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Adam Smith on Jeffrey Immelt

Here’s a letter to an e-mail correspondent:

18 December 2012

Dear Mr. L________:

Thanks for your e-mail.  You’re the fifth person to write to me to ask my thoughts on General Electric CEO Jeffrey Immelt’s recent praise of what he rightly calls “state-run communism” in China.  Mr. Immelt did indeed say, about Beijing’s still-heavy-handed direction of China’s economy, that “what they’re doing makes sense.”

I believe that Mr. Immelt is mistaken.  If state-run communism is a recipe for economic success, then mainland China under Chairman Mao would have produced paradise while the much more market-oriented societies of Taiwan and, especially, Hong Kong, would have languished in poverty.  Also, what economic growth China has enjoyed of late began only after – and, I would argue, only to the extent that – markets there have become genuinely liberalized.

While this beneficial liberalization is real and powerful, far too much of China’s economy remains in the clutches of the state.  A resulting confusion is that Mr. Immelt, like many others, mistakes the disproportionate fruits of China’s liberalization as being instead the fruits of the still-rampant cronyism and central direction that infect that country.

This confusion isn’t surprising coming from a business executive.  Although there are notable exceptions, business people are a group who, contrary to popular myth, do not get from their daily experiences special insights into the workings of an overall economy, yet who are prone to mistake their acumen for business as being acumen for economics.

Adam Smith explained it well in a related context: “That foreign trade enriched the country, experience demonstrated to the nobles and country gentlemen as well as to the merchants; but how, or in what manner, none of them well knew.  The merchants knew perfectly in what manner it enriched themselves.  It was their business to know it.  But to know in what manner it enriched the country was no part of their business.”*

In other words, said Smith, business people – understanding their businesses but not necessarily the discipline of comprehending the logic of the economy writ large – too easily mistake what is good for them for what is good for the economy.  Mr. Immelt accurately sees that government policies bestowing special privileges on particular firms or industries are good for those firms or industries.  But he incorrectly concludes – because, as Smith might say, ‘it is no part of his business to know otherwise’ – that such policies are therefore good for the economy.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (Indianapolis: Liberty Fund, 1981 [1776]), Vol. 1, p. 434.  This quotation appears in Book IV, Chapter 1.