From the Department of Not Very Important, but ...

The BBC reports this morning:

“Gordon Brown has been appointed chancellor for the second time.

Best known as Chancellor of the Exchequer, the Fife MP has now been chosen as Scotland's first college chancellor.

He was handed the title by the Adam Smith College, in his constituency of Kirkcaldy and Cowdenbeath.
Mr Brown will attend graduation ceremonies and act as an ambassador for the college locally, nationally and internationally.

College principal Dr Craig Thomson said: "Scotland's colleges are central to the development of a smart, successful future for Scotland.

"The visible support of such a prominent individual as the chancellor is a vote of confidence in the role that we play."

The college was created in August, following the merger of Glenrothes College and Fife College.”

It’s not only good for the College, it is also good for a local MP who is heading to lead the Labour Party as Prime Minister – it cements his already formidable links with his constituency. It’s called covering one’s ass in the unlikely event that someday a potential rival emerges locally to challenge him.

But full marks to the Principal of Adam Smith College for speedily – and craftily – aligning his College interests with such a powerful, and well liked, figure as Gordon Brown.

The BBC staff journalist who compiled this brief report also commented on Adam Smith. The college “was named after the Kirkcaldy-born economist Adam Smith, who lived from 1723 to 1790 … best known for his book The Wealth of Nations, but also published The Theory of Moral Sentiments, regarded as a groundbreaking work on philosophy.”

Good to see Smith’s work linked in this manner (if some of the 20,000 students at Adam Smith college also become aware of these facts, that is good for Smith’s legacy).

Kirkcaldy, situated just across the Firth of Forth from Edinburgh, is adding to the recent, and we hope continuing, stream of interest in Adam Smith as a person, with recent reports here of the Literary Walk in Edinburgh to sites associated with his many years spent in the capital, the commissioning by private subscription of a statue of him to be erected opposite the place where he was a Commissioner of Customs and a few hundred yards from where he lived (Panmure House) and where he was buried (Canongate Church yard).

Most recently, there have been calls for Edinburgh and Scotland to make more in their tourist marketing of the Scottish Enlightenment, in which Adam Smith and his friend David Hume played such prominent roles.

I think something is stirring in terms of Adam Smith studies. If this re-establishes his true legacy, I for one, would be very pleased.

New 'Kid' on the Blog

A new Blog site is open for traffic: "Adam Smith Lives!". It is written by (Sandra Peart) and for those interested in the history of economics thought from an academic and general reader angle.

Teachers of economics would benefit from the subject matter and its interesting snippets of how subjects were treated in the pastwhich would add 'fire' to class discussions and tutorials, and perhaps that favourite in academe, class papers.

Despite its attention grabbing title (I like it) there is a much wider coverage than Adam Smith alone. You will find it at: http://www.adamsmithlives.blogs.com/

In a short while Lost Legacy will link to it (memo to technology department: attend to this requirement asap, please). Adam Smith Lives! also contains some interesting links of other sites interested in the history of economics theme which may appeal to many readers here.

Check it out; bookmark it; and pay attention while you make notes!

Excuse Me, Mr Greenspan, but You are in Error

I do not tackle Alan Greenspan’s mistaken ideas, or rather his popular presentation of them, without considerable hesitation. Greenspan knows far more about running a capitalist economy than I do and I have no wish to invite the derision of colleague economists along the lines of ‘what the hell does Kennedy know that Greenspan doesn’t’? But, if I criticise the likes of Dowd in the comment below this one – more an open goal than a challenge – then I should not duck what I would criticise if anybody of lesser stature than Greenspan said the same things about Adam Smith. “Lost Legacy” exists to contest all manifestations of the corruption of Adam Smith’s legacy no matter from whom they emanate.

I quote from Alan Greenspan’s remarks on “Economic flexibility” to the National Association for Business Economics Annual Meeting, Chicago, Illinois (via satellite) on 27 September 2005:

“In one of the more notable coincidences of history, our Declaration of Independence was signed the same year in which Adam Smith published his Wealth of Nations. Smith's prescription of letting markets prevail with minimal governmental interference became the guiding philosophy of American leadership for much of our history.”

Fair enough. The “coincidence” is a fact and that’s all it was, though we know Smith held back publication waiting for news of the military decision to the ‘disturbances’ in the colonies; we also must accept the information from Greenspan that Smith’s prescriptions were followed in the USA (if not in all of the Americas, though Greenspan refers to ‘American leadership’ in much the same way as some refer to “England” when they mean “Britain”).

“With a masterful insight into the workings of the free-market institutions that were then emerging, Smith postulated an "invisible hand" in which competitive behaviour drove an economy's resources toward their fullest and most efficient use. Economic growth and prosperity, he argued, would emerge if governments stood aside and allowed markets to work.”

Oh dear. Smith did not postulate anything about the invisible hand (a metaphor he borrowed from Shakespeare (Macbeth, 3:2: “the bloody and invisible hand” – in which Shakespeare managed to libel the real King Macbeth who was well aware of the benefits to his kingdom of trade) and competitive behaviour. His references – only three in all of his Works - one only in “Wealth of Nations” - did not deal with markets at all and neither did the other two references in the “History of Astronomy” and “Moral Sentiments” (Mr Greenspan’s acolytes can look up the references and show them to their boss if he should doubt it).

It may be that “competitive behaviour drove an economy's resources toward their fullest and most efficient use”, but this had nothing to with visible or invisible hands. It was how markets worked and these were not mysterious, miraculous or amazing at all. Smith, and others before and since, knew about how markets work and did not, and do not, have to resort to pagan superstition to explain them.

“[Keynes] argued that, contrary to the tenets of Smith and his followers, market systems did not always converge to full employment. They often appeared to settle at an equilibrium in which significant segments of the workforce were unable to find jobs. In the place of Smith's laissez-faire approach arose the view that government action was required to restore full employment and to rectify what were seen as other deficiencies of market-driven outcomes.”

Two quick points. Smith wrote nothing about “full employment”, a strange notion in 18th century Britain, as would have been the concept of “equilibrium”, which is an invention of neo-classical economics, much disputed by the “Austrian” economists. Second, Smith did not have a laissez faire approach (words he never used, though he was familiar with them from his meetings with French Physiocrats in Paris in 1765-66). He chose not to use the words laissez faire at all because he did not agree that self-interest always led to benign results, of which the parable of the “Tragedy of the Commons” should surely teach young economists, and caution older ones against such an assumption, and Smith’s many strictures against monopolising and anti-competitive tendencies, should always remind us of his suspicions as to what they got up when relieved of all constraints as implied in a adopting a foolish policy like laissez faire.

Usually, for some strange and unfathomable reason, laissez faire is put into quotation marks and often hyphenated by modern English speaking economists, though not common in the French language as it is written. It is the simple third person tense of a common verb. Is it some kind of quasi-religious symbolising? Also, whatever Keynesian polices were replacing they had nothing to do with Adam Smith’s legacy.

“Whether by intention or by happenstance, many, if not most, governments in recent decades have been relying more and more on the forces of the marketplace and reducing their intervention in market outcomes. We appear to be revisiting Adam Smith's notion that the more flexible an economy, the greater its ability to self-correct after inevitable, often unanticipated disturbances. That greater tendency toward self-correction has made the cyclical stability of the economy less dependent on the actions of macroeconomic policymakers, whose responses often have come too late or have been misguided.”

OK. A fair assessment, sticking to what Smith wrote about. But overall, Smith’s presence in these remarks by Alan Greenspan to attendees at the National Association of Business Economists is somewhat controversial. I do not suppose many of the business economists in the audience recognised the controversy as, no doubt, they were brought up to believe more or less the same caricatures of Smith’s contributions, as reported by Greenspan, whose authority silenced any doubts they may have momentarily entertained if any of them had read “Wealth of Nations” and not just relied on what their professors told them, based on what they had learned, in turn, from their professors.

Until the Men of the Night Come for Them

On Znet.com (a radical ‘Marxist’ offering from Wood Hole, Massachusets, USA) Doug Dowd proclaims ‘consumerism’ is a social disease. He also writes nonsense about Adam Smith:

“Not for nothing was the opening chapter of Marx's Capital entitled "Commodities," for commodification is among the defining characteristics of capitalism. First was land and labor; now, everything is a commodity; everything is for sale.

Adam Smith provided the analytical basis for commodification. In his Wealth of Nations (1776). (sic!) He argued that free market competition, warts and all, would take us to "the best of all possible worlds." What he sought to replace was the corrupt and power-drunk mercantilist state of his time; he would be horrified by the corrupt and power-drunk monopoly capitalism of our time.”

Smith never knew the word, nor the phenomenon, “capitalism”. It was not invented as a word until 1858, when Marx was introduced to it.

If the real wages of labour were low in 1820 (asserted later in Dowd's article by his quoting another Marxist), they were even lower in the mid-18th century when Smith wrote. But these low wages were also higher in 1750 than they were in 1700, and, a fact that Dowd does not mention, both life spans and real wages in the USA and Britain continued to rise in the 19th century and the 20th century. Life expectancy in the US is the highest in the world, a factor not unrelated to its economy, “warts and all”.

Smith did not write about “commodification” (whatever that is). He wrote about the re-appearance of commerce following the 1,000 years of the barbarian/feudal interregnum experienced in Western Europe after the Fall or the Roman Empire. He did not write about the ‘best of all possible worlds’, a powerful satirical phrase of Voltaire’s, whom Smith knew personally and admired from his visit to him in Geneva in 1765,from his writings.

Dowd may not be acquainted with Smith’s “Wealth of Nations”, nor have read Karl Marx’s views on the progressive role of capitalism. Indeed, Smith was, perhaps, more critical of “merchants and manufacturers” than Marx was of capitalists.

What Dowd means by Smith arguing for “free-market competition warts and all” is not clear. The phrase “warts and all”, of course, is attributed to Oliver Cromwell – does Dowd just pluck out of a mangled sense of history anything to stick on whomsoever he writes about?

Whatever Smith might feel about the “monopoly capitalism” of our time, “corrupt”, “power-drunk”, or even sober, it would probably be mild compared to his views on those who wish to replace markets by state planning, bureaucratic direction and the inevitable accompanying totalitarianism of the “men of system” (“Moral Sentiments”, 1759, VI.ii.2.17, page 234).

These men, said Smith, are wise in their own conceit and the supposed beauty of their systems, they believe that society is a giant chess board, but they forget that humans are not wooden chess pieces, moved about by the hands of small bands of revolutionary fanatics; they are subject to principles of motion of their own.

If the men of system never realise this until after they seize power, they will find out quick
enough that the ‘masses’ do not share their enthusiasm to obey revolutionary orders, and those among them who do not become suicidal and depressed as they realise this, will forget all they ever proclaimed about the rights of workers as markets, 'warts and all' are replaced by poverty inducing commissars and their gulags. If they protest about this consequence of their revolution, the ‘men of the night’ will arrive to take them away for disposal as ‘ideologically unsound’.

Not By Design

John Allen Paulos (professor of mathematics at Temple University) takes on the Intelligent Design argument in today’s The Philadelphia Inquirer (Philly.com), 28 September in an article, “ID Proponents like designer-less market".

He writes:

“The natural question, discussed first by Adam Smith and later by Friedrich Hayek and Karl Popper among others, is: Who designed this marvel of complexity? Which commissar decreed the number of packets of dental floss for each retail outlet? The answer, of course, is that no economic god designed this system. It emerged and grew by itself. No one argues that all the components of the candy bar distribution system must have been put into place at once, or else there would be no Snickers at the corner store.

So far, so good. What is more than a bit odd, however, is that some of the most ardent opponents of Darwinian evolution - for example, many fundamentalist Christians - are among the most ardent supporters of the free market. They accept the market's complexity without qualm, yet insist the complexity of biological phenomena requires a designer.

They would reject the idea that there is or should be central planning in the economy. They would point out that simple economic exchanges, which are beneficial to people, become entrenched and then gradually modified as they become part of larger systems of exchange, while those that are not beneficial die out. Yet some of these same people refuse to believe natural selection and "blind processes" can lead to biological order arising spontaneously.

There are, of course, quite significant differences and disanalogies between biological systems and economic ones (one being that biology is a much more substantive science than economics), but these shouldn't blind us to their similarities nor mask the obvious analogies.
These analogies prompt two final questions. What would you think of someone who studied economic entities and their interactions in a modern free-market economy and insisted that they were, despite a perfectly reasonable and empirically supported Smithian account of their development, the consequence of some all-powerful, detail-obsessed economic lawgiver? You might deem such a person a conspiracy theorist.”

Comment:

Professor Paulos makes a good case and points out a devastating contradiction in the ID advocates case: they insist on ID for the proteins that create a blood clot but would not wish to tolerate a society in which the State centrally planned (by design) the economy in which they live, if only because they would rightly deny that human agencies could intelligently design how markets work, let alone how they developed historically.

Adam Smith actually made this point several time in his life’s work. He had, what we may justly call, an evolutionary view of how societies developed, from Gatherer-Hunters, through Shepherding and Agriculture and then through to Commerce (“at last”). This was called his Four Stage model of human societal evolution, which I discuss in “Adam Smith’s Lost legacy”, Palgrave Macmillan, 2005, Chapters 18-20).

He actually applied the same evolutionary model to the “Origins of Language”, first published as an essay in 1761 and later as an appendix in the fourth edition of “Moral Sentiments”. It is not difficult to show that languages evolve and are not printed in the mind, complete with nouns, verbs, adjectives and syntax by some agency called ID. The sheer proliferation of languages and their changes over time (tracked in all literate societies), their divergences (English and American; even the English of Chaucer’s day compared to Elizabethan English and ‘modern’ English) and their ‘borrowings’, show linguistic evolution before our eyes, or more correctly our ears.

Smith also applied the same model to “Moral Sentiments” – the evolution of social harmony by the adoption of appropriate behaviours (i.e., ‘appropriate’ to the group, not necessarily to some standard of prescriptive virtues) – and showed that nobody designed this, though many influenced it until it accreted into a set of norms acceptable to that group of humans. I also discuss this evolutionary moral process in “Adam Smith’s Lost legacy”, Palgrave Macmillan, 2005, Chapters 9 -14).

“Wealth of Nations” completed Smith’s evolutionary model in the growth of the economy, from the simple division of labour through to more and more complex, unplanned, undesigned, and uncontrolled deeper divisions of labour that we have come to know in the 21st century. There is nothing mysterious about the market mechanism, nothing ‘miraculous’ and nothing extraordinary. We have a good idea of how it evolved and how it works. There are, of course, no invisible hands! Humans operate it, but no one of them designed it; and nor did any invisible designer (what a throw back that is paganism for anybody, especially a Christian, to believe that!).

We do know that when allowed to operate, without design, it produces results unmatched by any alternatives.

A Misuse of Adam Smith's Work

In Alternet, San Francisco, Sean Gonsalves, of the Cape Cod Times has a piece syndicated, about President Bush and the ‘breakdown of government’ in the Katrina emergency. Without wishing to comment on the internal affairs of the USA, I am, however, concerned at the misuse of Adam Smith in Sean Gonsalves’s case.

He writes (in an excellent example of a knock-about columnist at work):

“Tell me that our market morality, with its slavish and idolatrous commitment to ''division of labor'' abstractions, hasn't reached the point where people are human robots unable to do the right thing without first getting an order to act?
Adam Smith, the father of capitalism, warned us about this kind of thing in ''The Wealth of Nations'' - something that laissez-faire free-market cheerleaders conveniently skip over.
Smith recognized that ''the understandings of the greater part of men are necessarily formed by their ordinary employments.''
And, he wrote, ''the man whose life is spent performing a few simple operations...has no occasion to exert his understanding...and generally becomes as stupid and ignorant as it is possible for a human creature to be.''
But Smith, a distinguished moral philosopher (not an economist) by profession, doesn't advise the pull-yourself-up-by-your-own-bootstraps canard.
The ''great body of people'' cannot avoid such mind-numbing effects, Smith wrote, ''unless government takes pains to prevent it.''
Stop the blame game? Sorry, but that doesn't butter the biscuit.”

The division of labour is not an ‘abstraction’ – Gonsalves writes his piece and other people turn it into a printed column and syndicate it.

In the history of the USA there is a strong line of legal precedence about the division of powers (even labour) between what the Federal Government may legally do and what State and local governments may do. Sean Gonsalves should know that. Hence, it is the case that Federal Government is “unable to do the right thing without first getting [or giving] an order to act?”

You can argue that Katrina was such a bad situation that the President should have ignored legal protocol (and, no doubt, the strong advice of his legal counsel apart from his political instincts - he had, after all, been a Governor of a State himself) and gone in over the head of the State Governor and the Mayor of New Orleans. But ‘hard cases make bad law', and given the blood spilled over the contest between State rights and Federal powers, it caused its own paralysis, apart from any cases of incompetence there may have been in those early hours and days. I am not sanguine about the correlation between government and incompetence.

Adam Smith was not the ‘Father of Capitalism’ and never advocated laissez faire. That was the next century, not Smith’s, and so what “laissez-faire free-market cheerleaders conveniently skip over” is not relevant to Gonsalves case against President Bush.

Gonsalves says that Smith recognized that ''the understandings of the greater part of men are necessarily formed by their ordinary employments.'' Indeed, he did say that in “Wealth of Nations” (Book V.i.f.50, pages 781-2) but, er, what has this to do with President Bush (who is certainly not confined in his daily work to “a very few simple operations”, plus his access to scores of advisors)? And the same applies to his gratuitous use of the sentence: ''the man whose life is spent performing a few simple operations...has no occasion to exert his understanding...and generally becomes as stupid and ignorant as it is possible for a human creature to be.''

Gonsalves adds: ‘The ''great body of people'' cannot avoid such mind-numbing effects, Smith wrote, ''unless government takes pains to prevent it.'' Again, what has this to do with the Katrina situation?

The division of labour that Smith wrote about (which was a well known phenomenon long before Smith wrote about it) in “Wealth of Nations” (Book I, Chapter 1) in great detail, refers to a single purpose form of labour, so simplified, that a labourer increase productivity significantly in collusion with others, albeit with the side-effect costs alluded to in the chapter Gonsalves quotes from Book V.

But even here I am not sure Gonsalves uses Smith’s point correctly. Smith was making the case for general elementary education provision for the children of common labourers. The more negative consequences of the division of labour he alludes to in Book V (in contrast to his praise of it in Book I) were the problem that they made young men less suited to the ‘martial’ spirit necessary for the defence of the country. It was this problem that needed government intervention in the form of funding elementary schools (always with some contribution financially from parents).

It had nothing to do with the potential need for government intervention over the heads of State Governors and City Mayors in the case of an emergency. Does Sean Gonsalves realise what he is suggesting when he demands that the US President should march in and take over the powers of a State (which the US President does not have and is unlikely every to get a Congress to accept). The fact that President Bush ignored the UN in the decision to go to war with Iraq is easily explained: there was nothing really that the UN could do to the US – which would veto any resolution to do anything about it at the UN Security Council. But there is plenty that the US Supreme Court (and the opposition democrats, and rival Republicans) could do against the President in such a blatant breach of the US Constitution.

If I had to spell the details out out to Sean Gonsalves (which I doubt), he would have no business being a columnist.

Great New Biographical Article on Adam Smith

The new 2004, 60 volume edition of the Oxford Dictionary of National Biography (DNB) has a great entry on Adam Smith. It is written by Donald Winch and is authoritative, scholarly and comprehensive.

I enjoyed reading every page and recommend it to everybody who wants to read about Smith’s Works, especially “Moral Sentiments” (the best short summary of his moral philosophy I have read for many a year) and “Wealth of Nations” (a cogent report on Smithian economics that corresponds to Smith's intended legacy). Donald Winch summarises Smith’s biographical details and places his contributions in proper perspective, pleasing I am sure to specialist scholars and pleasantly informative to general readers.

