Adam Smith would have avoided this mess

Amartya Sen takes on free-market orthodoxy by looking at what its patron saint had to say. In Capitalism Beyond the Crisis, the Nobel Prize winning Sen looks at how Adam Smith never expected markets would be all-encompassing tools for societal organization, and how he probably would not be surprised by the mess our economy is now in, given our decisions in the last 20 years. It’s a very good read, but here’s a summary to whet your appetite.
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?

His answers seem to be as follows:

Capitalism may have outlived its usefulness. The free-market system was already widely dependent on many non-market functions — he cites unemployement benefits, education, health care and other services.

Nor were markets ever expected to provide every answer. Sen quotes from Smith’s “Wealth of Nations” to show how he would have expected the current banking crisis would emerge. Sen adds that Smith also devotes much of his writings to bettering the fate of the poor, and presumes that Smith would have approved the idea of the welfare state.

As for excessive risk, Sen writes about the 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.

In short, capitalism as a system based on unfettered, self-regulating markets is a fiction whose time should never have come. But we do need a ‘new capitalism.’ Rather, we need a return to capitalism’s less market-driven roots.
For his second question on the insitutions we need, Sen casts a glance askance at 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 looks next to Keynes, to the work of Arthur Cecil Pigou, a rival of Keynes also based at Cambridge University. 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 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, and the U.S. dumps capital into an inefficient system that spends more per capita than any other in the world, but still manages to leave 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.