The suicidal impulse of the business community - Adam Smith Address

Business Economics, Jan, 1990 by Milton Friedman

REASONS FOR BUSINESS ACTIONS

I trust I've given you enough examples to show that my complaint is not without some basis. Let me turn to the question of why. I don't really have a satisfactory answer. One reason was stated more than a century ago by General Francis A. Walker. He was an honest-to-God military general who enlisted as a young man in the Civil War, had a brilliant war record, rose in the ranks, was wounded and captured, and after the war was over, was granted what was called the brevet rank of general as recognition of his services. He was also probably the most famous American economist of the nineteenth century. He was director of two censuses, gaining a worldwide reputation for his success in improving their accuracy and coverage, he was a professor at Yale, and the president of MIT, and also a very good economist. In one of his books he wrote, "Few are presumptuous enough to dispute with the chemist or mechanician upon points connected with the studies and labors of his life; but almost any man who can read and write feels at liberty to form and maintain opinions of his own upon trade and money. . . . The economic literature of every succeeding year embraces works conceived in the true scientific spirit, and works exhibiting the most vulgar ignorance of history and the most flagrant contempt for the conditions of economic investigation. It is much as if astrology were being pursued side by side with astronomy, or alchemy with chemistry."(2)

I believe that is part of the reason for the suicidal impulse of the business community. The source for many if not most economic fallacies is that what's true for an individual is almost always the opposite of what's true for the country as a whole. If you as an individual go to the market to buy strawberries, the price of strawberries is fixed and you can buy as many as you want. But suppose everybody suddenly decides to buy more strawberries. There are no more strawberries to buy than before. The quantity is fixed for the time being and the price is variable. Similarly, each one of us thinks we can hold as many pieces of paper of those things called money as we want to. But there's a fixed total of money that's been created by the Federal Reserve System. And so you have a game of musical chairs. If I acquire more cash or deposits, it's at the expense of somebody else. In case after case, the same phenomenon arises. But most businessmen do not hesitate to generalize from the particular to the general, satisfying fully the description of General Walker.

Joseph Schumpeter, in his brilliant and penetrating book, Capitalism, Socialism and Democracy, gives a very different, and more subtle, explanation of why "the capitalist order tends to destroy itself." He sums up his reasons in four points, one of which is particularly pertinent to my present topic: "the scheme of values of capitalist society, though casually related to economic success, is losing its hold not only upon the public mind but also upon the |capitalist' stratum itself."(3) To put this point in different words, none of us is able to free himself from the general climate of opinion in which he operates (to cite a trivial example, that climate requires me to hesitate before letting "himself" stand for "himself or herself"). In the United States, and indeed around the world, that general climate of opinion treats government action as the all-purpose cure for every problem.