Adam's Fallacy – Duncan K. Foley (2006)

Adam’s Fallacy by Duncan Foley is subtitled “A Guide to Economic Theology”, and it’s about the best short guide I’ve found to the major streams of economic thought starting with Adam Smith.  The ‘fallacy’ as Foley describes it, is as follows: “Smith asserts the apparently self-contradictory notion that capitalism transforms selfishness into its opposite: regard and service for others.”  Foley argues that it’s all a whole lot more complicated, and he tries to point out the tangle of scientific observations from moral arguments as he reviews the ideas of Smith, Malthus, Ricardo, Marx, Keynes, and a few other economic figures.

Here’s how he wraps things up:

Capital accumulation has its own logic – the discovery and exploitation of opportunities for profit in specific historical and social circumstances….  It is only prudent for us, living with capital accumulation, to understand its logic as well as we can.  That we understand it as well as we do is largely the fruit of the intellectual labors of these great thinkers and their followers.  But understanding the logic of capital accumulation does not require us to surrender our moral judgment to the market, either as individuals or as political actors. The exploitation of any profit opportunity involves a range of consequences, some good and some harmful. There is no escaping the moral relevance of weighing the good and the harm in each case.

Still, this is an economics book, so even it has some dry stretches, but I do recommend it as a good starting point and general introduction.  In these days of bailouts, bankruptcies and stimulus plans, it’s worth some study.

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  • Gavin Kennedy  On January 4, 2009 at 2:38 am

    Adam Smith did not confuse self-interest with selfishness. He was a moral philosopher and not one given to sloppy thinking; his criticism of selfishness as a behaviour is set out in his book, The Theory of Moral Sentiments (1759), particularly his specific critique of the ‘licentious’ views of Bernard Mandeville (‘Private Vice, Public Virtue’, 1724), which many modern commentators confuse with Adam Smith’s.

    In Wealth Of Nations, 1776, he explains that self interest in a commercial economy (he never used the word ‘capitalism’ – it was not invented in English until 1854) where everybody is dependent on the services of thousands of others for their ‘necessities, conveniences, and amusements of life’, requires them not to think only of their own self interest, but to address the self interest of others, i.e., to be ‘other’ not ‘self’, centred by mediating their mutual self interests. Unless they do this they may go hungry – there not being enough resources to make relying on benevolence, or stealing, reliable behaviours for everyday civilised life.

    Thus, people receive the means for their dinner, and much else besides, by offering others their daily bargains:

    “He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.’ (Wealth Of Nations, II.ii.2: p 26).

    For this fundamental misunderstanding of Adam Smith by Duncan Foley, a distinguished historian of economics (I have heard him lecture), I described his 2006 book in a review as ‘Foley’s Folly’.

  • Curt  On January 4, 2009 at 11:41 am

    I’ve only read bits of Adam Smith, so I’m no scholar on the matter. And I suspect most people who comment on/cite Adam Smith are in the same boat.

    I see there was also quite a lot of discussion about a small part of the book on this thread from Brad DeLong:

    In the end I’ll hold to my general comment that Foley’s book gives a good overview, and I think some of the resulting discussion and disagreement confirms his subtitle that we’re in the realms of theology.

  • Jim  On January 5, 2009 at 3:16 pm

    Sounds like I am entering the middle of an economic discussion with a couple of well studied economists! I will make a more simple point. Note the quote from above:

    “The exploitation of any profit opportunity involves a range of consequences, some good and some harmful. There is no escaping the moral relevance of weighing the good and the harm in each case.”

    This is a silly statement! Any human action involves a range of consequences. Agreed? When the outcome is “bad” in the view of society we then evaluate the “moral relevance”. When the outcome is “good” in the view of society there is no need to weigh the “moral relevance”. Note the words “in the view of society” above. Problem is we have “elites” trying to displace this very workable societal function.

    This is the lefts problem in my opinion. I contend that if you evaluate the “moral relevance” in each case, humanity would simply never do anything, And this is the “unintended consequences” that we experience every day with the efforts to fix the “harmful consequences”, when the results of the original action are good.

    Back to a more direct point which I have mentioned before: show me a system which will supply the goods and services as efficiently as the free market – my favorite example is the ability of a person in midtown Manhattan to get anything they want anytime of day, accomplished by the market without an analysis of the “harm” done in achieving this – and I will agree with Mr. Foley’s theory. It has been proven over and over that “central planning and control” will fail every time. Please suggest an alternative?

