Monday, November 30, 2009

The Economic Enlightenment Of Adam Smith: The Lesson For Malaysia & China

Most economists, learned or otherwise, associate Adam Smith's economics with the workings of the invisible hand in markets - and presumed that the market economy is the best way an economy works. Whilst this may be true under special conditions, there are limitations to the market such as the existence of monopolies, the insufficiency of market size, and the failure of market signals. So the market economy is more than just supply meeting demand.

So, Adam Smith's greatness, to me, is not his views on the market, but his enlightened view that economics is not about the accumulation of wealth but the increased production and consumption of goods and services that results in an improvement in human wealth.

He argued against the focus of the policies of politicians on the accumulation of gold and foreign reserves (wealth) as such policies tend to create monopolies, trade restrictions, the underpayment of workers (his labour theory of value led to Marx's militancy), and general inflation who adversely affect the general public.

Instead, Adam Smith argued that the focus of policy should be on building the prerequisites for an improvement in human welfare where more consumption can be obtained using the same amount of resources simply through specialisation and exchange. It is not a question of price but economies of scale and exchange.

To improve human welfare given the resources we have, it is far better for individuals or societies to specialise in what they are good at rather than trying to do everything themselves. It is possible to do everything on one's own but it is far better for everybody to cooperate - each doing what they are good at, for otherwise, we will be wasting the opportunities to do things better for oneself and everybody else.

Who does what therefore depends on what one is good at, naturally or trained, and depending upon consumer needs the renumeration or return one gets. It is just a question of knowledge and training.

If this system can be made open and unbiased (through proper teaching and training), then it is possible to train people to do good for society and to think and formulate in the interest of society.

It therefore does not augur well for our economic future if we teach our young to be self-interested and restrictive in their generosity. They may be wealthy but we will pity for their selfishness.

We can be generous only if we are confident about ourselves and our environment.

China can grow on its own if its entrepreneurs and captains of industry can bring themselves to pay workers sufficiently so that they can live a better existence. Afterall, the whole purpose of production is for the consumption of the people - rather than just to export and accumulation foreign reserves who turn out to be the worthless papers of a silly government.

That's why we should always focus to specialise in order to do things better so that we can all have everything that we need - which means that we should strive to be ordinary and homogeneous so that others may also have what we have. Otherwise, we'll all live poor lives.


walla said...

Another good post; humanity meets quant.

But today's wealth is not gold or reserves. It's garlic.(

Up to a stage, selfishness is needed to build enterprise. Once enterprise achieves critical mass, selfishness should become selflessness. The tipping point for that transition depends on personal conviction and exogenous situation.

Economic institutions and policies can help or hinder. If they are fair and wise, help. If they are unfair and unwise, hinder. For there will always be reactions to actions.

A progressive state comes from forward-looking societies where people are comfortable, and confident of their ability to uphold values and principles for the common good without sacrificing too much of their individualism that is their unique contribution to the fabric of society. In fact the greatest achievement is to morph individualism into commonalism.

Humanity wrapped in moderation embedded in culture polished by learning tested by experience colored by compassion and infused with higher orders. These are basics anywhere in the world anytime in the march of history.

Then awareness of one's real missions in life will become more acute and lasting.

That is important because to do otherwise is so easy. One is more easily persuaded that what vicariously succeeds should continue than to stop it, step out and reverse.

But the world doesn't work like that. It is mercantilist to the core. If something works, more of it, it says. Until wealth accumulation becomes an end in itself rather than a means to some other more commonly benefiting end.

Malaysia, China and others in the emerging economies group have had no choice but to be mercantilist. That was the role foisted on them by the advanced economy buyers. They had only labor. Therefore these must be cheap to beat the machines of the west.

But there should come a time, if policies and governments are wise where the labor will be paid better so that as people too they can come out from the pits in which they were unfortunately born. After all, poverty is a plight, disease, sin even.

However the world remains entrenched in what it sees as fair deals. In personnel evaluations, for instance, the following are assessed:

what done in period under review
how done in period under review
what initiatives shown in period under review
what new skills learned in period under review
what potential revealed in period under review,

and all those will be pegged to net performance of the enterprise which will in turn be pegged to the local then the regional then the global economies

with a subtracting factor for potential contraction of the next period's market,

and estimation of the overall tax exposure of the enterprise.

There is no shred of common societal concern in any of those parameters.

walla said...

The advanced economies should have gone through that stage. But the present crisis shows they can still be adamant to drastically remove headcounts without the slightest compunction.

However there is hope of global progress.

Like this:

So the world is moving towards more open minds, more caring hearts, more concern about the environment, not just of physical surrounding but also within society itself.

To help it along, a country should have institutional policies that foster corporate philanthropy by individuals acting as captains of enterprise. Corporate philanthropy need not be just donations to charitable causes. It can also be more people-sensitive human resource compensation schemes. But then the HR function will ask what is the basis. Thus it comes back to training and performance.

Everything should rise to the top in concert if any big transformation is to be attempted. That can start with the opening of all minds. But it has to continue to the biggest HR challenge - building value in a person that doesn't have to fall back to just economic value.

It is a catch-22. The biggest management challenge anywhere in the world is to break catch-22's.

The accumulation of foreign reserves denominated in USD are an example of such catch-22. Without buying US bonds in USD to finance US demand for imported goods, jobs won't be created from bottomless labor markets. But USD exchange value is falling unless the US economy can strengthen. When the time comes to call in and cash those bonds, the payment will be in USD whose value will be less than what was used to pay for the bonds. Another global financial crisis is thus imminent.

Some will say this will be the last disequilibrium.