Adam Smith 2.0

The other day, I came across an interesting story about Adam Smith in The Economist.  It appears that Adam Smith - the 18th century philosopher and economist, who is generally considered the father of free-market, free-trade capitalism - has been treated with remarkable indifference in his native Scotland.  The 17th-century house where he spent the last years of his life has only a small, tarnished bronze plaque mentioning his name.  His grave was overgrown until recently, and is still not easy for visitors to find.

The Economist story attributes this indifference to one of Scotland's best known sons to modern politics and historical ignorance.  "Smith's most famous work, The Wealth of Nations," the article says, "which describes wealth creation in a competitive commercial economy dominated by the market's invisible hand, has long been appropriated by right-wingers and anathema in left-leaning Scotland."

Driven by their narrow political ideology, some people seem to think of open markets as reflecting a kind of survival of the fittest competition in which anything goes.  But such people, I believe, have totally misrepresented not just Adam Smith and open markets, but the principles governing evolution and natural selection, especially as it applies to social animals like us humans.

The Economist story goes on to say that, - led by Prime Minister Gordon Brown, himself a Scot, - people are discovering that Adam Smith is not the right-wing ideologue he has been misunderstood to be.  "Leftists much prefer Smith's other big work, The Theory of Moral Sentiments," it says.  "Its deeply Scottish Presbyterian fulminations against materialistic desires for trinkets of frivolous utility, and lofty observation that man has some principles which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, can be made to sound almost socialist."

I don't think that Adam Smith had socialism in mind, but something much deeper - sympathy, that is, the very human ability to have a strong feeling of concern for another person.  Experts generally agree that Smith advocated both the self-interest of Wealth of Nations, and the sympathy of Theory of Moral Sentiments, with no contradiction between these two positions.  In his view, "individuals in society find it in their self-interest to develop sympathy as they seek approval of what he calls the impartial spectator.  The self-interest he speaks of is not a narrow selfishness but something that involves sympathy.”

I am very intrigued by this balance that Adam Smith wrote about between the fierce competition inherent in open, free markets and the supportive community behavior found in well functioning human societies.

I am a strong believer in open, free markets - not out ideology, but out of pragmatism.  I totally agree with the notion of the invisible hand that while free markets are often chaotic and unrestrained, they generally produce the right results.  Even though greed often guides the actions of individuals and groups, the benefit of competition will usually overcome the detriment of greed. 

We have seen, however, what happens when greed becomes extreme, such as with the illegal actions of executives at companies like Enron and WorldCom.  Short of such blatant illegal behavior, we have recently seen how an obsession with profits and personal enrichment can cause management to push the limits of sensible behavior, as with subprime lending and similar high-risk activities in the finance industry. 

What has caused such breakdown in the human sympathy that Adam Smith believed would temper our most selfish behavior?  What has made so many individuals oblivious to the implications of their selfish actions?  It would be nice if open-market kinds of controls scaled beyond the relatively local communities Smith had in mind, but apparently, that does not seem to be the case.

Sympathy and feelings of community may work well at the tribe or neighborhood level.  But perhaps, when communities reach a certain size, the kind of sympathy for our fellow humans that tempers our actions begins to decline.  When we don't know the people getting hurt by our actions, when such people are beyond our lines of sight and our lines of feelings, - across a whole region and country, let alone around the world, - perhaps any notion of sympathy disappears altogether.  That is why governments and regulatory bodies are needed to help control our worst excesses.

Achieving the right balance between self-regulated open markets and government-based regulatory controls is very, very tough.  You go too far in one direction, and you risk stifling competition and innovation.  You go too far in the other direction - as perhaps we have in the recent past - and you risk the kinds of systemic abuses that end up hurting so many people.

Does technology hold any promise to help us scale these notions of sympathy and community to the more global dimensions in which we are increasingly operating, both across a business and in society at large? 

Perhaps one need not look any further than what has been happening with the Internet and the Web in the last decade.  In particular, we have seen the Web evolve from a platform primarily oriented to help individuals access information, to a social networking platform - Web 2.0 -  that brings people together and helps them better communicate, collaborate and work with each other.

We have seen the impact of Web-based collaboration on globally integrated enterprises, where employees work closely not only with colleagues around the world, but also with partners, clients and others.  Beyond the workplace, people are increasingly collaborating for a wide range of reasons, not all of which are based on money.  We have seen the rise of successful global initiatives like Linux and Wikipedia, where people around the world self-organize into communities of interest around projects they enjoy working on, for which they derive no direct remuneration. 

