There but for .......

From the "Baseball Toaster" in Alemeda, California:

The Juice Blog, 30 August 2005

“Major League Bling”

by Scott Long

“I'm generally not a basher of athletes and how much they make, as I realize it's all about them free markets. (Do I sound like Adam Smith?)”

Apparently, the subject of Scot Long’s piece is a Mr Dwight Gooden, a former baseball star, who is having trouble with habits he has picked up that bring him to the attention of the ‘boys in blue’. These excitements become news items in the tabloids and cause much ‘tutt tutting’ among respectable folk, who previously fawned and fed the ego’s of yesterday’s sportsmen and women, and made them into ‘celebrities’ in the usual intrusive and vulgar manner.

When the crowds stop cheering and the hero retires, the main sparkle of their young lives has gone, forever. The nearest they get back to it is in a haze of memories, well watered by whatever gives them relief. Sad, but it’s an everyday story and not just one for great athletes. All kinds of people ‘succeed’ and then falter; and drink or drug themselves to death; slide into depression and end up on the street, sans family, sans friends and sans hope, and in Dwight Gooden’s case, sans a ‘Beamer’.

Scott brings Adam Smith into the story, more I think as an attention piece: think wages, think markets, think Adam Smith. It makes a good line and has the advantage of being a recognized name – even, perhaps, a celebrity, albeit from the 18th century. Markets do not provide happiness, not guarantee a happy ending. They provide the means only to whatever you believe will bring happiness, or at least respite from hunger, thirst, cold and fatigue (try living without respite). What we do with the means we acquire from markets is another story altogether.

People drop into the pits from all points in the income range – knock on any door in any street in any country and you may find someone on their way to the pits, some few even recovering from their trip to the pits, and many who know nothing about the pits and never will.

The Dwight Gooden story is only one such story that could be told.

Out of the Storm Came Forth Reason

The storms affecting the US, and New Orleans in particular, are the subject of an interesting debate on www.divisionoflabour.com on what Americans call ‘price gouging’ and what Brits call ‘profiteering’.

The storms cause damage to houses and people need experts to fix the damage by repairs or replacements. There are a fixed number of repairers in a locality and suddenly demand for their services jumps. What should happen? Should prices be allowed to rise; or should they be fixed by the authorities?

This is an age old problem in economics. Smith discusses the responses to local dearth (famine) in “Wealth of Nations”: VI.v.b.1-53: 524-43: Digression concerning the Corn Trade and Corn Laws”.

Below I reproduce a contribution in the comments section of Division of Labour (forgiveness sought if permission not granted) in which ‘Matt’ responds to ‘Stephen’’ (and ‘doinkicarus) who had argued for price controls:

“Stephen.... Prices are always the best mechanism for distributing goods, and emergencies are no exception.

Consider a hypothetical case where a hurricane has just created a lot of damage. There are plenty of people who will need roof repairs or trees cut or any other given thing. You are right that there is too little time for new firms to begin, and right again in believing that the number of roofers, tree cutters, etc. in the immediate area is likely too little to fulfill demand. Given that there is a set number of roofers, tree cutters, etc. in the immediate area, supply too will also be fixed. The hurricane has just created a huge demand shock for these services, and the first thing to happen is a price jump (when legislation doesn't get in the way that is). If we assume that the market was previously competitive, then the individual roofers and tree cutters will enjoy some newfound economic profit.

So where are we at? The "rich" all have a new shiny house while the rest of us are left with a new sun room? No. This is only the first stage of economics at work. Here is what you missed: There exist firms outside the immediate area who can fulfill the demand. These firms notice all the economic profit being earned and they move in to get a piece of the action. Eventually the prices fall and all the necessary demand is satisfied. Your argument is that this “eventually” is just far too long to wait, after all, we’ll be dead by then right? No. We really don’t have a choice. Consider what happens if some politician agrees with you and concludes: “No, we cannot wait for prices to adjust. We must force them to!” Well, if prices are held at their previous level, then there is no incentive for the out-of-town roofers & tree cutters to enter the area in the first place! So now we are trying to repair the damage with far fewer workers! And the damage will be repaired faster in this situation!?

Now it is true that the people with the highest reservation prices will have their houses fixed in no time, because it is most valuable to them. This does not necessarily have to be “the rich,” some rich people might have other homes to move live at, and will hold off repairs of their vacation home until prices drop. Other possibilities exist. On a side note, that whole line about Bill Gates is just loaded. This type of thing occurs everyday, and people are perfectly fine with it. Children die, you buy ice cream. Couldn’t you have forgone that ice cream and donated your money to buy much needed nutrition for some poor, starving, innocent, young child in some tormented third world country? It isn’t always the rich who make decisions that can appear like “bad outcomes.” This is similarly applied to doinkicarus’ reasoning here.

In a cruel response to doinkicarus’ observation that oftentimes people place values on goods that are higher than they can afford, I say: too bad. I value a brand new HDTV at it’s selling price, I value a new car at it’s selling price, there are plenty of things that all of us want but can’t afford. This is nothing new! The same goes for goods in times of crisis. Some people’s homes might be wiped out and they can’t afford a new one. Well, it certainly is tragic, but too bad. That is the way risk works, if you live where hurricanes live, you might be wiped out. Homes are important, but the person who cannot afford to rebuild must move somewhere else, where they can afford. It is harsh indeed, but it is reality. Now back to the real reality, aid programs and such dole out money to help people who’ve chosen to live in a risky area rebuld at the expense of people who made safer decisions in other parts of the country, so this situation might not exists very much…but that’s a different story.

Endnote: If it gives any credibility to my story, I am from Florida and I have my fair share of experience with hurricanes and natural disasters.

Posted by Matt at August 29, 2005 08:56 PM © Division of Labour 2005”

Now that is why “Division of Labour” is one of the best economics’ Blogs around. Good debate, not abuse; treating the subject with respect, and the other debaters, not with bad manners, and being instructive to all willing to learn. "Congratulations to the people at Division of Labour".

The Menace of Hyjacking Adam Smith

“The menace of hijacked capitalism”
An economist argues that to vanquish terrorism, poverty and crime, dirty money must be reined in

By Cecil Johnson, a Fort Worth-based free-lance writer. I review the review and should say at the start hat its general thesis is correct: Criminal activities undermine free markets, but the remedy already exists: it’s called justice.

To make his points the author, Raymond Baker, a 40-year business veteran and guest scholar at Brookings in Washington, DC, picks on Adam Smith, or at least the public’s version of him, to add support to his case.

The reviewer, Cecil Johnson, a free-lance writer from Fort Worth Texas, writes:

“Adam Smith has to be whirling in his grave because of what dirty money dealing is doing to capitalism, says the author of Capitalism's Achilles Heel in his illuminating and disturbing new book.”

For a start, Adam Smith would not know what capitalism is, either the word or the phenomenon. He lived (1723-90) long before capitalism became a reality in the 19th century. He lived in a world of mainly small markets, peopled by small traders and local farmers. The former sold simple agricultural implements made of manufacturers (artisans, tradesmen), likely to be bought by farmers and simple household utensils and small specialty goods, cloth and trinkets; the latter sold farm produce to consumers and cattle, sheep, goats, pigs, and chickens to each other. This is a long way from the large joint stock companies and global companies of today.

Quoting the book, the reviewer says:

"Adam Smith today would be appalled to see that the pursuit of fraudulent transactions and illegal profits has become utterly routine, unencumbered by the moral safeguards he envisioned, generated by people lacking the traits of character he knew were necessary for effective conduct of the free market system," Brookings Institution guest scholar Raymond W. Baker writes.

The idea that Smith would be innocently ‘appalled’ at the behaviour of the owners of land and businesses is quite wrong. He knew all about the mischevious behaviour of ‘merchants and manufacturers’. In fact he spent pages detailing their conspiracies and cheating ways. He was not an idealist who saw markets and the people running them as saints. He advised the greatest suspicion of anything they did and knew all about corruption at all levels. He was, after all, living in 18th century Britain at a time noted for it large scale corruption, socially, politically and commercially. He wrote harshly about the great joint stock companies operating in India and elsewhere for their criminal ways. Why should today’s corruption ‘appall’ him particularly? Using Smith’s name to lend a bit of drama to Baker’s message is unnecessary and gives the wrong impression of the worldly sense of the author of “Wealth of Nations”.

Cecil Johnson continues:

“The author, who spent more than 40 years in international business and is a senior fellow at the Center for International Policy, imagines that if Smith were to return today he would be "heartbroken" to find that distortion of his economic thesis has simultaneously generated great wealth and huge economic gaps that have stranded three times more people in poverty as there were living in the world when he wrote The Wealth of Nations.”

This concedes the false point that capitalism creates poverty, which is nonsense. The absence of capitalism creates poverty. Markets create wealth, the only antidote to poverty that works. The poor have not been ‘stranded in poverty’ by anything Smith advised; indeed, the adoption of market forms, even under communist dictatorships in China and Vietnam, the extention of markets in India, Asia and Central and South America, removes people from poverty far quicker and more certainly than alternative attempts at state managed interventions. Markets that are closed or closing (Cuba, North Korea, Iran, Venezuela, and much of sub-saharan Africa, including I am sorry to see the creeping intervention of the State in South Africa) are creating and maintaining poverty on a grand and sickening scale. This would appall Adam Smith.

The follows a disappointing sentence (from Baker, not the reviewer):

"If he [Smith] chose to remark on the invisible hand, he would identify it now with international pickpockets lifting the purses of the poor for deposit into the far-flung accounts of the rich," Baker writes.

Oh dear! Smith only mentioned the invisible hand three times in his long career and on each occasion it had nothing to do with markets. He never meant it as an all purpose metaphor to claim that pursuing one’s self interests always, or necessarily, benefited society. Smith was not stupid. He knew, and wrote about, self interest having malign outcomes, as it must when a person chooses to do a criminal act. That was true in the 18th century (and every other century before and since). Some outcomes are benign; others are malign.

The reviewer, Cecil Johnson, paraphrases Baker:

“It is a picture that would, indeed, make Adam Smith weep. He believed that capitalism would spread the wealth to all sectors of all societies. Of Course, Smith's version of capitalism, as Baker points out, was based upon a presumption of honesty and compassion for others.”

As above, Smith certainly practiced ‘honest and compassion for others’ but was not naïve to presume it in others. His “Theory of Moral Sentiments” detailed what is necessary to live a moral life – he was optimistic that many others would behave in such a manner – but was equally conscious of the ‘vileness’ and ‘mendacity’ of people if allowed to do whatever they wanted in the course of harming others. Hence, Smith persistent and loud clamour for justice – the negative virtue absolutely essential in a market economy, without which society would ‘crumble into atoms’. And that is the remedy for the criminal acts of anybody in a market system and in a decent society.

Cecil Johnson makes this clear in his last point:

“Baker makes it clear that the survival of freedom is inextricably linked to the survival of capitalism. He makes a case for curbing the abuses of dirty money to curb poverty, reduce crime and defeat terrorism.”

Adam Smith would say ‘Amen’ to that sentiment.

The book:

Capitalism's Achilles Heel: Dirty Money and How to Renew the Free-Market System By Raymond W. Baker, John Wiley & Sons 438 pages $27.95

If Age but Could and Youth but Knew

New York Times, 28 August 2005; eTaiwan News, 29 August 2005 ("voice of the people, bridge to the world")

Ben Stein, of whom I have written here in praise of his understanding of economic policy has written some advice for your ‘Freshers’ going up the their Universities for the first time; in doing so he reveals why he is well informed in economics:

“Until I got to my later economics courses with the redoubtable Professor C. Lowell Harriss, and until sophomore year, when it was my luck to have as a mentor and friend the visiting professor Milton Friedman, the greatest economist since Adam Smith, I knew little of how to get and spend and invest.”

Some accolade for Professor Milton Friedman; a might exaggerated, maybe, but I won’t quarrel about it. He certainly spoke and wrote a lot of sense’ The only time I heard him lecture was when he visited The University of Strathclyde and gave a powerful address on monetarism to a pack auditorium. He opened with his greetings to the ‘Republic of Letters’, - the ‘one true republic’ he called it. The University authorities had been expecting ‘trouble’ from opponents of Mrs Thatcher’s policies (those were those kinds of days). None materialised, which left the attendant University Janitors prominently placed around the hall, presumably to deter trouble, the best informed Janitors in monetary economics of any other British university.

Stein continues:

“I have read what in my opinion are the two greatest works of economics ever written: "The Wealth of Nations" by Adam Smith and "The Monetary History of the United States" by Milton Friedman and Anna Jacobson Schwartz, my mother's best friend from Barnard. Neither book makes much reference to connections, except for a sneering reference by Smith to "aldermen's wives" and their obsession with "place." And on the macro level, connections mean little. But on a personal level, they mean everything… Vitally, success in life is so much about connections and whom you know, those staples of bubbe meises (a Yiddish term meaning something like "grandma's wisdom") and so little about memorizing even the greatest of plays, like "Richard II," or knowing how to weigh the moon, that there should be a special seminar in making and keeping connections. It is embarrassing and demeaning that this should be so, but it is so and has always been so.”

Should Ben Stein read my “Adam Smith’s Lost Legacy” (Palgrave Macmillan, 2005: ISBN: 1-4039-4789-9) he will see the great extent to which Adam Smith practiced what Ben preaches about using ‘connections’, or what was known in the 18th century as working the ‘Interest system’.

Smith owed all of his advancements, from Glasgow to Oxford University (1740); from unemployment in Kirkcaldy to paid Lecturer in Edinburgh (1746-8); to appointment as Professor of Logic at Glasgow University in 1751 to Professor of Moral Philosophy in (1752- 63); to appointment as tutor to the young Duke of Buccleugh (1764-6); and his final appointment as a Commissioner of Customs in Scotland (1778-90) to his connections and his powerful political alliance with the 2nd and 3rd Dukes of Argyll, the government’s ‘fixers’ in Scotland.

In fact, Adam Smith is a model case study in how to get to know people and to get people to know you. His case shows that ability is seldom enough; without it, luck might help; but with it and with connections the combination is devastating. It would possibly make suitable material for Stein’s wished for ‘special seminar in making and keeping connections'.

Ben Stein also adds (there is much more in his article than I can quote here without breaching copyright!):

“Even more vital is the ability to work. Many college students think that work is slavery and captivity. Far from it. Labor is dignity, mental health, a grasp on reality. Freud said that nothing grounds a person so powerfully in reality as putting emphasis on work ("Civilization and Its Discontents"). In "Tommy," the Who said that "freedom tastes of reality" - at least I think that's what they're saying. Work, especially when combined with clear thought, makes possible a career of plenty and achievement and pride. Work is the key that turns almost any lock in the material world."

I have always believed, always said, especially to my children and to anybody I hear demeaning work, or worse, demeaning the people doing what they regard as humble jobs: “There is dignity in work”. And this applies to whatever work you do. Never, ever, be too proud to accept a job when you need one that is ‘below’ your normal line of work. Being voluntarily unemployed is demeaning; making an effort to feed and maintain yourself and your family (which includes anybody depending on you) is never demeaning, no matter what work you do.

Adam Smith retained his respect for the ‘common labourer’ (they did not have wives with the petty wishes of ‘Aldermen’s wives’) no matter how high he rose in fame. He worked hard for his pension, but typically, he gave most of it away in acts of private charity and died with a modest residue. A moral man, indeed.

Islamic Economic Policies Should be Tested

In an article in Contracosta.com the predicament of the differences between and unreconstructed Islamist and a scientific approach to economics is outlined

“Islamic, secular ideals at war: Creators of constitution must grasp economics” by Timur Kuran, a professor of economics and law and King Faisal professor of Islamic thought and culture at the University of Southern California, explains Islamic economics clearly. He is also the author of "Islam and Mammon: The Economic Predicaments of Islamism."

His article does not make comfortable reading. The gap between the Islamic position it explains and western economics is so wide that there is little room for negotiating a compromise. I have quoted some extracts from Kuran’s article:

“To understand the constitutional battles, observers must grasp not only the principles of Islamic law, or Sharia, but also Islamic economics -- an esoteric modern doctrine that would befuddle Karl Marx, Adam Smith and even the Muslim jurists who, a millennium ago, developed the principles on which it claims to be based.

Sadr's economic vision is developed in "Our Economics," his masterwork published in 1961.
The purpose of "Our Economics" is to discredit both capitalism and socialism as flawed and alien systems, offer Islamic economics as a vastly superior alternative and demonstrate that Islam harbors solutions to a panoply of vexing economic problems. In both capitalism and socialism he finds virtues. Islamic economics, he says, embodies all of these virtues while escaping their numerous vices.

Take poverty elimination, which a socialist society pursues through mandatory wealth transfers. Islam exhorts its adherents to assist the disadvantaged, and it teaches those of means to participate in a decentralized transfer system called "zakat."

Like practically every other modern Islamist, Sadr considers interest illegal, in the belief that the Koran bans it categorically, regardless of form, purpose or magnitude. At the same time, he repeatedly praises the market mechanism, arguing that the pressures of supply and demand should be respected, not resisted.

"Our Economics" seeks to overcome the contradiction through moral training aimed at removing wants liable to produce un-Islamic outcomes. If Islamic education makes people equate interest with unearned income, demand for interest income will disappear; hence, there will be no interest-based lending.

Accordingly, secularist anxiety about Dawa goes well beyond the substance of its current policy positions. In the rough-and-tumble of Arab politics, Islamist parties will enjoy an advantage in any national debate by virtue of their ability to frame their own position, whatever its content, as uniquely Islamic and rival positions as evil.”

One of the many problems in the above is seen in the last paragraph quoted. If a proposition for practical change cannot be tested and is decided by 'faith' whatever the outcome, it is not scientific.

For example, the best way to test an economic policy is to apply it in, say, one country and observe its performance against alternative policies elsewhere. If what the Dawa proposes in its economic policies works better, or even as good as elsewhere, then we should consider it seriously; if it doesn’t then we shouldn’t. That is how science has developed since the first millennium of the common era.

On this test, socialism and communism failed. All migration in the world is into the capitalist countries and not the few remaining communist countries. So far, the article reports that Pakistan and Iran have imposed the economic policies advocated by the Dawa to no visible effect on the problems of capitalism (relative poverty of minority and its non-relief by the voluntary Zakat). Economists will recognise the ‘free riding’ problem. Renaming ‘interest’ as ‘administrative charges’ does not a moral example make: faking results is as dishonest as you can be.

It is doubtful if these economic issues would ‘befuddle’ Adam Smith. A Karl Marx might be impressed with the credulity shown by those who present their ideas this way, but the rest of us are likely to be sceptical of the damage it would cause to the economies lumbered with these policies and would regret the likely disappointment of the poorest people left to wallow in their unrelieved misery.

Diary 3: Writing new book on Adam Smith for Palgrave's Great Thinkers in Ecoomics series

I am now on chapter 3, but progress is slower than usual because of my decision to check out every factual statement or opinion before moving on to another sentence, and noting the references details in a 'footnote'.

This causes quite a lot of searching work through my library and my notes or copies of articles. The idea is that I will be able to speed up the drafting and re-drafting process later in the project and that searching for the exact reference while I am on that page means I either find it, or don't. Later on, when I would normally go back to check all references (a chore either undertaken voluntarily or one enforced by the copy-editors) I often cannot remember the references or the context and I take ages trying to find them or reluctantly have to drop the material requiring a reference. If this is at the copy-editing stage, when time pressure is on (once a manuscript gets this far into printing the schedule is fixed by production) it usually occurs while I am engaged in something else.

I should make clear I am not usually enthusiastic about footnotes and normally do not use them, especially where they are used to add a commentary on parts of the text, or worse, merely inform readers that that point is expanded on earlier or later. At this stage of the writing programme, I see the references more a part of the 'scaffolding' of the text; whether they survive the drafting stages before arriving at a Final text remains to be seen. Given the important of the Great Thinkers in Economics as a near 'definitive' accounts of the people studied, I will probably feel obliged to keep them in in some form - but not for mere comments, etc. If it is not worth putting into the main text material it probably should not be in a footnote.

Already, the chapters are rather longer than will probably be required or accepted by the publisher. Palgrave's word limit appears to be firm. But that is OK; it is infinitely easier to cut back than to expand out, and any book can be improved by judicious editing and a bit or re-arranging.

