Archive for April, 2010

For the benefit of those who have not yet begun to follow his blog, here’s David Ruccio taking my bait on Sen’s recasting of Smith. I have just a small comment below.

Mainstream economists cite Adam Smith’s Wealth of Nations as the founding text of modern economics. But, as I’ve mentioned before, while they often cite the Wealth of Nations, they rarely read it, and they certainly don’t read it in conjunction with Smith’s other great book of moral philosophy, the Theory of Moral Sentiments.

That’s an error Amartya Sen sets out to correct—in his most recent “Manifesto”and as far back as his lectures On Ethics and Economics. Sen reads Smith against the grain of contemporary mainstream economic thought, both inside the academy (in the form of neoclassical economics, who celebrate free-market capitalism) and outside (for example, the views of right-wing politicians and bankers, who rail against any and all government interventions into markets).

And, for the most part, Sen gets Smith right: It’s important to read the Wealth of Nations in conjunction with and against the background of the Theory of Moral Sentiments. Capitalist markets operate not only on the basis of self-interest but other motives, such as humanity, justice, generosity, and public spirit. Smith was in favor of government programs, such as free public education and poverty relief (after discussing, in some detail, the mind-numbing drudgery of factory work), and suspicious of capitalists’ arguments that their projects were always in the public interest. He was opposed to colonial restrictions (although not against the civilizing mission, for the rest of the planet outside Western Europe, of capitalist markets). And so on.

That’s why Sen finds Smith’s vision to have “a remarkably current ring.” Capitalist markets need trust and sympathy, in addition to self-interest; capitalist markets create class divisions and are not an Eden of equal opportunity. It’s a testament to how much toward the authoritarian Right mainstream economic thought has moved—in terms both of celebrating free markets and of attempting to eliminate all other forms of economic theory—that Sen’s Smith appears downright progressive.

But, as Nick notes, there is much that is missing from or overlooked within Smith’s attack on mercantilism and celebration of the rise of commercial capitalism. And much that Marx was critical of when he read Smith in the British Museum and started to write Capital.

Let me mention two such criticisms. First, he took issue with the idea that there was a natural and universal “propensity to truck, barter, and exchange one thing for another.” Instead, Marx argued (especially in the section on commodity fetishism) that the set of characteristics that allowed human beings to engage in commodity exchange were a historical and social creation. There was nothing natural and universal about them.

Second, Marx criticized Smith’s theory of value. While Marx engaged Smith (and classical political economy generally) on the basis of the labor theory of value (which, of course, neoclassical economists rejected, in the late-nineteenth century), he showed that the adding-up theory of value (according to which wages, profits, and rents could be explained as the rewards to separate factors of production, labor, capital, and land) could not explain the origin of profits as surplus-value. Once Marx distinguished labor from labor power, he was able to demonstrate that wages came from necessary labor and the rest, profits and rent, from surplus labor. Capitalists appropriated surplus-value (some of which were then retained as profits, the rest distributed to landlords) for doing nothing. That became the basis of Marx’s theory of exploitation.

In general terms, Marx started his analysis where Smith left off, with the wealth of nations. Here are the first two sentences of Capital:

The wealth of those societies in which the capitalist mode of production prevails, presents itself as “an immense accumulation of commodities,” its unit being a single commodity. Our investigation must therefore begin with the analysis of a commodity.

That’s the problem with Sen’s economic manifesto. He stops with Smith instead of starting there; he attempts to apply Smith to our times instead of developing a critique of Smith for our times. He wants to add trust and sympathy to unbridled capitalism, and not to take the next step—of understanding capital as a social relationship, and of abolishing it.

I’ll just add that most economists only use Smith as a philosophical, not methodological, starting point. Smith’s theory of value has virtually no bearing on the economics done today- it’s been replaced with a utility/profit maximization framework, which warrants a post for another day (hopefully Wednesday). Why bother with the critique when you’re not really bothering with the original text itself?