Web 2.0 and related technical and societal innovations have helped us re-discover that humans are basically social animals, even at a global scale.  We badly need similar innovations around what I would call Adam Smith 2.0, that is, new ways of scaling human sympathy to the more global dimensions in which we now live and work.

What are the right new balance points that can help us pursue global open market competition, while tempering our worst excesses without requiring the excessive regulatory controls that stifle innovation?  This is an incredibly exciting question to pursue, as well as a very important 21st century challenge for companies and nations.

Comments

[Ricardo]

Very interesting comment. I believe that one important characteristic about this balance is that it is essentially dynamic. In other words, it will not only change over time but will also change depending on the purpose of each stakeholder.

[Chris Ward]

There are words of wisdom in IBM's Business Conduct Guidelines http://www.ibm.com/investor/corpgovernance/cgbcg.phtml .

They say that they are there to ensure the orderly running of Sam Palmisano's business.

But they also say, when discussing commercial competition, "While the purpose of such laws is primarily economic, their effect is often seen as going beyond consumer welfare to protecting other values of society, including individual freedoms. "

So Sam P does like making money. But he also likes a balance. And that's good.

[Hamish MacEwan]

You might want to have a look at Clay Shirky's latest:

http://www.shirky.com/herecomeseverybody/index-new.html

Your "sympathy," and his "love," both appear to have expanding diameters in a more connected world.

Hamish.

[Bob Pulver]

Hi Irving -

I think the crowdsourcing model holds great promise, particularly those focused on societal issues and philanthropic efforts. InnoCentive is a great example, but there are plenty of others. People are motivated to participate not with monetary rewards, but rather the reputation they earn and intrinsic value received from contributing. Society benefits for obvious reasons such as accelerated solutions for significant challenges and more widespread acknowledgment that these issues affect society as a whole. IBM's GIO 3.0 Media & Content topic hit on these themes.

Before you officially left IBM, we spoke about prediction markets. This technology and methodology are getting increased attention this year due to the elections, and some economists believe they could be quite useful elsewhere in government. This is not to say that all matters would be decided by putting the choices into a public marketplace, certainly. However, we know there are situations and policies in need of significant changes, so perhaps the idea isn't that far-fetched.

[Jim]

I believe the rise of the corporate entity broke the delicate balance between free, open markets and sympathy. Corporate entities were originally designed as a buffer against individual risk, which was seen as a restriction on the growing needs of business entities. Thus came the government creation of the corporate entity. I believe this had a dramatic effect on how, from a cultural/sociological perspective, people interacted with businesses and within business. As businesses grew under the corporate model, sympathy, for a variety of factors, was marginalized relative to the raw profit motive driving the open markets.

I wish the corporate model could be abolished, but I do not see that happening.

[Chris Ward]

Well, there are a number of cases where 'corporate' interests are being pitted against 'individual' interests; and it's in large part related to growth of Internet as a distribution channel, and the 'Web 2.0' user-generated content proposition.

For example here http://news.bbc.co.uk/1/hi/technology/7342135.stm and here http://news.bbc.co.uk/1/hi/technology/7246403.stm is a brewing storm over what should happen if someone distributes commercially-valuable material over Internet without the permission of the owner.

If I sing a song or make a home movie, it's not worth a lot. But over the last 50 years or so, fortunes have been made (and lost) with things like Star Wars and The Carpenters, by controlling distribution channels and making people pay for tickets to the movies and for vinyl, cassette tapes, CDs, etc.

So we now get to the position where individuals might quite like to put Karen Carpenter on their web site (and might be technically capable of it); the 'entertainment industries' see it as a threat to their revenue and want the 'internet service' industries to be their policemen; the 'internet service' industries know who pays the bills and want to respect the privacy of their customers; and governments are taking sides on the issue. The UK government sides with 'Big Media' and the European government sides with the Internet Service'.

How am I to know how it will all shake out ? That's like asking me whether you will survive an outbreak of Bird Flu; completely beyond my competence.

As an engineer, though, I know there's no turning back the clock. The next generation of Disney Home Movies will be brought to you over Broadband. Blu-Ray is the last generation of 'pieces of plastic with pictures of Cinderella and Snow White on' that Disney will sell.

New business models replace old. Opportunity is there for those who adapt.

It all has to do with the speed and direction of the flows of those little green pieces of paper that humans are so fond of chasing.