http://www.inv.com/logo.gif

                                   

 

 

                                     

                                    Adam Smith and the Modern World

 

 

With the recapture of the House in the 2018 elections, the Democrats have been able to shift the national discourse away from the latest distracting presidential tweet to substantive issues of policy, to solve problems:

 

A more equitable and therefore stable income distribution for all Americans.

Healthcare.

Climate change.

 

Before discussing the first, it is useful to begin at the beginning with Adam Smith who defined the market system of economic production. In 1776, he published, “The Wealth of Nations,” where he set forth the main motivating principle of the developing capitalist economy. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from the regard to their own interest.” 1 Taken alone, the motivation of self-interest would have torn society apart.

 

But Smith, writing from the more communal branch of the Scottish Enlightenment, was proudest of his foundation work, “The Theory of Moral Sentiments, 1759.” In that he traced social cohesion to its source, “How selfish soever man be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary for him...As we have no immediate experience in what other men feel, we can  form no idea the manner in which they are affected, but by convincing what we ourselves should feel in the like situation.” 2 Thus, Smith’s famous sympathy principle. “When we see a stroke aimed and just ready to fall upon the leg or arm of another person, we naturally shrink and draw back our own leg or own arm; and when it does fall, we feel it in some measure, and are hurt by it as well as the sufferer.” 3 Current medical research has confirmed that Smith’s observation of sympathetic human behavior results from actual brain structure. 

 

As opposed to feudal or imperial economies that grew by simple territorial aggrandizement, capitalist market economies grow by gaining new customers, fueled by self-interest and modulated by the sympathy principle. But, economic historian Robert Heilbroner wrote that Smith lived in a commercial world of small-scale enterprises. He did not foresee the rapid growth of other broad social forces: the acceleration of technology, the growth of large enterprises to achieve economies of scale and to address wide markets. 4 We also add the rise of mass politics to substitute for social structures that had become dysfunctional. This graph shows that beginning in the 19th century, world GDP/capita grew exponentially. What it does not show is the erosion of the traditional social orders of tribe, community and empire that resulted in considerable 19th century angst as the forces of modernization and colonialism repaved the entire world. Karl Marx accurately wrote, “Modern industry has established the world-market, for which the discovery of America paved the way. This market has given an immense development to commerce, to navigation, to communication by land.…the bourgeoisie developed, increased its capital, and pushed into the background every class handed down from the Middle Ages.” 5

 

The language of Adam Smith’s self-interest is often used to buttress the laissez faire economic system, allowing management to do “whatever it takes,“ as long as it might be profitable. Smith’s counter-balancing sympathy principle, implying stakeholder benefits rather than only shareholder profits, was totally swamped by the large-scale dynamism of the abstract and impersonal economic system. The end result was two world wars costing millions of lives and the Great Depression ruining a whole generation. Having won the Second World War, the United States set up a rule-based systems of trade and governance to ensure that large scale social chaos would not happen again.

 

In the 21st century, that international order is in question. Social orders require elites. Whether they are entrenched or rotated; an unspoken requirement of all elites is that they keep things running. Things aren’t running too well in the West. In the US the economy, beginning in the 1990s, ceased to provide good jobs for many Americans as their factories were shipped abroad; they then tried to maintain consumption by taking out consumer debt and subprime mortgages. This ended with the financial crisis of 2008. The subsequent slow recovery finally resulted in the election of the false populist, Donald Trump, by a despairing electorate. 6 In the UK, similar issues have resulted in an indecisive Brexit and weekly demonstrations in Paris by the provinces against the center. Further east, the issue is far-right power grabs exploiting a largely unfounded fear of immigrants. These are the result of social turmoil: stagnant and deindustralized economies in a large part of the West and drastic political changes since 1989 in Eastern Europe.

 

In the US, economic reforms to preserve a very rough purchasing power equality among groups are increasingly necessary, thus preserving liberal democracy. The role of government here is crucial because this is a large-scale problem.  On the philosophical level, this role evokes Smith’s now absent sympathy principle; on the public level, this evokes justice; and on the personal level, fairness. This really matters for the future. We won’t mention what can happen if US liberal democracy fails.

 

The US can respond by changing the trade system, to try to reproduce the broad ability to create wealth that existed in the past and/or letting economic forces do what they will and then redistributing the resulting income. It is important to avoid the division of society into two classes, the highly skilled and everyone else. 7

 

What is best for society? A classical economist might say that this is a meaningless question because you can’t combine individual utilities. In this formulation, there is no way to compare the pain felt by a billionaire who has to forego another jet with the pain felt by a head of a household without the money to buy food. But choice is necessary among social policies, drastically affecting the well-being of others. This is also the challenge AI faces. But AI has the advantage of forcing clarity on social issues because one is forced by the logic of computer code to explicitly define what is best.

 

In his article, “Impossibility and Uncertainty Theorems in AI Value Alignment,” Peter Eckersley discusses the logical problems of pure economic analyses by discussing the Impossibility Theorems of social welfare analysis. He notes that “ethical impossibility derives from competing objectives;” suggests (less convincingly) a way of logically dealing with these; discusses the human condition where people sometimes seek objectives that can’t be traded against each other; and describes how social objectives are achieved under different political systems. This article is highly quantitative. (We weren’t even aware of Axiology, which studies values. Value investing is financial axiology. )

 

A clearer discussion of the economic and moral issues involved is Hilary Greaves’ article, “Population axiology.” She is a professor of philosophy at the University of Oxford. Consider two possible economic policies that will affect both the numbers and the lifetime well-being of the people born. Greaves essentially describes two obvious objectives of economic polices in two possible states of the world, A and B.

