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It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages
Smith argued that in order to have a thriving free market economy, each member of society should be striving to do what is best for them. By achieving personal goals society as a whole is able to tap into each member's individual talents. This encourages creative thinking, societal advancements, and free trade. This view takes into account that profits or losses are attributed to the individual making the decisions. When market participants are held accountable for their actions and they face the consequences, they tend to become more responsible. Responsibility and accountability in the markets leads to the advancement of society as a whole.
There is however a fine line between Adam Smith's self-interest and the idea of greed discussed by Gordon Gekko in Wall Street. In order to understand the difference, it is helpful to use an analogy. Greed is to self-interest as lust is to love; it is a selfish and often unhealthy infatuation. It is possible that an individual begins by pursuing their own self-interest but through a lack of care for others and selfishness it turns to greed. Aggression is natural and healthy in a free market economy, but excessive greed often slows down progress and can change the entire business environment.
Take for example a negotiation between two business men. If they are simply pursuing their own self-interest, the negotiators will reach a compromise that benefits both parties. If on the other hand one of the dealmakers becomes greedy, they will not be satisfied until they have skewed the agreement so much that they are the only one who benefits. In this type of a one sided argument the greedy party will often push the other dealmaker so far that they chose to walk away and no agreement will be reached. The greedy party will go beyond making a good deal that a self-interested party would agree to. Greed slows down progress and is toxic to a free market economy.
The idea of self-interest versus greed has been discussed by several economists, not just by Adam Smith and the fictional character of Gordon Gekko. Milton Freidman, an economist who lived in the 20th century, has a view on this debate that is more similar to that of Adam Smith than Gordon Gekko. In a lecture given at Cornell University, he explains that members of society need to treat their fellow men with respect and dignity while also appreciating the individuality of each person. He said, "Treat fellow men not as an object to be manipulated for your purposes. Treat them as a person with their own values and rightsâ€¦to be persuaded, not coerced forced, bulldozed, or brainwashed". He believed that all people will act in their own self-interest and that self-interest, not greed, is beneficial to a free market economy.
Another economist with differing views on the definition of self-interest is Ayn Rand. She takes a more radical approach than either Smith or Freidman, siding more with Gordon Gekko. Rand did not believe in collectivism, instead she thought individual happiness was above all else, declaring selfishness to be a virtue. According to Rand each individual should satisfy themselves and make their own destiny, eventually reaching their highest potential.
Much like self-interest this will unleash individual talents and better society, but since each individual is only concerned with their own position there will be people left behind.
It is often difficult to tell the difference between greed and self-interest when you first interact with certain members of society. Through observation and interaction the differentiation becomes much more evident. In our society today this is a huge issue, with many criticizing greed and linking it to the current economic crisis. All people will pursue their own self-interest, but when self-interest turns to greed the economy becomes less efficient and the situation of society as a whole deteriorates.
The debate over the optimal level of government involvement is a capitalistic society has been around since the idea of capitalism was born. In the 20th and 21st centuries, two economists with differing views on this subject are Ayn Rand and Bruce R. Scott. Ayn Rand, a supporter of an absolute laissez fair economy, believed in a complete separation of state and economics. Bruce Scott on the other hand, argues that capitalism is an indirect 3 level system comprised of economic markets, institutions, and government. Their views on the role of government and private enterprise in a free market economy differ greatly, and it is important to understand the main arguments that each would make.
In his book, The Concept of Capitalism, Scott explains the role of government by using a soccer analogy. He believes that the concept of the "invisible hand" leads to an economy with many pitfalls. The laissez fair economy described by Rand is compared to an athletic game without rules. Market participants are free to do as they please, and without a basic framework, there is no level playing field. A society without rules and regulations has no security. This "survival of the fittest" mentality, as it is often referred to in nature, does not work in a free market economy. Scott would argue that this idea would lead to monopolies and an unbalanced advantage for some in the business world.
But, if you ask Rand, is complete control by private enterprise with no government intervention and regulation so bad? In her opinion, the answer is no. Private equity firms are in business to earn a profit, in turn creating jobs and reallocating capital. If government is to intervene and protect companies from failure, they are encouraging firms to continue with unprofitable practices. If a firm goes bankrupt, the remaining capital is shifted to profitable
firms who will put the money to a better use. She admits that layoffs are tough for an economy, but each individual still has the opportunity to make a profit.
