“The man of system…seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chessboard. He does not consider that the pieces upon the chessboard have no other principle of motion besides that which the hand impresses upon them; but that, in the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably and the society must be at all times in the highest degree of disorder.” Adam Smith, The Theory of Moral Sentiments, 1759
Posts Tagged ‘Adam Smith’
The cause of current disharmony in the United States
December 24, 2012Capitalism or market economy? That may be the relevant question!
January 11, 2012“The Financial Times is debating capitalism, but what it is really debating is the future of the market economy….Sloppy language leads to sloppy thinking. By continuing to use the 19th-century term capitalism for an economic system that has evolved into something altogether different, we are liable to misunderstand the sources of strength of the market economy and the role capital plays within it.” John Kay, ‘Capitalism is the wrong target’, Financial Times, January 11, 2012
Karl Marx never used the word capitalism in his seminal text, Das Kapital. However, following the publication of this book, the noun came to describe the system of business organization that emerged to make the industrial revolution possible. And by the mid-19th century that system was (albeit briefly) central to the economic landscape of the developing nations.
Wealthy individuals – either by themselves or with a small group of active partners – built and owned both the factories and the plants in which a new working class was employed and the machinery inside those premises. Under capitalism, so defined, business leaders exercised economic power from their ownership of capital and from the control that such ownership gave them over the means of production and exchange.
The economic power thus provided was not unlimited. It was severely constrained by competitive pressures exerted through the wider market process. But economic power surely existed within each such island of conscious power in that wide ocean of unconscious cooperation and competition.
By the end of the 19th century, capitalism, so defined, was in significant decline. Legislation passed in Marx’s time permitted the establishment of the limited liability corporation, thus allowing the emergence of businesses characterized by widely dispersed share ownership. By the 1930s, economists were writing about the implications of a resulting divorce between ownership and control.
The emergence of a cadre of professional managers holding only limited stock in the corporations that they ran, essentially marked the end of capitalism – narrowly defined – for the fastest growing segments of the economies of industrializing nations.
“The value of raw materials is only a small part of the value of the production of a complex modern economy, and the value of physical assets is only a small part of the value of most modern businesses. The critical resources of today’s company are not its buildings and machines but its competitive advantages – its systems of organization, its reputation with suppliers and customers, its capacity for innovation. These attributes are not, in any relevant sense, capable of being owned by anyone at all.” John Kay, ibid.
As always, John Kay’s insights open up fruitful avenues for thought and scholarship. Has the time now come to praise capitalism for its 19th century achievements, while recognizing that it plays only a limited role in the modern corporate economy? By refocusing our attention on the market economy as a whole, the raw edges of class warfare surely will be blunted, and the relevance of human cooperation and exchange, rather than conflict and war, once again will move center stage.
Such indeed was the case in 1776 when Adam Smith’s great treatise – The Wealth of Nations – first saw the light of day, long before the word ‘capitalism’ had emerged to redefine market cooperation in terms of alleged class warfare.
