Thursday, March 12, 2009

The Ambiguity of Capitalist Self-Interest

Adam Smith, author of The Wealth of Nations, patron saint of capitalism, believed that if all economic actors pursued their own self-interest, an "invisible hand" would guide the nation into general prosperity when properly joined to the miracle of market efficiency by governmental laissez faire.

Certainly there is some truth here -- but not the whole truth and nothing but the truth. Sometimes general pursuit of individual self-interest leads to national harm. Garrett Hardin's "The Tragedy of the Commons" illustrates.(1) In a pasture open to all (a commons), it is in the interest of each herder to add one more cow to graze, but if all add one or more cows, the whole commons could be ruined for everyone.

Apparently something like that is happening today. A lot of people, after the recent debauchery of greedy, profligate, credit-enabled spending, are saving -- all in the perceived self-interest of the former prodigals. But what the return of general prosperity requires now is consumer spending, in the absence of which the federal government must provide -- thus stimulus packages.

Again, note that nobody expects or even seems to think that the big banks should make the slightest sacrifice to begin lending, although the economy as a whole is dependent on their functioning as banks. Why, because it is not in the self-interest of individual banks to do so. As a result we all suffer. Many economists think this calls for a temporary nationalization of the essential financial institutions to break out of this bondage, but the Obama Administration seems too timid to do so, despite the fact that some Republicans call for it.

Memo to Adam Smith: Send us your recommendation immediately.

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