Also, the usual 'problem' is arising and it too slows down writing - looking up a reference easily slips into reading the section of the book or article, which also slides into re-reading the entire chapter or article.

The main thing is that progress is being made; the book's themes are taking shape but we have some ways to go before it develops its 'voice'.

Meanwhile, site traffic is increasing and pages read on the visits is now over 3,000 a week, which I see from another Blog is the minimum regarded as 'good'; still a long way short of some Blogs I visit which get nearly 2,000 'hits' a day.

Site Traffic Continues to Climb - slowly but surely

This has been the best seven days for traffic through "Lost Legacy" since we opened in March.

A total of 827 unique visitors clicked on 1,370 times and viewed 3092 pages.

A long way to go to catch the 'Big Blog players', I agree, but "Lost Legacy" is a highly specialised site and our visitors are discriminating people.

I am always looking for ways to improve the offering and the coverage, and your suggestions are most welcome: send your thoughts to: gavin[at]negweb.com

Thank you for visiting

Gavin Kennedy

Doomsters, Place Your Bets - if you dare

A couple of months ago, 21 May: "Oh No he Didn't Say that", I had good cause to critique an op-ed by John Tierney because he misunderstood reciprocity in early human societies and Adam Smith’s metaphor of the invisible hand (actually Shakespeare’s from Macbeth, 3.2: ‘thy bloody and invisible hand’). He claimed that the new "Star Wars" film was based on Smith's philosophy (which it isn't). In Wednesday’s International Herald Tribune (24 August 2005) he comes up with a cracker – a great piece on natural resources and sustainability (‘Oil prices: my $10,000 question’).

Matthew Simmons, a fellow columnist at the New York Times, said that ‘oil prices would soar into triple digits.’ Tierney called Simmons and asked him if he would back is doomster prediction with cash, to which Simmons promptly said ‘yes’ and the result: a $10,000 cash bet between them.

In undertaking the bet, Tierney is following in Julian Simon’s footsteps, who challenged environmental writers of ‘blockbusters’ predicting a continuing rise in oil prices as scarcity squeezed supply but not demand. Paul Erlich, author of the “Population Bomb” (I have two copies for some reason in my library) took a bet of $1,000 with Julian Simon that natural resources would be more expensive in real terms in 10 years time, i.e., by 1990. They weren’t and Julian Simon collected his winnings.

Simon wrote a book, “The Ultimate Resource” (I had a copy but cannot lay my hands on it) showing the naiveté of ‘environmentalists’ who do not understand either economics or the enviorment, and who have mechanical ideas about mathematical models (remember “Limits to Growth” and how the world would end as we know it in the 1980s? – I can see that book on my shelf from where I am writing this; I should explain that six years ago I moved most of my library to France and only this summer have I gotten round to organising the books in some sort of order on the new shelves I recently bought).

The bet is that average oil prices for a year will not be $200 a barrel in 2010 as adjusted for inflation. The winner takes the $10,000 from an escrow account plus any interest earned.

And Tierney has also extended his bet challenge to anybody: ‘If you think the price of oil or some other natural resource is going to soar, show me the money.’

Now, why don’t the doomsters, panic merchants, scare mongers and environmentalists rush their bets to Tierney – he can be found on email: Tierney(at)nytimes.com – but somehow I do not think he will be kept busy covering his bets.

At Last, a Marxist Prediction is Right, but not as Marx envisaged it!

Apparently the Chinese Communist government is allowing hundreds of state companies to begin selling shares in their (often loss making) enterprises to the public. This could raise billions of dollars for the state’s coffers.

It’s as likely to set millions of workers and their families on the road to relative prosperity, albeit from a near poverty level after 56 years of communist planning, not so much from the profitable enterprises that may result as from the widening of freedom to make their own decisions, take risks, select the ‘best’ options of them as they see them, and move on without State interference in the right decisions for them (and the wrong ones – where incentives are to operate at their most powerful, there must also be penalties too).

Interesting point, as the www.fee.com site points out: whereas the Marxist theory used to assert it is not so much a case of Marx’s prediction that under communism the ‘state would wither away’ (a hopeless hoax under actual communism from 1917 onwards, and Cuba, North Korea today) it is the communist state withering away in favour of capitalism, abandoned in 1949 by the Chinese Communist Party, and after some 30 millions died in various state-caused famines.

Best Smithian Analysis for a Long Time

From "The Austrian Economists" Blog (http://austrianeconomists.typepad.com): “Why Aren’t Institutions like Can-openers?” (Posted by pboettke on August 22, 2005):

After describing the shipping of a simple can-opener to a friend in Peru who does not have, but needs, one the authors turn to the difficulty of establishing the ideas that form institutions that can drive development without corruption, totalitarian diversions and entrenched poverty:

“The transfer of deep beliefs seems much more difficult than the transfer of things. Why that is so, it is not obviously clear. Pete Leeson, Chris Coyne and I have a paper, "Institutional Stickiness and the New Development Economics" which tries to address this issue that is currently under review at a journal. This work develops themes I first addressed in my "Why Culture Matters" paper that was published in an Italian journal of political economy and then reprinted in English translation in my Calculation and Coordination. Chris Coyne's work on the political economy of post-conflict reconstruction is grounded in this puzzle and he has made great strides in the theoretical underpinnings of this argument and the empirical illustration of the point.

Again in reading for my graduate seminar in Constitutional Economics that I start teaching in 2 weeks, I was struck once again by the wisdom of Adam Smith and how it relates precisely to this point. In his Lectures on Jurisprudence, the appendix includes Smith's plan for The Wealth of Nations. On pages 578-579 of the Liberty Fund edition of this work, he has a section in his plan entitled "Concerning the causes of the slow progress of opulence." Smith states that there are two reasons for why some countries are poor while others are rich. The first are natural impediments and the second are the policies of oppressive and injudicious government. Bad public policy render a countries agriculture and its arts and commerce underdeveloped. Bad public policy, the reader is told, increase the natural impediments to development.

What are the natural impediments?

The original poverty and ignorance of mankind the natural impediments to the progress of opulence. That it is easier for a nation, in the same manner as for an individual, to raise itself from a modern degree of wealth; money, according to the proverb, begetting money, among nations as among individuals. The extreme difficulty of beginning accumulation and the many accidents to which it is exposed. The slowness and difficulty with which those things, which now appear the most simple inventions, were originally found out. That a nation is not always in a condition to imitate and copy the inventions and improvements of its more wealthy neighbors; the application of these frequently requiring a stock with which it is not furnished. (emphasis mine)

And this stock need not refer to material accumulation, but as Chris [Chris Coyne] is showing relates more to the stock of social capital that resides in the people of the nation under investigation."

http://austrianeconomists.typepad.com/

This is the kind of economic thinking that is worthwhile and is the proper use of Adam Smith’s legacy. Why can’t we have more of it?

Potential Candidate for Idiocy of the Month?

“Heliographic Book News, California PRESS RELEASE 21 August 2005:

NEW BOOK OFFERS SCIENTIFIC LOOK AT LOVE

Why will Love be the most important "technology of the future" Why is a love-dominated world no longer an idealist's dream? This book offers the remarkable case based on Science...
A major new study of humanity’s favorite subject, Love, is now available: The Technology of Love by Charles E. Hansen. This book, the first of a two-volume project, is expected to send shock-waves throughout the reading community, both general and scholarly. Hansen, who began his study of Love while a doctoral student at George Washington University in the 1970s, offers the first formal ‘working definition’ of Love applicable to the entirety of daily living; and buttresses it with a breakthrough argument that Love is a scientific reality of our Universe that is here to stay.”

Allowing for the Publisher’s hype in the press release, the item came to my attention because it mentions Adam Smith and David Hume. I have not read the book and am loath to comment on its theme without reading the evidence; hence, I have not yet put this in the file as a provisional candidate for the Lost Legacy prize: “Idiocy of the Month”. Though to be frank, it does come from California … and it may be a plausible argument, but then does sound as if it could be tacky nonsense …

Read for yourself as The Press Release continues:

“The author offers remarkably penetrating interpretations of David Hume, Adam Smith, Sigmund Freud, and others, including Jesus, to make the case that the ingredients that ultimately form the experience of Love are the same fundamental ingredients of constructive social-economic interaction in general. Thus Love is not a cultural creation nor separable from the most basic understandings of our common humanity and our social constructions, beginning with the family. Furthermore, Hansen demonstrates that Love has scientific foundations in both physics and biology that will shock even the staunchest of socio-biologists, while at the same time showing clearly that the Love-fundamentals of Religion are of the same genre. Included is the boldest scientific sifting of Jesus’ teachings yet presented with a conclusion that Science and Religion are not as separate as most modern and post-modern thinkers have held. Yet this is not a ‘religious’ book.

Finally, and of considerable significance to readers religious or secular, Hansen offers the first scientific based definition of Justice as a derivative of Love, much as Hume suggested. Thus the question: What is Justice? that resides at the foundation of Western civilization, Hansen shows to have been ‘in error’: Plato’s (or Socrates?) question should have been What is Love? For it is only after defining Love that Justice can be fully understood.”

If anybody catches more on the book’s arguments, please post them here. I will watch Amazon for a second-hand copy.

Mercy to the Guilty, Cruelty to the Innocent

Adam Smith had suspicions about the conduct of ‘merchants and manufacturers’, finding them inclined to invoke the spirit of monopoly and any contrivance they could think of to raise prices against consumers. These deeply held, and often expressed views of Smith cut right across the careless attribution to Smith of notions about laissez faire and benign invisible hands, as repeated endlessly by modern commentators and commented upon critically here almost daily.

In a recent illustration of Smith’s justified suspicions, Martin Vander Weyer, author of 'Falling Eagle: The Decline of Barclays Bank' (Phoenix), writes a review in the Daily Telgraph, 24 August 2005, of “Lords and Liars” by Christopher Mason, under the heading of “The fine art of bad behaviour” (the intended pun justifies itself in the review):

“The facts of what Christopher Mason calls "the Christie's-Sotheby's conspiracy", the
commission-fixing deal struck between the chief executives of the world's two leading
fine art auction houses in the back of a parked Lexus at New York's JFK airport in
February 1995, are not in doubt and have been published numerous times, though never
before with such a rich underpinning of bitchy detail. The morality of the case, however,
is more obscure.”

How what happened could be thought to have been morally ‘obscure’ is beyond me.
The CEOs were found out for colluding against their customers interests. In Adam Smith’s
mind that was morally wrong and, I would suppose (we are all customers for much of our
daily lives) most of us would consider what they were doing was morally wrong, unless you
share a strange view that ripping of rich customers is acceptable along the lines of so-called
‘victimless’ crimes. Poor people selling heirlooms of windfall finds are cheated by these
Behaviours as much as rich people collecting them.

Martin Vander Weyer asks:

“Was what took place between the two firms really a major crime? Or was the case that eventually brought Sotheby's chairman Alfred Taubman to jail and its chief executive Dede Brooks to a six-month sentence of home-confinement an example of overzealousness in the American courts? Were the breakfast meetings between Taubman and his Christie's opposite number, Sir Anthony Tennant, at Taubman's Mayfair flat, anything more than a matter of civilised relations between the heads of two firms with adjacent interests? Or was it all a confirmation of Adam Smith's dictum, in The Wealth of Nations, that "people in the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices"?

There is little doubt that the meetings, social or otherwise, were aptly described by the quotation from Adam Smith’s “Wealth of Nations” (WN I.x.c.27). Nor is there any doubt that this was a conspiracy for substantial gain:

“The conclusion to be drawn from Mason's account is that the misbehaviour involved was certainly on a large scale: the criminal prosecutor's estimate of the amount that Sotheby's sellers were overcharged in commissions as a result of collusion between 1995 and 1999 was $44 million, and the two firms each coughed up damages of $256 million in a civil settlement.”

“Misbehaviour”? At $44 million! What in the reviewer’s scale of robbery constitutes a crime? One of the guilty, Al Taubman, owner of Sotheby’s, receives very sympathetic treatment from Martin Vander Weyer:

“Whatever else those hands could do, there is no doubt that Al Taubman loved his wife, loved the passport to high society that ownership of Sotheby's brought him, took little interest in the details of its business, and gave very generously to charity. To be guilty of naivety and social ambition hardly deserves a custodial sentence, and our final glimpse of him as an ailing 77-year-old, queuing in the cafeteria of a correctional facility in Rochester, Minnesota, is really rather tragic.”

All persons serving their sentences in jail are ‘tragic’, including all the other persons in their 70s, few of whom stole $40 million from their customers, or a fraction of that sum. Here too, we can see where Smith understood the feelings of sympathy of those contemplating the judicial outcome after the events leading to it, based on their humanity. These people should, says Smith:

“reflect that mercy to the guilty is cruelty to the innocent, and oppose to the emotions of compassion which they feel for a particular person, a more enlarged compassion which they feel for mankind” (“Moral Sentiments”, II.ii.3.7: 88-89).

Science Tests the Observable: Religion Invents the Invisible

In Brad Delong's Blog today (Brad Delongs Semi-Daily Journal) there is a superb sentence in the anti-evolution “disturbance” (to call it a debate is beyond the meaning of the word):

"Do facts have reasonable ranges, such that we can simultaneously argue that humans evolved, and humans were created? That science, the study of the observable, should encompass religion, the invention of the invisible?"

I do not always agree with Brad (he is bit too anti-Bush on all occasions over everything for me; no President, Republican or Democratic, is that bad), but as I do not vote in the USA it really is none of my business).

On science versus religion in the issues of evolution he is on the money in my view. Brad’s Blog on economics, commonsense and the decencies of life is very appealing and I always read his Journal each day.

Science and religion will never mix: the fact that the Sun and the rest circle the Earth was once an article of dogmatic faith among Christians; it could cost you your life to disagree, which is ridiculous.

Why should anybody die for a matter of fact, or indeed for one of faith, is beyond me. The fact that you believe one thing on the basis of your faith should not need to be endorsed by me for you to fell happy with your faith. If my endorsement is necessary there is something lacking in your faith. The fact that I believe your faith to be unfounded should not require that you abandon your faith; if it did, then there is something wrong with my view of the facts. I leave you to believe what you believe, as long as you leave me to my reliance on the facts.

The realisation or discovery that it is the Earth that circles the Sun, now confirmed by science, has not established that God does not exist, etc., and no scientific discovery would overcome any religious belief.

Hence, a person's faith is beyond facts. Why anybody needs more than faith to justify their religious beliefs is beyond me.

The first essay that Adam Smith wrote was: "The Principles which lead and Direct Philosophical Enquiries: illustrated by the History of Astronomy”, written, I believe from when he was a student at Oxford University (1740-46) from around 1744 to 1750, with occasional revisions all his life. He kept his manuscript by his bedside and it was one of the few essays excused the destruction he ordered to the rest of his papers (18 or more Volumes that his friends, Professors Black and Hutton burnt a few days before he died). They published it in 1795 (it is reprinted in “Essays on Philosophical Subjects” by the Liberty Fund, available from Amazon, etc.).

Why did he keep it? I believe because it was a symbol of the time when he lost his faith in the Christian religion and decided to become a philosopher rather than a Minister in the Church, his intended vocation up to 1744.

Those attempting to impose a return to faith-based teaching in a nation’s schools should read Adam Smith’s essay in respect of the history of astronomy. Their predecessors who hounded Galileo should be a stark reminder that religious beliefs about the material world they live in are not based on science, but on faith, which can be fundamentally wrong, as science continues to test reality with the process of disproving hypotheses about reality. There is no way you can test an article of faith; you can test every scientific statement, and nothing is lost be one hypothesis being disproved and replaced with another (except, perhaps, the feelings of those who turn an hypothesis into an article of faith and act like it is ‘must be true’ because they believe it to be true).

As Brad puts it:

“science, is the study of the observable, … religion, the invention of the invisible.”

Visible Improvements Beat Invisible Hand Metaphors

It is unfortunate that when someone is arguing a good case for something that Adam Smith would have been a sympathetic supporter, that the author of the excellent ideas quotes from Smith incorrectly. This creates a small dilemma for Lost Legacy:

Should we let the incorrect attribution to Smith go by without comments, or should we treat it in exactly the same way as we would if the author had been arguing for non-Smithian ideas?
The best way to help address the dilemma is to present the case and let you decide for yourself. My answer is given in what I say below.

I refer to an article in the Financial Express, Mumbai, India, 23 August: “Let all professional colleges set own fee structures: institutional subsidy can be given to those who cannot afford” by Parth J Shah, President, Centre for Civil Society, Delhi.

In the course of his argument for the right of colleges to charge appropriate fees, and not to be told what fees to charge by government, which a recent court case in India has decided in favour of the freedom of colleges to charge, the author says:

“The power of Adam Smith’s ‘Invisible Hand’ is finally understood. A proper framework rules of the game is necessary for the Invisible Hand to work. As Smith demonstrated, the institutions of private property and free competition are sufficient to align individuals pursuit of self-interest with social interest. Once fair and transparent rules are instituted, the Invisible Hand would work in the education sector also.”

Now, as regular readers will know that is not what Adam Smith said in relation to the invisible hand. He meant no general statement about markets, or self interest, or even that the metaphor of the invisible hand applied in all situations.

The metaphor of the invisible hand was used by Smith only three times (he took it from Shakespeare: Macbeth: Act 3, scene 2: ‘thy bloody and invisible hand’). His first use was in reference to pagan superstition (the ‘invisible hand of Jupiter’, the pagan god, Jove, not the planet); his second was in relation to the Feudal Lords being led by an invisible to supply their retainers and serfs, upon which their power rested, in roughly the same proportion to what they would have received from their own plots of land if they had had any from the land being divided equally; and lastly, in the preference of traders and manufacturers being led to locate their business locally rather than abroad, which led to the faster growth of national income.

In no case were these uses directed at markets, or at the self interest of individuals always being benign; it could lead to malign outcomes too, as when ‘merchants and manufacturers’ were led by their self interest to erect monopolies, impose restrictions and raise monopoly prices against consumers.

Smith believed that he best antidote to monopoly price fixing is not government regulations and interference in pricing decisions, but legislation to promote competition. Hence, if a college charges higher fees than another (neither being subsidized) than it has to produce a better quality of education to continue in business.

That Parth J Shah understands this is clear from his article. He should stick to making that point and not bringing in the invisible hand which refers to something else.

In my first teaching job on leaving University as an economics graduate was in a college which among other things delivered a non-degree course, the Diploma in Management Studies (DMS). The state fixed course fees. The DMS programme in the region was set at a low fee of few pounds per term, and it was a very popular programme. The college I taught at raised the DMS fee to £30 a term (with permission from the authorities who took the view that the College was going to find no takers when they could get the DMS course elsewhere at a third of the price).

The outcome? The College soon had the largest DMS programme in the region, with attendees from the whole region and not just from the local town. Why? Quality counts. It had fulltime teachers on the programme; it brought in guest lecturers from regional employers; it had clear rooms and proper chairs and desks; and carpets on the floors, with pictures on the walls. And the large surpluses earned from the courses went to funding other courses, and, eventually, the rent of a large building with large grounds that was furnished to a high standard. Most of the other DMS courses at low fees at other colleges continued.

Allowing local colleges to set their own fees, arrange their own scholarships and bursaries, and to compete on quality would do wonders for college education in India. It only requires the freedom to do so; no invisible hand is needed. Just visible good marketing sense, without unnecessary government interference.

That way, students, and their employers, signal what they approve of and poor schools go out of business - or, better still, improve themselves without requiring money from taxpayers.

William Wallace and Adam Smith

In a spirited piece, “Scotland: Seven Centuries After William Wallace” by Lawrence W. Reed, in Mackinac Centre for Public Policy Michigan 23 August, about aspects of Scottish history, heavily influenced by “Braveheart, the film, the author links his theme to Adam Smith and David Hume, and exhibits more than a trifle of poetic licence.

Lawrence Reed writes: “Wallaceite rugged individualism was apparent in the ideas of the Scottish Enlightenment, which produced Adam Smith, David Hume and other 18th century thinkers committed to ideas of limited government, self-reliance, freer markets and personal freedom.”