  • Jim  On January 5, 2009 at 3:56 pm

    Just posted today’s George Will column at my blog. I think it is an appropriate example of the “unintended consequences” of the Supreme’s attempt to evaluate the “moral relevance” of a situation 7 years after the greatest step forward in Civil Rights in our society. Worth reading.

    This is what Foley’s theory will generate. Be careful what you wish for.

  • Curt  On January 5, 2009 at 5:41 pm

    I don’t believe that Foley is suggesting that we move to some alternate system. I think he is interested in understanding the dynamics of the system we’ve got His message, perhaps an almost obvious one, is that we can’t and shouldn’t simply assume that because someone is pursuing a profit, their actions will automatically generate ‘good’. That doesn’t mean that we need to police every economic activity before it happens, and I don’t think he’s in any way suggesting such a thing. But it does mean that we need to be aware of the possibility of harm (even if completely unintended).

    I tend to agree that we should generally encourage people to try new things. Some of these activities will work, some won’t; and if they’re found to be generating more harm than good, then we need a way to address it. Unfortunately no one is perfect, there are unintended consequences, etc.

    Like Will, I am not convinced that all the government actions will have their intended effect (and it’s true regardless of the administration). I am hopeful that there will be some level of bipartisanship that will at least avoid the most ill-conceived actions, but we’ll obviously have to see how it works out.

  • Jim  On January 5, 2009 at 9:40 pm

    “…if they’re found to be generating more harm than good, then we need a way to address it.”

    By whom? This is what the “market” – society – does! We do not need to “… be aware of the possibility of harm (even if completely unintended).”
    Whomever you are suggesting “address it” only gets in the way of the market and addresses “it” for power and personal gain, at a huge cost to society – unintended consequences..

    Cynical? You bet! And I can read history, watch the events in the world, and see the folly of this idea.

    Problem is the lack of patience in our self-centered society. The market is not instantaneous. It takes time to correct, and there is some pain during that time of evaluation. For 150 years plus our society took the pain and grew dynamically in the right direction – few would disagree that we did grow in the right direction but they are not being honest with themselves in a macroscopic sense, that is, the United States net impact on the world has been VERY positive. Of course, if you don’t believe this, then you are not going to see my position.

    Imagine what the world would be today if the United States were to disappear. Better yet, imagine what the world would be if the United States were never to have existed!

    Bipartisanship does not solve this problem. Only the reduction of political power and the reduction of political involvement in the free market will allow us to return to the right track, avoiding the “unintended consequences” that eventually will be our doom.

    A “man” cannot do what the free market can, as much as we wish he could. Think about Manhattan!

  • Curt  On January 6, 2009 at 2:36 pm

    Sounds like you will be voting Libertarian from now on! 🙂

    You seem to indicate that you think the U.S. was on the ‘right track’ for 150 years, then got derailed (presumably by FDR’s actions in the Great Depression years, among other things?). I don’t think we’ve ever had a particularly free-market economy here in the U.S. (or anywhere else in the world, for that matter, so it’s hard to really know what would happen if we did have one). Between all the various subsidies, tax structures, regulations, government spending, etc. it’s hard to know where a free market would lead. I do know that we wouldn’t have nuclear power, or the internet, or a man on the moon without government activity (not to say that’s good or bad, just the truth). The mixed economy solution seems to be a fairly successful route for both the U.S. and other developing countries, at least so far.

    I don’t claim that there aren’t costs and inefficiencies to political involvement in the marketplace – but I do think that in some cases it’s really the only viable solution. Markets and market structures do great in some situations, not so good in others. When there is a breakdown, the potential impact of ‘letting the market do its thing’ could be very rough indeed.

    One other point however – note that when I was raising cautions about the Paulson $700 billion bailout request, your comment was “I think all will agree we are in a potential crisis. Crises take swift action to avoid them. Hank Paulson is the guy on watch – picked by W, so probably not too popular – and I think we have to let him do his thing.” I think we all see times when we believe that the market failure (for whatever reason) demands quick and decisive political action.

