Quote by Adam Smith

[Telperion]

What is the species of domestic industry which his capital can employ, and of which the produce is likely to be the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would no-where be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

Adam Smith, The Wealth of Nations (1776), Book IV, Chpt.ii, Para. 10

Discuss.

(I'll offer my own views after a few people give their responses.)

[symmakhos]

Smith here only regards the profit of each economical venture, but there are other ends which the state might see as valid. Ergo state subsidiaries to, for instance, domestic agriculture in, I think, most of the First world. The issue of public service and/or social security may also be taken into account.

[Moody]

"Private people" - are there any completely "private people"?

Of course, in Greek, the word 'idiot' literally means a 'private person'.

While a person can have a 'private life', can he ever be private per se?

Doesn't he owe his existence to his ancestors and to the enviroment that they have created?

And isn't the state [or rather, shouldn't the state be] the result of that very same ancestral striving?

Doesn't the individual owe his existence to the dead and shouldn't he be aware of those who are to follow him when he dies?

So, he has then, a RESPONSIBILITY to the state; he cannot be a 'private person'.

He has no right to PUT HIMSELF ABOVE the state.

[Telperion]

Thanks for the replies. I picked this quote because I think it embodies some of the most salient economic and political aspects of liberalism.

Economically, I'd say Smith does have a point, in that he has anticipated the argument made by contemporary economists about the role of information in regulating economic exchange. His insight is that economic information is more efficiently translated into economic behaviour if this is done in a decentralized rather than a centralized manner, since it is impossible for a centralised economic decision-maker to know everything necessary to match supply with demand in a modern industrial economy. So on that level, this quote is an explanation of why the Soviet centrally-planned economy was doomed to fail eventually, even though Smith's argument anticipated the Soviet experiment by almost two centuries.

Of course, one can also see that Smith's laissez-faire ideas embody an extremely radical form of individualism. Symmakhos is right that the state may have objectives beyond those that would be satisfied through purely private economic action.

But, this blends into the political issue touched on by Moody Lawless, namely, what the proper role of the state is in relation to the individual. I think Moody's ideas on this topic embody something close to the ancient conception of citizenship found in Republican Rome and Sparta, and even Athens to a significant degree (though I don't know if he'll agree with this comparison). This classical tradition saw citizenship and civic duty to the citizen-state as the highest political ideal, and would have categorically rejected the radical individualism posited by Smith.

Smith's view simply takes individuals as self-contained units who owe no responsibilities to anyone alive, unless they are voluntary and contractual (if we can tie his ideas to the liberal social contract view of the state). And, it would not even contemplate the possibility that individuals owe obligations to those who no longer exist, or do not yet exist. This is the sort of radical individualism that has visibly corroded the fabric of society and the state, to the point that individuals today see the maximization of their own material welfare and social status in the here and now as the highest good, and view citizenship as literally a commodity to be bought and sold, or even given away. I think one sees in Smith's political assumptions, then, the origins of the sort of social discohesion and political unraveling that are promoting the decay of contemporary civilization.

[Scoob]

Smith is making a moral (metaphysical) statement in the quoted passage. It's all "should", "cannot", etc. - when the practical question is, "to what ends?"

What's the difference between a group of politicians or bureaucrats deciding how best to employ capitol, and a corporate board of directors doing the same?

I haven't read Smith in depth, but what are his main points? Some I can think of would be:

A businessman or group of businessmen might have more intimate knowledge of their enterprise (if they have experience), which bureaucrats lack - so they might know a lot more about process and efficiency. Of course this might be less true for a corporate board of directors who are far away from the nuts and bolts of production and trade.

Likewise for knowledge of customers and what they want - although this can be limited even for businessmen.

And I'll note that what pass as metaphysical issues are decided by human consensus.

I think part of the problem in all of this is that humans are too stupid. We don't have enough knowledge as individuals, period. And of course modern information technology changes much of this. I'm waiting for the day when people have Internet chips wired directly into nerve tissue.

[Telperion]

Smith is making a moral (metaphysical) statement in the quoted passage. It's all "should", "cannot", etc. - when the practical question is, "to what ends?"

What's the difference between a group of politicians or bureaucrats deciding how best to employ capitol, and a corporate board of directors doing the same?

Smith was writing at a time before the corporation became the principal form of business organization. But, his point is that business managers make it their full-time job to know what their customers want (information), and how to satisfy those wants. That is what they specialize in. Gathering and responding to information in a decentralized manner is more efficient that doing so in a centralized manner (as was attempted by the Soviet central planners), because it is impossible for a central overseer to know everything everyone wants, gauge the availability of resources, and efficiently match the latter to the former.

