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The Invisible Hand Returns
"As Karl Marx is much too valuable a source of social insight to be left to the exclusive property of Communists, so Adam Smith is far too wise and amusing to be relegated to conservatives, to be cited too often by quite a few people who haven't read him," Dr. John Kenneth Galbraith told an audience gathered in the Rainey Auditorium of the University Museum last month. "Few writers ever, and certainly no economists since, have been as amusing, lucid, or resourceful -- or, on occasion, so devastating."
Galbraith, the renowned economist, author, presidential adviser, and emeritus professor of economics at Harvard University, was one of four economic luminaries invited to Penn for the 1997 Steinberg Symposium, "Rethinking Adam Smith." The symposium was sponsored by the School of Arts and Sciences; funded by Gayfryd and Saul Steinberg, W'59, charter trustee of the University; and moderated by Dr. Lawrence Klein, the Benjamin Franklin Professor Emeritus of Economics. From it, a complex picture of Smith's economic theories and their impact emerged, one that resists simplistic labels and rhetoric.
By directing industry "in such a manner as its produce may be of the greatest value," an individual "intends only his own gain, and [is thus] led by an invisible hand to promote an end which was no part of his intention," wrote Smith in The Wealth of Nations, published in 1776. "The formulation of that concept is, of course, a very important aspect of Smith's thought," said Klein, the 1980 Nobel laureate in economics, "but it is certainly not the only aspect that calls for scholarly analysis."
Smith was a professor of moral philosophy at Glasgow University, and his writings were full of penetrating insights as well as some seeming inconsistencies. He detested monopolies, for example, yet felt that government intervention against them would harm an economy even more. He recognized the sources of economic growth in countries before there was such a thing as a Gross National Product, but -- at least in his writings -- appeared oblivious to the Industrial Revolution that began during his lifetime.
To those who dismiss Smith as a man who "glorified greed," Dr. Douglass C. North, a Nobel laureate and economics professor at Washington University in St. Louis, had these words: "There's a difference between 'enlightened self-interest' in the way Smith meant the term and greed in the narrow and pejorative sense that so many people have used in thinking about how economics is structured. For Smith it is the market ... that converts self-interest into societal improvement." By reducing "the power of great lords over peasants and laborers," for example, the market "was a leavening force."
Dr. Robert J. Barro -- who playfully blamed a speech of Galbraith's in the 1960s for causing him to evolve from "a left-wing undergraduate student at Cal-Tech" to a conservative professor of economics at Harvard -- lauded Smith for advocating limited government. But Barro said he found much of the reasoning in The Wealth of Nations to be "disappointing," since its conclusions are "really more the product of the author's brilliant intuition than ... a theory or model laid out in some systematic manner."
For Dr. Jeffrey D. Sachs, director of the Harvard Institute for International Development and professor of international trade at Harvard, however, TheWealth of Nations is "filled with startling and striking empirical hypotheses about the sources of economic growth at a time when there were no GNP accounts, when the concepts of how to even measure income per capita were still about 150 years to come...."
According to Sachs, Smith realized that the degree to which individuals "can trade securely with others and at lowtransaction costs ... determines how much specialization a society can promote," and made it clear that trade was possible where geography permitted the transport of goods and where property rights were consistently upheld. Smith also predicted that free-trading economies would grow faster than closed economies.
Today, the data supports many of Smith's hypotheses, Sachs said. Landlocked countries, for example, "are not at the top of the growth heap.... They can't make the division of labor as easily. Nike does not go to Nepal or Bolivia to manufacture shoes. It just costs too much to get out of the Himalayas or the Andes." In contrast, Sachs said, "Businesses are lining up to produce" in Vietnam, endowed with a long coastline and natural ports.
Smith's theories about open trade and property rights also are proving true in the eastern European countries that have undergone rapid and comprehensive reforms, Sachs argued. Poland, for instance, "is becoming a workshop of Europe in a very broad range of industries, successfully pulling [its] living standards up at a rate virtually unmatched in the rest of the world."
Smith did miss the mark on a few matters, according to North. One was his classification of "unproductive labor" as any kind of work that didn't directly physically produce things -- including law, banking, and insurance. "That's more than half of the labor force in America today," North said. "What he thought of as unproductive labor, of course, is essential to production as you get economies becoming more complex. I think Smith should have seen this, because the whole keystone of his whole argument was specialization and the division of labor."
Galbraith agreed that while the "basic structure" laid out in The Wealth of Nations survived intact for almost 150 years, "It was in all respects a beginning and not an end." For one thing, "Man's capacity for cooperative effort" has far exceeded Smith's expectations, Galbraith said, citing the modern corporation as an example of the "marriage of cooperative effort and self-serving" interests. Nor did Smith foresee "the contributing role of the modern state," since there is now "some measure of agreement" that there must be an "intelligent balance between the role of the government and the role of the market."
Even a closer examination of Smith's writings on taxation might disappoint some of his staunchest fans. Smith wrote that "The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities" -- a notion, said Galbraith, that gives "no comfort to those who otherwise believe they were intended by nature to be untroubled by the Internal Revenue Service."
Smith's sharp pen even took a stab at higher education, Galbraith noted. "Smith said that professors with salaries and tenure, those that are subject to reward unrelated to their capacity to attract students, [carry out] their duty in 'as careless and slovenly a manner as that authority will permit.'" Clearly, Galbraith concluded, "There are some truths of Smith that do not endure."
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