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1776 saw the birth of our great nation and the release of the Adam Smith tome "The Wealth of Nations". The Wealth of Nations expounds that the free market, while appearing chaotic and unrestrained, is actually directed to produce the right amount and variety of goods by a so-called "invisible hand". The image of the invisible hand was previously employed by Smith in Theory of Moral Sentiments, a work whose title helps illustrate his philosophical belief in the link between individual morality and economic fairness. Adam Smith believed that human motives were often driven by selfishness and greed, but still felt that the competition of the free market, not regulatory controls, would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. In other words, he felt that while some people will chose to do only what is best for themselves, their success will breed competition between individuals, and will ultimately result in a common good for all without a need for regulatory intervention.
Some partisan politicians rely on Smith's theories to defend economic growth through free markets and an opposition to government regulations. Most have heard of the "modern-economic" theory produced in the mid-1990s known as Keynesian economics but Keynes drew heavily on information from Smith, and some economists, like former Sen. Phil Gramm from Texas and the former Federal Reserve Chairman Alan Greenspan actually prefer to reference the original economic theory developed by Adam Smith over 225 years ago. For instance Alan Greenspan argues that, while Smith did not coin the term laissez-faire, "it was left to Adam Smith to identify the more-general set of principles that brought conceptual clarity to the seeming chaos of market transactions". Greenspan continues that The Wealth of Nations was "one of the great achievements in human intellectual history". GWB, Jr. also liked to revert to the Smith model, since Keynes model states that the government should never cut taxes when at war, something that Bush ignored if he ever learned that aspect of Keynesian economics for his MBA.
Unfortunately what Greenspan, Gramm, and the only MBA President this nation has ever had, number 43, GWB, Jr. did not learn in school was that Adam Smith was wrong. Nobel Prize winner John Nash, Jr., in the late 1940s, presented his treatise on Governing Dynamics, that proved that individuals acting independently to improve their self worth would not be as beneficial to the common good as individuals that do what is best for the group. The creation of $65T in Credit Default Swaps (CDS securities) is a perfect example of a market activity that improved the self worth of some individuals and their related corporate entities while substantially harming the common good of the nation as illustrated by the current economic depression (CDS securities were not treated like other securities because instead of stock which is traded publicly, CDS securities are created as a private contract between two companies and private contracts are not regulated). While many still don't understand how a CDS gets it value, they do understand that a large number of Wall Street employees profited handsomely fiscally but not morally. Many still wonder why the regulators were unable to prevent the infectious spread of these ill-fated securities throughout the world's economic health, and why the common good of the average citizens had to suffer such an unrecoverable financial setback of such gargantuan proportions.
The financial services companies and energy futures firms like Enron needed some help in Congress to get more loopholes and restrictions removed in order to grow their firms at unsupportable year over year growth rates and they found their regulatory rules Benedict Arnold in former Senator Phil Gramm. With his Masters in Economics, and a wife on the board of Enron, Sen. Gramm lead the Republican Party down the path of full "laissez faire" as it eviscerated financial services regulatory laws including some that had been put in place specifically to prevent economic malfeasance, including some that had been around since the last US Depression. Most intelligent people now know that the over-reaching "laissez-faire" approach to regulatory guidelines put in place around the time we entered the 21st century did not work as planned to control companies like Enron, WorldCom, and Tyco or the financial services companies that made up the industry known as Wall Street.
In their first 21st century response, Congress, in an attempt to replace the ineffective "invisible hand" with effective "transparent oversight", introduced the Sarbanes-Oxley Bill (Sarb-ox), over the initial objections of many companies and without the support of the laissez-faire Republicans. In what appears to be the Greek tragedy portion of the laissez-faire legislation fight, the Republicans were able to limit the role of Sarb-Ox rules on financial services companies, allowing these entities to continuing operating, under the 'invisible hand', until they collapsed from their ill-conceived house of cards. And in one of the most ironic twists of this same business rules battle, companies like the Internet equipment provider Cisco Systems, Inc, a company that was initially a leading lobbyist against Sarb-Ox, implemented their new controls with a complete Return on Investment (ROI) within the first year and actually saw improvements in both sales and profit as a direct result of the new Sarb-Ox controls in use at their company.
One other weakness in the controls of the financial services industry is not what they report to the public but rather what their auditors or ratings agencies say about them. We know the former Enron accounting firm Arthur Anderson had Dick Cheney as an advertising spokesperson when he described the consulting firms 'creative accounting' techniques which were used to help hide Enron's true financial situation. In recent congressional hearings, financial firms have indicated that they reviewed the information on the large wall street firms and knew that the credit ratings given to their advertised securities were overrated and they used the information as risk prevention for their company but did not notify anyone outside of their firm of the potential risk to the 'common good' of society from the overrated securities. It seems clear we know what the problem is here and that is always a good start when looking for the best way to correct and measure the effectiveness of a resolution.
Please feel free to offer any ideas about a 21st century replacement for Adam Smith's Wealth of Nations.