  • Jim  On January 7, 2009 at 6:30 am

    I find as I get older I become more “libertarian”. But I will continue to support the party that is most “free market” supportive and this happens to be the Republicans at this time. Libertarianism has a lot to be said for it on the individual level, but in the real world, as you point out, things have gotten more complex than that philosophy can handle.

    I didn’t say “right track”. I said “right direction”. Again, as I get older I see that almost all disagreements are related to semantics. “Right track” implies judgement. “Right direction” is a factual statement. It seems to me hard to deny that the United States between 1776 and 1960 was accomplishing things that were the envy of the world. I notice you do not comment on whether you agree or disagree. Care too?

    A truly “free market” has never existed. It is like Libertarianism, a philisophical idea that we try to approach. Again, semantics. Using that word today accepts a level of interference for the good of the society. The question is what level. I am not sure I agree with the things you imply would not exist without government involvement. This is an assumption on your part. Had the government not interfered, perhaps technology would have accomplished the same things, only better. But, IT WOULD HAVE TAKEN TIME. And we no longer want to wait!

    Strikes me as odd you mention nuclear power. It would not exist without the government, but the government you support won’t let us use it! I’d pick other examples of the value of government involvement.

    Got to walk the dogs now. More later!

  • Jim  On January 7, 2009 at 12:08 pm

    Sidebar: reread all and see I did use the term “right track” regarding our return to less political involvement in the future. I am being judgemental of where we should go. I stand by the usage.

    “…but I do think that in some cases it’s really the only viable solution.”

    Give me two examples – national defense and border control excluded.

    My comments on Paulson were after the fact. I feel the bailouts are a major mistake. We are rewarding failure, and that never works. Also, they are not using the money as they indicated they would – a typical result when government is not held accountable – and they almost never are (in the short term). In the long term, hopefully the society will see the problem and resolve it through elections, holding them accountable for the failed policies. Would be easier if these failed policies were never implemented!

  • Curt  On January 7, 2009 at 2:37 pm

    Let me first deal with the very big question of the United States and its ‘trajectory’. Obviously I’m no historian, so this is just my take on things, thinking out loud a bit.

    I’d say up to the 1920s at least, and perhaps as far as the 1940s or beyond, the country was to a large extent made up of farmers, with an industrial base that started growing in the late 1800s. The country until around 1900 was pretty much involved with matters on this continent, and not very interventionist globally. There were obviously some big internal tensions, leading to the Civil War.

    World War II was a major turning point – at the end of the war the U.S. was in an unassailable economic position, and much of the world was grateful for the countries intervention. This led to a great rise in the middle class, very favorable union contracts, etc. I suspect this was essentially an unsustainable position to be in, but while it lasted, very favorable to the U.S. (I’d say the best years economically ran about 1946-1966).

    In the sixties, I think the Vietnam War and the ‘Great Society’ social programs started sapping some of the country’s economic strength. When U.S. oil production peaked around 1970, this was another turning point, where we no longer had control over oil pricing, and I suspect this led to coming off the gold standard soon after. Nixon’s price controls and whatnot probably did more harm than good.

    One idea I’ve had just lately is that coming off the gold standard was one trigger for the gradual explosion of credit and debt that we’ve been experiencing ever since. I’m afraid that much of what was considered as ‘economic growth’ over the last 15 years or so may simply be due to borrowing as opposed to true growth of economic capability. It seems now that we’re starting to pay the price for that. Whether the bailouts can create some sort of ‘smooth landing’ seems to me to be doubtful, though some very smart people argue otherwise.

    Also after WWII the country was increasingly active militarily around the world, for better or worse. This led to an increasingly large ‘military-industrial complex’ – and directly or indirectly to the development of nuclear weapons and power, and to the internet. In recent years fortunes have been made by private efforts building on top of the internet platform. Could the internet have arisen through the private markets? Perhaps, but it’s hypothetical – we’ll never know. The argument against it is that the required investment would be so big and so long that no private firm or firms would find it in their interest to try to create it.

    So now we are a country that is no longer on the farm, and people have a much lower degree of self-sufficiency than they used to. This is largely because of market forces and expansion of global trade. Therefore people are more dependent than ever on the smooth operation of markets (as you say, think of Manhattan – then think what happens if Manhattan didn’t get any shipments of food for three days!). I think that’s part of why there’s more political involvement when markets are (or appear to be) failing – we don’t have as much tolerance for it as in the old days. We’re much more tightly interconnected, and we all rely on many parts of the system continuing to operate in all circumstances.

