Read an Excerpt
Who's Afraid of Adam Smith?How the Market Got Its Soul
By Peter J. Dougherty
John Wiley & SonsISBN: 0-471-18477-2
Chapter OneLetter Man
Present-day economists may know more than medieval astronomers, but they too are captives of a single overarching idea: that most people in everyday life are rational calculators of their own self-interest-that they are, in economic jargon, maximizers of utility. Given a sufficient imagination, they will come to the logically correct decision every time. Alan Ehrenhalt
The man of systems seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges different pieces of a chess-board; he does not consider that the pieces of a chess-board have no other principles of motion besides that which the hand impresses on them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own different from that which the legislature might seem to impress on it. Adam Smith
I have spent the better part of my adult life as an editor of economists and their books. I am not an economist, nor do I play one on TV, but I know some of the profession's secrets. In fact, one of their bigger secrets has helped to shape the way I think about ideas and the ways in which those ideas can serve the useful purpose of making the world a better place-ways that I might not have anticipated only a few yearsago. This secret is lodged in the hidden identity of the philosopher Adam Smith, an identity I was lucky enough to discover during my education as an economics editor.
The Circle Game
Like so many of my fellow baby boomers, I was in the first generation of my family to go to college. College meant many things-penury, sideburns, medium-rare spaghetti-and, not least, a first exposure to economics. In the academic year 1968 to 1969, I survived, however barely, two hard, dreary semesters of economic principles. What little I learned about indifference curves, the GNP price deflator, the multiplier effect, and other such worldly wonders was more or less forgotten at exactly the moment I learned it. I sought relief in my courses on medieval history, the short story, politics, and film. Thus, when I began my adult life, it was hardly as an economic philosopher. A year after graduation, I got my first real job: a college textbook salesman at what was then Harcourt Brace Jovanovich.
Eventually, through hard work and luck, I was promoted to the position of textbook editor in the social sciences. In those days, only a few years out of college, I figured I would (a) live forever and ( b) work for Harcourt forever. Then, in 1981, Harcourt having left its ancestral East Side New York City headquarters for new West Coast digs in San Diego, I decided to forgo California and accepted the job of economics editor crosstown at McGraw-Hill. It is a millenial understatement to admit that I took this job less for the lure of economics than for the want of gainful employment in my accidental, but by now beloved, field of book publishing. Upon arriving, I received new business cards that described me (with sublime unbelievability, to my way of thinking) as "Economics Editor."
Immediately after settling in on one of the twenty-something floors of McGraw-Hill's Rockfeller Center off ices, I confronted anew what I remembered as the sawdust science of Adam Smith, including the Rube Goldberg-like figure I had earlier encountered in my economics principles textbook: the circular flow diagram of the economy. That diagram, whose provenance remains unknown to me still, is exactly what its name describes: A diagram that illustrates how each sector of the economy-households, businesses, governments, the international sector-is connected with the others through the flow of capital. It appears in 1950s-era cartoon drawings in the first pages of most elementary economics textbooks; little houses and smokestack factories and banks and national capitols illustrate each respective sector of the economy, and fat little arrows connect them all around.
A colleague tells me that a famous mid-twentieth-century economist, Abba Lerner, once tried to build a water-powered plastic version of the circular flow model. Eventually, it was relegated to the basement of the Berkeley economics department, where it apparently has conducted very little water but collected much dust. At any rate, the circular flow diagram has about as much intellectual sex appeal as, say, orthopedic shoes. And yet, there it was again, in all of its mechanical trappings, in the McGraw-Hill textbooks that I'd be working on as an editor. Right then and there, I decided that I would tread dismal water for a couple of years at most, and eventually move into an editorial field that would better honor my loftier humanistic pretensions; something like history or social theory-fields blessedly devoid of stylized contraptions like the circular flow diagram; fields more appropriate to a self-fashioned gentleman of letters like me.
But, unbeknownst to me at the time, I had started to absorb economics-not from divining its diagrams, but rather from talking to, and doing business with, its practitioners. The managers of McGraw-Hill seemed to be saying to me, though not in so many words, "Hey you, you're 30, collecting a salary, and wearing a tie-go up to MIT and negotiate contracts with some of the Nobel prize winners who defined the economics of negotiation!" Looking back on those days, economics-what I eventually discovered to be the rather more stylish science of Adam Smith-was all there in tiny fragments: signaling, asymmetric information, "cheap talk," cooperative and noncooperative strategies, reputation effects, oligopolistic competition-the whole nine yards. These clever economists I was dealing with thought like-well, come to think of it-they thought like economists. Clearly, there was more to this stuff than the funky circular flow. For all intents and purposes, I was back in Economics 101 and not minding it all that much this time around.
Within a year of starting my job-in December 1981, to be exact-I had my first meeting with the venerable economist and celebrated author Paul Samuelson. I discovered him to be what I know him to be today: a fine gentleman and a great scholar. But I got a big lesson in economics the following day during an acceptance speech that Paul gave at a dinner celebrating the publication of Paul Samuelson and Modern Economic Theory, a book of essays in his honor. In his talk, which was attended mostly by MIT economists and McGraw-Hill executives, Paul turned to us, the publishers, and referred to us as "the cartel." "Cartel!?" I thought. To my mind, this was awfully harsh. OPEC was a cartel, not us. But it was true. We were indeed a cartel. So, did I discover, were economists. We publishers collectively dominated our market by doing our best to keep our costs low and our profits high. Economists, for their part, shared publishing stories for the sake of gaining competitive advantage in their dealings with us, the folks who published their books. They fought the cartel by acting like a cartel. It was, as the saying goes, only business.