Stirring stuff indeed. What he attributes to Smith and Hume is correct but whether these ideas meant the same to William Wallace and the men he worked with and against is not so clear.

Never forget that Scotland was a fractious clan society at the time (13th century), with bitter feuds and outrageous betrayals on a grand scale, and living standards to match. A night out in the open near winter in the Highlands would soon cure romantic notions of a happy playground for neighbourly clansmen and their families, not shown in the film.

Adam Smith regarded the Highlands and their communities as backward savages in the 18th century. He opposed Jacobites and their tendency to rebellion against the union of Scotland with England, as had his father during the fateful shenanigans of the dissolution to the Scottish Parliament in 1707 (where gold and trinkets played a larger role in securing the vote than did stirring beliefs in freedom, as did in Wallace’s days in his dastardly betrayal to the English King by fellow Scots).

On the 1745 rebellion he noted that several thousand

"naked and unarmed highlanders took possession of the improved parts of this country without any opposition from the unwarlike inhabitants. The penetrated into England and alarmed the whole nation, and had they not been opposed by standing army they would have seized the throne with little difficulty. 200 yeas ago such an attempt would have roused the spirit of the nation. Our ancestors were brave and warlike, their minds were not enervated by cultivating arts and commerce, and they were ready with spirit and vigour to resist the most formidable foe.” (Lectures in Jurisprudence, 540-41)

It is clear which Scotland Smith preferred to live in, though like all Scots he respected the figures of the past. He just didn’t think there was any role for them in a modern world. Nor did David Hume, a gentle man in all things.

Addition to the Literary Edinburgh tour notice this week-end:

A correspondent has reminded me that Adam Smith was critical of the design of David Hume’s tomb, for which David Hume had left £100 in his will for its design (by Robert Adam, the still famous architect with buildings in Edinburgh and London), and for its construction. According to Ernest C. Mossner, Hume’s biographer, Smith commented:

“I don’t like that monument. It is the greatest piece of vanity I ever saw in my firned Hume” (Mossner, 1980 (2nd ed). The Life of David Hume, Clarendon Press, Oxford, p. 438.

Smith’s tomb was also designed by Robert Adam.

Details from: Ross, I. 1995, The Life of Adam Smith, Clarenden Press, Oxford, p 302
(Added 22 August 2005)

Self Command a General Not a Male Only Virtue

Another piece from the Scotsman (no, I do not have any shares in The Scotsman, though I admire its editorial lines on the economy, public and private, and on general political issues). This time it is on that age-old debate about women versus male influences on behaviour. Kirsty Milne’s article is occasioned by the recent death of a popular woman politician, Mo Mowlam, aged 55. My interest is in her reference to David Hume and Adam Smith:

“For we have been here before. The 18th century experienced a vogue for "sympathy" or fellow-feeling, explored by Scottish Enlightenment thinkers such as David Hume and Adam Smith. The smash hit of 1771 was The Man of Feeling, by the Edinburgh lawyer Hector Mackenzie, featuring a male hero whose sensitivity was attested by frequent bouts of tears. The fashion produced great uneasiness, with calls for a return to Roman or Spartan self-denial and self-command. The two sisters in Jane Austen's Sense and Sensibility, one spontaneously emotional, the other prudent and careful, play out this tension in fictional form.”

Yes, one could refer to Scottish Enlightenment philosophers, Hume and Smith (why not Francis Hutcheson too?) as being interested in ‘human sympathy’ (though it was hardly a general ‘vogue’). Smith was interested in what caused virtues to be practised and why they were applauded. (See my blog piece on Adam Smith’s Philosophy, no 1, earlier this month). But Kirsty Milne goes on to speak of a counter-reaction:

“The fashion produced great uneasiness, with calls for a return to Roman or Spartan self-denial and self-command.”

This is strange. Smith always included the Stoic virtue of self-command in his set of moral sentiments. He saw no contradiction between sympathy (through the Impartial Spectator) and self-command (which he praises in “Moral Sentiments” in several places). Adam Ferguson, among others, tended to lean towards worrying about martial virtues and their decline in a commercial society (he was from close to the Highlands and served as Chaplain to the Black Watch for many years before becoming an academic), but this did not appeal to Adam Smith or David Hume.

I think the counter-poising of feminine and male psychology (as discussed in the rest of her article over a kafuffle among John Buerk and the usual suspects in journalism) is a harmless source for a few paragraphs, but ought not to be taken too seriously.

Still we can all agree on the loss of the decent Mo Mowlam to public life.

Take a Walk in Adam's Footsteps

I am often asked by correspondents and students intending to visit Edinburgh for the first time, what should they look for and where should they look for it. I always recommend a visit to the grave of Adam Smith, though with some reticence as it has been sorely neglected over the years, and perhaps a look at the Panmure House, off the High Street, where he lived with his mother and his cousin in his last years (all three died there).

There is talk of the grave site being cleaned up and of a statue to Adam Smith being erected and sited opposite where he worked (uselessly) as a Commissioner of Customs. The money for cleaning the grave site has been offered by a private person and it is going the rounds in the usual bureaucratic labyrinth. The statue is under the careful management of the Adam Smith Institute (www.adamsmith.org) who are seeking donations for its cost and upkeep. You might also wish to read their daily blog: (www.adamsmith.org/blog)

However, in today’s “Scotland on Sunday” (part of the Scotsman group), there is a feature announcing publication of a book on the local scene in respect of many famous writers who have worked here (The Literary Traveller in Edinburgh by Allan Foster, Mainstream Publishing, £12.99 www.mainstreampublishing.com).

I have extracted some short entries of those associated with Adam Smith to give you a flavour of a short tour you could undertake, all within walking distance. Purchase the book; a good read. Allan Foster knows his literary Edinburgh and is a fine writer too.

1 ROBERT BURNS Lady Stairs Close (was Baxter's Close)
THE most celebrated of Scottish poets. Following the success of the first edition of his poems in July 1786, the Kilmarnock edition of Poems Chiefly in the Scottish Dialect, Burns was eager to return to print as soon as possible. But the Kilmarnock printer insisted on full payment in advance. Unable to pay, he tried for a second edition in Edinburgh, living in Baxter's Close, off Lawnmarket. In his pocket Burns carried a sheaf of introductory letters from the Masonic brothers back in Ayrshire, and within a week, doors opened and his star began to rise.

[Smith and Burns met at meetings of the Masonic lodge in Edinburgh. Burns read Smith's "Moral Sentiments" and it inspired his poem To A Louse].

2 DAVID HUME Riddle's Court (was Land), 322 High Street
SCOTTISH philosopher, historian and political thinker's first permanent Edinburgh home. It was in this house that Hume wrote his Political Discourses (1752) and started on his monumental History of England (5 volumes, 1754-62) and An Enquiry Concerning Human Understanding (1748). In 1753, he moved to Jack's Land, now renumbered 229 Canongate, where he lived for nine years, and where he completed his History. He lived out his life as a man of letters on the corner of St Andrew Square. He is buried in Old Calton Burial Ground, Waterloo Place.

[Smith and Hume were close friends and correspondents from 1749-1776, when Hume died.]

3 DR JOHNSON Boyd's Inn (now Entry), Canongate
THE point at which Dr Johnson arrived in Edinburgh in 1773. On Saturday, August 14, 1773, James Boswell received a note at his house at 501 James Court, off the Lawnmarket, that Dr Samuel Johnson had arrived at Boyd's Inn at the head of the Canongate. Johnson had come to Edinburgh to begin his tour of Scotland and the Hebrides, a journey which would eventually produce two classic works: Johnson's A Journey to the Western Islands of Scotland (1775) and Boswell's Journal of a Tour to the Hebrides (1785).

[Smith and Johnson met but never got on well together; Smith had critcised Johnson's dictionary in the Edinburgh Review in 1755; James Boswll attended a series of Smith's Moral Philosophy lectures at the University of Glasgow and tried to reconcile Smith and Johnson over the years.]

4 CANONGATE KIRKYARD Grave of Adam Smith
ADAM Smith (1723-90), Scottish philosopher and economist. Best known for his influential book The Wealth of Nations. Born Kirkcaldy, Fife, he is regarded as the world's first political economist.

[Don't miss a visit Smith's residence in Panmure Court, off the High Street, a couple of hundred yards from where he is buried.]

14 SIR WALTER SCOTT AND ROBERT BURNS Sciennes Hill House, Sciennes House Place
FIRST and only meeting of Walter Scott and Robert Burns. Scott met Burns only once in his life: when he was a lad of 15 in 1786-7, here, the residence of philosopher and historian Adam Ferguson. A plaque on the restored remains of the mid-18th-century Sciennes Hill House (aka Sciennes Hall) commemorates it. Partly demolished in 1868, it is the back of the original house that faces the street today, and the modified front faces the rear. Originally, it was the home of Robert Biggar, who lost his fortune after investing in the Darien Scheme.

[Robert Burns as above. Adam Ferguson had a rocky relationship with Adam Smith; he was also a friend of David Hume. Ferguson and Smith socialised over the years, on and off, about what is not clear, though it may be to do with accusations from Ferguson that Smith had 'borrowed' his ideas from others (see the appendix in 'Adam Smith's Lost Legacy'). Ferguson set the differences aside when Smith was dying and attended him in his last days.]

There are Regulations and Regulations: some help, others hinder

Adam Smith’s name is dragged into debates on all manner of issues, not always to good purpose. In today’s The Financial Express, 21 August 2005, in Daka, Bangladesh, is a clear example of an incorrect use of his name for a purpose to which he may not have been happy to be associated. Morgan Witzel writes in defence of regulations introduced by governments on business. He begins by citing Adam Smith’s defence of the Cromwellian ‘Navigation Acts’ in “Wealth of Nations”:

“Why red tape should not be dismissed as a company killer”
By Morgen Witzel

“Even Adam Smith, whose Wealth of Nations is regarded as the gospel of free markets, conceded that some regulation may be necessary. Writing in 1776, he supported the retention of the navigation acts, which barred foreign-registered vessels from landing cargoes in British ports, as he felt that the British merchant marine required protection; repealing the acts would allow British shipping companies to be undercut by foreign competitors.”

Some errors amidst the facts cited. I will ignore the usual hyperbole about “Wealth of Nations” being a “gospel of free trade” (historical curiosity: why so many allusions to ‘gospels’, ‘high priests’ and ‘disciples’ in reference to Adam Smith?) and move on to eagerly endorse the view that Adam Smith was not opposed to State regulations – he did not have to ‘concede’ this view – it was central to his approach.

Smith in Book V of “Wealth of Nations” favoured state investment in defence (the ‘first duty of government’); justice (without justice society would ‘crumble to atoms’); public works for projects beyond private finance (roads, canals, harbours and bridges); education of youth (a school in every village) and health (eradication of loathsome diseases). Given the scale of expenditure required to have met this public spending programme, Smith was not automatically against large scale government activity. He was not an ideologue for ‘free markets’ and did not advocate laissez faire.

Morgen Witzel’s reference to the Navigation Acts needs clarifying. Britain is an island not a continent. The Navigation Acts, while using commerce as the vehicle for implementing them, were more to do with the defence of Britain (or, rather, England originally from Cromwell, mid-17th century, to the Act of Union between England and Scotland, 1707). Britain’s overseas trade required shipping and shipping required the instruments of defence, such as ships and, crucially, experienced seamen, lots of them, who could be mobilised in times of war.

Throughout the 17th and 18th centuries Britain fought several wars and the Navigation Acts provided the necessary naval resources for Britain to prevail. Now, I do not doubt for a moment that commercial interests also saw a gain for themselves in applying the Navigation Acts with vigour. It gave them a monopoly of sea trade to and from Britain. And like all commercial monopolies this diverted income to sea commerce at some expense to other home trades, and of course consumers.

Its economic cost to the UK was to ‘buy foreign goods dearer and sell domestic goods cheaper’. Smith recognised this and stated: ‘Defence is of much more importance than opulence’ (“Wealth of Nations”, Book IV.ii.30: 464-5). The ‘protection’ that Smith considered British shipping to need was not ‘trade protection’ as Morgen Witzel suggests; it was military protection (against the Dutch at the time). He did not endorse the Navigation Acts to develop the British economy; it was to survive if Britain was blockaded by a superior naval force.

Smith also favoured government regulations in the Mint, the Post Office, Assay services and Hallmarks for gold and silver; and such like.

Morgen Witzel writes:

“Much regulation is designed to protect business, not to crush it. Regulations and laws against corruption, restrictions on the formation of cartels and monopolies, regulations that require companies to deal fairly and honestly with their customers and employees, have the intent of ensuring fair competition and preventing unethical behaviour.”

Wrapping up such a list is commendable but as I am sure businesses in Bangladesh (and India and Pakistan) well know, the proliferation of regulations, permissions, licences, endorsements, official stamps and hosts of petty paperwork, common in these countries is neither benign to business (they add to costs, not revenues) nor do they prevent unethical behaviour’. Quite the reverse in the latter case. Wherever they exist they promote corruption, on a wide scale and at all levels. If you seriously wish to reduce corruption and unethical conduct, scrap at a stroke all these petty permissions, collect all the rubber stamps in and burn them, abandon all licences and the need for the endorsement of officials. These are the keys to private bank accounts for those tempted (often by low official pay) to become informal tax collectors for themselves.

Lastly, advice that should not be followed:

“The European Union's information and consultation directive, which comes into force this year, requires companies to consult their employees formally on a broad range of issues ranging from pay and conditions to strategic decisions.”

This is the antipathy of what Smith would advise. It is the European Union at its worst. Entrepreneurs do not need such regulations in Europe and neither do they in Bangladesh. Think of the opportunities for delaying decisions until managements ‘incentivise’ employees so that they can proceed with their ‘strategic decisions’!

Good regulations, yes; bad regulations, no.

Smith, Keynes and Greenspan

From today’s “Detroit News” a piece praising Adam Smith’s ideas (excellent) but gets part of them upside down (not so good). The intentions of the author are commendable, but as we know from the law of unintended consequences, things happen ‘betwixt cup and lip’.

“America benefits from the wisdom of Adam Smith” By Thomas Bray, The Detroit News, Sunday, August 21, 2005

Thomas Bray writes:

“… last February, no less than Alan Greenspan paid a remarkable homage to Adam Smith in a lecture in Kirkaldy, Scotland, Smith's birthplace.

"Emperors and armies come and go," Greenspan noted, "but unless they leave new ideas in their wake, they are of passing historic consequence. The short list of intellectuals who have materially advanced the betterment of civilization unquestionably includes Adam Smith."
So far so good, indeed, much better than good, excellent, full marks and could not be improved, for Adam Smith would be in any ‘short leet’ (as we say in Scotland) of those who have advanced civilized values for the betterment of millions."

But then, calamity. That old problem that American academics do not seem able to overcome, the invisible hand re-appears and gets completely mixed up with self-interest in a manner that Smith never said, never meant and never intended.

Thomas Bray continues:

“Smith argued that the "invisible hand" of self-interest, if allowed to work, would promote the public good by leading individuals to invent new products and processes, employ more people and steadily grow more productive. "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest," Smith famously asserted."

The quotation is correct – Smith did famously assert it, but not quite as Thomas puts it. As for the ‘invisible hand’, the metaphor, used sparingly by Smith (only once in “Wealth of Nations”)and not as a general rule in respect of self interest, which, as Smith was at pains to point out could and did lead ‘merchants and manufacturers’ into the self-interested economic crimes of monopoly, restrictions on supply and high prices to earn high profits at the consumers’ expense, and, therefore, cannot be made to ‘assert’ what Smith did not say.

The self interest of the ‘butcher, the brewer and the baker’ leads them to prepare our supplies for dinner, but that is only part of the equation. There is our self interest too. And Smith’s quotation in context is not saying that that is the end of the matter – it is only the beginning. ‘Self love is insufficient’, said Smith. The mechanism for making it sufficient is found in his other famous quote: the ‘propensity to truck, barter and exchange.’ The alignment of the self interest of the parties to a transaction comes about through their bargaining: what they give up to get what they want.

Smith explicitly cautions readers not to rely on explaining why it is the readers’ self interest for the ‘butcher, the brewer and the baker’ to supply readers with their dinners. That would never do in a Smithian market: he exhorts readers to explain to the ‘butcher, the brewer and the baker’ why it is their self interest to supply readers with their dinners. And the device for mediating these conflicting self interests (readers preferring lower prices for their dinners and the ‘butcher, brewer and baker’ preferring higher prices in exchange for meat, beer and bread) is bargaining over prices, or the price system.

When bargaining results in an exchange of money for dinners the self interests of the parties are met and each party to the transaction has voluntarily adjusted their offer prices and supply prices to the identical price. If they left it to their own self interest they would never come to a deal. Bargaining mediates the discrepancies between the prices preferred by buyers and sellers. ‘Self-love is insufficient’ to do so.

Thomas Bray concludes:

“Nonetheless, intellectuals and politicians forgot about Smith. They rushed to embrace Keynesian theory, whose near-mystical complexities allowed them to believe government could stimulate the economy to even higher performance. Alas, most of their imagined improvements turned out to have counterproductive long-term effects. As a result, Smith is getting a fresh hearing, as the Greenspan lecture suggests.”

I was an economics student during the high-tide of Keynesian economic theory (though I did not find it ‘near mystical’; just unworkable in a full-employment economy because it led to inflation). Bray is right though: Keynesian economics as interpreted by politicians led to it being abandoned.

My concern is that if ‘Smith is getting a fresh hearing’, which version of Adam Smith is being listened to: what those who purloined his legacy say he advocated (the nonsense of the laissez faire version) or what he actually wrote about and advocated in “Wealth of Nations”?

Hell Lost its Bite; Heaven its Lustre

“God before and after Darwin”

Before Darwin shows why he was not the first to find a divine watchmaker scientifically and religiously comforting. By Ashton Nichols (August 19, 2005)

Before Darwin: Reconciling God with Nature. Keith Thomson. New Haven, Conn.: Yale University Press, 2005. 314 pages. $27.00 hardback.

You will already know that there is a acrimonious ‘debate’ (using ‘debate’ in its loosest sense) in progress, if that is the right word for a subject that is long past its best days, which were already closing down when Adam Smith, David Hume and others had to work under the ever-present threat of persecution by zealots – if an idea is enforced by vigilantes through intimidation and tyranny, its best days are nearly done and are prelude to its last days.

The contestants, Intelligent Design (a.k.a. creationism) versus Evolution, are at it all over the USA, and possibly Australia, if it is true to form; a minority of impressionable Ozzies tend to pick up on silly nonsense from across the Pacific. I am not going to get into the kafuffle here; my unpublished, as yet, “Pre-History of the Deal”, which needs a little work on it, takes an evolutionary look at the history of bargaining, so you may guess which side I write on.

However, reading as I do books and reviews of books outside of my field of political economy, from The Times Literary Supplement and elsewhere, I occasionally come across gems that link (in the loosest possible sense) indirectly to Adam Smith. One such, is a review by Ashton Nichols of Before Darwin: Reconciling God with Nature by Keith Thomson, New Haven, Conn.: Yale University Press, 2005.

In the review (in Science & Religion) there is a description of Charles Darwin’s status as a ‘synthesiser’, which seems to me an apposite description of the role of Adam Smith and his predecessors, though I believe that Darwin was being overly modest describing himself solely in the vein (and so would Adam Smith if he had done so):

“Charles Darwin is clearly the Copernicus of the modern era. No other scientist (not Einstein or Crick) and no other thinker (not Marx or Freud) comes close to the lasting impact that Darwin has had on our sense of ourselves and our place in the world. At the same time, like many other great scientists before him, Darwin admitted that he had very few original ideas. He was more of a synthesizer, one who brought together the ideas of others and the insights of several centuries into a unified field theory of life: a testable, repeatable set of observable hypotheses which have stood the test of two centuries. Darwin’s ideas and their applications are now virtually transforming our daily lives and the lives of countless living things around us. Think genetically modified food. Think artificial intelligence. Think cloning.”

