Adam Smith Was No Fan of Free Markets

Amartya Sen takes on free-market orthodoxy by looking at what its patron saint, Adam Smith, had to say. In Capitalism Beyond the Crisis, Sen uses a Smithian prism to look at three big questions:

1. Do we need a new capitalism?
2. What kind of economics institutions and priorities do we need?
3. How can we get out of our current crisis with as little damage as possible?

To summarize Sen, capitalism as a system based on unfettered, self-regulating markets is a fiction whose time should never have come. He thinks we don't need a new capitalism, but a return to capitalism's roots, which were much wiser about the limits of markets.

Sen quotes from Smith's "Wealth of Nations" to show how he would have expected the current banking crisis would emerge. Sen writes about Smith's warning about those who would promote excessive risk-taking, whom he called "prodigals and projectors" in "The Wealth of Nations:"

The implicit faith in the ability of the market economy to correct itself, which is largely responsible for the removal of established regulations in the United States, tended to ignore the activities of prodigals and projectors in a way that would have shocked Adam Smith.

As for our institutions and policies going forward, Sen cautions us on the return of Keynesianism. He says "Keynes can be our savior only to a very partial extent, and there is a need to look beyond him in understanding the present crisis." Sen in fact looks next to Keynes, to the work of Arthur Cecil Pigou, a rival of Keynes also based at King's College, Cambridge. Pigou worked on economic psychology, in a way that matters now, as we suffer a kind of psychological meltdown that reinforces and amplifies our economic one. Sen suggests the current crisis and its aftermath will demand an economic policy much more concerned with social services and economic inequality than Keynes was. Indeed, Sen argues that Keynes "came close to being the guru of a new capitalism, who focused on trying to stabilize the fluctuations of the market economy."

Finally, Sen focuses his third answer on how we have an opportunity to remake our national healthcare system so it will function far more efficiently, and cites neither Europe nor Canada, but Kerala, a state in India. He wants to know why Kerala has been able to provide low-cost but effective healthcare for all, while the U.S. spends more per capita on healthcare than any other country in the world, but still manages to have indifferent results, and leaves more than 10 percent of our population uncovered.

So far, he finds the Obama administration lacking in imagination. Perhaps it's time for them to dust off their Adam Smith.