Donald Winch is the author of the much cited 1978 authoritative book: Adam Smith's Politics: an essay in histiographical revision, Cambridge University Press.

The problem this is not a cheap purchase. Even with a publisher’s discount it costs £6,750 (email: ged.welford(at)oup.com). Alternatively for £50 + vat (17.5 per cent) you get 3 month’s access to the entire DNB (£195 + vat for 12 months) from www.oxfordonline.com
Go for it if you can.

Last weekend OUP gave 3-days free access from which I looked up Adam Smith and brouse through many others among his contemporaries (nice to see several authors of entires citing my own work on Captains James Cook and William Bligh, two contemporaries of Adam Smith).

Punish those Caught With Their Hands in the Till

Uddin Ifeanyi contributes an opinion piece on “Re-Defining Corruption” in “This Day” (AllAfrica.com) Lagos Nigeria (25 September);.

In it he quotes from “Wealth of Nations” (IV.ii.9. page 456; square brackets indicate minor errors in transcription]:

“Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally [, indeed,] neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part [it]. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it”.

While Uddin Ifeanyi makes some excellent points in what follows I am not sure that he has completely expunged the error that links what Smith says here about the invisible hand (using Shakespeare’s metaphor from Macbeth: 3.2) with the working of markets. The invisible hand had to do with motivations, not markets, as I have pointed out her on many occasions. Ifeanyi continues:

“Yet, although Adam Smith did not allude to this detail in creating his “invisible hand” metaphor, the market is indeed a peculiar place. Take the “tragedy of the commons” as but one example of the unintended consequence of self-interest’s free play. And what about “enlightened self interest”? Does this not resolve the blind spots on which the tragedy of the commons subsists?”

Noticing the “tragedy of the commons” is an excellent observation by Uddin Ifeanyi of the error of laissez faire economics – market failure is indeed a problem, though it must be said the real tragedy of the commons is caused by the absence of property rights in the “commons”, which would allow a market solution to operate, and is not really a problem of market failure because markets in these cases do not exist to start with.

I disagree that markets are ‘peculiar places’. They are well understood (and were in Adam Smith’s day, too) and there is nothing mysterious (visible or invisible) about how they work – there is a difference between something being worthy of ‘wonder’ and knowing how it happens - See Adam Smith’s ‘Essay on the History of Astonomy’).

Uddin Ifeanyi continues:

“Arguably, the market works best, when relevant information is available to all market participants at the same time. But most times, markets fail - i.e. when voluntary actions within the market generate a negative result that all involved would regret if they knew of it - on the back of an asymmetry of information. Because one party to the sundry transactions that give markets their vitality comes into useful knowledge ahead of his/her counterparties, s/he is able to take lucrative positions to the disadvantage of others. In other words, due to this information failure, markets fail to direct resources to their most highly valued uses.”

The only markets where all participants know the same information simultaneously are those close to theoretical constructs like “perfect markets”. A well-informed shares market with no ‘insider information’, perhaps, might comply, but that is not really the point. Participants in markets in sophisticated economies (and less sophisticated economies that have sophisticated segments in the economy, such as commodity markets) tend to be well informed, if not perfectly well informed. Specialist analysts, data collectors and researchers trade in supplying information for fees to market players. On a less sophisticated level, trade journals, e-mail newsletters, newspapers and other media earn incomes from supplying information. The extent to which players use the information, are aware of it and can react in time will vary. In short, perfect distribution of information at infinite velocity to those who could benefit from it in any market is unlikely.

Uddin Ifeanyi’s main point in the article is to highlight how the defendant’s family treats corruption when a member of it is ‘caught with his/her hands in the till’ (apparently the case in Nigeria):

“Despite the process of transfer of public funds to private hands that corruption usually gives breadth to, the extent to which corrupt practices further the public good is doubtful. For not only does corruption in public office subvert the very foundation of the state by making it less able to discharge its responsibilities. It increases economic inefficiency by exacerbating income inequality.”

Be clear. An imperative of a Smithian market is that the participants obey the law and are subject to justice if they forget that. Corruption is a crime (including using ‘insider information’) and it can never contribute to the public good. Neither can the ‘tragedy of the commons’; the former need the vigilance of the legal authorities and the full rigour of the courts and the latter needs a market in property rights, not exhortations to curb consuming the ‘commons’.

Uddin Ifeanyi is absolutely correct to conclude: “the imperative that they highlight is the very strong need to align the interests of political office holders and their civil servant cadres with that of the voting public. This way, these servants of the state and the people would watch over corporate Nigeria with the “same anxious vigilance” that they watch over their own endeavours.”

I am sure Adam Smith would have agreed with that sentiment. Electors should always watch the conduct of their elected and paid officials with the closest scrutiny. What they say and do should always have public (and family) support for legal remedies for their market transgressions.

Authentic Voice of a Classic Liberal

Razzen Sally, a lecturer at London School of Economics, has contributed an article, “Free Trade: old arguments, new threats” in Bombay’s Financial Express (India). A clearer statement of the viability of free trade for the eradication of poverty by the development of prosperity could not be made.

Congratulations to Razzen Sally for writing such erudite good sense in the Smithian mould, and to Financial Express for publishing it.

In a sample paragraph, one of many that could be quoted, we read:

“The core arguments for free trade are as compelling today as they were when Adam Smith set these out over two centuries ago. These I characterise as the trinity of prosperity, freedom and security. The economic case revolves around a specialised international division of labour, unencumbered by artificial restrictions, that allocates resources more efficiently and leads to long-term productivity gains. All-round growth and prosperity are its results. The moral case for free trade centres on individual freedom. It is individual choice and entrepreneurship that drive international commerce and the resulting prosperity creates better life-chances. Finally, free trade contributes to a more secure international political environment. By forging commercial bonds among nations, it fosters better understanding among the peoples of the planet.”

That summarises superbly the vision of free trade. But there is still a long way to go. Modern protectionism is driven by a mixture of motives such as the anti-capitalist suspicions of anti-globalisation militants (including remnants of the old Marxist ‘Left’) and the hostility of those who suspect ‘western’ values affront their deeply felt religious beliefs. This is different from late 19th century protectionism, which primarily centred on crude nationalism.

The danger of the protectionism of the militants is that it denies the benefits of prosperity to those least protected from the horrors of their abject poverty. The dangers of the reactive protectionism of national states faced with the success of India and China (previously it was Japan and the ‘Asian Tigers’) is that it could stall the onward growth in prosperity (and political freedoms) that would benefit tens of millions of Asians and, in an extreme circumstances, it could provoke violent conflicts, including terrorism, among those aggrieved by their predicament, unable to share prosperity and excluded from sharing in political freedoms, and susceptible to domestic political and religious fanaticisms.

Raveen poses the crucial question:

“what about the future of free trade as an idea? It is vital that a rounded political, economic and moral case is presented, in the service of freedom, prosperity and security. In some ways, the post-1945 case for free trade has become too narrow and mechanical. It needs to burst these chains and return to its classical-liberal foundations in Smith and Hume. This throws up two points.

“First, the modern conventional wisdom has it that free trade abroad can be combined with Big Government at home. But free trade is part and parcel of free markets; it is part of a constitutional whole that includes limited government and laissez faire at home. Second, 21st century free trade should rely less on bureaucratic and cumbersome international trade negotiations and more on the 19th-century method of unilateral liberalisation. It spreads internationally by example and emulation. The WTO and other international trade agreements can be helpful auxiliaries, but their importance should not be exaggerated.”

LSE used to be a bastion of traditional classical economics (Lionel Robbins, for example) in the mid-20th century and it is great to read a spokesperson for the same tradition in the 21st century. His second point is particularly apposite for both India and China, both dominated by Big Government, with China further along the road to totalitarian forms of it than India (which is also a democracy).

Raveen’s bold point about spreading free trade by unilateral ‘example and emulation’ is really radical, especially for the major economies (USA and EU). Unilaterally abandoning protection in agriculture can be afforded, political opposition can be resisted and generosity can be justified in the great cause of creating global wealth (which is a creation of mankind) and eliminating absolute poverty (which mankind did not create and cannot eliminate by demonstrations and charity).

Raveen’s article concludes:

“John Stuart Mill remarked that it is “the word in season, which, at a critical moment, does much to decide the result.” It falls to free trade’s friends to spread their word in season with global political currents, anti-protectionist interests (such as exporters, downstream users of imported inputs, globally-integrated multinational firms) and (often unanticipated) events.”

That is the authentic voice of a classical liberal. Do what you can to spread it throughout the Blogosphere. Adam Smith’s legacy is safe in the likes of Raveen Sally’s hands.

A Shame that it Has to Go

An old, old story to do with street markets – of the kind that Smith knew well, as did his contemporaries, for they were the only kind of markets that existed before the end of the 18th century outside the largest towns.

Street markets were to be found all over rural Europe, even in the smallest settlements on ‘fair’ and ‘market’ days. Remnants still exist in rural France. Where I live for part of the year – in rural Gironde – there is a ‘market’ day in one or more of twenty nearby small villages and towns within an hours driving distance, and in the nearest large town, Libourne, they have a street ‘market’ on three days per week.

Ever since the early signs of the restoration and re-emergence of the commercial economy in western Europe, a thousand years after the fall of Rome and the consequential descent into barbarism plundering a depleted agriculture (with violent unequal ‘arguments’ over hunting between ‘poachers’ and "Lords' bailiffs"), street markets were the most obvious manifestation that one age was passing and a new one beginning.

Predictably, with the emergence of markets – their noise, smells, rubbish and occasional fights, the local authorities sought to organise and administer them, with fees from traders, licenses and levies, and always in the name of ‘good order’, always as part of efforts to stamp out ‘petty crime’ and always with a tidier vision for what else they should be like other than the sprawling reality of how they always became, over-spilling into near-by streets, occasional ‘illegal’ practices, a little gaming, some excessive drinking and occasional opportunistic prostitution.

The Warsaw Business Journal, 26th September 2005, reports a threat to its city’s world-famous ‘bazaar’ from the conservative-minded Law and Justice (PiS) political authorities in an article: “Stadium threat” by John Todd. He writes:

"The stadium is known for unsanitary conditions, crime, a lack of any standards. If we want to be a modern capital city, it can't go on," says Jan Ołdakowski of Law and Justice.
Traders from around the world hawk everything from sofa sets to pirated DVDs and icons to baby ferrets at the defunct football stadium in Praga.

Warsaw's mayor Lech Kaczyński, a fellow PiS member and the party's candidate in next month's presidential election, wants the central government to shut down the illegal traders, move the legal ones to a new site and rebuild the stadium.

It's estimated that 4,500 merchants ply their trade, compared to the estimated 4,000 at Istanbul's Grand Bazaar. Music, film and software groups say the stadium accounts for 25 to 30 percent of all pirated material - excluding Internet piracy - sold in the country.

A Polish woman, who gave her name as Małgorzata and who paid her way through four years of university by selling pirated DVDs, said the Armenians, Poles and Vietnamese who control the three main areas don't stray onto each other's turf.”

Comment:

Street markets are good for a community. They sell fresher food than supermarket chains, often straight from the farms and orchards they were picked from that same early morning. People of all income groups attend looking for ‘bargains’.

In post-communist regimes, they are great schools in entrepreneurship and the simple – but, heavenly – practice of exercising choice. In state-stifled capitalist countries they are areas of independence, good for the economy and for social stability.

The dead hand of bureaucracy cannot stand them (though their spouses and kids also use them) because they are out of their control. They send in the inspectors, the license sellers and the officious, and drive them into order and discipline on pain of the badge of criminality for any who resist.

The lack of hygiene, the petty criminality and the disorder cannot be tolerated and, without actually lowering their country’s crime rates, or its food poisoning, or the disorder, they kill-off a symbol of a country’s vibrancy. They turn their foods into bland imitations of the real thing in packaged cabinet-sealed super markets, crime continues but elsewhere, and where an area had colour, the smells of fresh food and the laughter of happy commerce, it becomes, well, a parking lot, a monstrous development and a city space of branded businesses, the same as in any similar city anywhere else.

Adam Smith’s world of street markets vanishes from another part of the world. Sad.

Makings of a Man of System

The Daily Collegian 26 September (Amherst, Massachusetts, USA) carries an opinion piece by Matthew Giancola, Collegian columnist, entitled “I want a government I can trust”.
In it he accounts for his disillusion with George Bush and his drift towards supporting somebody else, or at least looking for someone else to support:

“governing should not be about beating someone else. It's about making the country better when you leave than when you started. Government should be about helping people. It should stand for equality, liberty and justice; for helping those who, due to physical or social circumstances beyond their control, cannot help themselves.”

And what was the turning point in this student’s disillusion with Republican’s? The Energy Bill:

“Government should not be used to help self-sustaining corporations as is the case in the recently adopted energy bill. In this monument too big, wasteful government, millions of dollars are given to big oil companies that make hundreds of millions of dollars in annual profits; companies that aren't in dire need of receiving federal subsidies.”

He does not want government to do anything that would support the interests of ‘big oil companies’ (a fair enough populist cry), but difficult to achieve if you pass legislation on anything to do with oil because oil involves oil companies (and their employees and their families; and raises taxes to help those who “cannot help themselves”). Given that he asserts the US has a “wasteful government”, Matthew Giancola wants the same wasteful government to “help people”, particularly “those who, due to physical or social circumstances beyond their control, cannot help themselves.”

And then he brings in Adam Smith to the argument:

“To paraphrase Massachusetts Congressmen Ed Markey, "Adam Smith would be spinning in his grave." A well-worn cliché, long since drained of any literary power it had and as usual followed by an ascription to Adam Smith that has arguable relevance either to Smith or the subject:

“This money should go into helping small start-up businesses get on their feet. And since this is an energy bill, that money could go to companies developing new, clean energy alternatives.”

Think of the practical implications of this notion of organising ‘help’ from a ‘wasteful government’:

Define, identify and select:
‘small (how small?);
‘start-up businesses’ (how financially sound, how good are their business plans, what about the backgrounds of the people involved?);
‘get on their feet’; (how long do we give them, when do we pull the plug on them financially);
‘that money could go to companies developing new, clean energy alternatives’ (given the scale of the technology and finance involved and the years, perhaps, needed to prove a ‘clean energy alternative’, how much do we give to each venture and why are the ‘big oil’ companies, the one’s with the most experience and the best funded research programmes excluded from support?) and, if the above is not enough, how big an audit force do we need to monitor all this expenditure, check on its productivity and decide if it is working effectively – if efficiency is doubtful, I’ll settle, no doubt in vain, for effectiveness?

Matthew’s proposal uses a bogey target – Bush, who is having a bad time at present – and offers an alternative that appears attractive, yet when you look at it you see all the makings of a complete waste of large sums of money (taken from tax payers) to do what governments – any government, including one headed by Massachusetts Congressmen Ed Markey, or even Matthew Giancola – always do badly.

Governments cannot, and need not, devise schemes to reward entrepreneurs, except tax them lightly, maintain stable conditions and ensure that the law is enforced on their operations, as it is on individual citizens.

I am entirely unconvinced that Adam Smith would be spinning in his grave, either about America’s ‘big government’ or about ‘big oil’. He wrote eloquently, and often, about government waste, its susceptibility to lobbying by special interests, the impudence of governments thinking they can do better than individuals in the spending of their money, and the ‘men of system’ who offer plans for society that take account of everything but the fact that people are not ‘wooden chess pieces’, moved about by the hand of the players, but are humans who move about of their own volition.

And that was true in the 18th century; it is still true in the 21st (and, no doubt will be true in the 31st).

In the meantime, we should watch for the name of Matthew Giancola, because he has the makings of an electable politician (also known as a ‘man of system’) and may, some day, move closer to centre stage under the banner of ‘the man you can trust’, a marketing phrase we have heard before from every politician who seeks to manage the government’s chess board, but I sense something different in Matthew's article that suggests he means it.

Nothing to do with Invisible hands

From the Orlando Sentinel (Florida), 25 September: “Gas prices fast to rise, slow to fall: Economists call this phenomenon the 'rockets and feathers' syndrome.” It is written by Paul Adams the (Baltimore Sun) with contributions by Christopher Boyd of the Sentinel staff, so it is not clear which author is responsible for the following error:

“Theories vary as to why this happens, but economists say it has much to do with the vagaries of the nation's fuel markets, which are routinely buffeted by a volatile mixture of politics, natural disasters, erratic consumer behavior, and the unforgiving forces of supply and demand -- all guided by what 18th-century Scottish economist and philosopher Adam Smith described as an "invisible hand."

Hopefully, regular readers of the “Lost Legacy” Blog will recognise the avoidable error, picked up from woefully inaccurate lectures in Economics 101 (or possible something called “Bluff Your Way through Adam Smith”, authored by someone who never read a word of his).

I challenge Adams and Boyd (and anybody else) to show anything that Adam Smith wrote that links the well-known economics of supply and demand – of which there is nothing mysterious – to Shakespeare’s metaphor of the invisible hand (Macbeth, 3:2), which was used by Smith only once in “Wealth of Nations” (Book IV.ii.9, page 456), as a metaphor for something else entirely and and it had nothing to do with markets.

What happens when buyers panic in the face of a rumour of petrol shortages, following an event like Katrina, is predictable, well known and inevitable: they create the shortage they want to avoid.

That prices rise when a shortage threatens or eventuates is also predictable in a free market. It delays the time period during which the commodity (petrol/gas) become totally non-available. Leave prices where they are only speeds up the transfer of the commodity stored in garages to supply the normal quantity demanded to the tanks of consumers who take time to use it (and perhaps continue wasting it on non-essential travel). Meanwhile, the normal quantity demanded cannot be met because of the surge in the demand and the drop in supply, even before the quantity supplied actually falls because of whatever natural calamity causes the rumours. It 'brings on' (as Americans say) the effects of the calamity.

Again this has nothing to do with the invisible hand. In “Wealth of Nations” (Book IV.v.b: pages 524-543) when Smith discusses ‘dearth’ (in this case situations that lead to famines) he does not mention invisible hands at all. Where Adams and Boyd get the connection from I have no idea, except it never came from Adam Smith.

An Excellent and Imaginative Suggestion

Paul Hutcheon in today’s Sunday Herald, 25 September, (Glasgow) writes an article, “Tourism bosses told: market the Enlightenment”, making an excellent and imaginative suggestion from David Speedie, special adviser to the president of the Carnegie Corporation in New York: “the Scottish Enlightenment is a unique selling point that could bring thousands of overseas visitors to the country.”

“The Scottish Enlightenment, which stretched roughly from 1740 to the early 1800s, is widely regarded as a period when Scots led the world in philosophy, political economy, history, architecture and geology”, writes Paul Hutcheon. “Kirkcaldy-born Adam Smith is one of the most revered figures of the age. His tract, The Wealth Of Nations, has inspired free marketeers and economists all over the world.”

Comment:

I certainly welcome such a suggestion, more for the outcome – a wider appreciation of what the Enlightenment was about – than for the likely means – a state-financed quango to oversee it, which, if not careful, would bureaucratise it and donate along with its (our!) money the usual dead hand of expensive lack of imagination. Of course, an Enlightenment Promotion Office ran from within the civil service would be much worse!

The Adam Statue, to be erected in Edinburgh’s High Street by private donations and outside the suffocating hug of government, is an excellent start to such a campaign, followed by the renovation of Adam Smith’s grave a short walk down the same High Street (though, true to form the offer of private funds for the expense, about £10,000, is snarled up in the Council’s Planning Department). Recently, I commented here on the Enlightenment links in the recently announced Edinburgh Literary Trail.

