Feature: Adam Smith
ADAM SMITH GOES TO MOSCOW
In their latest books, Walter Adams, MSU's distinguished professor of economics and past president, and currently Vernon F. Taylor Distinguished Professor of Economics at Trinity University, TX, and James Brock, '81, Moeckel Professor at Miami University of Ohio, have employed the format of a play to capture the drama and vitality of some of today's most pressing economic issues.
Their first play, Antitrust Economics on Trial: A Dialogue on the New Laissez-Faire, has been adopted in economics and law classes across the country. Following its success, the two economists have published a sequel, Adam Smith Goes to Moscow: A Dialogue on Radical Reform.
As its title suggests, their latest play explores the epic economic and political complexities faced by the former Soviet bloc countries as they struggle to transform themselves into free market democracies. Set in a palace in Eastern Europe, the spirited dialogue between a worldly-wise prime minister of a formerly socialist East European country and a fervently market-minded American economic advisor unfolds over seven days of animated give-and-take. Their lively (and at times heated) conversation covers the nettlesome challenges of privatization, marketization, stabilization, and the role of government in a market economy. The following excerpts provide a sampling of this unique marriage between the theater and the dismal science.
One key controversy in the formerly communist countries concerns the problem of 'privatizing' government enterprises, in order to transform them from state ownership to private ownership, while at the same time struggling to battle against the spread of rampant corruption. In the course of discussing this topic the following exchange takes place:
Advisor: A quick way to privatize your state enterprises would be simply to give them away. Assign the ownership of each enterprise to its current workforce.
Prime Minister: What you propose is a quick route to riots! workers at modern, profitable enterprises would be delighted. The value of their shares would make them rich beyond their wildest dreams. But what about the workers at antiquated, obsolete, and hopelessly unprofitable enterprises? They would get nothing. And what about the rest of the population?
Advisor: Well, then, give all your citizens ownership shares in all state enterprises.
Prime Minister: You are a dreamer. How would we possibly handle the astronomical number of stock shares created? Where would we find the thousands of stockbrokers and lawyers needed to handle the enormous volume of transactions?
Advisor: We'll be glad to ship you all of them you need -- free of charge.
Prime Minister: And what about agriculture and our huge state collective farms?
Advisor: Give them away too.
Prime Minister: But how do you divide up hillsides, forests, and fields? Good land and bad land? How do you divide thirty tractors among three-hundred families -- especially when the tractors are monstrous machines designed for cultivating vast tracts of land, not small, privately owned farms?
Advisor: Then just take a page from Adam Smith and let the invisible hand do your privatizing for you.
Prime Minister: What do you mean?
Advisor: 'Spontaneous privatization' -- give your enterprises to whoever takes them.
Prime Minister: You mean to whoever steals them?
Advisor: Call it what you will...
Prime Minister: It's theft!
Advisor: Superficially, it may appear to be arbitrary seizure and theft. But a more sophisticated analysis suggests it may be the most realistic, most feasible way to privatize your economy. With spontaneous privatization, enterprises will be plucked by those who most want them and who can most efficiently manage them, as if by an invisible hand.
Prime Minister: Oh, they'll be plucked, all right -- the way a wolf plucks chickens. What you call efficiency is what Muscovites call korruptsia, and we've had our fill of it since the regime's collapse. Apparatchiks who terrorized and preyed on the people under communism, now enrich themselves under the fledgling democratic-market regime.
Advisor: You complain about all the racketeers, but there is more honest trade today than when your country was run by the all-embracing mafia that was the Communist party.
Prime Minister: I think you have studied economic theory too much. On another day, the advisor and the prime minister are discussing the ways the market economy functions, the manner in which it conveys information, and the incentives it creates for efficiency and responsiveness to buyers' preferences.
Advisor: The beauty of the market system is that profits and losses provide the most persuasive incentive for people to respond with alacrity to price signals. Those who don't react in a timely fashion will suffer losses; those who are alert to the market, and who are quick to act, will be rewarded with profits.
Prime Minister: But wouldn't everyone need an advanced degree in economics in order to process these price signals, to make the computations you describe, and to follow the intersections, tangencies, and shifting points of equilibrium in you notorious economics graphs? With all due respect, I must say that given the economists I've had to deal with, I find a nation of Ph.D.s in economics to be frightening prospect. As I recall, it was Walter Bagehot, the nineteenth-century English business writer, who quipped that no true Englishman in his secret soul was ever sorry to read the obituary of an economist.
Advisor: Having been surrounded myself by thousands of economists at the annual meetings of American Economic Association, I, too, would find the prospect alarming. Fortunately, it is not necessary. As Professor Milton Friedman explains, the appropriate analogy is that of a top-flight billiard player. Champion pool players need not have any formal education in the theorems of advanced trigonometry in order to ply their craft. They calculate their angles of impact and deflection as if they understood trigonometry, and make their shots as if they were applying trigonometry to the pool table, even though the concepts of sine, cosine, arc, and tangent may be completely alien to them.
Prime Minister: To paraphrase Moliere's Bourgeois Gentleman, the billiard player is a trigonometrist but doesn't know it. In the same way, your free market businesspeople are economists without knowing it?
Advisor: Precisely.
The Advisor's effort to instruct the Prime Minister about the crucial importance of fiscal responsibility in reining in government spending sparks the following parley:
Advisor: You must adopt a stringent fiscal and monetary policy to avert the dangers of hyperinflation. This means drastic action to eliminate the budget deficits, which currently account for anywhere from 5 to 20 percent of GDP in the region. It means an end to the huge increase in the national debt ...
Prime Minister: Forgive me for interrupting. If we agree to balance the budget and stop subsidizing our inefficient state enterprises, the result would be mass bankruptcies and mass unemployment. Besides, the United States is hardly a good role model of fiscal responsibility. Isn't it true that, over the last dozen years, you have increased your national debt from one trillion to four trillion dollars? That over this period the United States has been transformed from the largest creditor nation to the largest debtor nation in the world? That you seem congenitally incapable of controlling your annual budget deficit?