Let’s go back to one of Smith’s most disliked institutions, the East India Company, and two Scotsmen, James Matheson and William Jardine, both graduates of Edinburgh University, one of whom (Jardine) was a physician. In 1817 Jardine left the East India Company and partnered with Matheson and Jamsetjee Jeejeebhoy, a Parsi merchant in Bombay in Western India to pursue the export of opium to China—which, by that date, had become the main source of Company profits. China, whose empire was in a state of some decay, tried to stop the importation of opium and, on the orders of the Daoguang Emperor, Viceroy Lin Zexu—who today is represented by a statue in Chinatown in New York with the inscription “Pioneer in the War against Drugs”—destroyed several years’ supply of the drug in Humen, near Canton, today’s Guangzhou. In China today, Lin is a national hero.
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Smith’s notion of the “invisible hand,” the idea that self-interest and competition will often work to the general good, is what economists today call the first welfare theorem. Exactly what this general good is and exactly how it gets promoted have been central topics in economics ever since. The work of Gerard Debreu and Kenneth Arrow in the 1950s eventually provided a comprehensive analysis of Smith’s insight, including precise definitions of what sort of general good gets promoted, what, if any, are the limitations to that goodness, and what conditions must hold for the process to work.
I want to discuss two issues. First, there is the question of whose good we are talking about. The butcher, at least qua butcher, cares not at all about social justice; to her, money is money, and it doesn’t matter whose it is. The good that markets promote is the goodness of efficiency—the elimination of waste, in the sense that it is impossible to make anyone better off without hurting at least one other person. Certainly that is a good thing, but it is not the same thing as the goodness of justice. The theorem says nothing about poverty nor about the distribution of income. It is possible that the poor gain through markets—possibly by more than the rich, as was argued by Mises, Hayek, and others—but that is a different matter, requiring separate theoretical or empirical demonstration.
A second condition is good information: that people know about the meat, beer, and bread that they are buying, and that they understand what will happen when they consume it. Arrow understood that information is always imperfect, but that the imperfection is more of a problem in some markets than others: not so much in meat, beer, and bread, for example, but a crippling problem in the provision of health care. Patients must rely on physicians to tell them what they need in a way that is not true of the butcher, who does not expect to be obeyed when she tells you that, just to be sure you have enough, you should take home the carcass hanging in her shop. In the light of this fact, Arrow concluded that private markets should not be used to provide health care. “It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable,” he wrote. This is (at least one of the) reason(s) why almost all wealthy countries do not rely on pure laissez-faire to provide health care.
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Of course, there have always been mainstream economists who were not libertarians, perhaps even a majority: those who worked for Democratic administrations, for instance, and who did not subscribe to all Chicago doctrines. But there is no doubt that the belief in markets has become more widely accepted on the left as well as on the right. Indeed, it would be a mistake to lay blame on Chicago economics alone and to absolve the rest of an economics profession that was all too eager to adopt its ideas. Economists have become famous (or infamous) for their sometimes-comic focus on efficiency, and on the role of markets in promoting it. And they have come to think of well-being as individualistic, independent of the relationships with others that sustain us all. In 2006, after Friedman’s death, it was Larry Summers who wrote that “any honest Democrat will admit that we are all now Friedmanites.” He went on to praise Friedman’s achievements in persuading the nation to adopt an all-volunteer military and to recognize the benefits of “modern financial markets”—all this less than two years before the 2008 collapse of Lehman Brothers. The all-volunteer military is another bad policy whose consequences could end up being even worse. It lowers the costs of war to the decision-making elites whose children rarely serve, and it runs the risk of spreading pro-Trump populism by recruiting enlisted men and women from the areas and educational groups among which such support is already strong.
The beliefs in market efficiency and the idea that well-being can be measured in money have become second nature to much of the economics profession. Yet it does not have to be this way. Economists working in Britain—Amartya Sen, James Mirrlees, and Anthony Atkinson—pursued a broader program, worrying about poverty and inequality and considering health as a key component of well-being. Sen argues that a key misstep was made not by Friedman but by Hayek’s colleague Lionel Robbins, whose definition of economics as the study of allocating scarce resources among competing ends narrowed the subject compared with what philosopher Hilary Putnam calls the “reasoned and humane evaluation of social wellbeing that Adam Smith saw as essential to the task of the economist.” And it was not just Smith, but his successors, too, who were philosophers as well as economists.
Economics should be about understanding the reasons for, and doing away with, the world’s sordidness and joylessness.
Sen contrasts Robbins’s definition with that of Arthur Cecil Pigou, who wrote, “It is not wonder, but rather the social enthusiasm which revolts from the sordidness of mean streets and the joylessness of withered lives, that is the beginning of economic science.” Economics should be about understanding the reasons for, and doing away with, the world’s sordidness and joylessness. It should be about understanding the political, economic, and social failures behind deaths of despair. But that is not how it worked out in the United States.
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