    Sorry for the long comment, but one last note – I think it’s interesting that you (1) have great confidence in the long-term ability of markets to solve many problems yet (2) feel that people are now too “self-centered”. This goes right back to the original issue that Foley raises – isn’t the market about each person pursuing their own goals? What can be more self-centered than that? Why do you think it’s a problem that people are ‘self-centered’? (Or do you see it more as a problem of lack of patience?)

  • Jim  On January 8, 2009 at 3:17 pm

    I think you are a pretty good historian – a lot better than I!

    Do you think the US was moving in the right direction from 1776 to 1960?

    “Could the internet have arisen through the private markets? Perhaps, but it’s hypothetical – we’ll never know.”

    That is the problem with government intervention – we will never know! We know the downside of government intervention over private development – why chance that when you do not know? Government intervention should be extremely limited and used only in the case of imminent disaster! Else, it will be abused.

    “Self-centered” is perhaps another semantic problem. Market inputs do not need self-centered inputs, but “self-interest” inputs, which may not be self-centered at all. That is, a “self-centered” person would accept a claim of bankruptcy with our eased laws; a “self-interested” person would not accept bankruptcy because they see what it is doing to the society.

    My brother once said to me: “Doesn’t everybody vote for what is good for them?” This statement knocked me on my heels as a terribly “self’-centered” position. I have always voted for what I think is good for the city, state, country, etc. You?

    Hope that explains my take on Foley’s position.

  • Curt  On January 8, 2009 at 5:17 pm

    You ask: Do you think the US was moving in the right direction from 1776 to 1960?

    To be honest, I find it hard to answer a question like this with a simple yes/no. I think the U.S. was the boldest experiment in democracy in its time, I think the government structure with its checks and balances was a brilliant design. I think that the hard-fought struggles to (for example) end slavery, gain womens’ suffrage, gain union rights, were all steps that helped to fulfill the promise of the country. I’m proud of the way the country has (generally) been able to absorb new people from around the world, and keep providing opportunities for those who have a dream and want to work hard.

    I don’t see 1960 as a particular turning point (of course that entire period was before my time). The experiment continues. The current situation is so close-up that it’s hard to have much perspective on it. The fact that we’ve elected an African-American as President will probably be seen as another significant milestone. If the economy continues to falter, this may also be a significant milestone in our history, but not in a good way!

  • Curt  On January 8, 2009 at 5:38 pm

    I see the distinction you are drawing between self-centeredness and self-interest. It seems like a self-centered person is using a very narrow view of his/her self-interest, having little concern beyond themselves.

    But can we strictly say that a self-centered person is not acting in their own self-interest?

    If the person is so self-centered that they make choices that so neglect the ‘common good’ that it backfires and in fact brings them to ruin, then they clearly did not have a very good sense of what is in their own self-interest.

    But it does raise interesting questions about what is the ‘proper mix’ of concerns of a self-interested person… is there some ideal? does this relate to the ‘moral relevance’ issue that Foley raises?

  • Jim  On January 9, 2009 at 12:48 pm

    To quote Dennis Prager: “Only a person “educated” in our university system after 1970 would not be able to answer “yes” as to whether the U.S. moved in the “right direction” between 1776 and 1960!” Please don’t be offended, just a Pragerism that I agree with.

    To operate effectively a republican style government must be of a society which has a moral base. Our society is losing its moral base – Europe, I am sure you will agree, has lost theirs – and as it is lost we will face bigger and bigger problems – as Europe is today. An example I heard today is that the average worker in Belgium takes 35 days of “sick leave” per year – they are not questioned on their reasons – and this is on top of their very liberal vacation policies. They must only work 9 months of 12! An example of “self-centered” versus “self-interest” of a Belgian and we are headed the same way!

    This moral base is what allows the population to be “self-interested” – work ethic to raise all of the society – not “self-centered” – “I don’t feel good today” – and make decisions which quite often are counter to our own short term good, but appropriate for the society.

    I do not think this is what Foley is talking about. He is recommending a more selfish level of moral relevance. In the above example he would say the liberal sick day rules make for a more efficient work force by allowing 10% of those people who are really sick have the day off – while the unintended consequence is that 90% of the days are simply a self-centered decision by the worker to relax for the day! And he would be willing to take that cost – to the detriment and eventual destruction of his country.

