Smith was Not a Prophet

In a bio piece by Mike Dorning (Chicago Tribune) in The Mercury News, San Jose, (http://www.mercurynews.com/mld/mercurynews/news/politics/13042213.htm), 31 October, we read about a newish, but rising, Congressman, Mike Pence. He is described as “becoming the voice of small-government conservatives”.

Apparently, “Mike Pence begins every day by reading the Bible. He works with a bronze bust of Ronald Reagan watching over him from across his office. And his vision of heaven, he said, is studying the free-market economist Adam Smith in the morning and riding horseback in the afternoon.”

He also prays a great deal. Nothing at all wrong with any of that. In a free country everybody has a right to conduct themselves within the law as they please. Smith called that Natural Liberty.

Assuming that Congressman Pence is studying Adam Smith’s Works systematically, I applaud his study plan. So many people who are quick to quote Smith just rely on the odd extract, usually torn out of context. But if he is reading Smith in the same manner as he reads his Bible (from Joshua one morning to Genesis the next), I am concerned at the image of Adam Smith he projects – as the author of a kind of Biblical text, with revered passages to be chewed over and interpreted like one of the Old Time Prophets.

Smith was not a ‘High Priest’, a ‘Prophet’ or the ‘Father’. I do not think he was a ‘conservative’, more of a radical traditionalist who believed that changes in society came best from gradualism, not revolution’ or sudden lurches, and that above all, those proposing reforms should always be aware, out of ‘common humanity’ of the impact of their proposals on those least able to protect themselves and should take this constraint into account when they impose too hasty time schedules for their reforms to take effect.

Trade-off between Freedom and Security

Michael F. Cannon has an article published in CATO Institute, 31 October, (http://www.cato.org/pub_display.php?pub_id=5138), which was originally published in National Review.com on October 14, 2005, entitled “Choice and Security”

In it he poses a most interesting question:

“Which would you rather have, freedom or security?

The Left has argued that since September 11, 2001, President Bush has curtailed civil liberties in an attempt to keep America safe from terrorism. Few people on the Left believe this bargain will pay off, and the skepticism runs deeper the farther left one moves across the political spectrum. The same cannot be said when it comes to economic freedom. Here, acceptance of a trade-off between freedom and security increases as we look leftward. In The New Republic, Jonathan Cohn recently asserted the existence of that trade-off — and argued for making the trade — on issues from Social Security to education to healthcare.

Cohn criticizes conservatives for selling greater choice in these areas without acknowledging that it would result in less economic security. His argument goes like this: The limits on choice that conservatives would sweep away also make people more secure. Social Security provides Americans a guaranteed pension; having the choice of putting one's Social Security taxes in a personal account would weaken that guarantee. Public schools are devoted to educating all comers; vouchers take money away from those schools and that mission. Each state has its own set of health-insurance regulations, many of which attempt to make coverage more affordable; allowing consumers to choose what slate of regulations they want would make those well-intentioned rules less effective.

Though not a conservative, I will break bread with conservatives when their aim is to tear down barriers to choice. Social Security privatization, school vouchers, and deregulating healthcare would expand the menu of choices available to ordinary people. There is an alternative explanation of the relationship between choice and security: Rather than crowd out economic security, choice actually increases it, whether it's saving for retirement, educating one's children, or protecting one's health.

Who Wants to Buy from a Government Monopoly?

My argument goes like this. From whom would you rather buy bread: a government monopoly, a private monopoly, or one of a number of competing grocery stores? It's really not much of a contest. The government and private monopolies would have consumers right where they want them. They don't have to take much care to meet specific needs, and they are likely to overcharge, which leaves consumers with less money (i.e., they are less economically secure). Competing grocery stores, on the other hand, will fall over themselves to provide fresh whole grains at a price that most increases a consumer's economic security.

Adam Smith said it well: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." But once consumers are dispossessed of their freedom to choose, businesses worry far less about consumers' economic security.

That is the basic argument. But it is over time that choice really begins to look good. In the process of falling over themselves, those producers strike upon tiny improvements in quality, delivery, etc., all of which translates into even greater security. Such innovations have caused prices to fall for everything from food to computers to telecommunications. Over time, choice makes products of ever-increasing quality available to an ever-increasing number of people at an ever-decreasing cost.”

Michael F. Cannon makes a compelling argument. Competition disciplines producers into trying harder to earn the consumers’ spending and disciplines those inclined to create monopolies into avoiding anti-consumer practices that raise prices and thereby profits at the expense of consumers and their real incomes.

The impartial competitor in Smithian markets is analogous to the impartial spectator in moral sentiments. Unfortunately, many who quote Smith on the ‘butcher, the brewer and the baker’ confine themselves to only part of the transaction. In fact, almost the entire economics profession has ignored the while exchange process at the heart of every economic transaction ever carried out.

Most economists believe that prices are formed, goods are exchanged, wants are satisfied, as if in an instant auction system – sellers cry out a price and buyers respond with their cash. Smith spent a little longer on the formation of bargains and so should modern economists. Instead, they fell into what I called the ‘fundamental error’ in “Adam Smith’s Lost Legacy” (2005). They saw only one side of the transaction – the “butcher, the brewer and the baker” acting in their self-interest – and forget the effort required for two parties, each acting in their self-interest, to mediate their different interests (sell dear, buy cheaper).

Each party to a market transaction has to address the interests of the other; buyers raise their offers; sellers lower their demands, until a common price is struck, for there can only be one price in a market transaction. When buyers contemplate competitive prices from several butchers, brewers and bakers and choose the price closest to their offers, the negotiation is silent, but the outcome is the same as if they had stood and tried to bargain with the sellers verbally (as some do; and in marekets for major transactions almost all do).

The same is true for the sellers contemplating potential consumers in a competitive market; they survey the different buyer’s offers and select the one closest to their demands (silently) or from verbal attempts to bargain. Each addresses the other’s interests to persuade them to transact close to the range of prices they have selected for that purchase or sale. In fact, Smith goes on to describe this very process in the same chapter from which the ‘benevolence’ of the ‘butcher, brewer and baker’ is dismissed.

Likewise, the impartial spectator operates in what J. R. Otteson calls the ‘moral market place’, except ‘prices’ as understood by economists for economic goods (excess demand at zero prices) are not the instrument of the transaction (a point, respectfully, I think is not fully appreciated by Jerry Evensky in his brilliant recent book, Adam Smith’s Moral Philosophy, Cambridge 2005). In the moral market place, 'exchanges' are the reciprocal favours (good turns, obligations, expectations, etc.,), universally common in all societies and throughout history and pre-history, and their practice has a decisive role in social relationships.

Smith alludes to this in "Moral Sentiments" (TMS II.iii.2: pages 85-6): “by a mercenary exchange of good offices according to an agreed valuation.” Reciprocity was the basis of the first transactions between humans (and I believe among the pre-human hominids, the ‘Brutes’) which evolved, socially, over millennia into transactions recognisably economic in the form of exchange through trade between strangers.

With these caveats, Michael F. Cannon’s article is a welcome contribution to the restoration of Smithian political economy and moral philosophy.

Impact of Religious Doctrine on 18th century Authors

Professor David R. Keller, Director of the Centre of the Study of Ethics at Utah Valley College, (The Salt Lake Tribune www.sltrib.com) in an article discussing the confusing distinctions between the terms ‘Liberal’ and ‘Conservative’ in the US (not mentioning the confusion caused by these same terms in the UK) makes an aside mentioning Adam Smith:

“And while Jesus berated those who worship money, or mammon, most contemporary "conservatives" embrace free-market capitalism and the accumulation of wealth with almost religious fervor, as if Adam Smith's "invisible hand" is God's hand.”

Not too clear what point I should make about this because there is a debate among Smithian scholars on the alleged religious implications of the metaphor, the invisible hand. For example in his unpublished PhD thesis Andy Denis, 2003 Chapter 4: ‘The invisible hand of God in Adam Smith’, Denis asserts that the metaphor had religious significance (http://www.city.ac.uk/economics/staff/denis/default_print_1_1077_1077.html).

I am reading currently a new book by Jerry Evensky, “Adam Smith’s Moral Philosophy: a historical and contemporary perspective in markets, law, ethics and culture” Cambridge University Press (ISBN 0-521-85247-1). It is excellent and joins recent books by Sam Fleischacker (Samuel Fleischacker, On Adam Smith's Wealth of Nations: A Philosophical Companion. Princeton: Princeton University Press, 2004 (ISBN: 0-691-11502-8) and J. Otteson (“Adam Smith’s Market Place of Life”, Cambridge University Press, 2000 (ISBN: 0521016568) as signs that scholars are questioning accepted views on Adam Smith, and are correcting many of the false interpretations that make up his lost legacy.

Jerry Evensky also enters the debate about the religious influence in Adam Smith’s work, basically saying Smith was a ‘Deist’. While I have not yet completed reading Evensky’s book (I received it only two days ago), I intend to enter the debate from the contrary point of view, partly set out in my Adam Smith’s Lost Legacy, 2005, Palgrave Macmillan, (ISBN 1-4039-4789-9), Chapter 8: “The religious climate” in Smith’s day. I think many scholars underestimate the importance of religious censorship and the persecution by zealots of those deemed to be 'unsound' on Biblical doctrine and their effect on how people expressed themselves.

Invisible Hand no 24

In the Tapei Times today there is an article without a bye-line of the author. It appears to be from the New York Times, 30 October, 30 October, page 12: see: http://www.taipeitimes.com/News/bizfocus/archives/2005/10/30/2003278045

It is headed: “Nobel-winning economist looks beyond the invisible hand” and the following paragraphs are included in what is, otherwise, an interesting read about aspects of the work of Thomas Schelling, an economist who was awarded the Bank of Sweden Nobel Memorial Prize in Economics this month (thoroughly deserved, I might add, for his work in games theory).

“Thomas Schelling studied Adam Smith's ideas, and now his findings have significantly changed the way economists think about competition and social welfare.

Adam Smith's celebrated theory of the invisible hand is the idea that individual pursuit of self-interest promotes the greatest good for all. When reward depends primarily on absolute performance -- the standard presumption in economics -- individual choice does indeed turn out to be remarkably efficient.

But when reward depends primarily on relative performance, as in hockey, the invisible hand breaks down. In such situations, unrestricted choices by rational individuals often yield results that no one favors.

The invisible hand assumes that reward depends only on absolute performance. The fact is that life is graded on the curve.”

With no blame attached to Thomas Schelling, the author manages to make several errors in respect of Adam Smith.

Adam Smith did not have a “theory of the invisible hand”, celebrated or otherwise. This is an invention of modern academe, the evidence for which is pure serial repetition by economists who have not read him, but who have, instead, taken this common attribution to be true merely because their tutors told them so.

Smith’s used the invisible hand as a metaphor and he used it only once in “Wealth of Nations”. It was never “theory” but as a once only illustration of how human motivations can have unintended consequences, which, in the case he was discussing, were, happily, benign consequences. He did never made it a general rule that “the idea that individual pursuit of self-interest promotes the greatest good for all.”

The pursuit of self-interest could just as easily promote malign unintended consequences, and a moment’s thought would suggest why, that this is the case. ‘Merchants and Manufacturers’, wrote Smith, tend, wherever they can, to promote monopolies and reductions in supply to raise prices against the interests of consumers. Self-interest does not automatically, or via an invisible hand, promote “the greatest good for all.” It all depends, and because it depends, on the circumstances, Smith did not make the metaphor into a ‘theory’. That is an inaccurate exposition and not Adam Smith’s.

Anyway, the metaphor was originally Shakespeare’s from Macbeth: 3:2 (“thy bloody and invisible hand”).

Unwittingly, the author of the article understands this (I am sure Thomas Schelling does). He or she distinguishes between ‘absolute’ and ‘relative’ performance in Hockey. By 'absolute' is meant what everybody might do (because they are compelled somehow but otherwise do not) and by 'relative' is meant what some individuals might choose to do because they value one outcome – safe play – over another – winning.

