The study of the
political economy of America in the recent years
has brought about contradictory inferences, however
a common thread that weaves through the political
economics literature is that the rich are getting
richer faster than the poor are getting richer.
Paul Krugman, professor of economics at the University
of Princeton and the most controversial political
economist in America during these years, has addressed
this hypothesis in a host of articles in his many
books, newspaper and magazine articles et al.
In For Richer, the first essay in a New York Times
series on class and class wars in the United States,
Paul Krugman invites the reader’s attention
to issues that the libertarian economists often
ignore or fail to recognize in their discourses.
He proclaims the disappearance of the middle class,
illustrates the increasing problems of income
inequality and plutocracy, and examines the efforts
by economists as well as government institutions
to conceal class composition using statistical
data. The shifting paradigms of corporate executive
ethics and influence is yet another topic discussed
in the essay. [Krugman, 2002]
While Krugman’s sources may be limited and
even debated, it points to certain essential and
crucial socio-political and economic issues plaguing
the American society. That the Americans are presently
living in a new Gilded Age, which is as extravagant
as the original, but with a gap between the very
rich and the rest widening faster than ever. Whatever
be the allegations on Paul Krugman, it is important
that the issues are addressed and appropriate
measures identified for the citizens and government
to change the difficult state of things.
Krugman’s Analysis and Adam Smith’s
Concepts of Self-interest and “ Invisible
Hand”
As Krugman’s observations are essentially
focused on the individual’s greed and self-interest
in the capitalist society that America is, it
would be worthwhile to relate these observations
with those of Adam Smith, the 18th century philosopher
economist who wrote The Wealth of Nations, a tour
de force on the theory of capitalism introducing
the concept of the “invisible hand”
that leads capitalist societies to economic efficiency.
While Adam Smith believed greatly in the intrinsic
worth of the capitalism and so-called “invisible
hand” of the market, he could foresee the
self-interested behavior of businessmen. According
to Smith, maximizing self-interest was a ‘rational’
behavior in economics. His often quoted observation
from The Wealth of Nations :
‘people of the same trade seldom meet together,
even for merriment and diversion, but the conversation
ends in a conspiracy against the public, or in
some contrivance to raise prices’ –
imply that the businessmen are always concerned
of making themselves richer, even if its by harming
their fellow citizens and their nation.
Paul Krugman’s observation on corporate
executive ethics and the statistical data that
he presents on the concentration of wealth in
a few hands in “ For Richer” falls
in line with Adam Smith’s description of
the capitalist system, which is essentially propelled
by the self-interested behavior of the businessmen.
However, a main argument in The Wealth of Nations
is that the free capitalist market, though seemingly
chaotic and uncontrolled, is in reality steered
to produce the right quantity and range of goods
by a so-called “invisible hand.” According
to his theory, in the event of a product shortage,
its price rises, which creates the motivation
for its increased production, thus curing the
shortage ultimately.
The ‘invisible hand’ not only guides
production, but also guides the price of the product
in a competitive capitalist system. The increased
competition among manufacturers and the increased
supply would eventually lower the price of the
product to its production cost, which he termed
the “natural price.” Nonetheless,
Smith was cautious of the self-interest of businessmen
and insisted against the formation of monopolies.
Smith held that while human motives are often
selfish and greedy, the competition in the free
market would tend to benefit society as a whole
anyway.
Krugman’s Analysis and De Tocqueville’s
‘Self-Interest Properly Understood’
Alexis de Tocqueville in his book Democracy in
America also addressed the issue of self-interest
of Americans. However Krugman’s observations
differ significantly from Tocqueville’s
concept of ‘self interest properly understood.
Tocqueville described America as a community of
good Samaritans, with people persistently helping
one another. He explains how Americans had an
innate grasp of the concept of enlightened self-interest:
“The Americans enjoy explaining almost every
act of their lives on the principle of self-interest
properly understood.”
He continues to say “enlightened self-love
continually leads them to help one another and
inclines them to devote freely a part of their
time and wealthy to the welfare of the state.”
[Tocqueville, 1840; pg. 611] Tocqueville’s
principle of self-interest properly understood
seems to be in line with the pre-1970s America
presented by Krugman; it’s hard to associate
the self –interest of modern corporate executives
reported by Krugman with Tocqueville’s concept
of self interest.
Krugman’s observations seems in line with
that of Adam Smith, in that he attributes the
economic achievements of the United States to
the concentration of income at the top, typical
of free market system, however his hypotheses
goes beyond the “invisible hands”
of the market that Smith considered would benefit
the society. Krugman considers the concentration
of wealth on the top as the main reason that the
United States has more poverty and lower life
expectancy than any other major advanced nation.
Though he considers the hypothesis of the effects
of “globalization”, “skill-biased
technological change,” and “superstar”
theory, he concludes that explanations for the
growing inequalities ultimately to the “role
of social norms in setting limits to inequality.”
[Krugman, 2002]
Paul Krugman’s views in a way confirm Adam
Smith’s caution of the greed of the businessmen,
however he fails to identify the invisible hand
that would guide the self-interest towards the
benefit of the society. While he essentially seems
to agree with Adam Smith’s notion that individual’s
self interest might indirectly promote the interest
of the society, he suggests the proliferation
of global trade and globalization of business,
the emergence of the new economy coupled with
the absence of social norms have increasing sidelined
the ‘invisible hand’. Krugman’s
essay essentially point to the need for governmental
control by creating effective laws and the reinstitution
of ethical norms in the corporate world, so that
Adam Smith’s magical “invisible hand”
will guide businesses in the right direction.
Then corporations and executives , while trying
to make themselves richer, will finish up doing
things that are good for the whole society.
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