Academic journal article Business Economics

The Adam Smith Address: Capitalism and Its Discontents

Academic journal article Business Economics

The Adam Smith Address: Capitalism and Its Discontents

Article excerpt

I am grateful to the National Association for Business Economics for presenting me the 1998 Adam Smith Award. I accept the honor humbly, given the impressive roster of former recipients, the importance of the organization awarding it, and, especially, the greatest of all economists for whom it is named.

I had thought of speaking on a subject of particular relevance to my own research or policy experience: difficulties in measurement in a rapidly evolving economy and their implications both for understanding economic progress and for making economic policy; the impact of changing demography on consumption and saving; new ways of thinking about comparing economic performance across countries or of understanding economic growth; or budget, social security and/or tax reform. But recent events, and my remembrance of the broad sweep of Adam Smith's penetrating insights and analysis of the evolution and comparison of economies, plus his emphasis on the performance of alternative economic systems, have led me to choose a broader and perhaps more fundamental topic: capitalism and its discontents.


Adam Smith, regarded by many as the intellectual godfather of modern economics and the case for a decentralized competitive market economy, focused his heaviest guns on mercantilism, a topic, by the way, not without relevance today. In the almost two and a quarter centuries since Smith wrote The Wealth of Nations, economic systems have developed in various forms indifferent places. Serious scholars as well as a much larger number of pundits have debated their relative economic success and moral underpinnings. Within our own profession, the center of gravity has waxed and waned among different schools of thought and political and economic persuasions. It was not all that long ago that Hayek and then Friedman were relatively lonely voices calling for restraining, indeed reducing, the role of government in the economy.(1)

What I would like to do briefly is review a few such episodes in economic and intellectual history, to shine some light on the recent calls for abandoning the capitalist model (or, more accurately, usually some highly distorted caricature of the capitalist model) in favor of some alternative. These episodes include: during the Great Depression, communism; in the post-World War II period, market socialism; as recently as the 1980s, the convergence of all economic systems to heavily managed gigantic welfare states; in the 1990s, calls for a "third way," based on some other system of values; and the almost hysterical recent calls from hedge fund managers, prime ministers, pundits and even economists who should know better, to "do something" about "global capitalism." Commentaries with titles such as The Crisis in Global Capitalism, Global Capitalism RIP, Collapse of Capitalism, Who Lost Capitalism? and The Free Market's Crisis of Faith deserve a response, for their prescriptions of capital controls and even larger government almost certainly will cause great harm to those the authors claim to want to protect.

My own strongly held belief is that a limited government-based capitalist economic system not only is the system most likely to deliver the greatest economic progress but is the model most consistent with substantial personal economic and political freedom. However, I want to focus primarily on results, to play the role of positive scientist, not moral philosopher, in spite of the temptation to do so given that Adam Smith himself was a Professor of Moral Philosophy. Let me emphasize that I am discussing large differences in the economic role of government. Criteria for determining the appropriate role of government are discussed below.

The Great Depression

Many of us are too young to have known from personal experience, but recall from what we were taught and what we read, that in the Great Depression of the 1930s, a large number of intellectuals and others in Western Europe and North America turned to communism, or at least turned a sympathetic ear to it, given the horrible destitution of that period. …

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