Download Summary of class, Wednesday, 5 April

Summary of class, Wednesday, 5 April
• Central question: What is the relevance of “justice” for economics and
business? Will a successful manager be a just or an unjust person?
• Plato, The Republic
• Does wealth make justice possible (Cephalus)? Or, is justice the basis for prosperity
(Socrates)? Can an unjust society be prosperous? In the short run? In the long run?
• Introduces 4 conceptions of justice
• Speaking the truth and repaying debts (Cephalus)
• Giving to each what he deserves: good to friends, evil to enemies (Polemarchus)
• The interest of the stronger: the strong take and do what they wish and call it “justice”
(Thrasymachus)
• Social harmony, whereby members of the society, performing specialized functions (division of
labor), are able to work together for their common good (Socrates)
• Offers 2 contrasting philosophies of happiness
• Happiness is the power to take and do what one wants, what gives one pleasure, without regard for
justice (or morality generally), while only appearing to be just and good (Thrasymachus).
• Happiness, in both the individual and in the society, comes from justice, a harmony whereby
everything in the individual or the society work together for the well-being of the whole (Socrates).
Socrates: Justice is a harmony that enables both
societies and individuals to thrive and to be happy.
In the society
• In an unjust society, people are
concerned only with what they
individually want, and because these
wants oppose one another, the people
are constantly at war with one
another.
• In a just society there is harmony,
whereby members of the society,
performing specialized functions
(division of labor), are able to work
together for their common good.
In the individual
• An unjust person asks only, what do
I want? And because his desires
conflict with one another, he is
constantly at war with himself and
hence unhappy.
• A just person is concerned primarily
with what is right or best. In this
way his desires are harmonized, and
he is at peace with himself.
Adam Smith (1723-1790),
Chair of Moral Philosophy,
University of Glasgow
• Theory of Moral Sentiments (1759)
Refutation of egoistic theories of the
likes of Hobbes and Mandeville
• The Wealth of Nations (1776)
•
•
•
Refutation of mercantilism
Demonstration of Mandeville’s idea
that human vices are useful in serving
the common good
Analogical application of Newtonian
mechanics to moral philosophy
Adam Smith agrees with Socrates, that
justice is necessary for economic prosperity:
"Justice … is the main pillar that upholds the
whole edifice [of society]. If it is removed,
the great, the immense fabric of human
society . . . must in a moment crumble into
atoms.“
--Theory of Moral Sentiment (1759)
Wealth of Nations as a theory of Justice
• A theory of how justice (just, or fair, prices and
distribution of goods), which makes prosperity
possible (cf., Plato), is possible without just persons
• Inspired by the theories of Isaac Newton: principle of
counterbalancing forces (e.g., for every action there is
an equal and opposite reaction)
How is society to become just?
•Socrates’s answer: By educating the
rulers of the society to be just
persons. (Much of The Republic
describes this type of education.)
Adam Smith believed that:
• Human beings are naturally sympathetic and compassionate (contrary to
the views of Nicolo Machiavelli, Thomas Hobbes, and Bernard
Mandeville):
“How selfish soever man may be supposed, there are evidently some principles in
his nature, which interest him in the fortune of others, and render their happiness
necessary to him, though he derives nothing from it except the pleasure of seeing it.
Of this kind is pity or compassion, the emotion which we feel for the misery of
others, when we either see it, or are made to conceive it in a very lively manner.
That we often derive sorrow from the sorrow of others, is a matter of fact too
obvious to require any instances to prove it; for this sentiment, like all the other
original passions of human nature, is by no means confined to the virtuous and
humane, though they perhaps may feel it with the most exquisite sensibility. The
greatest ruffian, the most hardened violator of the laws of society, is not altogether
without it” (Theory of Moral Sentiment).
“That whole account of human nature [by Machiavelli, Hobbes, and
Mandeville], however, which deduces all sentiments and affections
from self-love, which has made so much noise in the world, but which,
so far as I know, has never yet been fully and distinctly explained,
seems to me to have arisen from some confused misapprehension of
the system of sympathy.”
But …
• He (like Machiavelli, Hobbes, and Mandeville) was not
convinced that that education had succeeded in
making rulers more just.
• So, might justice be achieved in some other way?
Might society be just without just rulers? Such an
idea would have been unthinkable to ancient and
medieval philosophers.
Major relevant influences upon Smith
• Bernard Mandeville (1670-1733): Might prosperity be possible without
virtue? Might vice be useful in promoting prosperity?
• The Grumbling Hive, or Knaves Turn'd Honest (poem; 1705)
• The Fable of the Bees (1714)
• Mercantilism
• The economic philosophy that whereby wealth = money (gold and Silver)
• Smith strongly rejects
• Wealth of Nations largely a refutation of it
• Physiocrats, esp. François Quesnay (1694-1774): What might moral
philosophy learn from natural philosophy?
• Isaac Newton (1643-1727)
• Theory of gravity
• Counterbalancing forces
• Quantification of natural forces?
