By Even great economists can make poor or incomplete arguments. George Stigler, a titan of the Chicago school alongside luminaries like Milton Friedman, Gary Becker, and half a dozen other Nobel Laureates, wrote an essay about what he saw as a surprising inconsistency in Adam Smith’s Wealth of Nations.
His article, “Smith’s Travels on the Ship of State,” makes the case that “The Wealth of Nations is a stupendous palace erected upon the granite of self-interest.” This seems uncontroversial, given Smith’s famous description of how the market harnesses self-interest to benefit society. People are “led by an invisible hand” to benefit their fellow man, even without plannning to.
Indeed, markets create order through the signals and incentives created by prices, profit, and loss. Stigler praises Smith for his clear-eyed analysis of self-interested behavior in the market. Smith undeniably cast politicians, rulers, and the ‘man of system’ as self-interested actors.
Besides the profit-seeking of the butcher, the brewer, and the baker through voluntary exchange, Smith also recognized that business could (and would) seek profit through government protection, government subsidies, and government regulations. Smith famously said: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices.”
Smith warned that governments tend to play a hand in this political profit-seeking – sometimes unintentionally. For example:
A regulation which obliges all those of the same trade in a particular town to enter their names and places of abode in a publick register, facilitates such assemblies. It connects individuals who might never otherwise be known to one another, and gives every man of the trade a direction where to find every other man of it.
But, Professor Stigler argues, Smith did not apply the assumption of self-interested behavior consistently: “Smith gave a larger role to emotion, prejudice, and ignorance in political life than he ever allowed in ordinary economic affairs.” Smith’s vision becomes clouded when he analyzes political actors and behaviors. And that’s a symptom of a deeper malady in Smith – his failure to rigorously and consistently apply self-interest in all human behavior:
“It is in the political arena that Smith implicitly locates the most numerous and consistent failures of self-interest in guiding people’s behavior, but this is not the only place where self-interest fails….Every failure of a person to make decisions which serve his self-interest may be interpreted as an error in logic: means have been chosen which are inappropriate to the person’s ends.”
Stigler argued there was no meaningful distinction between market behavior and political behavior: “no clear distinction can be drawn between commercial and political undertakings: the procuring of favorable legislation is a commercial undertaking.” This sounds similar to “Politics Without Romance,” in which James Buchanan argues for “symmetric” assumptions about people in politics and people in markets. We should not assume that people become more altruistic or less self-interested when they engage in political activity. But Buchanan makes this point:
“The public choice theorist should, of course, acknowledge that the strength and predictive power of the strict economic model of behaviour is somewhat mitigated as the shift is made from private market to collective choice. Persons in political roles may, indeed, act to a degree in terms of what they consider to be the general interest. Such acknowledgment does not, however, in any way imply that the basic explanatory model loses all of its predictive potential, or that ordinary incentives no longer matter.”
Such a point seems straightforward and modest, yet Stigler sees the world differently. Stigler contends that because political actors thrive on self-interest, exhorting them to altruism is a futile exercise. After all, one could not really lower the price of eggs by encouraging egg producers to lower their prices. Why bother asking politicians to ignore their constituents, snub their friends, or abandon the pet projects that secure their power?
“Why tell the sovereign that free trade is desirable, if one has no method of disarming the merchants and manufacturers who have obtained the protectionist measures….Why believe that better turnpikes await only the appointments of a better class of commissioners?”
And Stigler has a point. The experience of politics is not pretty. Public Choice economics elaborates the theory of special interests and collective action, and documents why political activity is best explained by self-interested behavior. When Smith encourages the sovereign to act in principled, rather than self-aggrandizing, ways, Stigler understandably asks, “how now Professor Smith?”
Smith was optimistic about the force of self-interested behavior leading to social benefit, and also correcting miscalculations and errors, because of competition given the incentives of profit and loss and the signals transmitted by prices. There’s a whole literature about the efficiency and inefficiency of political markets. Bryan Caplan’s Myth of the Rational Voter and Donald Wittman’s The Myth of Democratic Failure are two prime examples along with the public choice literature.
Hayek, however, claims that “the facts of the social sciences are what people think and feel.” So, is it possible to change what people find to be in their self-interest? I’m not referring to changing the material payoffs or benefits they receive, say through greater monetary or physical penalties, but to their valuing states of the world differently. In a famous article written with another Nobel Laureate (Gary Becker), Stigler rules such a question out of bounds for economists. After all, with tastes there is no arguing.
But there is an obvious distinction between politics and commercial arenas: prices! For our purposes, we don’t need to determine how efficient or inefficient political signals and competition are to recognize it does not have a market price system. Therefore, we should be more cautious about assuming that self-interested behavior will operate as efficiently and effectively as it does in private markets.
Stigler and Becker flatten the landscape of human motivation, treating our inner drives as static one-dimensional data points. While analytically clean, this approach eviscerates the complexity of human beings. This is not what Smith would (or did) do.
As a moral philosopher, Smith believed that people (whether in markets or in government) can and should be reasoned with. Our morals form through social interaction, and those morals then shape our behavior. Smith famously criticized Mandeville’s assertion that all human action is, by definition, self-interested and therefore inherently self-oriented and vice-ridden.
Smith correctly points out that the moral weight of our decisions does not rest on the existence of the self, but on what the self takes an interest in. And presumably human beings can choose their interests. Smith reasons accordingly, even if it seems like he fails to apply a narrow self-interest lens at times. But let me tell you from personal experience, not all commissioners are made equal. Smith would encourage us to exhort public officials to do well and hold their feet to the fire when necessary.