Markets and morals

Hugh Stretton, University of Adelaide

John Kay The Truth About Markets: Their Genius, Their Limits, Their Follies, Allen Lane, Penguin, 2003 (496 pp). ISBN 0-71399-489-4 (hard cover) RRP $85.00.

Jonathan B. Wight Saving Adam Smith: A Tale of Wealth, Transformation and Virtue, Prentice Hall, 2001 (552 pp). ISBN 0-13065-904-5 (hard cover) RRP $52.95.

These books serve a common purpose in wildly different ways. They explore our human nature and the mess or blessing it can make of our economic life and government. Kay’s conclusions are seriously conservative. Wight’s are subjects of some suspense and surprise, appropriately because his book is a novel. Both mix high philosophical reasoning with some discreditable old tricks of the economist’s trade. But together they offer the best catalogue, the toughest criticism, and the most intelligent explanation of market cruelties and inefficiencies that I have ever read.

Kay’s subject is the complexity of the developed countries’ life and institutions, and the dangers of radical attempts to improve them. A true conservative is telling you why Left and Right attempts may be as dangerous as one another. Samples from his final chapter (pp. 378–9):

The difference between rich and poor states is the result of differences in the quality of their institutions. What was offered to Russia [for its capitalist reconstruction] was not American institutions, but the nostrums of the American business model. The institutions of the market—secure property rights, minimal government economic intervention, light regulation—were supposed to be simple and universal. If these prescriptions were implemented, growth would follow.

The truth about markets, however, is far more complex. Rich states are the product of—literally—centuries of coevolution of civil society, politics and economic institutions, a coevolution which we only partially understand, and cannot transplant. The appeal of the American business model today, as of Marxism yesterday, is the suggestion that the history of economic institutions, the structure of current society and the path of future development have a simple economic explanation and an inevitable outcome. This is as misleading a view of political economy as the Marxist one.

There is no grand narrative, only little stories. But the need for grand narrative is so firmly ingrained in human thinking that the fruitless search for it will never end. This book is dedicated to those for whom a partial understanding of complex reality is better than the reassurance of false universal explanations.

Readers from Left and Right may find the book partial in both senses of the word. It insists that government has contributed many of the necessary conditions for our market success, but only in detailed, adaptive ways, as an occasional repairman. And although Kay is a relentless critic of a great many market inefficiencies and cruelties, he seems less afraid of them than of radical attempts to reform or replace them. Neoliberal market liberators and global integrators run level with communist revolutionaries as threats to the tolerable civilization that the rich democracies have so painstakingly achieved.

Readers from Left and Right may find Kay's book partial in both senses of the word.

Jonathan Wight’s novel opens with the arrival at a young economist’s house one stormy night, in a battered old car, of a big shambling ill-dressed old man, dripping wet and sucking at the remains of a cigarette. He’s Harold Timms, a truck mechanic who fixes diesel engines. He’s distressed at the sudden invasion of his mind and body by Adam Smith (whom he physically resembles), who has come back to put the world right about markets and what The Wealth of Nations (1776) actually said about them. A main reason why economists misunderstand that book is that they haven’t read his earlier work, The Theory of Moral Sentiments (1759). That’s not about markets, it’s about human nature.

From Smith’s arrival, the book has double business. Being a novel, it has to have a plot. Its narrator is Richard Burns, the young economist. His PhD supervisor, Professor Robert Lattimer, is the eminent author of the slogan Stabilization, Liberalization, Privatization (S-L-P) that is guiding the rich ‘aid’ that is devastating the world’s poor countries. Lattimer knows that Burns’ unfinished thesis promises ‘a dynamic model of stock market valuation in a country undergoing rapid restructuring, even in a country so recently socialist as Russia’. Lattimer is on the board of the mega-corporation WorldChemm, a bidder for the entire Russian aluminium industry. He thinks Burns’ formula (with or without Burns’ consent) could equip WorldChemm to win it.

