The Theory of Moral Sentiments - Adam Smith [4]
The nature of the present economic crisis illustrates very clearly the need for departures from unmitigated and unrestrained self-seeking in order to have a decent society. Even John McCain, the 2008 U.S. Republican presidential candidate, complained constantly in his campaign speeches of “the greed of Wall Street.” Smith had a diagnosis for this: he called promoters of excessive risk in search of profits “prodigals and projectors”—which, by the way, is quite a good description of many of the entrepreneurs of credit swaps insurances and subprime mortgages over the recent past. The term “projector” is used by Smith not in the neutral sense of “one who forms a project,” but in the pejorative sense, apparently common from 1616 (so I gather from The Shorter Oxford English Dictionary), meaning, among other things, “a promoter of bubble companies; a speculator; a cheat.” Indeed Jonathan Swift’s unflattering portrait of “projectors” in Gulliver’s Travels, published in 1726 (fifty years before The Wealth of Nations), corresponds closely to what Smith seems to have had in mind. Relying entirely on an unregulated market economy can result in a dire predicament in which, as Smith writes, “a great part of the capital of the country” is “kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.”7
Smith’s criticism of an unregulated market economy did not go unchallenged. It is a matter of some historical interest that Jeremy Bentham took Smith to task in a long letter he wrote to him in March 1787, arguing that Smith should leave the market alone.8 He argued, for those whom Smith saw as “projectors”—with various projects of making quick money—were also the innovators and pioneers of change and progress. Smith was good-humored about the critique.9 But he knew the distinction between projectors and innovators well enough, and there is little evidence, despite Bentham’s expectations, that Smith wanted to revise what he had said on the need for regulation.
To understand the nature of a country’s financial stability in a way that is, as it happens, immediately relevant to the current economic crisis, it is extremely important to pay attention to Smith’s argument that “When the people of any particular country have such confidence in the fortune, probity, and prudence of a particular banker, as to believe that he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him; those notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be had for them.”10 Such confidence need not always pre-exist or survive, Smith argued; a climate of mutual trust has to be cultivated and fostered. Even though the champions of the baker-brewer-butcher reading of Smith, enshrined in many economics books, may be at a complete loss about how to understand the present economic crisis (since people still have excellent reason to seek more trade even now, in the middle of the crisis—only far less opportunity), the devastating consequences of mistrust and the collapse of mutual confidence would not have puzzled Smith.
MARKETS AND THE NEED FOR OTHER INSTITUTIONS
The spirited attempt to see Smith as an advocate of pure capitalism, with complete reliance on the market mechanism guided by pure profit motive, is altogether misconceived. Smith