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Sustainability and the ‘invisible hand’ of the market

21 Feb

The critics of the concept of sustainable development and CSR always argue with Milton Friedman’s famous quote that “the business of business is business” and also refer to Adam Smith’s metaphor of the “invisible hand” that would guide the markets. They see especially CSR as an attempt to more regulation through the backdoor and a way to restrict the market power and the players within their specific markets; overall CSR is bad for modern capitalism. Even worse, one could interpret this combination as a permit for amoral behaviour and a plea against regulation that restricts ways to pursue self-interest.

But wait a minute! When Adam Smith published “An inquiry into the nature and cause of the wealth of nations” in 1776, partnerships were the dominant form of enterprise in which ownership and management meant the same thing. In this context is also useful to understand that Adam Smith was against chartered corporations and joint stock companies that were formed by Act of Parliament or by Royal warrant as ‘exclusive’ monopoly entities. Adam Smith did not oppose all joint stock companies (he recommends such arrangements for such as banks, insurance, viaducts, and canals, provided they were not awarded monopolies). His main complaint about the chartered trading companies were their monopoly status, their lack of supervision (18 month’s round trips of messages from London and back via India) and their integral part in the mercantile political economy of the day which he criticised severely in Book 4 of Wealth Of Nations.

Sad but true, most lobbyists of the “invisible hand of the market” metaphor are not aware that Adam Smith did also publish “The theory of moral sentiments” in 1759, where he explains that the self-interest of the market players (buy and sell side) needs to be pursued by people of conscience and with a clear moral capacity; he argues that sympathy is required to achieve socially beneficial results. The self-interest he speaks of is not a narrow selfishness that allows whatever market transaction, but something that involves sympathy. He regards pure selfishness as inappropriate, if not immoral, and that the self-interested actor has sympathy for others. He continues that the self-interest of any actor includes the interest of the rest of society, since the socially-defined notions of appropriate and inappropriate actions necessarily affect the interests of the individual as a member of society.

I would argue that Adam Smith’s idea of the self-interested market player that has developed a moral capacity and can make informed market decisions with the aim to achieve socially beneficial results will find a lot of merit in integrating sustainability thinking and CSR as a tool to implement that thinking into his/her understanding of necessary fair market conditions: a better understanding of the needed changes in legislative frameworks (and its enforcement) to support sustainability as a means for fair markets (so no monopolies), a changed mindset about the basic role of a company (counterpoint to Milton Friedman), the need for broader education on sustainability issues in all economic curricula (to disable amoral behaviour and enable Adam Smith’s concept of “sympathy”), and a broadly developed set of indicators of economic, environmental and societal impacts of the transactions of the organization and of the individual (to increase the available information to make good market decisions).

Adam Smith, a sustainability activist more than two centuries ago – a very different take on his legacy? At least he was somebody sustainability advocates of today can lend more credit from than the narrow-minded lobbyists of modern capitalism who haven’t got the whole story about Adam Smith.

[Remark: this blog entry benefited from an earlier remark based on an blog that I posted during my time at GRI in late 2008, from Prof. Gavin Kennedy, who writes a great blog called “Adam Smith’s lost legacy”, see http://adamsmithslostlegacy.com/BlogBlog.htm]


 
1 Comment

Posted by on February 21, 2010 in Back to basics

 

Tags: , , ,

One response to “Sustainability and the ‘invisible hand’ of the market

  1. Mildred Cantu

    June 20, 2011 at 05:46

    Fabulous. What an impressive webpage!

     

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