The late Adam Smith, the celebrated father of modern economy died in 1790 is making a reappearance in magazines and newspaper columns in Europe this month, praised and vilified in equal proportion, to mark the tenth anniversary of the global financial crisis.
I do not recall this sort of intense coverage in Malaysia or elsewhere to commemorate the 1998 Asian financial crisis so I find this quite odd.
The 2008 crisis was a bitter turning point. It had not only opened the gate for the rush of capital from the East to the West, ironically to save the Western economy, it also revealed the flaws of capitalism
But for Europe and its ideological brother across the Atlantic, it matters as the 2008 crisis was a bitter turning point. It had not only opened the gate for the rush of capital from the East to the West ironically to save the Western economy, it also revealed the flaws of capitalism, a serious existential crisis that brought into question its future as an ideology.
A crisis that began with a frontpage image of people lining up outside Northern Rock bank in Newcastle in the UK to withdraw their savings as the stock market was crashing down came to an end only with the American and European governments taking over some of the banks and extending USD1.2 trillion in loans to those that had seen their entire cash reserve wiped out. It was also a crisis that saw a sovereign nation – Greece – went bankrupt.
And the man whose ideas was said to have given birth to the capitalist system as we understand it today is now roasted for laying the foundation that led to its excesses.
The idea of capitalism could be traced to the Age of Enlightenment through thinkers like Thomas Hobbes and John Locke who held the notion that men are by nature free and always act in their self-interest. So in order for a society or a nation to achieve economic growth, men should be allowed to be in their state of nature which is the freedom to pursue their self-interest.
Governments have a very minimal role to play and should restrain from coming in between men and their pursuit of wealth. The market and its ‘invisible hands’ have their own mechanism to ensure that everyone gains from the economic activities.
Those were the lofty ideals understood by many that led to the concepts of free market, competition, deregulation, privatization, free trade and globalization. And it was this and more, exploited by the bankers to the extreme that became the major cause of the crisis that had threatened the entire global economy to shut down.
Therefore one perhaps can understand the vilification of the man and his ideas and the blame he got for the crisis and the growing inequality, the rise of anti-globalisation, Donald Trump and populist politics in Europe that follow. Some even went further to argue that the foundation of the capitalist economic system – that individual pursuit of self-interest is good for the society – is entirely incorrect.
A closer review of his life and writings would reveal a broader outlook than the narrow perspective on capitalism that the Western capitalists appeared to be cherry-picking for their own good
But a closer review of his life and writings would reveal a broader outlook than the narrow perspective on capitalism that the Western capitalists appeared to be cherry-picking for their own good.
Adam Smith had not only written the ‘Wealth of Nations’ that had become a classic in economic thought, he was first and foremost the holder of the Chair of Moral Philosophy at the University of Glasgow where he lectured on The Theory of Moral Sentiments that was later published as a book. So a fair assessment of his idea of “self-interest” and the power of individual action in economic life would also need to take into account the other key components of his ideas on public well-being such as “sympathy” and “benevolence”.
In fact, his very definition of political economy, the key subject of the ‘Wealth of Nations’ implies that the purpose of economic activities is to enrich both the people and the nation.
In the preamble, he said that “Political economy, considered a branch of the science for the statesmen and the legislator, proposes two distinct objects: first to provide a plentiful revenue or subsistence for the people or more properly to enable them to provide such a revenue or subsistence for themselves and secondly to supply the state or the commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign.”
In other parts of his book, he admonished the economic idea of Mercantilism prevalent during his time that promoted wealth accumulation and pursuit of economic interest as the objective of human existence and that the interest of the nation could be better served when the interest of the merchant group is protected.
He remarked, “Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconvenience to society? No society can surely be flourishing and happy of which the greater part of the members are poor and miserable.”
So contrary to popular belief, he advocated for high salary for the working class as much as he endorsed the freedom of the capitalist to conduct business and accumulate wealth. He supported progressive instead of regressive taxation, which means that citizens should be taxed in proportion to their wealth - the more you earn, the more you pay.
And what is even more surprising is his idea for the protection of nascent industries, which in Malaysian context means our national car project, as a means to accelerate economic growth.
Clearly the economic system as we know today has got nothing to do with Adam Smith. I am not holding him to be someone possessing superior ideas on how we organize our economic life, but as a Western thinker and the acclaimed father of the modern economy, I would have thought that the West would have been more truthful to his ideas as a whole, rather than in bits and pieces, and perhaps in the process avoided the great economic mayhem that they experienced in 2008.
Nazim Rahman is currently attached to Sciences Po in Paris. He wishes to thank Dr Pamfili Antipa of Banque de France for her thorough analysis on Adam Smith’s Wealth of Nations.