With Speedie’s suggestion it seems there might be momentum growing to do something worthwhile with it. Other key figures from the period were Frances Hutcheson, whose philosophical formula, “the greatest happiness for the greatest numbers”, anticipated utilitarianism, and, of course, the towering figure of David Hume, born at Ninewells, near Edinburgh, who contended that moral values and judgements were social constructs. As were Lord Kames, John Dalrymple, Adam Ferguson, Professors Black and Hutton, Professors Stewart (father and son), William Robertson, Andrew Carlyle, and the Adam family of architects.

From Wall Street Journal to Moral Philosophy

In yesterday’s Blog on the discussion between Professors Russell Roberts and William Polley in the Wall Street Journal (WSJ), I praised them for the excellence of their article. I have since followed up by looking at their Blog sites (www.marginalrevolution.com and www.williampolley.com/blog).

On William Polley’s Blog he carries, today, a reference to an article in WSJ, 29 September 2004 (http://www.opinionjournal.com/extra/?id=110005687) by Professor Deirdre McCloskey, who teaches economics, history, and English at the University of Illinois at Chicago; and philosophy, economics, and art and cultural studies at Erasmus University of Rotterdam. She is the author of 20 books on economics, British economic history, and the rhetoric and philosophy of economics; and is finishing another called "The Bourgeois Virtues: Ethics for an Age of Capitalism." Her article appears in the Fall 2004 issue of In Character: A Journal of Everyday Virtues. I think readers of “Lost Legacy” would find it most interesting on its own account and also because of her many references to Adam Smith and “The Theory of Moral Sentiments”.

Entitled, “What Would Jesus Spend?: Christian virtues won't hurt the economy”, Deirdre McCloskey, says much with which I would agree, and as it is consistent with Smith’s approach in “Moral Sentiments”, I feel sure he would have agreed with her too.

However, this is a Blog dedicated to being accurate about what Smith wrote and asserted in the context of mid-18th century Britain, and I am therefore obliged out of defence of our standing policy to comment on one area of Smith's work where I believe Professor McCloskey goes astray. It concerns, you may not be surprised to know, the vexed question of the metaphor of the invisible hand, though not of the kind that such errors of attribution normally attain.

She explains Smith’s acerbic comments on the consumption by the “proud and unfeeling landlord” who forgets “his brethren” and imagines he consumes all of the produce of his lands, but because his stomach is no bigger than a poor man’s, he receives ‘no more than that of the meanest peasant’ (TMS IV.i.10. page 184). In “Wealth of Nations”, Smith adds that the “rich man’s” desire for ”the conveniences and ornaments of building, dress, equipage, and household furniture, seems to have no limit or certain boundary” (WN I.xi.c.7. page 181)

Professor McCloskey comments:

"This is all true. Millionaires, and especially billionaires, have limits on how much they can use those incomes so much higher than ours for correspondingly unequal consumption--of, say, trousers. But Smith--arguing in effect against Rousseau's notion that property brings inequality in its train--goes too far. In consequence, he says cheerfully, the rich "are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants.

That is incorrect. Smith is forgetting that if, say, Saddam Hussein took 50% of Iraqi national produce and put it into arms and palaces, the stuff was in consequence not available for ordinary Iraqis to consume as food or fuel or shelter. Iraq was impoverished, and so the necessaries of life were available in nothing like the distribution that would have been made under equality. The percentage distribution was the same--one man, one pair of trousers--but the absolute amount was reduced by the needless luxury. Saddam may not have gotten the benefit of palaces he never visited. But neither did anyone else. Socially speaking the resources were thrown away. What a rich woman cannot consume, such as the diamond bauble that sits unworn in the back of her jewelry box, is simply wasted, socially speaking. She gets no pleasure from it, except perhaps the happy memory of its purchase.”

I respectfully disagree with her assessment of the veracity of Smith’s assertion, without it in any way undermining the excellence of the rest of the full article. Let me dissect Smith’s actual statement to show why. The rich landlord cannot consume all the produce of his land. The surplus above his own consumption he is:

“obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, among those who provide and keep in order all the different baubles and trinkets, which are employed in the œconomy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessities of life, which they would in vain have expected from his humanity or his justice.”

The “rich landlords” select from the heap of produce ‘what is most precious and agreeable” and:

“in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end of which they propose from the labours of all the thousands whom they employ be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements.”

This leads directly to Smith’s only reference in the “Moral Sentiments” to Shakespeare’s metaphor of the invisible hand (Macbeth: 3.2) and makes its context clear (above all, that it had nothing to do with the working of markets; which ‘workings’ are certainly not mysterious and are well known):

“They [the rich landlords] are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided in equal proportions among all its inhabitants, and thus without intending it, without knowing it, advance the interests of society, and afford the multiplication of the species.” (TMS IV.i.10 pages 184-5)

Smith’s assessment was absolutely correct. First, look carefully what he said. The rich landlord believes he consumes all that his land produces, but in order to eat his food, sitting in a palace (compared to the hovels lived in by his retainers and serfs – except those retainers living in the servants quarters of his palace), prepared by his cooks, served by his waiters, fitted out and maintained by his retainers and protected by his armed guards, all of whom receive a share (not a fair share) of the food distributed to them by the rich landlord, or more accurately by his ‘Factor’ and his Oafs, which comes from the large pile his lands produce.

Moreover, the serfs who work his land, plant, tend and harvest the crops and shepherd his sheep, goats, horses and cattle, also draw of the same pile (again not fair shares), as do the local clergy in the Church, and so on. Rich men also fancy (‘insatiably’) “all the different baubles and trinkets”, plus covers, cloaks, trousers, kilts and nick-knacks, all of which are produced and sold to him for his ‘gratification’ and vanity and delight by those who produce them or bring them in trade. All these people receive in return the necessities of life, in some measure related to their value, or the equivalent in coin.

Now Smith’s proposition is perfectly accurate. For a single rich landlord his annual produce is distributed in this manner and they receive: “nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided in equal proportions among all its inhabitants”. Each family’s share is “nearly” the same (i.e., probably less) than it would have been if each family had the same amount of land to live off. I should think that this would have led to a smaller total annual produce for the same number of people because of the inefficiencies in small holdings, without the progress of the “improvements” wrought by feudal tenures, and the ‘protections’ afforded by his landlord.

Now what is true for a single rich landlord would have aggregated to a similar truth for a society of all landlords. All that is produced is consumed, unequally, but the subsistence level would be sufficient for the “multiplication of the species” (a prime objective of the ends of nature in “Moral Sentiments”).

This leaves the validity of Professor McCluskey’s analogy of Saddam Hussein’s palaces and the Iraqi population in her article:

“The percentage distribution was the same--one man, one pair of trousers--but the absolute amount was reduced by the needless luxury. Saddam may not have gotten the benefit of palaces he never visited. But neither did anyone else. Socially speaking the resources were thrown away.”

This does not invalidate Smith’s assertion, Saddam Hussein being no stranger to “selfishness and rapacity”. His palaces were guarded by retainers and soldiers, watched by his police, courts and jailers and built and maintained by labourers, and in so far has they were paid for these services, as were the rich traders who visited him and his bureaucrats and sold him ‘trinkets and baubles’ (and weapons), they too shared in the stolen loot of 50 per cent of GDP in Professor McCloskey’s scenario. The people of Iraq were poorer than they needed to be in much the same way as were the retainers and serfs of feudal Britain in the 18th century. But the appropriate distribution of income is not Smith’s point so much as the effect of these motivations from which the rich landlords believed they benefited. The equity, efficiency or otherwise of these operations has nothing to do with the point Smith makes.

It was the lure of trinkets and baubles that finally undermined the power of local feudal lords; they handed over their surplus produce to traders and manufacturers and in consequence, had to free the serfs from feudal to tenancies, which reduced the lord’s powers militarily and politically. The towns grew more powerful and, with the re-establishment of commerce from the 16th century on, led to the growth of markets and the political powers of the new rich merchant and manufacturing classes. As they say, the rest is history.

Professor McCloskey’s last point in the article is so accurate and worth noting that I hope my above critique does not leave anybody doubting that she is a person worth reading (check out her article):

“The businessmen wearing the Adam Smith ties need to do a little reading of “The Wealth of Nations” and especially The "Theory of Moral Sentiments" on the train from Westport. Smith did not say, ever, that Greed is Good. And the Christians and other opponents of the sin of avarice need to stop conceding the point to the men of Westport. There is no paradox of thrift, not in a properly Christian world. Nor even in the world we have.”

(Google 'Deirdre McCloskey' and read some of her other articles.)

Global Trade Has a Long History

In today’s (23 September, 2005) Daily Times, Pakistan (‘your right to know – a new voice for a new Pakistan’), Dr Johann-Volker Peter, attorney-at-law in Frankfurt/Main, Germany, writes in an article “Globalisation: investment in a world of scarcity and complexity”:

“Anti-globalisation activists protest against international economic institutions, international groups, global trade agreements, international investments, and the alleged negative consequences for the poor. They are wrong. Globalisation is not just ‘international agreements and institutions’ but also a complex historical process. It is rooted in the worldwide division of labour and production. It is consequence of the scarcity of goods and the complexity of life.

Already in 1776 Adam Smith (1723-1790) had explained in his Wealth of Nations, “A country that has no mines of its own must undoubtedly draw its gold and silver from foreign countries in the same manner as one that has no vineyards of its own must draw its wines.” Thus he pointed out in the 18th century a principle that holds in the 21st century: a scarcity of goods and factors of production leads necessarily to a globalised economy. International investments are required to cope with the scarcity of goods, factors of production, and complexity of the world economy.”

Comment:

Globalisation has become one of those buzz words signifying what is presented as a new discovery: international markets and supply chains, as if these are something new. Some people even talk of the ‘first era of globalisation’, which apparently ended in the 1914-45 European wars, followed now in the 21st century with the ‘second era of globalisation’ (with the implied threat it too will end in global wars). Such talk is non-historical; suited for pressing the case of ‘imminent new threats’ and mobilising excitable demonstrators, but of no significance for understanding, nor of much value as a prediction.

Global trading has a long history – several millennia – and is not just a late modern invention. Evidence of trade in the earliest surviving remnants of human settlements (including Neanderthals, as well as Homo sapiens) show that trade was conducted over quite vast distances (modern Germany to modern Spain). The Roman Empire was a commercial society, not just an agricultural society, and when it fell to barbarian invasions, an almost trade-less society endured for near-on a thousand years (500 – 1500 in the Common Era), until gradually restored, and on which Adam Smith famously cast his gaze inn the mid-18th century.Even in the depths of European barbarism – around the first millennium of the Common Era – traded goods travelled from as far as Cathay (China) (silk) and across Northern Europe from the Baltic, from southern Europe and from Aquitaine (south-west France).

The history of the world since the first millennium (CE) is a history of the expansion of international trade, first in commodities, which only the families of ‘Princes’ consumed, until today where the families of the entire spectrum of society are joined in international divisions of labour and their concomitant necessity, international markets.

Price 'Gouging' Again

Staff writers at the Independent Record, Helena, MT, USA, compile thoughts on gasoline ‘price gouging’ following Katrina (21 September 2005).

They report that some people were surprised to hear President George Bush was among the politicians warning against ‘price gouging’. They comment:

“But, despite the president's capitalist credentials, they shouldn't have been surprised. Bush is a politician, and responding to constituents' concerns is what politicians in a democracy do. … Voters may not fully understand the mechanics of fuel pricing, but they know when they smell a rat.”

This is an example of the economic illiteracy discussed in the previous post, evidenced by the comment they make next, with its gratuitous mocking of Adam Smith ('deity' indeed) and the usual rubbish about the invisible hand:

“Well, people less than convinced of the deity of Adam Smith and the "invisible hand" of his ideal market might agree with this basic lesson in economics 101, but that doesn't prevent them from noting that one whole heck of a lot of money is going somewhere real fast. It's not necessarily going to the guy who runs the gas station on the corner — his profit margins probably haven't changed much at all — but somebody is making out just fine.”

The point of gasoline prices going up rapidly is to deter, if not eliminate, people buying gasoline at the old lower price and to drive some of the quantity demanded off the market temporarily until the impending or actual shortage eases. True, you could achieve this several other ways, though none of them is as efficient as letting prices rise.

You could appoint special deputies to attend each garage forecourt and interview the car owners to decide (on some specified criteria) just who should be allowed to fill-up at the pumps. This might take some time to a) specify the criteria to meet the community’s priorities; b) argue it through with those disappointed at not meeting the criteria, and c) have law officers present to arrest those who refuse to leave without gas/petrol and to deter attacks on the deputies.

You could leave prices as they were – ban any price rises – and allow people to fill up (from an orderly queue? – who enforces it?) until the garage empties of gasoline, as it surely will speedily from panic buyers led by rumours. Then nobody else would have access to gasoline no matter what their need or their willingness to pay higher prices, no matter how high they might have gone.

Of course, it is possible that owners of garages would close-up their premises and go home, on grounds that the aggravation of dealing with angry drivers was not worth the hassle.

The staff writers concede these points:

“It's probably true that rising prices are slowing demand and thus preventing long lines at the pump.”

Their objection to prices rising appears to be concern about who is gaining from the price hikes:

“But we're paying mightily for the privilege of a quick fill-up.”

The gasoline companies make windfall profits in the short run (so does the government from gasoline taxes, normally proportional to the price per gallon/litre). That is the ‘price’ we pay for having the market constrain the quantity demanded; the purpose is to eliminate the queues of those who do not want to pay, or cannot pay, a higher price and who can make do with what they have in their tanks or who can make other arrangements during the shortage.

Proposals for windfall taxes of the oil companies won't do anything for the owners of cars paying more for their mobility. Others advocate the government should cut its tax on gasoline and reduce prices. Well, no faster way to empty the garages of gasoline could be devised - then a pending shortage would become and actual one within hours.

“Maybe it isn't quite right to call current pump prices "gouging," … but it won't hurt a bit to have state attorneys general and other elected officials investigate the matter. In a democracy, that's what those officials do.”

Sure. Have an investigation, afterwards. Perhaps a public inquiry. But for now, during the early hours of the shortage, let markets do their work, quickly, efficiently and without fuss. That’s what markets do.

Good Sense on Illiteracy in Economics This Month's Prize?

Two economics professors in the Wall Street Journal on-line discuss economic illiteracy and contribute perceptive thoughts on the problem and consequences of public ignorance of economics. Their discussion is reproduced in: “Knowledge Deficit” on 21 September. Russell Roberts is a professor at George Mason University and William Polley is a professor at Western Illinois University. I provide two short extracts, which do not do justice to the debate at all (see www.wsj.com for the full debate):

Russell Roberts writes: What is economic literacy and is it important? I'd start by defining what it's not. It's not financial literacy. It's nice to understand how the stock market works, how compound interest can grow faster than you might think and how to balance your checkbook. High school classes, along with the media, often mingle the two kinds of literacy, which continues an unfortunate confusion that economics is mainly about money.

Bill writes:. Perhaps a return to the ideas of Adam Smith as expressed in both "The Wealth of Nations" and "The Theory of Moral Sentiments" would yield some suggestions though, because I think it would reveal how much more broadly we have to think.

"The Wealth of Nations" is a treatise on man's interaction with his fellow man in the marketplace. That is, it's a study of prudence. Today, it ends up being taught as constrained maximization, and in the rush to cover all of the techniques, essential insights can be lost if you're not careful. A thorough examination of the virtue of prudence as Adam Smith perceived it would be time well spent, and it's a nice complement to the idea of constrained maximization for those who are technically inclined.

"The Theory of Moral Sentiments," on the other hand, is a treatise on temperance. It is a study of propriety, sympathy, and justice. Sadly, many people don't even know the book exists or that it was written by the man who is sometimes called the "father of capitalism." Ignorance of Smith's other major work leads people to think that economics is only about greed, self-interest, and rational maximization. As a result, many intelligent people who would be quite capable of becoming economically literate are turned off to economics because they see it as promoting a "greed is good" mentality that doesn't square with their world view. Unfortunately, this perception is so well embedded in the pop culture view of economics and economists that it may be very difficult to reverse.”

And Russell Roberts comments on the role of the Blogosphere:

“Russell: One source for optimism in this otherwise bleak analysis is the blogosphere. I think it's very hard to teach the economic way of thinking. But reading the best economics blogs is like sitting around the faculty lounge absorbing the economic way of thinking by example. The blogosphere has made it a lot cheaper to acquire good economic intuition. And it has made bad journalism a little more expensive.

Bill writes: Naturally I share your sense of optimism for the blogosphere, Russell. One can get quite an education from a regular reading of some of the many fine economics blogs. I see incredible potential in this medium for communicating the economic way of thinking to a wider audience.”

Comment:

The debate as a whole, and Professor William Polley’s suggestion on reading Adam Smith’s two works in particular, is prime candidate for this month’s ‘Lost Legacy Prize’.

Economics teaching is in good hands if Professors Roberts and Polley are representative of the profession; patently they are not, though the main problem is what many others have been taught as students in in Economics 101 and beyond. We read of some of their errors in the world’s media in "Lost Legacy" every day almost.

I like the line that the Blogosphere has made ‘bad journalism’ ‘more expensive’. In correspondence I initiate with some of the authors of the pieces I report here, several reply they had only repeated what they had been taught; a few that they had been teaching the error for long enough, but they would rephrase their words in future.

Separation of Markets from Religion

In an article published in “England on Sunday”, a paper from from within the community of the (Anglican) Church of England, Marcus Braybrooke, writes in “The Record - Bringing theology and economics together again”:

“Economics has its origins in ancient Greece and its roots in ethics. Aristotle, for example, said that the ultimate purpose of politics and economics is ‘the good of man.’ It is also forgotten that Adam Smith was a professor of Moral Theology and wrote The Theory of Moral Sentiments 16 years before his famous book The Wealth of Nations. In The Wealth of Nations itself, Adam Smith laid the groundwork for economic analysis but this was embedded in a broader discussion of social justice and the role of government. He observed that “Commerce… ought naturally to be, among nations, as among individuals, a bond of union and friendship.”

Braybrooke also states:

“the guru of the World Economic Forum, George Soros, has warned that if economic activity is governed solely by the principle of self-interest, it is in danger of undermining social values and loosening moral constraints."

He also recites the pessimistic changes wrought by countries like India and China on levels of world poverty and repeats that fallacy that poverty is getting worse, when in fact the data show that poverty is decreasing, not increasing, and that this is a result of loosening the central powers of the State and allowing markets to develop more freely.

“Certainly the widening gap between rich and poor is intolerable. I have never forgotten on my first visit to India over 40 years ago seeing young children picking over the rubbish heaps looking for a scrap of food. The gross inequalities in our contemporary world are iniquitous and getting worse. Half the people on earth live on less than two dollars a day, a billion people on less than a dollar a day. A billion people go to bed hungry every night – and a billion and a half – one-quarter of the people on earth — never get a clean glass of water. One woman dies every minute in childbirth. The situation is aggravated by the spread of HIV/AIDS. Two and a half million people were expected to die of AIDS in the year 2004. Rightly, the conference in Kenya at which our book was launched, was preceded by a visit to an orphanage for children — some of whom were themselves infected – whose parents had died of HIV/AIDS.”

A great deal has changed in 40 years (1965!) in India and China (and Taiwan, Guandong, Shanghai, Malaysia and Singapore) since Braybrooke watched the all too common sight of people picking over the rubbish dumps. Tens of millions have been brought beyond poverty with work opportunities in thriving economies (for recent data, see www.globalizatioinstitute.com). Markets are doing more for making poverty history than all the demonstrations, all the wringing of hands and all the slogan shouting; that they don’t shout about the tremendous strides in enriching poor people – which it is plain to see travelling around these countries – can only be because the facts of the changes undermine the story that it’s getting worse, not better, and it would, of course, mean fewer sales for books telling them the opposite.