This distinction is close to Smith intended point: if everybody pursued their own self interest without detriment to anybody else’s (a big 'if' and one that never escaped Smith's attention) then doing so by everybody would promote “the greatest good for all.” But humans do not play the game this way, either in society or hockey. Smith knew that and his analysis never concluded that they would. It may be that something absolute like this is "the standard presumption in economics", but it never was a presumption of Adam Smith's, so whatever Schelling went 'beyond' it was not away from Adam Smith. It could more correctly be seen as a 'return' to Adam Smith's approach.

I believe this interpretation of Smith’s single use of the invisible hand metaphor is closer to being correct than it being a 'theory' as reported in today's the New York Times, via Tapei News.

Adam Smith and the US Declaration of Independence

J. G. Vassallo writes an excellent article, “Where do we go from here?”, in Malta Independent On Line (The Malta Business Weekly, 29 October, St Julians, Malta), while discussing a brief recent history of political affairs in the island of Malta and the problems created by its governments.

His answer to his own question, “Where do we go from here?” is a lovely link between Adam Smith’s “Wealth of Nations” (March 1776) and the US “Declaration of Independence” (4 July 1776).

I am not sure whether Jefferson had a copy of the “Wealth of Nations” in time for it to have influenced his drafting of the “Declaration”. The relevant chapter could have been “Of Colonies” (Book IV, Chapter vii), plus many comments on mercantile policies, but the timeline looks tight to get copies from London to Virginia and for them to be read in the midst of all the other things that were occupying Jefferson’s mind in those weeks before the Second Continental Congress adopted the “Declaration” on behalf of the 13 colonies.

However, Jefferson would certainly have been aware of reports of Smith’s general views before they appeared in “Wealth of Nations”. Benjamin Franklin met Smith and it is reported that Smith showed him chapters from the manuscript (1775), but whether Jefferson “borrowed heavily” from “Wealth of Nations” is probably overstating the case. That the sentiments of the “Declaration” and Smith’s works are of similar vintage is at least a reasonable assertion without implying conscious borrowings.

Here is how Vassallo presents his peroration:

“It has been said that some fetters make us free, such as the moral law that lies at the core of contracts, and sound natural law, embodied in a wise government, based on consent of the governed.This encapsulates the aspirations of a growing number of Maltese citizens disillusioned by the government’s recent performance. People are asking: “Where do we go from here?”When Thomas Jefferson penned his revolutionary declaration on the inalienable rights to life, liberty and the pursuit of happiness in 1776, he borrowed heavily from another revolutionary document of that same year: Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations.

Smith’s ideas were every bit as astounding as Jefferson’s. Because, while Jefferson believed that men were not made to live under tyranny, Smith declared that men were not made to live in poverty.

I submit that this is a good answer to the real, present-day aspirations of the Maltese electorate."

"Iron Curtains?"

John Zmirak in FrontPageMagazine.com (edited by David Horowitz) writes on illegal immigration into the USA, “Securing America’s Borders (Finally)”, 28 October 2005 http://frontpagemagazine.com/Articles/ReadArticle.asp?ID=19972

“As corporations have been driven by short-term numbers such as quarterly growth in stock price or earnings, longer-term investments and social responsibility have been almost forgotten. It’s refreshing to visit Starbucks for a coffee – knowing that the company provides health care and 401k plans for its part-time workers. Why? Because its founder, Howard Schultz, has a conscience; he was inspired to found his company by reading Small Is Beautiful, penned by the Catholic social philosopher E.F. Schumacher. Similar sentiments can be found in the work of free-market stalwarts Adam Smith and Wilhelm Röpke, who knew that a free society and free economy depend on social stability and the hope of upward mobility for one’s children.”

This sensible slant is a part of John Zmirak’s trenchant case against illegal immigration. Presumably he supports legal immigration, though much of what he reacts to would apply, though on a lesser scale from legal immigrants from poorer countries replacing American unskilled workers. However, I won’t go there as the internal affairs of another country are not my business, except to say that for the UK, I am relatively unconcerned about immigration, legal or otherwise, because on balance it is a positive fillip to economic growth and stability.

Nice, though, to see Adam Smith in his proper place: “in the work of free-market stalwarts Adam Smith and Wilhelm Röpke, who knew that a free society and free economy depend on social stability and the hope of upward mobility for one’s children.”

Where immigration becomes a law and order question, the remedy is to rely on legal norms to deal with such problems, from custodial sentences through to deportation. The latter sentence is not available to the domestic miscreants from gangster, criminal or ‘under class’ participants. Education for the children of such parents is another part of a remedy for the next generation.

Where immigrants and the children of immigrants invest in their human capital (which may mean seeking employment in low wage sectors to gain a toehold, as exemplified in Hong Kong for many years, and for the accumulation of frugal savings, to invest in the education of the children, to gain places in higher wage sectors) they add value to the country that adopts them.

There is something uncomfortable with forming an ‘iron curtain’ at borders to keep people out, having recently got rid of the original iron curtain in Soviet Russia to keep its people in. Most of the 9/ll terrorists entered the USA ‘legally’ and the British version 7/7 terrorists were born here; some of the people captured in Afghanistan were US born citizens.

The Relevance of Adam Smith vs the Irrelevance of Karl Marx

V. Sundaram writes in News Today, India, an article explaining “Why I am Not a Marxist” (http://newstodaynet.com/28oct/ss1.htm):

“In these days of globalisation and privatisation, Karl Marx is as irrelevant as Adam Smith. The great capitalist barons of the past have no counterparts today. The real owners of our public limited companies and giant corporations, the millions of stock-holders, play no roles in managing these oligopolies. The big firms are in the hands of professional managers and technical experts whose names most stock-holders would not recognise if they heard them. Although on top levels the pay of some executives may be large, yet the principal motive is to keep the company alive and growing. They maximise profits not for themselves but for stock-holders, for those whom Galbraith described as 'the unknown, anonymous and powerless persons who do not have the slightest notion of whether their profits are, in fact, being maximised'.

There is no way to eliminate these impersonal behemoths unless you also wish to eliminate such things as cars, telephones and cell phones, television, air-conditioners, washing machines, airplanes, and modern weapons of war. And there is no way that the techno-structure can function without managing prices well enough to avoid the chaotic short-term effects of numerous parameters that are inescapable aspects of the real world. Yes, monopoly competition of a sort still prevails aluminium vs. steel, wood and glass vs. plastics, one brand vs. another brand in the world of consumer durables and so on and classical competition is still vigorous on lower levels of the economy but within the techno-structure the picture is a far cry from the simple free-market capitalism of Adam Smith.”

The rest of the article is about what Sundaram asserts was wrong with Karl Marx and Vladimir Lenin ,and their modern representatives among the various Indian Communist Parties, one of which in government does not appear to be very sympathetic to other communists trying to induce high-tech workers into trade unions in case they frighten away foreign investment!

For “Lost legacy” our concern is with what he says about Adam Smith. His opening line that “Karl Marx is as irrelevant as Adam Smith” is intriguing. In terms of the reduction of mass poverty in India, I would have thought Smith’s critique of mercantile policies, such as import and export duties, overly bureaucratic regulations, red tape and licences, would make him very relevant. The degree to which Smith’s free market policies have been adopted within India is directly related to the upsurge in growth rates and the reduction of poverty by bringing hundreds of thousands of workers families into paid employment.

Again, this is a sign of the relevance of Smith. That even communist managed states in India are vying for inward investment (sans trade unions) suggests Smith is replacing Marx as their guide to economics.

As Smith knew nothing about capitalism as it developed in Britain and elsewhere in the 19th century the reference to the “simple free-market capitalism of Adam Smith” is irrelevant, but Smith’s simple market economics of a commercial society is highly relevant.

Links Between Growth and Moral Behaviour

Michael Mandel of Business Week Online, 7 November 2005 (they always print ahead of the publication month), reviews Benjamin M. Friedman’s new book, The Moral Consequences of Economic Growth, Knopf (592 pages for $35): “What’s So Good About Growth”.

Note this is a statement, not a question, which is remarkably mature for a subject that attracts a lot of silliness from people who a) either have plenty of material goods and benefits and want growth to stop, or b) do not realise to what lives of abject poverty they are condemning other people, towards whom they would normally exhibit some sympathy.

Michael Mandel writes:

“The title of Harvard University economist Benjamin M. Friedman's new book, The Moral Consequences of Economic Growth, might seem a bit off-key. After all, politicians and economists typically focus on the material benefits of growth -- more and better jobs, higher gross domestic product, larger incomes, and more money available for government programs. And companies such as Wal-Mart Stores Inc., typically point to economic benefits, such as low prices for consumers and jobs for workers, when they want to justify their business policies.But the narrowness of the public discussion is exactly what Friedman wants to address. "Our conventional thinking about economic growth fails to reflect the breadth of what growth, or its absence, means for a society," he writes. "Growth is valuable not only for our material improvement but also for how it affects our social attitudes and our political institutions -- in other words, our society's moral character."

The real benefit of growth, Friedman argues, is that it encourages a wide range of social virtues, including dedication to democracy, tolerance of diversity, social mobility, and commitment to fairness. By contrast, he writes, "when living standards stagnate or decline, most societies make little if any progress toward any of these goals, and in all too many instances they plainly retrogress."

The lack of a direct link between personal satisfaction and the level of GDP per person seems to undercut the purely economic arguments in favour of growth. After all, why should we undergo all the turmoil of technological change and economic restructuring if more gadgets and bigger homes aren't going to make us happier in the end?Friedman argues that economic growth has a key additional benefit: As long as people see their own income rising, they worry less about doing better than others. And that in turn creates a more favourable environment for political and social advances. To demonstrate this point, he draws on economic studies and historical examples, both American and global. In the 1700s, he points out, it became accepted that the rise of commercial and trading activity was a force for positive legal and institutional change. Adam Smith, for one, believed that moral progress went hand in hand with economic progress, as voluntary exchange replaced the use of force.”

Friedman hits the nail on the head, as we say. For a change, it is an absolutely accurate use of Smith’s name on this topic. Smith, a moral philosopher, linked the growth of the commercial society, i.e., his Fourth Stage of History; see his Jurisprudence Lectures (a low cost copy can be obtained from Amazon.com in the Liberty Fund series) to his theory of moral sentiments behaviours in society.

People have always lived in societies like our primate cousins, and our forebears never ‘lived by bread alone’; neither did they live alone. The choice faced by humankind, from the primitive ages of society, when they made early contact with other human societies, was between plunder and trade. In many ways that remains our choice.

Hence, the significance of Smith’s opening chapters of “Wealth of Nations” on the division of labour and the propensity to ‘truck, barter and exchange’, a theme I covered in my talk this week to a public audience at the National Gallery in Edinburgh (read it on the Articles button on the left).

Invisible hand, no 23

The Washington Post runs an article, “Broken Pledges in Hong Kong” by Kin-ming Liu, October 28, 2005, which contains the following:

“Actually, Hong Kong was, in a way ruled under a "one country, two systems" formula by the British, too. British governments followed socialist policies at home for decades after World War II, but in Hong Kong they gave free rein to Adam Smith's invisible hand; Hong Kong has often been called the world's freest economy. But the post-1997 government, despite paying lip service to free-market principles, has undermined this cornerstone of Hong Kong's past success.”

“Adam Smith's invisible hand”? Surely not. They stepped back from interfering in commercial markets, may be, but how did Shakespeare’s invisible hand (Macbeth, 3:2) get into the act? How do you summon an invisible hand and what does it do that isn’t already done by markets?

Smith’s use of the metaphor once in “Wealth of Nations” and once in “Moral Sentiments had little to do with how markets work. Smith certainly did not include an invisible hand working in the markets he analysed. His use of Shakespeare’s metaphor (“thy bloody and invisible hand”) was about the unintended outcome of human motivations. In the case of “Moral Sentiments” it was about the Feudal Lords making a similar distribution of the products of agriculture to their retainers and serfs as would be distributed if all the land was shared equally, and in the case of “Wealth of Nations” it was about the private motivations of traders preferring to keep close to their capital stock by placing it locally and not abroad. Neither is to do with how free markets work.

Smith and the invisible hand are locked together in the minds of many commentators who call on his name to illustrate their articles and speech. It has become the icon of smithian references; readers and listeners nod sagely in recognition of Smith’s name. Fine, but don’t let us accept that markets, well understood by Smith and many others of his contemporaries and certainly by all modern economists, have any ‘miraculous’ features, or invisible hands or Gods, in them.