But Harold Timms is grieving from the recent death of his wife, and confused by the use Adam Smith is making of him. Burns’ girlfriend, an anthropologist who understands how people can be possessed by ancestral spirits, persuades him to drive Timms across the United States to the care of his sister in California. On the way they are shadowed by a very different ex-pupil of Professor Lattimer. Max Hess is a German immigrant to the United States, where he was a brilliant student. But his research took him to fieldwork in Bolivia. His thesis owed more to Che Guevara than to Lattimer, who arranged for it to fail. Hess is unforgiving, acts as a populist agitator for the poor, and follows Burns across the continent with intent to kill him, presumably to prevent him from finishing the work that might help WorldChemm. A book reviewer must not disclose the resolution of a novel’s plot, but this one ranks high for surprise and (depending on your values) betrayal.

Meanwhile it’s a long drive across the continent. More gripping than the plot, and more important to the author, is Adam Smith’s conversation along the way. Its phrasing is modernised but it is all footnoted to its sources in Smith’s works, most of it to The Theory of Moral Sentiments. I am one of the many scholars who have long known of that work from modern accounts of it but have never read it. Its opening sentence:

How selfish soever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it (cited in Wight p. 136).

Smith did suggest that pursuit of wealth does more than our other impulses for industrial growth.

Burns as devil’s advocate suggests that most fond feelings are in one way or another selfish, prompted by others’ services to oneself. Not so Smith, who continues thus in Chapter II:

Those who are fond of deducing all our sentiments from certain refinements of self-love think themselves at no loss to account, according to their own principles, both for this pleasure and this pain. Man, say they, conscious of his own weakness, and of the need which he has for the assistance of others, rejoices whenever he observes that they adopt his own passions, because he is then assured of that assistance; and grieves whenever he observes the contrary, because he is then assured of their opposition.

‘He paused’ Burns warns his readers. ‘Now listen well—’

But both the pleasure and the pain are always felt so instantaneously, and often upon such frivolous occasions, that it seems evident that neither of them can be derived from any such self-interested consideration (cited in Wight, p. 138).

Was Smith contradicting himself when he famously told us that it is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their own self-interest?

Not necessarily. Self-interest need not be selfish or acquisitive. It can mean interest in one’s self, meaning one’s faith and values (virtuous or vicious), and care and affection (or lack of them) for other people. Smith’s understanding of human nature accords with classical religious, secular and introspective perceptions of our good and evil, generous and selfish, loving and uncaring impulses. The natural sympathies that he observed are for other people’s pains and pleasures whatever their causes. They’re not confined to grateful or resentful responses to our treatment of one another.

The sympathies do however help to shape our relations with one another. Inescapably, as we choose how to live with our flawed natures, aware of worldly opportunities for the best and worst of our impulses, each of us is deciding day by day and year after year what sort of person to be. Thinking about that is ‘self-interested’ in the plain meaning of the words, but it need not be vain, greedy, careless of others’ happiness, or any other of the common meanings of ‘selfish’. Adam Smith’s dinner may well improve in proportion as its suppliers want to be, not merely appear to be, honest and friendly and good at their trades.

Smith thought aims other than making money do and should matter to most people.

Smith did suggest that the pursuit of wealth does more than our other impulses do for industrial growth. He may have been thinking chiefly of wealth-seeking investors. Wage-earners don’t necessarily propel growth. Getting a living is a condition of life, but only one of its necessary conditions, and compatible with plenty of its freer choices of interest and activity. At this point Wight quotes directly from The Theory of Moral Sentiments. Imagine how our neoliberal business and political leaders and columnists might characterise whatever long-gone academic chatterer must have written The Parable of the Poor Man’s Son:

A poor man’s son, whom heaven in its anger visited with ambition, begins to look around himself and admire the condition of the rich. He finds the cottage of his father too small for his accommodation, and fancies he should be lodged more at his ease in a palace. He is displeased with being obliged to walk afoot, but sees his superiors carried about in carriages, and imagines that in one of these he could travel with greater convenience. He judges that a numerous retinue of servants would save him from a great deal of trouble. He thinks if he had attained these conveniences he would sit contentedly in the tranquillity of his situation. He is enchanted with the distant idea of this felicity.

