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Adam Smith Against the Grain: Time, Risk, and Subprime Mortgages

Sat, September 2, 4:00 to 5:30pm, Hilton Union Square, Golden Gate 7


Adam Smith’s legacy has been largely dominated by interpretations that portray him as a champion of free-market capitalism and an unwavering critic of political interventions into the economy. However, these interpretations are problematic, not merely because they anachronistically ascribe an intellectual framework that distorts Smith’s work. They also make it difficult to read Smith in his own terms, which has the effect of concealing some of his most exciting and innovative insights into the nature of the relationship between freedom, economic organizations, and political institutions. However, if Smith is read both more closely and more widely—analyzing not only Wealth of Nations, but also Theory of Moral Sentiments, a figure emerges that is often at odds with his neoliberal legacy. Instead we find a thinker who is far more ambivalent about the future of capitalism, and one whose concerns are strikingly relevant in the neoliberal present.

This paper represents a portion of a larger work on the temporality of Adam Smith’s thought, and focuses on but one place in his work where the relationship between freedom, capitalism, and government challenges traditional interpretations, while revealing unique possibilities for examining our present. Specifically, it demonstrates that Smith develops a temporal framework for understanding how social and political forces shape the behavior of corporate actors, which can illuminate corporate behaviors that appear illogical or counter-intuitive. It then employs Smith to explain the emergence and expansion of the subprime mortgage, despite its foreseeable unsustainability.

First, it synthesizes key sections of Theory of Moral Sentiments and Wealth of Nations to demonstrate the essential role that the perception of time plays in human behavior. Smith was not unique in asserting such a role, as materialists like Thomas Hobbes, and empiricists like John Locke, all sought to ground human freedom in the real world, and bringing time under human control was essential to that mission. Where Smith diverts from his peers, however, is that the he understood time as a fundamentally social construction; we act for futures possible, but possibility is socially, not scientifically, determined. This means, for Smith, that when humans contemplate the future, they calculate risk and responsibility not in the abstract, but in response to the context of manifold social, political, and economic organizations. Much of Wealth of Nations is dedicated to how such contexts shape human behavior, and this is also true for his analysis of the then nascent corporation. About these Smith raises a number of concerns, but all center on how various qualities of corporations, from limited liability to boards of directors, work collectively to distort ideas about the future. The effective result, he argues, is that the natural human disposition towards prudence and risk aversion are perverted such that corporate actors are compelled toward increasingly aggressive risk seeking. Smith argues that these actions occur not because corporate actors are blind to risk, however, but because they are able to exploit their political connections to offload the risks to the public. And while he is certainly critical of political actors who intervene in the economy, his indictment is not intervention per se, but intervention that serves particular interests against the public interest. In fact, he charges political institutions with the task of managing timescales of interaction such that the horizon of those with little power expands, despite pressures from the powerful to curtail the possibilities of the weak for their own profit.

After establishing a Smithian framework for reconsidering the forces that shape corporate behavior and the true nature of political responsibility, this paper turns to the question of subprime mortgages. Although their role in the 2008 financial crisis is now well-established, much remains to be understood about their emergence. Aside from glib narratives about greed, even less is understood about why their use expanded, as their destabilizing effects on financial markets were foreseeable. Tracing the financial crisis back to the 1934 Housing Act, Smith is employed to demonstrate both how the emergence of subprime mortgages can be explained by changes in social and political reality that altered the timescale of corporate logic, making riskier, short-term decisions appear newly rational. It further incorporates Smith’s political critique, not of an overinvolved state, but an under-involved one, as the radical expansion of subprime mortgages followed waves of deregulation that allowed for an unprecedented level of highly aggressive risk-seeking, nearly all of which was ultimately offset to the public.