The reviewer also makes an interesting comment on David Hume, Smith’s close friend (whom he let down badly, in my view, when Hume was dying, the details of which are in “Adam Smith’s Lost Legacy”). It is the best one paragraph summary of David Hume’s views on belief in a Deity (on the same subject that Smith went out of his way to avoid committing to Hume that he would see to it being published after Hume’s death):

“As Thomson reminds us, the Scottish philosopher David Hume literally emptied the churches of England with two simple questions. If we can believe in any being that we cannot see (a dragon, an alien, a God), then surely it is just as easy not to believe in that being? Similarly, miracles in every religious tradition — Christian, Buddhist, or Hindu — resolve themselves into a simple question: is it more likely that the laws of nature (hitherto so absolute and eternal) have been suspended for an instant, or is it more likely that one human being has told a lie? In Hume’s view, the Christian God could not have existed when the Egyptians were worshipping only Ra, or the Greeks were worshipping only Zeus, since all of these monotheistic deities are mental constructs, just as all of the polytheistic gods were. For Hume, Lazarus was resuscitated by a supremely wise doctor and teacher, just as we now resuscitate dying people simply by breathing into their lungs, in countless hospitals every day, whatever religion we practice or do not practice.”

I should say that Thomson, the author of “Before Darwin”, exaggerates about Hume’ emptying the Churches’, but we get the idea – over time, others asked the same questions about ‘miracles’ and the rest, and thus began the decline in threats of Hell’s fire and promises of Heaven, until they lost their bite.

Postscript: I should have mentioned when commenting on Smith's 'synthesising', that Professor Salim Rashid (University of Illinois) would not agree with my assessment. He argues that Adam Smith was an outright plagiarist (see Salim Rashid: "The Myth of Adam Smith", Edward Elgar, 1998). Hence, in his view, Smith went beyond synthesising by not acknowledging his intellectual debts to several 17th and 18th-century pamphleteers. This is not the place to pursue this issue, but I believe Salim Rashid's assessment is problematical and he exaggerates the case. I assess these issues in the book on Adam Smith I am writing at present for Palgrave's Great Thinkers in Economics series. Needless to say, perhaps, Professor Rashid is a very knowledgeable contributor to studies of Adam Smith's work and his views require a proper consideration, and an answer if they are not accepted.

Benefits of Outsourcing and the Myopic Visionaries

From Budapest (apologies - the source was accidentally deleted)

Matthew Higginson in an article “Knowing why, how, when and what to outsource”, quotes economists’, Mary Amiti and Shang-Jin Wei, who argue in a 2004 IMF paper on outsourcing, that there is nothing new in the concept:

“The growing outsourcing of services in industrial countries is simply a reflection of the benefits from the greater division of labor and trade that have been described for manufactured goods since the time of Adam Smith and David Ricardo.”

The main difference is that the division of labour through outsourcing is now encompassing services, which labour sees as moving jobs from a higher wage economy to lower wage economies. The idea that no work should be outsourced to a lower wage economy until wages in that economy are comparable to the wages of the higher wage economy, plus all the attendant add-ons in health and safety regulations, health and pension benefits, and such like, is at best a hopeless utopian requirement and at worst a reactionary anti-development stance. That trade unions are among those clamouring for such draconian measures should not surprise anybody because unions exist to enhance the wages and conditions of their members only and their veneer of international solidarity often runs shallow when their members’ interests conflict with the interests of foreigners.

Of great relevance in this debate, the classic paper by Ronald Coase, “The Nature of the Firm”, 1937, is probably the best source for understanding it. Work remains inside the firm while the transaction costs of its organisation remains lower within the organisation than the costs of the acquisition of goods or services outside the firm from markets. Suppliers of outsourced services can achieve economies from supplying such services to several customers, a market which is unreachable for in-house departments whose expenditures, capital and labour, are spread heavily on the organisation’s local requirements.

When a firm finds that the costs of an outsourced service (wages, management plus the outsourced form’s profit element) exceeds the internal costs (wages, overheads, transaction costs), the outsourcing option becomes viable. The difference in wage rates may only be one factor in an outsourcing decision, and may not be a permanent factor, as wages in lower wage sectors and countries tend to converge, particularly when the labour moves into highly skilled and better trained jobs. Outsourcing between firms in the same economy is already a feature of the division of labour. Specialist firms gain from economies of scale (breadth and depth) and wage differentials may be non-existent.

Outsourcing between countries with different current levels of development is part of the process of development. As the developing country receives high-tech outsourced jobs, its lower wage levels also begin to rise, which raises its ability to pay for imports from other economies, including from developing and developed countries.

These are benefits of ‘globalisation’, which affluent demonstrators march against; it seems the ‘myopic visionaries’ are always with us.

Pessimism from the Guardian

Larry Elliott, Economics Editor of The Guardian, Thursday August 18, 2005 writes in “Edwardian summer: welcome to the second age of globalisation, and the labour practices of Victorian mill owners’:

“History does not always repeat itself. It may be different this time, with the second age of globalisation avoiding the pitfalls of the first. There are those who point out, rightly, that modern industrial capitalism has proved mightily resilient these past 250 years, and that a sign of the enduring strength of the system has been the way it has apparently shrugged off everything - a stock market crash, 9/11, rising oil prices - that has been thrown at it in the half decade since the millennium. Even so, there are at least three reasons for concern. First, we have been here before. In terms of political economy, the first era of globalisation mirrored our own. There was a belief in unfettered capital flows, in free trade and in the power of the market. It was a time of massive income inequality and unprecedented migration. Eventually, though, there was a backlash, manifested in a struggle between free traders and protectionists, and in rising labour militancy.”

In what I suppose is a typical apocalyptic tone from Larry Elliot (he does write for the Guardian after all) we really get a miniscule listing of economic problems to frighten us into panic. A graduate in history from Cambridge (what are they teaching there – certainly not a sense of balance from weighing the evidence against the scale of the alleged problem?) he thinks 250 years of capitalism is fairly tested for its resilience by a ‘stock market crash’ (these have happened on similar and larger scales to the most recent episode many times before – not even 1929 did lasting damage); by the ubiquitous ‘9/11’ – please, let’s keep our perspective here – two large buildings were destroyed and cost 3,000 lives; meanwhile tens of thousands, sometimes hundreds of thousands, die in earthquakes and other ‘natural’ disasters, without destroying the world’s economy; and now, pause for trumpets, we have a rise in oil prices to $65 a barrel and rising still. It would have to rise to twice that to equal the great OPEC hike of the 70s, and that did not destroy the world economy either.

The last ‘age of globalisation’ was accompanied by ‘a struggle between free traders and protectionists’ and the entire history of commerce in the modern era always has been accompanied by the ‘titanic’ struggle between these two polar opposites. Adam Smith joined battle in the 18th century against what he called ‘mercantile political economy’, a battle that went on throughout the 19th and 20th centuries; so its continuation into the 21st (and probably the 2nd too), should not surprise anyone.

For those interested, the clearest expression of mercantile political economy, outside “Wealth of Nations” is found in Frederich List’s “The National System of Political Economy” (1841), except that List promoted mercantile policies, allied to State power, while Smith opposed them. Reading the history of economic thought calms the nerves of those who come at it as if mercantile versus free trade is new phenomenon. It is not new and would not ‘frighten the French’, as my mother-in-law used to describe anything (not much)that shocked her.

Larry Elliot continues:

“Second, the world is traditionally at its most fragile at times when the global balance of power is in flux. By the end of the 19th century, Britain's role as the hegemonic power was being challenged by the rise of the United States, Germany and Japan while the Ottoman and Hapsburg empires were clearly in rapid decline. Looking ahead from 2005, it is clear that over the next two or three decades, both China and India - which together account for almost half the world's population - will flex their muscles.”

His first sentence is very true, as I was discussing here earlier this month in respect of a discussion that took in Organski and Kugler’s thesis (‘The War Ledger’, 1980, University of Chicago Press). It is his last sentence that caught my attention; good old panic mongering of the kind fuelling the protectionist drum beats (still distant) in the USA.

Note the vague threat: “both China and India - which together account for almost half the world's population - will flex their muscles.” Yes? But what precisely will they do? Invade America? Each other? Or who? And to what ends?

They are now in a trap of their own making. Being nuclear powers they have become entangled in the same stalemate we had in the Cold War. Unable to exercise their military power against a nuclear power they have to find a way of living with other nuclear powers. The alternative is too fraught to contemplate.

I expect they will become more independent in their pronouncements at the United Nations, but they have done that for years to no effect. Remember the ‘non-aligned’ movement, which was always an inconvenience, but nothing more, during the Cold War to the NATO countries? So what then is the threat from them of the next ‘two or three decades’.

Larry Elliot does not say. We are left to fill in the worst scenario that our mood of panic induces. I do not intend to lose any sleep over it, and neither should you.

Flat Tax Fibbing (by omission) from the Treasury

I read the ‘Daily Telegraph’ everyday, mainly to have a laugh at the ‘Alex’ Cartoon which I have followed since it began in the ‘Independent’ and then switched, presumably for a better deal, but probably because ‘Alex’ and ‘Clive’ were more likely to find sympathetic readers in the ‘Daily Torygraph’. Also anything by John Keegan is good value (from my Cold War days).

Today (19 August) there is a article by George Jones and George Trafgarne reporting on how the Treasury heavily censored an internal paper on the Flat Tax for public distribution. The censor’s black pencil altered the drift of the original Treasury paper from one that gave the case for and against Flat Tax reform into one that merely gave the case against. That seems to me somewhat unsatisfactory. The Treasury has been caught out in what amounts to political ‘fibbing’.

Some extracts are appended (but do read the full copyright article in the Daily Telgraph at www.dailytelegraph.co.uk):

“The Treasury has suppressed arguments in favour of introducing a flat tax - a radically simplified system charging the same rate on all income - documents passed to The Daily Telegraph show.

Part of a two-page section that was removed says: "The reduction in rates and thus the tax burden faced by individuals should, in theory, stimulate further economic growth" and would establish "a one-off virtuous circle from tax cuts to economic growth to tax revenue".

Hong Kong has had a flat tax of 16 per cent since 1947. President George W Bush's advisory panel on federal tax reform is examining the system and Angela Merkel, who is challenging Chancellor Gerhard Schröder in the forthcoming German election, has hired a leading flat tax advocate as her economic adviser.

The censored document originally published by the Treasury gave prominence to what it identified as the many difficulties involved in introducing a flat tax.

It described as "misleading" claims that it would improve levels of compliance because there would be less reason to evade taxes. It said the evidence that flat taxes would raise revenues was "at best mixed" and questioned whether increases in Russia's tax revenues could be attributed to the introduction of a flat tax of 13 per cent.

Flat tax rates are usually accompanied by a large personal allowance and the Treasury highlighted research by the Adam Smith [www.adammsith.org] think-tank that a flat rate of 22 per cent, with a universal £12,000 personal allowance would cost about a third of income tax revenues.

The complete report says that the combined effect of savings in compliance and an increase in revenue should enable a cut in average taxes and spur further reductions in avoidance and evasion, making the economy more attractive to foreign investors and creating a mini-boom.”

Will anybody electable propose a Flat Tax reform in the UK? I share Adam Smith's pessimism about the prospects for Free Trade in the matter of Flat Tax reform - utopia is more likely to be established than the politicians adopt Flat Tax, which like free trade is a proven route to Smithian opulence for all, including and particularly, the 'common working person' and their families.

Second-hand Sales Help Growth Without Inflation

Yesterday, I discussed Mark Gilbert’s disparaging remarks about the second-hand Internet auction phenomenon, with e-Bay and its many competitors and how it had no effect on interest rate decisions.

Gilbert wrote:

“More than 50,000 Britons draw income from selling secondhand goods on Internet sites such as EBay Inc., the London-based Centre for Economics and Business Research said this week. Adam Smith's ``nation of shopkeepers'' is becoming a race of junk dealers. No wonder the U.K. economy is heading into the ditch.”

Today, another article on the same phenomenon gives an entirely different account of its impact, along with the billions (trillion?) of transactions paid by credit card over the net. This article is from Mella McEwan, Midland Report Telegram in mywesttexas.com, and what a dfferent account it gives, using the simple quantity of money identity (MV=PT):

‘The "eBay Effect": More resources introduced into financial system by Mella McEwan
One of the modern phenomena that we have observed within this framework is a notable increase in the velocity of money (V). Credit cards, debit cards, paying bills by phone and online, electronic transfers, and a host of other innovations have caused the financial system to become much more efficient. The result is that we can accomplish many more transactions (T) without increasing the money supply or prices. Much of our remarkable era of growth without significant inflation can be traced to this simple fact.

There is another part of this story, however, that to date has not been chronicled. I call it the "eBay Effect," although it is really much more than that. The idea is that, for most of our history, a substantial part of wealth has been tied up in assets that were not liquid (easily convertible to cash). While many of these assets, such as machinery, are essential to productivity and progress, this freezing of available funds was an impediment to transactions. If you had furniture, machinery, or almost any other "used" asset that you no longer needed, you had a difficult time converting it to cash. You might run an ad in the local paper or a trade publication; you might even hire a broker; but it was almost always a slow and expensive process. Because of this lack of liquidity, such assets were also difficult to use as collateral for loans. The money was pretty well locked up.

Those days are gone! With the advent of the Internet, online auctions and specialty sites bring millions of buyers and sellers from around the world together on a non-stop basis. The search cost for finding the right purchasers has dramatically diminished, and virtually everything has become a liquid asset. Thus, more things are acceptable as collateral, more things can be quickly and efficiently converted to cash, and the entire financial system gains efficiency. As a result, more transactions can be accommodated, which in turn provides growth without inflation.”

What a difference is made by a change in perspective! Mark Gilbert’s piece on Blomberg.com needs rapid revision.

Two Quibbles and a Recommendation

The Royal Gazette, Bermuda, 18 August 2005
Robin Stewart:

“Economies work best when people are allowed to get on with their lives, and in the wonderful invisible hand metaphor of Adam Smith, the motivating force of self-interest creates an unintended consequence of prosperity. That metaphor is the most famous example of illustrating that there is a marvellous economic order that operates efficiently without the designing hand of authority.”

In this paragraph in Robin Stewart’s Opinion article in the Royal Gazette, Bermuda, there is a great deal of good sense and in its basic contention there is historical accuracy. I agree with almost everything in the paper. Stewart’s account of the folly of Government ‘planning’ is so good it deserves wide circulation.

Hence, in quibbling with an aspect of it, I am not criticising Robin Stewart’s basic contention that markets, when allowed to work properly are a great boon to human civilisation. But if we let certain lapses along under the rationale that ‘we know what he means’ or ‘his main point is correct’, we join the drift away from Adam Smith’s legacy that ends in endorsing the drift that became a wholesale distortion of what Smith actually said. In short, we join the abusers of Adam Smith’s legacy.

At the risk therefore of being dismissed as a pedant or someone who has ‘lost the Smithian plot’ (because what Stewart is arguing against is far worse than the distortion of Smith) I shall plunge in with two points, one my usual attack on the misuse of Smith’s (or rather Shakespeare’s; Macbeth, 3.2: ‘they bloody and invisible hand’) metaphor of the ‘invisible hand’, and the other the problematic ‘quotation’ from a paper by Smith in 1755, but which unfortunately was destroyed before it could be examined.

First, the invisible hand: Stewart presents it accurately as an ‘unintended consequence’ of human motivation. That is how Smith used it in “Wealth of Nations” (page 456), in his case in respect of traders preferring to trade locally, where they could manage their investments, rather than abroad. This had the effect of raising national income faster than if they sent their capital abroad where it raised the foreign country’s national income. Note, this had nothing to do with markets: it was about the growth of national income, which was the purpose of his inquiry.

But then Stewart, in common with many other modern commentators, shifts the metaphor from annual national income due to the location of the trader’s investment, to that of “the market” generally. But that was not Smith’s point – for wherever the investment was located it would have the same effect of raising national income (all matters considered equal), but then different sets of people would benefit – either local people or foreign people. Remember. His book was about the wealth of nations, and not the wealth of the international community.

The twin sources of prosperity were the division of labour and the propensity to ‘truck, barter and exchange’ one thing for another. This served the absolute dependence of all on all, which was the driving force of markets.

No need for an invisible hand, sometimes called, in my view wrongly, ‘miraculous’, (there is a school of thought critical of Smith which accuses him of using a religious mysticism in the metaphor, something he never intended because he never used I in relation to markets). Stewart comes close to this adulation of a perfectly understandable operation when he calls it a ‘marvellous economic order’. There is nothing mysterious about markets; their functions are well understood.

Stewart’s second point of contention is slightly more complicated and would take an essay to thoroughly cover. Its background forms an appendix in my “Adam Smith’s Lost Legacy” (Palgrave Macmillan 2005) and is too long to cover here.

Robin Stewart writes:

“At the risk of irritating Mr. Hayward, Adam Smith I believe said it best:"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point are unnatural, and to support themselves are obliged to be oppressive and tyrannical."

However, the problem is that the person (Dugald Stewart – not Robin Stewart!) who read the quote into his celebration speech of the life of Adam Smith over two meetings of the Royal Society of Edinburgh in January and March, 1793, (Dugald Stewart was Smith’s biographer with that long essay speech), unfortunately had the only copy of Smith’s 1755 paper from which the quote was made, and, more unfortunately, Dugald Stewart’s mentally ill son is believed to have burned it, and it not longer exists. There is no recorded case of anybody else reading the paper, nor quoting directly from it. All quotes since have come from Dugald Stewart’s speech.

In scholarly terms we cannot confirm its authenticity, which is a pity. When it is quoted the author should always make clear the status of the speech (‘Adam Smith is believed to have said …’, etc.). It would be wonderful if a complete copy of the 1755 paper, attributed to Smith, could be found and published, the one that Dugald Stewart quotes from was probably the only copy made and was the one read to the Glasgow Club in 1755.

The Price Mechanism Will Adjust Behaviour

From Brad Delong’s Semi-Daily Journal, 18 August, comes a story from the New York Times showing the effects of world oil prices on bureaucrats within the Communist State apparatus in China both at the to, in Beijing, and nearer the ground in Guandong:

“Fuel Shortages Put Pressure on Price Controls in China - New York Times: Sudden shortages of gasoline and diesel in Southeastern China are reigniting a debate here: Is pressure from state companies, coupled with freely available information on oil prices, driving China to accept market forces faster than it may have wanted?

Dozens of service stations in Southeastern China, notably in cities near Hong Kong, abruptly ran out of fuel this week just as officials in Beijing were debating requests from domestic oil companies to charge more for diesel and gasoline. The shortages have produced long lines of angry motorists... disrupted some freight shipments.... Sinopec, the state-controlled oil company that dominates the refining of fuel in China, especially in Southeastern China, said late Wednesday that the shortages were a result of people stockpiling fuel now that they have enough information to bet on the direction of oil prices.... People in China today have much greater access to information about world prices than ever before, and as they see high world oil prices, they are topping off fuel tanks in expectation that China will soon raise domestic prices, Mr. Jia said. "They buy inventory for their own tank in the hope the price will be changing," Mr. Jia said. "People think the trend in China should be toward a price increase."

Interesting illustration of how world markets intrude into business decisions in a communist economy. Prices are set by the State Officials in Beijing, a long way from the hinterland of Hong Kong (itself a separate economic entity). In the absence of an upwards price adjustment, suppliers (managed by State officials) begin to hold back capacity, as they can (making excuses when asked why their refineries and distribution centres are shipping well below their normal 97 per cent capacity: ‘holidays of personnel’,’ maintenance schedules’, and whatever else the fertile minds of bureaucrats think up to protect their fiefdoms), in anticipation of rising prices in future (just like normal market- oriented hoarders).

The main point to notice is that the same reaction of individual customers to anticipated future price movements is evident (Adam Smith’s point about the propensity to ‘truck, barter and exchange’ is ubiquitous and that individuals behave similarly to those in markets, even when their ‘markets’ are as imperfect as they are in a communist managed economy).

Drivers, and factory managers, keep their fuel tanks full; small unit consumers fill their jerry cans, borrow or buy more jerry cans, and tell their friends and relatives to do the same; others observe people doing the same and, as word spreads, more jerry cans appear at station forecourts to be filled. The owners of petrol stations, or their managers, can see what customers are doing and call their families to get down quickly and fill up too. The combination of higher demand in fear of going short and lower supply to make the officials’ books look better when prices eventually rise exacerbates the swings in the situation. Individual hoarding postpones individual shortages; but willy-nilly, economising on the use of the scarcer commodity gradually takes over.

