Friday, October 10, 2008

The Wealth of Nations

I thought that this time of global financial crisis would be a good time to read Adam Smith's The Wealth of Nations and learn for myself about the Invisible Hand of the market. It's a book that, like the Bible, is often cited and little read, and like the Bible, I suspect that it's often misread and misapplied.

In the beginning, I found Smith's prose surprisingly simple and lucid. He explains the division of labor, which allows workers to exchange the products of their labor for the products of other workers' labor. The blacksmith takes his keg of nails to the brewer and exchanges it for a keg of beer. In a cash economy, he sells his nails for a certain amount of minted silver, and then exchanges the silver for the keg of beer. The principle is simple. As Smith says, "every man lives thus by exchanging." And the ultimate value of goods in exchange (what Smith calls the "real price") is the human labor that went into producing those goods.

So far, so good. Unfortunately, the further Smith moves from simple exchanges—the product of my labor for the product of yours—the harder he is to follow. The economy becomes increasingly abstract. An exchange involving a keg of nails and a keg of beer is concrete, but things like stock and credit are almost platonic ideas that seem far removed from concrete things like nails and beer.

The Wealth of Nations was published in 1776. Fourteen years earlier, in 1762, Adam Smith was lecturing and beginning to develop his ideas on political economy. In that year, a series of his lectures on rhetoric were published that begin with his thoughts on the origin of language:
It seems probable that those words which denote certain substances which exist, and which we call substantives, would be amongst the first contrived by persons who were inventing a language. Two Savages who met together and took up their dwelling in the same place would very soon endeavour to get signs to denote those objects which most frequently occurred and with which they were most concerned. The cave they lodged in, the tree from whence they got their food, or the fountain from whence they drank, would all soon be distinguished by particular names, as they would have frequent occasion to make their thoughts about these known to one another, and would by mutual consent agree on certain signs whereby this might be accomplished.
Language is, like money, an instrument of exchange that floats free of the thing it represents. Instead of pointing out an actual tree, the cave-dweller can use the mutually agreed-upon word for "tree." The cave-dweller's descendant, instead of trading one tree for another, can purchase a tree with a piece of silver. Words and money are instruments of exchange (although when we exchange words, we call it communication) representing concrete things in the real world.

Adam Smith famously asserted that human beings, at least in their economic transactions, act not out of humanity or benevolence, but out of self-interest. He wrote: "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." This is, I suspect, no more than a realistic assessment of human nature and human motivation.

In 1762, the same year that Smith's lectures on rhetoric were published, Sarah Scott published her now nearly forgotten novel Millenium Hall, about a group of gentlewomen who establish a utopian community in a Cornish country house. Unlike the homo economicus that Adam Smith describes, the ladies of Millenium Hall are motivated entirely by considerations of humanity and benevolence. Their utopian economy is based upon the principle of a "reciprocal communication of benefits," of "continually endeavouring to serve and oblige each other." The women of Millenium Hall believe that it is better to give than to receive, and that the receiver confers a benefit to the giver by gratifying her impulse toward benevolence and generosity.

This is interesting to me because in Sophocles' Antigone, which I'm reading with my students at Carleton, Creon and Antigone have opposing views of what constitutes a "benefit" (in Greek, kerdos). Creon thinks of benefit in mercenary terms; he accuses the Guard who reports the illegal burial of Polyneices' corpse of attempting benefit from a bribe, a piece of silver in exchange for cooperation. In Creon's economy, benefits are bought and sold, and even loyalty has a monetary value. Antigone, on the other hand, says that even death will be a benefit (kerdos) if it's the price she pays for fulfilling her obligation to her brother. She thinks in terms of concrete personal relationships, he thinks in terms of abstract economic transactions.

Unfortunately, Antigone did go to her death for her sense of personal obligation, and Sarah Scott's Millenium Hall remained a utopian fantasy. Meanwhile, Adam Smith's Invisible Hand continues to direct much of our economic life through the influence of his modern disciples like Milton Friedman, who championed privatization and deregulation and inspired the economic policies of Ronald Reagan.

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