06 March 2009

Sen & Smith on Capitalism

"Indeed, early advocates of the use of markets, including Smith, did not take the pure market mechanism to be a freestanding performer of excellence, nor did they take the profit motive to be all that is needed. [. . .]

Smith never used the term "capitalism" (at least so far as I have been able to trace), but it would also be hard to carve out from his works any theory arguing for the sufficiency of market forces, or of the need to accept the dominance of capital. [. . .]

Smith viewed markets and capital as doing good work within their own sphere, but first, they required support from other institutions—including public services such as schools—and values other than pure profit seeking, and second, they needed restraint and correction by still other institutions—e.g., well-devised financial regulations and state assistance to the poor—for preventing instability, inequity, and injustice. If we were to look for a new approach to the organization of economic activity that included a pragmatic choice of a variety of public services and well-considered regulations, we would be following rather than departing from the agenda of reform that Smith outlined as he both defended and criticized capitalism." ~ Amartya Sen
As economics currently is taught in most universities it is more or less a discipline for amnesiacs. Students learn about this or that model as it applies to this or that narrow problem. There are some exceptions, of course, and they include many of our most accomplished economists. But while most of our Nobel winners, for instance, are considerably broader in their thinking, they are not necessarily attuned to the history of the discipline. Why is this important? Because instead of reading their fore bearers, economists read technical papers and textbooks that presume to have gotten the history of economic thought, and the lessons it offers, right. We get lots of market fundamentalism - peddling inane policy with religious fervor [1] -, often accompanied by vague reference to a caricature of Adam Smith. Not only is the fundamentalism unjustified so is the rationalization. You can find a useful essay - "Capitalism Beyond the Crisis" - by Amartya Sen here in the NYRB. Sen hammers on some of these points and his argument supports an experimental approach to political economic institutions [1] [2] [3] [4] [5] too.
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Update: A shorter essay by Sen discussing the same themes has appeared here in the Financial Times.
Update 2 (26 April 2010): And you can find yet another Sen essay in Smith retrieval here.

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