Lessons from the Global Financial Crisis: The Relevance of Adam Smith on Morality and Free Markets
Richard Morgan has made a valuable contribution withLessons from the Global Financial Crisis , by bringing together succinctly Adam Smith’s work on markets and on morality, that is The Wealth of Nations and The Theory of Moral Sentiments. The importance of the latter is being increasingly recognized by economists at the current time, correcting an excessive focus on the Wealth of Nations in recent decades.
The global financial crisis would not appear to Smith as unprecedented. Smith was well-aware of financial crises and incorporated their threat into his economic views. Smith observed from financial crises such as the 1772 crisis in Scotland, which, Morgan reports, reduced 30 banks to three, that an unregulated banking system posed great risks for society.
Smith’s argument for government regulation of banks, as quoted by Morgan, p.38, is based on a negative externality, in that the security offered by the banking system to all people can be endangered by the actions of a few individuals.
Morgan’s exposition balances Smith’s argument that markets devoid of government regulation can defeat themselves with Smith’s scepticism about the wisdom of government decision-makers. In Morgan’s view, governments bear some of the responsibility for the GFC in failing to control the amount and type of credit.
More generally, Morgan reminds us of Smith’s warning to beware of “the man of system”, that conceited individual enamoured with his ideal plan of government. The 20th century has chilling examples of catastrophes due to men of system. Less far reaching examples occur weakness of people to believe that a simple answer exists for economic and social problems makes them prey to “man of system” thinking.
- Smith’s Life and Career
- The Philosopher Economist
- Smith and Social Cohesion
- Moral Judgments
- How Living Standards Are Improved
- Smith and Self Interest
- The Importance of Benevolence
- Self Interest Does Not Mean Selfish
- Self Interest, Saving, Investment and Prosperity
- Self Interest and the Banking Sector
- Smith, the Critic of Exploitation
- The Proponent of a Well Governed Society
- The Threat of Government Intervention