To obtain these conveniences, he submits in the first year, nay in the first month of his application, to more fatigue of body and more uneasiness of mind than he could have suffered through the whole of his life from the want of them! He slaves to distinguish himself in some laborious profession which he hates, forces himself to be obsequious to people he despises, and, by so doing, finally acquires all the material riches he so long sought. But by now he’s in the last dregs of life, his body wasted with toil and diseases, his mind galled and ruffled by the memory of a thousand injuries and disappointments, and he begins at last to realize that wealth and fame are mere trinkets of frivolous utility. Thus (Burns adds) the poor man’s son threw away the key to happiness which was with him all along. The stumbling block to happiness lay in his mind, not in his luxuries (p. 91).

Smith is not usually as hostile as that to making money by lawful means. But The Theory of Moral Sentiments leaves no doubt that he thought that other aims in life do and should matter more to most people. To be trustworthy is a virtue; and where it prevails it improves economic performance. But it is not a reliable product of business ambition or experience. Smith thought that local knowledge of everyone involved in local business could allow more trust and lower costs than dealings with strangers allowed in his day. And mutual trust might contribute even more valuably to the quality of life and to people’s self-respect than to business efficiency.

‘Grand narratives’ seems a misleading phrase for the radical thought and action Kay fears.

Similar perceptions shape John Kay’s conclusions about trust. Business and government owe their success to the quality of their people and institutions, which they owe to three or four centuries of intricate evolution, full of trial and error, slow learning, and interlaced developments of the law, philosophy, arts, and household and community and business cultures which have shaped the people we are.

There will be familiar Left and Right disagreements with Kay’s go-slow conservatism. Here follow one of each, defending some radical discontinuities, and family values.

‘Grand narratives’ seems a misleading phrase for the radical thought and action that Kay prudently fears. Historians tell many grand narratives. Among them are the step-by-step development of religious toleration, modern democracy, free education and health care, women’s rights and equalities. They unfold with setbacks, interruptions, conflicts of purpose and changing plots and plans as in fiction’s grandest narratives, but with enough consistency of purpose and direction to make ‘narrative’ a better term for their progress than it is for the attempts at sudden, theorised, inexperienced change that frighten Kay. (And is he right to fear all such radical events? Most Americans believe they’ve benefited more than they have suffered from fighting to free themselves in the 1770s and their slaves in the 1860s, after ‘little stories’ of attempts at peaceful liberation had failed.)

Family values? Kay is as bad as the neoliberals in neglecting the volume and value of unpaid work. The Australian Bureau of Statistics reports the hours of unpaid work done by household members. Economists have valued the work both at the wage rates for similar work and at the market value of its products when they are paid for (as many of them are by rich households). Over time and with varying methods household work has been valued at between a third and a half of all the work we do. For some purposes the neglect of that information may not matter. But for one purpose it matters disgracefully. The productivity of unpaid work, as of paid work, varies with the capital it uses. But unlike paid work in the private sector, household output is not what pays for the capital it uses. Any economist knows that such a capital market must be grossly inefficient. This one is also socially inefficient: poor people, most dependent on their own housework and cooking and child care, can afford least household space and capital, and can therefore work least productively at those tasks. In direct and indirect ways that can limit their skills for the work, and often—as 2003 Australian of the Year Fiona Stanley and other researchers are now telling us—their children’s lifelong capacities for work and happiness. If poor households can’t afford working capital, there is a public as well as a sympathetic interest in financing it as we finance public capital.

You want to know how eminent economists, critical of other market failures, can tolerate that one? Figure 3.1 on page 20 of The Truth about Markets depicts ‘The dimensions of economic lives’. Households sell labour to industry for income with which they shop for goods which they bring home to use or consume. All the work is done and the goods produced away from home. In Box 3.1 on page 27 Kay explains that ‘those who argue that GDP should account for environmental costs or unpaid work are more concerned to make environmental or feminist arguments than to enhance the integrity of national accounting frameworks’. I would like to be in earshot when this otherwise very intelligent Pom tells the Australian Bureau of Statistics that although its Census count of the national population and its hours of paid work is ‘objective fact’, its Time Use Survey’s count of the hours of unpaid work can be dismissed as ‘both subjective and elusive’.

Hugh Stretton was educated at Melbourne, Oxford, and Princeton and taught history at Oxford and at the University of Adelaide, where he is now a research fellow in economics. His first book was The Political Sciences (1969) and his latest is Economics: A New Introduction (1999).

Read Anthony Housego’s review of Hugh Stretton’s Economics: A New Introduction.