The economy: smart or dumb?

Photo: Christian Guthier, net_efekt, Creative Commons

Photo: Christian Guthier, net_efekt, Creative Commons

Turn to the back of most newspapers, at least the broadsheets, and you’ll come across the money pages – ‘your money and you’, etc.: how to get the best deal on energy suppliers, what to do with that inheritance, how to get on the property ladder, tips on buy-to-let, where ‘the smart money’ is going.

Here the economy appears as a game, full of risks and opportunities, that can be played safely, if only you are smart enough, or get the right advice. Some may see the money pages as a source of advice on how to be prudent and provide some security; others as how to make money and get rich.

But while the advice may seem sensible and what any smart person would heed, the implicit model of the economy is not ‘smart’ but actually a stupid and short-sighted one.

Money only has value if there are things on sale that it can buy. Those goods and services have to be produced. The money pages take the standpoint of the reader as a holder of money, and recommends actions that are likely to benefit them – either saving them money or making them additional money – regardless of whether they provide anything useful in return or do something that benefits others and the economy. On this view, economies are just the sum of individual choices. They promote a wholly self-interested view of economic life. Things are bought and sold, but without any consideration of who produces it, and what they get in return, or of any bad consequences for others.

Photo: Alan Cleaver, Creative Commons

Photo: Alan Cleaver, Creative Commons

The financial columns and websties appear to be for everyone, but what you can do with your money depends on how much you have, and many of the opportunities are simply beyond the pockets of many readers. What’s more, many offer ways of making money at the expense of other people.

Most people get money by working, but what’s distinctive about the money pages is that they deal with how to get more money without doing extra work, through so-called ‘investments’. These are assets that provide the holder with unearned income – that is, an income that doesn’t depend on providing a service of some sort in return. ‘Invest’ in buy-to-let housing and you’ll get money from rent and probably capital gains on the property too: any payment you receive that covers more than construction and maintenance costs is something for nothing.  (This is the something-for-nothing culture that we need to counteract!) Buy an ISA (Individual Savings Account) and the money will be ‘invested’ in stocks and bonds and other securities, and will yield you an income. Unless the shares or bonds are newly issued, then your money goes not to the firm but to the previous owners. (Even in the former case, the money need not be used for any productive investment: for example, it may just be used to raise funds to takeover another company – a mere change of ownership.) Only if your investment funds  improvements in the production of goods and services or of public wellbeing is it doing anything productive, and only then is the return something-for-something, as your action enabled that development. Otherwise it’s just a matter of buying a stream of unearned income or betting on the future value of things.

At this stage in the discussion someone usually pipes up with Adam Smith’s famous argument that in markets, it’s in the self-interest of sellers to give buyers what they want, because they’ll lose custom to competitors if they don’t. So, it’s best for everyone if each person follows their self-interest! Here’s the key sentence, the only one from Smith that some economists seem to know, or think they need to know.

“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 self-interest.” (Wealth of Nations, Bk I, ch.II)

Adam SmithIt’s clear from the passage preceding this quote that he did not rule out benevolence altogether as a motive in economic matters, and it’s clear from his life work that he valued public spiritedness: “The wise and virtuous man is at all times willing that his own private interest should be sacrificed to the public interest of his own particular or society.”(1) True, there are circumstances where the pursuit of self-interest in competititive markets does indeed encourage behaviour which benefits consumers. But it’s a huge jump from Smith’s tiny 18th century businesses to today’s Walmarts, Goldman Sachs and Microsofts. And Smith’s examples were businesses that produced goods, rather than operated in financial markets (e.g. for loans). And he was not talking about renting out property; let’s remember it was Smith who said of landlords that they love to reap where they have not sown (2); he was under no illusion that the pursuit of self-interest by landlords benefitted anyone else, least of all the tenants.

In markets, people generally do pursue their self-interest, partly because even if they wanted to know the social and environmental costs of their actions for others it would be difficult to get the information. But just because people follow their self-interest it doesn’t follow they have equal power to get what they want. The asset rich (bankers, landlords,  capitalists) can get what they want at the expense of the asset poor (borrowers, tenants,  employees). Nevertheless the butcher-baker-brewer quote has been used to whitewash anything and everything involving markets.

Particularly in the face of global warming, we cannot afford to perpetuate this myopic pursuit of self-interest, with no regard for the consequences for others and the planet. True, we need some markets, because there are lots of things whose production and distribution cannot be centrally planned; but you can have markets without minority private ownership of land and control of banks, and workers can have co-ownership of their market enterprises. But in addition economies need to be regulated to stop high carbon production and energy use, if we are not to give the next generation a frighteningly inhospitable planet. Only then would our economy be ‘smart’.

(1) Smith, A. (1759) The Theory of Moral Sentiments, Indianapolis: Liberty Press, pt VI, sec ii, ch 3.1, p 235 (6th and final edition published in 1790, a year after the 5th and final

2014-09-24 15.41.59 edition of The Wealth of Nations).

(2) (1776) The Wealth of Nations, Bk I ch.V


2 thoughts on “The economy: smart or dumb?

  1. Hola! I’ve been reading your weblog for a long time now
    and finally got the bravery to go ahead and give you a shout out from Huffman Tx!
    Just wanted to say keep up the great job!


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