Adam Smith analysed the problem of the poverty of nations by looking for data on how nations could grow wealth and what made it difficult to do so if countries curtailed economic activity. The Soros view that ‘self interest’ is the problem (which, I may say, is a view he came to have exhibiting his self interest unashamedly in a very unSmithian manner for years – though it is better than a sinner is repentant than that he continues with ‘sin’) misses the point about self-interest in commercial economics. It is the mediation of self-interest in commercial bargaining – ‘I can only get what I want, if and only if I give you what you want’ (Wealth of Nations, Book 1, chapter 2). Two self- interested ego-maniacs will fail to agree to a bargain if they remain ruthlessly committed to their own self interest and do not take account of the other party’s self interest, and what is true for one of them is true for the other. That is the meaning of Smith’s reference to the ‘bonds of union and friendship’.

Whether there is much to be gained from brining ‘Economics and Theology together again’ is debateable. The history of religion and commercial activity is not replete with great examples or encouraging precedents. The Church in Smith’s day took a reactionary view towards commerce and to those who advocated Natural Liberty (for example, David Hume and Adam Smith) and sided throughout the ages with Mercantile interests that treated neighbours as the enemy. The problem is that religious people see themselves as the paragons of morality; the fount of all ethical policies. Braybrooke advocates unspecified ethical policies and declares: “It is now vital that moral constraints are applied to globalisation.” He hopes that globalisation will bring people to a common sense of ethical purpose.

In Smithian markets the players are free to do what they wish under the necessary constraint of the rule of law and justice and not to harm others. Illegal actions, anti-social policies of pollution dumping, toxic waste, and dangerous production methods, are no part of a Smithian market. What role there is for religion in the rule of law is not obvious and given the intolerable behaviours that often result when religions meet in close proximity, I do not expect much from their contributions – before they preach to others they should put their own inter-faith relations in order.

LibDem Spokesman Refers to Adam Smith

Oliver King, political editor of The Guardian, 20 September 2005, interviews Vincent Cable of the Liberal Democratic Party. He opens with:

'If the Liberal Democrats were a different kind of party, Vincent Cable would be the man who told his colleagues to turn the music down and go to bed. A self-styled "enforcer", he has to impose financial discipline, reign in uncosted spending pledges and give the party much-needed economic credibility. That doesn't always make him the most popular Liberal Democrat, but his is a role that could be crucial to the future success of the party. A look at the opinion polls suggests more people would vote for the Liberals if they trusted them on taxation. Hence Mr Cable's belief in "fairer not higher" taxation'

At the end of the interview he asks:

“OK: You're often perceived as being on the right of the party, if that's a fair term. On a personal level, who is your political hero?

VC: Let me step back a bit. I'm not on the right. I've just written a pamphlet for Demos where I've tried to debunk the whole concept of left and right polarity. It clearly exists on a limited scale as a principle in politics, in terms of identity, immigration and Europe. But I don't think it helps to be put in a box of being right, left or centre. In terms of a personal hero, I don't have one individual, but there are people in the liberal tradition who I've studied who I've found inspiration from intellectually and in other ways. I'm an economist and Adam Smith was someone who came up with a lot of the ideas we have today, not just markets but capitalism with a moral purpose, essential public goods that came from Adam Smith, not just free trade. If you look through the nineteenth century, figures like Gladstone and Lloyd George and social democrats like Roy Jenkins, they've all played a role in building how I look at the world.”

Comment:

It is becoming fashionable (which, at least, is a step in the right direction) for UK politicians to refer to Adam Smith in terms of his decency, his humanitarian approach, his moral sentiments and his sympathy for the underdog. This is in contrast with the more usual rabid and extreme presentation of Adam Smith as a ‘social-Darwinist’ (actually a libel on Charles Darwin), of so-called laissez faire dogmas, unsentimental adherence to libertarian free markets and, of course, an orphan child of that misused metaphor, the invisible hand.

Jacob Viner, that great Smithian scholar of the first half of the 20th century, remarked in regard of the “Wealth of Nations”:

“Traces of every conceivable sort of doctrine are to be found in that most catholic book, and an economist must have peculiar theories indeed who cannot quote from the Wealth of Nations to support his special purposes.”

(Jacob Viner, ‘Laissez Faire’ in Adam Smith, 1776-1926: lectures to commemorate the sesquicentennial of the publication of the Wealth of Nations, Augustus M. Kelly, 1989 [1928: University of Chicago], page 126).

And this is the problem with the recent fashion of quoting Adam Smith in political debate (as Roy Hattersley does in one of today’s Blogs). Each side quotes what suits them and neither side show any inclination to take Smith’s views in their whole – usable quotes along with the unusable quotes, or better still by demonstrating knowledge and familiarity with his entire Works – to present a complete picture of Smith’s views rather than the partial one with which they agree.

History Tour and the Price of Petrol in Nigeria

In Vanguard, (Lagos, Nigeria) Morenike Taire writes a strange piece around a theme of Adam Smith to which “Lost Legacy” might be sympathetic, but which goes off the rails at times and ends up without being clear what it was about (this may, of course, be due to references to local Nigerian events of which I am not aware).

Morenike writes:

“It all started, supposedly, with Adam Smith, and his theory that screwed up the study of economics forever. That, sentimentally arguing, might not have been the intention of the so-called father of modern economics who, by his 1776 book, The Wealth of Nations, changed the way the world functions forever.

Smith approached the issue from a totally different angle from what his capitalist descendants today approach it. He might be said to have been patriotic, seeking to reach nationalistic interests by individualistic means. His descendants, on the other hand, go about it the other way, mainly in using national means towards individualistic ends, and pretending to be sticking strictly to the ideals of their founding father.

Smith’s argument had been that the wealth of nations could be increased by allowing the individual to seek his own self interest and by removing government control over the economy.

He further proposed a deliberate minimization of the role of governments and the maximization of the role of the free market. Smith might have hoped, by his widely controversial and acclaimed theory, that the capitalism he endorsed would promote political freedom and by extension, economic freedom. This might explain why while today’s capitalists use Adam Smith’s theory as their defense, today’s socialists also borrow from him.”

See what I mean about it suggesting a broadly correct stance on the treatment of Adam Smith’s legacy? (Interesting comment following my item below on Roy Hattersely's resort to quoting Adam Smith when espousing leftwing socialism.) It continues:

“The result is the confusion of the layman, who makes up the vast majority of the world’s population today. When Smith wrote his book, the world was in a warped stage of its development.

International politics and economics where Africa was concerned for instance, centered around whether the economic justification for building the wealth of the new world by the trade in African slaves and the cheap labour it provided, ought to or ought not to supercede the moral outcry against the trade from both within the new world and outside of it.”

Smith, of course, was never sympathetic to slavery, which we should remember was not a monopoly of the New World, but had a considerable history and presence in the Old World too, especially in the Arab countries on North Africa and the Middle East (and also in Russia, parts of what we now call Germany, the Balkans and further East).

The Morenike runs two events together, separated by more than a hundred years if indeed it was ever a conscious decision:

“Eventually, the scale tipped in the European favour, and in favour of the unwritten theory that a great deal of transport costs and the nuisance of moral sentiments can be spared if, instead of shipping out the slaves, they were simply made to do the work at home and to feel good about it to boot.

Diplomacy then became the art of being able to tell someone to go to hell and they actually look forward to the trip. Democracy, then, was only for a few, and not the new religion it has now become whereby nations of the world are encouraged either to accept, or die!”

Make of that what you will. I find it difficult to disentangle it to understand what the author is saying.

“Self interest, then, did not foresee a global village, and nations had referred to the ancient concept. The world, including Adam Smith, could be excused if they had not imagined then, that the wealth of the world would one day lag on a global village as long as the wealth of Africa lags.

Can it be excused though, if Democracies in Africa do not recognize this? Can African leaders be forgiven for adhering to the evolved version of Adam Smith’s theory, which only pretends to put the nation first?”

Near the end we find:

“It is in Nigeria that Smith’s theory is corrupted to the most ridiculous level; where services are said to be totally deregulated, yet government fixes the price by fiat. The NNPC boss was even on TV to threaten those who dare to overshoot the sixty five naira mark.”

If this is an ironic stab at the doctrine of free markets up against the practice of State price regulation, it makes sense; if it is something else, it doesn’t. This seems a long way to go round – Smith’s “Wealth of Nations”, a summary of his views, the slave trade, the end of colonialism and the rise of African national states – to get to the price of petrol and the issue of price capping petrol.

Oh No! Not Again

In The Guardian, 19 September 2005, Roy Hattersley, former senior Labour Minister in the ‘Old Labour’ governments of Harold Wilson and James Callaghan in the 1970s and 1980s, writes an article “In sympathy with strikers”.

His theme is “bring back the right to secondary picketing” and he denies the charge that those who advocate legislation to legalise secondary picketing are “clinically insane.” Indeed, he says, “Secondary picketing” and “secondary action in general - is, on any rational analysis, often justified and frequently laudable.”

“The real complaint against secondary action is easily explained. It is hated because it works."

Hattersley helps his case by a little re-writing:

“Remember Rupert Murdoch's destruction of the print unions. His transport fleet was the most vulnerable part of his operation. It was made a separate company, so strike action by the drivers and attempts to persuade them to strike were illegal. While secondary action is unlawful, big companies enjoy immunity from the consequences of action they initiated.”

The print unions were hardly the sons of toil. They were highly-paid, over-manned and a law unto themselves, holding back technological developments in the newspaper industry for years. They were so arrogant about their strengths they did not need secondary picketing from outside their fiefdoms in the printing industry – internal secondary picketing was sufficient, even the threat of it. If one newspaper was hit by a strike, the employers tried for some years to bring all newspapers to s stop to prevent competitive destruction of the employers’ resistance to strike action.

When Murdoch warned the print unions in The Times that their strike action would result in his moving the printing of the newspaper to a new site a few miles away (he even gave the union leaders an invitation to visit it). The print unions scoffed at his threat and called all the unions at the Times out on strike. Hence, Murdoch closed the site and moved the operation with those employees willing to work with the new technology and new workers recruited on the quiet. The result was a prolonged, often violent, but in the end sad end to the power of the print unions.

Murdoch did not destroy the print unions; they committed suicide themselves. As the strike became desperate, they turned to outside help, particularly on the nationalised state railways to ‘black’ Times papers and prevent them travelling on trains for distribution around the country. (The notion of low paid, state employees striking in favour of high-paid print unions is a testament to the power of union bosses in those days, not the natural solidarity of train drives and porters.) It was a then that the print unions realised they had been out-manoeuvred by Murdoch. He had outsourced the distribution of his papers to TNT – the courier company. When the strike ended in total victory to Murdoch, he did not place distribution with the railways; he kept dealing with TNT (to the delight of the drivers and loaders).

Next, Hattersley turns to Adam Smith for support for secondary picketing:

“More than 200 years ago Adam Smith, examining strike action, concluded: "The master can hold out much longer than the men ... In the long run, the workmen may be as necessary to the master as the master is to him. But the necessity is not so imminent." Trade unions were created to redress the balance. They cannot do that if they are prohibited from confronting the big companies that manipulate the small.”

To compare labour relations in the mid-18th century with the 21st century is a leap of faith in loose analogy and slick rhetoric. Smith’s observations of how wage earners and profit makers conducted themselves are a biting comment on the disproportionate imbalance of power. ‘Combinations’ were illegal; local magistrates were totally unsympathetic to people brought before them on charges of combination; public whipping through the streets, while not common, it was certainly the fate of some leaders of strikes, in Smith’s time.

Today? Unions are legal; the right to strike is enshrined in law; true, unions can no longer force employees to join them – the right to join or not to join is also enshrined in law; true, unions must be operated democratically, with regular elections by secret ballot (something Hattersley when in government did not enforce); there is legislation against unfair dismissal, against discrimination and there is legislation in favour of redundancy pay; the right to holidays (not a common experience in the 18th century); the right to sick pay and provision for pensions. All this before we could list the benefits available to working men and women under the Welfare State, which Hattersley did so much to create (he seems to have forgotten the many differences between 18th century and 21st century Britain).

Instead, he wants to return Britain to the appalling misuses of union power from which his government and, more importantly, the electorate suffered in the 1970s ands 80s. He considers such a society ‘decent’ – to whom? The thousands of people whose holidays, compassionate visits to family, and taste of exciting adventures abroad, are ruined by secondary picketing in support of employees in a trade dispute that has nothing to do with them, or the victims of the strike? What kind of decency are the victims learning about as they are dumped, cruelly and without compassion, onto the floor of Heathrow by the strike action of porters, baggage handlers and drivers whose concerns for others takes second place to an outbreak of excellent sunny summer weather for themselves and a day in the garden for themselves? (Mr Hattersley, himself, always has been a decent, if misguided, person.)

Hattersley concludes:

“It all comes down to the most important political question: whose side are you on? Adam Smith was right again: "We have no acts of parliament against combining to lower the price of wages but many against combining to heighten it." The odds have always been stacked against low-paid workers.”

Excuse me, but the print unions Hattersley started with were never low paid; the Heathrow baggage workers are not low paid. Secondary picketing is a weapon of enforcement used by high and low paid, if given the right to do so. It is a blanket weapon of intimidation that is useable in all manner of circumstances, including by high-paid BBC employees, pilots and such like. His reading of Smith’s “Wealth of Nations” is highly selective, as is the reading by those quoting Smith to laud the so-called “invisible hand” and laissez faire.

En route, contact intermittent

I am travelling back by road from France to Scotland for the next couple of days, so Blogging may be difficult, though I will try and if the Hotels are in the modern world will get through. I expect to be back in Internet land no later than Wednesday.

Apologies.

Gavin

Johan Norberg: Talking Sense from the Evidence

Emma-Kate Symons writes a piece about Johan Norberg in today’s Australian: “In defence of a global about-face” (Quotations © The Australian 2005)”The Washington Post describes him as a glamorous young pro-capitalist who is reinventing radical chic. He is the darling of the American libertarian Right and occupies the celebrity socioeconomic guru territory once monopolised by leftist No Logo (anti-globalisation) activist Naomi Klein.”Norberg “proudly sports a ponytail and happily recounts his past life as a student anarchist.”

This must be the headline’s reference to “global turnaround”.

His name is mentioned alongside "the Financial Times commentator Martin Wolf, The New York Times columnist Thomas Friedman and economist Jagdish Bhagwati."

(I am rooting for Jagdish Bhagwati’s recent nomination for a Nobel Prize in Economics; he had a great influence in my student days and has carried on the good work in his recent pronouncements in defence of globalisation.)

He told Emma-Kate Symons that:

"I used to share many of the beliefs of the anti-globalisation movement. That is where I came from. I saw economic change and restructuring as more of a problem and I didn't see the positive side to it”.

"But then I began to study Swedish history and read about the fact that 100 or 150 years ago every country was a poor country, including Sweden. It is so easy to take these things for granted. But when you see that our forefathers were actually starving you have to think about the dynamic creative forces that have turned this around."

Now there is nothing like a dose of evidence to incite people to change their minds. I recommend it as a method. Smith’s “Wealth of Nations” contains well-argued ideas plus a great deal of empirical evidence.

Norberg claims Adam Smith, John Locke and Ayn Rand as the “key influences” on his ideas and he is passionate about “ending global poverty”. He represents what changed him from ending global poverty on an anti-globalisation programme to become a leading voice for globalization were stories of real people whose lives were changed positively for the better, like that of:

“Bhagant, an elderly agricultural worker and untouchable in the Indian village of Saijani, this leads to houses being built of brick instead of mud, and to people getting shoes on their feet and clean clothes - not rags - on their backs," (from his book: “In Defence of Global Capitalism”).

"Outdoors the streets now have drains and the fragrance of tilled earth has replaced the stench of refuse. Thirty years ago Bhagant didn't know he was living in India. Today he watches world news on television."

Again Norberg cites more evidence:

“Since 1981, extreme poverty in the developing world has been reduced by half. It has dropped from 40 per cent to about 21 per cent. The world has never seen such a rapid reduction in poverty, hunger and infant mortality."

Norberg’s approach is an excellent example of the appropriate use of Adam Smith’s legacy and it is a welcome change from the usual nonsense I am often obliged to quote from and correct here.

An Opportunity to Test an Hypothesis

Richard Spencer in Beijing writes that “the petrol crisis sweeps China” in today’s Daily Telegraph. The panic buying is setting in, the rumours spread and the choice is: ration by government order or raise prices:

“The crisis began last month in Guangdong province, home to many of the country's vast new factories. Within a few days of reports of petrol shortages, queues half a mile long had formed. Sinopec and Petrochina, the two state oil giants, publicly blamed the typhoon season. But their complaints to the government about its pricing policy were soon leaked. These oil firms are, like all key national industries, state-controlled. But under reforms, they are supposed to behave like real companies. They complained that the price restrictions meant that the more petrol they delivered to the pumps, the more money they lost.“Shanghai was next in line, and this week it was Beijing's turn to be hit, though once again, the companies publicly cited "technical and logistical reasons".Local newspapers reported that 60 stations in the Beijing area had stopped selling 90-grade petrol, used by most small cars and taxis, since July.”
(Daily Telegraph, London, Saturday 17 September)

China seems inclined to continue setting a price cap below the risen world price (they were $20 a barrel below the world trading price at $60 a barrel).The price should rise advocates would predict decreasing shortages and a speedier adjustment period; the ration ‘fairly’ advocates would predict fairness amid the shortages (but probably not enough petrol).

China, widely seen as the cause of the rising petrol price, is an ideal place for an experiment in which remedy is best, or at least better, than the other.

In Smithian terms, world ‘market’ prices have risen above ‘natural’ prices; if this ‘gap’ is prolonged in a separable entity, shortages will result. Even if ‘panic’ buying did not makes matters worse – exhortations not to ‘fill up’ are usually ignored, indeed, are promoted by the act of exhortation – there would still be a tendency to shortages appearing because the incentive to conserve use of the good is muted.

If prices are allowed to move upwards (the higher and faster the better for provoking drops in the quantities demanded to materialise), conserving what petrol they have or can obtain will set in, substitutes for using petrol (or more correctly using motor vehicles will spread) and on the supply-side incentives from the higher profits will induce searches for alternative fuel systems.

Will this happen in China? Not clear just yet. The Chinese political bureaucracy is as capable as stubbornly sticking to its non-market instincts as their equivalents in the West. But China is also a place of surprises and the elite has shown itself capable of abandoning its failed Marxist model when opting for a dose of managed price freedom. Then the interesting consequence would be that the communist elite would show those in favour of rationing, or holding prices below world prices, in capitalist US/UK/Canada/Australia and New Zealand how to do it!

The Man Who Knew and Drew Adam Smith

The Scotsman, 17 Sept 2005

The artist who included cartoon-like sketches of Adam Smith drawn from life in his collection, John Kay, is now commemorated by his grave in Gretfirars Churchyard, Edinburgh. Kay’s portraits of Smith are famously reproduced in books and in newspaper articles about him. The Scotsman used a Kay portrait when it published an article of mine in March on Adam Smith, for example.

The initiative regarding Kay’s grave side memorial (his grave was left unmarked for nearly two hundred years, why, nobody knows) is most welcome. I append a few lines from the article in today’s Scotsman:

“His etchings of Edinburgh notables date back 200 years, and are at most nine or ten inches high, with some black-and-white caricatures hardly larger than a credit card.
But John Kay's art deserves a bigger place in Edinburgh's memory and Scotland's art history, say campaigners led by the 44 Scotland Street author, Alexander McCall Smith.

Mr McCall Smith is to unveil a memorial stone to Kay today, near his unmarked grave in Greyfriars Kirkyard. A bronze plaque will also be unveiled at Kay's former home on 227 High Street.