That is a form of paganism, which, after all, was the context of the first of the three times he referred to an invisible hand in his essay on astronomy, published posthumously in 1795. In that essay he referred to the ‘invisible hand of Jupiter’ – the Roman god, not the planet – in that part of his discourse where he discusses ‘pagan superstition’ and the belief that human lives were ruled and ruined by invisible gods that nobody has seen, or can ever see.

On Kin-ming Liu’s ‘one country, two systems’ allusion to Britain’s relations with its former colony, Hong Kong, I found that suggestion most interesting and worth reading.

Ill Read by Candlelight

When modern day commentators speak with conviction about Adam Smith’s views on capitalism they are out by a hundred years or more. Of course, most of them (and most economists, too) have not read Smith’s “Wealth of Nations” (1776), and most of them have not even heard of Smith’s “Theory of Moral Sentiments” (1759), let alone read its contents. It is most likely that such people, blithely talking about Smith’s alleged status as the ‘Father of Capitalism’, have no idea about life in the mid-18th century and just how bereft it was of all the products (and services) which are taken for granted in most households (even the poorest). What products they used came not from capitalist enterprises, capitalist retailers or capitalist wholesalers, but from individual, often local, trades people, usually only marginally better off than their customers.

Among the 21st century’s disregarded, but absolutely ubiquitous, taken-for-granted product is electricity. Its most common use is in lighting a home. Walk in, switch on, and forget about it, until time to switch off and go out or got to sleep.

Fiona Houston writes a most interesting piece in The Herald (Glasgow, Scotland) “The light that never goes out”, which is on a feature of daily life in the 18th century (and most of the 19th century, and among poorer families well into the 20th too). She refers to candle light. She writes about how candles were made and used, how they worked, how they were taxed by nosey excise men, and how they were marginally better than total darkness, and terrifying to imaginative children send to bed in the dark. She also reveals something about her regular use of them in her life today.

In summary: Fiona Houston’s article is well worth a read by anybody blasé about the boring consumer opulence of his or her modern life:

"The waning of the light fills me with gloom. At the start of the month I could still cook in the twilight. Just a few days later I needed a candle. During the summer, living out of doors much of the time, I was burning very few. Now I'm forcibly reminded that winter evenings require four if I am to enjoy a reasonable level of lighting.

My understanding of "reasonable" is generous by eighteenth-century standards. Candles were largely home-made from tallow. The process is messy, long and tedious. The results were carefully husbanded to last through the dark months. Even the gentry did not waste them, and certainly not on children....

That lamp would have been a crusie. Paraffin was not available and lamps were still of the primitive, boat-shape that had been used since time immemorial. It would probably have burned whale oil…It has a raised channel on which to place the wick, made from the pith of the bog rush.

First I must extract the pith. I had done it before but had forgotten the trick. I had to consult my mentor in these matters, Patrick Cave-Browne. He is probably the most knowledgeable person in Scotland about all things relating to combustion: a regular fire-wizard. It is Patrick who lent me his tinder box. He not only showed me how to strike a light with a flint on steel, but has come at intervals with new flints to replace the blunt ones... He has made candle moulds for me and initiated me into many arcane (and smelly) processes.

Dipping rush-lights requires a deep cylinder of melted tallow. I had to beg more fat from the butcher and render it down slowly in my big pan over the fire. You add some water and just let it stew for hours, a stinking business. Then you extract the membranes and stringy bits and let the mass cool, breaking the fat off the top of the liquid. It's clean and white and keeps for ages. I made pairs of rush wicks and dipped one in each tube, bringing them out to hang over two nails while the next and the next went in. By the time six pairs were hanging on my rack of nails (made by Patrick, of course), the first was cool enough to dip again. Working outside, the tallow cooled sufficiently quickly to make good "dips" after 10 immersions in the tubes. But these had to be topped up repeatedly, so there was lots of dashing in and out of the cottage with a pan of hot tallow. Working inside more dips were needed and the whole place reeked.

… you have to be vigilant to move the stub as it nears the twig or you would set the holder on fire. That makes me reflect on how static people were. Once the lights were lit you were at home, in one room and that is where you stayed. You would see whether a wick needed to be trimmed or a rush-light moved up in its holder. You wouldn't go off to another room, or if you did, you would take the light with you.

Candles burn for three to six hours, depending on the type of tallow (beef or mutton) and the size of the wick. Patrick has kindly made me two moulds but production is slow. They take hours to cool so only two candles can be made at once. It's best to do it at the same session as rush-light dipping, when there's a tallow pot on the fire for some time, otherwise the heating and reheating of the fat gets tedious. At least I don't have the added problem of secrecy. Candles were taxed, so moulds were hidden away and used in private, in the hope that neither the excise man nor a busybody neighbour would see.

Seeing, of course, is what it's all about. I ran tests on my means of lighting. I can read by a modern candle, though it's easier with two. It is more difficult with a tallow candle and even more so with the smaller flame from a rush-light. It's impossible with the light from a crusie. .. One evening, when the fire was low, I tried living by its light alone. The glow was enough to help me cross the room without bumping into things. But the corners were in deep shadow. Trying to cook close underneath the lamp taxed my patience. Yet this was how most houses in Scotland were lit for generation after generation.

I sat in the semi-darkness that night, watching the small but steady flame, and thought about people in the past. They had to read by the smallest of lights. But read they did. Two hundred years ago there were many more literate folk in Scotland than in England. Dorothy Wordsworth was surprised by several well-read Lowland cottagers. Eliza Grant mentions Highland saw-millers, a man and a boy, who busied themselves reading the classics and geography as they waited for a log to travel through the mill. All those Enlightenment figures, too, from Adam Smith and David Hume, sons of lairds, to the poets Robert Burns and Robert Fergusson, both from poorer homes, all of them had to spend many months of the year reading by candle-light, rush-light or crusie. It's easy to overlook what a challenge this represents.

And fire light, too. It's a winter pleasure of mine to take away the girdle and pot and let the flames climb a little. The flickering light chases away the inner gloom as well as the darkness in the room.”

Read Fiona Houston’s article on life by candlelight in today’s Herald (Glasgow, Scotland, UK) at: http://www.theherald.co.uk/features/49685.html and re-think, if you need to, just how different the inconvenience of daily life was for those writing without electricity in the 18th century before capitalism.

Smith and the Founding Fathers

In two short paragraphs, Erick Galindo, writing in TalonMarks.com (Cerritos college news on the web, Norwalk, California), manages to misrepresent Adam Smith’s legacy twice:

“Governor Arnold's indecent proposal”

‘Adam Smith may sound like an average name, but the man was less than average. His "Wealth of Nations" created the basic laissez-faire philosophy of free enterprise.

Smith had "an invisible hand" in shaping the United States' capitalistic policy.’

This is common fare on some campuses, where tutors have learned the errors from their tutors (and so on, close to ad infinitum).

For the record: Adam Smith did not create ‘basic laissez faire philosophy’. Laissez faire was first advocated by some French economists before Adam Smith; he met with them, listened to their views on laissez faire, and disagreed that it was safe to let ‘merchants and manufacturers’ completely free because of their unwelcome tendency to form monopolies, restrict the market and exploit consumers. Smith believed that competition is the best discipline to prevent such laissez faire outcomes.

Such misled authors as Erick Galindo can hardly mention Smith (the rest of whose article on its subject meets standards of accuracy) without the obligatory linking of Shakespeare’s metaphor of the invisible hand to Adam Smith (as if their readers would not know whose name they were invoking). Smith’s influence (not completely certain, though evidence is present that he was read by some of the Founders), on the United States in its early days had little to do with the use to which his name was put in the mid-19th to 20th centuries.

What the invisible hand (as used once by Smith in “Wealth of Nations”) had to do the “United States' capitalistic policy” is anybody’s guess because nothing Smith wrote about in the mid-18th century had anything to do with ‘capitalism’, as it developed in the mid-19th century.

Frederick List not Adam Smith!

Doug Brandow on Reasonline.com (‘free minds and free markets’) under the heading ‘A Capitalist Peace: markets, more than democracy, may be the key to preventing war’.

It begins: “…new research suggests that expanding free markets is a far more important factor, leading to what Columbia University's Erik Gartzke calls a "capitalist peace." It's a reason for even the left to support free markets.”

The thesis about markets versus democracy and peace is worth considering, but the use of words like ‘capitalist’ raise other questions, well rehearsed here.

Brandow continues:

“The capitalist peace theory isn't new: Montesquieu and Adam Smith believed in it. Many of Britain's classical liberals, such as Richard Cobden, pushed free markets while opposing imperialism.”

This is problematic. Given that ‘capitalist’ was first used in 1792, how did Smith ‘believe’ in it?’ (he died in 1790), let alone Montesquieu (‘Spirit of the Law’, 1748)?

"President George W. Bush's foreign policy is predicated on the idea that spreading democracy will discourage war. But new research suggests that expanding free markets is a far more important factor, leading to what Columbia University's Erik Gartzke calls a "capitalist peace." It's a reason for even the left to support free markets."

Brandow almost gets the association correct between commercial markets and peace:

“The shift from statist mercantilism to high-tech capitalism has transformed the economics behind war. Markets generate economic opportunities that make war less desirable.”

We can agree with that – so could Adam Smith. The gap between ‘statist mercantilism’ and ‘capitalism’ (first used as a word in 1854) was well past the time of Adam Smith and Montesquieu.

Brandow could have referred to Frederick List’s work, “The National System of Political Economy” (1856) which argues his case for him, if only negatively: a shrill case against Adam Smith on free markets and free trade (with Smith’s well known caveats to the fore to show his ‘hypocrisy’) and the case of a German unification along pure nationalist lines which were to become embedded in the national consciousness of the German states, well articulated by List.That democracy does not guarantee peace is unarguable; that free markets do it better is accepted. That this had anything to do with Smith’s analysis of commercial markets (NOT capitalism!) is problematical to say the least.

Pleasing Reception to Talk on Adam Smith's Lost Legacy

I went along to the National Gallery of Scotland to give today's talk on Adam Smith's Lost Legacy expecting a couple of dozen or so attendees, perhaps there by mistake thinking it was to be an 'illustrated lecture' as advertised in the Gallery's brochure.

The surpirse was that the Lecture Theatre filled up from ten minutes to go until well over a hundred people assembled in the plush surroundings of the Hawthenden Room and paid, largely, attentive notice to my speech, illustrated with only two slides of likenesses of Adam Smith. The rest was a 45 minute talk on Smith's philosophy from 'Moral Sentiments' and "Wealth of Nations", their links and how the set of impartial spectators, the impartial competitors and impartial jurists made Smith's a major contribution to the Scottish Enlightenment. The talk is posted under "Articles and Press" here. It is based on my talk to the InnerPeffray Libary on 12 October, with changes and clarifications.

The questions were excellent examples of people absorbing what had been done to Smith's Legacy, his moral philosophy and, yes, one on Shakespeare's invisible hand! I think the majority of the audience were unacquainted with Adam Smith and I hope the talk provokes some of them to find out more. Certainly, I think there is a rich seam of interest (and pride) in the Enlightenment and this augurs well for future attempts to make more of Edinburgh and Glasgow's contributions to that period (1740-1790).

More Criticism of Corporate America

Bernard Rapoport, a member of the Board of Contributors - Central Texans who write columns regularly for the Tribune-Herald - is chairman emeritus and founder of American Income Life Insurance Co. He wrote an article “Andrew Jackson, where art thou?”, on Sunday 23 October in Wacotrib.com (Waco Tribune-Herald)”

“President Jackson: He liked rugged individualism and capitalism. Then again, he wasn't worried about the smooth polish of moneyed society. He would denounce today's CEOs getting $5 million, $10 million or even $50 million bonuses, sometimes for performances that aren't even satisfactory.

How can such a thing happen? The board of directors authorizes it. The money doesn't come out of board members' pockets. Stockholders pay for it.
Adam Smith, the father of theoretical capitalism, perceived that competition would be the regulator of such matters.

Smith never came to grips with the possibility of monopolism. But I think he understood the problem when too few have too much and too many have too little.”