Meanwhile, world demand rises to fuel the rapid growth of China and India, and the world’s media spreads the news to those who have not noticed it yet, repeating the cycle on a bigger and bigger scale. Conditions mature for a tall spike in demand prices, which fuels the mania of the hoarders, and the ‘panic’ spreads, along with the doomsayers’ laments rising towards its crescendo.

Now, enter one reaction from the other part of the world, far from Brad’s California, in New Zealand, from one excitable pressure group, “Powerless New Zealand”, in their press release via Scoop (‘independent news’), which they call ‘Peak Oil’:

New Zealand Ponders Peak Oil Thursday, 18 August 2005, Press Release: Powerless New Zealand

“Thus, as a consequence some might argue of the exploding global capitalistic society within which we live it is ourselves that have driven the price of oil to its current level. Don’t blame the oil companies blame yourself. And if enlightenment philosopher David Hume was correct in that “all conflict springs from scarcity” the roller door to the double garage of self-destruction has already been opened. Iraq and Iran both swim on a sea of oil and everybody wants it. We want it so bad we are prepared to die for it.

With an election looming PowerLess NZ invites New Zealanders to make the distinction. Simply email your politician and ask them how they are planning today for peak oil – building more roads obviously is not the correct answer (nor for that matter is dropping out of Kyoto). Don’t accept feel good newspeak answers.

Supply of the black oozy lifeblood of the economy will begin shrinking by about 3% per year. Economic growth throughout the western world will end abruptly as hyper-inflated oil prices become structural shortages! Hume’s conflict will manifest itself at the service station as well as the streets of Baghdad.

The remainder of this decade will be increasingly defined by energy or a lack thereof. Voters ought to consider this issue seriously; our collective continued well being depends on action now. Well prepared, New Zealand could be well placed to weather such a storm but preparation will require intensive national effort in order to dramatically reduce our dependence on fossil fuels. This election make the right decisions so that the effort can begin.

Steve McKinlay for Powerless NZ, 18 August 2005, [leads] a growing group of scientists, energy analysts and concerned citizens whose principle objectives are to alert both Government and the general public to New Zealand’s looming energy crisis.

Our aim is to support development of renewable energy resources at both a private and public level, as well as encourage a firm move away from dependence upon fossil fuels. More information about global peak oil and resource depletion can be found at http://www.oilcrash.com/ and http://ontic.blogspot.com”

There we have it. The language of forced similes and metaphors, complete with the usual code word: ‘concerned citizens’ (whose forebears were the inner voices that urged on lynch mobs and religious extremists of past generations) want government action to ride the ‘looming energy crisis’ at ‘both public and private’ levels, i.e., a Ministerial initiative, no doubt employing the growing group of “of scientists, energy analysts and concerned citizens” (the latter forming the nosey ‘inspectors’ brigade of individual ‘misuses’ of non-renewable energy).

Who knows what nonsense this ‘growing group’ of doomsayers will impose at public expense, or what bureaucratic tyranny they will devise to implement their concerns?

Yet, staring them in the face is the most efficient way to reduce the demand for oil products, to promote alternative sources of energy and to tackle the actual energy crisis (the ‘looming’ crisis fuels their deep foreboding).

It is called the price mechanism. Attempts to thwart it always fail and history is replete with attempts to do so. The efforts of the local bureaucrats in China, and similar efforts in the rest of the world, are the froth of the early recognition that is expected from a price system; it is not a sign that the end of the world is ‘looming’.

Once the price system gets into its stride the behaviours of everybody in it will adjust without a single Ministerial cabal, hysterical cry of a single ‘scientist’ or ‘energy specialist’ (read oil company employee), or a frown of concern from an individual citizen. Of course, all would prefer to pay less for anything and have more of it, but we all agree that they cannot without sacrificing having something else – because all economic goods are scarce; see Economics 101.

Now David Hume understood that, as did Adam Smith. Apparently, "Powerless New Zealand’s" sponsors do not.

In Defence of Shopkeepers and Tradesmen

Oh, dear, another example of an inappropriate quotation from Smith. This time it is bashing shopkeepers, to make a point about Bank of England interests rates:

“Bank of England's Rate Schism Is Poised to Widen” by Mark Gilbert from Blomberg News on Blomberg.com:

“More than 50,000 Britons draw income from selling secondhand goods on Internet sites such as EBay Inc., the London-based Centre for Economics and Business Research said this week. Adam Smith's ``nation of shopkeepers'' is becoming a race of junk dealers. No wonder the U.K. economy is heading into the ditch.”

“If people realize that they have sellable goods sitting in their cupboards, it ought to increase consumers' confidence just like any other unexpected boost to wealth,'' said CEBR economist Laura Phaff in a press release. With the health of the U.K. economy depending on such shaky foundations as rising stocks, a declining pound and digging secondhand trinkets out of the attic to flog them over the Internet, the Bank of England is unlikely to stop for long at a 4.5 percent rate.”

For one thing Adam Smith was not disparaging about Britain being a nation of shopkeepers (I think it might have been Napoleon). Smith’s comments were critical of others: “The prejudices of some political writers against shopkeepers and tradesmen, are altogether without foundation.” Presumably, we can add Mark Gilbert to the ‘political writers’ who are prejudiced against them.

Smith adds that the number of shopkeepers and tradesmen ‘can never be multiplied so as to hurt the public, though they may so as to hurt one another.’ "Wealth of Nations", II.v.7: page 361)

He also objected to the ideas of ‘founding an Empire’ for the purpose of selling goods to the colonists (he had in mind the American colonies) ad forcing them to buy only from the mother country’s shops. For this ‘may at first sight appear a project only for a nation of shop keepers, adding that it would be ‘extremely fit for a nation whose government is influenced by shopkeepers.’ (“Wealth of Nations”, IV.vii.c)

The stupid prejudices against shopkeepers and tradesmen developed into a social prejudice in the 19th century; to be whispered to be ‘in trade’ was social death. Somebody had a go at a Sainsbury’s political ambitions recently with the remark about him being ‘in trade’, and I have heard several 'high' Tories remark, disparagingly, about Margaret Thatcher being the daughter of a ‘man in trade’. Such remarks, in my view qualify as idiocies of the moment – how long would any of us have survived without shopkeepers and tradesmen?

However, Mark Gilbert raises a separate issue. E-bay and “digging secondhand trinkets out of the attic to flog them over the Internet” may not be significant in the great scheme of things, but people disposing of surplus items, on e-Bay, car boot sales, small ads, and to neighbours for cash, perform a most useful service. When Patricia and I were setting up home together we bought many basic items from such sources (not eBay, as this was some time before the Internet), many of which we still have and will keep.

This trade increases the net welfare of two sets of people: those who acquire the goods and make more use of them than the previous owners, and the previous owners who make better use, for them, of the cash they receive. And mostly it is kept out of the remit of government.

Whatever adds to net welfare is beneficial; if it is picked up in the National Income stats it adds to growth, or compensates for its decline (second-hand sales transform stock into revenue).

Reducing Poverty in Yemen (or anywhere else)

Rema Ahmed Al-Khateeb’s interesting piece on poverty in today’s Yemen Times describes without explaining. It seems to say that poverty (a low degree of ability to ‘enjoy the necessities, conveniences and amusements of life’, which the author attributes to Adam Smith, and which its opposite, a ‘high degree’, etc., constitutes affluence) is caused by or equates to ‘inequality’. A few people can afford ‘two square meals a day’; while many cannot, and the many factors ‘responsible for poverty, include: Unemployment and an unequal distribution of wealth.’ As a result, says the author, ‘the gap between the haves and have-not is widening’.

Of the cause causes of poverty – unemployment and unequal distribution of wealth – which of these would reduce poverty, permanently? Take redistribution of wealth. By wealth Adam Smith meant the annual product of the bounties of nature and the product of labour, or what amounts to the same, the annual exchange value of these products. Hence, redistributing the current unequal distribution, assuming this was done, would relieve poverty for the time it takes to redistribute the products, or their exchange value, but would not be repeatable to the same degree thereafter, until everybody in Yemen was equally poor.

Why? Because to conduct the redistribution would require government (or the ‘mob’) to forcibly seize the products of nature and labour from the affluent, and hand them to the poor. Once consumed, who would replace the next time period’s products? It is unlikely
that the affluent would do so, or be able to do so, because everybody – through all the gradations of rich and poor alike – would not know whether to work to replace their annual income, knowing it would be seized off them, or would be able to work, if they had jobs, because the employers would not know what they could keep, or if it was worth while to work and keep what they would regard as too little from their efforts.

Please, understand I am not raising the specter of this outcome in order to rubbish Rema Ahmed Al-Khateeb’s suggestion; I am treating it seriously and only pointing out some practical consequences, given the goal of eliminating poverty.

This leaves reducing or eliminating unemployment as the better means of tackling poverty. On this, Adam Smith had much to say that is still relevant, while discussing the wages of the labouring poor, of which Scotland had a lot at that time in the 18th century. His book, “The Wealth of Nations” was largely about how a nation could grow from the relative (and absolute!) poverty of the majority of people, common at the time in Europe, to becoming affluent generally. It sounds as if Yemen is in that same position with which Adam Smith was concerned in 1776.

For that to happe the country had to let the commercial age do its work. As men were primarily concerned with bettering their, and their families’, lives they would do so if free to do so. All, or at least most, interference in markets by government regulations, inspectors, and such like, lowered the necessary growth in the economy. At any one moment, the amount of work available was proportional to the amount of products produced by the economy. Now this quantity is not fixed – the good news – but it is influenced by the society concerned. All attempts to ‘speed it up’ by government or state agencies usually slow it down. The pursuit of the wrong economic policies – state managed industries, tariff barriers, protection and state monopolies of local producers – result in slower growth than is possible without that interference.

Growth produces more employment – hence, a reduction in poverty – and more employment creates more wealth, and more wealth means there is more to go around.

Wealth is created by mankind – poverty is the automatic consequence of not creating wealth. It has little to do with the existing distribution of wealth; it is the consequence of past decisions that prevented the creation of wealth in the recent past.

That is the real lesson of Adam Smith’s “Wealth of Nations”. That is why, though we have pockets of relative poverty today in Scotland, the living standards of the people in Scotland, including the relatively poor, are incomparably higher per capita than those alive when Adam Smith was writing. Indeed, the living standards of the average income earner in Scotland is today much higher than what passed for the rich of Scotland on the 18th century. The same is, and will be true, for the people of Yemen, provided they apply the lessons of “Wealth of Nations”.

Notes on Smith's Philosophy: an occasional series, no. 1

Adam Smith on the virtue of "doing nothing"

On the always interesting Blog,’ Division of Labour', a regular contributor quotes a passage from Smith’s “Moral Sentiments” (TMS II.ii.1.9: p 89):

"Mere justice is, upon most occasions, but a negative virtue, and only hinders us from hurting our neighbour. The man who barely abstains from violating either the person, or the estate, or the reputation of his neighbours, has surely very little positive merit. He fulfils, however, all the rules of what is peculiarly called justice, and does every thing which his equals can with propriety force him to do, or which they can punish him for not doing. We may often fulfil all the rules of justice by sitting still and doing nothing."
Posted by Robert Lawson

Robert Lawson’s quotation on justice from Adam Smith is indeed an ‘oddity’ when read in isolation from this most significant chapter in his book “The Theory of Moral Sentiments” (1759). He did not claim that the views expressed were his own uniquely – he reported on the “account commonly given” (which he considered to be “undoubtedly true”) and a little reflection on the context shows the good sense in what he reports.

He compares beneficence with justice. Beneficence is always free, ‘it cannot be extracted by force’ (flogging someone for not showing beneficence would be a nonsense; imposing a law requiring people to show beneficence on pain of punishment would be unenforceable) and the lack of beneficence is ‘no positive evil’ (it may be the ‘blackest ingratitude’, however). Justice on the contrary, may be extracted by force. The violation of justice is injury. The positive virtues do not have that affect; they are more a disappointment in their breach).

Justice is a negative virtue. There can be no excuse for ‘hurting our neighbour’. To ‘disturb his happiness merely because it stands in the way of our own, to take from him what is of real use to him merely because it may be of equal or more use to us, or to indulge in this manner, at the expense of other people’ (TMS II.ii.2.1) are examples of injustice for which the victims may seek remedies. (Is this relevant to the current ‘eminent domain’ issue in the USA?)

Man only subsists in society, and always has, in contrast to Locke and Hobbes, as do other primates. Everyman stands in need of assistance from others, and are likewise exposed to mutual injuries from others. At one end of the spectrum, the necessary assistance, based on reciprocity, arises from love, gratitude, friendship and esteem, and society is ‘happy’ (many are laughing and enjoying themselves). At the other end of the spectrum, the source of reciprocity comes without these laughing virtues, but in no wise is society threatened with dissolution (always remember there is always ‘a lot of ruin in a Nation’). It may be less ‘happy’ (in the sense that few are overtly laughing) but the utility of the power of the reciprocity principle suffices, and it will continue to be so because of the resultant ‘mercenary exchange of good offices according to an agreed valuation’, otherwise known as bargaining (i.e., ‘truck, barter and exchange’ from “Wealth of Nations”, Book I.ii.1: 25).

Society, however, cannot subsist among those ‘who are at all times ready to hurt and injure one another’ (TMS II.ii.3.2: 86) The moment that injustice happens and it is not curbed and punished, from that moment ‘mutual resentment and animosity take place’ and all of society’s bonds are ‘broke asunder’, and it descends into the violence and opposition of the ‘discordant factions’ (lynch mobs, fiery crosses, pograms, genocide, vendettas, and revenge attacks).

Justice is the ‘main pillar that upholds the whole edifice’ and without it society must ‘crumble into atoms’. Through merited punishment (the rule of law) society ‘protects the weak, curbs the violent and chastises the guilty’. Without justice ‘a man would enter an assembly of men as he enters a den of lions’ (here, Smith paraphrases Montesquieu without acknowledgement).

From this, we can see the importance that Smith attached to the principle of justice, the negative virtue which is practised by abstaining from injuring others. If a person abstains from injuring or harming others he practises the virtue of justice; to make his point (bearing in mind his students were aged between 14 to17) Smith went to an extreme for rhetorical effect; hence, ‘sitting still and doing nothing’ is eminently sensible ad striking enough to catch the attention of his young students (it caught Robert Lawson's didn't it?).

To Laugh or To Weep?

A quiet few days on the Adam Smith ‘atrocities’ in respect of his legacy front. Must be the holidays. The perpetrators of offences against his actual legacy are taking a break, but no doubt they will be back in September.

In the meantime you may want to look at an amusing skit on the usual interference in markets by unnecessary regulations in Foundation for Economic Education web site:
Email them at: <inbrief@fee.org>

The piece is called “Nailing Free Enterprise” by P. Gardner Goldsmith, and, much like the classic “I, Pencil” is excellent back up material for a dull tutorial (are there any others?).

Check it out. It will either cause you to smile or weep.

To Cap or not to Cap? Preferably Not to Cap

Bit of a debate starting in Hawaii on capping oil prices now that it has reached $65 a barrel.

News about Price caps always draws attention to their alleged need - prices must be going up - which could provoke a run to the nearest petrol station to fill-up, in case by the time a cap is introduced the price has gone up to $70, or the cap is not imposed and they go up anyway.

Those that can afford $65 a barrel, divided into gallons (since we went to litres, I have lost track of the comparative price per gallon) will continue to consume at the old rates; those that feel or fear the pinch will start to consume less.

Already, the price system should be kicking in, causing people to economise on their use of petrol, alternative fuel research programmes should start receiving favourable responses, and development expenditures related to alternative fuels likewise should attract more attention, and no doubt government departments will start thinking of uses to put their windfall tax gains as the pump price rises.

If the government cuts its tax take, this would add to the 'subsidy' effect of lower relative prices. US petrol (gas) prices are relatively lower than in the UK. From this we expect consumption to be higher per household (and higher depending on the proportion of high consuming vehicles that are driven). If the government (more likely in the UK) taxes what it call "excess profits", it will slow the search for alternative supplies or fuels (but it make politicians look good).

The Hawaii Reporter (freedom to report real news, Sunday 14 August) carries a short piece:

“Gas Caps Won't WorkLegislators Who Supported Caps on Price of Gasoline Need to Go Back to Economics 101” By John M. Corboy, MD, and a board member of the Grassroot Institute of Hawaii, writes:

“Some legislators just don't get it.

Price controls, like in the case of the legislators attempting to control the price of gasoline by imposing a cap on the wholesale price beginning Sept. 1, 2005, always distort the market.
Price caps lead to shortages or lower quality goods or services. It is hardly surprising that government meddling may now lead to higher gas prices, according to a recent report by the Public Utilities Commission. "Unintended consequences" as usual.

Adam Smith discovered over 200 years ago: Government regulation of the natural market place always harms consumers, directly in proportion to the degree of interference.”

Slight exaggeration, but Dr Corboy's is the right approach to price caps.

Diary 2: Writing new book on Adam Smith for Palgrave's Great Thinkers in Ecoomics series

Diary 2 (August):

My ‘best laid’ plans certainly went in reverse not long after writing the first ‘diary’ entry.

Requests for two examination questions with solutions, plus the PDF proof files for the new book, "Strategic Negotiation" for the MSc programmes at Edinburgh Business School, and some contract work, forced me to put off getting to work on Adam Smith for Palgrave’s Great Thinkers in Economics series. However, I completed these tasks, hosted for some guests and family visiting us in France, and returned to Adam Smith 2 work as soon as I could.

I am now into the first 4,000 words, a fairly slow pace for me, occasioned by my decision to find, note and footnote on the draft pages full bibliographical details of any fact I cite, any authority I refer to and any reference I allude to, as I go along. This certainly slows me down but, from experience, the longer the ‘scaffolding’ work is postponed the greater the delays and errors that slip into the schedule when I move from draft to final publishable text.

I find I create several versions in my ‘draft’ category, and it is not unknown to have several ‘Final’ versions too (which I have been known to mix up in the final push for the publisher). Having copy editors asking for something because of incomplete or missing references and searching for them diligently under time pressure, is an avoidable pain, which I intend to avoid with this book. Let’s see how it works out.

On footnotes I have long had the view that they should be avoided, especially when they suffer from ‘foot and note’ disease, of the kind that introduces footnotes into the flow that consist of inconsequential author’s comments, or from that awful habit of authors who keep telling the reader (sometimes in the text too) that he or she ‘discusses this question later’, or worse, on 'page 60', or ‘as discussed above on page 6’. If a point is elaborated later (which the reader will come to) or has been commented on earlier (which the reader would know), why interrupt the flow? I once read a controversial book (the theme with which I sympathised) on political geography which not only did this to excess, but had end notes in place of footnotes, and it proved so frustrating and distracting turning back and forwards for no real value that I stopped reading it after chapter 6 of 18.

It’s early days yet and I have not yet settled down to my ‘voice’ for the book. Reacquainting myself with Adam Smith, his life and Works, is just great. I feel at home with my subject. Spending an hour or so on the LostLegacy Blog is also relaxing because it constantly gives me practice in phrasing short comments and replies (alas, some of them a bit repetitive I know!) on aspects of Adam Smith. The associated correspondence from people whom I have commented upon, in praise or critically, is also helpful and, while I do not always agree with everybody, most correspondents are polite and good humoured.

One, Nicholas Gruen, persisted with remarkable diligence since June to make contact despite every one of my email addresses failed to respond. Since we have made contact, he has added to one of my themes for the new book – great minds think alike (yes, I know ‘fools seldom differ’) – and for which I will gratefully acknowledge.

More Nonsense About Nelson and Smithian Economics

The nonsense is spreading like a wildcat meme. It's rapidly becoming the disease of the month, started by an author in search of a 'theory' that will sell more books, spread new light on Trafalgar. In 1805, Nelson's navy was not the most literate in the world, nor did it need to be. Royal Navy discipline and constant practice in bringing its guns to bear in 'close action' - the essence of Admiral Nelson's tactics, tried and practised at several earlier engagements since the Battle of the Nile, ensured victory.