 

 Totalism: Maximize total GDP (as in current economic assumption). A is better than B if and only if total well-being is higher in A than in B. But this rule, which can be implemented in an AI program, leads to the ethically “Repugnant Conclusion,” that for any state A there is a better state of affairs Z, in which more people have a life that is barely worth living. Total GDP in Z is still maximized.

 

Averagism: Maximize per capita GDP (such as in the utilitarian goal of the greatest good for the greatest number). A is better than B if and only if the average well-being of A is better than the average well-being in B. But this rule leads to the “Sadistic Conclusion,” (this sounds worse) where a large number of people with a positive but below-average well-being can reduce the average more than a smaller number of people with a negative well-being.

 

Considering this distributional side of economics, under either assumption society can evolve into these undesirable states. Consider the supply side of economics; competitive markets will ultimately self-destruct due to the advantages of economies of scale afforded by the new technologies.  Adam Smith perceived there has to be a moral side to economics, to benefit society.  That role is now represented by Government. NYU economist Michael Spence (2011) writes that the role of government is to “set the table.”

 

Market forces have acted to the detriment of developed societies by exporting their wealth-producing capacity; AI is also beginning to gnaw away at the jobs remaining. To counterbalance these situations, government has to become a lot more active and specific.

 

The Demand Side

 

In classical economics, commodity and unemployment surpluses cannot occur, because the market always equilibrates supply and demand. In Keynesian economics, aggregate demand is volatile, a volatility which can be mitigated by monetary and fiscal policies. Keynesian economics is the standard model for developed countries.

 

With increasing inequality in the US there are discussions on how Keynesian demand management can preserve the purchasing power of Americans. Here are several major proposals:

 

·       The Earned Income Tax Credit.

·       A Universal Income at a subsistence level of $1,000 per month for all adults.

·       A Child Allowance.

 

The estimated impact these income supplement plans upon the deficit, taxation and economic growth vary with the assumptions of the economic models.

 

We address the possible effect of the above upon work incentives, discussing a large partial income subsidy in Alaska, the land of Sarah Palin, guns and “socialism.” In 1968, the massive Prudhoe Bay oil field opened in Alaska. In 1976, the state set up the Alaska Permanent Fund Corporation, funded by the state’s oil revenues. In 2015, every man, woman and child received a dividend of $2,072. This figured has dropped to as low as $800-$900 when oil prices are low.

 

According to a 2/13/18 Vox article, “…economists Damon Jones of UChicago and Ioana Marinescu of UPenn decided to figure out if Alaska’s cash payments were discouraging Alaskans from working. Their conclusion: not really. They find that ‘the dividend had no effect on employment overall.” They did find a difference in the increase of part-time work, possibly as people were now more able to pay for transportation and child care and other fixed expenses of employment.

 

On a national basis, the article states, “…a similar policy financed by hyper-efficient (we think meaning minimal economic  distortion) taxes – like ones on land value, carbon emissions, alcohol, cigarettes, gasoline and sugar (and maybe a small financial transactions tax) – would likely do what Alaska’s policy does: reduce poverty, boost average incomes, and not harm the economy in the process.” Income supplement or substitution programs will be increasingly necessary as AI capabilities increase.

 

But you cannot have economic demand without the ability to produce wealth. As the declining living standards of the middle classes in developed countries attests, something has to be done. The US could take a cue from the developing countries.

 

The Supply Side

 

A 1/28/19 NYT article chronicles the travails of Apple Computer as they tried to assemble the $3,000 Mac Pro in the Austin, Texas:

 

“Chinese suppliers shipped their components to Texas. But in some cases, the Texas team needed new parts as designs changed, and engineers who were tasked with designing the computer found themselves calling machine shops in central Texas. That is how they found Stephen Melo…

 

“When Mr. Melo bought Caldwell in 2002, it was capable of the high-volume production Apple needed but demand for that had dried up as manufacturing moved to China He said he had replaced the old stamping presses that could mass-produce screws with  machines designed for more precise, specialized jobs….He made do with his new machines, although he could not make the exact screws Apple wanted. His company delivered 28,000 screws in 22 trips. Mr. Melo often made the one-hour drive himself in his Lexus sedan….

      (with other manufacturing difficulties this has likely not been a very profitable product)

“In December, Apple announced that it would add up to 15,000 workers in Austin, just miles from the Mac Pro plant. None of the new jobs are expected to be in manufacturing.”

 

The US could decide what industries are crucial to its future, favoring (with government policies) the scaling up of higher valued-added industries in technology and renewable energy, to increase well-paid employment.  For those who are not in those industries, having the government subsidize an earned income tax credit so they can take the risks to start their own businesses, would help restore balance to society.

 

In trade negotiations, developing countries often require companies who want access to their markets to start factories, further developing their own economies. The US should make the valuable access to its consumer markets conditional upon the  establishment of high value-added manufacturing facilities here. In certain industries, this might mean favoring Americans as producers rather than consumers.

 

The problem with competitive political discourse is that people tend to focus only on the demand side of economics or the supply side, and live in their own comprehensive meanings. In public policy, both demand and supply side reforms are crucial, and it will be the job of good leadership to convince the American people that both are necessary - because problem solving is about the relevant facts. Consider, finally, the issue of trust. A 12/14/17 Pew Research poll found that only 18% (sic) of all Americans say they trust the government in Washington to do what is right. The trust of the American people in their government can be improved by results.

 

 

 

Footnotes

 

 

RETURN TO HOME PAGE