Seems there is a distinct dissatisfaction in the US media about the state of capitalism. Add the New York Times, among many others, on the subject of capitalism and the US government, and you would conclude the level of criticism is worrying (protectionism, need for price controls, etc.,), as well as feel re-assured that democratic rights are still very much OK in the US compared to countries that murder journalists and opposition politicians who step out of line.

But Adam Smith, once again, is being used under false flags. He was never “the father of theoretical capitalism” (where do these ideas come from?). He neither knew about it nor the word itself (first used in 1854).

As for the sentence: “Smith never came to grips with the possibility of monopolism”, it beggars belief, given he wrote many thousands of words decrying the monopoly practices of ‘merchants and manufacturers’ in “Wealth of Nations”.

Assuming Bernard Rapoport looks for Adam Smith on ‘monopoly in capitalism’, he won’t find anything on the subject for Smith to come to ‘grips with’. Smith wrote about commercial markets in the 18th century, not capitalist markets in the 19th and 20th centuries. This should be obvious to the authors of such articles, just from looking at Smith’s lifetime (1723-1790). Bernard Rappoport states that “Jackson was president from 1829 to 1837” and, therefore, presumably knows that Smith had been dead for 39 years when Jackson became President.

Rappoport’s article, excepting his remarks about Adam Smith, is a strong case against what he calls ‘monopolism’ and does not need incorrect attributions about ‘capitalism’ to Adam Smith. If he wants to add to his case against monopolies and the remedy (competition, within the law and justice), he is spoilt for choice in “Wealth of Nations”.

Dealing With Corporate Theft - bankrupt the Directors!

Raymond Garcia, writing in Swans Commentary (www.swans.com) on 24 October, makes a trenchant case against Corporate entities having no restraints in the US on their conduct once they go bankrupt. Individuals are not so fortunate in escaping the consequences of their actions, he notes, because their entire assets are exposed to retribution by courts if they are deemed to have acted irresponsibly or illegally.

He quotes Adam Smith in support of his case from “Wealth of Nations”. Here is an extract (read the article too):

"Ironically, this very contradiction was illustrated in the business section of The Chicago Tribune on October 13, 2005. The top of the fold article was titled "Delphi Chief Warns Workers," in which the CEO of Delphi warned workers that if they didn't accept these radical pay and benefit cuts, they'd hire scabs or go bankrupt. Directly below it was an article about Federal Reserve Chief Alan Greenspan (ex-Ayn Rand disciple) glowingly pronouncing that the US economy was avoiding energy price-fueled inflation because of its "flexibility."

Here you have the definition of "flexibility": unfettered (by regulation) liquidity for capital and its investors; zero legal accountability for corporations who abrogate contractual obligations to real people; and a workforce of individuals forced to legally and financially bear the burden of their own demise. It's laughable that we are still regularly treated to blather from the punditocracy that we are "the pinnacle of free market capitalism."

The sainted prophet of such ideology, Adam Smith, warned in The Wealth of Nations that the power of what became monopoly and oligopolistic groups (in his day, monarchy charter entities like The East India Company and The Hudson Bay Company) would destroy the possibility of truly free markets and their social benefits, as he envisioned them. In the U.S., we ignore(d) that part of Smith's writings. We have set up corporations and their elite ownership to be insulated from democratic influence and legal accountability, and reduced individuals to the status of mere corporate supplicants. That's who we are, what we've become, in The United Corporate States of America.”

Comment:

Smith did indeed write about the pernicious effects of joint stock companies, which became the main organising entity of capitalist development in the mid-19th century in Britain and the USA. In various forms they dominate the corporate activities of most capitalist countries (all versions).

Smith regarded the inevitable fact that joint stock companies, which are necessary to raise the vast capital stock of the large private chartered monopolies of his day, such as the East India Company, would have the obvious defect that the managers of them would not be the owners because shares would be dispersed among savers, who would not be directing the business. This opened option for the Directors to act in their own, and not the owners’, interests.

Raymond Garcia focuses on the legal fact that Corporations were given a legal identity, became legal ‘persons’ in their own right, and could be sued just like an individual, the difference being that once the corporate entity is bankrupt, it ceases to exist and can no longer be sued, except that the remaining assets are used to liquidate its debts or that proportion of them that are disposable.

Smith saw the joint stock company from the perspective of the mid-18th century. He had no notion of the sheer scale of capital accumulation that became possible, or the funds that would be mobilised, from societies much wealthier in a real sense than anything known or imaginable to him or anybody around him. The records of the Chartered private companies were so bad that it stigmatised the concept of joint stock companies for him. His vision of commercial firms were smallish scale in the main, though he had access to some quite large firms and their owners, such as the Carron Ironworks, near Falkirk, under Dr John Roebuck and he knew Wedgewood in England (pottery). His entrepreneurs were independent tradesmen, journeymen, blacksmiths, iron forgers, saddlers, weavers, builders, and such like, whose capital requirements were obtained, and to be obtained, by harsh frugality out of their revenues, plus a little borrowing.

Stepping outside of Smith’s time, the expansion and legalisation of joint stock companies was inevitable. The weakness he rightly points to is glaring and, fortunately capable of some partial remedy. If the Directors or managers act in a criminal fashion, they should remain accountable, and at peril of judicial sanctions against their private property. That already happens in the UK to an extent. Moreover, if the Directors manage a pension fund for their employees, better the company manages that this at arm’s length with no borrowing from it. If they mismanage the pension fund, as they seem to do regularly, they are in breach of contract on the basis of what they promised – deferred income for a pension – they should be liable to be sued individually for this breach, and their private property put at risk.

I do not suggest that this solves all the problems, but it equalises the misery for the perpetrators with their victims. That should act as a deterrent (with close attention paid to the source of the funds with their families acquire ownership of assets in their names to keep them out of reach of creditors.

“The sainted prophet of such ideology, Adam Smith” was never linkable in any way to "the pinnacle of free market capitalism." That is a creation of those who purloined his legacy.

A "warped up Scottish economist"?

Hilak K. Sued in the Guardian, Dar es Salaam, Tanzania (ippmedia on-line edition) 23 October 2005, writes an opinion piece on the election campaign underway that shows large discrepancies between the election funding of the governing party and the opposition:

“It’s a context between riches and poverty” (see full article : http://www.ippmedia.com/ipp/observer/2005/10/23/52479.html)

In the article Hilak K. Sued brings Adam Smith into the story:

“Tanzania, they will never meet if the ongoing one-sided monetary fling is any indication. Every one can see that the ongoing contest is not between huge rally crowds and tiny crowds, between helicopters and motorcycles, or cheers and jeers. It’s between riches and poverty.

And didn’t that warped up Scottish economist, Adam Smith, say in his masterpiece Wealth of Nations, that ’With the great part of rich people, the chief employment of riches consists in the parade of riches?’ What Tanzanians are witnessing in campaign spending could claim a place in the Guinness Book of Records. We are slowly entering the big league.

At no other time in Tanzania’s history has so much money gone into circulation in such a short time.

Nobody will ever know the exact amount, but it should raise the country’s inflation rate a few percentage points.”

I hope Hilak K. Sued realises that Smith’s critical comments on the how the rich behaved were meant to be disparaging, not condoning, their behaviour.

What the author means by ‘that warped up Scottish economist, Adam Smith’ is not at all clear, though I am pleased to note that he reminds readers of the distinctive identity of Scotland (which is a step up from foreigners confusing England with Scotland) and that Adam Smith wrote “The Wealth of Nations”.

Of the rest of the article on electoral practices in Tanzania, I have nothing to say, except, perhaps it beats regimes that bludgeon demonstrators to death, run phoney elections with 99 per cent voting for government candidates and use brutal starvation policies to punish opposition voting areas.

Good News on Adam Smith Awareness

Something is definitely stirring about Adam Smith in Scotland this year. Consider:

• news that an offer was made to donate £10,000 to clean up the site of Adam Smith’s grave an embarrassing eye sore for many years);

• news that a statue of Adam Smith is to be erected by private subscription in the High Street, opposite where he worked from 1778 until just before he died in 1790 as a Commissioner of Customs, and a few hundred yards from where he lived in Panmure Close, off the High Street;


• news that a “Literary Trail”, celebrating the many authors of Edinburgh is started,including places of note related to Adam Smith;

• suggestion from the Carnegie Trust, New York, that Visit Scotland, the tourist agency,should market Adam Smith and the Scottish Enlightenment (1740-1790), rather than heather, kilts, ‘Braveheart’ and ‘Brigadoon’ type themes;

• the new further education college, formed in Glenrothes and Kirkcaldy (birth place of Adam Smith), is named ‘The Adam Smith College’ (www.adamsmith.ac.uk);

and today:

• Andrew Marr, a top flight print and television journalist is to make for the BBC a feature prpgramme (at last!) on the Scottish Enlightenment, featuring both Adam Smith and David Hume (its leading exponents and contributors).

(Modesty, of course, requires that I do not mention the publication in March of ‘Adam Smith’s Lost Legacy’ – hence, I won’t!)

News of Andrew Marr’s programme is announced by William Lyons, Arts Correspondent, in today’s Scotland on Sunday: 'We should open our eyes to our Enlightenment'. (wlyons@scotlandonsunday.com).

“THEY were the finest intellectuals of their time whose thinking has influenced the world ever since.

The leading lights of the 18th-century Scottish Enlightenment - such as David Hume and Adam Smith - laid down the founding principles on which many societies are based even now. But the valuable legacy of one of the greatest gatherings of minds in history is now being ignored despite their many achievements, according to one of Britain's best-known broadcasters.
Andrew Marr, the former BBC political editor, who is making a feature-length documentary on the Enlightenment for BBC Four, says too often it has "been pushed to one side" in favour of other periods of history such as the "Tudors" or certain glamorous "aspects of war".

Marr, who presents the flagship Sunday AM programme, said: "It is terribly sad. Edinburgh [during the Enlightenment] is a tiny little place where there is a small group of argumentative, ferociously competitive, hard-drinking, brilliant men.

"It's a bit like the moment when the French Impressionists discover each other in Paris or the moment when Shakespeare and the other great dramatists suddenly congregate in London over a period of 10 years and change world literature. Yet it is an absolutely crucial period that has been underplayed by television and film.

"When I was a student in Scotland you were expected to know about it and yet it has probably faded from people's thinking now."

The Scottish Enlightenment refers to a 60-year period in the 18th century when Scotland was benefiting from the prosperity brought by free trade within the British Empire and the introduction the first public education in Europe since classical times.

Within this period, a number of academics and philosophers including Hume, Smith, Adam Ferguson and William Robertson wrote a number of seminal works on moral philosophy, history and economics.

They gave rise to the notion of free markets, democracy under the rule of law, and individual human happiness as the measure of a society's success.
Marr said: "It [the Enlightenment] is clearly the foundation of the modern world. Almost everything we are arguing about at the moment - whether it's the religious hatred law and free speech, immigration, the movement of peoples, goods and services and what that does to national identity, or the proper limits of the state - go back to the positions first set out in the Enlightenment."

Andrew Marr's programme, which will begin production early next year, will provide a part-dramatised history of the period of the Enlightenment, focusing on Scotland's capital."

(Read the full story in Scotland on Sunday: www.scotlandonsunday.com).

Ethicists as Fanatical 'Men of System'

In ‘canadianeconoview’ blog, 21 October, 'Note to Ethicists - supply curve slope up':
http://canadianeconoview.blogspot.com (bookmark it!)

A piece by ‘BSF’ linking a fall in the number of donors of human sperm and eggs following an Act prohibiting anybody doing this for ‘reward’, except receipted transport expenses.

The consequences were predictable and if the intentions behind the Act were to end egg and sperm donations it has worked as elementary supply and demand economics suggests it would.
There is still a demand for such donations and, clearly, if an Act of government requires to be invoked to prevent payment for donations, as clearly, it is a case of an economic good involved, because there is evidence of excess demand at zero price.

“BSF” quotes and comments:

“The number of Canadian men and women donating sperm and eggs is dwindling to near zero because of a federal law restricting donor compensation, a new study shows. The act criminalizes the practice of paying for donations. Under the law, only expenses with receipts -- for example, taxi and parking chits -- will be reimbursed.”

BSF asks, with barely repressed irony: “So, drive the price to zero and, by golly, the quantity supplied also falls to zero. Who'd have believed it?”

