TGIF: Benevolent Self-Interest

The most famous sentence in Adam Smith's 1776 treatise, An Inquiry into the Nature and Causes of the Wealth of Nations, appears in Book I, Chapter 2:

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.

It's a beautifully written sentence (except that he should have twice written "his" instead of "their"). He might have written, "It is not from the benevolence of producers that we expect consumer goods, but from their attending to their businesses." Ho hum. Who would have remembered it?

More importantly, however, Smith's sentence pointed to a core truth of full liberalism, or what he called the "obvious and simple system of natural liberty": namely, you cannot properly own other people and should not act as if you do. That's the pro-freedom, anti-slavery premise, written about 30 years before Great Britain would begin to stop the slave trade between African chieftains and Europeans, among others. Let's never forget that while the West did not invent slavery (far from it), the West, uniquely, did invent anti-slavery both in theory and practice. The first anti-slavery organization was founded by Quakers in 1774-75 in Philadelphia, my hometown. English Quakers followed in 1787. No known anti-slavery societies in Africa, Arabia, or Asia have come to our attention.

In his sentence Smith was saying that if you want someone (other than, say, a loved one or friend) to do something for you, you offer money or some product he wants in return. You transact business. The person behind the counter does not exist for your sake, and you should not expect him to work long hours out of duty. He has a life precious to him and need not justify his existence. He is an end in himself, as John Locke had written in the previous century. (Yes, Kant said it too, but for him it was not connected to the pursuit of happiness.)

Smith continued:

We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens....

Here I differ with Smith. Self-love, that is, concern with one's interests, is part of our humanity. No conflict exists between making the most of the one life one lives and goodwill toward others. We are engaged in a common challenge—living—and empathy naturally flows from that fact. It is a pernicious doctrine, indeed, that holds otherwise. Clearly, a merchant or manufacturer prospers by attending to his customers' preferences. Real liberals have always emphasized the fundamental harmony of interests in the market. The great libertarian journalist John Stossel calls this the "double thank you" that consummates transactions.

I suspect that the word selfish acquired its unfortunate and exclusively negative sense as a consequence—emanating from Jerusalem, not Athens—of a hidden agenda aimed at acquiring power. Smith regretted that moral philosophy had become detached from the Greek notion of the pursuit of happiness. The Wealth of Nations (Book 5, Chapter 1, Part III) includes this passage:

Ancient moral philosophy proposed to investigate wherein consisted the happiness and perfection of a man, considered not only as an individual, but as the member of a family, or a state, and of the great society of mankind. In that philosophy, the duties of human life were treated of as subservient to the happiness and perfection of human life. But, when moral as well as natural philosophy came to be taught only as subservient to theology, the duties of human life were treated of as chiefly subservient to the happiness of a life to come. In the ancient philosophy, the perfection of virtue was represented as necessarily productive to the person who possessed it, of the most perfect happiness in this life. In the modern philosophy, it was frequently represented as almost always inconsistent with any degree of happiness in this life, and heaven was to be earned by penance and mortification, not by the liberal, generous, and spirited conduct of a man.... By far the most important of all the different branches of philosophy became in this manner by far the most corrupted. [Emphasis added.]

He must have had a premonition about Kant, who developed his duty-based moral theory in the following decades. How Smith's passage relates to his first book, The Theory of Moral Sentiments, I will leave to others. We don't need to explain empathy in terms of sentiment or impartiality. Rational self-interest will get us where we want to go.

Continuing with Smith's point about market transactions (Book IV, Chapter 2):

But it is only for the sake of profit that any man employs a capital in the support of industry; and he will always, therefore, endeavour to employ it in the support of that industry of which the produce is likely to be of the greatest value, or to exchange for the greatest quantity either of money or of other goods.... [E]very individual ... intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Then Smith goes a step further:

Nor is it always the worse for the society that it was no part of [his intention]. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

People who dislike market-oriented society seem to despise what Smith celebrated. "It's not enough to provide wanted goods and services to strangers," they'd say, "You should do it because you love them." Profit is seen as a spoiler. In this view, the profit seeker lacks moral worth because he benefits from serving customers. However, that's a feature, not a bug: in the broader context, the pursuit of self-interest in a free society ultimately benefits us all.

TGIF: The Great Carl Menger

There can be no doubt among competent historians that if ... the Austrian School has occupied an almost unique position in the development of economic science, this is entirely due to the foundations laid by this one man.... [I]ts fundamental ideas belong fully and wholly to [?].... [W]hat is common to the members of the Austrian School, what constitutes their peculiarity and provided the foundations for their later contributions is their acceptance of the teaching of [?]. —F. A. Hayek

Who was Hayek writing about?

Carl Menger, of course. Menger (1840-1921), a professor at the University of Vienna, launched the Austrian school of economics with his trailblazing Principles of Economics, published in 1871. (It was not translated into English until 1950.) He is famous for being one of three economists who independently and nearly simultaneously shifted economics onto a radically different track: marginal utility. Hence, the term marginal revolution in economics.

