adam smith

The Compassion of Adam Smith

by Ryan Young on October 14, 2011 · 1 comment

in Economy, Sanctimony, Zeitgeist

It’s much more fashionable to attack Adam Smith these days than to read him. Yes, he favored economic liberalism, which wasn’t exactly in style in his time. Nor is it in ours. History remembers him as cold and calculating. But in real life, he was neither.

There are two main drivers behind Smithian liberalism, neither of them cold or calculating. One is that man is a social animal. The foundation of Smith’s moral theory is the impartial spectator theory. People figure out the right thing to do by asking themselves if an impartial third party would approve of their actions. Empathy — thinking of others and feeling for them — is at the very heart of Smithian morality.

Take trade, for example. Smith is well known for being an ardent free trader. But why? Because trade is an inherently peaceful act.It is moral.

If you have something I want, I’m not going to hit you over the head and steal it. No impartial spectator would approve of that. Instead, I’ll trade it to you for something you value even more. Everyone wins.

If you don’t think you’ll gain from the exchange, then nobody can force you to make it. And no one will trade with you unless you treat them with civility and dignity. Trade is much more moral than the alternative.

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Joe Biden vs. Adam Smith

by Ryan Young on November 18, 2010 · 1 comment

in Economy, Personal Liberty, Politics as Usual, Sanctimony, Zeitgeist

Vice President Joe Biden recently said that every great idea of the last two-plus centuries came from government. My colleague Alex Schibuola and I rebut him over at The Daily Caller using Adam Smith’s book The Theory of Moral Sentiments as our weapon of choice. Biden, it turns out, is an almost perfect example of what Adam Smith described as the “man of system.” This is not a good thing.

As Smith put it:

The man of system … is often so enamored with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it … He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board.

The problem, of course, is that human beings are not chess pieces. They have their own wants and desires. They move on their own. The man of system does not take this into account. This is why his plans fail time after time, even if he has the best of intentions.

Read our whole article here.

For those of you interested in learning more about Adam Smith, I couldn’t recommend him more highly. Don’t be scared off by his 18th-century prose style. Sit down with either of his books for less than an hour and you’ll develop and ear for it.

I don’t agree with everything Smith said; he invented the labor theory of value. But he was a keen observer of human nature. He was also a kindly soul, who wanted man to be free, happy, and prosperous. The overarching theme of his thought is mankind as social creature.  Our social instincts color how we form our notions of morality (the impartial spectator theory), and explain why economies function the way they do (peaceful exchange, as opposed to simple theft).

The Theory of Moral Sentiments is available for free at the Online Library of Economics and Liberty. You can also get a hard copy or a Kindle edition from Amazon.

For help wading through and digesting Smith’s arguments, I recommend Russ Roberts and Dan Klein’s six-part podcast series about the book, and D. D. Raphael’s short and readable The Impartial Spectator: Adam Smith’s Moral Philosophy.

Other quality secondary sources on Smith include E.G. West’s short-yet-thorough biography, and P.J. O’Rourke’s On the Wealth of Nations, which pairs Smith’s economic theories with O’Rourke’s mordant wit.

Image credit: Joeff’s flickr photostream.

Adam Smith on Lotteries

by Ryan Young on November 10, 2010

in Economy, Odds & Ends, Precaution & Risk

In many places, lotteries are the only legal form of gambling. And even then, only the government is allowed to run them. This may be because lottery profit margins are often 30 percent or more. Casinos average about 5 percent. Lotteries are the worst possible deal for gamblers.

Why do people still play lotteries, then? It’s because humans have an inherent cognitive bias to overestimate the odds of success, and underestimate the odds of failure. This is a useful cognitive defect, because it encourages risk-taking. It was evolutionarily useful back in our hunter-gatherer days. And it remains so today; there would be far less entrepreneurship if people saw odds more clearly. But there are drawbacks. Lotteries are among them.

I didn’t know there were state-run lotteries in 1776, but apparently there were, because Adam Smith explains what a bad deal they are in The Wealth of Nations:

The world neither ever saw, nor ever will see, a perfectly fair lottery; or one in which the whole gain compensated the whole loss; because the undertaker could make nothing by it. In the state lotteries the tickets are not really worth the price…

Many people think that buying more tickets improves one’s odds of winning. But Smith saw that this was not a wise strategy:

There is not, however, a more certain proposition in mathematics, than that the more tickets you adventure upon, the more likely you are to be a loser. Adventure upon all the tickets in the lottery, and you lose for certain; and the greater the number of your tickets the nearer you approach to this certainty.

(Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 124-25.)

Dear Mr. Biden: Vice Presidents Were Meant to Be Seen, Not Heard

by Alex Schibuola on October 27, 2010 · 1 comment

in Culture, Politics as Usual, Zeitgeist

Vice President Joe Biden claims: “Every single great idea that has marked the 21st century, the 20th century and the 19th century has required government vision and government incentive.”

I believe that Adam Smith wrote a very accurate description of Mr. Biden in the 18th century (before government vision and incentives too!):

The man of system…is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it.

He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them…

…in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

(Adam Smith, Theory of Moral Sentiments, 1759)

Would Mr. Biden like to also step up and claim credit for the following government achievements too?

Roosevelt’s Japanese internment camps, legitimacy of slavery in the world, inflation, war after war after war, Jim Crow laws, nuclear weapons, biological weapons, corporate welfare and bailouts, Fannie Mae, Freddie Mac, Hitler’s Holocaust (12 million dead), Stalin’s Soviet Union (20 million dead), Mao’s Communist China (40 million dead), Kim Jong Il’s North Korea (body count still in progress), Chavez’s Venezuela (a.k.a. Titanic), Mugabe’s Zimbabwe, the suppression of liberty. I could go on and on…

Mr. Biden, I find your vanity and conceit to be overwhelming.

Marcus Aurelius: Emperor, Philosopher, Economist

by Ryan Young on December 11, 2009

in Culture, Economy, Odds & Ends

Gibbon’s Decline and Fall begins with the death of Marcus Aurelius in 180 AD. It was all downhill from there.

Besides being a well-regarded emperor who was succeeded by an ill-regarded son, Marcus was a philosopher. Reading the works of Epictetus turned him into a devoted stoic as a young man. Marcus’ book Meditations remains the sterling example of the stoic mindset: civility, moderation in all things, and above all, taking triumph and tragedy with the same quiet dignity.

Marcus also had a bit of the economist in him. Despite predating Adam Smith by sixteen centuries, Meditations contains an excellent example of opportunity costs. Only the law of demand is more important in the economist’s toolkit. As a way of saying “mind your own business,” he writes:

Do not waste what remains of your life in speculating about your neighbours, unless with a view to some mutual benefit. To wonder what so-and-so is doing and why… means a loss of opportunity for some other task.*

*Meditations, III.4; trans. Maxwell Staniforth.

Appetite for Creative Destruction

by Iain Murray on February 2, 2009 · 2 comments

in Culture, Deregulate to Stimulate, Economy, Personal Liberty, Zeitgeist

Duff McKagan of Guns n’ Roses fame is going to be writing on financial matters at Playboy.com. What makes this more interesting than the simple fact it allowed me to type that last sentence is that Duff has outed himself as a free-marketer. He says:

I do find how money works rather fascinating. Adam Smith, the main person looked at to be the founder of capitalism, was a simple but brilliant economist who had particular ideas on how a free market would take care of itself. The theory of every little niche being filled in the marketplace seems too ‘free’ to actually work…but it has for the most part over the last 240 years. This is a statement made free of politics by the way.

Duff gets my vote for Mayor of Paradise City.