Friday, August 28, 2009

Adam Smith's economic morals

We uploaded in our website,, 2 papers the other day. The author of the first paper, Dr. Emmanuel de Dios, was my former professor in my undergrad and now the Dean, University of the Philippines, School of Economics (UPSE). Definitely among the brightest economic minds in this country, and definitely among the non-Statist economists too.

Here he reviewed and discussed Adam Smith's 2 books, Theory of Moral Sentiments (TMS) and the Wealth of Nations (WN). Really fantastic way of connecting the "common denominator" of Smith's philosophical and economic works.

I told Sir Noel that Adam Smith's philosophical and economic ideas almost perfectly match our advocacies in MG. We ourselves do not advocate zero government just Minimal Government, similar to Smith's Minimal State. The liberals, european liberals I mean, call it Lean State, big emphasis on the role of markets and individual choice/freedom and individual responsibility.

In case you are interested to also post his paper in your blog or website, let me know so I can give you his email address to inform him.

The second paper is my own discussion of the evil of re-introducing re-regulation of the local oil industry.

I copy-pasted a few relevant paragraphs of the 2 papers below.

(1) Smith’s Economic Morals: An Introduction
by Emmanuel S. de Dios, PhD,
July 2009 (15 pages)

(originally posted at UPSE's website,
http://www.econ. respub/dp/ pdf/DP2009- 04.pdf)

... Underlying Smith’s argument is his fundamental claim that it is in people’s nature to engage in reciprocal exchange for mutual benefit. Smith calls this "an inherent tendency to truck and barter". It will be seen that this is in fact an extension of the moral philosophy Smith had already laid down in the TMS. On the one hand, people stand in need of each other’s assistance; on the other hand, there is no more reliable means of eliciting assistance than through an appeal to the other person’s self-love. While one may appeal to the another person’s charitable motives, this is an inherently weak incentive; the only reliable incentive is for him to realise that you can perform a service for him in exchange (do ut des = I give and you give). Hence this famous line:

"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages." [WN I.ii.2]

...Historically, Smith argued, the attempts of government to direct and manage the course of specialisation caused more harm than good. He criticised the then-prevailing system of economic philosophy, mercantilism, for its wrong-headed ideas of protecting certain sectors of the economy, discriminating against foreign goods, and creating monopolies. While the natural price was the lowest that could be gotten in the long run, monopolies raised prices to "the highest which can be got" [WN I.vii.27]. The main reason this occurred was that lobbies frequently managed to persuade lawmakers that "the prosperity of the nation depended upon the success and extension of their particular business"

Finally, as already noted, Smith also criticised the fiscal profligacy of governments, which reduced the capital available for investment (now known as the "crowding-out" effect). He thought it presumptuous that governments should presume to lecture private individuals regarding how to spend their resources:

"Great nations are never impoverished by private, though they are sometimes by public prodigality and misconduct." [WN II.iii(2).10]

"It is the highest impertinence and presumption…in kings and ministers to pretend to watch over the economy of private people, and to restrain their expence, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without exception, the greater spendthrifts in the society. Let them look after their own expence, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will." [WN II.iii(2).36]

(2) Consumers' welfare through deregulation, not politicized pricing
by Nonoy Oplas
August 26, 2009 (4 pages)

".... Price regulation means politicized pricing. Politicians and government bureaucrats, not the sellers and consumers in the supply-demand dynamics, will determine what is the “appropriate” price of the regulated commodity. When demand would increase significantly, say people suddenly have extra income, or they over-spend their savings for a big fiesta or festival, etc., prices will rise when suppliers did not anticipate such big increase in demand. But under a politicized pricing regime, prices should remain where they are unless the price regulators and bureaucrats will say, “Yes, you may raise your prices, but only at this level; in addition,…”

Renewed oil price control scheme will attract the most corrupt politicians and bureaucrats. The corrupt will be so thrilled to have the power to say “Yes” or “No” to all applications for price adjustment by ALL corporations and players. All they have to do is to delay by one day, one week, one month, any upward price adjustments regardless of the reason, in order to force those companies to give them bribes so that price adjustments will be acted upon quickly...."

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