The gentle satirist's most famous subjects ranged from the founding father of economics, Adam Smith, to the notorious villain Deacon William Brodie.”

Writing Adam Smith for Palgrave’s “Great Thinkers in Economics Series”

Diary 4: Writing Adam Smith for Palgrave’s “Great Thinkers in Economics Series”

I spent all of August and a week of September writing my next Adam Smith book. Like all intentions, mine were interrupted by some residual work I had to complete for Edinburgh Business School: I spent much of June and July finishing a DBA course: Strategic Negotiation”, which itself had been held up nearly two years by my writing “Adam Smith’s Lost Legacy” (Palgrave March 2005). Once this was away via attachments on e-mail and the copy editing completed, and a final look through of the PDF, I got back to Smith II (as I dub it).

But I have had to stop again because Heriot-Watt University’s distance course texts are published with their on-line course materials (more cases, exercises and essays) and these amount to a near volume-size of extra writing, plus the first examination papers with solutions (commencing in June 2006).

Plus, I am returning to Edinburgh from France until at least the end of January. I will get back to Smith II, all being well, sometime in mid-end October (hurray!) and when I return to France in March I will stay until the ms is finished. That is my plan.

So far I am up to chapter 4 of Smith II. Progress on the first draft is slow, even absent the above interruptions, because the nature of the Palgrave series means that a large proportion of the readership will be professional and academic economists, and while this is not the exclusive audience I have to check and cross-check every date and source so that it is not criticised for sloppiness. Sometimes looking for a vague source, even with my fairly comprehensive Smithian library, takes a couple of hours, or it seems like it does. Fortunately, I have to hand all of his Works.

The gem among them is the Glasgow edition of “Adam Smith’s Works and Correspondence”, backed with the Penguin edition, edited by Andrew Skinner (who else?) with his insightful introductions to the two volumes. I also have the 1937 Edwin Cannan’s edition, which with its margin notes, is also excellent for locating things. Andrew Skinner’s and Haakonssen’s Index to Smith’s Works is a boon to the writer trying to be fastidious.

While in Edinburgh I will return to the University library and continue the journal trawl, focussing on explaining Smith, not in arguing with the interpretations of others, except to indicate I read them.

I have the main theme of Smith II more or less worked out in my mind. My intention in that a reader will know authoritatively about Smith’s political economy and how it integrates with his moral philosophy, something that economists tend not to investigate, consequently missing the depth of Smith’s contribution.

Markets Are Not Mysterious - We Know How they Work

"Financial Literacy Matters at All Ages"
(Korea Times, 13 September) by Dr. Horst J. Kayser, President & CEO of Siemens, Korea

“Why is it that in a market economy everybody maximizes his personal benefit and still is able to contribute greatly to the social good when the mechanism of the “invisible hand,” as Adam Smith called it, works freely and if individuals act according to the rule of law?”

Dr Kayser confuses a view attributed to Adam Smith with what he actually wrote in “Wealth of Nations” (Book 4, page 456). His so-called ‘invisible hand’ (actually Shakespeare’s in Macbeth: 3.2) applied to a single situation he described when traders preferred to place their scarce capital stock locally (where they could monitor it) rather than abroad (where they couldn’t). They did this to protect their investment more easily, but in doing so they benefited the national economy. His comment was about personal motivation and not about how markets operated. It was possible for personal motivations – self-interest - to work both benignly and malignly. Not all self-interest works for the common good (monopolists, polluters, anti-competitive businesses, employers who treat their workforces badly, etc.).

Others attributed near mystical powers to markets and extended Skakespeare's metaphor under Adam Smith's name, into a ‘mysterious’ mechanism. But Smith knew (and the rest of us know) how markets operate; there is not need to mystify them, nor consider them miraculous. Significantly, Smith did not refer to the invisible hand when he analysed markets in Book 1 of “Wealth of Nations”.

Another Clown Steps Forward

Rabble News: “A U.S. view: Common sense revolution goes south” by Keith Gottschalk

“This disaster and its aftermath was the intended consequence of countless policies implemented by a ruling American élite that looks out solely for itself and its allies and couldn't give a tinker's damn for the suffering of the less fortunate.”

Wild rhetoric is common place in politics and North America has its fair share of extremist views, but does Gottschalk seriously contend, and does anybody believe him, when he asserts that the recent Hurricane and its aftermath was “the intended consequence” of US Government policies? (!) The idea is so ludicrous that Gottschalk must have taken leave of his senses, for no sane person would suggest that any government would intend such an event to happen, and certainly not one so carefully watched by its free media as in the US, the major opposition aspirants to high office, and, of course, the open legal system.

Let us put the above down to an excess of political license and look at what he says about Adam Smith:

“Bush, acting as the new American Caesar used an executive order (how to make law without that pesky legislating branch) to allow contractors to pay workers on Federally funded projects whatever the hell they feel they can get away with. After all, the “market forces” we worship in the U.S. say that if desperate people can be made to work for paltry wages, then somewhere Adam Smith is smiling and all is right with the world.”

From wild rhetoric, Gottschalk, goes to completely inverting the life’s work of Adam Smith, who spent large sections of “Wealth of Nations” berating those who exploited the common labourers and their families, conspired against their employees to prevent them combining (i.e., forming what we now know of as trade unions) to fight wage cuts, and generally advocating policies to enable the poor to share in growing opulence. I can only conclude that Gottschalk has never read Adam Smith, or he is a clown.

Another paragraph will show him to be both unacquainted with Adam Smith and also a clown:

“Though the mountains may fall and the hills turn to dust, the cruel invisible hand of the free market will be used as a mailed fist to the working poor of America. Needless to say the so-called “opposition party” in the U.S. will roll over like puppies after having rolled over for so much before.”

His allusion to the: “the cruel invisible hand of the free market” is meant to link, cleverly to Adam Smith, but readers of “Lost Legacy” will know (see previous posts on the invisible hand nonsense perpetrated mainly by US academe of both far left and far right persuasions, plus the clowns) that Smith’s lonely metaphor had nothing to do with markets, free or otherwise.

Rabble News editors tell us that “Keith Gottschalk has written for daily publications in the Midwest U.S. and was formerly a radio talk show host in Illinois. He frequents babble as the Américain Égalitaire” (babble is the controversy column of Rabble’s website).

Judging by his website picture Mr Gottschalk is not one of the starving poor of America – he looks like a well-fed media personality - whose acquaintance with the lives of the poor must have long since passed and he is now a distant observer of their lives. What the poor need is jobs, regular wages and access to the opulence presently enjoyed by Mr Gottschalk and his ilk. Adam Smith showed how this could be done - so far his views largely have been ignored.

Wrong Century, Dr Whybrow

Oh Dear! He’s moved Adam Smith, a very 18th century philosopher, to the 19th century. Dr Whybrow wants to ask some questions, and his article, presumably reports on what he found, but in all that work he did not bother to check when Adam Smith was philosophising, so the article cannot be worth much to read. So I won’t:

“... American economic and neurobiological deregulation, unparalleled in previous decades, Dr. Whybrow looks to 19th-century philosopher Adam Smith for answers. ...”

Posted in “American Mania: When More Is Not Enough”,Medscape (subscription) – USA

Whining Aussies - Poms are Innocent this Time

Graeme Philipson is back at whining for a protected, tax-break supported, IT industry in Australia, to close the $20 billion deficit in trade in the sector. To carry the Mercantile flag of protection on this occasion he reports the views of ex-IBM staffer, Lou Richard, now managing director of Newport Capital and one of the Australian IT industry's better-known figures, who “since his early days with IBM Australia he has held a number of senior marketing and management positions in Australia and Britain before moving into venture capital in the 1990s.”

In short: Lou Richard left IT for the more suitable role for him in investment, itself a common story, it seems, of talented people finding they can do better outside IT in Australia (it’s called finding their ‘comparative advantage’ of which more in a moment).

Graeme reports (Sydney Morning Herald, 13 September, www.smh.com.au) that Lou Richard, the venture capitalist, “dismisses the argument of comparative economic advantage, which says that some countries have a natural advantage in some areas.” Hold on Graeme, if Lou Richard ‘dismisses’ the theory of comparative advantage, he must be pretty smart; this theory is about the only unchallengeable theory in economics since David Ricardo (NOT Adam Smith!) advanced it in the early 19th century.

Graeme continues:

“Mr Richard says Adam Smith was a shill for the early multinationals and that the concept - that some countries are naturally suited to certain activities due to their culture or raw resources - was Olde England's way to exclusively franchise the "high-value, really interesting and lucrative occupations to themselves".

What a load of rubbish! The ‘early multinationals’ can only mean the chartered State monopolies, like the East India Company, granted a monopoly of trade on the age-old mercantile principles of government policies first followed by English, and later by British, governments. There were no equivalent international companies in the mid-1750s that Richard could possibly mean - they came later in the mid 19th century, long after Smith died (1790). Now to describe Adam Smith as a ‘shill’ for any of the chartered companies is breathtaking ignorance (apologies for the unscholarly language, but it is seldom I come across such ‘problematic’ statements – to put it more politely in scholarly tones).

Smith’s “Wealth of Nations” is a critique of Mercantile Political Economy, and a severely critical one at that. He considered them the worst examples of wrong-headed commercial practice; he railed against their perfidious behaviour, their mendacity and their outright criminality that, in the East India Company’s case, turned India into a poverty-stricken disaster, while enriching the shareholders back in what was now the UK.

Now, we should go back to your misattribution of the concept of ‘comparative advantage’ to Adam Smith. His actual contribution was to advance the idea of ‘absolute advantage’; some countries did have natural advantages – Scotland’s climate, he opined, (and Graeme with a Scottish spelling of your name, you must know something, if only from your grandparents, of Scotland’s climate) was less suitable for wine production than, say, France’s or Portugal’s (Australia when he wrote “Wealth of Nations”, 1776, was not yet settled: the “First Fleet” was 12 years later; the OZ wine trade another 15 years or so later). For Scotland to grow grapes (or bananas, mangoes and coconuts) it would take a massive investment in ‘hot houses’, wasting scarce ‘capital stock’ which was better put to other uses more suitable for Scotland, which could be traded for French wine. For as long as the absolute advantage remained this dictated the most effective trade, primitive as it sounds today.

Graeme continues his report of Lou Richard’s dismissal of David Ricardo’s theory of comparative advantage:

"Do we really believe Taiwan dominates the semiconductor manufacturing sector due to that country's massive reserves of sand? Does Volvo dominate the marine stern drive sector due to Sweden's access to the sea? Does Italy lead the global leather goods market due to an abundance of cows? It's all rubbish. The national will, driven by need, greed and self-interest, is the driver, plus a modicum of luck and government co-ordination."

The examples Lou quotes all contain the answer to his questions: semiconductors, marine stern driven engines, and leather goods, etc., can be produced anywhere on Earth where you have the enterprise, flair and determination to do so (though it helps in Italy’s case that they have access to cows!). These are mobile industries for which the countries concerned have developed a comparative advantage in producing and distributing the goods. They could also be produced elsewhere if the conditions are created – entrepreneurs are one necessary ingredient; trainable workforces another; innovation, design and marketing skills help too.
But the iron law remains: if country X (or firm Y) is comparatively better at the activity that country Z (of Firm Ω), which may have a slight comparative disadvantage of some kind, then country X (and Firm Y) will have more success than country X (and Firm Ω), for as long as they maintain their comparative advantages (please note the condition!).

No! says Lou Richards, supported by Graeme: Instead “The national will, driven by need, greed and self-interest, is the driver, plus a modicum of luck and government co-ordination”. But then Lou and Graeme fall into the trap of Smith’s “absolute disadvantage” – to overcome Ricardo’s comparative advantage the Mercantile idiocy of allocating capital stock to produce that which can be purchased more cheaply (and remember it is at high quality too) from abroad, thus diverting scarce capital from other more profitable activities within Australia.

Surely, this is the business that Lou Richard (along with the other ex-IT executives who have become venture capitalists too) is in: directing capital to their best uses for a profit? If Lou isn’t good at this, he’ll lose a packet.

India is successful at IT exports because IT technology is mobile, the workforce is available, and currently it enjoys cost advantages at a high quality of service. So does Taiwan (as long as it keeps out of war with the mainland). As for Italian leather goods; well there are plenty of cows in Australia, but, alas, no resident design flair comparable, let alone better, than found in Italy at this moment, and perhaps for the foreseeable future. Should that design flair develop in Australia it could challenge Italy; achieving that goal by forcing Australian consumers only to buy Oz leather products would be the height of folly.

Whining about these things is unseemly; spewing the usual guff about ‘Mother England’, the great excuse-all of every Australian feeling of inferiority (why I cannot guess, given its wonderful climate, people and society – that is what made it the ‘lucky country’), should be below Graeme and Lou’s dignity to display so wantonly.

In football (I am not mentioning cricket this morning) it is common for managers to address their players, after they have performed less well than they could: ‘go take a look at yourselves – you know you can do better.’ This might be good advice for those in Australia in IT to do the same.

Meanwhile leave Adam Smith’s legacy and reputation out of your misery.

The Final Frontier: same human behaviours?

In an interesting article on the future of space exploration, Phil Smith, a space industry analyst and space artist in the Washington, DC area, speculates about the next thousand years, even tens of thousands of years, during which humankind will establish itself extra-terrestrially, marking a new eon (the ‘Astrazoic eon’) in the history of the human race.

If it reads a bit close to the experience of the exploration, pioneering and settlement of the Americas, with a mixture of State-sponsored funding and management added to private entrepreneurship, that is to be expected, perhaps. John Locke asserted (Locke: Two Treatises on Government, 1690) that ‘in the beginning all the world was America’, i.e., the America of the wilderness and its savage tribes, the descendants of central Asian peoples, who crossed the ice-age land bridge and spread throughout the empty spaces 13,000 years earlier into what we now call the Americas. Phil Smith similarly constructs a sequel in which future human space exploration and eventual settlement reproduces the pattern so that one day they might say, the ‘entire Universe is modern America.’

Phil Smith writes on “The Astrazoic Eon” in The Space Review: essays and commentary about the final frontier', Rockville, MD, USA (12 September 2005):

“Beginning with pioneers, the bulk of activity in space will be commercial in nature. I quote a statement from Robert Bigelow, who says it best: “The U.S. Government could fund and order Lewis and Clark to explore the West, but it could not pay or force pioneers to settle the region. Governments do have an important role to play in creating an environment conducive to space development, but it is the pioneering entrepreneurs, not the soldiers or bureaucrats, who can take and colonize a new frontier.” Money and the acquisition of things are prime motivators for pioneers and eventually settlers, though by no means are they the only push-factors in migration.

The term “commercial” is understood to describe a free market (or capitalist) system defined by Adam Smith and subsequently practiced in ever-evolving forms in the United States and other countries. A free market system is as essential to the health of a democratic republic as a constitution drafted to protect the rights of its citizens because it promotes innovation and change. A free market system is largely self-regulating and provides the best environment for promotion of opportunity, excellence, personal growth, and freedom of expression. It is a self-sustaining force with the necessary amount of motivation, guile, and passion to tame the challenges of interplanetary space. Curiosity and the desire to explore, while powerful motivators for some individuals and critical to the overall process of migration, are minor motivators on the scale of civilization. A free market system, when supported by a representative democratic style of government, will be the true sustainer of human exploration and exploitation of the solar system. It is important to remember that space is not at all different than Earth when it comes to economic potential. The differences lie in magnitude.
One of the government’s legitimate roles, working closely with industry partners, is to enable free markets to gain a foothold and prosper, to seed commercial activity when free enterprise cannot do it on its own. Then, when markets flourish, the government stands back and only provides those services deemed appropriate by the people, like keeping the peace, regulation of certain markets, licensing, and so on. These roles are ideally suited for the Departments of Transportation and Commerce.”

Comment:
Apart from Adam Smith never defining a ‘capitalist’ system (neither the word nor the phenomenon existed in the mid-18th century) its ‘ever evolving’ forms in the modern USA are even more distant from what Smith wrote about in “Wealth of Nations”.

The dangers inherent in space exploration and eventual settlement whether conducted under the direction of an Earth-bound State or by major capitalist corporations, I suggest that the omens are not good for confidence in their conduct of future space exploration. State sponsored exploration inevitably will delegate tyrannical powers to unsupervised and, therefore inherently, unscrupulous pirates and brigands, as the visitations of Spaniards and Portuguese upon Central and South America showed (as well as the indigenous populations on each other).

The Dutch and British chartered joint stock companies were formed for distant trade in the 17th and 18th centuries and were hardly examples we would recommend to follow in space, as an examination of their histories as ‘monopolies’ (which no doubt will be deemed ‘necessary’ by their lobbyists for expensive ventures in space too) and a reading of what Smith wrote about them and their conduct in “Wealth of Nations” (Book IV) soon reveals. Unless kept far apart, such organizations usually end up conducting war on each other, dragging their Earth bound governments into them too.

Unless there are democratic republics, operating at peace with each other all over the Earth (‘the entire world becomes America again’ – which is some agenda for the immediate future, if ever really possible) the prospect of the appropriate conditions for avoiding the mistakes of the past when the entire world was settled, being reproduced in space under peaceful commercial enterprise is remote.

Phil Smith concludes: “A free market system, when supported by a representative democratic style of government, will be the true sustainer of human exploration and exploitation of the solar system. It is important to remember that space is not at all different than Earth when it comes to economic potential. The differences lie in magnitude.”

Comment:
Paraphrasing this assertion we should may be conclude: ‘It is also important to remember that humans in space are not at all different than humans on Earth when it comes to (mis)behaviourial potential. The differences lie, perhaps, only in altitude.’

A Little Tale of Sunday Shopping

I was reading through this week’s Blog articles and, of course, re-read the one’s I wrote on the invisible hand, a recurrent topic on Lost Legacy because of the widespread misattribution of its meaning from its use as a single metaphor in “Wealth of Nations” which has become an iconic (even ironic) word for what Adam Smith wrote about.

I went out to get some tomatoes from a nearby village shop, because I am still deep in rural France for a few more weeks and tomatoes are part of my wife’s recipe for Penne Bolognaise; she went back to Edinburgh a couple of day’s ago on family business, but the certain knowledge that my version of her recipe would not be as good as the original is by no means the only reason that I am, as Californians say, ‘missing her already’.

While driving (its 5 km away) I thought about the invisible hand some more. Without knowing for certain, I knew the shop would have lots of tomatoes to choose from, and that set a train of thoughts about markets (I avoid using “THE Market”, on the grounds there isn’t one in any meaningful sense of the phenomenon, though called such by many people).

Smith said we all seek to better ourselves, which some have interpreted to mean we all seek after greater wealth. He meant much more than wealth as an example of his meaning. We have this determination to better ourselves from birth to the grave (what is a baby’s cry but a call to be made dry and be fed?). Some even believe that they are going to a ‘better place’ after death called ‘Heaven’ (and some of these, uncharitably, believe their neighbours – in the Biblical sense – deserve to go to a worse place called Hell).

Examples of Smith’s desire to better ourselves includes shifting our sitting, lying or standing position to become more comfortable; when we sit in a draught we close the window; when the sun is our eyes we put on shades; when it’s raining we seek shelter; when we are hungry we look for food, and so on.

Now the important point to note is that we are not ‘led by an invisible hand’ to do any of these things. The cause of each of them – and the millions of other instances – is well known. It does not need mysterious invisible hands, nor miracles or anything like them. The same goes for what happens in what we call markets, the phenomena of which are well understood. People act to better themselves, however they define betterment in this context. People sell items because they anticipate that people, somewhere, will be willing to pay for them to better themselves compared to what they would be in the absence of a chance to buy, assuming the price is within their range compared to what else they could do with their money (and how much they have got left).