Employers are not responsible for looking out for their employees; they are responsible for pursuing a profit. If employees want to have the opportunity to earn a profit by working for a private enterprise, the firm needs to make enough money to pay its salaries. The business is only able to make money if their revenues exceed costs, which include employee wages. Rand's argument is that we do not blame employees when they quit one firm to earn more money at another, so why should we be able to blame a business for reducing their workforce to stay or become profitable. If a businessman earns his wealth in private equity it is just that, earned not taken.
Bruce Scott would combat this argument that saying that this ignores the idea of balancing the costs and benefits of market frameworks. Is it worth sacrificing the welfare of thousands to benefit few? It is not acceptable to let the rich get richer simply because they are in a position of power while the poor have no chance of improving their economic position. The responsibility of government is to establish regulations, regulators, and institutions in order to ensure that there is a set of rules and constraints for the market to operate within. For capitalism to work correctly it requires structure and security. Market participants need to know that they are doing business in a fair and regulated environment in order for them to want to participate.
Another issue that Rand seems to ignore is that since government is tasked with maintaining a monetary system, it is impossible for the economy to act in complete isolation of government. Without the government producing, insuring, and regulating money an economic system would not be able to operate. Scott acknowledges that the government involvement in
infrastructure, education, military, and technology is all intertwined in the success of private enterprise. It was government investment that helped to transform our society to post-industrial from rural. Again, Ayn Rand has a differing viewpoint.
Rand argues against the idea that government investment in programs such as the New Deal helped to advance our economy and private enterprise. She instead gives credit to the individuals involved, not to government. Scott may disagree, but her argument is that it was the individuals that allowed for social progress and the intervention by government was merely interference. The invisible hand will correct the markets; there is no need for government to step in.
Both Rand and Scott make valid points, and it is very difficult to draw the line of where government intervention should stop and unregulated private enterprise should begin. The difference between the "invisible hand" and the "visible hand" is at the center of this argument. The United States has followed the ideas of Scott more than Rand in recent years, intervening in an attempt to keep our country out of a depression. Though the viewpoints of Bruce Scott and Ayn Rand differ greatly, they are both able to make valid points and arguments for their ideas.
Adam Smith's concept of "fellow feeling" is involved in several aspects of a free market economy. Smith's ideas on "fellow feeling" were much closer to synonymous with sympathy in his time, but today it carries a much deeper meaning. In The Theory of Moral Sentiments, Smith explains that sympathy involves being able to use your imagination to feel what another is feeling. By putting ourselves in the shoes of another, we are able to understand what they are going through and objectively analyze their reaction. If we can truly understand how we would feel in the situation and through imagination transport ourselves there, then we might begin to understand if the reaction of another is appropriate. If one plays the role of an impartial spectator and practices "fellow feeling", they are much more likely to truly understand what another is going through.
This idea is strongly connected to the free market economy. If market participants all practice Smith's idea of fellow feeling, the level of trust within the market will be greatly increased. Buyers and sellers will be able to do business with one another without fear of being taken advantage of because the other person understands what they are going through. A very good example of this playing out in a free market economy is Jonathan Wright's character of Peter Chen in the novel Saving Adam Smith. Peter Chen is the owner of a business who puts the morals of his company above earning a profit. In one example, Chen is faced with an ethical dilemma when his largest customer repeatedly treats his staff with disrespect. Peter chooses to cut ties with this customer in favor of protecting his employees and maintaining firm morale.
Peter's actions go against the typical firm idea that "the customer is king" and instead follow the idea of fellow feeling. In Saving Adam Smith Peter says, "If we chose profits ahead of everything, even ahead of core values, then we'd make different decisionsâ€¦Our workers would
figure out pretty they're just pieces of meat, disposable items to the bottom line". In his opinion this would lead to a lack of creativity, motivation, and fulfillment. In the long run this business model will create committed employees with increased productivity, but it could also pose a problem.
There is a fine line between respecting customers versus employees, one that must be satisfied in order to remain in business and not go bankrupt. Peter is following Adam Smith's views by operating his company with a strong commitment to fellow feeling, not only making his decisions based on the potential profits. Committed and motivated employees are willing to go out of their way to support a company, producing higher quality work. When employees feel that they are not disposable they have a greater level of loyalty to the firm and will go to great lengths to promote it. Employee turnover will be reduced, and in today's global business environment where competent and trained employees are very valuable, this will decrease training costs while increasing productivity. On the other hand, if a company turns away all of their business, they will not be able to make money and continue operating. This will lead to layoffs, financing problems, and possibly even bankruptcy. Management must consider both these strength and weaknesses before making a decision to choose employee moral over profits.
