Selected Essays of James Tobin
Chapter 28: False expectations
28. False expectations* Celebrating the collapse of communism – its economic statism, its political despotism and its military threat – the West hailed the fall of the Soviet Union as a historic victory for free-market capitalism. The 150-year clash of ideologies symbolized by the names Adam Smith and Karl Marx was at long last over. Adam Smith had won. In the euphoria felt as the Cold War was ending, the West expected the ex-communist countries to prosper under free-market capitalism. After all, it could only be their disastrous economic system that kept living standards of Soviet citizens so far below those of their Western neighbors. In Western countries themselves, right-wing antigovernment politics had gained in strength even before the end of the Cold War. Thatcherism and Reaganomics stand out. The collapse of communism increased the conﬁdence and conservatism of these movements, and they cited the failures of extreme dirigiste regimes behind the Iron Curtain to promote their political agenda. THE INVISIBLE HAND Adam Smith’s most famous passage is this: ‘As every individual . . . endeavors . . . to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value . . . [he] necessarily labors to render the annual revenue of the society as areas as he can. He . . . neither intends to promote the public interest, nor knows by how much he is promoting it. . . . [He] is in this, as in many other cases, led by an invisible hand to promote an end which was...
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