Smith understood the elementary factors involved in markets (“Wealth of Nations” Book I). Nobody has the tell the local SPAR shop to stock tomatoes this morning (Sunday); nobody had to tell the local farmers to plant, groom, feed and harvest tomatoes this summer; it happened because everybody in the chains of supply of tomatoes, and all the other things sold in the shop, independently sees opportunities to better themselves compared to the situation they would be in if they didn’t.

If their expectations are correct they succeed in their quest – if we shut the window that is causing the draught, we are more comfortable; if the draught is coming under the door we will not help ourselves by shutting the window or turning the tv on. There is plenty of room for wrong choices – nobody said that everything and anything you do will deliver what you expected; nobody says every one’s a winner, or that society should be so made so as to give you the modicum of happiness and comfort that you believe you deserve. Your only chance (it was never a right to have it done for you, though humanity dictates it should be if you are incapable) is to so adjust your affairs as to improve your lot by your actions being consistent with the anonymous, untold, unplanned and unordered actions of the rest of society’s members, or at least sufficient of them in a chain that links their aspirations for self-betterment with yours.

Again there is no invisible hand at work; it does not exist; it was a playwright’s metaphor (Macbeth, 3:2) picked up by Smith trying to make a point (the only time he used it in "WEalth of Nations") to dramatise the unintentional consequence of people trying to better themselves by reducing the anxiety and insecurity of letting their scarce (and they were very scarce) capitals travel long distances out of sight until sometime much later they might return and make them better off. If they didn’t return they lost everything. The alternative was to keep their scarce capital within sight and near at hand, where they could protect them, watch over them and, hopefully, see them grow day by day if they had made the right choices.

The consequence of these choices, made daily across the land, with no co-ordination (or publicly paid 'co-ordinators’), no imposed ‘strategy’ (or publicly paid ‘strategists’), no grand ‘design’ (or ‘publicly paid designers’), and no invisible ‘hand of Jupiter’, the Roman God (or any other god, for that matter) (Smith’s ‘History of Astronomy’ – written 1744-49, published posthumously 1795).

Markets work because people are made better off by them – they break-out wherever and whenever the State tries to do their job for them, sometimes underground – and people accept them because they work. Much like the evolution of words in language (as Smith wrote about in ‘Consideration Concerning the First Formations of Languages’, first published in 1761, and then in the third edition of “Moral Sentiments” in 1767) both in ancient times and now too; nobody arranges for them, nobody controls them. Words evolve of their own accord; some words and expressions stick; many others appear and disappear. Trying to fix from the centre how a language should be formed is akin to herding cats, as the Acadamie Français demonstrates in its hopeless quest to prevent foreign (mainly English) words and expressions from becoming integrated into the French language. Every road sign in France says ‘STOP’, not ‘Arrette’ (except in that funny place called Quebec), about which I chuckle in tribute to the folly of ‘top people’. Trying to regulate and improve markets is a bad idea, even if it has good intentions behind it.

Lost Legacy’s relentless campaign against the misuse of the invisible hand metaphor is part of the wider campaign to restore Adam Smith’s Lost Legacy and his vision of the benefits of the Fourth Age of Commerce, especially to the poorest in society.

How it's Seen in Phoenix - by one person at least

In an (short) article: “Capitalism v. Socialism” (PhoenixNews.com 10 September 2005, a writer ‘sundex” opines:

“Pure capitalism assumes no limitations or restrictions on the economic forces of commerce. This state of affairs is unachievable except in the untamed minds of the uneducated.”

Comment: OK. Acceptable observation.

“As history will tell us, when the limitations on commerce are relaxed, there is a corresponding increase of commercial attempts to control the market to the benefit of the commercial stakeholder.”

Comment: Very good in general; all depends, of course, on which ‘limitations’ are relaxed. But it broadly agrees with Adam Smith that ‘merchants and manufacturers’ tend to be against competition and the best remedy for that is not to pass laws or regulations assisting in limiting competition. Beyond that it is down to cases.

“We saw this in early America, with robber barons reeking havoc on competitors, property owners, and anyone else who got in the way. We also saw this in pre-Marxist European society, when business interests shamelessly employed entire families at subsistence wages for the sake of profitable enterprise.”

Comment: Fair enough as an observation; bit concerned at the designation of “pre-Marxist European society”. To what exactly does this refer? Which countries is ‘sundex’ including? Is it reflecting that peculiar political view, found in North America (I’ve heard it said as far north as Toronto) that Europe is ‘socialist’ and only in North America (exceptions are sometimes insisted upon to exclude Canada) do we find ‘capitalism’?

More to the point: the exploitation of workers and their families was not confined to capitalist ‘business interests’; the communist states continued the exploitation of workers and their families and used the ‘surpluses’ (a.k.a profits) for the benefit of the communist apparatchiks and their families.

“The absolute, natural effects of the unseen hand of Adam Smith cannot possibly occur.”

Comment: This is the most inappropriate sentence in the article. For a start, Smith never said anthing about capitalism. I presume ‘sundex’ is referring to the usual guff about the ‘invisible hand’ and its extended meaning found in US academe, and passed on through the generations. That is a set of meanings given to it and not representative of Adam Smith’s views at all (see several posting on this Blog for last week for the actual history of Smith’s use of Shakespeare’s metaphor from Macbeth (3:2 – ‘thy bloody and invisible hand’). Ultra briefly: it had nothing to do with markets.

A paragraph or so after this wrong statement, ‘sundex’ ends his article with the briefest of sentences about socialism and a blast at ‘inherited wealth’, so we cannot follow up on what socialism means, of why we should be afraid of inherited wealth, or who should get that wealth instead (hopefully, not the State).

Burdens of Name Recognition Ludvig von Mises and Adam Smith

"Mises the Revolutionary" by Ralph Raico

[Posted on Friday, September 09, 2005: www.mises.org]

“It is said that a number of years ago, when Bill Buckley was at the beginning of his career of college-speaking, and somewhat more tolerant of libertarians than he is today, he once wrote two names on the blackboard thereby nicely dramatized the point that students in his audience were being presented with only one side of the great world-forming debate between capitalism and socialism. The name of the defender of democratic socialism — I think it was Harold Laski, possibly John Dewey — was recognized by most of those present.
The name of Ludwig von Mises was entirely unknown to them.”

“How has it been possible that the great majority of economics and social science students, even at elite American universities, are completely unfamiliar with Mises?

“But Mises was even more than a great economist. Throughout the world, among knowledgeable people — in German-speaking Europe, in France, in Britain, in Latin America, in our own country — Mises was famous as the great twentieth century champion of a school of thought which could be said to have a certain historical importance and a certain intellectual respectability: the one that began with Adam Smith, David Hume, and Turgot, and included Humboldt, Bentham, Benjamin Constant, Tocqueville, Acton, Böhm-Bawerk, William Graham Sumner, Herbert Spencer, Pareto, and many others. Offhand, one would have thought that this acknowledged position alone would have entitled Mises to being presented within the "pluralistic" setting of left-liberal Academe.”

Ralph Raico is right about the general ignorance of people about Ludwig von Mises (a deficiency you could put right, if it includes you among its population, by visiting: www.mises.org and other sites, like Austrian Economists, etc.,).

However, I am not so sure that having great name recognition is an unmixed blessing. Adam Smith has almost total name recognition and not just among economists. Journalists, film script writers, advertising agencies, politicians of all stripes, and columnists, and just about every ‘Tom, Dick and Harry’ (and ‘Jane, Judy and Samantha’ too) know the name, think they know the economics (invisible hands and all that sort of nonsense), albeit it fatuously wrongly, and are sure he was in favour of laissez faire, intimate with capitalism (even ‘invented it!) and was rightwing to boot (and sometimes leftwing on the other foot).

Hence, the mission of “Lost legacy” is to correct the ideas associated with the instant name recognition of Adam Smith. Ralph Raico and his colleagues have a different mission: to create name recognition for Mises and to advocate his economics, which are, incidentally, closer to Adam Smith’s than, say, to Milton Friedman’s, to name another modern icon.

Government Management of Commerce not a Good Idea

Gold Anti-trust Action Committee

A new report is titled "Move Over, Adam Smith: The Visible Hand of Uncle Sam," and has been published by Sprott Asset Management of Toronto:

“It was written by the firm's president, John P. Embry, and his assistant, Andrew Hepburn, and concludes that the U.S. government has intervened to support the stock market so many times that "what apparently started as a stopgap measure may have morphed into a serious moral hazard situation, with market manipulation an endemic feature of the U.S. stock market."

"We have not taken a position on the wisdom of intervention in this paper, largely because exceptional circumstances could argue for it. In many respects, for instance, the apparent rescue after the 1987 crash and the planned intervention in the wake of September 11 were very defensible. Administered in extremely small doses and with the most stringent safeguards and transparency, market stabilization could be justified. "But a policy enacted in secret and knowingly withheld from the body politic has created a huge disconnect between those knowledgeable about such activities and the majority of the public, who have no clue whatsoever. "There can be no doubt that the firms responsible for implementing government interventions enjoy an enviable position unavailable to other investors. Whether they have been indemnified against potential losses or simply made privy to non-public government policy, the major Wall Street firms evidently responsible for preventing plunges no longer must compete on anywhere near a level playing field. It is most unfair that the immensely powerful have been further ensconced in their perched positions and thus effectively insulated from the competitive market forces ostensibly present in our society.”

Comment:

Apart from emergencies, government intervention is usually unhelpful (and can be blighted by incompetence even then), and once civil servants and politicans get used to playing the game of referee, major player, and the ‘expert’ who knows better than the real players, it becomes addictive. They cannot do it well and cannot let it go.

Smith did not have a high opinion of 18th-century ‘merchants and manufacturers’, but he had an even lower one of ‘kings and ministers’ (governments) interfering in commercial matters:

‘It is the highest impertinence, therefore, of kings and ministers, to pretend to watch over the economy of private people, and to restrain their expence either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without exception, the greatest spendthrifts in society. Let them look well after their own expence, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.’ (WN II.iii.36: 346)

On these grounds the concerns of the Gold Anti-trust Action Committee may be
Well founded.

Oh, No He Didn’t!

Alec Hogg writes the usual nonsense about Adam Smith and markets.

Smith gave a detailed analysis of how markets work (WN, I.v-xi: 47-275) and never mentioned, hinted or implied that there was an invisible hand at work. He didn’t have to; his exposition is perfectly clear. Hence, when Alec repeats the usual canard about the invisible hand he informs us that no matter how good he is on commodity prices – besides his regular column for Moneyweb Holdings Ltd, he also delivers a live update at 7:33am weekdays on Lotus FM’s breakfast show, ‘O’Neil in the Morning’ (a ‘must listen’) – his knowledge of Smithian markets is, er, limited. Judge for yourself:

“Oil adjusting; RCH rival impresses, new iPod doesn’t” by Alec Hogg.

“When the father of modern economics, Adam Smith, wrote his seminal Wealth of Nations 230 years ago he unveiled to the world what he dubbed “the invisible hand” – an unseen force which automatically addresses imbalances in economies. That hand has been working overtime recently, reacting to crude oil’s jump to over $70 a barrel.”

It would be rude to call that paragraph codswallop; hence, I shall restrain myself, and as you have probably heard enough about the invisible hand for one day, assuming you read more than this contribution – say, two of the three below – I shall add nothing. I shall finish my lunch instead.

Football and Adam Smith

Hardly needs a comment, but welcome nevertheless.

My two great passions – football (the UK version, not the ‘handball’ game called ‘football’ in the US!) and Adam Smith - mentioned together on something they have in common: Two of the great 12 books of modern civilization, and both from Scotland!

From the Daily Record (Glasgow, but widely read all over Scotland) 8 September 2005

“FOOTBALL RULES OK
THE original rules of football are among 12 books which changed the world, a TV series claims. The rules, drawn up in 1863, take their place among weighty tomes like Scot Adam Smith's The Wealth Of Nations - the cornerstone of economics.”

How to Spoil an Excellent Suggestion for Disaster Relief

Steven Bainbridge in an article on “The Invisible Helping Hand” in Tech Central Station repeats the usual canard about the Invisible Hand (I have had occasion to comment on the errors on this topic published in Tech Central Station before).

Now the case he is making is a good one. He advocates the use of public expenditure to pay the private sector to deliver needed goods and services, in this case rescue assistance, organization and rebuilding of infra-structure in New Orleans.

Where that expertise can be supplied by large corporations (Bechtel, Halliburton, etc.,) they should be put under contract and stand-by to provide those services anywhere needed in the USA. It was always a principle of Adam Smith, when considering public expenditure in “Wealth of Nations” (Book V) that the decision on whether to use public commissioners or private contractors should be an empirical one: which would do it most efficiently?

Only myopic ideologues believe that public expenditure should always be provided by public employees.

In these arguments in the UK, the advocates of public provision only would rather that the provision was not made than that it be delivered by private contractors paid for out of public funds, no matter how important it is for the beneficiaries of the provision. Ironically, the much vaunted National Health Service in Britain, since its inception in 1949, has always had its General Practitioner services (GPs are the local doctors who provide medical services to households in their local areas; they are most common access point to health services for most people) provided through independent self-employed private contractors under contract to the NHS, and are run on a profit basis. As this is not widely known by ideologues, it has escaped their attention and their sabotage.

It follows that “Lost Legacy” is not at all opposed to the contracting out by the US Government, Federal or State, of disaster relief services. Apparently, Steven Bainbridge considers that some US citizens would be uncomfortable about this being the case. He writes:

“Some will have an immediate knee-jerk antagonism to the idea that someone will make money off the suffering of others. We've known the answer to those complaints for centuries, however, thanks to Adam Smith:

...every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

Outsourcing works precisely because it takes advantage of Smith's invisible hand.”

Oh, dear! How to spoil an excellent case with an unnecessary blemish. Invoking Shakespeare’s invisible hand (Macbeth, 3.2) under the guise that Adam Smith used the metaphor too, and also adding gratuitous nonsense about its application that was never intended or said by Smith is an avoidable error, all too common among US academe, who heard from their professors tell ‘em so, who also never read “Wealth of Nations”.

Could I suggest that Steve Bainbridge (and the editors at Tech Central Station, an otherwise excellent production, as I have also noted here – see my comments on the stance taken on the Chinese trade by them) acquire a copy of “Wealth of Nations” (the Liberty Fund publish a low price paperback copy of the definitive Glasgow Edition, originally published by Oxford University Press for over ten times the price Liberty charges).

Now turn to Book (IVii.4) and commence reading from page 454 to 457. Embedded in these pages (IV.ii.9: 456) you will find Smith’s only reference to the invisible hand in “Wealth of Nations”. Nowhere else does it appear. It was never a general statement of the utility of the invisible hand.

The relevant passage quoted from refers to the preference of home traders to deal in their local markets over risking their capital out-of-sight in foreign markets. Their motivations for doing this are partly risk aversion and partly because that is where they make their money. This preference, spread among many individuals, has the effect of raising the annual produce of their own country.

It is the necessary consequence of their actions. This has nothing to do with markets. If you employ yourself in the national market then any gains you make (profits, etc., value added) cumulate nationally; if all domestic traders do the same, then the national market will grow faster than it would otherwise. That is Smith’s point. There is nothing mysterious about it – every Economics 101 student understands it. Smith was being rhetorical, as he often was.

How this ‘works’ for outsourcing is a mystery. It has nothing to do with the prodigious project management skills, organizational power, and competence of the outsourcers (Bechtel, Halliburton, etc.,). They are driven by very visible skills; so are markets, of which there is no mystery about either – how markets work has been known since Smith’s time and it wasn’t ‘miraculous’ even then, and should not be treated as such now.

Great suggestion, Steven Bainbridge; pity you spoiled it with a cheap quote that has no relevance to your subject.

Tories to Look At Flat (or at least Flatter) Taxes

George Osborne, shadow chancellor, at the Social Market Foundation think-tank on Wednesday 7 September 2005 said:

“You need not go much further than Adam Smith, who outlined the principles of good taxation over 200 years ago. He called for taxes that were transparent, simple, efficient, and fair.’’

:Smith did not outline his proposals for tax: he stated as maxims what were the premises of good tax policy, which because of their ‘evident justice and utility’ they have ‘recommended [themselves] more or less to the attention of all nations.’ (WN V.ii.b: 825-7)

That many modern nations have moved away from these maxims of common usage in the 18th-century is a cause of regret.

George Osborne continues

“In Britain, thanks to the complexity and confusion which Gordon Brown has introduced into our tax system, there is a strong case for flatter, simpler and fairer taxes; and I believe that the case for a flat tax, even with the obvious obstacles I have set out, at least needs serious consideration.
Gordon Brown has made it clear that he is not interested in a proper discussion of an idea which the rest of the world is waking up to. It shows how his thinking is stuck in the past and how dogmatic he has become. So we Conservatives will do the thinking instead.
Over the next few weeks I will announce a commission to look at the implications for Britain of the flat tax abroad and of flatter and simpler taxes at home. It will be independent of any political party, it will report next year, and its conclusions will be available to everyone.
Whether or not flat taxes prove to be the answer to the current mess the tax system is in, we must be guided by our principles of transparency, simplicity, efficiency and fairness in setting tax policy.”

Now that is good news for tax reform; a commitment to at least (even at last!) examine how a flat tax could be introduced in some version (‘flatter and simpler taxes’). Clearly, Mr. Osborne is someone whom we should keep an eye on as he (perhaps) really goes places politically.

Let's Do Better When Reporting on Adam Smith

In the Heritage section of The Scotsman, Edinburgh (Scotland’s leading national newspaper) a short briefing note on Adam Smith is published. It has a number of (correctable) shortcomings and I sent the following letter to the Editor with my suggestions. To read the article (I cannot publish it in full for copyright reasons) go to: (registration: www.heritage.scotsman.com)

The Editor:
The Scotsman
Edinburgh
Sir,
I read the Heritage article: “Adam Smith: founder of modern economic theory”, with concern because of the number of a) factual mistakes or important omissions in it, and b) debateable opinions expressed by the author, Will Springer.

Scotland’s National Newspaper, published in Edinburgh, where Smith lived for many years should publish accurate accounts of one of its most famous inhabitants.

I quote below and I either correct the factual error or omission, or the debateable opinion.

1 Omission: “Smith was born in 1723 in Kirkcaldy, Fife. Bright for his age, he attended the University of Glasgow at 14.”

Add after ‘14’: ‘and the University of Oxford from 1740-6’

Errors: “In 1746, aged 23, he was giving lectures on rhetoric in Edinburgh and five years later returned to Glasgow to teach university courses in both logic and moral philosophy.”

Corrections: “In 1748, aged 25,…” “and three years later” [i.e., in 1751]

3 Errors:
“His greatest contribution to society was An Inquiry into the Nature and Causes of the Wealth of Nations, a breakthrough book that covered for the first time the role of self-interest and a better use of labour; the forces of supply and demand; the advantages of competitive business; and the implications of the laissez-faire economy.”

3.1 Corrections: delete “for the first time”

(‘self-interest’ was a well known concept related to what we now call economics in the early 18th century: Mandeville, 1724; Francis Hutcheson, 1737; Hume passim, etc.)
3.2 delete: “laissez faire”; replace with ‘competitive’

(Adam Smith never taught ‘laissez faire’ economics, nor mentioned it in “Wealth of Nations”, nor agreed with it – it was popular with some French economists. Smith suspected the idea of letting ‘merchants and manufacturers’ completely alone to do what they wished because of their nefarious tendencies to monopoly and conspiracies to raise prices).

4 Error:

“Smith described the principle of the “invisible hand” in which every individual is being led by an invisible force toward his or her own self good and that interference from government is a hindrance to success.”

