One of the benefits of blogging is in the comments and feedback from readers. I very much appreciate hearing from you. Several of my favorite reader comments have come from Joseph Martini. He doesn’t always agree, but he is thoughtful, and thought-provoking. He took issue with my last entry, More snow in July, and while I was contemplating getting back to him, I discovered he has his own blog, called Give ‘n Go, in which he also posted his response to my thoughts. That inspired me to give him a response in kind, which I’m also posting here:
It would be absurd to get into a tit-for-tat about what Adam Smith meant for his time or contemplated for the future. Still, I will stick to my presumption that he couldn’t imagine the effects of the perfect storm of greed we are currently witnessing.
You nearly make my point again when you say this about Adam Smith’s philosophy:
He made it very clear that considerable structure was needed before the invisible hand of the market could work efficiently.
For example, property rights must be strong, and there must be widespread adherence to moral norms, such as prohibitions against theft and misrepresentation.
Smith understood that “considerable structure was needed,” but “widespread adherence to moral norms” is not structure; it’s an assumption about how people will behave in their social and economic relationships. He suggests that there will be a natural amelioration of greed and self-interest as one learns that the common good is a critical aspect of one’s own self-interest. If this no longer happens in a natural way, it is probably fair to assume that a more specific “structure is needed.”
We also have to remember that Adam Smith’s influences and references involved much, much more physical labor and human contact than trade relationships often do these days. In their barter-oriented economy, people learned that their personal gains were greatly dependent on their trade and interactions with others. Too much taking would be inherently self-defeating.
I don’t think Smith had any conception of the something-for-nothing mentality that is all too common now. It’s a malaise that has infected all social strata and all economic sectors, from the hedge fund managers to minimum wage service employees. Free wealth is alluring, but it’s becoming obvious that it’s a nasty trap: a pot of gold on the other side of a sinkhole.
I also don’t think this is anything like a normal “boom/bust cycle.” I’ve built my business on an understanding of seasons and cycles. I know that winters come with regularity, as do economic downturns. We therefore studiously avoid growth in response to what we see in the summer months or boom times. These ebbs and flows are natural and healthy and it is foolish to fight against them in an attempt to make things always good for our particular industry. The greater good is more important. Thus, I proposed the analogy of the ski industry possibly wanting “snow in July.” If it could be granted, the results would be disastrous, even if the ski industry had a short-term boon.
This is one of the reasons I blame the NAHB. If they were advocating for their constituents, they failed quite badly. They know about ebbs and flows in the housing industry. They study it and have the numbers, graphs and charts going back decades to reflect on as a reminder. They also knew that the sub-prime type loans were a big problem. Yet they did nothing. Their knowledge and expertise also comes with responsibility, much like that of medical doctors. It’s as if they looked at the effects of a growth hormone, saw a cancer starting to grow, but simply ignored it, perhaps hoping the growth would outpace the disease. Or…what were they thinking?
This massive economic tragedy isn’t a part of any cycle we should accept. To the dismay of many, one obvious conclusion is that it turns out we can’t trust ourselves. Left to our unfettered inclinations, our penchant for free wealth leads us over even the cliffs we can see. We apparently need a hand to stop this insanity, and to be effective, it most certainly won’t be invisible.