To project back a, at the time, little known theme from the '"Wealth of Nations" is a silly folly of a grand order (allowing for its silly presentation as "uncompromising pursuit of the end"). Trafalgar was not unique as a Nelsonian battle - he had used the same tactical manouvre successfully before (e.g., at Cape St Vincent). Breaking from the traditional line-of-battle formation and going headlong for the nearest enemy ship, ignoring rank and precedence, was Nelson's way, which his officers followed because he ordered them so to do, and the seamen on the gundecks sprung into action with their devastating salvoes, not from reading Adam Smith (most couldn't read) or listening to others reading it, but because their officers and warrant officers ordered them to do so, and they had been trained to obey their orders.

Myths about Nelson abound - ever since Robert Southey, the lakeside poet, wrote his romantic book on him - and most are as shallow. The misuse of Smithian theories adds a new shallowness to the myths.

REVIEW : Nelson's victory at Trafalgar was heroic but horrific, Arkansas Democrat-Gazette - Little Rock, AR, USA...

"Trafalgar worked according to the basic principle enunciated by Adam Smith that the individual's uncompromising pursuit of the end that will satisfy him will ..." zzzzzzzzzzzzzzzz

Sheena MacDonald: A Candidate for August's Lost Legacy Prize?

Scotland on Sunday 14 August 2005
Reliable transport system is still just a flight of fancy
Sheena MacDonald

"Has Adam Smith's pioneering thinking on economic freedom 250 years ago been misinterpreted by today's competitive capitalists? Is claiming to incorporate an ethical dimension in your business plan a fig-leaf for bad management?"

"Adam Smith himself provides a role model. Appointed to the chair of moral philosophy at Glasgow University before he was 30, he made time to discuss common interests with his friend David Hume, who lived in Edinburgh. Exchanging letters was too ponderous a means of communication. So Smith travelled to visit Hume. This took a couple of days. He did not have the resources for a private coach, so bought a ticket for the public stage which journeyed through numerous pick-up points before achieving its destination. If it seems droll today to imagine spending two days travelling between Glasgow and Edinburgh, consider what Smith did with his time to think. The Wealth of Nations, published in 1776, was not written in haste. To this day it remains a text-book for economists trying to yoke efficient use of resources with public service and welfare."

Pretty good angle on Adam Smith and the problem of transport between Edinburgh and London from one of Scotland's top feature writing journalists (who a few years back suffered from a terrble road accident occasioned by a speeding police car).

Today, trains every 30 minutes take 45 minutes to cover the journey from Glasgow to Edinburgh. I used to do it myself regularly when I worked at the University of Stratclyde in the 1970s- itself located a few hundred yards from where Adam Smith taught at the then location of the University of Glasgow, also known as Glasgow College, in the 1750s, next door to the Cathedral, still standing. Glasgow University moved two miles away in the 1880s to its present location on Gilmore hill, hwere the origial College building was re-built exactly.

Small quibble: if only "Wealth of Nations" was an 'economics textbook' read by modern economists! It is now seldom read at all, except for isolated quotations and mostly it is misunderstood.

But for all that, Sheena MacDonald is more accurate (as top journalists always are) about Adam Smith's life and his works. Is Sheena a candidate for August's Lost Legacy Prize? (For the record, I have never spoken to Sheena MacDonald to my knowledge, hence no favouritism here....)

It's Never Easy to Reform Tax

"The Guardian: Going flat out"
LeaderSaturday August 13, 2005

“The notion of a flat tax is based on a simple premise: charge a single tax rate on all personal income. It eliminates complexity and bureaucracy, a welcome reform considering people were complaining about taxes well before Adam Smith called them "an unnecessary trouble, vexation and oppression". Supporters boast that tax returns could be done on the back of a postcard. Both Conservatives and Liberal Democrats have attacked current tax legislation, which has ballooned to over 11,000 pages, and formed commissions to study the idea.”

Faced with a challenge to the assumptions of modern taxation policy, the rest of the editorial reports the response of the Inland Revenue which, not surprisingly is entirely negative. The ‘commissions’ it has set up will create the paperwork to show a Flat Tax won’t work, will cost too much and, even if it did work it still wouldn’t be a good idea.

Tax reform – from simplifying it to adopting a different complex system – is never going to be easy. Flat Tax is simple and whatever else it does it reduces the need for several thousand tax officers, accountant and consultants specialising in tax avoidance schemes and thousands of man-years of journalists’ paid work to comment for and against tax practices, including reforms.

Idiocy of the Month?

Bringing Adam Smith into the Battle of Trafalgar (1805) is the latest idiocy to be published this month. I quote from Matthew Price’s review of the book by Adam Nicholson (Matthew Price is a writer in Brooklyn). The idea that Nelson’s officers and the seamen had read, even heard of, Adam Smith, or any of his ideas, is almost too ridiculous for words, or for that matter that his ideas were ‘surging through Britain’.

Smith’s reputation at the time was in a bit of trouble. The Establishment were on the offensive over the French and their ‘Emperor’ Napoleon. Smith’s friends had been investigated for signs of sedition, in case some of the passages in “Wealth of Nations” could incite the ordinary men and women into rebellion. They were hardly cheering below decks or on the quarter decks for freer trade and competitive markets!

Newsday.com
Nelson's victory at sea
(August 14, 2005)

"Nicolson throws every adjective in the dictionary at us to make a simple point: Nelson was a great leader of his men, who inspired them with confidence and daring. His great achievement was "the liberation of individual energies to ensure victory." Though Nicolson's descriptions of the battle itself are vivid, he is often distracted by the ambitions of his thesis. Trafalgar represents an eruption of the Romantic life force; Nelson's battle plans were a rebuke to the 18th century cult of gentility and restraint, while he and his officers "might be seen as a set of sanctioned villains, living lives that oscillated between intense risk and predatory gain." What's more, the British navy was an extension of the commercial spirit of Adam Smith surging through Great Britain - "Nelson's fleet carried a capitalist charge," Nicolson writes. This is provocative, though at times I wasn't sure if I was reading about a vice admiral or a CEO who had gorged himself on Tom Peters and Tony Robbins."

SEIZE THE FIRE: Heroism, Duty and the Battle of Trafalgar, by Adam Nicolson. HarperCollins, 341 pp., $26.95.

Spreading the Word

A posting I made here on 1 August: "Guilty By the Books You Read" has been posted today on a US Blog, IntellectualConservatism.com, which circulates widely across the USA. One of the books, 'dangerous' by implication, was Adam Smith's "Wealth of Nations" which occasioned my comments criticising such notions published in the Washington Post.

How such reading could be treated with suspicion is not explained in the Washington Post article. The person causing the 'offence' by his reading was John Roberts, a nominee by President Bush for the US Supreme Court.

As a correspondent here pointed out, Adam Smith, while at Oxford as a student was chastised severly by his tutors, who had searched his room, presumably on a 'tip off', and found a copy of David Hume's Treatise on Human Nature (1739). They took this as evidence on his impiety and unsuitability for becoming a Minister in the Protestant Church, for which he was destined under the terms of the Snell Exhibition he was on. Smith decided to become a philosopher instead.

Censorship is a sign of tyranny. If you don't want to read a book that offends you, or you think will offend you, then don't read it. The same with newspapers, tv programmes and speeches. That you do read, watch or listen it does not mean that you agree with them; it is probably a sign of your maturity in that you are able to participate in civilised discourse without wanting to ban what you do not like. If you remain friends with people across the political spectrum, and refuse to be told who to speak or listen to by others, that is a sign of the harmonious society that Smith wrote about in "Moral Sentiments".

Both David Hume and Adam Smith remained friends despite knowing of each other's philosophical differences; they were both friendly with their critics and were befriended by others who were criticsed by the 'zealots' of the day. Hume had many friends among the Scottish Ministers of the Kirk, in which some never gave up trying to persecute him for athiesm. Fortunately, his friends exceeded by a long way his enemies in the Kirk. Interesting that the Christian zealots in Smith's day seemed to have forgotten that Christ was criticised for consorting with 'sinners and publicans', instead of only the pious.

Adam Smith was no friend of the Jacobites, who wanted the Stuart Kings restored to the throne, yet he wrote the preface to a collection of the poems of William Hamilton, which his friends published on Hamilton's return to Scotland, having been pardoned for his Jacobite activities in the 1745 rebellion. If he was worried about such a public act, Smith did not let it deter him. He judged his conduct on the common decencies and the quality of Hamilton's poetry. I hope John Roberts learned something from reading "Wealth of Nations", a fine choice, if I may say so, for a young lawyer seeking a career in the justice system.

When people question the books you read, the friends you keep and the people you meet socially or otherwise, I believe you should look closely at these people and wonder whether you would want them in a position to cause you, and others, harm.

NYT and CATO Institute and some Republicans agree!

It is not often I agree with a New York Times Editorial (some of the Op-eds either) but today’s “America’s Summer of Discontent” is right on the money.

“When analysts and economic historians look back, this summer may well prove to be the turning point in Chinese-American relations, the time when America chose short-range paranoia over rational behavior. From the dozen or so proposals in Congress for across-the-board tariffs against Chinese imports to the Pentagon's rumblings about Chinese military buildups, the rhetoric from Washington keeps escalating. America seems to be on the run, fueled by the false perception that China's rapid economic rise poses an inevitable threat to the United States. By repeatedly demonizing China, Washington risks creating the hostility it fears.”

That is exactly what I have been saying for sometime now about the distant protectionist drum beats, slightly muffled but persisting, right across the political spectrum from Democrats to Republican, including the inaptly named Adam Smith, a Representative from Washington State. Applying the genuine Adam Smith’s approach to trade we get a different take from the Congressman (and his Republican allies). The New York Times editorial puts the issues in perspective.

“The Chinese economic surge has been awesome. If America is going to respond to it reasonably, its leaders - and the public - will have to acknowledge the obvious: China is no longer a second-level economic power that can be bullied around. America's financial stability rests in no small way on the continued Chinese purchase of the government's debt.”

There is no limit to the extent which a misreading of national interest can lead a country into serious errors that damage its national interests. Likewise with individuals. Once a misreading is absorbed, errors follow. Sometimes the consequences of our actions produces benign results; other times they produce a vale of tears. There is no automatic invisible hand correcting our fallacies. To believe that there is, changes Adam Smith’s lonely metaphor into a religious miracle, when in fact it was just a literary metaphor, used sparingly (only three times – and not, please note, about markets).

The prosperity of a trading partner is never a threat to those with which it trades. Voluntary exchange is the alternative to violence both between persons and between nations. Adam Smith taught that. It is surely time others beside the New York Times and CATO Institute understood it too. (Now there is an unusual but welcome alliance!)

Stakeholder Capitalism: a Dangerous Illusion

A news item that is worrying if you care about development. Kuseni Dlamini, a lecturer at Wits University, Johannesburg, describes what he calls “A capitalism SA can call its own” in Business Day.

The piece opens with a statement: “DEPUTY Finance Minister Jabu Moleketi’s call for business to embrace stakeholder capitalism is the right call at the right time, coming from the right person.”

That is worrying. When politicians advise business on what they should do, we can be sure that the advice should receive the most cautious response. Advice often precedes legislation to enforce the advice (especially when the advice proves unsatisfactory and politicians conclude those not heeding it are to blame). Adding new layers of decision-making to business is not normally a recipe for economic success. It has never worked anywhere else.

‘Stakeholder capitalism’ is an extension of the ‘Welfare capitalism’ of Germany, France and Netherlands; not shining examples of success recently, though they probably look good to people looking to solve serious structural problems in South Africa.

Kuseni Dlamini argues his case by a criticism of Adam Smith, plus a sideswipe at Karl Marx (to show balance?). He writes:

“Adam Smith argued that the trickle-down effect of capitalism ensured that everyone, including the poorest of the poor, would benefit from the system and thus ensure its continued profitable existence.”

Smith most certainly did not say anything about ‘the tickle down effects of capitalism’. For a start he never knew anything about capitalism, a phenomenon unknown in the 18th century; the word capitalism was first used in the 1850s, long after Smith died in 1790. Moreover, to link Smith’s name to the ‘trickle down’ effect is to misunderstand his most important insight: it was the division of labour and the necessary phenomenon of ‘truck, barter and exchange’ that would raise living standards of ‘the poorest of the poor’ and create employment for those without it.

For a developing, such practical policies seem more appropriate than experiments with an untried ‘stakeholder capitalism’. South Africa is a big country: why not designate a slice of it for an experiment that is sure to work: a free zone for people to practice the ordinary capitalism tried an tested elsewhere? Just a thought; trying to be helpful.

For the optimum conditions for increasing the division of labour and extending markets, you do not need ‘stakeholders’, ‘politicians’ and others to lecture people how to engage in this process. You need liberty, the rule of law, the rights of property, the sanctity of contracts and the absence of monopolies (usually promoted by businessmen and their employees).

Dlaminia continues:

“Smith exaggerated capitalism’s ability to redistribute wealth to the poor. He failed to foresee the greed and criminal tendency of some capitalists, such as those at Enron, Parmalat and WorldCom.”

What a charge sheet against a man who lived before capitalism, the industrial revolution, the advance of technology, and the very organizations that made capitalism possible, including giant corporations like Enron, Parmalat and WorldCom! He ‘failed to forsee’ events in the next two centuries! What rubbish is this? Who did forsee them? Nobody, of course.

Smith was very well aware of the capacity for ‘merchants and manufacturers’ to act against the interests of their consumers and society’s general interests in economic growth. He had enough detailed criticisms against the traders and tradesmen who made up commercial society in the mid-18th century without having to add the universal capacity for a minority in all classes for illegal and immoral acts to the critique he made of them in “Wealth of Nations”. A minority of criminals exists in all societies, at all levels, including governments and universities (and, I dare say, there have been one or two found in the ANC).

However, enough said. I leave the last word to Kuseni Dlamini:

“Buzz words such as stakeholder capitalism run the risk of meaning all things to all people, yet, in the ultimate analysis, yielding no tangible benefit.”

I could not put it better myself as a description of the most likely outcome of freely taking the advice of Deputy Finance Minister, Jabu Moleketi, on stakeholder capitalism.

Human Decencies in Art and Economics

In an on-line journal, DemocraticUnderground.com, amidst a welter of anti-George W. Bush articles, one addresses a theme, “Prices and Values: Why Economics Fails As a Sole Foundation of Public Policy”, written by Ernest Partridge, of The Crisis Papers.

Near its end – a familiar disquisition on the inequities of ‘cost-benefit analysis’ – there is the following:

“… the marketplace can obscure Adam Smith's essential distinction between "values in use" and "values in exchange."
"The things that have the greatest value in use," Smith writes, "have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value is use." As examples, Smith cites diamonds, which have little value in use but great value in exchange, and water which has effectively infinite value in use (we can not survive without it), but very little cost (exchange value). Significantly, "environmental values" such as clean air and water tend to be "values in use," and thus greatly undervalued in markets.”

Apart from the observation that water may be about to be transformed into a commodity of much greater value than hitherto as world demand presses against available supply, it is a familiar debate, shadowed by the debate about the value of art and access to art (in its most general sense) and why taxpayers should subsidise more of it.

Cost Benefit Analysis CBA) post-dates Adam Smith, of course, and is one of many tools designed in the 20th century to assist (not dictate) decision-making between alternative uses of scarce funds. The debate on the usefulness of economic concepts long preceded CBA.

In the 19th century there were the furious, bad tempered assaults on economics as a subject and a science by such as Thomas Carlyle (an outright racist who believed Africans were meant to be slaves), John Ruskin (who had similar racist sympathies, as well a an artistic hand in designing wallpapers) and Charles Dickens, whose accounts of English life were believed in total by 20th-century Soviet readers as indicative of life in 20th century capitalist countries (would than Soviet citizens could have ‘suffered’ the opulence of capitalist countries, instead of enjoying the rigours of socialist planning).

In terms of style, the anti-economists, won hands down. The ‘dismal’ economists were lambasted for believing and expressing, without evidence of literary and artistic style, a sound humanist belief in the equality of mankind; they opposed slavery (going back to Adam Smith) and tended (Smith and J. S. Mill) to sympathise with the working man and their families, seeing economic growth as the route to opulence. They didn’t need CBA to know that it was better to be opulent than to be poor, or worse, in slavery to be wretched and helpless beyond belief.
The men of letters, who knew the real value of everything and despised the price nexus, had nothing to offer the labouring poor or slaves. That they despised the capitalist entrepreneurs (and to be fair, many of them were despicable) means they despised the very people in society who would help liberate the poor from poverty (real wages were rising steadily in the UK, including among those in ‘Dark Satanic Mill’ country, and continued to do so into the 20th century) and also the people who would lead the moral campaign against slavery.

What this suggests is that political economy should take a broader view of society than its money wealth – a position endemic in Adam Smith’s work – and its civilising arts. Smith was closely interested in the Arts and some of his writings, unfortunately neglected and which he did not complete, show a man as passionate about poetry, plays and literature as much as he was passionately opposed to those mercantile policies that kept the poor and disadvantaged (and the already rich and privileged) in the status they were born into and from which there was little chance of escape.

Smith, an able mathematician, able in his day to discuss abstract theorems from geometry with Scotland’s finest professors of mathematics, by their own account, would not have been comfortable at all with the dead-end into which economics has been diverted in the past 100 years. He would have regarded all mathematical tools, no matter how complex, as aids to understanding, not dictates of policy choices.

We do not have to choose one or the other; it is not Value versus Use or Art versus Science. Add what Smith called the human decencies or common humanity to economics and you get as close to his actual legacy as it is possible to be, which is a long way from image he has been given by those who despise science in the name of Art, as well, in the sad cases of Carlyle, Ruskin and Dickens, who seemed to despise some of their fellow human beings as being fit for slavery, a charge nobody could lay against Adam Smith, or John Stuart Mill.

On The Mediation of Self Interest

It’s a start in the right direction or and the end run in an old wrong song. Ariana Eunjung Cha writes the following:

"Adam Smith said that self-interest is the purest form of altruism. . . . As venture capitalists we are driven to produce financial returns, but to do that we have to think carefully about whether our investments solve unmet needs," said Robin Bellas, a general partner with Morgenthaler Ventures,” (“Dot-Coms Are So '90s; In Silicon Valley, Doing Good Is the New Thing”, Ariana Eunjung Cha, a Washington Post Staff Writer, Tuesday, August 9, 2005).

I am not sure where “Adam Smith said that self-interest is the purest form of altruism”, so we cannot be sure which it is. With ‘Discuss’ added at the end it could be a useful topic for an undergraduate class paper. It could also be an ingenious apology for leaving “merchants and manufacturers” completely free to do whatever they want to make profit.

Cha’s article continues the theme of enterprises deliberately adding ‘do good things’ to their portfolio of interests, either because ‘doing good is good to do’, or because it is good for PR (as Professor Friedman proclaims – as long as the CEO does not believe the PR and sticks mainly to makiing profits).

I have argued in “Adam Smith’s Lost Legacy” (Palgrave, 2005) that a fundamental error in economics is to see Adam Smith as a advocate of self interest by looking after self and letting others look after themselves. This is to misunderstand both “Moral Sentiments” and “Wealth of Nations”.

Markets (for moral sentiments and for goods and services) mediate the different self interests of participants. Each must modify their self interests to address the self interests of those they directly transact with. Just as a person must lower the self interested outrage at some discomforting event to the pitch with which the internal spectator can sympathise (or some expression of happiness at some joyous occasion), which modifies the social expression of feeling, making them acceptable to others, so two bargainers transacting for an exchange of what each wants for what each has got must, modify their starting rate of exchange (what each gets for what they want to give), making voluntary exchange possible, replicable and peaceful.

In that sense, Adam Smith could have held the view that pure self interest, expressed as the best way to serve one’s own interest is to serve the interests of others, could be seen as the ultimate in altruism. I would still feel uncomfortable with the link if put this way. Altruism is a rare behaviour, unreliable when you need it and not universally replicable in practice. More reliable are behaviours associated with moral sentiments and voluntary exchange and these are universally replicable, and are replicated across society, as Adam Smith showed, and society endorses in practice.

But, if it creates discussion on what he meant I am happy to pass the notion on to readers.

