Monday, May 28, 2012

Specialization and Spontaneous Order - more lessons for Obama

Perhaps it would have been more appropriate to have written this on July 4, rather than on Memorial Day. But you can’t argue with inspiration.

July 4 commemorates that date in the year of 1776, the date we pick to mark the Declaration of Independence and the launching of the grand and noble American experiment that is still playing out. It so happens that 1776 is also the year of publication of Adam Smith’s famous book, An Inquiry into the Nature and Causes of the Wealth of Nations, more commonly known simply as The Wealth of Nations.

It is not really an accident that these two works are so close in timing. They share a common intellectual tradition, the ideas of English liberalism that were ”in the air” – and had been around for at least a hundred years dating back at least to the works of John Locke and the other contributors to the English natural-law tradition. For the first time in human history all individuals are seen as possessing certain basic rights, simply by virtue of being human, the same rights regardless of their station in life. Ironically, for most of human history these rights were far from “self-evident.” But the American Revolution, and the essence of the Constitution that followed, was predicated upon them – the rights to life, liberty and property - even though amended by Benjamin Franklin to read “the pursuit of happiness.” What is the connection?

Adam Smith’s work affirmed that secure individual rights to property were absolutely necessary for a nation to prosper – a key to the wealth of nations – and thus to the pursuit of happiness.  And every infringement of that individual right, however small, is an impediment to the attainment of that ideal. There are two essential ideas in Smith’s work, that together fully explain the how this works.

The first is the idea that productivity is the result of a the division of labor – specialization, leading to an improvement in knowledge, skills, expertise, etc. that enhance production and lead to the introduction of new and improved methods and products. But this division of labor has to be organized. People have to decide what to do and how to do it, and their plans and actions needs to dovetail with those of many others upon whom they depend. How is this “proper” division of labor to be coordinated? As explained in my previous post, this is the function of the market process, that system of natural property rights that results in voluntary production and exchange on the basis of market-established prices that act as both incentives and signals to do the “right thing.” So, it is not from the benevolence of the butcher that we get our meat, but from his attention to his own self-interest in the pursuit of profit. He is led by an invisible hand to provide us with the meat that within his specialized ability to produce. Coordination is not organized, it emerges spontaneously – it is a spontaneous order.

The invisible hand and the division of labor together provide a basic understanding of how the market systems works – when it is allowed to work. It is not perfect. The world is not, and will never be, perfect. People make mistakes, lots of them. The pursuit of profits brings both profits and losses. But, overall, this is the best, the only, system that is consistent with national prosperity, with the escape from the poverty that was the common plight of most people in the world prior to the modern era, and is still the plight of billions.

Like the Declaration of Independence, Adam Smith’s Wealth of Nations, reads as fresh today as the day it was written A great thinker and communicator, Adam Smith’s message is one that all national leaders should take to heart, including those of the nation whose founding documents were based on it. 

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