An economist who would greatly disagree with this management approach and Smith's views is Ayn Rand. Rand believed in pursing one's self-interest and individual happiness, not in collectivism. She would support doing what will make the most profits for the company, and turning away your biggest customer is not worth the tradeoff. Rand would argue that fellow feeling is not intertwined with a free market economy, one which has little room for emotions. Milton Freidman, another economist, would tend to side more with Rand than Smith
but not agree with the same extreme feelings that Rand has. Freidman would agree that there a component of fellow feeling in a free market economy, and that respect for other market participants is necessary. He would not, however, agree with the idea of turning down profits. Freidman argued that each individual should and will promote their own self-interest, but that they should not coerce or take advantage of other in the process.
Each economist has slightly different opinions on the place of fellow feeling within a free market economy, but no two more opposite than Rand and Smith. Fellow feeling helps to increase reliability in the markets and fosters an environment of mutual trust between buyers and sellers. It is impossible to tell how a company run by somebody like the fictional character of Peter Chen would fare in today's business environment, as there are many strengths and weakness involved with this management style, but it would be an interesting social experiment.
According to Bruce Scott, capitalism is an indirect three level system that is comprised of economic markets, institutions, and political authority. It is a system that involves not only Adam Smith's "invisible hand" but also the "visible hand" of government. Scott argues that in order to have a thriving democratic, capitalist society, government is a necessary player who sets the framework for the economy to operate within. Government is involved in both an administrative and an entrepreneurial role, setting the laws and regulations that govern competition. In Scott's book, The Concept of Capitalism, he says, "If political actors do not maintain property rights, contract rights, rule of law systems, and the whole panoply of supporting and regulatory institutions, modern capitalism cannot exist". Scott goes on to discuss the importance of regulators, a broad category that accountants fall under.
In order to ensure a system free from abuses of power, regulators are a necessary component of a capitalistic society. In today's society accountants have many roles. They can be general accountants, book keepers, auditors, investigators, or a variety of other things. For simplicity purposes, I will examine what Scott's views are of a general accountant and an auditor's roles in the economy. Every company has a general accountant no matter its size. They are an integral part of the organization tasked with evaluating records provided by book keepers, preparing financial statements, and projecting the company's future profits.
Accountants have a great deal of interaction with rules, regulations, and government agencies in order to ensure accuracy and reliability of their reporting. This is a profession in which consistency across companies and industries is very important, so the guidelines and regulations set by government agencies play an integral role. In Scott's book, he refers to a society without government like a sports game without rules. Rules are needed to set the
framework for society to operate within. This is especially evident in the accounting profession, where rules and standards are the basis that the entire profession must abide by.
The free market economy participants rely on accountants to project an accurate picture of what is happening within a company, but as Bruce Scott notes, many market participants have the urge to abuse their economic power. This is where the ideas of Adam Smith's impartial spectator come into play. Smith stated that a person sympathizes least with those that he never met and most with those that are close to him. This means that an accountant sympathizes most with his company and his own well-being and least with the well-being of the general public that he has never met, creating the urge to reflect the best possible results on the financial statements. Smith says that people learn to adopt the perspective of an impartial, outside observer from which they can judge their own behavior as well as the behavior of others.
If an accountant plays the role of an impartial spectator, he will have a completely unbiased perspective and can make an impartial assessment in all aspects of a situation. Smith does bring up the point that there are some people who have not formed a conscience and have no impartial spectator. Those people are able to get by simply by following the rules, because one cannot be guided by an impartial spectator unless they have formed a conscience. If an accountant is guided by the idea of the impartial spectator, they will be able to make a fair decision on how to account for items in the financial statements and the urge to commit fraud and lie to investors will be diminished.
As previously stated, not all market participants will act with integrity and in the best interest of society all the time. This is where the role of regulators comes into play. In Scott's book he states, "Competition cannot be the only regulatory agency". Markets are not always
able to self-correct and that is why regulators are important. The role of auditors in society is to regulate the accounting profession. Auditors ensure the accuracy of the financial statements of a company before they are distributed to the general public. They act as a check on a company and enforce all applicable laws, regulations, and standards. Auditors give the general public a reason to rely on a company's financial statements and feel confident about their decision to invest in that firm.
When following the ideas of Bruce Scott, accountants play a very important role in society. They are intertwined in all aspects of business and also act as regulators. Accountants interact with the standards set by government on a daily basis, and without these rules and standards the profession would not be credible in the eyes of the public. Auditors help build trust in the markets and play an essential role in a democratic society.
Source List- Question 1
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Source List- Question 2
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Source List- Question 3
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Source List- Question 4
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Scott, Bruce R. The Concept of Capitalism. Heidelberg: Springer Verlag, 2009. Print.
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