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Monday, February 27, 2012

Strategic CSR - Adam Smith

The article in the url below by Jeffrey Sachs critiques Adam Smith’s concept of the ‘invisible hand’ (“self-interest, operating through markets, leads to the common good”). While the invisible hand works in principle, Sachs argues, in terms of maximizing social welfare:

“… the paradox of self-interest breaks down when stretched too far.

In particular, Sachs identifies four ways in which “Self-interest promotes competition, the division of labor, and innovation, but fails to support the common good”:

First, self-interest fails when market competition breaks down. Second, self-interest can easily turn into socially unacceptable inequality. Third, self-interest leaves future generations at the mercy of today’s generation. Fourth, self-interest leaves our fragile mental apparatus, evolved for the African savannah, at the mercy of Madison Avenue. Today there is evidence of both hopelessly addictive consumerism and brain numbing cultural forces.

He concludes:

For these reasons, successful capitalism has never rested on a moral base of self-interest, but rather on the practice of self-interest embedded within a larger set of values.

There is a lot going here. First of all, I am not convinced Sachs’ “four ways” are really four ways, but more likely two ways. The second seems to be an outcome of the first, and the third is not specific to capitalism—however we decide to organize things in this life, future generations will bear the consequences of those decisions.

It seems to me, however, that the conclusion Sachs draws from the ‘flaws’ he identifies in Adam Smith’s model is very important—the idea that capitalism can only ‘succeed’ when embedded in a larger value system. In other words, some form of individual restraint is crucial. In many societies, that value system is provided by religion. Without that or any other form of civilizing restraint, capitalism can degenerate into raw selfishness and deceit.

Later in the article, Sachs refers to Andrew Carnegie’s Gospel of Wealth, which I hadn’t read before and found fascinating. Here was Carnegie writing in June, 1889 (I wonder how he would have judged society today):

This, then, is held to be the duty of the man of Wealth: First, to set an example of modest, unostentatious living, shunning display or extravagance; to provide moderately for the legitimate wants of those dependent upon him; and after doing so to consider all surplus revenues which come to him simply as trust funds, which he is called upon to administer, and strictly bound as a matter of duty to administer in the manner which, in his judgment, is best calculated to produce the most beneficial results for the community--the man of wealth thus becoming the mere agent and trustee for his poorer brethren, bringing to their service his superior wisdom, experience and ability to administer, doing for them better than they would or could do for themselves.

This work, together with the reviews and excerpts I have been reading from Charles Murray’s excellent new book (Coming Apart: The State of White America (1960-2010) e.g.: http://online.wsj.com/article/SB10001424052970204301404577170733817181646.html), suggest systemic deficiencies with our dominant economic system that generate significant (and presumably, at some point, irreversible) social consequences.