Thursday, October 04, 2007

American Business and the Forgotten Adam Smith

I don't have a problem with the concept of competition and free enterprise. My problem with American business is the tendency sometimes of the executive suite to work against the American people instead of for the American people. We're clearly in one of those periods now. The biggest problem with American business these days is its unwillingness to look very far down the road. Couple the shortsightedness of business with its blind faith in unlimited growth and it's not hard to figure out we're headed for trouble.

In my last post, S.W. Anderson of Oh!Pinion wrote a thoughtful comment that ended with these two paragraphs:
Owing to our national psychology, tradition and the bedrock belief of our financiers, entrepreneurs and business-executive class, greed is accepted as good. Growth is seen as imperative and potentially limitless, the only real brakes on it being the lack of ambition some exhibit and the contrariness of others.

You mentioned illusion. Well here's my candidate for the root cause of our dangerous illusion: Every one of the notions in the previous paragraph is not only untrue but dangerous if accepted uncritically and blindly acted upon.

Anderson's comment overlaps something I read three nights ago. I just finished a book by biologist Bernd Heinrich called, The Snoring Bird (I recommend it, by the way). The book is largely a biographical account of the author's father and the author's own development as a biologist. The book becomes a kind of history of how science, particularly biology, has changed over the years and there's a considerable weaving back and forth between the events of the day, including World War I and World War II, the personal biography of the father and son, and the lifelong scientific passion and work of these two capable people.

Near the end of the book (pages 373-374) is a surprising passage on economics that came out of a long study of bees in the early 1970s:
.... I learned how bees sample a variety of flowers on their life's first trips out of the hive, and then they specialize in "majors" and "minors" much as students do in college, or as people do in choosing a profession. I was electrified by my results and felt they were so interesting that they could indeed be read by nonspecialists. ...

In one [op-ed article] titled "What Bees and Flowers Know," I took the undoubtedly unpopular position that we were using too much energy. Did more make us happier? What is the limit when we occupy every square inch of soil? If we build up our population on the energy base of coal and oil or nuclear power, we would be likely to end up exceeding our ecological bounds and destroying our natural environment; and to think only in terms of decades or centuries is shortsighted. Paul Landon, editor of a journal I had never heard of called Business and Society Review, read the op-eds and then wrote to me—"I was very impressed by your article in the 21 January 1974 NYT Op-Ed 'What Bees and Flowers Know'"—and asked if I would write an article titled "The Limits of Adam Smith's Theory of Greed" for his journal.

Adam who? I was one of the last persons in the world to have any concern or concept of economics and had never read anything about it. So I went to the library and was very surprised that this Adam Smith was none other than the "father of capitalism" who had published a very famous 1,097-page book (in 1776) titled Inquiry into the Nature and Causes of the Wealth of Nations (or Wealth of Nations, for short).

When I read this book I was surprised and pleased to discover that Smith's description of the labor of people and the economic organization of society has some uncanny resemblances to what I had been learning about bumblebees. To the bee, time is honey [sic]. It is their work distilled from flowers, and in the hive the honey is "exchanged" to allow different skill specializations of different individuals. Some of the analogies of humans specializing for a diversity of jobs and bumblebees specializing for a diversity of flowers that resulted in energy economy and the common good were apt, and striking. Yet what Smith was describing also included vast differences from what people now refer to as "capitalism." In Smith's model of capitalism, as in the bees' economy, every individual has an equal and fair chance to compete; everybody gets the same pay for the same amount of product resulting from his or her labor; and most important, no costs of the competition can be foisted onto the shoulders of a competitor or spectator. The last item seemed to me to be one of Smith's major points, because without it, capitalism would be like having a marathon where the competitors try to get ahead of each other not by their merits by by their demerits: strewing banana peels, withholding food and water, etc. To protect the common good would require restraints, and these could come only from government to channel the competition for equal opportunity. Competition is a great thing, but it has to be fair. Stealing natural resources that belong to everyone clearly cannot be allow.

It's a fascinating analogy, though it's worth pointing out that humans are not bees. Bees, for example, aren't capable of thinking in terms of decades or centuries. Then again, given the behavior of today's corporations, most executives can't think too far down the road either. There are exceptions. Ironically, the oil business, which can be criticized for many of its business practices, has no choice but to think in terms of ten to twenty years since that's how long it often takes to develop some of its larger projects these days. Nevertheless, today's businesses are driven by expediency. An insane form of that expediency is saving labor costs by sending jobs overseas in order to make products that are sold to Americans who are finding fewer and fewer good-paying jobs to pay for those goods in the first place. Ah, but real estate prices have been climbing for twenty years (thanks partly to foreign investments) and American are encouraged to take out mortgates for those goods—mortgages they might not necessarily be able to afford. The illusions of our times are not few.

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Anonymous S.W. Anderson said...

The following point is crucial, in micro- and macroeconomic terms, obviously, but also when it comes to public policy.

"In Smith's model of capitalism, as in the bees' economy, every individual has an equal and fair chance to compete; everybody gets the same pay for the same amount of product resulting from his or her labor; and most important, no costs of the competition can be foisted onto the shoulders of a competitor or spectator."

You are rightfully concerned about natural resource inputs such as land, water and air. Labor inputs must be reckoned with equitably as well. Yet current practice is much more akin to saying, "Damn the torpedoes; full speed ahead!" Full speed ahead, no matter who gets hurt.

In an economy that hopes to be healthy longterm, obscure inventors and small-scale entrepreneurs and businesspersons must not become endangered species. The Winchester repeating rifle, Edison's lightbulb and penicillin didn't come to us from the bowels of huge, multinational corporations.

However, the Tucker automobile and an individual's late-1970's innovation of powering a Datsun stationwagon with freon, a small turbine and lots of copper tubing, with fantastic fuel economy and virtually no harmful emissions, were both denied access to the marketplace by big corporations that only wanted to suppress them — to suppress even potential competition, in a very real sense.

Who lost out as a result? I maintain it wasn't just Tucker and the backyard mechanic with the freon-powered vehicle.

7:47 PM  
Blogger Craig said...

S.W., thanks for your comment. And you're right, the point is crucial and it's often missed: our economy thrives the most when people are creative and have a chance of showing what they can do; a system based too heavily on who has the most money and political weight and who can do the best job of protecting their market share or defending a product past its time simply invites decline. In the current environment, I wonder how many billion dollar businesses can really start in a garage and have a reasonable chance of remaining in the hands of the creative people who started the business?

The picture is not all dark though. I have no idea how successful they will be but I see a definite upsurge of quiet attempts in the background where talented people are trying out new ideas without plugging in to the megascale economic structure. These are people who have sometimes learned the hard way that corporations are not on their side. But they still need a facility or some land or both to test out their ideas and there are people now and then with money of their own willing to do this. Unfortunately, it may take a real depression before large numbers of people start looking for different ways of doing business.

It's probably not going to happen, but I favor breaking up the top hundred companies or so and making five hundred to a thousand companies out of them. Smaller companies, particularly if they're hungry, tend to do a better job of finding new ways of doing things. They also tend to do a better job of retaining jobs in the US.

1:10 AM  
Anonymous Anonymous said...

What about Reinhold Niebuhr?

9:28 PM  
Anonymous Adam Ant-Smith said...

This comment has been removed by a blog administrator.

7:13 PM  
Anonymous Adam Smith said...

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1:37 PM  

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