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This one is almost too easy. Krugman charges freshwater macroeconomists with epistemic closure. He writes,

Ask a grad student at Princeton or MIT, “How would a new classical macro guy answer this?”, and the student can do it; classes at freshwater departments teach real business cycle theory, and good students can tell you what it says even if their professors have a different view.

But students at freshwater schools — or, alas, many of their professors — can’t return the favor. It’s been painfully obvious since the crisis broke that people at Minnesota, or even many people at Chicago, have no idea what New Keynesian economics is all about. I don’t mean they disagree, or think it’s garbage, they literally have no idea what the concepts are. And that’s why they reinvent 80-year-old fallacies when they try to discuss the subject.

It’s interesting to ask why this sort of cocooning is a feature of the right but not the left. But it’s very real, and has a dire impact on economic as well as political discourse.

Of course, we can just as easily replace salt-water students in this analogy with students of heterodox economics/political economy, and freshwater economics with the whole mainstream. For instance, ask a post-Keynesian or a Marxian to hold court on IS/LM, and they can do it easily. This is not because these economists are heroic; instead, they realize that is essential to build a counter-theory by learning the original theory and its critique.

My course in Marxian political economy began with a reschooling in intermediate micro and macro- we actually learned this stuff better a second time by being forced to think critically about it. However, ask Krugman or his friends at Princeton and MIT about the starting point for Marx’s critique (hint: use-value versus exchange value) or Polanyi’s (hint: embeddedness) and I fear their eyes might glaze over. If the mainstream response to my argument is that the aforementioned critiques are not “serious economics,” well, we no longer have anything to talk about.

P.S. (private message for David Ruccio)- since I’ve dispensed with this one easily enough, hopefully you can take some time to follow up on my post re: Sen/Smith.

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Mark Thoma links to Amartya Sen’s “The economist manifesto” in the New Statesman. The key point:

The spirited attempt to see Smith as an advocate of pure capitalism, with complete reliance on the market mechanism guided by pure profit motive, is altogether misconceived. Smith never used the term “capitalism” (I have certainly not found an instance). More importantly, he was not aiming to be the great champion of the profit-based market mechanism, nor was he arguing against the importance of economic institutions other than the markets.

Smith was convinced of the necessity of a well-functioning market economy, but not of its sufficiency…

I like this bit as well:

He emphasised the class-related neglect of human talents through the lack of education and the unimaginative nature of the work that many members of the working classes are forced to do by economic circumstances. Class divisions, Smith argued, reflect this inequality of opportunity, rather than indicating differences of inborn talents and abilities.

And to conclude:

Smith’s analyses and explorations are of critical importance for any society in the world in which issues of morals, politics and economics receive attention. The Theory of Moral Sentiments is a global manifesto of profound significance to the interdependent world in which we live.

Sen’s breakdown passes Gavin Kennedy’s eye test, which is good enough for me as to whether Sen “got Smith right.”

It should be read by all readers of Lost Legacy (Follow the link).

Amartya Sen presents the authentic Adam Smith and corrects the mistaken views of many modern economists and their interpretations of his moral philosophy and political economy.

Sen certainly does an excellent job laying to waste uncritical mis-readings of Smith’s work. However, he does not venture into deeper critiques of the theory of value underlying Smith’s economic philosophy- one might rightly argue that this was not the point of this particular article. Nevertheless, I find it interesting that Sen points out the even more oft-ignored discussion of class in Smith, but does not raise the Marxian specter. Smith’s discussion of class divisions can be seen as a starting point, but it’s Marx who uses class as a basis for his entire theory. There is surely some value to be added here from bringing in Marx’s theory of class and of value.

Unfortunately, I’m not going to be the one to add that value right now. Perhaps Kasey or David can jump in in the next couple of days, since I’m tired and lazy and have another post I reeeeally need to write.

