In October of 2008, the chairman of the Federal Reserve, Alan Greenspan, admitted to Congress and the viewing public that free markets cannot regulate themselves.
This is imporanat because I think it may have been missed by the great majority. Here we have an admission by one of the highest ranking members of our society that the entire philosophy to Adam Smith’s “invisible hand” is completely false.
Greenspan appeared alongside Christopher Cox, the chairman of the Securities and Exchange Commission, and John Snow, who served as the secretary of the Treasury early in the Bush administration.
In his prepared remarks, Greenspan said he was in “a state of shocked and disbelief” about the breakdown in the ability of banks to regulate themselves.
Greenspan told Representative Henry Waxman (D) from California:
I made a mistake in presuming that the self-interests of organization, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.
Referring to his free-market ideology, Greenspan added:
I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.
Waxman pressed Greenspan:
In other words, you found that your view of the world, your ideology, was not right, it was not working?
Greenpans responded:
Absolutely, precisely. You know that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.
Now, notice what just happened. All economists profess the teachings of Adam Smith, but none have actually read his works. This is yet more proof that the chairman of the Federal Reserve, arguably the world’s most important bank, is either quite unfamiliar with Smith’s work or has purposely (or naively?) kept the truth from the public.
Here’s a quick review of some of Smith’s most important points regarding the subject in question:
Book I, Chapter VIII, Pg. 80:
We rarely hear, it has been said, of the combinations of masters, though frequently of those of the workman. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject.
Book I, Chapter IX, Pg. 117:
Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.
Book I, Chapter X, Part II, Pg. 152:
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty or justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.
Book I, Chapter X, Part II, Pg. 168:
Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favor of the masters.
Book I, Chapter XI, Part III, Conclusion of the Chapter, Pg. 292:
The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers.
Book I, Chapter XI, Part III, Conclusion of the Chapter, Pg. 292:
The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.
Book IV, Chapter I, Pg. 469:
When the profits of trade happen to be greater than ordinary, over-trading becomes a general error both among great and small dealers.
Book V, Chapter I, Part III, Pg. 820.
Though the principles of the banking trade may appear somewhat abstruse, the practice is capable of being reduced to strict rules. To depart upon any occasion from these rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous, and frequently fatal to the banking company which attempts it.
You can learn more about real Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations in my article titled: Adam Smith’s Division of Labor – “stupid and ignorant as it is possible for a human creature to become”
Thanks for reading,
Notes:
References are to book, chapter, subdivisions and (in some cases), paragraph, as given in the Glasgow edition (see below). Other editions include book and chapter only. Page numbers are included as a locational help.
Smith. An Inquiry into the Nature and Causes of the Wealth of Nations. Ed. R. H. Campbell and A. S. Skinner. 2 vols. Glasgow Edition of the Works and Correspondence of Adam Smith 2. Oxford U. Press, 1976.
Complete Online Version: An Inquiry Into The Nature And Causes Wealth Of Nations by Smith Adam
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