Adam Smith on CSR

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I've mentioned the Bill Gates/Mike Kinsley/Conor Clarke creative capitalism project before. A new highlight on the site is a piece by my esteemed colleague Martin Wolf. (This is what Martin does on his holidays.) I'm not entirely sure what Martin's note has to do with "creative capitalism"--the idea is mentioned and dismissed in the last paragraph--but he has written the best short essay on the political preconditions for capitalism I have ever read.

Consider a society in which everybody was a profit-maximizer. What would it be like? It would be one in which rulers, soldiers, judges, bureaucrats would take whatever they could. It would be one in which bribery and corruption were the norms. It would be one in which market capitalism of the kind Professor Landsburg (and I) extol would be impossible. It would be one in which almost everybody would be poor. And because it would be one in which almost everybody was very poor, it would also be one in which the only way to obtain wealth would be to join in the race for political power. This would be all too natural. It would also be a negative-sum society, in which life tended to be nasty brutish and short.

Profit-maximization is not a generalizable norm for a successful capitalist society. Indeed, it is not an ethical principle at all, for it violates Kant's categorical imperative -- that one should "act only according to that maxim whereby you can at the same time will that it should become a universal law." Profit-maximization is a situational ethic, applicable only to economic activity -- that is, activity carried out under competitive conditions. Monopoly providers of public goods -- security, justice and so forth -- must not act under profit maximization.

We do not even want people engaged in private business to be profit-maximizers tout court. Let us suppose, for example, that a business knows of an undetectable way of dumping poisonous waste, thereby saving itself vast sums of money. Do we believe that it 'ought' to do this? I certainly do not. Do we believe businesses ought to create cartels? No, again. Do we regard it as right for business leaders to manipulate their pay -- by back-dating stock options, for example -- in order to steal as much as possible from their shareholders? No, yet again. Yet all these people are doing is maximizing their personal profits, as individuals in the market economy supposedly should

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So the big problem with competitive capitalism is not that it is uncreative. It is certainly highly creative. The problem is that it is unnatural. There have to be rules, ethical norms and institutional constraints governing profit-maximizing behavior, to ensure that the maximization operates for the social good. Of course, pure libertarians would deny this. They believe that a society could be constructed on the basis of voluntary exchange, with no coercion. I think that would last until the first well-organized gang came over the hill, as Thomas Hobbes argued. We need the Leviathan. The question is how we tame it.

Reluctant as I am to follow that performance, it so happens I have posted a new contribution too. Mike and Conor asked me earlier for some thoughts on what Adam Smith would make of creative capitalism. If you're interested, and with all due diffidence, I'll post what I sent them after the jump. More...

Adam Smith on creative capitalism

In his speech at Davos, Bill Gates quoted the opening lines of Adam Smith's Theory of Moral Sentiments:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.

Bill doubtless meant this as a reply to those fond of quoting selectively from the other Adam Smith, author of Wealth of Nations. People who say they admire that book are especially keen on this sentence:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.

Bill is telling us that even Smith--"the father of capitalism...who believed strongly in the value of self-interest for society"--praised the impulse to altruism. Society needs both, and this is where creative capitalism comes in. Its aim is to marry sentiment and self-interest; to unite, as it were, the two Adam Smiths.

I agree that Smith is badly served by many of his supposed followers. The idea that "greed is good", which one often sees attributed to him, is a travesty. He was no libertarian either. His idea of "natural liberty" was almost the opposite of what it is usually taken to mean (namely, "do as you wish"). He was at pains in both books to emphasize the importance of self-control, of regard for the opinions of others, and of an expansive role of government in providing security, rule of law, and economic infrastructure. Way ahead of his time, he was even in favor of compulsory schooling.

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