What impressed me that evening was that, even in his acceptance speech, this most knowing of economists took the trouble to remind us that the facts of economic life are always with us. We're nice guys, we publishers, but we're also a cartel. Good neighbors make good fences. Acknowledging this economic fact brought definition and clarity to our affairs. In fact, it made the usually friendly partnership of author and publisher possible in the first place.
The inevitability of economics in life, so well obfuscated by the economists' circular flow diagram and a jargon that would gag an army of code crackers, is fundamental-or so I discovered. The eminent Victorian economist Alfred Marshall talked about it when he described economics as "the study of mankind in the ordinary business of life." But until you've let it marinate a while, you don't really know it. And so it is equally important-no, necessary-to develop a way of thinking about it, of reconciling it with the world. That way of thinking is economics.
It's Not Personal
It wasn't long before I began to take in the atmospherics of economic inevitability all around me. I was imbibing the culture. For example, I found the film The Godfather to be a great tutorial in economics. In one of its most famous scenes, godfather-in-waiting Michael Corleone echoes the point about economic inevitability as he seeks to reaffirm his family's position in the New York crime cartel by planning to avenge his father's murderous competitors. Michael, played by a young and humorless Al Pacino, turns to his brother Santino, a hyperagitated James Caan, and intones the classic Mafia refrain: "It's not personal, Sonny. It's strictly business." This chilling incantation conveys but one of the many powerful economic tropes of this film. It makes me wonder why economists don't show The Godfather in the first week of classes, rather than the circular flow diagram. Soaked in the blood-drenched tones of Mafia history, rational action takes on an intensity that is irresistible even to the least amenable economics student.
The Godfather would also serve to help economists make a surpassingly important point about capitalism, the particular economic culture in which most of us live and in which free markets are deployed to help feed and clothe us and spread the wealth of nations. The point is this: The morality of a tragic and lawless subculture like the Mafia, in which economic inevitability is enforced at the business end of a gun, is different from that of our mainstream commercial culture because we have insisted on the civilizing features that make our economic culture distinct.
In our culture, even the most ruthless economic exchanges usually lead to civilized outcomes-the blood left on the boardroom floor is ketchup. These outcomes are the legacy of painstakingly evolved civilizing institutions, including, but not limited to, law, social norms, good government, engaged citizenship, public service, and professionalism. We do not always get these institutions right-consider the number of lousy laws on the books-but these noneconomic institutions are as important to the maintenance and expansion of a healthy capitalism as are the economic machinery of stock markets and collective bargaining agreements.
I've Got a Secret
If we are to make the world a better place, we need to strengthen and enrich these noneconomic institutions, for they, along with more purely economic structures, are the hope for the future. Economics matters in this effort because economic life is so intimately implicated in the other spheres of living from which these institutions-cultural, political, and social-spring that it is folly to leave it out. By the same token, skillfully designed civic institutions are, as economists have been discovering in greater dimension, vital to economic progress. This leads me to the economists' big secret.
Adam Smith, stone-faced architect of the economics of prices, factories, and free trade (and, much as I hate to admit it, probably the culprit behind the circular flow diagram), had some big ideas about making noneconomic institutions work, as well. He was, in addition to being the father of economics, the designer of a grand cultural system built around the very civilizing institutions that we tend to look past when we think of the grinding economic machinery of capitalism.
Smith keynoted his broad attitude toward a civilized market society by insisting:
... He is certainly not a good citizen who does not wish to promote, by every means of his power, the welfare of the whole society of his fellow citizens.
These words hardly describe the money-grubbing homo economicus subscribed to by the critics-and even some of the apologists-of capitalism. On the contrary, they suggest that modern economics, at its very heart in the work of its founder Adam Smith, amounts to a good deal more than the usual batter of land, labor, and capital than a casual observer might think. Economics is also part of a larger civilizing project, and Smith's original effort to understand it was an exercise in soulcraft-one that has continued since his time and will not end today. This soulful side of Adam Smith is also, typically, the last thing one learns-or, at least one of the last things that I learned-in an economics education.
The Sidewalk Science of Adam Smith
By the early 'Nineties, having finessed my way around the circular flow a few dozen times, I had earned an editorial reputation worthy of my business card. I had racked up a string of impressive books by the likes of Nobel laureates Robert C. Merton and Harry Markowitz, the late great finance economist Fischer Black, and celebrated behavioral economist Richard Thaler, not to mention the distinguished Wall Street economist and writer Peter L. Bernstein. And by then, I had also become increasingly interested in the arcane civilizing side of Adam Smith, largely through the work of some prominent noneconomists.
After the fall of the Soviet Union and in the wake of the Reagan and Thatcher reformations, a handful of prominent intellectuals had begun to scratch their heads about the importance of civil society as a component of successful market democracy. Civil society describes the small-scale ordinary structures of life, including schools, neighborhoods, restaurants and small businesses, churches, local media and libraries, workplace cultures, pubs, families, sports and recreation groups-the "little platoons" that operate in the shadow of gigantic impersonal forces such as the state and the corporation. Analysts seemed to be recognizing that these small-scale structures play a much bigger role in incubating success than anyone had thought for a long time. Through these mediating structures, real progress, social and economic, finds its fire.
As the story goes, the "complex web of associations, networks, and contacts" that comprise civil society animates the shared expectations, the reciprocity, and, most valuably, the levels of trust essential to the smooth commerce of everyday life in a market democracy. Trust and its accompanying norms are vital ingredients in this account. Social scientists, in their attempt to get to the heart of what makes a vibrant civil society tick, have given them a slightly souped-up name: Collectively, they call them social capital because, like economic capital-money, machines, and property-the more social capital a society holds, the more efficiently and productively it tends to work.
Excerpted from Who's Afraid of Adam Smith? by Peter J. Dougherty Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.