Adam Smith: Is Private Vice a Public Virtue?

My recent musings on selfishness (here and here) have reminded me of Adam Smith (1723-1790) and his economic theory. Although I don’t think that he, himself, characterized his theory like that, his thought has sometimes been summarized by saying that “private vice is public virtue,” meaning that the selfish motivation of individuals actually benefits society at large because it creates competition and therefore better services.

But like in my previous posts, here, too, I would argue that the word “selfishness” is inappropriate. Legitimate self-interest can be a public virtue, yes, but not selfishness. It is not selfish of the baker to want to make a living by selling his baked goods. Sure, he probably does not sell it out of altruistic motives; he sells his because he wants to survive and to take care of his family or other dependants, if he has any. He acts out of a legitimate self-interest, and as a by-product he also happens to feed other people.

My inclination is to distinguish this kind of self-interest, which is indeed the driving force of the economy, from selfishness, which is ultimately destructive for society. For instance, if a CEO makes several hundred times what his average employee makes, well, I think that would qualify as selfishness. Even an economic libertarian like Friedrich von Hayek, whose Road to Serfdom I read the other day, would probably get a heart attack if he heard some of the current ratios between the incomes of CEOs and normal workers.

A thorny issue related to selfishness versus legitimate self-interest is when you make a product that is actually harmful for the consumer. Many products in modern society entail risks or have certain harmful effects, such as cars, which carry a pretty high risk of leading to injury or even death and are rather harmful for the environment. And yet, would we call a car manufacturer selfish for creating a partially harmful product?

Still, there are cases in which the case is pretty clear-cut: aggressively marketing junk food to young children, forcing China into accepting your opium (or, nowadays, taking advantage of the legal situation in China to try hard to get Chinese people addicted to tobacco, even after everything we know about the effects of smoking by now), or using cheap labor from countries with insufficient labor-protection laws—those are the kinds of selfish behaviors that go beyond legitimate self-interest and are ultimately destructive for society.

So, I would not say that “private vice is a public virtue,” but “private self-interest can be a public virtue.” Even in terms of economics, selfishness remains a vice that can be a very destructive force.

P.S.: I chose the example of tobacco marketing in China carefully; I do not mean that states should outlaw smoking completely. Even when it comes to producing cigarettes, the issue of selfishness versus legitimate self-interest is not an easy one; see the movie Thank You for Smoking to illustrate the point.

Does Capitalism Make People Happy?

A few days ago, I talked about Erich Fromm’s psychological critique of Capitalism. People familiar with the thought of Karl Marx might have noticed the similarity of Fromm’s position with Marx’ theme of alienation. As a matter of fact, Fromm was strongly influenced by Marx. Which does not mean that one ought to dismiss Fromm out of hand. Personally I tend to consider Marx’ psychological critique of Capitalism his strongest point, much stronger than his utopian dreams of a revolution by the proletariat.

One may ask, of course, if there is any way to prove or disprove Fromm’s critique. Is there any hard evidence about people within capitalistic societies being less happy than in other societies?

Now as far as I understand Fromm, one cannot reduce his observations merely to the issue of happiness and psychological illness, but if one were to do so, there are in fact several worldwide studies on happiness. Obviously happiness is somewhat difficult to measure, but the studies I have read usually place Denmark at or near the top. And Denmark’s economy is a mix of Capitalism and Socialism.

In North America, Canada consistently outdoes the United States in happiness rankings, and again, Canada has more socialist elements than the more prominent economic powerhouse across its border. The United States, though the biggest economy in the world and one of the highest per-capita income countries, has not made it into the top ten in any happiness rankings I am aware of. It is beaten not only by the semi-socialist Scandinavian countries, but also by much less wealthy places like Costa Rica, Bhutan, The Bahamas, Brunei, Antigua, Malaysia, Saint Kitts, Ireland, and Seychelles. In one study of 2006, it ranked right behind the United Arab Emirates.

Mainland Asian countries in general rank pretty low, whether wealthy or not (Japan ranking lower than China, for instance), and it would be interesting to ask why.

The Psychology of Capitalism

In my last post, I talked about democracy and free-market capitalism. But though I am not uninterested in political systems and economics as such, I am even more interested in the psychological effects of different political and economic systems.

Free-market capitalism has undoubtedly achieved much and continues to do so. Even issues like the environment might ultimately be better solved by a (more or less) free market than any alternative system. At least I’m open to the idea. But what of the human psyche? Does a consumer culture have ill effects on a psychological level?

Some noteworthy psychologists have thematized this. I am thinking, for instance, of Erich Fromm, who talked a lot about the contrast between “having” and “being,” and he asks whether the “having” culture of capitalism produces psychologically healthy individuals. People, according to Fromm, do not exist as independent individuals within a societal framework. Rather, their characters are molded by the socio-economic structure, and it is possible, says Fromm, for that whole structure to be psychologically unhealthy. In the case of capitalism, he believed that it produces a “manipulated personality” that is estranged from the world, from others, and from itself. (See, for instance, Fromm’s book The Sane Society.)

