Adam Smith and John Keynes on either side of the court facing the foreclosure net

adam smith keynes foreclosure court

The housing and financial crisis has led to a lot of rethinking. Adam Smith with his hands-off theory and Keynes with his hands-on theory are on either side of the court facing the foreclosure net.

Emma Rothschild, the noted historian has noted that Smith has used the phrase “invisible hand” only once in his classic treatise The Wealth of Nations. Recently Bantam has published another edition of the famous book with an introduction by economist Alan Krueger of Princeton. Currently Krueger is the top economist in the Treasury – the latter being the prime moving force in solving the foreclosure crisis. The principles of Keynes are now dominating Washington thoughts.

However Washington has not gone against Smith. In fact Smith is being used as a guide to steer the Obama administration to give a new look to the American economy. Smith is there – albeit lurking unnamed in some of the most scholarly thought provoking books penned during the early months of the Great Recession.

The guiding force in thinking is how the market-based infrastructure can benefit from the principles of Smith without suffering the downsides.

In the post World War II decades the followers of Keynes who had entered the line of thinking in Washington thought that they had found the perfect answer to the problem. They were confident that by mixing in right proportions a formula containing interest rates, regulation and spending the business circles would be tamed and unemployment controlled.

Commenting on this Paul Krugman (Nobel Laureate) commented in ‘The Return of Depression Economics and the Crisis of 2008’ - “This was hubris.” The technocrats over calculated how many jobs they would be able to create without provoking inflation; this is exactly what they did – aggravated inflation.

It was their failures together with the bigger bungling of socialist economies prepared the ground for the rise of laissez faire thought. Most of Asia shifted to a market based infrastructure showcasing grand improvements in the living conditions. Krugman wrote, “Capitalism could with considerable justification claim the credit.”

These successes produced their own extremes. The laissez faire principles were elevated to the status of a dogmatic religious scripture. The high priest was Alan Greenspan.

Robert Barbera an economist from Wall Street noted that Greenspan and some others failed to grasp the fact that market capitalism was undoubtedly the best but it was not the perfect flawless economic system.