Sen: Adam Smith’s market was not alone

The ongoing recession, which hit the major economies in the world, and the end of the big boom we saw which peaked in 2007 led many to ask: is capitalism dead?  In today’s Financial Times, economist and Nobel prize winner Amartya Sen tried to answer it.  In it, he went as far back as the time of Adam Smith, the father of modern economics to try to discuss what is going on and what needs to be done.  He argues that it is not so much an issue of a dead capitalism as it is the nature of it and the need for change.  Do we need a ‘new capitalism’, he asked.  Without ever calling it capitalism, Adam Smith, according to Sen, spoke of other non-profit values that are necessary for a well-functioning ‘capitalist’ system.  Many of us understand the ideology simply to be profit-driven, without the consideration for other important factors to help it sustain itself.

It is often overlooked that Smith did not take the pure market mechanism to be a free-standing performer of excellence, nor did he take the profit motive to be all that is needed. Perhaps the biggest mistake lies in interpreting Smith’s limited discussion of why people seek trade as an exhaustive analysis of all the behavioural norms and institutions that he thought necessary for a market economy to work well. People seek trade because of self-interest – nothing more is needed, as Smith discussed in a statement that has been quoted again and again explaining why bakers, brewers, butchers and consumers seek trade. However an economy needs other values and commitments such as mutual trust and confidence to work efficiently.

During the most recent years, the mutual trust and confidence he spoke of seemed to have crushed.  Primarily driven by the complex financial instruments that have sprung out of the financial system, it has become more difficult to trace the functioning of the system and have a full knowledge of what’s going on. This all happened when life was thriving, and credit was much available for everyone to exploit.  There was also the deceptive mortgage lenders who led borrowers to believe the affordability and even worthiness of signing up for that mortgage. People have been so productive and confident about the financial markets and the progress it is bringing the economies that the requirement for government oversight fell short.  This situation exposes an irony:

The need for supervision and regulation has become much stronger over recent years. And yet the supervisory role of the government in the US in particular has been, over the same period, sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance has grown, the provision of the needed supervision has shrunk.

Sen closes the piece by saying that we do not need a new capitalism.  What is needed is an understanding that market economy has its limits and for some institutions to be successful, we cannot ignore how organizations “from market to the institutions of state – can together contribute to producing a more decent economic world.

Read Sen’s whole commentary, courtesy of the Financial Times’ week-long discussion of capitalism and its future.

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