Mercantilism
• an economic theory and practice, dominant in Europe during the 16th
to 18th centuries, that viewed economy as serving the state.
• Thomas Mun (1571-1641); James Steuart, An Inquiry into the
Principles of Political Economy (1767)
• A large portion of The Wealth of Nations is a critique of mercantilism,
whose main error, Smith claims, is that it assumes, like King Midas,
that the wealth of a nation consists in money, i.e., gold and silver
“It would be too ridiculous to go about seriously to prove, that wealth does not
consist in money, or in gold or silver; but in what money purchases and is
valuable only for purchasing…. [T]o attempt to increase the wealth of any
country, either my introducing or by detaining in it an unnecessary quantity of
gold or silver, is as absurd as it would be to attempt to increase the good cheer
of private families, by obliging them to keep an unnecessary number of kitchen
utensils” (Wealth of Nations IV, 1).
What might moral science learn from natural science?
Natural philosophy/science
• William Harvey (1578-1657):
theory of blood circulation
• Isaac Newton
• Gravity: an “invisible hand” (Smith,
History of Astronomy)
• Counterbalancing forces:
gravitational pull of Jupiter =
centrifugal force of Jupiter’s moons
• Quantification of natural forces
Moral philosophy/science
• François Quesnay (1694-1774):
theory of money circulation
• Adam Smith
• Market prices “gravitate” toward
natural prices under conditions of
“perfect liberty”
• Counterbalancing interests--Market
equilibrium: price at which quantity
of supplied goods = quantity of goods
demand
• ? Can human desires be quantified?
Might there be an analogy between the laws of nature, that
keep the cosmos in harmony, as described by Newton, and
the laws that make a society just?
“the invisible hand of Jupiter”
The “invisible hand” of the economy
• What maintains the harmonious
relationship between Jupiter and its
moons, such that the moons remain
in their orbit around the planet?
• Answer: the counterbalancing
forces of Jupiter’s gravity and the
centrifugal force of Jupiter’s moons.
• What creates the harmony in society
(justice) that is necessary for
economic prosperity?
• Answer: the counterbalancing
interests of sellers and buyers, viz.,
the forces of supply and demand.
God created both the laws that maintain the harmony
of the universe and the laws of social justice.
“The administration of the great system of the universe
[and] the care of the universal happiness of all rational
and sensible beings, is the business of God and not of
man. To man is allotted a much humbler department,
but one much more suitable to the weakness of his
powers, and to the narrowness of his comprehension;
the care of his own happiness, of that of his family, his
friends, his country [i.e., his own self-interest]” (Theory
of Moral Sentiments).
Theory of the “invisible hand”
“The natural price … is … the central price, to which the
[market] prices of all commodities are continually
gravitating. Different accidents may sometimes keep
them suspended a good deal above it, and sometimes
force them down even somewhat below it. But
whatever may be the obstacles which hinder them
from settling in this center of repose and continuance,
they are constantly tending towards it.”
--Wealth of Nations
“Natural Price” vs. “Market Price”
“Natural Price” = wages + rent + (ordinary) profit
(cost of
producing a
good and
labor land
stock/capital
bringing it to
market)
“Market Price” → f (supply ∙ demand)
(Price at which a good sells once brought to market)
Market Price – Natural Price = “extraordinary profit,” if market price > natural price
= losses, if market price < natural price.
The “invisible hand”
“gravitates”
Market Price
Natural Price
under conditions of “perfect liberty”
• Both suppliers and buyers enjoy unrestricted entry to and exit from markets
• Large number of sellers and buyers: so large that no individual seller or buyer
alone can affect the market price
• All relevant knowledge available to sellers and buyers
• “Extraordinary profit” provides incentive to increase supply and thus
lower market price
• Losses provide incentive to decrease supply and thus raise market price
“Extraordinary Profits”
0
Market Price ↦ f (s · d)
Consider:
• Who most benefits from this system and most wants it?
Capitalists (owners of the means of production)?
Workers? Landowners? Consumers?
• Who benefits least from this system and most opposes
it?
http://www.econlib.org/library/Smith/smWN5.html#B.I,%20
Ch.11,%20Of%20the%20Rent%20of%20Land
• Might an economic system of free markets be better
termed “consumerism” rather than “capitalism”?
Ludwig von Mises (Austrian School of economics
“The direction of all economic affairs is in the market society a
task of entrepreneurs. Theirs is the control of production. They are at
the helm and steer the ship. A superficial observer would believe that
they are supreme. But they are not. They are bound to obey
unconditionally the captain's orders. The captain is the consumer.
Neither the entrepreneurs nor the farmers nor the capitalists
determine what has to be produced. The consumers do that. If a
business man does not strictly obey the orders of the public as they are
conveyed to him by the structure of market prices, he suffers losses, he
goes bankrupt, and is thus removed from his eminent position at the
helm. Other men who did better in satisfying the demands of the
consumer replace him” (Human Action)