Correction: delete or rewrite
(Smith mentioned Shakespeare’s [Macbeth: 3.2: ‘thy bloody and invisible hand’] metaphor of the invisible hand only three times in his lifetime: the first in ‘History of Astronomy’ [1743-49], posthumously published in 1795, referred to the ‘invisible hand of Jupiter’ in respect of pagan religions believing in invisible gods and devils; the second in “Moral Sentiments” (1759) was about feudal lords distributing food, shelter, etc., to their retainers and serfs in ‘nearly the same’ proportion as they would have produced for themselves if the land had been equally divided among them; and for the third and last time in “Wealth of Nations” (1776) he referred to traders preferring to watch over their business locally rather than set up in foreign countries (risk aversion), which benefited National Income.

In none of the three cases did Smith link the invisible hand metaphor to markets, nor did he generalise it to mean “every individual is being led by an invisible force toward his or her own self good”. The metaphor is about the unintended consequences of human motivation, which could have benign as well as malign outcomes. We are not always led to the former outcome: pollution, reduction in National Income, unemployment, poverty and so on. Smith gives many examples in “Wealth of Nations” of malign outcomes from adopting the wrong economic policies, many adopted with the best of intentions and of people acting in ways that benefit them but harm society.)

5 Error and doubtful opinion:
“and later his exposure to leading thinkers in France while he travelled the Continent as a personal tutor to the young Duke of Buccleuch.”

Correction: delete ‘later’

(Smith travelled to France with the Duke of Buccleugh in 1764-6; it was on his return in 1766 that he began “Wealth of Nations” – he claimed he had started writing a book during the trip to pass away the time but does not mention which book it was or how he had got with it. The subject of the influence of the French economists on him is controversial because most of the ideas in “Wealth of Nations” were formed by him in the years 1746-1763; note also his contact with Hume was limited during these years because he stayed in Kirkcaldy with his mother for most of it).

6 Doubtful opinion:

“Although widely accepted by Smith’s intellectual peers, Wealth of Nations drew sharp criticism, most notably in Scotland by cotton and tobacco merchants fighting to save their once-profitable businesses.”

Correction: ‘drew sharp criticism, most notably in Scotland by cotton and tobacco merchants’? This is news to me; I would be grateful to have a note of the references for this opinion? From 1776, when Wealth of Nations was published, to 1783, Britain was at war with the American colonists and it was this that hit the America-Scotland trade and not anything published in it! Smith spent some years prior to publication – holding it back in fact – while advising the British government in person to find an amicable solution to the quarrel. His support for the Union with England was precisely based on the benefits it brought to Scotland in trade. How he could help or hinder their ‘once profitable businesses’ is not at all obvious.

7 Error:

“Arguably Smith’s greatest followers were his countless students who learned first-hand about the complexities of political economics and moral philosophy and who put those beliefs into play.”

Correction: delete:

(His students were not ‘countless’ who ‘learned first hand’, presumably in his lectures at Glasgow [1751-63], and they are eminently countable – the matriculation rolls of Glasgow University are available: approximately 100 per year for 11 years is about 1,100! Whether they put his ‘beliefs into’ play is also doubtful; many became lawyers or Ministers of the Church or inherited aristocratic titles; government ministers who listened to his advice did not always take it. Many Glasgow merchants did take his advice, and he benefited from their experience. It was in the next century, after Ricardo and others, that free international trade became an agenda item; also John Stuart Mill, 1749.)

Yours sincerely

Gavin Kennedy

Price 'Gouging' (US), Profiteering (UK)

A most interesting column in today’s (7 September 2005) Townhall.com (Washington DC): “In praise of price gouging” by John Stossel (© 2005 John Stossel)

It’s about the politicians and media who want to punish those who practice price “gouging”, especially when there are shortages caused by events like last week’s hurricane. Stossel disagrees and makes a counter-case:

“Consider this scenario: You are thirsty -- worried that your baby is going to become dehydrated. You find a store that's open, and the storeowner thinks it's immoral to take advantage of your distress, so he won't charge you a dime more than he charged last week. But you can't buy water from him. It's sold out.

You continue on your quest, and finally find that dreaded monster, the price gouger. He offers a bottle of water that cost $1 last week at an "outrageous" price -- say $20. You pay it to survive the disaster.
It was the price gouger's "exploitation" that saved your child.”

Stossel’s good point is that prices cause people to change their behaviour. Instead of buying casually for any reason, including trivial ones, the make a more serious choice than usual, weighing up whether to buy the same amount or less and save their money for something else.

Adam Smith had quite a lot to say about famines in “Wealth of Nations” (“Digression Concerning the Corn Trade and Corn laws”, IV.v.b: 524-43) and the price changes and their consequences he spoke of for famines apply to other situations of severe shortages. He considers that the actions of governments to cap prices, will either bring on severer shortages, as people stock up, or from their continuing to consume recklessly.

Stossel continues:

“Might the water have been provided by volunteers? Certainly some people help others out of benevolence. But we can't count on benevolence. As Adam Smith wrote, "It is not from the benevolence of the butcher, the brewer or the baker, that we can expect our dinner, but from their regard to their own interest."

In quoting this famous passage, Stossel misses off the next sentence, which conveys a most important point, slightly changing the stark message of self-interest towards a more accurate presentation of Smith’s views:

“We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages” [WN I.ii.2: 27]

It is not rampant self-interest that brings about and conducts the exchange, i.e., your money for the merchant’s dinner goods (beef, beer and bead – a comment on an 18th-century diet?), because if two selfish egos conflict, nobody would get their dinner easy, nor would the supplier get whatever he wants in exchange.

The parties to the transaction must each ‘lower’ the passions by which they express their self-interest to the level which the other party can go along with. This is the bargaining process: the seller starts out with a higher price and the buyer with a lower price than the one with which they both end up. Hence, the buyer tries to convince the seller that charging a lower price would be good business and in his interest – unsold beef, beer and bread go mouldy – and the seller tries to convince the buyer of the benefits of wholesome beef, beer and bread if he buys now, which is in his best interest.

Stossel’s last point is a neat summary of his case:

“Force prices down, and you keep suppliers out. Let the market work, suppliers come -- and competition brings prices as low as the challenges of the disaster allow. Goods that were in short supply become available, even to the poor.

It's the price "gougers" who bring the water, ship the gasoline, fix the roof, and rebuild the cities. The price "gougers" save lives.”

In the space John Stossel had (c.700 words) he does a pretty good job of explaining some economic hard truths. Try to disregard them, no matter your motives, and you risk making a situation worse. Government directed ‘famine relief’ in countries without the rule of law often becomes the selective punishment of whole populations who do not conform to the Government’s criteria of ‘good citizens’ (Zimbabwe, Sudan, Ethiopia). Where government agencies are corrupt and incompetent similar consequences come about (UN ‘Oil-for-Food’ in Iraq).

Resolving famines and severe shortages caused by earthquakes and floods is never an easy undertaking. The best modern author on the subject is Amartya Sen; though you won’t go far wrong by starting with John Stossel’s short piece on one aspect of dealing with emergencies.

Flat Tax, Adam Smith and a Critic

“Why flat means unfair” ”A single rate of tax would only help the better off. The real motivation of those who propose it is to cut expenditure and public services”
by David Walker in The Guardian, Tuesday 6 September 2005

David writes:

“the basic case for progressivity remains the one made by that celebrated socialist Adam Smith, who said taxes should be based on equality of sacrifice. The extra income earned by a rich person is simply worth less than the extra pound in a poor household. Which is why a flat tax was, and is now, evidently unfair.”

Ignoring the attempt at satire (assuming it was satire and not sarcasm), he brings in Adam Smith, presumably in a pathetic attempt to embarrass the Adam Smith Institute (who can well look after themselves in these matters) who have recommended at Flat tax.

I suggest we look a little closer at what Smith says.

Smith, writing in 1776 (revised in 1790 just before he died) commented on taxation policies in Europe in the 18th century, a century before the taxation system – and the public sector – took the shape and size they are now. He reported (i.e., did not invent or originate) the four common maxims of taxation (please, not ‘canons’), the evident justice and utility’ of which, ‘have recommended them more or less common to the attention of all nations’ (WN V.ii.b.6: 827).

The first maxim states that: subjects ought to contribute towards the support of the government, ‘as nearly as possible, in proportion to their respective abilities’ (WN.V.ii.b.825).

He also, in the matter of house rents (not income), wrote that a tax on them ‘would in general fall heaviest on the rich [they pay higher rents for more magnificent houses than the poor]; and in this sort of inequality, there would not, perhaps, be any thing very unreasonable. It is not very unreasonable that the rich should contribute to the publick expense, not only in proportion to their revenue, but something more than in that proportion’ (WN V.ii.e.6: 842). This is hardly a rallying cry to ‘soak the rich’! It concerned taxes on house rents where the advantages of being rich were obvious – tax by post codes?

On taxes on the wages of labour, Smith was very clear that as ‘the wages of the inferior classes of workmen’ determined whether whatever passed for subsistence was ‘liberal, moderate, or scanty’, and he favoured no tax on such wages at all (WN V.ii.i.1: 864). The proposals for a Flat Tax exclude all earnings below a high threshold, addressing this part of Smith’s advice. Where it should be set is a matter for debate – the higher the better in my view, and all the thresholds and percentages can be adjusted in the light of experience.

Smith endorsed proportionality, with slight hints that in specific cases it could be ‘more than in proportion’, even targeted on the luxury consumption of the rich if this could be managed with an economy of administration (the 4th maxim [WN V.ii.b.5: 826] as ‘commonly’ practised in the 18th century, but less so now, e.g., some taxes raise little more than they cost to collect, adding in all the unpaid costs of completing the paperwork and wasted on tax avoidance/evasion).

The various formulations to interpret ‘equality of sacrifice’ are too complex to go into here (see Richard Musgrave: The Theory of Public Finance) other than to say it is not obvious which is the one that Smith would have supported (it was J. S. Mill who formulated the concept). To argue that he would have opposed a Flat Tax to address the many problems of today’s tax and public expenditure regimes is simply daft.

On the basis of Smith’s views on the crucial role of what drives some people to extraordinary efforts to ‘better themselves’ by work and enterprise, and in doing so enable thousands of others to do the same, especially the otherwise destitute and poor (are not we all three pay checques from severe poverty?), I conclude we can safely say he would give the proposal a close and unbiased examination. He would not knee-jerk dismiss it in pursuit of some ideological goal, or because he was sympathetic to those who gain from the current tax system, mainly, and almost without exception, those who administer it, those who receive their income from it and those who receive their income from servicing the foregoing.

In this last respect, I note that David Walker is the Editor of the Guardian’s "Public", a monthly aimed at Executives in the Public Sector, of which there are many; a slice of modern life of people who gain a great deal from leaving the system as it is; not exactly a case of David going to barricades for the very poor, is it?

An Excellent Example from "Division of Labour"

From “Division of Labour”, in the premier division of economics’ Blogs (www.divisionoflabour.com), 5 September 2005

It’s not often an entire Blog entry deserves the widest publicity, but today’s posted by Lawrence H. White, a regular contributor at Division of Labour, is among those that you should read.

It incorporates an approach practised at ‘Lost Legacy’ (correcting nonsense put out by people uninformed about the work and ideas of Adam Smith, or distorting them when they should know better – in Bollywood's case, it is more likely to be the former) with some positive points to make about Adam Smith on the difference between Mercantile companies, like the East India Company, and free market organisations operating in free smithian markets, not State-sanctioned monopolies and their murderous and destructive history.

I reproduce as much as I dare, with no intention of infringing copyright; hence it is edited in places (my comments, editing, etc., are in [square brackets]).

“Absurd Economics of Mangal Pandey – The Rising” by Lawrence H. White:

I [saw] one of the summer Bollywood blockbusters, Mangal Pandey – The Rising. Count me among the disappointed.

In the film [there] is a gratuitous slap at free-market economics that is so out of place, it’s absurd. Mangal Pandey is a sepoy, an Indian soldier in the private army of the East India Company in the 1850s. An English officer explains to him how the East India Company works, then adds with a sneer: “And they call it the free market.” Excuse me? They – at least those in the know – called it mercantilism. The company operated under a legally rigged monopoly franchise, not in a free competitive market.

[Film script writers, directors and producers often take anti-market stances and deride and denounce profits, as if it is theft. The fact that these same people are among the most grasping, cynically exploitative of the people who work for them, and entirely focused on making ‘profitable’ movies for their own gain, should not escape the notice of customers. They are great organizers of successful entertainment, but extremely poor historians or economists. Perhaps they bash profit in compensation or by way of apology for being so good, and determined, at doing so?]

Adam Smith … was a relentless critic of the [East India] Company. He contrasted the bad deal the Company offered Indian workers with the beneficial results of the relatively free market that the British allowed in North America. Smith wrote [Wealth of Nations, I.viii.26; Cannan 1937 edition: p 73]:

‘The difference between the genius of the British constitution which protects and governs North America, and that of the mercantile company which oppresses and domineers in the East Indies, cannot perhaps be better illustrated than by the different state of those countries’.

[Smith’s critical account of the policies pursued by the British and Dutch Mercantile companies in the East Indies is in Book IV.vii.c pp 626-41 [Cannan, 1937 edition: 590-606]. He concludes, after reviewing their nefarious policies, and those of their employees and the consequences:

“Such exclusive companies, therefore, are nuisances in every respect; always more or less inconvenient to the countries in which they are established, and destructive to those which have the misfortune to fall under their government.”

Congratulations to Lawrence for his vigilance and let's give thanks that they never tried to develop America with a State-sanctioned Mercantile Company.

Good Lines Do Not Smithian Insight Make

Time 12 Sep 2005 edition

“10 Questions for John Bogle, author of The Battle for the Soul of Capitalism, which is coming out this fall/Autumn (Yale University Press).

Interviewed by Barbara Kiviat, 4 September 2005. In the course of the interview, which was basically on: “WHAT'S SO WRONG WITH CAPITALISM TODAY?”, Mr Bogle opined:

I got a group of fund managers together to talk about these issues, and one of the guys said, "Wait a minute, Jack. I understand what you're saying, but these things come and go. Why don't we just let Adam Smith's invisible hand take care of it?" I looked at him and said, "For God's sake, don't you know that we are Adam Smith's invisible hand?"

Now, regular readers should know I won’t let such statements go, not even from multi-millionaire successes like Jack Bogle. He knows a lot about making capitalism work (a system of political economy not known to Adam Smith – it took root in the middle of the next century after he died in 1790), but he confuses Smith’s selective use of Shakespeare’s metaphor (Macbeth, 3.2) with Smith's analysis of markets, which revealed them to be simple, not invisibly complex, nor run by supernatural forces along the lines of biblical miracles.

It’s a good line though: ‘we are the invisible hand’! Whatever he meant by that it had nothing to do with how a market works. See my earlier Blog today on Shakespeare’s invisible hand.

Loose Language is Not Needed

In National Business Review, New Zealand, 5 Sep 2005 in “Analysis: Katrina shows strength of open market,” Pavel Molchanov, a financial analyst in Texas, writes, the course of an otherwise excellent article on how markets tackle shortages:

“The beauty of an open economy is that Adam Smith’s famous invisible hand diverts scarce supplies to where they are in peak demand – that is, where prices are the highest. With US refining margins spiking higher after Katrina, European refiners almost immediately booked 30 petrol cargoes across the Atlantic – in addition to the emergency fuel provided by European governments.”

Adam Smith’s (it was Shakespeare’s actually: MACBETH 3.2) famous invisible hand is famous because it is widely misinterpreted, mainly by American academe, who infect their students with its application to everything. It was never Smith’s meaning to attach his metaphor to markets (they work perfectly well without ‘invisible’ or ‘miraculous’ assistance by well known price signals). In fact, in the only three times he used the invisible hand metaphor (and only once in “Wealth of Nations”) he was not referring to markets at all.

His first use was of Shakespeare’s metaphor in his essay on the philosophical method (illustrated by the “History of Astronomy”, written between 1744-1749 and first published in 1795, posthumously) he was referring to pagan religious beliefs in invisible gods, notably Jupiter, or Jove, not to markets.

His second was in “Moral Sentiments” (1759: page 184) and referred to feudal lords, from their ‘mean rapacity’, maintained their retainers and serfs on ‘nearly the same’ distribution of food, etc., that they would have obtained if the land was divided equally among them. Again nothing to do with markets!

His third, and last, use was in “Wealth of Nations” (1776: page 456) in which he notes that because traders prefer to keep their operations where they can see them, believing it safer or more convenient, they ensure that the home economy (national output) grows faster than foreign economies. This, again, has nothing directly to do with markets; more with motivation and its consequences.

In analysing markets in “Wealth of Nations”, and how they function efficiently, he did not make use of Shakespeare’s metaphor and those who continually write as if he did, and teach others the same fallacy, should ask themselves why he abstained in this manner?

As a moral philosopher, Smith knew very well that motivations could be benign (the virtues) and malign (the vices). He spent pages denouncing the anti-social motivations and actions of ‘merchants and manufacturers’ in conspiracies to raise prices, in monopoly behaviours and in prejudicial legislation against consumer interests.

By using the invisible hand metaphor indiscriminately and giving its use false credibility by linking it with Adam Smith’s name (instead of Shakespeare’s: ‘thy bloody and invisible hand’), the consequence, unintentional I am sure, is to give an unjustified cover to all kinds of economic policies to which such benign intentions are not justified. That is why Smith never endorsed laissez faire economics which could mean: 'leave business alone to do whatever it wanted, as if ordained by a greater good' (e.g., pollution, dumping, savage labour practices, slavery, monopoly and such like).

Leaving business completely alone leads to the scandals infecting corporate life all over the world. Leaving markets alone, within the rule of law and justice, to do their well-known and well-understood work, makes good sense, and good economics. Loose talk of invisible hands only confuses the distinction.

Holiday Quiz

A puzzle is circulating round the Blogshpere involving doezens of academics and students on opportunity cost. The resultant exchanges of views is most interesting. What follows is from the Marginal Revolution Blog:

"Opportunity Cost

I was stunned to read Robert Frank's NYTimes column about a recent study testing economist's knowledge of economics. Paul J. Ferraro and Laura O. Taylor of Georgia State University asked some 200 economists, many with PhDs from top-economics programs, at the 2005 annual meetings of the American Economic Association, a simple question:

"You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? (a) $0, (b) $10, (c) $40, or (d) $50."

I have a hard time believing that this is possible but 78 percent of the economists gave the wrong answer! This is not a hard question. There is no trick. Opportunity cost is central to economics, the people asked were among the best economists in the world, a large majority of them have taught intro econ and yet the correct answer was the least popular.

This is a professional embarrassment.

Test yourself against some of the world's best economists. The answer is in the extension. By the way, if you really want to learn economics come to GMU. I guarantee that your professors understand opportunity cost. We are also good on scarcity and incentives. Comments are open.

The answer is b, $10. Your next best alternative to the Clapton concert is attending the Dylan concert which has a benefit of $50 and a cost of $40 or a net benefit of $10. The net benefit is what you give up by attending the Clapton concert. "

Lost Legacy Comment:

Now go to Marginal Revolution : www.marginalrevolution.com to read the very long number of contributions on this topic (also Trade and Barter, etc.,) and have an enjoyable time (holiday if in the US as its Labour Day) reading.

If teaching economics in the new term, post it for your students when they have covered opportunity cost, and, meanwhile, circulate your academic colleagues with the question and poll the results.

I am not so surpised or embarrassed as many seem to be: a questionnaire on Adam Smith's views, actual as oppsoed to popular, would score as badly, or worse.

Another Loose Connection to Adam Smith

Editorial in "Varsity", Toronto, responding to complaints that the media carries too many reports of gun shootings:

"It is a simple fact that news media operates on the principle of supply and demand. Despite news journalism's supposedly inherent commitment to the objective communication of current events, the teeny-tiny content scrawling across CTV Newsnet (and CBC Newsworld, in less conflicted times) has undoubtedly been picked from the produce aisles of potential stories by Adam Smith's invisible hand."

