Erwin Dekker and Arjo Klamer
This chapter argues that the art of phronesis is central to doing the right thing as an economist. Phronesis, or practical wisdom, is what we practice when we deliberate, weigh values, take into account our feelings and those of others, consider the circumstances, and grope for the right thing to do. Central to phronesis is figuring out the goods to strive for and the appropriate means to realize those goods. We argue that the goods can be categorized into personal goods, social goods, societal goods, and transcendental goods. An important choice that any economist faces is which conversation to join, to which part of economics he wishes to contribute. We argue that situating ourselves in a university department, in the search for truth and truth only, is an important moral choice, with consequences for the goods we can realize.
Arnoud W. A. Boot and Anjan V. Thakor
This article examines how banks choose between relationship- and transactions-based lending, and more generally the role of debt versus equity instruments and the economic functions of banks. The arguments presented suggest that banks have a growing dependence on the capital market for sources of revenue, for raising equity capital, and for risk management, while capital market participants came to rely increasingly on banks' skills in financial innovation and portfolio management. The increased integration of banks with financial markets raises domestic and cross-border financial stability concerns, which in turn has implications for the design of domestic and international financial system regulation.
Iris J. Lav
This article tackles the issue of comprehensive state budget reform. With structural deficits rampant, reform is needed to maintain the current level of programs that states and localities now provide, but cannot support over time with current revenue policies. Recent “reforms” have mainly focused on cutting both spending and taxes. Nonetheless, it is believed that people want their services and will vote to pay for them, if given that option. The article notes that there have been very few successful state tax reforms in recent years. But modernization of tax systems is needed to alleviate structural deficits. Part of the problem is institutional myopia: improved multiyear budgeting can warn policymakers when proposed actions are likely to create budget problems over the long term.
Sidney J. Gray and Helen Kang
This chapter explores accounting transparency as an important aspect of corporate accountability. After defining accounting transparency and identifying factors that influence it, the chapter considers the debate between providers and users of accounting information on how transparent accounting information should be defined, measured, and reported. It also discusses the roles of international standard-setting organizations in promoting accounting transparency as well as measures of accounting transparency, including disclosure level and market reactions. Finally, it looks at future prospects for setting international accounting standards, paying particular attention to International Financial Reporting Standards.
Robert B. Ward
Over the last decade, observers of state and local finances have been alarmed over an emerging picture of long-term, structural imbalances. This article examines the concept of fiscal sustainability in several formulations and explains that it essentially means limiting expenditure commitments to those that can be met by available revenue streams. It investigates why fiscal sustainability in actual practice, however it might be measured in theory, has fallen into disrepair. The usual lineup of budget-busting culprits is next examined, with the proliferation of entitlement programs standing at the head of the line. Over the past four decades, state and local budget increases reflected the strength of the economy during an unprecedented run of prosperity. Meanwhile, the array of entitlement programs that drove spending was increasingly shaped by political, demographic, and institutional forces, each with its own clientele of beneficiaries. That has made adjustments more difficult when revenues do not keep pace with spending patterns.
Christopher J. Berry
Using Smith’s own references to thinkers he identifies as significant pioneers, the chapter presents a synoptic and necessarily gross-grained selective survey. It pays particular attention to the thought of Descartes, Bacon, Hobbes, Locke, Pufendorf and also to Shaftesbury, Mandeville, and Hutcheson. Newton, because he is the chief subject of another chapter, is not here considered but Harrington, though not mentioned by Smith in this context, is included. While Smith can be seen to take something from all these thinkers, without exception this is done critically. This duality recurs as the survey proceeds.
This chapter outlines Marx’s general attitude towards Smith. It argues that Marx was a close reader of The Wealth of Nations and that he generally admired Smith’s work. The chapter outlines how Marx criticizes various aspects of Smith’s thought and then develops them as a part of his own theory. Topics covered include value theory and the development of money and capital. The chapter then moves on to discuss their views of the development of character and argues that their positions on both the state and historical change are also surprisingly similar. Their main difference is that Smith largely looks backward, sees that things are better than they were, and offers various reforms to improve society. Marx looks largely to the future, thinks that the future could be so much better than the present, and argues for a communist revolution.
Dennis C. Rasmussen
Adam Smith was arguably the first great Enlightenment thinker to offer a thorough and considered response to the writings of Jean-Jacques Rousseau, the first great Counter-Enlightenment thinker. As recent scholarship has stressed, Smith sympathized with many aspects of Rousseau’s wide-ranging critique of commercial society. In the end, however, their differences were far more fundamental. This essay examines four key areas of divergence between the two, namely their views on the popular dissemination of the arts and sciences (and popular ‘enlightenment’ more generally); the moral effects of commerce; the nature of liberty and citizenship; and the idea of progress. In each case, Smith stood closer to the leading figures of the French Enlightenment—thinkers such as Montesquieu, Voltaire, and Diderot—than he did to their great critic Rousseau.
The concepts of self-interest and self-love feature prominently in both The Theory of Moral Sentiments and The Wealth of Nations. Various notions of self-preservation, self-interest, and self-love are distinguished, and it is shown how self-love functions less as a motive than as an orientation. Although self-love may corrupt moral perception, the impartial spectator serves as an antidote. Smith’s conception of self-interest in The Wealth of Nations is a broad one and not inconsistent with the moral psychology of The Theory of Moral Sentiments. That the virtue of benevolence features less in The Wealth of Nations than The Theory of Moral Sentiments is not surprising given Smith’s overall account of sympathetic interaction, as well as the threshold of knowledge required for benevolent action. The chapter closes with a summary consideration of prudence, a virtue grounded in self-interest, and an examination of the status of ambition.
This chapter examines Adam Smith’s reflection on the Law in his main works. Particular attention is paid to the difference between Smith’s thought and the Juridical Enlightenment. Smithian Jurisprudence appears significantly different from works by Beccaria, Filangieri, or Bentham, where some continuity with current economic analysis of law can be found. It is much more difficult to find it in Smith’s idea of the impartial spectator, the resentment of the victim, the theory of the stages, or the stoic vision of the legislator. Finally, the chapter illustrates how far Smith is from modern Law and Economics and from some aspects of contemporary economic orthodoxy.