BSF then takes the argument to something written by Adam Smith and rails against the authors of the legislation with a very large sledgehammer against their fanaticism (such is politics):

"Look, guys, like it or not supply curves slope up. The people who put together pieces of legislation like this one are perfect examples of what Adam Smith, in Chapter II of Section II of Part VI of the Theory of Moral Sentiments termed "The man of system":

"The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily andharmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder."

According to Smith, this type can be identified by possession of a distinct tendency:

It is to erect his own judgment into the supreme standard of right and wrong. It is to fancy himself the only wise and worthy man in the commonwealth, and that his fellow-citizens should accommodate themselves to him and not he to them."

Comment: Well said. I agree with BSF and Adam Smith. I suspect the motives of the politicians behind this legislation.

[Incidentally, and only for ease of references for less well known passages, I would prefer to use the citation details as: TMS VI.ii.2.17: pp. 233-4, in line with the standard references to the Oxford edition of “The Works and Correspondence of Adam Smith”.]

An Anarchist on Adam Smith

Paul Bowman publishes an article, “What is Communism?” (“An anarchist analysis of the history and meaning of communism”), in Anarkismo.net, Oct 21 2005 .

In his long article, Paul Bowman states:

“Political economy begins with the work of Adam Smith in the late 17th [sic] century. Smith's "Wealth of Nations" was a project of leaving behind the religious discourse of the previous century's Civil War where political tendencies couched their class aspirations and ambitions in the language of theology. To do so he followed the enlightenment push to create a secular, rational and "scientific" discourse which attempted to avoid the murderous and indeterminable controversies of religion by reference to "facts". The aim was to determine the best course of government action or policy directed to the end of increasing overall wealth. In order to do this the challenge was to define a reliable measure of wealth or "value". Given the history of inflation, currency alone was clearly not viable as a direct measure. In the end Smith settled for a theory of value based on the amount of labour embodied in goods produced.

This was the basis of what was to be further developed by subsequent political economists such as James Mill and David Ricardo as the "labour theory of value" - that is the theory that the underlying value of that makes a given amount of grain exchangeable for a given amount of wrought iron or cloth is determined by the average amount of labour time necessary for the production of each product. The main question addressed by Smith's political economy was how changes in the distribution of wealth affected the rate of growth of the overall wealth of the nation. The main argument was that those government policies which, through taxation, re-distributed wealth from the manufacturing and commerce sectors to the land-owners retarded growth as the latter group, being unwilling to re-invest the extra income into more wealth-generating industry, simply frittered it away in excess personal consumption.

From the outset political economy was a subject with an agenda, namely that of defending the interests of the rising manufacturing classes against those of the dominant land-owning gentry and aristocracy who had a monopoly on governmental power. At the same time, through the arguments of political economists like Thomas Malthus, they argued against the effectiveness of the Poor Relief taxes the manufacturing bosses had to pay for the feeding of the poor and unemployed during periods of economic slump and high unemployment. This latter aspect came particularly to the fore in the great economic slump that followed the ending of the Napoleonic wars in 1815 [?] and the struggle around the proposed legalisation of unions in 1824.”

Comment

There are several points to be made about these extracts. It follows the norm for ideological analyses of ideas in the constant allusion to the ‘conspiracies’ of ‘collusion’ between authors, like Adam Smith, and members of a ‘ruling class’, who, secretly, control everything.

Bowman asserts that to increase “overall wealth” the “challenge was to define a reliable measure of wealth”. He chooses to call this "value", and in particular the “labour theory of value”. That assertion exaggerates the role of a labour theory of value in Smith’s arguments. Smith follows John Locke’s idea that in the ‘rude state of society’ (hunting) the prey belonged to the hunter, and this was probably true, though Smith also discusses plausibly how arguments over prey and products of gathering were also common. None of Smith's analysis of commercial society required a labour theory of value; he showed in his 'natural' and 'market' theory of prices (demand and supply!) how wealth, as he defined it, is created and distributed between rent, wages and profit. That Ricardo and Marx continued down the labour value dead-end (19th century) was their responsibility, not Smith's.

The labour theory of value became non-relevant when the production of wealth (the annual produce of agriculture, trade and manufacturing) depended on the division of labour and the ownership of property.

Measuring Smithian wealth is not a complicated process, and certainly not as complicated, vague and ultimately implausible as it became many decades later in the mid-19th century (see my review of Marx’s labour theories of value and ‘surplus value’ in ‘Capital’ in the Articles button on the left column).

There must be something paradoxical in the image Bowman presents of 18th century political economists “defending the interests of the rising manufacturing classes against those of the dominant land-owning gentry and aristocracy who had a monopoly on governmental power” and his own obvious disapproval of the same landowners, from an historical perspective, for frittering their profits “away in excess personal consumption” instead of investing it to create more wealth, the bulk of which was consumed by the labouring poor (sheer weight of numbers, not generosity)!

Smith’s trenchant critique of the agricultural owners in the 18th (not the 17th!) century was certainly aimed at the ‘non-improvers’ among them, but not the improvers and the yeoman farmers of Britain (and those in the American colonies, of whom he had great hopes – he predicted the America farmers would make their country the richest in the world by 1870 as measured by real output, not, er, ‘labour value’).

I know of no evidence that he was writing in this manner on behalf of the "merchants and manufacturers" of mid-18th century Britain (of whom he expressed his suspicions in many places in "Wealth of nations"), and he could not have been doing so on behalf of capitalists in 19th century Britain (he died in 1790). And that's the problem with conspiracy theories; they are unprovable - untestable, too! - and answer everything and nothing. Because they are asserted, it does not follow that they are true or believable, or even credible.

Two Seminars on Adam Smith

On the same day as my short talk on "Adam Smith's Lost Legacy" at the National Gallery, in Edinburgh, news of a seminar at John Hopkins University on another aspect of Adam Smith’s work:

In The John Hopkins University News-Letter www.jhunewsletter.com

Wednesday, Oct. 26 4 p.m. Seminar in Political and Moral Thought -- "Adam Smith's Critique of International Trading Companies: Theorizing Globalization in the Age of Enlightenment" will be given by Sankar Muthu, Political Science Department of Princeton University.

From his book, Enlightenment and Empire (Princeton University Press), Sankar Muthu moves his focus beyond Denis Diderot, Immanuel Kant, and Johann Gottfried Herder, to consider Adam Smith’s work on ‘empire’, with particular reference to his robust critique of the East India Company and others. This looks to be a most fruitful area of research.

From the blurb to his book, a taster of its themes:

“In the late eighteenth century, an array of European political thinkers attacked the very foundations of imperialism, arguing passionately that empire-building was not only unworkable, costly, and dangerous, but manifestly unjust. Enlightenment against Empire is the first book devoted to the anti-imperialist political philosophies of an age often regarded as affirming imperial ambitions. Sankar Muthu argues that thinkers such as Denis Diderot, Immanuel Kant, and Johann Gottfried Herder developed an understanding of humans as inherently cultural agents and therefore necessarily diverse. These thinkers rejected the conception of a culture-free "natural man." They held that moral judgments of superiority or inferiority could be made neither about entire peoples nor about many distinctive cultural institutions and practices.”

Patents are Monopolies?

The Economist 20 October 2005 on Patents and copyright protection

“The granting [of] patents ‘inflames cupidity’, excites fraud, stimulates men to run after schemes that may enable them to levy a tax on the public, begets disputes and quarrels betwixt inventors, provokes endless lawsuits...The principle of the law from which such consequences flow cannot be just.”

The Economist may have put it rather strongly in 1851, but its disapproval of patents represented conventional wisdom at the time. A century earlier, Adam Smith had described them as necessary evils, to be handed out sparingly, and many other economists have since echoed his reservations. Patents amount to temporary monopolies on useful new inventions."

My expertise is in copyrights of written Works, so my remarks need not be related to patents on inventions, pharmacological products (medicines) and, perhaps, software products. When the Copyright, Patents and Designs Act came in 1988, I was surprised to see copyright in published texts extended from life plus 50 years to life plus 70 years.

So very few published texts get past their first year of publication (95 per cent?) it seemed difficult to justify such protection, especially when the concept of moral rights was introduced to protect subsequent users from tampering with authorship or treating a work derogatively.

In a fast moving technology, such as software, why would anybody be using a piece of software 70 to a hundred and fifty years after it was first written? Software is lucky to last 18 months.

On the whole, I agree with Smith’s reservations. Anybody for continuing with the patents of James Watt?

Correct Use of Smith's Use of Shakespeare's Invisible Hand Metaphor

David James, writing in Australia Business Review Weekly, 20 October 2005, on “The cultural advantage” (‘Changing the company culture is a difficult and often indeterminate exercise, but working on the 'soft' issues can produce hard financial results’) reports on the thoughts of the chief executive of ANZ Banking Group, John McFarlane.

Read his article at: http://www.brw.com.au/freearticle.aspx?relId=15906

He concludes his thoughtful piece with, what starts out as a welcome summary of Adam Smith’s views, makes a reasonably correct and proper use (if people must) of Shakespeare's (Macbeth, 3:2) metaphor of the invisible hand (also used once by Adam Smith):

“The tenor of McFarlane's argument resembles that of another Scot, the 18th-century economist Adam Smith, who argued that the proper operation of markets is principally a moral issue, and that many of the more healthy influences in free markets are not a function of the intentions of the individual actors but rather a consequence of the underlying dynamics of the system. When McFarlane talks of the bank's "energy in the right direction", of "momentum" that is "driven down into the organisation", or "stimulating an upward movement", he is looking for the organisational equivalent of Smith's "invisible hand": the hidden influences that shape events for the collective good.”

Congratulations, David James.

Leftish Bias on US Campuses: a problem with no solution

Teddy O’Reilly, a senior majoring in history, at the University of Wisconsin-Madison, writes in his column in The Daily Cardinal, “the nation’s oldest independent student newspaper”, on “Changing Views for the Class”:

It is another political piece, somewhat controversial, because it raises issues of free speech and liberty. It opens:

“David Horowitz, the California Trotskyite who switched sides during the Reagan 1980s, has emerged as the avatar of the liberally oppressed. At his urging, U.S. Rep. Jack Kingston, R-Georgia, has proposed legislation to “project the principle of intellectual diversity” and support Horowitz’s academic Bill of Rights, a document designed to combat the classroom indoctrination perpetrated by liberals and other lefties. But getting the federal government involved in the classroom is certainly an odd way for conservatives to push increased tolerance.”

See what I mean? The details of the campaign need not detain us – you should read the report at: http://www.dailycardinal.com/article.php?storyid=961502 and make up your own mind.

Frankly, and on a personal level, I am broadly sympathetic and agree with what Horowitz complains of, because of the impression I have of US academe that there are symptoms of political bias in its campuses, which I find disturbing, though this only reverses the bias the other way from either side of the 2nd World War. However, waves of ‘political correctness’ (an infantile form intimidation) are now on a scale well past the point of parody.

Teddy O’Reilly concludes with:

“Horowitz’s plan and Kingston’s congressional resolution remain Mephistophelean remedies. Neither would grant such new-right conservatives what they seem to want—namely, more power in the marketplace of ideas. So, to quote a string of conservatives stretching back to Adam Smith, let “the magic of the market” do its work without the sort of “government regulation” that Horowitz and Kingston demand. As students (and professors), we should be suspicious of people who want to regulate us while simultaneously calling for the deregulation of their own affairs.”

I am not sure why Adam Smith is classed as a ‘conservative’, possibly a meaningless label in mid-18th-century Scotland. Most authoritative assessments would describe his politics, and certainly his instincts, as Whig not Tory. By any standards he was certainly radical (though never revolutionary) and his proposals, which he did not push as a ‘man of system’ (a term he reserved for fanatics and people of intolerant predilections). Perhaps, ‘sceptical Whig’ is a more accurate, if vague, label for Adam Smith (see Donald Winch, 'Adam Smith’s Politics’, Cambridge University Press, 1978, for the authoritative account).

Why Adam Smith is linked to ideas about ‘the magic of the market’ is another question, given that Smith was well informed of how markets work and he never suggested there was anything ‘magical’ about them. This is probably a case of the usual misapplication of Shakespeare’s ‘invisible hand’ (Macbeth, 3:2) into anything that mentions Smith’s name and markets in the same sentence.

