Hot! IMF chief twists Adam Smith’s view of inequality

NationalPost.com – FinancialPost.com/FPComment
February 1, 2011.   Peter Foster

Modern liberals used reflexively to condemn Adam Smith as the “father of capitalism” (although he had never heard the word). More recently, however, they have been trying to recruit him, switching their emphasis from misunderstanding what he wrote in The Wealth of Nations to misquoting what he said in The Theory of Moral Sentiments.

One significant cause to which they have been attempting to sign up the 18th-century Scottish philosopher is combating the “income gap.” The latest big-time policy wonk to attempt to bring the Sage of Kirkcaldy onto the “Inequality Sucks” team is Dominique Strauss-Kahn, head of the International Monetary Fund.

In a recent speech, Mr. Strauss-Kahn declared that “Adam Smith — one of the founders of modern economics — recognized clearly that a poor distribution of wealth could undermine the free market system, noting that: ‘The disposition to admire, and almost to worship, the rich and the powerful and … neglect persons of poor and mean condition…is the great and most universal cause of the corruption of our moral sentiments.’ This was over 250 years ago,” Mr. Strauss-Kahn continued. “In today’s world, these problems are magnified under the lens of globalization.”

However, it is Mr. Strauss-Kahn’s lenses than need a new prescription. For a start, Smith’s quote says nothing whatsoever about “a poor distribution of wealth” undermining the free market. Mr. Strauss-Kahn claims that Smith thought that large income gaps would “wear down the social fabric,” but in fact Smith noted (in the part of the quote that Mr. Strauss-Kahn left out) that the attitudes he described towards the rich and poor were necessary to maintain the “order of society.” Far from suggesting that “admiration of the rich” might undermine markets, Smith believed that such admiration was a market driver, even if he didn’t particularly admire it. Smith was writing about admiring fashion, not fascism. And finally — while channelling Smith is always a tricky business — I would venture that Smith’s eyes would pop out were he to witness the level of “poverty” about which Mr. Strauss-Kahn is rending his garments.

The notion of a “welfare state” was utterly alien both to Smith’s political times and his own moral inclinations. Smith lived in an age of personal responsibility. Poor relief was a local, personal affair, as was the “beneficence” that Smith praised as the highest virtue. “Beneficence,” wrote Smith, “is always free, it cannot be extorted by force.” Forced redistribution would have offended Smith’s notion of justice, and he would instantly have spotted that “social justice” is a weasel concept that reverses the notion of justice entirely.

The rich of Smith’s day were nothing like Mark Zuckerberg. They were aristocrats who lived off the backs of agricultural peasants. Moreover, according to “gap” logic, the world would be a better and fairer place if business geniuses such as Mr. Zuckerberg had never been born. Anybody who doesn’t grasp that such an idea is nonsense is incapable of rational thought. But then modern liberals thrive on pressing emotional buttons, not thinking clearly.

Smith would have thought it ridiculous to suggest that a nation might become wealthier or happier by forced “redistribution.” The key to improvement was the universal desire to “better one’s condition” under a regime of secure property rights and minimal government. The division of labour, free trade, and the “natural order” of the market would do the rest.

Perhaps the most bizarre aspect of attempting to recruit Smith is the suggestion that he might be more concerned about Gini coefficients (which measure inequality) than the actual condition of the current “poor.” Smith himself noted that even the poor people of his own day, thanks to the unacknowledged wonders of the Invisible Hand, lived better than had kings of previous times. That’s because they had access — via work — to coats, shoes, kitchen utensils and the odd sack of oatmeal.

As Matt Ridley points out in his book, The Rational Optimist, “Today, of Americans officially designated as ‘poor,’ 99% have electricity, running water, flush toilets and a refrigerator; 95% have a television, 88% a telephone, 71% a car and 70% air-conditioning. Cornelius Vanderbilt had none of these.”

As for the bigger global picture, “[I]n 2005, compared with 1955, the average human being on Planet Earth earned three times as much money (corrected for inflation), ate one-third more calories of food, buried one-third as many of her children and could expect to live one-third longer.… She was more likely to be literate and to have finished school. She was more likely to own a telephone, a flush toilet, a refrigerator and a bicycle.… It is, by any standard, an astonishing human achievement.”

When it comes to the relative poverty of underdeveloped countries, Smith would quickly see that it was rooted not in insufficient “aid” (which has been a disaster), but in kleptocratic governments that keep the Invisible Hand in chains. Meanwhile, he would hardly fail to notice that the taxation system in developed countries is “progressive” — that is, geared towards taking a disproportionate amount from the rich — to a degree inconceivable in his own day.

The vast wealth created by the success of the Smithian system has inevitably attracted the predations of power seekers and their fatally conceited bureaucratic courtesans, who perpetually seek moral justification for their pursuit of other peoples’ earnings. They won’t find it in Adam Smith.

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