The Social Psychology of Economics and Adam Smith

Thomas Mucha over at Salon has a great piece asking the question if Economists are really horrible people. He basically asks why the “invisible hand” wants to slap you across the face. My question has always been: “Why can’t I slap the Invisible Hand?”

Of course, Adam Smith is the Father of modern Economics in Capitalism. And Karl Marx hated him.

The question really boils down to Adam Smith’s ideas on “rational self-interests” and the Social Psychology of Altruism. Mucha makes the argument that resources are scarce, and the self interests that Smith saw as “rational” is really greed. But Adam Smith wrote the Wealth of Nations in 1776, in a Mercantile Economy, and saw few limits to Capitalism’s economic potential. Karl Marx of course would chase Adam Smith across an open field with a hatchet in his book Das Kapital some 80 years later.

The one thing that Marx would agree with Smith about is the “rentier” class being a bunch of leeches. These are people who obtain “rents” from surplus value, such as insurance agents, landlords, and stock traders.

One thing that rarely crosses the mind of anyone pontificating on Adam Smith is that Smith advocated for equality. Yes, the invisible hand came out of rational “self” interest, but Smith realized that equality (and inequality) did not. Smith specifically advocated for Government regulations on rentiers, monopolies, and cartels, because he thought that in order for Capitalism to work, everyone had to have equal access to, well, capital; either through wages or open markets.

The “free” market for Adam Smith was NOT about capitalists doing what ever they wanted. The “free” market was Smith’s idea that markets had to be accessible to everyone “freely” – and for that, he saw in 1776 that there had to be government regulation with monetary policy.

The “rational” self-interest of Adam Smith in 1776, was Homans’ Exchange Theory. I buy a loaf of bread from a baker, because I need to eat – and so does the baker. Me and the baker engage in an “exchange” equally and freely, and everyone is happy. Both the baker and myself are simply doing what’s in our own self-interest; and it’s rational to want to eat.

It’s when I cannot afford the loaf of bread because my boss doesn’t pay me enough that creates the Economic and Social problem. While Smith did not advocate for a “minimum wage”, he did advocate for a “fair market” wage based on skill sets. So college educated people working at McDonald’s would NOT fit into Smith’s ideas.

It’s not that the Father of Modern Economics, and by default all economists are bad people. It’s not even that the “invisible hand” of rational self-interest is all that bad. It’s that few in Capitalism have actually read Adam Smith, or follow his principles.

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One Response to The Social Psychology of Economics and Adam Smith

  1. 06cedmuho says:

    Reblogged this on 06cedmuho.

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