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2022 | OriginalPaper | Buchkapitel

4. The Nature and Causes of Corporate Negligence, Sham Lectures, and Ecclesiastical Indolence: Adam Smith on Joint-Stock Companies, Teachers, and Preachers

verfasst von : Andreas Ortmann

Erschienen in: Adam Smith’s System

Verlag: Springer International Publishing

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Abstract

I shall argue that Smith saw all three institutions adversely affected by similar incentive structures that were likely to produce poorly functioning organizations. Smith identified self-interest as the driving force of the incentive misalignments that he diagnosed, and he considered what, if anything, could prevent these institutions from being afflicted by them.

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Fußnoten
1
The distinction reflects the degree to which the quality of a good can be assessed before purchase, after purchase, or both. If a consumer must consume the product to determine its quality, it is said to have experience quality (Nelson 1970). Michael Darby and Edi Karni (1973) labeled those experience goods whose quality cannot be determined after consumption credence goods. Examples of experience goods are car repairs and health, day, or elder care; examples of credence goods are organic fruit or certain kinds of medical care and other prevention and repair services. In contrast, goods whose quality can be assessed prior to purchase are called inspection or search goods (Carlton and Perloff 1994; Tirole 1988). Note that labor (services) can be similarly classified. The effort that goes into routinized activities can be easily gauged. In contrast, effort is often difficult to observe or verify for non-routinized activities. Smith did not use the labels employed by the modern Industrial Organization literature, but he understood well that whether the quality of a good or service can be assessed before or after purchase feeds on the internal organization of an institution and its products.
 
2
One can indeed show that the underlying incentive problems in each are identical in strategic game form (Ortmann and Colander 1997). To describe such situations, Herbert Simon (1991) has coined the notion of “problem isomorphs”. From here on I shall use the terms quality (of a good or service) and effort (of the production factor labor) interchangeably.
 
3
He thus anticipated, by roughly two hundred years, group-size effects now well established in the literature (Isaac, Walker, and Williams 1995 ; Abrahamson and Park 1994 ; Yermack 1996).
 
4
While Smith (WN, 735) favors the application of the benefit principle as a basic rule for higher education, he stresses that “the laboring poor, that is the great body of the people” may not have the means to become literate and numerate. “For a very small expense the public can facilitate and can even impose upon almost the whole body of the people, the necessity of acquiring those most essential parts of the education” (737). Such state intervention, Smith argues, is desirable because of the detrimental consequences of the division of labor on the human mind and, ultimately, the social fabric (734–35).
 
5
“It is the interest of every man to live as much at ease as he can, and if his emoluments are to be precisely the same, whether he does, or does not perform some very laborious duty, it is certainly his interest … either to neglect it altogether, or, if he is subject to some authority which will not suffer him to do this, to perform it in as careless and slovenly a manner as that authority will permit” (718).
 
6
Cognoscenti will note that Smith used a Nash equilibrium to model the idea: “that his neighbor may neglect his duty, provided he himself is allowed to neglect his own”.
 
7
The notion of collusion is well established in Smith’s work. See, for example, Smith’s (WN, 66–68) intriguing discussion of the bargaining between workers and masters.
 
8
A referee for this journal noted that the title of this section was “Smith on Educational Institutions”, but that I discuss mostly colleges and universities. Smith indeed discussed educational institutions in general. However, he also argued that incentive problems were highly and positively correlated with endowments. Some universities had them, but most schools and colleges did not, or had “but a very small one” (WN, 716–17). Smith, incidentally, identified three other sources of incentive problems. First, professions such as law, physics, and divinity required “a certain number of years in certain universities” (719). Second, “the charitable foundations of scholarships, exhibitions, bursaries, &c. necessarily attach a certain number of students to certain colleges, independent altogether of the merit of those particular colleges” (719). Third, classes (and teachers) are mandated by a college. In all three cases, Smith was concerned about limitations of students’ choice sets since these circumstances reduced teachers’ incentives to worry about their reputations (See WN, 719–20 for a detailed discussion).
 
9
According to his biographer, Smith received during his years at Glasgow College more than half of his salary from fees (Rae 1895, 48–49). This was in contrast to the payment mode at the University of Oxford, the consequences of which Smith had experienced as student. Recall Smith’s scathing comment on that university’s professors.
 
10
As I have argued elsewhere, there are important lessons here for contemporary higher education (Ortmann 1997b).
 
11
Smith was quite aware that religious instruction, as an added bonus, could have tangible benefits. Specifically, affiliation with a sect could provide a social context much needed for those fleeing the countryside and in danger of sinking into obscurity and darkness (WN, 747).
 
12
“Such a clergy, when attacked by a set of popular and bold, though perhaps stupid and ignorant enthusiasts, feel themselves as perfectly defenseless as the indolent, effeminate, and full-fed nations of the southern parts of Asia, when they were invaded by the active, hardy, and hungry Tartars of the North” (WN, 741).
 
13
Smith (WN, 747) realized sects may nevertheless appeal to the anonymous and hence possibly amoral masses. He suggested two remedies: academic study and artistic exposure. He recommended the study of science and philosophy because “science is the great antidote to the poison of enthusiasm and superstition; and where all the superior ranks of people were secured from it, the inferior ranks could not be much exposed to it”. He also promoted “public diversions” such as painting, poetry, music, and dancing because they drive out “that melancholy and gloomy humor which is almost always the nurse of popular superstition and enthusiasm” (748).
 
14
Benjamin Klein and Keith Leffler (1981, 618 n. 5), whose article is generally considered the path-breaking work in this area, point out that Smith’s discussion of efficiency wages in book 1 of WN anticipates the essence of their argument about the role of market forces in assuring contractual performance.
 
15
Among the relevant works are Anderson and Tollison 1982, Anderson 1986, Rosen 1987, and West 1990. Gary Anderson (1986, 1079–80) in particular recognized that “the Roman church was a kind of spiritual equivalent of the East India Company monopoly, which Smith had extensively analyzed in the immediately preceding section in book V. Although he did not himself explicitly draw this analogy; the analogy is striking”.
 
16
In fact, they can all be expressed game-theoretically as I have shown elsewhere in joint work with Stephen J. Meardon (Ortmann and Meardon 1995; Meardon and Ortmann 1996a, 1996b).
 
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Metadaten
Titel
The Nature and Causes of Corporate Negligence, Sham Lectures, and Ecclesiastical Indolence: Adam Smith on Joint-Stock Companies, Teachers, and Preachers
verfasst von
Andreas Ortmann
Copyright-Jahr
2022
DOI
https://doi.org/10.1007/978-3-030-99704-5_4