This was a radical recasting of value and price theory. "The value of goods arises from their relationship to our needs, and is not inherent in the goods themselves. With changes in this relationship, value arises and disappears...," Menger wrote. "It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being." Menger was not a moral philosopher but an economist, explaining how human action generates market phenomena such as prices.

While the classical economists thought in terms of entire classes of goods and subscribed to the labor, or cost-of-production, theory of value and price, the marginal-utility theorists focused on how individuals act to satisfy their wants. A person chooses and necessarily makes tradeoffs among discrete units of goods—a quart of milk, a dozen eggs, a pound of ground beef—according to his unique personal circumstances: his preferences, purposes, aspirations, likes, and dislikes. He doesn't care how much labor or material went toward making a product. He cares about how useful a product is to his prioritized purposes. The more units he has of a given good, the less valuable any one unit is because he would abandon his lowest ranked purpose if a unit were lost. That's the law of diminishing marginal utility. Overall, that consumers value particular goods imparts value to the factors of production—not vice versa. Means are valued for their contribution to ends. Menger emphasized this change in direction in the flow of value.

In this sense, value is subjective; it's a relationship between a valuer (the subject, or actor) and something he believes will increase his well-being. A person can err about whether a good will affect his well-being, but so long as he expects to benefit, he will value and pursue it. That will influence the market somewhat. (Hence, the commitment to subjectivism in economic analysis does not commit one to subjectivism in philosophy.)

Since personal circumstances vary widely, so do individuals' relative valuation of goods, creating potential mutual gains from trade. In other words, people exchange unequal values from their points of view, contrary to what the classical economists thought. 

Menger took economic subjectivism and marginalism further than his co-revolutionists, William Stanley Jevons and Leon Walras. For instance, he realized that value scales rank rather than measure preferences. There are no utils.

Despite his plan, Menger did not develop his new approach all the way, but he got the ball rolling. That ball was moved further along by his intellectual heirs, including Eugen von Böhm-Bawerk; Ludwig von Mises: F. A. Hayek, who won a Nobel Prize in 1974; Murray Rothbard; Israel Kirzner; and far too many next-generation economists to name. (For more on Menger's achievements, see David Henderson's article "Carl Menger" and Steven Rhoads's "Marginalism." Also see Peter Klein's foreword to the Menger book linked above.)

What I find interesting about Menger lately is his commentary on Adam Smith and the issue Smith is so famous for, the division of labor. I quote from Menger's Principles:

“The greatest improvement in the productive powers of labour,” says Adam Smith, “and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.” And: “It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people.”

In such a manner Adam Smith has made the progressive division of labor the central factor in the economic progress of mankind—in harmony with the overwhelming importance he attributes to labor as an element in human economy. I believe, however, that the distinguished author I have just quoted has cast light, in his chapter on the division of labor, on but a single cause of progress in human welfare while other, no less efficient, causes have escaped his attention.

What escaped Smith's attention? you ask. In reply, Menger described a primitive economy that enjoyed the advantages of dividing up and specializing in the various laborious tasks. To be sure, the people in that economy would be better off than otherwise. But:

Let us now ask whether a division of labor carried so far, would have such an effect on the increase of the quantity of consumable goods available to the members of the tribe as that regarded by Adam Smith as being the consequence of the progressive division of labor. Evidently, as the result of such a change, this tribe (or any other people) will achieve either the same result from their labor with less effort or, with the same effort, a greater result than before. It will thus improve its condition, insofar as this is at all possible, by means of a more appropriate and efficient allocation of occupational tasks. But this improvement is very different from that which we can observe in actual cases of economically progressive
peoples. [Emphasis added.]

Menger here says that the mere division of labor will take a group only so far, but its progress must fall short of what we see in the world. What does he mean?

Let us compare this last case with another. Assume a people which extends its attention to goods of third, fourth, and higher orders, instead of confining its activity merely to the tasks of a primitive collecting economy—that is, to the acquisition of naturally available goods of lowest order (ordinarily goods of first, and possibly second, order). If such a people progressively directs goods of ever higher orders to the satisfaction of its needs, and especially if each step in this direction is accompanied by an appropriate division of labor, we shall doubtless observe that progress in welfare which Adam Smith was disposed to attribute exclusively to the latter factor. We shall see the hunter, who initially pursues game with a club, turning to hunting with bow and hunting net, to stock farming of the simplest kind, and in sequence, to ever more intensive forms of stock farming. We shall see men, living initially on wild plants, turning to ever more intensive forms of agriculture. We shall see the rise of manufactures, and their improvement by means of tools and machines. And in the closest connection with these developments, we shall see the welfare of this people increase.

By "goods of third, fourth, and higher orders," Menger of course meant producer, or capital, goods, that is, intermediate manmade products intended to produce goods for or closer to the consumer level.  Tools, equipment, and machines magnify the productivity of labor many times. Without them, human output is meager, even with a division of labor. This is Menger's complex structure of production, the stages of which are classified according to how close or far in time they are from the retail level.

