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Elusive ‘wealth of nations’ in a global economy

We live in the global age. We have been living in it for quite some time now. It is some 20 years, give or take, since the word “global” began to establish itself in the economic lexicon. A friend one has known for that length of time ought to be someone we know a lot about. Yet globalization still continues to baffle us. Really, we do not even seem to know whether it is friend or foe. Making sense of the global economy is not an exercise in which we have excelled thus far. So what should we do?

When in doubt, resort to the classics. This is the advice that comes to mind. Accordingly, I looked into that mother of all classics in economic writing: Adam Smith’s “An Enquiry into The Nature and Causes of The Wealth of Nations.” Running to 2,000-odd pages, this is some inquiry indeed. Inquiring within the inquiry, I found the following enlightening passage. Here the founding father of economics is talking about the relationship between private individual decision-making and the public interest:

“He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Readers please note that this is the place where Adam Smith’s famous “invisible hand” makes an appearance. The one and only place. For all the attention that this expression has attracted over time, it is but one phrase in a great ocean of words. One wonders how the great man feels as he looks down from on high at all the fuss we are making of that nonrecurring phrase.

But I digress. What is really interesting about this passage is that the whole analysis presupposes complete identification between individual welfare and that of the whole nation. And that private individuals will always choose to give support to domestic industry rather than foreign ones. Given these assumptions, the invisible hand theory makes perfect sense. It is the only logical conclusion. In this type of world, there is no room for meddling by the visible hand. Heavy-handed attempts to dictate individual behavior toward the patriotic choice are totally uncalled for. Individuals will always end up making the patriotic choice anyway, as they pursue their own private gain.

This whole image is so enlightening because it is so different from the world in which we live at present. In the global age, there is no guarantee that individuals will always choose domestic industry over foreign counterparts. Very much to the contrary, today’s individuals responsible for management will tend to do business with foreign partners if that is the less-costly choice. They will choose to relocate their production facilities overseas if that is the cheapest way. In such a world, increases in the wealth of the individual will no longer lead automatically to an increase in the wealth of the nation.

Does all this mean that in the global age, we have to start resorting to the visible hand of government to prevent the individual pursuit of wealth leading to a decline in the wealth of the nation? Surely not. But it might be a tempting idea for some beleaguered politicians looking for a quick fix and a quick boost in popularity. Perish the thought.

Noriko Hama is an economist and professor at Doshisha University Graduate School of Business.