O’Reilly is right though to draw attention to the difficulty of arguing for free speech, the removal of political bias in the recruitment of faculty and in the grading of students’ performance, while suggesting legislation to enforce what should be the ethos of what being an academic community is all about.

You cannot force people to be virtuous, a point made by Smith in his “Moral Sentiments”, and I suggest this applies to tolerating ideas disapproved of by academic biases. It remains a problem, though, that currently is a blemish on US academe.

Votes and Individual Choices

A report by Sheila Potter, “The Incumbents” in a local newpaper, Saanich News, Saanich, British Columbia, Canada ( www.saanichnews.com) is an analysis in terms of individuals in a local council and their political leanings (Left to Right). It includes this description of Jackie Ngai, which caught my attention:

“Although Jackie Ngai describes herself as a centrist, and for a brief period in 2004 wanted to run as a federal Liberal, current Saanich Counc. Jackie Ngai is the most right wing voice on council. Schooled in economics at the University of Victoria, she's been known to invoke the invisible hand of Adam Smith during her arguments. Most often, she votes in step with Mayor Frank Leonard, if not one step further right. For example, she had the strongest free-market views on council about restricting private liquor stores, saying no restrictions at all were necessary. On development issues, she falls in line with the rest of council in her approach to shaping development around urban nodes. She does sometimes irk community associations for not negotiating as hard as they would like with developers.”

It is not reported by Sheila Potter in what context Jackie Ngai invokes “the invisible hand of Adam Smith during her arguments”. I cannot see what is particularly rightwing about the metaphor of the invisible hand, nor rightwing about the issue of “restricting private liquor stores” or for “saying no restrictions are necessary”. Rightwing is a term invoked across a wide range of issues. Exponents of rightwing agendas run the full range from the libertarian (left and right!) through to the authoritarian (left and right!).

The overlap is so strong that it mocks the very terms ‘Left’ and ‘Right’, allegedly a designation to whether the French revolutionary assembly sat to the right of the podium or the left (echoes of the ‘right hand’ of God , ‘right hand man’, etc.,?).
In northern Europe (mainly in Scandinavia) there is no sense to be got from the political spectrum on liquor or alcohol. The Establishment (predominantly leftwing until recently) has traditionally been against it and has imposed state monopolies on alcohol production and sales (reaping the taxes) and has also imposed draconian fines (more taxes) on offenders of the many restrictive laws and bye-laws to do with the purchase, transport and consumption of alcohol. Is it the same in Canada, a northern country geographically?

Where Adam Smith could contribute to such debates in such circumstances is not clear. His, or rather Shakespeare’s (Macbeth 3:2), invisible hand would not seem appropriate to the hours of opening of particular stores. These are determined by a political agenda, of which I have nothing to say. If such hours are a local matter then the local people will decide; Smith’s liberty was always liberty under law and justice.

Prohibition, religious fatwa’s and personal taste apart, restrictions on alcohol consumption, like those on pig meat, fois gras, meat generally, fur coats, leather goods, ivory, rare birds’ eggs, endangered species and drugs, are, or ought to be (one does not follow the other), decided by votes in separable communities and, in the absence of votes, by individual preferences.

Testing

TEST

Technical problems caused an interruption is services yesterday, for which apologies. If this message is posted correctly then they are over.

Gavin

More on Niger’s suffocation of Smithian commerce

More on Niger’s suffocation of commercial activity on http://psdblog.worldbank.org re: the Nicholas Kristoff column, with contributions from Tim Harford:

"Niamey, Niger -- In countries like this, children end up being killed not only by malaria and measles, but also by an insistence on the six-week paid vacation.

This land of mud huts and malnourished babies is the very least developed country on the planet, but local regulations stipulate that companies must give all employees six weeks and two days of paid vacation a year. Not surprisingly, there are almost no employers in Niger...
...The minimum wage is set at $35 a month in Niger, higher than the local market level. Employees are allowed to work no more than nine hours a day, weekend work is basically prohibited, and women are not allowed to work evenings at all. Layoffs are usually not allowed.

Perhaps those rules (typically inherited from European countries during colonial days) sound as if they protect workers. But the upshot is that companies don't come to Niger and don't hire anyone they don't want on the payroll forever. So almost all people toil in the informal labor sector where there are no protections whatsoever.

The whole piece is worth reading. Kristof is doing what few journalists are able to do - see past well-meaning regulations to understand their true effects. The sad truth is that a poor country cannot just rule itself rich: regulations stipulating longer holidays and better pay will simply be
ignored if they're out of touch with the harsh reality of a life in poverty


AUGUST 13, 2005
Does Niger have a market mentality? Tim Harford The Washington Post article, The Rise of a Market Mentality Means Many Go Hungry in Niger, has generated a lot of heat in the blogosphere. Here's an extract:

In a country adopting free market policies, the suffering caused by a poor harvest has been dramatically compounded by a surge in food prices and, many people here suspect, profiteering by a burgeoning community of traders, who in recent years have been freed from government price controls and other mechanisms that once balanced market forces.

I'm not going to fight any ideological battles here. (Everyone else has done that. Check out Cafe Hayek for a counterargument; Owen Barder claims the middle ground.)

Instead, I just wanted to check out the facts about these free market policies.

- It costs nearly four years' income to pay the fees required to set up a limited liability company in Niger; entrepreneurs also have to deposit minimum capital of over seven years' income.
- Niger has the most rigid employment laws in the world.
- If you want to get a loan, it costs nine months' income to set up some
kind of collateral. Coverage by credit registries is almost nonexistent.
- Trying to collect an unpaid invoice by going through the courts will take
nearly a year and cost over 40% of the invoice's value.
I wouldn't blame this red tape for the crisis, but such policies and
institutions have been shown to slow down growth, increase unemployment,
increase the size of the informal sector (where people have no legal
protections) and keep women and young people out of the labor market.

Good Sense From Cafe Hayek and the New York Times!

Over at the excellent economics blog, Cafe Hayek, Don Boudreaux, posts a short piece on African development in Niger, recently in the news for gross malnutrition appearing. I post it here because it deserves the widest readership.

This 'debate' is on (the main) part of the problem: the lack of commercial enterprise. The need for a society to move to the commercial age ('at last') was a prime theme in Adam Smith's "Wealth of Nations" and in his "Lectures on Jurisprudence".

From Cafe Hayek Blog (www.cafehayek.com):

"Nigeriens Kept Poor by Government
Don Boudreaux

New York Times columnist Nicholas Kristof has more insight and wisdom in his column today than you'll find in any fifty randomly chosen volumes on economic development or in any pronouncement whatsoever on poverty and "foreign aid" by Jeffrey Sachs.

The people of Niger are poor not because that country is densely populated. (It's not: it's population density is nine persons per square kilometer.) They are poor not because of drought; not because they lack resources; not because Americans and Europeans are rich.

They are poor because, for example, local regulations stipulate that companies must give all employees six weeks and two days of paid vacation a year. Not surprisingly, there are almost no employers in Niger.

Commerce is the foundation of civilization, the font of prosperity, and the key to peace. Niger's government -- either because of foolishness or evilness (take your pick) -- squashes commerce in that country. No amount of aid, mosquito nets, op-eds by Sachs, or serenading of Bono and Paul McCartney will do Nigeriens any good until commerce is allowed to florish there.

October 17, 2005"

Bookmark Cafe Hayek. They talk good [in my view, Smithian, though they may disagree] sense over there.

Bookmark Enterprise Africa

You can keep up to date with the project "Enterprise Africa" (mentiuoned earlier) which is researching the facts about entrepreneural development on the ground in the continent. This is not a 'happy clappy' exercise in why millions, billions, should be ploughed into Africa as 'aid' (most of it wasted by bad governments), but is an attempt to find out the extent to which local obstacles are in the way of 'bottom up' economic development and what can and should be done about it.

Book mark: EnterpriseAfrica@mercatus.org and read for yourself. I do not claim that this is the answer to all of the problems of a continent, to which rightly there is much goodwill, but everything else seems to have turned to sand.

Errors at The Economist via the Herald

Writing in the Herald (Glasgow, 18 October) Alf Young reports on recent controversies on Corporate Social Responsibility (CSR), using an article in The Economist as the lead in. He reports:

“It went back to Adam Smith for its main conclusion”, and then repeated what The Economist said: "It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest," wrote Smith, famously, in The Wealth of Nations. That regard, Smith believed, centred above all else on making a profit.”

Comment

This is the problem with using quotations from “Wealth of Nations” (1776), which usually refer to a different world to 21st century Britain. While the quotation about the “Butcher, the Brewer and the Baker” is among the most important in Smith’s book it was not strictly (even loosely) about profit or, indeed, about Smith’s alleged views on profit. It was about the propensity of humans to bargain, exchange on thing for another, though the criticism first applies to The Economist, and for the comment immediately behind it, criticism applies to Alf Young (a talented journalist with more than a smattering of acquaintance with economics, and I should say, an acquaintance with myself too).

The propensity to ‘bargain’ (the gist of the quotation and the chapter it is taken from), is about the exchange between the consumer looking to acquire ingredients for his family’s dinner (his self-interest) and the three traders whose self interest is to sell those ingredients. The issue is how they reconcile their different self-interest by the act of bargaining. This is shown conclusively from the earlier versions of this passage in Smith’s “Lectures in Jurisprudence” (as discussed in my “Adam Smith’s Lost Legacy”, Palgrave Macmillan, 2005).

The main conclusion is that buyers serve their own interests best by serving the interests of the sellers, and vice versa, and to achieve this outcome they must both modify their own self interests (offer low; demand high), analogously to an individual in high dudgeon about something, modifying their reactions by lowering its violence to the level that the Impartial Spectator can go along with (Smith’s “Theory of Mortal Sentiments”).

Alf Young continues:

"The Economist leader writer agreed. "The standard of living people in the west enjoy today is due to little else but the selfish pursuit of profit," he wrote, before concluding: "All things considered, there is much to be said for leaving social and economic policy to governments. They, at least, are accountable to voters."

Comment

If businesses are purely concerned with their ‘selfish pursuit of profit’ to the disregard of the self interests of their customers they may end up not making sales and not making profits.

Alf Young:

“But neither Adam Smith nor the Economist have stopped the cause of corporate social responsibility in its tracks. Indeed the CSR bandwagon, as its critics see it, rolls on.”

Comment

Adam Smith did not have a view on corporate responsibility (except perhaps a negative one in that he was suspicious of the motives of ‘merchants and manufacturers’ when left alone to pursue their own interests without restraint). The commercial sector in Smith’s time was a smaller proportion of the UK economy (agriculture and the State took up most of it) and in terms of GDP, it was in total not a large amount compared to the size it is today. Smith was more concerned with businesses being frugal to ensure continuing capital accumulation. We can only guess (wildly) about what he would have prescribed (and proscribed!) in terms of CSR.

Alf Young continues:

“For his part, Adam Smith wasn't arguing against profit-seekers promoting the wider public interest. Rather he was observing that, in the mid-18th century, the tradesman who single-mindedly pursued his own gain would be "led by an invisible hand to promote an end which was no part of his intention".

Smith saw these wider social dividends as the unintended consequence of personal profit-seeking.”

Comment

Smith did not make the invisible hand a general proposition. He mentioned the invisible hand only once in “Wealth of Nations” (Book IV.ii.9: p. 456) in respect of a specific incident: a business preferring to invest locally than abroad, thus adding to domestic capital accumulation which allowed the national economy to grow more quickly. Such self interest could also cause (and did!) monopolistic cartels and restraints on competition and, in turn, cause a slower rate of capital accumulation (his main concern was the growth in ‘wealth’, by which he meant real output, not box loads of money).

Alf Young ends:

“The proper business of business, as the Economist argues, may indeed be business. But times and society have changed. At the start of the 21st century it may well be that, to achieve that greater public good, Smith's invisible hand has to show itself in action on occasion.” Comment If this means CSR needs to be shown in the 21st century, fine. If Smith’s invisible hand (actually, Shakespeare’s: Macbeth, 3:2!) is required too, I cannot agree. This makes a passing metaphor into a major prescription, something not among the intentions of Adam Smith.