Time (which implies risk) is revealed as critical. The higher the order, the longer the period until the final good is ready for sale to consumers. "Thus," Menger wrote, "in the process of change by which goods of higher order are gradually transformed into goods of first order, until the latter finally bring about the state called the satisfaction of human needs, time is an essential feature of our observations." Radical.

The further mankind progresses in this direction, the more varied become the kinds of goods, the more varied consequently the occupations, and the more necessary and economic also the progressive division of labor. But it is evident that the increase in the consumption goods at human disposal is not the exclusive effect of the division of labor. Indeed, the division of labor cannot even be designated as the most important cause of the economic progress of mankind. Correctly, it should be regarded only as one factor among the great influences that lead mankind from barbarism and misery to civilization and wealth....

The Austrian school thus started with Menger's observation that Adam Smith, widely held to be the father of economics, overlooked "the most important cause of the economic progress of mankind." That took some confidence.

In its most primitive form, a collecting economy is confined to gathering those goods of lowest order that happen to be offered by nature. Since economizing individuals exert no influence on the production of these goods, their origin is independent of the wishes and needs of men, and hence, so far as they are concerned, accidental.

People in such a condition are fundamentally passive concerning their environment. A low standard of living should surprise no one.

But if men abandon this most primitive form of economy, investigate the ways in which things may be combined in a causal process for the production of consumption goods, take possession of things capable of being so combined, and treat them as goods of higher order, they will obtain consumption goods that are as truly the results of natural processes as the consumption goods of a primitive collecting economy, but the available quantities of these goods will no longer be independent of the wishes and needs of men. Instead, the quantities of consumption goods will be determined by a process that is in the power of men and is regulated by human purposes within the limits set by natural laws. Consumption goods, which before were the product of an accidental concurrence of the circumstances of their origin, become products of human will, within the limits set by natural laws, as soon as men have recognized these circumstances and have achieved control of them.

Human beings moved from passive to active in satisfying their wants. That was a turning point in history.

The quantities of consumption goods at human disposal are limited only by the extent of human knowledge of the causal connections between things, and by the extent of human control over these things. Increasing understanding of the causal connections between things and human welfare, and increasing control of the less proximate conditions responsible for human welfare, have led mankind, therefore, from a state of barbarism and the deepest misery to its present stage of civilization and well-being, and have changed vast regions inhabited by a few miserable, excessively poor, men into densely populated civilized countries. Nothing is more certain than that the degree of economic progress of mankind will still, in future epochs, be commensurate with the degree of progress of human knowledge. [Emphasis added.]

If only he could see what reason, capital accumulation, division of labor, and trade have wrought! The lesson we should take from Menger is that all government actions that obstruct the formation of capital and free exchange—such as tariffs, to pick a random example—torpedo human welfare.

What Kind of Liberal?

Not to put too fine a point on it, but I am a Locke-Smith liberal.

If Adam Smith Were Writing the Wealth of Nations Today

“It is not from the benevolence of the mask maker, glove maker, or hand-sanitizer maker that we expect our person protective equipment, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.”

TGIF: Trading Places

"What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war." --Henry George

When Donald Trump can propose tariffs on imported steel, aluminum, washing machines, and solar-panels without being roundly booed off the stage, one has to wonder if reason has any power to win the day. Is this truly a democracy of dunces?

Read TGIF at The Libertarian Institute.

TGIF (The Goal Is Freedom) appears on Fridays. Sheldon Richman, author of America's Counter-Revolution: The Constitution Revisited, keeps the blog Free Association and is executive editor of The Libertarian Institute. He is also a senior fellow and chair of the trustees of the Center for a Stateless Society and a contributing editor at Antiwar.com.

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What Gets Rewarded?

Here is another one of my columns for the American Institute for Economic Research: "What Gets Rewarded?"

As Usual, Adam Smith Had It Largely Right

I'm an anarchist, but I still like this from Adam Smith (1755), a lovely man, indeed:

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.

By comparison with today, how nice does "peace, easy taxes, and a tolerable administration of justice" sound? 

TGIF: Of Bumblebees and Competitive Courts

Considering that what liberty we continue to enjoy in the West is a product in large part of competing legal institutions operating within overlapping jurisdictions hundreds of years ago, it's curious that so many libertarians still believe such an order -- an essential feature of free-market, or natural-law, anarchism -- would be inimical to liberty. Why wouldn't that which produced liberty be up to preserving it?

TGIF: Tackling Straw Men Is Easier than Critiquing Libertarianism

Maybe I’m being unreasonable, but I think it behooves a critic to understand what he’s criticizing. I realize that tackling straw men is much easier than dealing with challenging arguments, but that’s no excuse for the shoddy work we find in John Edward Terrell’s New York Times post, “Evolution and the American Myth of the Individual.”

In his confused attempt to criticize libertarians (and Tea Party folks, whom I’ll ignore here), Terrell gets one thing right when he says, “The thought that it is both rational and natural for each of us to care only for ourselves, our own preservation, and our own achievements is a treacherous fabrication” (emphasis added).

Indeed it is. Unfortunately for Terrell’s case, it’s his treacherous fabrication.

Read it here.