Folly of Stopping Unocal Deal

Congratulations, James K. Glassman, a fellow at the American Enterprise Institute and host of TechCentralStation.com ( a Blog quoted on Lost Legacy more than once recently), for talking eminent Smithian sense on the Unocal, the tiny oil company, and its attempted purchase by China!

Glassman being closer to the scene, names the names and pitches it at ‘em with gusto. Among the names we have: “Rep. Duncan Hunter, R-Calif., chairman of the Armed Services Committee, Lou Dobbs of CNN, Sen. Byron Dorgan, D-N.D., of the Midwest isolationist caucus ... and to all the rest of the xenophobic crew.”

That is what it became; sheer xenophobia. (Is Duncan Hunter's affiliation a cause or sympton of the xenophobia on Uocal?)

Asks Glassman: “Why is the strongest nation in the world -- a country with an economy larger than its next five competitors combined -- scared about the takeover of a truly minuscule American firm?”

Good and unanswered question.

And the facts:

“Unocal in 2004 produced just 70,000 barrels of petroleum a day. That's less than one-half of 1 percent of U.S. consumption and less than one-10th of 1 percent of world consumption. Only one-third of Unocal's reserves and none of its refineries are in the United States.

Even if CNOOC decided to ship all of Unocal's North American oil and gas to China -- an absurd proposition when a market for it exists right here -- the loss of U.S. supply would be trivial. Global supply would be unaffected.”

And the consequence of allowing the shareholders to sell their company:

“Meanwhile, the United States, deprived of Unocal oil, would purchase the missing supply from any of dozens of providers around the global. Prices would be unaffected.”

And the likely consquene of blocking the deal for political reasons plus not a little paranoia:

“Any disruption of trade -- in goods, services, people or capital -- necessarily raises costs and slows economic growth. That was Adam Smith's lesson in 1776, and it's still true today.”

Glassman points to another problem for the US: the changing demographics which show that US living standards cannot be maintained for an ageing population with declining numbers of young wage earners to support increasing numbers of retirees. From this the structure of wealth creation has to change, included in which changes will be increasing foreign ownership of US assets and increasing US ownership of foreign assets, or, absent such changes, declining domestic wealth creation.

And it is already happening, with foreign ownership of US financial assets. And US ownership of foreign assets, including Chinese also grows. Glassman notes:

“Currently, China's investment in Western business is tiny. Meanwhile, U.S. investment in China is rising. Take Chinese oil companies. Berkshire Hathaway, Warren Buffett's company, has a one-eighth interest in PetroChina. ExxonMobil owns one-fifth of Sinopec. Those two firms, plus CNOOC, have all launched successful Initial Public Offerings in the U.S., selling shares to American investors.”

Where does this leave the Unocal deal?

“But Unocal? How pathetic, childish and cowardly! This is not the behavior of a courageous nation founded on political and economic freedom.”

How true! Adam Smith’s polemic against mercantile economics has been forgotten. The new mercantilism – global protectionism – is stirring to a still distant drum beat. We need more people like James Glassman to tell it like it is to mute the mercantile, and xenophobic, drums.

You can read James Glassman’s article in the Minneapolis “Star Tribune”, 9 August 2005 (www.startribune.com) and on "RedNova", from Dallas, Texas (RedNova.com). Read it and e-mail to your circle, for and against the Unocal deal.

Demand for Economist Writers Exceeds Supply

Plaintive piece in The Guardian by Heather Long about the alleged absence of economists writing in the UK media compared to their alleged proliferation in the USA:

“Krugman is not the only economist in the US to have achieved celebrity status. America is full of economic "personalities" these days. Steven Levitt's economic tome Freakonomics is second on the New York Times bestseller list. Nobel prize winners Joseph Stiglitz and Gary Becker publish comment pieces almost weekly and Stephen Landsburg writes an Everyday Economics column for Slate magazine.

But on this side of the pond, economists, particularly academic economists, remain hidden in their ivory towers. They are neither household names nor a significant presence in newspaper commentary pages. How strange for a country that produced the most famous economists of all time: Adam Smith, David Ricardo and John Maynard Keynes.”

Heather misses the Blogosphere, where there are many economists writing almost daily on both sides of the Pond. She missed Brad De Long’s semi-daily Blog which is excellent value and ‘Division of Labour’ (USA). There are our own Tim Harford in the FT (‘Dear Economist’, an absolutely funny and entertaining column of ‘knock out’ quality) and another Tim, Tim Worsthall, who has a strong following and talks a lot of sense.

Heather shows her innocent naiveté of the history of economics, by referring to economics as the ‘dismal science three times in two paragraphs:

“There are those who would say America does not benefit from having so many vociferous "dismal scientists". Economists, however, provide a very necessary service to society: they can offer long-term views that are not biased by the short-termism of the government or the media. And economics is more than a dismal science.

At its core it is a philosophy, an extremely practical way of viewing the world. Economists believe people, business and governments are rational agents who make decisions by weighing costs and benefits. Whether you call it dismal or distinctive, economists have a different way of looking at the world, and we could use more of this thinking.”

Heather should know that the origins of the label ‘dismal science’ are from Thomas Carlyle who denounced John S. Mill’s views that black plantation workers in the Caribbean were the same as whites in Europe and all people on Earth were equally capable within the same range as each other. They were not born to slavery they were forced into it.

This upset the deeply racist Carlyle to the extent that he published a blistering reply, as was his want, vividly denouncing J. S. Mill (and NOT Thomas Malthus, as is usually asserted) for his ‘absurd’ notions of mankind’s basic equality.

Carlyle’s 1849 pamphlet was entitled “An Occasional Discourse on the Nigger Question” which gives an idea of its tone (later editions were changed to ‘Negro Question’) in which Carlyle advocated a return of slavery to Jamaica.

Perhaps some economist in the UK should write a piece on the origins of the 'dismal science' for Heather Long and Guardian readers?

Extremist Language Modified

In Business Week (15 March) we have a continuation of the “social responsibility” debate in which Professor Milton Friedman elaborates on his view that: “Social Responsibility” is “Fundamentally Subversive”. In doing so he sticks to his line by creating wriggle room to arrive at a more sensible – and proper Smithian position - that incorporates firms seeking to meet their own interests by adopting socially responsible stances on the spending of their revenues.

“Q: Your 1970 article on social responsibility is entitled "The Social Responsibility of Business Is to Increase Its Profits." Does that belief still apply today?
A: Yes, I still hold fully with that article. I haven't seen any reason to change or add anything to it.”

No ambiguity there! They should stick to making profits and nothing else. But the follow up question shows cracks in the iron stance of ‘Profits and nothing but profits’:

“Q: So nothing has changed in the operating environment that might make companies need to engage with the community more today than in the past?

A: It's covered in that article. I point out that a company that is playing a large part in a community may want, for its own purposes and profit, to maintain good relations with the community and to engage in community activity. In doing so, it would be pursuing its own profit. But, of course, it may believe that it will be better public relations if it labels its actions an act of social responsibility. I believe most of the claims of social responsibility are pure public relations.”

This is a moderation of his extremist position, which implied – nay, asserted – that spending on anything unassociated with maximizing its profits is ‘subversion’ (by which he means a kind of 'socialism').

It must be modified because the extremist position is untenable. It may be popular with certain types of businessmen and women, because ‘nothing but profits’ is a rallying cry against any and all interference by society on whatever they do (their laissez faire dogma) – and these people pay good money to hear this dogma repeated – but the fact is there are numerous interferences in business decisions based solely on restricting the self interests of business.

Friedman merely wants it to be labeled in whatever way businesses feel comfortable, as long as it is recognized by those who need to know that it serves their interests and is chosen freely by them, not by interfering ‘do-gooder’ third parties.

“How they label it -- whether they call is social engagement or social responsibility -- is not the real issue,” says Friedman, adding, as long as they do not spend “directly or indirectly any substantial fraction of its profits on such social activities”, because if they did they would be “competed out of existence”.

When asked about Coca Cola having to deal with local boycotts of its products in India, Friedman extends the use of deceptive language. He is asked: "Should Coke consider those activists as stakeholders who need to be addressed?" No, answers Friedman: “They should consider them as problems for running the business. They have to be counted, and it's perfectly sensible for Coca-Cola to spend money on trying to reduce the influence of such groups.” And, crucially, “It may be that the most efficient way to do that is by pretending that they are stakeholders.”

The deceptive method is plain. Use whatever names you need for the purposes of PR, these names might fool others but we [nudge, nudge, wink, wink] know the reality. It is nothing to do with a firm’s social responsibilities or for doing good (cue for Smith’s quote about firms trading for the public good); it is pure self-interest and profit maximizing behaviour.

With this approach, the hard line of nothing but profits is modified (as it should be). Smith’s position was already clear: “merchants and manufacturers” should not be left to do whatever they want in the pursuit of their self interest. That was too dangerous for society.

Left to themselves, they would create monopolies, anti-competitive devices and high prices in conspiracies against the public; hence, laws are needed to prevent these abuses. Left to themselves, they would pay their employees in company owned shops at high 'prices' fixed by the company: hence laws are needed to make them pay employees in cash. Smith’s remedies for the same kinds of problem in the 18th century led to a whole host of interventions in the freedom of decision making by profits-only businesses.

Liberty for Smith was always liberty under the laws of justice. And what constitutes the law depends on the temper of the age. As new abuses appear, legislation eventually catches up to prevent them. In the battle for the minds of the electorate and the attention of legislators, firms find it is in their interest to intervene actively to change public perceptions and modify legislative remedies.

Where they can and as often as they can, businesses repeats out of their contexts quotations from Adam Smith to oppose all kinds of decent laws to remedy abuses, from women and child labour in the 19th century, and laws for shorter working hours, holidays and injuries at work ever since.

Adam Smith was never a laissez faire ideaologue, Milton Friedman is becoming more 'Smithian'.

[All quotations from Business Week online, 15 March 2005: acknowledged as the Copyright 2005, by The McGraw-Hill Companies Inc. All rights reserved.]

On Doing Good and the Interests of Business

Business Week online 15 August
“The Debate Over Doing Good:
Some companies are taking a more strategic tack on social responsibility. Should they?”
Brian Grow, Steve Hamm and Louise Lee write:

“Such platitudes, of course, make critics cringe. The Nobel prize-winning economist Milton Friedman, 93, casts a long intellectual shadow over the debate. In a seminal 1970 New York Times Magazine article, he declared social initiatives "fundamentally subversive" because they undermine the profit-seeking purpose of public companies and waste shareholders' money. Even today, Friedman, a senior fellow at Stanford University's Hoover Institution, rails at the idea that managers elected by shareholders to run companies should spend their profits on social causes. "Adam Smith said in 1776: 'I have never known much good done by those who profess to trade for the public good.' It's a good quote," says Friedman.”
Yes, it is a good quote, but it is only a quote and not one directly connected to the issues raised in the debate on ‘doing good’ raised in Business Week.

If shareholders do not want managers of their companies to do other than maximise their profits, they can insist that they do so. But the pressure for ‘doing good’ often comes from shareholders, and ‘doing good’ is open to a wide range of activities. The money also comes from the firm making profits – no profits, no ‘doing good’.

But first, look more closely at Professor Milton Friedman’s quote. It comes from “Wealth of Nations” and it is from a well known paragraph, page 456, quoted here many times, mainly in my complaints of it being misquoted – it contains Smith’s single reference to the invisible hand. Smith is referring to the choice that individuals make between trading in domestic or foreign markets and which course of action promotes domestic annual revenue (GDP the most.

Because individuals prefer to trade nearby where their investments are more easily supervised, they unintentionally promote domestic GDP more than they would if they invested abroad and promoted foreign GDP. They trade locally because they think it is in their best interests and it is in fact so; hence, they do not need to be told to do so or urged to do what their best interests already makes them do anyway.

Now, this is a different proposition from the one under discussion on how firms should spend their profits. If the directors, acting for the shareholders, consider it benefits the firm by sponsoring a public event (a concert, a football match, the Olympics, etc.,) they will do so. How much they spend on these sorts of activities is subject to scrutiny by auditors, shareholders and, in many cases, regulatory bodies. They spend millions on public image marketing for the same ends.

The article goes further and looks at expenditures on such community activities as building children’s playgrounds. Professor Friedman’s views of the appropriate role of profits is shared by most economists; but other people beside economists have influence on the role of profits and how they might be taxed to promote public activities or the general public purse. The conduct of business recently in spectacular cases of fraud, theft and greed has provided recruits for hostile campaigns against business. The recruits have votes and the legislature counts votes and pass laws that apply to businesses.

Some expenditure in counteracting these hostile views might be regarded as appropriate by shareholders – that is the basis of lobbying Congress after all. If that is legitimate expenditure, so are children’s playgrounds in local communities where they would not otherwise be available. It is conceived by those who support these expenditures as in their interests to undertake them and be associated with ‘doing good’.

Charitable donations by corporations are of long standing. Included among such charitable giving are donations by corporations to the nation’s universities, of which the University of Stanford and Stanford Business School in particular have been major beneficiaries for many years. The business arguments for doing so are too obvious to need repeating here.

That there are people outside business who preach that business should spend more of its profits on whatever public ‘good’ they select, is no threat to the message in Smith’s quotation. Business does not need to be dissuaded from doing what is not in its interests to do.

That is true today as Smith noted it to be true in his day.

Reinventing Adam Smith

In a somewhat rambling piece, “Reinventiung the Party of Jefferson” By David Nichols From: Democrats Table, in TPM Café (‘politics, ideas and lots of caffeine’), taking in gun control (it seems to oppose it in case there is need for popular military resistance to President Bush suspending Congress in 2008 because of a terrorist incident in Los Angeles!), the Civil War (or the ‘War Between the States’) and a dispute between Jefferson and Hamilton in the 18th century, there is this gem about Adam Smith:

“In this new global industrial economy, how do we apply the truths given to us by men like John Locke, Thomas Jefferson, or, for that matter, even the father of modern capitalist thought, Adam Smith? These men all wrote when industrialization was only in its infancy, when almost all economic endeavors were either agricultural or small-scale examples of “cottage” industry. Only the in the state issued monopolies of foreign trade, of companies like the Dutch and English East India Companies or the Hudson Bay Company did they encounter anything remotely similar to awesome economic power of the modern corporation. About these organizations they were either silent, or they objected to them on the basis that they were barriers to “free commerce.” They could not envision the world that would come, where such monstrous companies would come to dominate virtually every corner of the economy.”

Why ‘even’ Adam Smith? And why get his credentials, and therefore his legacy’ so wrong?

Adam Smith was not ‘the father of modern capitalist though’. The paragraph goes on to establish that none of the people David Nichols looks to for the application of their truths were remotely aware of anything called capitalism, a word not invented until 1858 (even the word ‘capitalist’ first appeared in print in 1793, three years after Smith had died). Industrialisation was not just in its infancy, it was virtually unknown in anything like what it turned out to be from 1820 onwards.

All economic endeavours were ‘either agricultural or “cottage” industry’ writes Roberts, so what could Locke or Smith write that was relevant to a capitalist economy with its Joint Stock Companies? Smith expected the United States to become a major economic power by the 1880s, but one based on agriculture – he had no notion of one based on manufacturing in its modern sense. His ‘manufacturers’ were tradesmen with hand assisted tools not power driven machinery arranged in ‘factories’.

Smith’s “Wealth of Nations” was a polemic against monopolies, including Joint Stock Companies with Royal Charters, and his suspicions of the “merchants and manufacturers” were clearly stated in many places.

How this made him the ‘father of capitalist thought’ is not stated by Roberts. Methinks there maybe a lot more than 'lots of caffeine' in what they drink at this cafe...

Outsourcing is Good

Some good sense from a Cato Institute article, “In defense of outsourcing”, published in blackenterprise.com, a publication I have quoted from before:

“In other words, you outsource in your personal life. Everyone does, and with good reason. I am not grotesquely less competent at the ordinary tasks of life than my fellow citizens. But if I tried to produce personally all or most of what my family consumes, my family would face a dirt-poor standard of living. Adam Smith ([1776] 1994: 48586), patron saint of economists, recognized this lesson two centuries ago, writing, "It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy." Smith also noted that the logic of outsourcing applied to nations as well as householders. He continued: "What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom."

Of course change has awkward consequences for some, which are visible and obvious to those affected by them, and therefore politicians are reactive to the consequences, as are trade unions, and they make ‘noise’ about them. But the obvious benefits which are every bit as real as the negative consequences are not as obvious as a real person who loses a job. This does not deny the existence of compensatory benefits of the changes.

Some years ago the great Singer Sewing Machine company in Clydebank, Glasgow, closed down and there were huge consequences for the thousands employed in it as the factory gates shut for the last time. Denial, anger and disgust swept across the media presentation of the ‘calamity’ and politicians made great noise about the ‘end of Clydebank (i.e., civilisation) as it has been known’, with nostalgic folk memories stirred unashamedly (‘the plant that Hitler failed to close’, etc.,).

Within a few years the entire Singer factory site had been levelled, transformed, cleaned-up and rebuilt with new, modern office blocks and warehouses, employing thousands at wages well above those paid to the former labour force at Singers. To have kept Singers going would have left the area a bleak, dank spot, a monument to the pre-first World War factory system for as long as the subsidies continued, only to delay the day when the new places of employment would have been erected.

Outsourcing is an example of the division of labour. Where it reduces a firm’s costs, it adds to revenues, either for re-investment or for lower unit prices. New investment adds to productivity; lower prices increase real wages (what wages can buy), which also adds to employment from the suppliers of the extra baskets of wage goods.

These benefits are real, visible and every bit as worth having, but they do not occur at once, unlike the images of the persons sacked from their old jobs. I often wonder, whenever I drive past the old Singer Sewing Machine Company site, whether those who made such dramatic fuss about its closure have ever stopped to ask themselves if they are still proud of what they tried to stop and if the new site is a worse use of scarce capital than Singer’s?

I also wonder if they are among those today who protest today about ‘outsourcing’ in the same terms? It’s not so far from Singer’s old site at Clydebank to the University of Glasgow site, by the Cathedral, where between 1752-64, Adam Smith taught his class about the benefits of the division of labour and the principle of only making in-house what is cheaper for you than buying it from someone else.

The Paranoia Spreads

An opinion piece from John Hall, senior Washington correspondent of Media General News Service, 6 August 2005 on the Unocal Corp aborted take-over by CNOOC, the Chinese national oil company begins to lay out its potential consequences.

The tone reminds me of my Cold War years spent studying defence economics and the economics of war. In particular, I am minded of the fascinating research done by Professor A. F. K. Organski and his colleague Jacek Kugler which produced “The War Ledger” (University of Chicago Press, 1980), an attempt to measure why international wars happened, how they ended and the relevance of the research for the nuclear stand-off between the Soviet Union and the USA.

Are others from that era dusting down their old textbooks, research papers and notes from the symposia they attended on both sides of the Atlantic? I hope it remains nostalgia and not the beginning of a return to the study of general war in the 21st century.

Among the Organski and Kugler findings from data starting in the late 19th century through to the 1980s is that wars are more likely to become a possibility when two nations, one powerful and the other very much an underdog in global power terms. Their designation of this most dangerous episode in their relations is in the period (perhaps lasting twenty years) when the underdog nation grows rapidly and begins to threaten to overtake the powerful nation in GNP. This produces the instability that makes the large nation’s elite sensitive to a ill-defined threat from the overtaker. Of course, it is all a lot more complicated than just that, but you can see the flavour of their model of the causes of war. Read the book.

Hall sees the fallout from the current Chinese headlong boom leaning towards heightened tension against the USA around the world; in foreign policy terms there is much in dispute – Iraq, Korea, Taiwan – and in domestic terms there is China’s abysmal human rights situation, the communist system of tyrannical government. Given China’s spirited exhibition of flaunting its independent voice in international affairs, its access to the UN Security Council with its veto as a permanent member, there will be plenty of occasions to irritate the USA government, media and electorate.

Yet China is a long, long way from overtaking USA GDP, the supposed trigger of dangerous drifts to war. Its headlong expansion of its military capability looks worse than it is because of the low base from whence it starts. But, as I have noted here before, the image is enough to put sections of the media and individual political leaders into ‘panic’ and ‘paranoia already.