Do Nothing!

An interesting article in Chicago Flame online: ‘the independent student newspaper at the University of Illinois at Chicago’ (17 October 2005):

“Blaming earthquakes on capitalism, and the political troubles in Venezuela” by Christopher Skeet carries this paragraph:

“Chavez's latest tirade was to blame the recent earthquake in Pakistan on the "world global capitalist model." I'm not kidding, go look it up! He actually blames capitalism for earthquakes! The 20,000 deaths around Islamabad last week were not the result of plate tectonics, migrating lithosphere, or any known laws of geology. They were all murdered by Adam Smith.”

Of course, this is irony, not a serious suggestion, though what ideological opponents of western capitalism dream up knows no bounds.

It was common in Stalin’s Russia, and among its supporters elsewhere, to accuse their dissidents and opponents, when they did not have anything substantial of which to accuse them, of the catch-all charge of being ‘objectively in support of” (whatever horror they inserted cared to insert). The “world global capitalist model” seems to be a little over done: ‘world global’? Is there a non-world ‘global’ or a non-global ‘world’?

But just for the record (I know, but it is site policy not to pull punches), anything to do with capitalism cannot be blamed on Adam Smith, even silly fantasies about earthquakes. He never wrote about, never knew anything about it, and didn’t even know the word capitalism (first invented in 1854; Smith died in 1790).

On a more serious note, in my days in defence economics (before the end of the Cold War) I wrote a short paper arguing that the West should stop getting worried about this or that African country that went communist (usually by military coup, civil war – dressed up as ‘revolution’ – and armed uprising, funded and supplied by the Soviet bloc). This was never because I thought it would be beneficial or harmless, especially for those left within its borders.

I took the view that such regimes could not last indefinitely, nor in most cases for long. Imposing communist state management on their economies would sooner ruin them than anything the West could do by intervening, especially militarily. They would crumble of their own volition, and they did. They were not genuine national movements and usually represented a fraction of the tribal composition within their borders. The Soviet Union would waste its resources supplying them. When the Marxist rebels took over Luanda, within weeks they received US$2 million of military supplies; Egypt took hundreds of millions, much of it unusable before long.

Take the longer view, I suggested. Impoverishing their people using communist planning would create more anti-communists more quickly than giving the failing government a life-line in blaming transparent interventions by the West.

In the case of Venezuela, the subject of the article, I concur completely with its concluding advice: ‘do nothing’! Don’t blockade. Don’t invade (apparently Chavez is already claiming the US intends to do so, though he offers no evidence). Don’t give him more importance than he really deserves.

Given that the self interest of the Venezuelan people will slowly grind the communists down, I think that Adam Smith would approve of the ‘do nothing’ policy. I also think it might have been a better policy for the US in Cuba too. The end game is near in Cuba. There is no need to do anything.

Smithian Commerce on the Ground in Africa

Given all the pessimism about entrepreneural development from the bottom up in Africa, it is a pleasure to read of the activities of a group of economists from George Mason University in the USA. They have set up a research project to investigate closely what happens on the ground to entrepreneurship in Africa.

We know about bad government blocking natural economic growth, which, if given the space to develop would dramtically change the economics of wealth creation (the only lasting antidote to poverty); we alse know about corruption; the proclivity for civil warfare; the racism (black on black, not just white on black); the criminal violence; and the climatical deprivations. All these stand in the way. We know that.

But what of what actually happens to those green shoots of Smithian commerce, which if they could work would make a difference? What's inhibiting them; what's encouraging them?

To keep in touch with the research and what it shows visit :

http: //www.mercatus.org/enterpriseafrica/subcategory.php/311.html

Good Use of Adam Smith's Legacy

Nice to read something that refers sensibly to Adam Smith and correctly uses his legacy to make an important contemporary point.

“Global Energy Challenges In The Coming 30 Years” By Lord Browne,

(Extract from from the Dewhurst Lecture, delivered by BP’s Group Chief Executive Lord Browne to an audience at the World Petroleum Congress in Johannesburg on 29 September.)

“As well as investing in exploration, production and processing facilities worldwide, the industry is shifting its geographical base and in the process is beginning to learn how to operate successfully in complex areas, in countries in transition, and in emerging markets. We’re beginning to understand that if you want to manage the risks of a very long term investment it is important to be engaged with the countries in which you are operating. Not just extracting resources and paying taxes, but also playing a part in the successful development of those countries. Being transparent about what you pay; staying out of politics and making no political contributions. Avoiding bribery and facilitation payments and working with local communities to develop enterprise and education – to ensure that countries are ready and able to make full use of the wealth which resource development can bring.

We’re beginning to understand how to help the countries in which we work avoid the resource curse – the negative impact of suddenly becoming what Adam Smith would have regarded as a rentier, with a huge inflow of unearned income which can swamp all the incentives which shape an economy.”

Full Text is in Middle East Economic Survey VOL. XLVIII No 42 17-October-2005 (http://www.mees.com/postedarticles/oped/v48n42-5OD01.htm)

Brilliant Article, Shame About One Paragraph

“In Praise of Profiteering” by Chris Leithner (Quebec Libre, Quebecois) is a forceful and accurate analysis of the positive role of prices and the relationships between the quantities supplied and demanded in competitive markets, especially in times of emergencies, like hurricanes, floods, and other disasters. I would not fault his analysis. However, Chris Leither (a Canadian living in Brisbane, Australia) refers to Adam Smith, quite unnecessarily, and does so in a manner that exposes the usual errors about his legacy.

“Entrepreneurs, arbitrageurs, businessmen and employees – in short, human beings incentivised by "greed" – typically expose themselves to inconvenience, hardship and danger in order to earn these profits. Adam Smith demonstrated in A Theory of Moral Sentiments (1759) that a variety of powerful emotions, including altruism, motivate people. Importantly, however, if you wish to induce somebody to furnish a good or service in a great hurry, then a monetary incentive tends to be a reliable motivator. In the material world, in other words, people tend to do at least as much for themselves as for strangers. The glory of freely fluctuating prices and laissez-faire capitalism – the "system of perfect natural liberty" as Smith called it – is that it relies upon co-operation rather than coercion. Accordingly, the supplier prospers only to the extent that the consumer benefits.”

It is the sentence: “The glory of freely fluctuating prices and laissez-faire capitalism – the "system of perfect natural liberty" as Smith called it – is that it relies upon co-operation rather than coercion”, that causes my difficulty.

‘Laissez-faire capitalism’ is a redundant expression when referring to markets – they worked perfectly well in commercial societies (e.g., Roman Empire, Euro-China trade), which predated by millennia the advent of capitalism in the 19th century. This error is compounded when Chris adds that ‘laissez-faire capitalism’ is ‘the “system of perfect natural liberty" as Smith called it’.

Interestingly, Smith at not time used the words ‘laissez faire’, nor ‘capitalism’ (I offer 100 US dollars to anybody who can show where he used them either on their own or together). Smith’s system of natural liberty was certainly written by him, but not in connection with laissez faire (an expression used by some of the French economistes but not by all, and never by Smith), or in connection with ‘capitalism’, a word not invented until 1854 (Oxford English Dictionary), sixty-four years after Smith died in 1790.

I recommend that you read and keep a copy of Chris Leither's article (from www.quebecoislibre.org) , minus the offending passage, because it really is a masterly demolition of the notion of imposing price controls (including wages) in such occasions when the immediate need is to bring the quantities demanded (and not mere demand) closer into line with the quantities supplied as quickly as possible.

When Translation Distorts History

Scholars and specialists in a particular subject area always welcome translations of certain texts, important in the history of economic thought. With is in mind I ordered, eagerly even, an English translation of Anne-Robert Turgot’s Réflexions sur la Formation et al Distribution de Riches, 1766, from Othila Press (199), 58a Abindon Road, London, W8 (ISBN 1 90i647 17 X).

The fact that its title page, over the name of Anne-Robert Turgot, carries the title, "The Formation and Distribution of Wealth" (a partially incorrect translation of Turgot’s original title), plus the sub-title "Reflections on Capitalism", should have alerted me, but it didn’t, and I passed on until I read the translator’s 38-page introduction and the last chapter, “Smith’s Wealth of Nations and Capitalism” by Malcolm Hill, at both of which I screamed, ‘no, ‘no’, a thousand times ‘no’!

In place of access to the writings of Turgot, I had to read through opinionated pieces by his translator, Kenneth Jupp, that bandied the word capitalism about as if it emerged from the writings of Turgot (88 years before the word first appeared), and from the book’s title, it suggests it was actually one used by Turgot, which it patently was not. How many purchasers of this book blithely accept their association of Turgot and Smith, as the translator and commentator, do with ‘capitalism, a phenomenon of which neither Turgot nor Smith were remotely aware, and nor was it to appear, unanticipated, until the mid-19th century?

Sir Kenneth Jupp and Malcolm Hill join the list of those who have falsified Adam Smith’s legacy, I hope inadvertently. The translator argues that the "Reflexions are here translated into modern English", to which I must respond: "Fine, as long as by 'modern English' you do not interpolate words from another era and deposit them in a text written in 1766 as if the phenomena of capitalism was an everyday description of the economy of mid-18th century France."

Haunting Theory

Jason Dawe (Sunday Times) writing for its sister paper, The Times,
13 October, produces “The theory of supply and demand must be followed”, which includes:

“Adam Smith, accredited with being the founder of modern economic theory, knew all about supply and demand. He said that when demand is high and supply is low then you can up your prices. But if demand is low and supply is high you have to reduce them.”

Comment

This is better understood by adding ‘when the quantity demanded is higher than the quantity supplied, the seller can increase her prices; when the quantity demanded is lower than the quantity supplied, the seller is advised to lower them, qualified by the ability to store the products or postpone the purchases until the imbalances reverse. Obviously perishable goods must be disposed off or wasted; cars can be stored, or their purchase postponed.

“While this theory is simple to understand, the reality can be difficult to manage. The economic models suggest that to maximise sales and profitability you want supply and demand to be similar – not that easy in a global economy.”

Comment

True, to the extent that the balance can be maintained indefinitely. Less easy when internet sales – the global economy – can be tapped to overcome local shortages or surpluses.

“But the laws of supply and demand do occasionally work in favour of the car companies, particularly when they design and build a car that proves to be a bigger hit with buyers than anticipated. With demand outstripping supply, discounts are forgotten as waiting lists grow and customers pay top dollar for the latest, shiniest new models. … But … the situation doesn’t last forever - demand eases back, production levels often increase and ultimately prices start to come under pressure.”

Comment

Yes, differentiated product offerings that consumers prefer leads to surges in the quantity demanded but equilibrium in markets is always under siege.

"If car manufacturers continue to a) over-produce and b) target niche markets they will find Adam Smith’s theories on supply and demand will come back to haunt them. Making a car that appeals only to a limited number of people could be a very costly strategy.”

Comment

Sorry, but Adam Smith’s analysis of 18th-century markets is ever present, 'haunting' or otherwise. Making a car that appeals to a wide range of people can also be a 'very costly strategy' if a rival does it better. That's the business risk of entrepreneurship; wrong, then 'very costly'; right then very 'lucrative'. The choice of strategy is not included in the theory of the quantities demanded and supplied. If it was easy, many more would be showing the others how.

Nobody Led Society to Markets or Capitalism

Ryan Ash, a psychology and biology senior, and Elliott Nash, a government and philosophy senior, both at the University of Texas at Austin, contribute an article in The Daily Texan, a university newspaper, “Students need more reasoning”, containing the following:

“Human history has proven that application of unflawed reasoning renders successful outcomes. Reason led Adam Smith to capitalism, the most successful economic system ever devised. Reason led Locke to liberal democracy, the fairest and freest political system ever devised. Reason led Einstein to the atom bomb, the most successful weapon ever devised.”

I have no wish to quibble with an article (almost all with which I agree), crushed for space, but I think I should make clear that the sentence: “Reason led Adam Smith to capitalism, the most successful economic system ever devised”, is misleading on two grounds.

Adam Smith was not ‘led to capitalism’, a phenomenon that appeared several decades after he died in 1790. Even the word ‘capitalism’ was not invented until 1854 (Oxford English Dictionary, Vol.ii: Thackeray); the word ‘capitalist’ was first used in 1792 (A. Young; W. Goldwin, 1793). Smith died in 1790.