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Freedom to eat junk?

Given the centrality of utility theory to economic theory, it is not surprising that many economists think of the world’s problems and solutions as matters of personal responsibility. Or even worse, they claim that as long as individuals are free to make choices, there is little anyone should say or do to change the situation. For example, the Economist in 2003:

Why not tax fattening food – sweets, snacks, and take-aways? That might discourage consumption of unhealthy food and recoup some of the costs of obesity.

It might; but it would also constitute too great an intrusion on liberty for the gain in equity and efficiency it might (or might not) represent. Society has a legitimate interest in fat, because fat and thin people both pay for it. But it also has a legitimate interest in not having the government stick its nose too far into the private sphere. If people want to eat their way to grossness and an early grave, let them.

However, it is not clear that the freedom to buy whatever we want in the supermarket is really freedom in a deeper sense. A public health perspective suggests that we need to move beyond solely talking about the personal responsibility and realize the importance of the food environment, as explained by Marc Ambinder in The Atlantic:

… just being an American can naturally lead you to be obese: obesity is an almost inevitable consequence of living with our cultural norms, our history of agricultural production and subsidies, our long-standing socioeconomic inequalities, and the impact of technology on our behavior and bodies.

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Friday Links

Wow- this week really got away from me. Posts I intended to right are festering in the drafts folder. Hopefully the weekend will allow me to sort that out. Here’s an abbreviated version of Friday Links:

Ten important points about Goldman Sachs

More on the Evergreen Cooperative Initiative

Organic does not equal non-capitalist

Greenpeace on the climate bill

Famed author Eduardo Galeano looks forward from the Summit of the Mother Earth

If you’re in the DC area, come to the Fiscal Sustainability Teach-in/Counter conference next Wednesday. I’ll be attending the 8:15 session with Bill Mitchell, and hopefully can coherently blog about it afterwards.

Somewhat of a diversion: David Foster Wallace’s commencement address at Kenyon college in 2005

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To celebrate Earth Day 2010, you might check out No Impact Man (2009), where Colin Beavan tries to find out if it is possible for his family to live a both sustainable and good life.

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Siglitz’s Freefall and now Johnson and Kwak’s 13 Bankers both do a good job of navigating a complex situation to provide a comprehensible account of the economic crisis for the interested nonexpert. And both offer appealing solutions of financial reform through regulation and government intervention in markets. However, I have not yet seen any account that really explains how financial innovation, in the real world, can be regulated and how any solution will avoid repeating cycle that we have just endured. The crisis is not even over, and Wall Street is already planning tactics to skirt the regulatory measures that will be imposed on them. Kevin Drum at Mother Jones suggests why the financial system may not really change:

Politically, the obvious play for both parties is to outbid each other in efforts to rein in Wall Street, which practically everyone in America hates. But even though this would be an enormous vote getter, neither party is doing it. Democrats are offering up some mild reforms that would modify the playing a field a bit but not really fundamentally change anything. Republicans won’t even go that far. Apparently motivated by industry fealty and a desire to simply oppose anything Democrats offer up, they’re unwilling to support even modest reforms.

It’s hard to know what to think about this. If your city were nearly destroyed by a huge earthquake, proposing better building standards would be an obvious response. It wouldn’t be a left vs. right thing, it would be a property developers vs. everyone else thing. The financial meltdown of 2008 was like that. It exposed such massive fault lines in our banking system that outrage really shouldn’t be a left vs. right thing. It should be a big banks vs. everyone else thing. But the intellectual and monetary hold of Wall Street on our political class is so overwhelming that it was able to turn the whole affair into just another excuse for the usual partisan bickering. The winners, of course, will be the big banks.

Is it inevitable that the big banks be the winners? Or does someone have a proposal for how regulation can actually be implemented? And a reform that will inhibit Wall Street from sidestepping the regulation (like they did over the course of the past three decades) and landing us in a mess all over again?

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