Part 2 of a Discussion of Peter Foster’s Why We Bite the Invisible Hand Chapter 6 “Tuesdays with Mandeville”
As introduced in the last blog, Bernard Mandeville pioneered writing about the hypocrisy he thought was endemic to commerce that was a conversation happily continued by many to follow.
Foster dives into Bernard Mandeville’s influence from his book, The Fable of the Bees, published in 1705 and updated with additional essays in 1723.
There was, wrote Mandeville, not merely an enormous gap between the beneficial realities of commercial life and people’s appreciation of them; there was a similar chasm between what people practiced and what they preached. (p. 125)
Mandeville considered people hypocrites for saying they were virtuous when really all their actions were driven by love for themselves. He had a dark take on what Adam Smith would realize was a good thing.
Mandeville spotted — although imperfectly — the counterintuitive fact on which Smith would elaborate: that pursuing self-love through commercial markets unavoidably meant helping others who were pursuing their own self-love. (p. 126)
We will come back to Smith in a moment, but what I learned from Foster is that Smith was writing to Mandeville and the ideas he had put forth when he began The Theory of Moral Sentiments.
Mandeville thought the economy would cease to work if people actually lived up to the virtues they claimed because vain spending on luxuries was the source of jobs to him. (p. 126)
This mistaken understanding — that consumption drives the economy — is still common today in Keynesian thinking. However, it fails to realize that it is investment that comes from saving that drives the economy.
In fact, the prudent diversion of capital toward the new processes and technologies of the Industrial Revolution would be one of the key factors that helped the revolution take off, not “prodigal” expenditures. (p. 127)
Mandeville also embraced what is now known as the broken window fallacy when he stated the Great Fire of London had been a benefit to the economy.
While it is true a lot of money was spent to rebuild the city, the fallacy is the lack of recognition of what else those funds could have been used for. It ignores the opportunity cost of spending the money to rebuild when it could have been used for investment that increased output if the destruction had never happened.
Although his grasp on how markets worked was flawed, Mandeville’s cyncial take would prove both highly influential and politically useful. He would be effusively praised by Marx. His upside-down notion that it was consumption rather than production that creates wealth would be reborn with Keynesianism and its support for prodigal government expenditure. His summary of commercial society as a process by which “private vice becomes public virtue” would be eagerly regurgitated by moralists masquerading as economists, such as John Kenneth Galbraith. (p. 128)
Smith’s Response
Adam Smith’s teacher at Glasgow, Francis Hutcheson, had taught Smith these errors in Mandeville’s thinking: that consumption was the cause of growth and the broken window fallacy.
But Smith refuted Mandeville on moral grounds with his opening to “Theory of Moral Sentiments.” Mandeville had a very negative view of people that we were all hypocrites who used self-deceit to hide the fact we are all driven by selfishness.
In Moral Sentiments Smith took up Mandeville’s challenge to tell people “what they really are.” Its opening sentence expressed a more fundamentally positive view of human nature, albeit a qualified one. “How selfish soever man may be supposed,” wrote Smith, “there are evidently some principles in his nature, which interest him in the fortune of others, and renders their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” (p. 129)
I have read Smith’s writings before but never knew it was a response to a conversation started by Mandeville. He was refuting the notion of selfishness as the reason capitalism worked just as I have to today when teaching economics.
Self interest is not a synonym for selfish. Self interest is a rational driving force that does not preclude caring about others.
Unlike Mandeville, Smith did not regard the pursuit of self-interest as vicious. Indeed, he recognized that sympathy was not only the essence of sociability but a key aspect of commerce. (p. 132)
Conclusion
We have learned that calling people hypocrites and selfish consumers is nothing new; in fact it precedes the creation of capitalism.
But why is it so popular to condemn capitalism instead of appreciate the extreme improvement to our standard of living it has given us?
McCloskey explored this question as well and offered the idea that the elites were threatened by the social upheaval capitalism offered, even as it improved us materially.
Ultimately, McCloskey notes the elite did manage to fight back against free market capitalism and replaced it with systems that kept them in charge, allowing for a veneer of market capitalism.
Mandeville considered humans hypocrites because we liked to pretend we were benevolent while actually being completely selfish.
Hypocrisy is, if anything, even more rampant than in Mandeville’s day because there are so many more commercial wonders to fail to appreciate, to pretend not to be interested in, and so many more producers of those commercial wonders to scorn. The puzzle is not merely why people have such trouble grasping the benefits bestowed by the Invisible Hand, but why they are inclined to condemn in moral terms. (p. 137)
Foster hints the answer is to be found in Charles Darwin’s The Origin of Species to be explored in his next chapter.
Reference: Foster, Peter, 2014. “Tuesdays with Morrie” Chapter 6 of Why We Bite the Invisible Hand, Pleasaunce Press.
