Tuesday, June 23, 2020

Adam Smith as a Practical Development Economist

For modern economists, Adam Smith's classic The Wealth of Nations is a source of memorable concepts: the division of labor, the "invisible hand," relying on the self-interest of the butcher and baker to provide us with products we want, the insight that people of the same trade rarely get together without trying to come up with some contrivance for raising prices, the four canons of taxation, and many more. 

But those actually reading the book, rather than cherry-picking snippets and quotations, will find that it is not just a book of theories and hypothetical examples. Instead, it is chock-full of historical episodes, national episodes, and arguments based on the evidence of the time. William Easterly takes on the task of rethinking Smith in this way in his essay, "Progress by consent: Adam Smith as development economist" (Review of Austrian Economics, published online September 9, 2019). As Easterly writes:  

There is a curious notion in development economics that the field emerged out of nowhere right after World War II. I used to share that view ... Apparently we believe that economists for decades and centuries had remarkably little curiosity about the dramatic development differences evident around them.
It took me embarrassingly long to acknowledge some obvious ancient history of development thinking, and some other development economists are apparently taking even longer. As long ago as 1776, Adam Smith wrote a book called the Wealth of Nations. It turns out, after many hours of careful reading, that the book is indeed about the Wealth of Nations.

Far from ignoring the wider world, Smith cited 164 different historical or contemporary
place names or names of ethnic groups. ... The omissions ... are rare and reflect information availability. Only Australia and New Zealand are left out altogether. Specific place names in Africa are limited to some places on the coast, but there are very important discussions of the African continent as a whole. The rest of the world is well covered ... Smith has abundant coverage of future Third World places such as Peru, Mexico, Chile, Egypt, India, Africa, Central Asia, and China. Smith’s First World success stories are England, lowland Scotland, British North America, and Holland. The future Second
World is also covered in discussions of Russia and Eastern Europe. ...

Smith used his widespread examples to test his preferred hypothesis to explain development. The hypothesis is not a surprise – development happens based on free trade and free markets, making possible the division of labor and gains from specialization. Many of his examples use natural variation in trade based on access to waterways, or proximity to prosperous towns or rich neighbors. So for example, England, Scotland, and Holland benefit from access to waterways, towns, and rich neighbors. Inland Africa suffers from the lack of all three. The Incas and the Aztecs had not enough trade for a
different reason – they lacked money as a means of exchange. China and India were intermediate development examples because they had large domestic markets and good interior water transport, but had refused to participate in international trade. Free institutions and moral norms that support individual choice and trade also matter. ...
Adam Smith (and economists in general) are sometime caricatured as believing that "greed is good." And of course, Smith is famous in part for emphasizing the power of self-interest to produce beneficial social outcomes, as if led by an invisible hand. But as Easterly emphasizes, Smith's vision of self-interest involved all parties having the power and freedom to make choices. Thus, Smith was a notable opponent of colonialism and slavery in his time, because those under colonial rule or enslaved were denied the power to make their own choices. Easterly explains: 
One such idea that was widespread and influential for a couple centuries in Western intellectual history is that less developed people were unfit to have the same rights as more developed people. Underdevelopment equaled innate inferiority, which implied your inability to make wise choices for yourself. Advanced development equaled innate superiority, which included the ability to direct development for the inferior people. These ideas opened the door for the more developed, allegedly superior people to make choices for the less developed people. Europeans had the right to seize lands of American Indians because Europeans would make the wise choices that would develop the lands more. Slave-owners had the right to dictate to slaves unfit to make choices for themselves.Colonizers had the right to dictate to whole countries unfit to make choices for themselves.

 Many thinkers linked the idea that underdevelopment reflects innate inferiority to the right of the more developed to coerce the less developed. Adam Smith is notable in this debate because he argued more universally for individuals’ right to choose for themselves, and emphasized how these choices would serve both their own interests and those of society and the world as a whole. Smith shows how recognizing the right to choose and consent is essential for development to really be beneficial for all. The gains from trade can only occur if one party does not coerce the other, an idea that led Smith to fiercely criticize European conquest and colonization of non-Europeans. ...
Slaves did not consent to have their production seized by their owner. Slaves are also not free to move to higher wage employments. Slaves have no incentive to work hard, and so lands worked by slaves “produce as little as possible.”Likewise, slaves have no incentive to make laborsaving innovations on the job, these “have been the discoveries of freemen.” (He confirms this empirically with a comparison of high productivity Hungarian mines with free labor compared to low productivity Turkish mines using slave labor in the same neighborhood.) ... Smith’s view here on African slavery was sufficiently notorious that Virginian pamphleteer Arthur Lee in 1764 complained Smith had “debased” the American slaveowning colonists into “monsters.”"
In other words, Smith is not arguing that self-interest which takes from others is economically (or socially) beneficial. Instead, he is pointing out the benefits that arise when self-interest of buyers and sellers interact in a shared moral context where all parties are able to make independent individual choices. Of course, this argument needs to be spelled out in detail in many ways, but that's why Smith wrote his book and Easterly wrote his essay. 

To modern ears, Smith's formulation may seem obvious (even for those who disagree and see it as naive or misleading). But as Easterly  points out, in his own time, Smith's view was distinctive: 
Despite what seems like a natural synthesis in Smith of a pro-market argument with an
anti-colonial and anti-racist one, it is sad that this combination would rarely occur again
among economists or other intellectuals in the centuries and decades after Smith before
the modern era.