Journaltalk - Smith's Travels on the Ship of State

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1. Stigler questions inconsistencies in Smith’s analysis. Stigler interprets Smith as saying that self-interest explains behavior in commercial actions, but not political. He posits, “Why should legislators erect ‘a hundred impertinent obstructions’ to the economic behavior which creates the wealth of nations? Do men calculate in money with logic and purpose, but calculate in votes with confusion and romance?” He goes on to say, “Indeed no clear distinction can be drawn between commercial and political undertakings: the procuring of favorable legislation is a commercial undertaking.” 265-66

   Stigler is correct when he asserts that people are self-interested regardless of the nature of their dealings. He fails to elevate his analysis beyond the level of the individual. He does not address the fundamental difference between commercial and political exchange. Power is asymmetric within politics. A faction controls the power to coerce.

   In line with North and Weingast ¹, the faction in power has an incentive to maintain control. The ruling faction controls the allocation of rents. Any change from the status quo requires an assessment of how the proposed changes will affect their ability to coerce and control rents. North and Weingast use the Glorious Revolution as an example of the dynamics between factions shifting. The king relinquished some of his coercive control in the present for future gains. In the case of the Glorious Revolution the choice made by the king resulted in an improvement in the economy for all, but such is not always the case. A ruling faction could also be despotic and extractive.

   Stiglers main point on Smith is that he failed to adequately address the role of self-interest in non-commercial dealings. Given the myriad circumstances within an institutional framework I find such a statement to be wanting. The same argument could be applied to our current legislative woes. Why do we have tariffs if we all know that we would be better off without them? Clearly the factions able to exercise the coercive nature of politics finds it in their self-interest to maintain the tariffs. The “impertinent obstructions” are in the self-interest of the ruling faction.

   Smith was aware of the need to address institutions as well as individuals. In fact, he believed that one of the proper roles of the economist was to study these institutions and understand how to arrange them so that it was in the self-interest of the actors within the institutions to behave in a way that was beneficial to the rest of us. Smith operated in a different system than modern economics. Macfie ² describes it as a “philosophical” or “social approach” compared to the modern approach of “scientific or analytic methods”. 390. Smith’s style of assessment was designed to approach issues from multiple perspectives and present all the facts and observations. Smith’s style is contrary to the modern practice because it can result in inconsistencies that are purposefully avoided using the modern analytic methodology. 392. Stigler’s reading of Smith is unkind without addressing the difference between Smith’s holistic methodology and Stigler’s economic, analytic approach.

   References
   ¹ North, Douglass and Barry Weingast. Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England. The Journal of Economic History. Volume 49, No. 4 (1989): 803-832.

   ² Macfie, Alec Lawrence. The Scottish Tradition in Economic Thought. Econ Journal Watch. Volume 6, No. 3 (2009): 389-410.

   posted 23 Apr 2010 by Jonathon Diesel