The Discerning Texan
All that is necessary for evil to triumph, is for good men to do nothing.
-- Edmund Burke
-- Edmund Burke
Thursday, February 10, 2005
Greenspan pays his respects to Adam Smith
Thanks to PrestoPundit for pointing to me to this most excellent tribute paid to Adam Smith in a speech by Alan Greenspan, a portion of which is reprised below. But by all means, read the whole thing:
It was left to Adam Smith to identify the more-general set of principles that brought conceptual clarity to the seeming chaos of market transactions. In 1776, Smith produced one of the great achievements in human intellectual history: An Inquiry into the Nature and Causes of the Wealth of Nations. Most of Smith's free-market paradigm remains applicable to this day.
Smith was doubtless inspired by the Physiocrats, as well as by his friend David Hume, his mentor Francis Hutcheson, and other participants in the Enlightenment. Early political economists had made impressive contributions, many of them anticipating parts of Smith's global view. But Smith reached beyond his predecessors and subjected market processes to a far more formidable intellectual analysis. One hears a good deal of Franz Joseph Haydn in the string quartets and symphonies of Wolfgang Amadeus Mozart; yet to my ear, at least, Mozart rose to a plateau beyond anything Haydn and his contemporaries were able to reach. So, too, in his sphere, did Smith.
He concluded that, to enhance the wealth of a nation, every man, consistent with the law, should be "free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of ... other ... men. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."
The individual is driven by private gain but is "led by an invisible hand" to promote the public good, "which was no part of his intention." This last insight is all the more extraordinary in that, for much of human history, acting in one's self-interest - indeed, seeking to accumulate wealth - had been perceived as unseemly and was, in some instances, illegal.
In the opening paragraphs of the Wealth of Nations, Smith recognized the crucial role played by the expansion of labor productivity in improving welfare when he cited "the skill, dexterity, and judgment with which labor is generally applied" as one of the essential determinants of a nation's standard of living. "Whatever be the soil, climate, or extent of territory of any particular nation, the abundance or scantiness of its annual supply must in that particular situation, depend upon ... the productive powers of labor."5 More than two centuries of economic thought have added little to those insights.
Smith, on remarkably little formal empirical evidence, drew broad inferences about the nature of commercial organization and institutions that led to a set of principles that would profoundly influence and alter a significant segment of the civilized world of that time. Economies based on those principles first created levels of sustenance adequate to enable the population to grow and later - far later - to create material conditions of living that fostered an increase in life expectancy. The latter development opened up the possibility that individuals could establish long-term personal goals, a possibility that was remote to all but a sliver of earlier generations.
Smith's ideas fell on fertile ground and within a very few decades verged on conventional wisdom. The ancient political power of the landed gentry, the major beneficiaries of the older order, was giving way to a new class of merchants and manufacturers that was a product of the Industrial Revolution, which had begun a quarter-century earlier. Pressures were building in Britain and elsewhere to break down mercantilist restrictions. But with Smith, the emerging elite found their voice and sanction.
Smith's sanction, however, was directed to the freedom of markets and trade, not to the new business elite, many of whose business practices Smith severely deprecated. He concluded that the competitive force unleashed by individuals in pursuit of their rational self-interest induces each person to do better. Such competitive interaction, by encouraging specialization and division of labor, increases economic growth.
Smith's essentially benevolent views of the workings of competition counteracted pressures for market regulation of the evident excesses of the factory system that had begun early in the eighteenth century. Those excesses were decried a century later by the poet William Blake as "... the dark Satanic mills" that by then characterized much of industrial England.
Perhaps if the Wealth of Nations had never been written, the Industrial Revolution would still have proceeded into the nineteenth century at an impressive pace. But without Smith's demonstration of the inherent stability and growth of what we now term free-market capitalism, the remarkable advance of material well-being for whole nations might well have been quashed. Pressures conceivably could have emerged to strengthen mercantilistic regulations in response to the stresses created by competition and to the all-too-evident ills of industrialization.
It was left to Adam Smith to identify the more-general set of principles that brought conceptual clarity to the seeming chaos of market transactions. In 1776, Smith produced one of the great achievements in human intellectual history: An Inquiry into the Nature and Causes of the Wealth of Nations. Most of Smith's free-market paradigm remains applicable to this day.
Smith was doubtless inspired by the Physiocrats, as well as by his friend David Hume, his mentor Francis Hutcheson, and other participants in the Enlightenment. Early political economists had made impressive contributions, many of them anticipating parts of Smith's global view. But Smith reached beyond his predecessors and subjected market processes to a far more formidable intellectual analysis. One hears a good deal of Franz Joseph Haydn in the string quartets and symphonies of Wolfgang Amadeus Mozart; yet to my ear, at least, Mozart rose to a plateau beyond anything Haydn and his contemporaries were able to reach. So, too, in his sphere, did Smith.
He concluded that, to enhance the wealth of a nation, every man, consistent with the law, should be "free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of ... other ... men. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."
The individual is driven by private gain but is "led by an invisible hand" to promote the public good, "which was no part of his intention." This last insight is all the more extraordinary in that, for much of human history, acting in one's self-interest - indeed, seeking to accumulate wealth - had been perceived as unseemly and was, in some instances, illegal.
In the opening paragraphs of the Wealth of Nations, Smith recognized the crucial role played by the expansion of labor productivity in improving welfare when he cited "the skill, dexterity, and judgment with which labor is generally applied" as one of the essential determinants of a nation's standard of living. "Whatever be the soil, climate, or extent of territory of any particular nation, the abundance or scantiness of its annual supply must in that particular situation, depend upon ... the productive powers of labor."5 More than two centuries of economic thought have added little to those insights.
Smith, on remarkably little formal empirical evidence, drew broad inferences about the nature of commercial organization and institutions that led to a set of principles that would profoundly influence and alter a significant segment of the civilized world of that time. Economies based on those principles first created levels of sustenance adequate to enable the population to grow and later - far later - to create material conditions of living that fostered an increase in life expectancy. The latter development opened up the possibility that individuals could establish long-term personal goals, a possibility that was remote to all but a sliver of earlier generations.
Smith's ideas fell on fertile ground and within a very few decades verged on conventional wisdom. The ancient political power of the landed gentry, the major beneficiaries of the older order, was giving way to a new class of merchants and manufacturers that was a product of the Industrial Revolution, which had begun a quarter-century earlier. Pressures were building in Britain and elsewhere to break down mercantilist restrictions. But with Smith, the emerging elite found their voice and sanction.
Smith's sanction, however, was directed to the freedom of markets and trade, not to the new business elite, many of whose business practices Smith severely deprecated. He concluded that the competitive force unleashed by individuals in pursuit of their rational self-interest induces each person to do better. Such competitive interaction, by encouraging specialization and division of labor, increases economic growth.
Smith's essentially benevolent views of the workings of competition counteracted pressures for market regulation of the evident excesses of the factory system that had begun early in the eighteenth century. Those excesses were decried a century later by the poet William Blake as "... the dark Satanic mills" that by then characterized much of industrial England.
Perhaps if the Wealth of Nations had never been written, the Industrial Revolution would still have proceeded into the nineteenth century at an impressive pace. But without Smith's demonstration of the inherent stability and growth of what we now term free-market capitalism, the remarkable advance of material well-being for whole nations might well have been quashed. Pressures conceivably could have emerged to strengthen mercantilistic regulations in response to the stresses created by competition and to the all-too-evident ills of industrialization.
