have been with us from the very beginning... if not before.
Great News! The good life will soon return to America. Auspiciously, months before the holiday shopping season began, Americans were told that after more than a year of fiscal recession, or what some have characterized as akin to an economic depression, consumers were optimistic. The confidence index and other indicators were much improved. Manufacturing executives assured the public, the engine that drives the free enterprise system was in a "sustainable recovery mode." In the very near future, products, and people's sense of need, would be fabricated again. Everything will be right with the world, economically. Few feared the threat that, long ago, Americans had come to accept. The foundation of a democratic system had eroded in favor of consumption.
What if Adam Smith's "invisible hand" argument doesn't mean what we think it means? What if it doesn't mean that everything else but the "free market" can and should be ignored? What if if Smith actually depended on social and historical context in order to make his argument in the first place? What if it was an argument deeply dependent on what Harvard law professor Jon Hanson, co-creator of The Situationist blog calls "the situation"?
In fact, that's exactly what happened!
Recently, Berkeley economist Brad DeLong posted
"Yet Another Note on Adam Smith's 'Invisible Hand': What It Is and What It Is Not", in which he points out that the phrase "invisible hand" only occurs once in the whole of Adam Smith's The Wealth of Nations. He then quotes a good-enough chunk of text to give the full context in which the phase occurs-an argument that merchants prefer to ship goods through their home port, even though it costs more (even needlessly unloading cargo), and thus produce much the same result as mercantilism in promoting domestic economic activity. DeLong then summarizes thus:
Note that Adam Smith's "invisible hand" argument is not the argument economists make today. Adam Smith argues that there are:
• political failures--uncertainty about how to access and indeed the prevalence of the rule of law in other countries.
• psychological failures--people are so anxious to have some of their wealth around them where they can touch it that they pay longshoremen to unload and reload goods at Amsterdam rather than drop-shipping them straight from Konigsburg to Lisbon.
And he argues that, as a result, merchants are good patriots--that they deploy their capital to "render the annual revenue of the [national] society as great as he can."
It is within this context-the argument above-that Smith writes, "By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention."
This is, indeed, quite different from the invisible hand argument we are supposed to believe in. The merchant's self-interest here is not the least bit rational in the abstract sense we normally suppose. This is not the result of the merchant's reason (as later theorists might define it in terms such as "the rational actor" or "rational expectations theory", so much as it reflects the merchant's psychology-a clear deviation from abstract reason--and the merchant's situation-explicitly his uncertainty over goods he cannot see, foreign laws and customs should things go awry, etc.
In this passage, Smith is overtly talking like a behavioral economist, rather than a more orthodox "rational actor" or related sort of practitioner. However, there's an even deeper intellectual departure here, since his entire argument is based on a particular set of social institutions, expectations, past experiences and resultant practices, all of which contribute to his particular predilections that silently shape what is rational to him.
As at least two commentator point out, when these are altered-as they have been since Smith wrote-the individual self-interest of the merchant no longer produces the same result: He favors the foreign economy over his own. Therefore, if was not the "free market" that produced a benefit for all from the self-interest of one, it was the specific set of institutional, historical, cultural/social conditions that produced that coincidence of individual and collective benefit.
More on Smith later this weekend. But for now, when it comes to who Obama--and all the rest of us--ought to be listening to, what Adam Smith said:
Merchants and master manufacturers are, in this order, the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the public consideration. As during their whole lives they are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen. As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of the society, their judgment, even when given with the greatest candour (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects than with regard to the latter.
Their superiority over the country gentleman is not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his. It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction that their interest, and not his, was the interest of the public.
The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.
The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.
Ya think?
p.s. My old friend Michael Lind did a much more elaborate mining of Smith for his common sense vs. the mythological image of him, here.
Can we repair our political practices and achieve something like the popular democracy that has remained always just around the corner? Popular democracy - a democracy in which the wisdom of a self-governing people is translated into policy - was opposed from the beginning of our nation's history by the likes of Alexander Hamilton. Hamilton was a shrewd authoritarian who had the insight that capitalist elites, protected by federal charter and largesse, could rule safely as invisible monarchs. This, of course, unraveled the naïve hopes of Adam Smith, who attempted to include compassion and human sympathy within his rationalist model, and who thought a free, unfettered market economy would promote human sympathy, equality and understanding.
Today, the elite democracy view is embodied in top-down political practices that diminish the franchise and excuse voter suppression, advantage the wealthy through legal fiat that makes wealth and speech equivalent, reduce citizenship to passive consumerism, and maintain a class of political consultants and pundit elites who believe themselves a cut or two above the people they pretend to represent.
What's loosely referred to as the "netroots revolution" is part of a revitalized progressive, popular democracy movement aimed at the reform of these practices. Its egalitarian emphasis is on engagement and action by the many. Citizens are entering the political sphere in numbers that threaten the hegemony of an elite class that has long dominated the Republican and Democratic parties. A good example of the movement's spirit was seen in the overwhelming grassroots reaction against the patronizing and condescending performances of moderators Charles Gibson and George Stephanopoulos during the ABC Obama/Clinton debate. Sen. Hillary Clinton revealed the elite's us-and-them feelings of superiority when she told a private gathering of contributors that activists were getting in the way of their old-politics plans: "I mean, that's what we're dealing with. And you know they turn out in great numbers. And they are very driven by their view of our positions ..." Clinton said.
This is all well-known to the readers of this site and other movement activists. Still, we need to continue thinking through the theoretical basis of the movement, including the articulation of fundamental progressive moral views. So much needs to be urgently accomplished, so much attention is needed on pressing issues and tactical demands, that the editors and readers of OpenLeft should take pride that they have always made room for such explorations.
Here I want to approach one of the keys to the progressive moral view and to the possibilities of popular democracy, and that is the role of human empathy in our political practices. In Part I of this series, The Promise of Popular Democracy: Origins, I looked at democracy's true ancient roots in human empathy and anti-authoritarian practices. I deconstructed the privileging of austere reason over emotion in the Myth of Democratic Origins, and pointed toward a more authentic picture of the political human being.
Our current world of globalization, technological advancement and the widening schism between rich and poor stems from the Industrial Revolution. Indeed, the Industrial Revolution is arguably the most important historical watershed in human history. So why did it happen in eighteenth-century England? Furthermore, how come the unprecedented economic growth it produced only served to make parts of the world even poorer?
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