Monday, January 9, 2012

Adam Smith vs. Friedrich August von Hayek

It was Carl Sagan's book The Demon-Haunted World that first got me to notice "contradictory platitudes." Haste makes west, but a stitch in time saves nine. Where there's smoke, there's fire, but you can't tell a book by its cover. He who hesitates is lost, but fools rush in where angels fear to tread. Two heads are better than one, but too many cooks spoil the broth.

This weekend I started reading the newly-released volume two of Yoram Bauman's Cartoon Introduction to Economics that shared an Adam Smith quote from Book IV of the Wealth of Nations:

What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.
This idea started the classical view of economics, that running a country is like running a household. However, seeing it in this cartoony context caused my mind to contrast it with a famous Friedrich Hayek quote from The Fatal Conceit:
Part of our present difficulty is that we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within the different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed, rules of the micro-cosmos (i.e. of the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilisation), as our instincts and sentimental yearnings often make us wish to do, we would destroy it. Yet if we were always to apply the rules of the extended order to our more intimate groupings, we would crush them. So we must learn to live in two sorts of world at once.
Can I fit both of these ideas into my head without breaking something? I don't think I can. One of my favorite criticisms of communal societies and small-scale attempts at collectivism is that it doesn't scale. If that's true, how can I absorb Adam Smith's wisdom that a government should tighten its belt when times are tough, just like a household should?

1 comment:

  1. I think that it depends on the kind of government in place for one thing. A government is certainly not like a household, but it is much like a business, and all three, business, government, households, have certain things in common that would give credence to the idea that the government shouldn't should conduct it's finances like a household.

    It's really about what impacts these different bodies have on the economy at large. Governments do not produce, mostly they consume, much like a household does.

    And I'm not entirely convinced that Mr. Invisible Hand is making the argument that governments and households are best conducted identically. Just because somethings don't scale doesn't mean that everything doesn't.