GFC 2007: Historical Roots (2/3)

The current crisis in economic theory has deep historical roots. To understand it, we must go back to sixteenth century Europe. Continual warfare and bloodshed among different Christian sects led to the search for a secular basis for society. How can we achieve cooperation in a society composed of religious groups with different goals? Secular thinkers promoted freedom and wealth as the core values of a secular society. One could expect different groups with conflicting goals to agree to these as common goals for the society. Freedom and wealth would provide each group with the possibility and material means to pursue whatever goal they desired.

Considerable effort was put into promoting freedom and wealth as desirable collective goals, because these were in conflict with prevailing and dominant religious conceptions. Efforts of secular thinkers led to the transition from the Biblical maxim“the love of money is the root of all evil” to its opposite: “lack of money is the root of all evil”. Duty to society takes precedence over individual liberty in traditional society. Secular thinkers created a political theory which puts individual freedom above claims of the social order.These momentous changes were fundamental in creating the modern world.

Secular thinkers disagreed about effects of allowing individual freedom and pursuit of wealth on society.  The disagreement was about the nature of human beings. Rousseau felt that human beings were naturally good, and hence advocated anarchy – no rules or regulations of any kind were required. On the opposite extreme, Hobbes thought that human beings were naturally evil. Without strong government enforcement of extensive laws, life would be “nasty, brutish and short,” if people were allowed complete freedom to act as they desire. Locke took an intermediate position, finding society and government necessary, but with minimal rules acceptable by all.

The debate between Locke and Hobbes continues to this day in various guises.  The Hobbesian view was that extensive government control and regulation in all spheres of life is required for a stable social order. Followers of Locke argued that minimal control would suffice. A very important ingredient in the victory of minimal government views was the “invisible hand” argument of Adam Smith.  He argued that even though people are selfish, society would benefit by allowing them freedom to pursue self-interest. This provided a counter to the Hobbesian idea that selfish individuals would destroy society unless there was extensive government control.

Laissez-Faire economics is based on intellectual grounds prepared by Locke and Smith. It argues that one should allow maximum freedom to individuals in the economic sphere. We are witnessing today the outcomes of a social experiment spanning two centuries. Whereas traditional societies warn strongly against pursuit of pleasure and wealth, secular thinkers thought that these baser tendencies of humans could be harnessed for the betterment of society. As long as the institutional frameworks of politics, justice, and society were sound, allowing freedom for pursuit of wealth would enrich society.

All religions and cultural traditions have asked individuals to sacrifice selfish pleasures to fulfill social obligations, and frowned on pursuit of wealth.  The outcomes of this social experiment make clear why this is so.Contrary to the expectations of secular thinkers, individualistic pursuit of wealth and pleasure did not remain confined to the narrow domain of economic activities. When profits were permitted to trump compassion, the odious actions of Shylock the Jew became socially acceptable.Bankers threw millions out of their homes for nonpayment of interest after the financial crisis of 2008. According to a recent report on Fractured Families, “the fabric of family life has been stripped away.” The relation between greed and the global financial crisis will be discussed in the third and last part of this essay.

For a collection of writings presenting critiques of conventional economic theories, see: Guide to Economics.

1 comment
  1. Macrocompassion said:

    The claim that greed is the driver but that Smithian distribution and pursuit of common aims, is all very well provided that it is not possible to monopolize the market and to control the means of access to the market. But this monopolization has not been controlled. In particular it is the ownership of land and the control of the availability of this natural resource that has never been fairly spread. Landless workers, both rural and urban, have been subject to continual exploitation and the opportunities that they should be enjoying are severely curtailed.

    Without a radical change in the way this opportunity may be justly shared, there will always be the same problem and the compromise solutions of the past (such as workers unions fighting management control) will continue to result in the self-same loss of human dignity and freedom, that have been characteristic of our present society. Should land values be taxed (as proposed by Henry George in 1879, “Progress and Poverty”) the non-use of valuable sites would no longer be worthwhile, more of them would become available and the associated production costs would fall. At the same time much of the existing tax would be lowered with the combined effect of greater incentive to produce and to consume.

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