    Does all that make sense?

  • Curt  On January 9, 2009 at 2:08 pm

    This topic just keeps growing and growing! So much to consider!.

    1. Fortunately I’m very hard to offend! The way I look at things, the first step is to look at a question from a few directions, discuss and see if we can come to some agreement on the facts, and then make decisions and judgements. If you ask me about the US 1776-1960, I think the first step is to look at what happened in those years – and it’s a lot! The Revolution, Slavery, Civil War, Native Americans, Suffrage, rise of corporations, immigration, WWI & II, etc. etc. etc.
    You seem to indicate above that you believe this is a simple factual question (‘“Right track” implies judgement. “Right direction” is a factual statement.’), but in this case I don’t get the distinction – both seem to imply judgement to me. And before I make sweeping judgements, I prefer to consider (at least some of) the facts, and to acknowledge that I may have a mix of opinions and judgements about various deeds and activities of the U.S. in that time period.

    2. About ‘moral base’ – again, there are semantic issues about what this means. You seem to be equating it (or at least describing it in this instance) as a sort of ‘Puritan work ethic’ – certainly that’s one kind of moral base. The interesting question in this context is what is the ‘required moral base’ for a self-interest that creates effective free markets?

    Given that you feel that the U.S. is losing its moral base, thus more people have a ‘false’ self-interest – why are you so sure that the free market will operate as you expect? (One could seemingly make this argument about some of the recent bank woes – even Alan Greenspan said “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity are in a state of shocked disbelief.”)

    Historically it is indeed interesting that the most free-market oriented countries derive from England – I’d say they are England, the U.S., Australia and New Zealand. Other areas certainly have different ideas & traditions, leading to different approaches to government and economics. Some of those approaches work better than others in terms of standard of living, etc. but it seems to me that they are valid, and may be the optimal choice in those societies given their traditions, etc.

    3. About Europe – I’ll limit my comments to what I saw in the Netherlands, but indeed there is a generally different attitude about work there. Some people (not all by any means) do indeed seem to take advantage of the fact that it’s hard to fire people there. This cannot help but reduce efficiency and productivity of the workforce.

    And yet – there’s low crime there, people feel safe walking around in the cities. So there is a kind of ‘moral base’ that is stronger there, in my opinion, than in the U.S.

  • Jim  On January 12, 2009 at 11:10 am

    Re: “Right-Track” v “Right-Direction” – not to get too hung up on semantics but perhaps an analogy is in order – me:

    I feel my life has been in the “right-direction”: educated, family, business, etc. etc. etc. But I am often on the “wrong-track”: I’ll offfer no detail but take my word for it! If a person judged me by looking microscopically at my life at any point in time, they might conclude I am a lousy person. I hope you don’t think I am!

    Likewise, in understanding the United States, I feel the left are looking too much at the “wrong-track” situations, of which there are many, and this is blinding you and most post 1970 university graduates to the “right-direction” of this most successful country!

    Both are “judgements”, but one is an overview judgement and the other is a specific judgement. I see a major difference. Perhaps you do not.

    “Moral Base” is another difficult term. I am not ready to define what I mean precisely yet, but will.

    On your Europe comments, if you are as good a demographer as a historian, you will recognize that the Netherlands (as we know it today) will not exist in 100 years. Agreed? Is this where you want the U.S. to go? I don’t! I want it to exist with the dynamic growth, freedom and wealth that it has enjoyed for 200+ years.

    By the way, remember the Dutch were very much like us in many ways 3 or 400 years ago. Compared to their situation today, is that what you wish on the U.S.?

  • Curt  On January 12, 2009 at 12:21 pm

    Ok, I get a better sense of your distinction – ‘direction’ has a much broader scope than ‘track’.

    I am interested in this question of ‘moral base’ and its role in self-interest…
    and since we’ve done a lot of comments here, I’m going to do another post that will allow us to continue digging into that and other points about ‘pre-requisites’ of markets.

    I’m going to postpone an answer on the Netherlands question (interesting topics, but in general I’ll just say that change is the nature of things, and that many things as we know them today will not be the same in 100 years – for better or worse).

  • Jim  On January 12, 2009 at 3:32 pm

    See you at your new post!

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