Do We Need a Kinder, Gentler Bubble?
Question: Is the answer to the crisis a kinder, gentler bubble?
Paul Solman: I’m posing this question to myself, but let me pass the buck from the outset on this one – to the eerily astute Adam Smith — whose “other” book, The Theory of Moral Sentiments, contains this sweeping passage (and his most convincing use of the term “invisible hand”).
I warn you: It’s longish. I further warn you: It was written in the 18th century and some things have changed a bit since then, including the English language. I urge you: Read it. I’ve commented briefly at the end.
A watch…that falls behind above two minutes in a day, is despised by one curious in watches. He sells it perhaps for a couple of guineas, and purchases another at fifty, which will not lose above a minute in a fortnight. The sole use of watches however, is to tell us what o’clock it is, and to hinder us from breaking any engagement, or suffering any other inconveniency by our ignorance in that particular point. But the person so nice with regard to this machine, will not always be found either more scrupulously punctual than other men, or more anxiously concerned upon any other account, to know precisely what time of day it is….How many people ruin themselves by laying out money on trinkets of frivolous utility?…
The poor man’s son, whom heaven in its anger has visited with ambition, when he begins to look around him, admires the condition of the rich. He finds the cottage of his father too small for his accommodation, and fancies he should be lodged more at his ease in a palace. He is displeased with being obliged to walk a-foot, or to endure the fatigue of riding on horseback. He sees his superiors carried about in machines, and imagines that in one of these he could travel with less inconveniency….
He is enchanted with the distant idea of this felicity. It appears in his fancy like the life of some superior rank of beings, and, in order to arrive at it, he devotes himself for ever to the pursuit of wealth and greatness. To obtain the conveniencies which these afford, he submits in the first year, nay in the first month of his application, to more fatigue of body and more uneasiness of mind than he could have suffered through the whole of his life from the want of them…. Through the whole of his life he pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquillity that is at all times in his power, and which, if in the extremity of old age he should at last attain to it, he will find to be in no respect preferable to that humble security and contentment which he had abandoned for it….
Power and riches appear then to be, what they are, enormous and operose machines contrived to produce a few trifling conveniencies to the body, consisting of springs the most nice and delicate, which must be kept in order with the most anxious attention, and which in spite of all our care are ready every moment to burst into pieces, and to crush in their ruins their unfortunate possessor. They are immense fabrics, which it requires the labour of a life to raise, which threaten every moment to overwhelm the person that dwells in them, and which while they stand, though they may save him from some smaller inconveniencies, can protect him from none of the severer inclemencies of the season. They keep off the summer shower, not the winter storm, but leave him always as much, and sometimes more exposed than before, to anxiety, to fear, and to sorrow; to diseases, to danger, and to death….
Our imagination…in times of ease and prosperity expands itself to every thing around us…. The pleasures of wealth and greatness, when considered in this complex view, strike the imagination as something grand and beautiful and noble, of which the attainment is well worth all the toil and anxiety which we are so apt to bestow upon it.
And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind…. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants…. [T]he proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his brethren… [but the] capacity of his stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. The rest he is obliged to distribute…. The rich…consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency…they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species…
I would add, on the quite visible other hand, a gloss on our current plight: We’ve all made promises to each other based on the grand but salutary deception of recent decades: “Give me that which is yours, and I shall promise to pay you back handsomely from that increasing store that shall be mine.”
We have now come to believe, however, pretty suddenly and for various reasons, that the borrowing emperors have no clothes, or at least no way to honor their promises (IOUs/debts/bonds/mortgage-backed securities/credit default swaps/etc.). It is thus hard to keep the grand deception alive just at the moment. We suddenly switch from spending and lending to saving and laying off.
Thus the problem is, when we lose faith in growth, we lose the growth itself. If we are to grow again, Adam Smith would presumably suggest that we need to restore our faith, no matter that it may be faith in goals that deceive. To make that faith credible (credit; credere: to believe), the bubble must be measured. One way of putting it: “kinder and gentler.”