[Scoob]

Smith was writing at a time before the corporation became the principal form of business organization. But, his point is that business managers make it their full-time job to know what their customers want (information), and how to satisfy those wants. That is what they specialize in. Gathering and responding to information in a decentralized manner is more efficient that doing so in a centralized manner (as was attempted by the Soviet central planners), because it is impossible for a central overseer to know everything everyone wants, gauge the availability of resources, and efficiently match the latter to the former.

Gotcha. Interesting.

But here's the problem. What determines "what people want"? Marx wrote a lot about how the market creates "needs" in people.

Is corporate success (or success of individual products) determined solely or even primarily by being "what people want" - or are there other factors such as power in the market (of course this is where economy of scale, advertising, etc come into play), widespread distribution, etc?

A lot of advertising is simply behavioral modeling: ads show a powerful, successful, beautiful, or socially prominent person enjoying a product, and people copy. Or, people simply know a lot of others who use a product, so they follow suit.

Business managers and salesmen are not simply passive agents who determine what consumers desire, and fulfill that need. (Of course in general any information gathering is a quite active process that creates the information as much as it "discovers" it).

[Telperion]

Well, it depends on the nature of competition in the market in question. In 'perfect competition', where all products are uniform and all firms are price-takers, the determination of wants/utilities is exogenous to the market. However, in imperfect competition, where firms have some price-making power and engage in product differentiation and related activites such as market segmentation, targeting, positioning, advertising, etc., utilities are at least partly endogenous to firm behaviour.

The fact that I can only answer your question by engaging in economic doublespeak undoubtedly proves what a corrupt person I am.

[Scoob]

Well, it depends on the nature of competition in the market in question. In 'perfect competition', where all products are uniform and all firms are price-takers, the determination of wants/utilities is exogenous to the market. However, in imperfect competition, where firms have some price-making power and engage in product differentiation and related activites such as market segmentation, targeting, positioning, advertising, etc., utilities are at least partly endogenous to firm behaviour.

The fact that I can only answer your question by engaging in economic doublespeak undoubtedly proves what a corrupt person I am.

You're speaking over my head. I don't have training in economics. Sorry if my prose was turgid in previous posts, in case you were commenting on that.

Ideas about "perfect competition" have about as much meaning for me as promises of a "worker's paradise."

Anyway, uh... what were we talking about? Planned economies versus free markets? Of course the reality most of the time is that once free markets develop, they become monopolies or oligopolies, and my question is how this is different than state planning.

[Telperion]

Sorry if my prose was turgid in previous posts, in case you were commenting on that.

No, I was just engaging in a self-deprecatory remark. It wasn't directed at you.

Ideas about "perfect competition" have about as much meaning for me as promises of a "worker's paradise."

Anyway, uh... what were we talking about? Planned economies versus free markets? Of course the reality most of the time is that once free markets develop, they become monopolies or oligopolies, and my question is how this is different than state planning.

Well, I apologize for getting too jargony. But, it's difficult to answer that question as an economist would without getting into their technical concepts. Basically, 'perfect competition' is the starting point of economic analysis. It assumes that all products are uniform, and that no firm has the power to individually influence the price of the product (which is set purely by the market equilibrium of supply and demand). So, no efforts at product differentiation (and things flowing from it, like marketing/advertising) are made. This is a hypothetical model, but closely matched by modern commodities for grain, soy, etc.

Imperfect competition is much more common, and involves several modifications to the basic economic model of perfect competition. In such a situation, firms do have the power to exercise some individual influence on the price of their products, and accordingly engage in price and other forms of competition (product differetiation) in order to maximize their profits.

But, in both of these situations, economic decision-making is decentralized. Or, to put it another way, information about economic decisions (relating to supply and demand) is processed in a decentralized way, because firms specialize in various products, and do not try to understand or influence all of the information about supply and demand in the economy as a whole. Firms individually respond to purchasing patterns and other behaviour, even as they try to shape consumer preferences (in imperfect competition). Even a monopoly is a decentralized decision-maker - e.g. a company that has a monopoly in computer operating systems software isn't also trying to process and coordinate information about every other product in every other sector of the economy at the same time. It focuses on its own niche.

That is very different from a situation where a centralized decision-maker tries to match supply and demand, across all products and all resources for all producers and consumers, when he cannot possibly track and coordinate the billions of items of information he would have to in order to do this efficiently.

If you want a more detailed explanation of why that is, there is an excellent book on the topic by Janos Kornai called "The Socialist System: The Political Economy of Communism", and I can try to outline his arguments for you if you're interested.