What do you think? Is free-market capitalism better at producing material advances than psychological well-being? Are there inevitable ill effects of capitalism on the human psyche?

Do We Actually Have a Democracy? Do We Actually Have a Free Market?

Considering the economic trouble in the Eurozone at the moment, this is a good opportunity to take a break from my obsession with Immanuel Kant and instead jot down a few thoughts on economics—not specifically the current situation but more generally.

One basic question is what economic system is best. A free-market economy or a more controlled economy?

I suppose something similar may be said about a free-market economy as Churchill said about democracy. It is the worst form of government, except for all the other forms that have been tried from time to time. However, Churchill’s witty statement about democracy unwittingly raises an important issue, namely the fact that modern nation states do not actually practice pure democracy.

If an ancient Athenian stepped into a time machine and arrived, say, in modern America, I doubt he would recognize the political system as a democracy. The American people have almost no direct vote on anything, the limited democracy being only representational. Then there are these big power houses of Congress that are modelled on Rome rather than Athens. Furthermore, our hypothetical time traveller would be surprised to see in a supposed democracy such an extremely undemocratic institution as the Supreme Court, in which the justices not only serve for life, but are not even appointed by the people. The President himself appoints them. And speaking of him: What on earth is a President doing in a democracy? Even having something like triumviri (three leaders) would be a stretch on the democratic spirit, but a single person of such immense importance? One, furthermore, who is Commander in Chief? Hail Caesar. To the Athenian democrat, this smacks mightily of a dictatorship, meaning the rule of a single person.

Now, my point is not to say that the United States and other modern states have fallen from the high ideal of pure democracy and need redemption. Quite the opposite: By intentionally mixing in elements from other forms of government such as republics, oligarchies, and yes, even dictatorships, the Founding Fathers of the United States actually improved upon the idea of a democracy. They heeded Plato’s and other people’s critiques of the inherent weaknesses of democracies (see, for instance, Plato’s analogy of the Ship of State in The Republic) and attempted to safeguard against them through these non-democratic elements.

Likewise, only because a free-market economy might be better (or at least less bad) than all the other systems that have been tried from time to time, it might still be possible to improve upon it by mixing in other elements. In fact, one can argue that this has already happened, including in the United States.

Let us again imagine a time traveller, only this time an American Capitalist from the early 20th century being catapulted just a century forward. Would he really recognize the current economic system in the United States – let alone in other countries – as a free-market economy? Would he not rather call it socialism? And I am not talking about Obama’s health-care reform here. I mean, first of all, the changes to the free-market economy through Roosevelt’s New Deal in the 1930’s: the National Recovery Administration, the Agricultural Adjustment Act, the acts regulating credit and stock exchanges, the Glass-Steagall Act for steering bank investments, the empowerment of worker unions through the Wagner Act, the creation of Social Security and income support programs, other acts in support of families and job guarantees, minimum-wage laws, ad almost infinitum.

Then came World War II, which further changed the once free-marked economy. It increased the income tax, multiplied the size of the government to unprecedented proportions, and reshaped the whole economy. Government intervention became the norm, the unions that had been created a decade earlier now gained momentum, government health-care spending expanded, not to mention the economic role played by the United States on the international stage through the Marshall Plan, the International Monetary Fund and other agreements. None of these developments were pure free-market forces, but hands-on interventions of the government in the economy.

I do not now wish to debate whether specific aspects of the New Deal and the changes during World War II were good or bad, but mostly to point out that many of these changes are now seen as normal and quite compatible with a (supposedly) free-market economy. How many people are out on the streets protesting against Social Security nowadays? How many people want to get rid of all government-protected labor unions? How many truly think the government should play no economic role on the world stage? Yet, a Capitalist from the early 20th century would hardly recognize these features as belonging to a free market. He might think we are joking if we claim to be for a free market and yet have no objection to Social Security. Marxists in disguise, that’s what he would probably call us.

But, just like with the non-democratic elements in modern democracies, might not some (certainly not all!) of these “socialist” measures in the free-market have been an improvement upon the system? And might there not be further improvements to be made?

On the other hand, there seems to be plenty of evidence that administering medicine to free-market forces often proves worse in its side effects than the disease it is meant to treat. Increase minimum wage and you increase unemployment. Keep down inflation, and you may also keep down growth. Increase control, and you increase corruption (India, anyone?), because you need people to do the controlling. But who controls the controllers? Sadly, often money does. Prohibit alcohol and you get an Al Capone.

The list could go on. But I think I ought to draw in my reins here, get off my laptop and start implementing some order in our way too free-looking kitchen.

That’s my two cents for now. As always, objections are welcome.