Lessons from Adam Smith

Reading the obituary of the late Chun Kyung-ja, one of the few influential Korean female painters, made me think of Adam Smith, touted as the father of capitalism. Chun, famous for her exotic and vivid paintings of women and flowers, suddenly announced her retirement and left for the United States after a public skirmish with the National Museum of Modern and Contemporary Art. Chun claimed a painting of a young girl with a butterfly on her shoulder on display was not her work but a fake, which the museum strongly denied.

I wondered if the maestro of modern economics would accept the neoliberalism concept as a part of the legacy of the free-market principle he concocted if he lived till this day. I think he would have claimed that neoliberalism that supports deregulation, privatization, free trade and minimization of government spending for a greater role of the private sector is a deviation from his ideas of free-market economics.

Smith’s idea of a free-market economy was based on a system that would create wealth not just for some butchers or brewers but where a society as a whole benefits from people working in a productive manner and rewarded justly for their labor. But we have seen the results of neoliberalism from the global financial crisis in 2008. The fruits of globalization and liberalization have been reserved for the richest 1 percent, while the remaining 99 percent live with stagnating incomes and in relative poverty. Inequalities are commonplace and deepening all over the world.

The financial crisis in 2008 forced experts and policy makers around the world to look for an alternative to the neoliberal approach and even led the conservative Davos Forum to take up the slogan of “Great Transformation” for its 2012 annual conference. Governments and intellectuals rushed to re-evaluate and challenge the mainstream theory that assumes market liberalism is the best in search of better solutions.

But the campaign did not last. John Quiggin, an Australian economist at the University of Queensland, argued in his 2010 book, “Zombie Economics: How Dead Ideas Still Walk Among Us,” that the crisis failed to kill the blind faith in markets despite the runaway speculative investments, and it goes on to stalk our economic lives. The Davos Forum in 2014 claimed victory over the financial crisis, citing recoveries in the global economy. The United States declared an exit from its expansionary fiscal policy and is deliberating on a timetable to push interest rates higher. These moves could suggest things have normalized for the global economy.

Compared to the New Deal programs launched under President Franklin Roosevelt to fight the Great Depression between 1933 and 1938, however, the response measures to the 2007-08 meltdown were no more than makeshift actions. The New Deal concept was designed to deliver the 3Rs - relief, recovery and reform - to change the paradigm in economic governance and bring about long-lasting prosperity to the nation and people.

Solutions to the latest crisis were targeted at artificially boosting the economy through an unconventional overdose of liquidity called quantitative easing, doing little to ease the fundamental problem of neoliberalism that brought about extreme polarization in wealth. To be honest, few are now confident about global economic prospects. As history lives to attest, makeshift actions can repeat mistakes and worsen problems. For the sake of the people and nations, governments must end such capitalist pursuits.

How should capitalism evolve after being divorced from neoliberalism? We can go back to the basics and its architect, Adam Smith. First, capitalism must serve all. Neoliberalism that benefits a few is not genuine capitalism. Smith championed free-market principles because, as he said, “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”

Second, laissez-faire liberalism can hardly be permitted. Capitalism prevailed over other economic concepts because it best fit the innate greed in humans. But excess of selfishness can be self-destructive, as we have seen through the fallout of neoliberalism. “The person under the influence of any of those extravagant passions, is not only miserable in his actual situation, but is often disposed to disturb the peace of society,” Smith said, advocating government regulations to contain abusive and excessive exercises of individual freedoms that could jeopardize the common good and stability of a society.

Third, public policy should place priority on the security and stability of the people and society over capital interests. The interests of capital do not always jibe with the public interest, as seen from the catastrophic outcome of the global financial meltdown under the neoliberal banner of economic efficiency.

Since the liquidity crisis of the late 1990s, Korean governments have been faithful in following the neoliberal doctrine regardless of changes in power. Korea’s market policy encompassed all the fallacies of neoliberalism. The current government sticks to the same path. Efforts to seek a third way have been limited. If the government envisions prosperity for all, it must not dwell on figure-based recovery or growth but seek a different path that can truly reflect Smithian capitalist ideas of a free economy for the benefit of all.

Translation by the Korea JoongAng Daily.

JoongAng Ilbo, Nov. 7, Page 31

The author, a former prime minister, is the director of the Korea Institute for Shared Growth.

by Chung Un-chan