Poor Adam Smith. Forever linked to the Shakespeare's 'invisible hand' metaphor (Macbeth, 3.2) and lumbered with its user's literary associations, no matter how weird, idiotic or loosely connected. The above editorial is full of metaphors, similies and such like, its author having swallowed a book of them, which she spits out at every sentence, as if to say: 'what a clever editor I am'.

You Gotta Help Colombo

“Political Lunacy”
Carl Luna's observations on California politics

In a witty skit, Carl Luna, professor of Political Science at San Diego Mesa College and a lecturer on politics and international political economy at the University of San Diego comments on some price hiking in California, a long way from the tragedies unfolding in New Orleans. He is interviewed by ‘Peter Falk’, a.k.a. ‘Colombo’ on price hikes in petrol(gas) prices. You must read it to enjoy it – some good economics too (visit: “SignonSanDiego.com) at the Union-Tribune 1 September”

His explanations to Colombo don’t go down too well because the old detective, in his usual manner, keeps raising ‘another thing I gotta ask’, and exposes inconsistencies in the economist’s arguments. In desperation, Professor Luna pleads for help:

“One of you out there has got to be able to give me a better defense of how the machinations of the gas markets really do reflect the operation of the both free and fair market Smith argued must exist for capitalism to truly flourish?

Until then, I find myself thinking it all just might come down to the adage of Deep Throat: Follow the money”
.
Again a good example of how to teach economics from America.

Adam Smith a Sociologist - as well as a Philosopher?

Kieran Healy writes:

Kieran Healy in his course, Sources of Sociological Theory concludes:

“Although Smith is often presented as the champion of the individual, and opposed to thinkers who emphasize social structure or the state, it's immediately clear when you read him that Smith was as much a "discoverer of society"--that is, of the idea that the social world is a human product consisting of myriad interlocking relationships dependent on specific institutions and human capacities--as any of the other theorists typically recognized as founders of modern sociology. His treatment of the problem of the division of labor also provides a platform to understand the others. Marx is much easier to understand once you know a bit about Smith, of course, but so are Durkheim's ideas about social solidarity and the non-rational foundations of contractual exchange. And much of Weber's work on the origins of capitalism was conceived explicitly with Smith in mind.”

To which, Brad Delong, author of one of the most lively economists’ Blogs on the web (www.delong.typepad.com) responds (1 September):

“All I can say is that the only way you'll pry Adam Smith away from us economists is to snatch him from the cold, dead fingers of our invisible hand.”

Now that’s fighting talk.

However, Professor Andrew Skinner, the doyen of Adam Smith studies and the last occupant of the Adam Smith Chair in Political Economy at the University of Glasgow, Adam Smith’s alma mater and the institution that appointed him Professor of Logic, followed by Professor of Moral Philosophy (1752-63), has commented in his superb edition of Smith’s “Wealth of Nations” (Penguin Books, 1986. page 10: ‘Analytical Introduction’) as follows:

“it is instructive to recall that the source of Smith’s initial fame was (social) philosophy, rather than economics, and that he himself regarded The Moral Sentiments and The Wealth of Nations as but parts of a single greater whole; as the parts of a grand synthetic system which he hoped to complete with a published account of ‘the general principles of law and government, and of the different revolutions which they had undergone in the different ages and period of society.”
The area of study just mentioned embraces a particular type of historical (and sociological) exercise and a discipline which is clearly distinct from philosophy and economics."

Not wishing to intrude on a private quarrel, I think that with Andrew’s authoritative assessment, Kieran has shortened the odds on him succeeding in making Smith a source of sociological theory, especially as Smith’s use of the invisible hand metaphor had more to do with the sociology of pagan religion, the sociology of the power structure of feudal society and the sociology of the unintended consequences of social prejudice, than it had to do with economics.

Smith on Law and Order, Theft and Punishment

I wish to return to “When the Moral Levee Breaks” by Lee Harris (TechCentral Station, Washington, DC, 1 September 2005), which I discussed yesterday in respect of his assertions that Adam Smith failed to recognise humankind's ‘primordial instinct for theft’ and that, besides a propensity to ‘truck, barter and exchange’, humans have an ‘even more natural tendency to pilfer, rip off, and steal other people's stuff’. Lee Harris goes closer to the theme in his article, occasioned by people in New Orleans pilfering shops (for electrical goods that won’t work because the electricity is off) and breaking into houses to steal whatever they can.

Lee Harris considers such behaviours show that civilisation is very thin in a moral sense and could break down, or collapse – themes repeated in his recent book. There is no doubt that Adam Smith understood all this and that he would not have been surprised at such behaviour breaking out in similar circumstances, anywhere in any society. He often refers to the ‘rapine’ of war, when soldiers freed from constraints of stable society (such as is inevitable in the fog of general war and local engagements in fighting) engage in plundering whatever takes their fancy, including raping women of all ages.

The question is why is this not a general phenomenon? Smith addresses this question in “Moral Sentiments”, (1759), his Lectures on Jurisprudence (1762-3), and in “Wealth of Nations” (1776). People do not refrain from theft of each other’s property solely because they are behind a ‘moral levee’ (a neat but inappropriate metaphor from Lee Harris, connecting his general point to the protective levee’s around New Orleans, which is below sea level and liable to flooding if the levee’s burst).

Smith begins with the evolution of property from there being none to it making its appearance in the Four Stages of society: Gathering-Hunting, Shepherding, Farming and Commerce. When Gathering was the norm, humans lived of what they picked from trees and plants. There was no sense of ‘property’ because the wilderness was lightly populated by human kind – the bulk of it not populated at all for hundreds of thousands of years. If somebody wanted something the stretched up or climbed up to get it; it you wanted something you did the same. There was abundance; hence no need to ‘steal’ or fight over it.

With Hunting (Smith missed out scavenging, but neither he nor anybody else knew much about the lives of the Hominids, a proto-human lineage lasting four to six million years, nor the lives of the early Homo sapiens, lasting about 200,000 years), ‘property’ made is appearance in vague way, via conflicts about the point at which a prey became one man’s and not another’s (when spotted, when chased, when struck by stone or arrow, when mortally wounded, when dead, when picked up or when returned to camp?). One can see that many arguments could follow that sequence, and not a few bloody fights.

With the Shepherding stage, when some animals were tamed and fed and bred close to humans property took on a clearer meaning. Those shepherd societies that resolved these disputes developed ‘laws’ and ‘precedents’, backed with a willingness of the band to execute its forms of ‘justice’. The property of those who had tamed flocks and herds was recognised by the band and punishment inflicted on any person without property taking what ‘belonged’ to others who had property. Smith puts it bluntly: government was formed to protect those with property from those without it.

As flocks and herds grew in number, and men lived off them, both those who ‘owned’ them and those who worked with the owners to protect them, for which they received food and skins for their families, ‘government’ took on the role of protecting the shepherd society from other shepherd societies, as their populations grew and made contact with others nearby. Theft of a sheep, etc., became punishable by instant death, adding a new deterrent to theft, underlined when one shepherd society went to ‘war’ with another because of ‘thefts’ or threats of thefts.

It was when farming began about 10,000 years ago and spread west and east throughout large parts of Europe and Asia that property became established in ‘law’ and moral concept. Farming subsists on distinct and measured tracts of land with boundaries and fences (among other things to keep out the flocks and herds of shepherds – the original cause of the deadly quarrel between Cain and Abel).

Trespass was a ‘crime’. Theft of crops, stores and materials were crimes too. Farmers huddled close to their lands and at convenient places formed small ‘towns’, from which ‘government’ deployed organised force to defend the town dwellers’ property in the surrounding lands. Law goes with Order. Thieves were punished; potential thieves were deterred.

Leaping across the first Age of Commerce (its high point was the Roman empire) and the interregnum of the ‘dark ages’ (for want of space here), the profession of law extended the complex definitions of property, inheritance, contract and obligations to government revenues (to pay for the administration of justice and defence against barbarian neighbours), we arrive to the situation in New Orleans.

In the absence of ‘law and order’ when the personnel who enforce it and helping citizens are engaged in rescue work, what restrains thieves? Well, for some of them they are driven by extreme need (food, clothing, shelter and simple tools to fix their temporary abodes) and this overcomes their natural inhibitions about theft of what does not belong to them, which inhibitions can be moral (‘thou shall not steal’) and just plain fear of punishment if caught and for others theft is a way if life, normally constrained by law and order, and lack of opportunity.

Now, Adam Smith taught all of this from 1748-64 in his Glasgow classrooms; he wrote about it for the world to read in “The Theory of Moral Sentiments” and “Wealth of Nations”. He cannot be accused with any sense of justice by Lee Harris of not understanding what he clearly understood, or of focussing on ‘truck, barter and exchange” and neglecting the consequences of a break down in law and order, i.e., justice, as exemplified in New Orleans this week. Harris is wrong about Adam Smith (who had a Doctorate in Law, DDL) and should correct his mistakes.

Two quotations from Smith’s “Moral Sentiments” will make these points clear:

“A society cannot subsist unless the law of justice are tolerably observed, as no social intercourse can take place among men who do not abstain from injuring one another; the consideration of this necessity, it has been thought, was the ground upon which we approved of the enforcement of the laws of justice by punishments of those who violated them.”

and

“Man, it has been said, has a natural love for society… Its disorder and confusion, on the contrary, is the object of his aversion…Every appearance of injustice, therefore, alarms him, and he runs, if I may say so, to stop the progress of what, if allowed to go on, would quickly put an end to everything that is dear to him. If he cannot restrain it by gentle and fair means, he must beat it down by force and violence, and at any rate must put a stop to its further progress… mercy to the guilty is cruelty to the innocent” (TMS II.ii.3.6-7, 87).

Lee Harris includes in his ‘libel’ on Adam Smith the side-story of how he kept smugly quiet while a young counter hand in a café was vocally upset at the tv pictures showing looters in New Orleans making off with arms full of stolen property from unprotected shops. Perhaps he should reflect on his smugness; to what extent does such behaviour in times of emergency crises that he pontificated about in his article, give succour to those whose actions contribute to the breakdown of society, its morals and its impediments to mob rule, from which we would all suffer dreadfully?

How much better would it have been for Lee Harris to give public support for the young counter-hand’s moral stance; if the boy cannot learn this from experienced citizens like Le Harris, from who does he learn it and, failing anybody else, what stops him shrugging his shoulder and his morals off them?

Adam Smith is Innocent (so was Captain Cook)

“When the Moral Levee Breaks” by Lee Harris, TechCentralStation,
Washington DC 1 September 1005


Lee Harris writes an interesting article and I don’t want to spoil his pitch, but he is quite wrong in parts in regard to Adam Smith and Captain James Cook.

Captain Cook went several times to the Pacific islands and his attitude to islanders’ thefts was not entirely relaxed. He was exasperated by their abilities to steal, and took measures to prevent it, often blaming laxness among his crews. He also flogged islanders severely when caught. In fact it was theft by an Hawaiian that provoked the incident in which he was killed a Kealakekua Bay (See my: The Death of Captain Cook, Duckworth, London, 1975).

Lee Harris writes:

“Adam Smith, who wrote The Wealth of Nations before Cook's voyages, made an immense to-do about the natural human "tendency to truck, barter, and exchange one good for another." But Smith unfortunately did not address the question of humankind's even more natural tendency to pilfer, rip off, and steal other people's stuff. After all, in the Scotland of his time, people behaved themselves: the Calvinist clergy made sure of that.

Yet Smith's failure to take humankind's primordial instinct for theft was not unique; on the contrary, all political theorists of the modern era, from Rand to Rawls to Nozick have implicitly assumed that we are living in a world in which acts of theft are simply unthinkable -- an unspeakable No No that protects our civilization in the same way that the levees around New Orleans were once considered to have protected its population from inundation.”

Numerous points:

Adam Smith did “address the question of humankind's even more natural tendency to pilfer, rip off, and steal other people's stuff.” He lectured at the University of Glasgow, 1754-1763, on, among other things, Jurisprudence, in the course of which he had a lot to say about ‘theft’, linking it to his Four Stage theory of social evolution from the Gatherer-Hunters, though to Shepherding and Agriculture, and on to the Age of Commerce.

He went into detailed explanations of the behaviours of savages and barbarians and civilized people in respect of their attitudes to property. Where property is defined, theft is a minority behaviour punishable, in the 18th century by death, as in shepherding societies (the Tartars and the Saudis), in the latter often instantly, without the benefit of trials.

In savage societies – gatherers and hunters, such as found in North America and the Pacific Islands - Smith said that ‘theft is not much regarded’ because there were no definitions of property and hence no concept of theft - but only if the person did not have the item in his hands. Physically forcing it off them was punishable, severely. It corresponds to the theory of Justice called 'occupation'. (A. Smith, “Jurisprudence”, 1762, p.16, published by Liberty Fund, 1982). Smith was well aware of human proclivities in this area. Even in Calvinist Scotland there was a constant parade of miscreants brought before the courts for theft. Whatever the failings of Rand, Rawls, and in these matters, Nozik, it is wrong to join Smith to them.

Alongside these proclivities, among the most savage of peoples, Smith’s dictum of the ‘propensity to truck, barter and trade’ was also practiced. Indeed, Cook’s journals, and those of Captain Bligh, one of his junior ‘warrant’ officers at Kealakekua Bay, show much evidence of the trading posts they set up to trade with the same ‘thieving’ Tahitians and Hawaiians, which were exceptionally successful on all occasions, showing that the ‘savages’ knew all about trade before they met the Europeans and considered it compatible with their habits of 'thieving'.

Lee may consult my above book, and my books on Captain Bligh (“Captain Bligh, the Man and his Mutinies”, 1988, Duckworth) and Adam Smith (“Adam Smith’s Lost Legacy”, Palgrave Macmillan, 2005) to correct his wrong impressions.

Incidentally, Adam Smith had copies of Cook’s voyages in his library and correponded with Sir Joseph Banks, Cook's, and later Bligh's, friend and sponsor.

All Fall Down

The Katrina disaster in New Orleans, and elsewhere, is producing the usual pundit nonsense where a little knowledge is dangerous. That several commentators purport to be economists, or at least familiar with markets, is worrying. Several of the good economists Blogs (see Brad Delong, Trade and Barter, The Austrian Economists, Tim Worstall, Division of Labour, Café Hayek, et al), have picked up on the stories, fantasies and first impressions posing as deep thoughts and given them the appropriate treatment. Laypeople should be treated very gently, but professionals, well they get what they deserve.

Most critics refer to Bastiat’s classic piece on the ‘broken window’ fallacy: that a broken window is ‘good news’ because it means money has to be spent on replacing it, which is good for glaziers and therefore good for business and the economy. The fallacy lies in treating the replacement of the window as an addition to national income, when it fact it takes expenditure away from where it was intending to go before the cash was used to pay the glazier, or it reduces savings. Broken windows, as with car smashes, leaking roofs and money spent on emergency medicines, are ‘distress purchases’, not intended purchases in the normal course of a day.

Whatever the consumer had intended to purchase that day – adding to the expenditure stream – is now diverted to remedy the distress of the emergency. The net effect is not positive. It may be good news for the glazier – an unexpected boost to her income – but it is bad news for the hairdresser, whose appointment is cancelled, or the restaurant losing a customer, or whatever. The more expensive emergencies – roof leaks – may simply cancel the intended holiday expenditure – again adding nothing net to total expenditure.

Similarly with unforeseen court fines for misbehaviours; they curtail spending by the miscreant in the form of the fine (apart from any extra costs of gaining a conviction).

If it were true that disasters have a sunny side to them – a Tsunami for example? – then we should welcome them, even live dangerously without precautions and watch the GNP go up! As somebody said in one of the Blogs, somebody nuking the US would be doing it a favour, a most ludicrous suggestion, even as a ‘joke’.

As a young economics student in the 1960s – where did all the flowers of our youth go? – during the high-tide of Keynesian economics, I spoke as a meeting of trade unionists in Edinburgh, who were debating a proposal of the Council to apply to run the Commonwealth Games, for which they needed to build a multi-million pound stadium.

I opined the view that they should support the Council’s proposal because the stadium would create employment (fair enough) but then, in an outburst of speaker's rhetoric, and flushed with first year Keynesian macro, plus my Samuelson, I added, that I hoped it fell down when finished, because then they would need to build another one, doubling the economic benefits I claimed.

Shortly afterwards I came across a little book in a second-hand bookshop, of which Edinburgh still has many, called ‘Economics in One Lesson’. Reading it I was mortified to find the story of the broken window, which completely undermined my enthusiasm for building stadiums and hoping they would fall down, in a misjudged analogy to Keynes’s passion for burying milk bottles at the bottom of disused coal pits and then digging them up again to stimulate growth.

Every time I hear or read of so-called silver linings from disasters, I think of my public, and still embarrassing, faux pas.

August's Lost Legacy Prize Winner

In a path breaking article, “The Data of Development”, by P. Boettke, on the “Austrian Economics” Blog (a must for a visit: www.austrianeconomists.com; bookmark it for consistently good, clear articles on economics from an Austrian perspective – the closest modern perspective to Adam Smith – though not always pure ‘Smithian’).

“Why are some countries rich and others poor? This vexing question has preoccupied the best minds in economics since at least Adam Smith's An Inquiry Into the Nature and Causes of the Wealth of Nations. In the late 19th century, Max Weber asked why capitalism had developed in Europe and failed to take root in China, and in the early 20th century Joseph Schumpeter sought to understand how entrepreneurial innovation fueled the wealth of nations. From Smith to Schumpeter questions of economic development were asked without reference to the aggregate data of national income accounting.”

That is a good start to the article which addresses themes that often perplexed me as a young economist brought up during the years of the high-tide of Keynesian macro-economics.

“Armed with Keynesian theory and the statistical tool-kit of refined measurement and control, Keynesian policies could guide government in the effort to correct the flaws of the capitalist system and manage the economic system appropriately so that stability and prosperity could be experienced.”

And this is the problem with Keynesian economics – its sets out to correct the ‘flaws of capitalism’ with the in-built flaws of bureaucratic interventions that are self-contradictory. By maintaining, for example, aggregate demand to maintain full employment, it weakened the working of the economy. Workers employed in loss making activities (it doesn’t matter if this was the fault of the bosses, of whose fault it was – industries rise and fall as part of a modern economy) they have no incentive to change their ways rapidly, and they can also behave with reckless disregard for the effects of their behaviour because the prospect of unemployment is not real if they know that the government will always pump in the state sponsored demand sufficient to maintain aggregate employment. This was the fatal flaw in the income policies foisted on the economy by the Labour Government advised by Balogh, Kaldor, et al.

To show they are serious, the article describes a programme they are about to undertake that will conduct in a Smithian manner a study of what actually causes entrepreneurial performance in Africa (and inhibits it). There is more likely to be a real increase in economic welfare from such studies – as a practical guide to adopting policies that work on the ground – than from working out at the aggregate level how to financially bankroll wasteful governments whose performance at any level – even if honest and corruption free – is lamentable and endemic.

“Rather than study statistical aggregates, the focus here will be in on-the-ground study of how entrepreneurs are erasing the devastating problems of poverty in some of the poorest regions of the world. The eradication of poverty will not come from international aid agencies and the decisions by western leaders on how best to redistribute wealth world-wide, but through the entrepreneurial spirit of Africans themselves. Given the freedom to realize the gains from trade, individuals will strive to improve their lot in life and the lives of their children, etc.”

Congratulations to Austrian Economics. Winners of this month’s prize for the best contribution in the spirit of the true Legacy of Adam Smith.

PS A close runner-up also came from Austrian Economists: "Best Smithian Analysis for a Long Time".