And that is the danger of the distant drumbeats of protectionism. Is it the perceived threats that promote protectionism or protectionism that promotes threats?

To quote Hall:

“China's phenomenal industrial growth and its dizzying dash towards prosperity have made it the world's second-largest consumer of oil and third-largest importer. This growth has happened almost overnight, but it has been accomplished without much political liberty. And China's wealth has been accompanied by a buildup in military might that so far has not been explained by any real threat to China's security”

Which leads Hall to:

“China could retaliate by cashing in the huge wad of American debt it is holding, which is supposedly sustaining an American housing-mortgage bubble of stupendous proportion. It could also begin turning its back on American investors and giving better terms to competitors in other countries.”

And so it goes on. Theoretical Tit-for-Tat exchanges feed the ever resident paranoia – ‘fight ‘em now or we fight then in California’, the home state of Unocal Corp, etc.

Hall writes:

“The United States is known far and wide as a country that believes in open markets and practices what it believes. It is headed by a conservative president and its Congress is dominated by Republicans. The Adam Smith necktie is still a major fashion statement.”Yet if this was true (and I have my doubts), the reaction to the attempted Unocal purchase by China would not have been so virulent. Where were the wearers of the ‘fashion statement’ during these months?

But, of course, fashion is a fickle mistress.

More Paranoia about China - and HP sauce

In a letter in the Financial Times (5 August) from a Mr Erik B. Cooper, Denver, Colorado, US, we have another, albeit articulate, example of the current paranoia about China. This time it’s about China’s failed attempt to buy Unocal, a US oil company. Mr Cooper writes:

“Although China has liberalised its economy to a certain degree, it is still a communist country. Coincidentally, CNOOC is primarily owned by the Chinese government, and Fu Chengyu, the CNOOC chairman, is a senior communist official. To give a communist government access to deep-water drilling technology, as well as strategic US petroleum assets, would be an obtuse strategy. Even Adam Smith realised that national security concerns play a great deal in formulating free market policies.”

Adam Smith did indeed consider defence to be more important than opulence (Book V, “Wealth of Nations”) and praised the then Navigation Acts as “wise” and in the interests of commerce. The Acts prevented foreign merchant ships carrying cargoes from the US Colonies to Britain and forced merchants to ship in British ships, crewed by British sailors. This ensured a plentiful supply of sailors for the Royal Navy and British ships should war break out. He considered the cost of these policies worth while as they helped defend Britain in the war-time. He didn’t, incidentally, think the wars that Britain was dragged into were always wise or necessary.

If indeed it is an interest of the USA to prevent foreign ownership of businesses this would bring into line with present intentions in France where the recent suggestion of a hostile bid for Danone, a well-known food manufacturing firm, famous for HP Sauce, has led to government ministers talking about introducing laws to prevent foreign bids, ostensibly if they are hostile, but given that existing managements seldom welcome take-overs, it would provide an ideal legal cover for evading them by declaring them ‘hostile’.

Adding Chinese bids to a list of prohibitions (a ‘hostile’ government?) is another turn of the screw towards rampant protectionism.

If HP Sauce is within the security interests of France, Unocal’s tiny oil percentage is within the security interests of the US and the annual trade with CAFTA countries (less than the monthly trade with China) is also included, we can see unwelcome trends in both Europe and US towards the inevitable excuses for protectionism.

If successful - and paranoia feeds on itself - it could ‘solve’ the oil crisis by dampening economic growth in both continents by spurious ‘security’ driven protectionism in defence of HP sauce, vegetables, clothing and oil. Then we would all be worse off.

Another airport investment curbed

When the State intervenes in commercial decisions it creates new problems for itself and commerce. What starts as appropriate intervention to ensure safety, amenity and a clean environment, extends by accretion into commercial matters. The sort of problems arising from general intervention are illustrated by the little, but promising, contra-tempts in Washington State, USA, over a Southwest airlines' proposal.

The Seattle Post Intelligence (5 August) reports:

“Last month, Southwest said it wants to build a new $130 million terminal at Boeing Field and run up to 85 daily flights there, compared with 38 now at Sea-Tac, to avoid rising per-passenger costs that would help pay for Sea-Tac's $4.2 billion, 10-year expansion.

The airline has said it would pay less at Boeing Field, which serves private planes, cargo jets, and Boeing Co. commercial and military aircraft operations.”

But this was no easy commercial decision where the airline puts its own capital at risk. The guardians of the public purse cry ‘foul’.

“Both U.S. senators and five other members of the state's congressional delegation have denounced Southwest Airlines' proposal to leave Seattle-Tacoma International Airport and move to a King County-run airport”

Interestingly, and not surprisingly, the local political reps, a Senator and five members of congress, are using the ‘we need time to study more details’ stalling ploy (i.e., check how widely local opinion is in favour, or not too opposed, to the switch in airports). That a commercial decision has become a political decision, with local regulators and councilmen involved too does not augur well for it becoming a good decision.

One obvious item is the theory that there is a fixed amount of traffic for air travel and dividing it between two airports means both would be sub-optimal investments. There is no evidence that air travel is fixed in quantity. Indeed, new air ports, new airlines, new fee structures, and competition are all associated with growth in air traffic. Governments are lobbied to keep the status quo and potential opposition candidates scrutinize openings for flanking a sitting representative with a pro- or anti-stance in these matters.

Now it happens that one of the Democratic congressmen who signed the letter denouncing Southwest’s proposed move, is our friend, Adam Smith, of whom I wrote about last week on his opposition to CAFTA. The case for or against Southwest is not so clear cut as the case for CAFTA in terms of the original Adam Smith of “Wealth of Nations” fame. From Scotland and only one report to go on, I cannot presume to tell Congressman Smith that he is wrong (or right) on this issue.

I can, however, speak generally about the principles behind such a decision. The prejudice of a Smithian approach would be that commercial decisions (provided they do not break laws, are safe to people and the environment, and are paid for by the beneficiaries, including users) should be left to those who put up the capital for the venture. It would take considerable evidence to the contrary to say ‘no’ in these circumstances.

So far, the opponents have not in my view sustained that contrary evidence. They appear to be intervening in a commercial decision on commercial grounds and that is not good enough for a Smithian.

In Scotland we had a similar intervention in the location of airports some years back. Post-war the Scottish Office decreed that Prestwick Airport, on the distant south-east coast of Scotland, miles from the main population centers, was to be the sole international airport for Scotland and for many years refused permission to either Glasgow or Edinburgh regional airports to offer international flights to anywhere other than England. Indeed, so frustrated were some people that Glasgow and Edinburgh were ‘squabbling’ with each other for international rights, that they proposed that a new third airport be built half-way between the two cities.

It was a ‘brilliant’ idea that was used by the pro-Prestwick lobby to keep its monopoly for an extra-20 years. Eventually, sense prevailed, and Glasgow, Edinburgh and Prestwick now fly direct to hundreds of international destinations.

Might the vested interests in Washington – those running and planning major multi-million dollar tax-paid projects and infra-structure around the state; those holding or seeking political office locally, Statewide and nationally; and the most important of all, the consumers of rival air travel – move out of the way and let the markets for air travel settle the issue of the viability of one, two or more airports in Washington State?

Of course, this could all be a ploy by Southwest to have its airport and landing fees reduced at Sea-tac ... but that it is probably a tad bit too cynical.

A Rare Error of Fact in The Economist

From an email promoting The Economist (I already subscribe and have for many years), I found this gem and it prompted the following letter to the Editor.

The Editor
The Economist:
Sir,
From, of all sources, The Economist:

“Wilson's outlook was, therefore, moral, even civilising, but not moralistic. He believed "that reason is given to us to sit in judgment over the dictates of our feelings." Reason convinced him in particular that Adam Smith was right, that through its invisible hand the market benefited profit-seeking individuals (of whom he was one) and society alike. He was himself a manufacturer and ... insisted that all the arguments and propositions put forward in his paper should be subjected to the test of facts. That was why it was called The Economist.”

Oh dear! The Economist commits the ‘invisible hand’ fallacy (that it was about markets, when in fact it was about human motivation having unforeseen consequences).

See “Theory of Moral Sentiments”, page 184, and “Wealth of Nations”, page 456, (Smith’s other reference is in his short essay, “History of Astronomy, page 49, where it is about pagan superstition, not markets). [All references are from the Glasgow Edition of Smith's Works and Correspondence, OUP.]

That a market would always ‘benefit’ both any individual seeking profits and society as a whole on all or most occasions is far too strong a conclusion to draw from Smith’s use of the invisible hand metaphor referring to another context.. He gives many instances where profit-seeking individuals cause dis-benefits to society (e.g., in his critique of mercantile policies and daily business practices).

Given the proclivity of ‘merchants and manufacturers’ to seek profits from monopolies, restrictive practices, anti-competitive actions against outsiders and overseas suppliers, a proclivity that Adam Smith mentions time and time again throughout “Wealth of Nations”, I cannot see how the copywriter can make the invisible hand false statement in the same paragraph as he or she claims that James Wilson sought always the ‘test of facts’.

The copywriter offends Wilson’s rule about ‘facts’, and Adam Smith’s meaning. But 'to err is human, to forgive is divine'.

False Flags

Mr Stuart Hayward, columnist for the Bermuda Sun, 3 August 2005, blasts at a Mr Bob Stewart, ex-Shell Executive, for some trenchant attacks on a Rotary Club sponsored, volunteer forum, known as the Sustainable Development Initiative (SDI).

Coming into this public argument without any briefing on what the purpose of the SDI is, how its recommendations will be implemented, of who Bob Stewart is and his intentions, suggests that the prudent course would be to say nothing for or against SDI and Bob Stewart’s case; hence, I shall say nothing for one side or the other.

However, Stuart Hayward makes some side-comments about something I do know about, namely Adam Smith, and I shall comment on these:

“These themes identify Bob Stewart as one of the remaining economist dinosaurs who follow Adam Smith.”

It is not clear just which version of Adam Smith Bob Stewart is supposed to be following. If it is the Adam Smith of the lost legacy tendency, then it is of too recent a vintage to be described, even rhetorically, as akin to the dinosaurs (i.e., out of date already).

Humankind has lived on earth for around 200,000 years (so far); the dinosaurs as a genre lasted around 170 million years, so they must have been doing something right for them to survive so long. They died out about 65 million years ago. The real Adam Smith lived just over 200 years ago; the mythical Adam Smith was invented about 100 years ago and, unfortunately, is still going strong.

Judging second-hand what Bob Stewart believes about Adam Smith is fraught with difficulty as we cannot be sure that Stuart Hayward reports him accurately, but he puts it this way:

“This group [presumably the ‘dinosaur’ economists] believe there should be no government control over anything”.

Clearly, Bob Stewart is not talking about the real Adam Smith of 1723-90, but of a mythical ‘Adam Smith’ invented in the late 19th century and preached endlessly about in the 20th century, who is alleged to have been an extreme libertarian anti-state economist, so familiar on US campuses and in the speeches of corporate leaders, usually when they want to government to do something for them!

Smith certainly believed in clear roles for government in the 18th century, as Book V of “Wealth of Nations” testifies. Apart from defence, justice, education and infectious diseases, Smith saw a clear role for the state wherever private capital was insufficient, or the possibility of profit too remote, but where expenditures were needed for the benefits of commerce and society.

In Smith’s days this was confined to roads, canals, harbours, street lighting, and pavements (sidewalks?). But that was a formidable agenda. Britain’s roads were atrocious and hampered trade and it needed thousands of miles of them. Add in defence, justice and education and this is a formidable agenda for government expenditure.

Perhaps the work of the SDI deliberations would likewise qualify for government support – I do not know because I do not know its remit – or at least support for any practical suggestions that would benefit Bermuda. We must wait and see to decide on that issue. But one thing is for certain: Bob Stewart cannot use Adam Smith as an authority to condemn SDI, it never being a principle of Adam Smith that state support was wrong in principle. Smith was pragmatic, not an ideologue.

Stuart Hayward makes a final reference to Adam Smith:

”Apparently Adam Smith didn’t foresee monopolies (or ‘duopolies’ in the case of Shell and Esso) where companies got so big they crushed the competition and used their economic clout to persuade governments into selective interventions that advantage the economic behemoths and penalise economic ‘weaklings’ – that is, most ordinary people.”

Again, I can say categorically that the notion that Adam Smith believed that “merchants and manufacturers” should be left alone to do whatever they wanted is a myth, believable only if you have never read “Wealth of Nations”. His book is a long polemic against the notion that: a) merchants and manufacturers will operate solely in the public interest by doing other than conspiring against consumers to institute high price–high profit regimes, monopolistic practices and restrictions on competition; and b) legislators blindly follow ‘advice’ from the same merchants and manufacturers, under the pretence that they know what is best for the economy, and create a legal basis for advancing private self-interest.

Smith’s tirades (not too strong a word) against ‘mercantile’ practices and servile governments that do the bidding of these people, shows clearly where he would have stood in respect of anti-competitive monopolies, oligopolies and cartels, if he had lived to see them.

Smith did not live long enough to know the phenomenon of capitalism, nor even the word (invented in 1858); his markets were small affairs, like street markets in small towns, not global markets so familiar today, and if anything, Smith was on the side of ‘ordinary people’. He saw markets growing in importance and, through the division of labour and free bargaining, he saw them producing a general opulence right across society.

To what extent this applies to SDI, Bermuda and its economy is open to informed judgement. If Bob Stewart is accurately reported, it looks to me he is sailing under a false flag if he ascribes to Adam Smith the ideas he claims for him.

Gavin Kennedy (Prof)
Author: Adam Smith’s Lost Legacy (Palgrave Macmillan, 2005)
gk@ebs.hw.ac.uk

Causes of War not Economic

On an excellent blog site, Truck and Barter (incidentally among the top three economics blogs that I have found, so far; the other two being Division of Labour and Brad Delong's semi daily Diary), a discussion has opened on economics as a cause of war.

Adam Smith considered he wars he witnessed in the 18th century as destructive of wealth and, mostly, not worth expending wealth (in his terms the products of wealth-creating resources) upon. Defence was the 'first duty of the state' he said in "Wealth of Nations", primarily against barbarian invasions, as the history of Europe from the fall of the Roman Empire showed (and the more recent history of Scotland confirmed).

Some current debates claim that oil is the cause of the Iraq War; thus defies he economics: several billion dollars for oil the US can buy cheaper in world markets does not make economic sense. Looking at other wars, including the history of Euopean imperialism and Empire, the balance sheet is entirely negative. Lenin was wrong too: most European investment and export of capital went to the USA, Argentina and the Commonwealth (Canada, Australia, South Africa) and not to Africa, India and Asia. What ever drove war and colinialsm it was not the economic benefits.

Adam Smith noted this in his complaint that the wars with the French over North America and the Caribbean cost £100 million for the benefits of under £20 million of trade. He remained suspicious of the proclivity of 'Princes' and Governments to fight wars over trivial issues.

A short talk with people in Northern Ireland, Kosovo, Serbia, Bosnia, Cyprus, Israel and Palestine, or most places in Africa, not to mention to Islamic militants, would soon raise questions about the 'economic' basis of their mutual hatreds.

An Empirical Not a Doctrinal Question

“Santorium’s Mighty Wind: The Accuweather Protection Act 2005”

Senator Rick Santorium, The Republican Senator for Pennsylvania:

“….the free market system is godly: It "not only produces wealth but also virtuous people whose worldly enterprise complements the work of the Creator." Big government, I need hardly add, is an unholy lumbering giant that's "overly intrusive and burdensome."

Timothy Noah, who writes "Chatterbox" for Slate, comments:

“On the other hand, private companies like AccuWeather, which disseminate information collected by the National Weather Service—a big-government agency--cannot hope to compete with the NWS if the NWS itself disseminates that information. The combined might of Adam Smith and the Man Upstairs are simply no match for the brain-dead time-wasters on the federal payroll. Or so Santorum must believe, because he has introduced a bill forbidding the NWS from providing "a product or service…that is or could be [italics mine] provided by the private sector" unless the secretary of commerce (who oversees NWS) determines that "the private sector is unwilling or unable" to do so, or unless some international treaty requires the NWS to do so…

How do you resolve this riddle? Perhaps by concluding that the common denominator to contemporary conservative thought isn't ideology at all, but rather the crude imperative for big government to shovel as many special privileges as possible to big corporations. Adam Smith would be appalled.”

My comment:
It’s not a clear cut case and we need more data. Interpreting what Smith would have advised I suggest that government may use tax funds to do what private individuals or corporations cannot do adequately, if it benefits commerce and society generally. If the revenue raised is charged to the beneficiaries and is positive, this pays back some taxation and should reduce the burden of government.

On the other hand – and the answer is empirical – if government uses public funds and cross-subsidises activities that are or can be competently carried out by the private sector and have measured benefits to consumers, then government should keep out of duplicating private commercial activities.

It is wrong to assume that Smith had fixed positions on such matters. He favoured a state-owned Mint for currency and state-owned post offices because both could provide profits for the government. He didn’t favour state-owned bakeries.

That Senator Santorium’s state is the home state of the AccuWeather company suggests he is doing what politicians usually do – seek to shore up his chances of re-election.

Guilt by the Books You Read?

Guilty by their reading!

In an article on the proposed appointment of a new member of the Supreme Court the witch-hunt is on – as per usual. This year it is an in-depth research into John Roberts, jr, a nominee of a Republican President, to find reasons why he should be castigated and not appointed. Some years back it was into a nominee from a Democratic President – the worst they came up with was his alleged habit of ‘making passes’ at women.

In the Washington Post we find a most serious charge against a nominee – he read certain books and discussed them with others while a recently graduated law student in a lowly job in the West Wing of the White House. They couldn’t script it better for the fictional presidency of ‘President’ Bartlet – perhaps, it could feature in an episode of the sixth series.

Not wishing to intrude on the internal affairs of the Washington, DC, I am compelled to make a comment because one of the heinous books the young man read and discussed with others (he could hardly discuss it with himself) was the “Wealth of Nations”!

How this amounts to evidence of his unsuitability for the US Supreme Court is not stated, but does not have to be because the writers – and no doubt Post readers – will have sufficient lack of knowledge of Smith’s “Wealth of Nations” to draw the conclusion that reading such a book is proof positive of a proclivity, not for ‘truck, barter and exchange’, but for evil, extremist rightwing judgements against all things decent in America.

The Post reports:

“Many, like Roberts, [the Nominee] had attended premier law schools, surrounded by liberal students and professors. Now, they were side by side with people who shared their own views. They read and discussed books such as Plato's "Republic," the Federalist Papers and Adam Smith's "The Wealth of Nations," and contemplated "how to leave a legacy that goes beyond passing this bill or that," Fein said.”

“A Charter Member of Reagan Vanguard Court Nominee Was Part of Legal Team Seeking to Shift Course on Civil Rights Laws” By R. Jeffrey Smith, Amy Goldstein and Jo Becker Washington Post Staff Writers, Monday, August 1, 2005

Bruce Fein, the informant ('fink' is too strong a word) was an associate deputy attorney general at the time - it is not reported what books, if any, Fein read and discussed]

As for Plato’s “Republic” (surely read and discussed at Law School?) and the “Federalist Papers” (surely mandatory reading among young people seeking careers in US government, the courts and politics?), the mind boggles as to what sinister meaning can be attributed by their informant on their private behaviour in the West Wing. I would consider it a sign of their diligence as young lawyers working for senior counsel in the White House that they spent social time discussing such texts. That it was President Reagan’s team they worked for is another attempted slur on their guilt by association.

All in all a disappointing piece, sloppily compiled (was Fein questioned as to what interpretation he put on Roberts reading “Wealth of Nations”, a book written by someone passionately dedicated to liberty, good government and opulent economies)?

Adam Smith was well qualified in jurisprudence (he received his law doctorate in 1763 for his work on the legal history of jurisprudence at the University of Glasgow, 1752-1764) and he was an admirer of the American constitution (the subject of the Federalist Papers). He too had studied Plato at Oxford University and no doubt discussed his works and other classics in his many private conversations (Plato features in “Moral Sentiments”, 1759).

Shame on Bruce Fein, the reporters and the editor of the Post.