Second, capitalism was not ‘devised’, though it has certainly been ‘successful’. This is the most important aspect of the market economy (which Smith wrote about and analysed using his inductive reasoning and not from axiomatic first principles): nobody devised it, created it intentionally, organised it, or managed it. Markets were never dependent on the ‘inventiveness’ of mankind; they evolved without plan or precepts, and still do.

The market economy, in tandem with unprecedented technological progress and the ever-increasing division of labour, developed into capitalism, which, like the commercial market economy before and during Smith’s time, was not rationally planned by human agency.

It is absolutely essential to understand this evolutionary process and not to ascribe markets, and, later, their evolution into capitalism as somehow the product of the minds of individuals. Smith analysed the working of markets (please, no ‘invisible hands’!) and helped us understand them; many 19th and 20th century economists (Menger, Marshall, Edgeworth, Mises, Hayek, and such like) help us understand how capitalism works. But understanding is not the same as creating the phenomena we rationally observe.

With that caveat, congratulations to Ryan and Elliot Ash in their efforts to expand rational thinking in their university.

Greenspan Still Wrong on Adam Smith

Alan Greenspan speaks to the National Italian American Foundation in Washington, 12 October, repeating some of the points I criticised earlier here (Archives, 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.

With a masterful insight into the workings of the free-market institutions that were then emerging, Smith postulated an "invisible hand" in which competitive behavior 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.”

“The free-market paradigm came under more-vigorous attack after the collapse of the world's major economies in the 1930s. As the global depression deepened, the seeming failure of competitive markets to restore full employment perplexed economists until John Maynard Keynes offered an explanation that was to influence policy practitioners for generations to come. He 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.”

“We are also beginning to recognize an international version of Smith's invisible hand in the globalization of economic forces. 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.”

Comment

For the record, Smith’s use of Shakespeare’s metaphor (Macbeth, 3:2) had nothing to do with ‘competitive behaviour’. Keynes’s criticism of the ‘free market paradigm’ was not ‘contrary’ to Smith’s ‘tenets’ (though it might well have applied to classical economists and to neo-classical economists). As Smith did not have a ‘laissez faire approach’ (a view properly attributed to John S. Mill in 1848 and to some of the 18th century French Physiocrats) any view that Keynes adopted for government intervention could only have directed at the views of 19th century economists born long after Smith had died in 1790. As the invisible hand did not refer to what Greenspan says it does, it is unlikely that he recognises an 'international version' of it.

If by de-regulating aspects of the modern over-regulated economy Greenspan believes that corrections to “unanticipated disturbances” would be completed earlier, most of us can agree with him. Smith’s criticisms of State Regulations, however, referred to fairly long-standing laws (the Settlement Acts, the Poor Laws and Apprenticeships, etc., including policies associated with Mercantile political economy), which are not strictly analogous to post-War regulations of recent vintage. That is not to say he would not have been critical too; it underlines that he was addressing 18th not 21st century problems.

And Introduction to Ibn Khaldun (1332-1406)

Jawad Anani, an economic expert in Al Basira Consultants, in Dar Al-Hayat ( 13 October 2005, Saudi Arabia) writes to the theme, “Preserving Wealth… A Challenge for the Gulf Countries” and asks:

“Will Arabs succeed in creating a viable and long-lasting wealth by continuously investing in the real estate sector? Will such investment generate surpluses that can be reinvested in other sectors, thereby enabling nations to create wealth? Which state is stronger, the one that generates income or builds up wealth? Does this question seem, by contrast contradictory? What are the conditions needed to ensure that wealth will be preserved from generation to generation and in hard times?”

“Ibn Khaldun has tackled these questions in his well-known "Muqaddimah" (Introduction) published in 1378. [1375?] Adam Smith, the Father of Modern Economics, has also sought to answer these questions in his book, "The Wealth of Nations" published in 1776, four centuries after Ibn Khaldun's. Besides, Ibn Khaldun used terms, such as "industry," i.e. the economic human activity, including trade, agriculture, and manufacturing. He also referred to expressions, like "the disparity between countries in building up wealth," clearly stating that the "sovereign's control over wealth heralds the beginning of the demise of civilization.”

“As for Adam Smith, who toured Europe for a decade [actually for two years, 1764-6, and the tour was confined to France and Geneva] and was affected by the French Liberals, mainly because of his friendship with their leader, Voltaire, he realized that producing wealth depends on three factors: One, leave the individual [to] work and trade freely, for he can achieve the best good for all thanks to his selfishness. [Not a view of Adam Smith’s] Two, specify the relation between the governed and the governors and determine their roles and obligations without giving clout to one party over another. Three, ensure the free trade and economic activity between countries.”

“In this context, we do not intend to draw a brief comparison between Ibn Khaldun and Adam Smith. For many authors have previously elaborated on this issue. [Worth pursuing] But, we want to benefit from the writings of such creative authors to see whether the Arabs create a wealth likely to last and expand even when its causes and current motives vanish.” [Comments in square brackets are mine].

Comments

Jawad Anani in his article does not define what he means by “wealth” and it is not clear how rental income or capital value in real estate would add to the real wealth of the Gulf, an area he points out that is suffering from inflation and declining real incomes, plus some other problems for foreign investors.

His reference to Ibn Khaldun (1332-1406), however, is most interesting and worthy of readers searching under his name in Google.

A quick google (www.answers.com) found the following reference to a quotation on economics from his "Muqaddimah":

"In the early stages of the state, taxes are light in their incidence, but fetch in a large revenue...As time passes and kings succeed each other, they lose their tribal habits in favor of more civilized ones. Their needs and exigencies grow...owing to the luxury in which they have been brought up. Hence they impose fresh taxes on their subjects...[and] sharply raise the rate of old taxes to increase their yield...But the effects on business of this rise in taxation make themselves felt. For business men are soon discouraged by the comparison of their profits with the burden of their taxes...Consequently production falls off, and with it the yield of taxation."
This sociological theory includes the concept known in economics as the Laffer Curve (the relationship between tax rates and tax revenue follows an inverted U shape).”

From this extract, Ibn Kaldun, is worth a more detailed study.

Ibn Khaldun’s biographical details suggest he had a most ‘Machiavellian’ personality (and that he was successful at it too!), serving many rulers in Tunisia, Spain, and Egypt. His book on World History appears to be praised widely .

William Peterson on "Market Democracy"

William Peterson, the winner of the 2005 Gary G. Schlarbaum Award for Lifetime Achievement in the Cause of Human Liberty and the 2006 Schlarbaum Laureate, gave his acceptance speech, “Mises in America” (delivered October 8 and published 12 October by Ludwig von Mises Institute), contains the following interesting passage:

“So, Miseseans, see how market democracy explains the success of the West, how Adam Smith's vivid metaphor for self-interest as the "invisible hand" fits into his system of "natural liberty," of winning self-help by helping others. Recall a famed line in his The Wealth of Nations: "It is not from the benevolence of the butcher, or the brewer, or the baker that we expect our dinner, but from their regard of their own interest."

Comment

While not altogether sure of Peterson’s linking of the invisible hand to self-interest, I endorse the potential value of the phrase: “of winning self-help by helping others”, especially in the context of direct reference to Smith’s example of the ‘butcher, the brewer and the baker”.

Mises called this “market democracy”, and much of Peterson’s eloquent speech is directed to contrasting this “true democracy” with electoral democracy (which you can read by referring to the web site ). I discuss the principle of Smithian one’s self-interest being best served by serving the self-interest of others, particularly in negotiation, “Adam Smith’s Lost legacy” (Palgrave Macmillan).

[The citation of the Award says: William Herbert Peterson has served a crucial role as a leading public intellectual, elaborating on the insights of Mises through teaching, writing, and speaking on the relationship between free enterprise and human liberty.]

Misunderstanding Smith's Domestic Life

From the north eastern federation of anarchist communists in Canada, comes an unusual piece: “The World’s Largest Workplace: social reproduction and wages for housework” by P. J. Lilley and Jeff Shantz

“But how did we get into an economic system of evaluation that refuses to account for, and truly recognize the real value of women's unpaid work? Basically, the system of accounting for value was defined by bourgeois men who wished to evaluate the growth of wealth in the nation state. Economists like Adam Smith started out by separating moral, aesthetic and use "value" from "market" value. As Marilyn Waring points out in her detailed book of feminist economics, If Women Counted, "If Adam Smith was fed daily by Mrs. Smith, he omitted to notice or to mention it. He did not, of course, pay her. What her interest was in feeding him, we can only guess, for Adam Smith saw no 'value' in what she did."
Oh, Dear! What a load of, er, ‘misunderstandings, from two authors, three counting Marilyn Waring, who may not be familiar with Adam Smith’s domestic circumstances..
Adam Smith never married. His intentions in that direction were unfulfilled – the ‘lady in Fife’, with whom he courted, also remained unmarried and died twenty years after him. He lived with his mother all her life, so ‘Mrs Smith’ was not his wife. His thoughts about her are found in his Correspondence, (Corr. No 79, page 98-99)) in 1784, when she died, and probably answer the authors’ question: “What her interest was in feeding him, we can only guess, for Adam Smith saw no 'value' in what she did.”
She was someone:

‘who certainly loved me more than any other person ever did or ever will love me; and whom I certainly loved and respected more than I ever shall either love or respect any other person, I cannot help feeling, even at this hour, as a very heavy stroke upon me.’

His cousin, his mother’s niece, was Jane Douglas, who was his mother’s companion and housekeeper. They shared the household almost continually from 1746 to 1788 (when Jane died), moving with Adam from Kirkcaldy to Edinburgh, Glasgow, back to Kirkcaldy and then back to Edinburgh. From this shared the income he earned from teaching and writing.

To suggest he did not ‘value’ his mother and his cousin is quite astonishing; I am surprised that so-called anarchists want to put a price on family affection.

The paragraph’s opening is also strange:

“But how did we get into an economic system of evaluation that refuses to account for, and truly recognize the real value of women's unpaid work? Basically, the system of accounting for value was defined by bourgeois men who wished to evaluate the growth of wealth in the nation state.”

Humans have always lived in society and earlier ones in the main were much the same as ours; the modes of production might have changed but people remain much the same. So, to what society are anarchist-communists comparing? Capitalism has many critics, but to compare its failings with all those that preceded it and finding capitalism wanting is a disappointing reading of history.

But then so is the idea of an anarchist (freedom from State coercion) – communist (totalitarian coercion of the worst kind. No doubt there is an explanation; though there is none for these errors about Adam Smith.

When Risks of Fraud Cost More than Fraud

John Stossel (discussed here before see Archives) takes up the issue of competitive markets for two ‘sacred cows’ in car dealerships and real estate in a column in Townhall.com (Washington, DC): ‘Let the free market be free’ 12 October.

Stossel writes:

“In a truly free market, businesses can't kill competition, because they can't use force. Unfortunately, in our "mixed economy," they can get their friends in politics to use force to stifle competition.

Adam Smith saw it all the way back in 1776. In "The Wealth of Nations," he wrote, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." He advised that any legislation such a group proposed "ought always to be listened to with great precaution."

David Hyatt, spokesman for the National Automobile Dealers' Association, about that, he said, "If the manufacturer sells directly over the Internet, it leaves the dealer in an unfair competitive situation."
Hyatt added: "There is a very healthy system in place." Healthy for his car dealers, anyway. Less healthy for consumers.”

When stossel confronted David Lereah, chief economist for the National Association of Realtors, about that, he said, "Not everyone is providing the adequate amount of services to protect the consumer."

Stossel concludes:
“Why not let real-estate services compete on the open market? Traditional brokers provide a lot of knowledge and effort, and their multiple listing services reflect big investments; if you want the benefit of their energy and expertise, it's only fair that you should pay for it. But if you think you're better off with a cheaper alternative, that should be your choice, too. The government should stick to enforcing the contracts you willingly decide to make.”

These organised interventions by car dealerships and realtors restrict competition and raise prices to consumers. They are enforced both by restrictive practices – only supplying cars through dealerships and refusing direct sales – and by legislation forcing house sales through licensed realtors and through solicitors.

This is a mercantile policy criticised severely by Adam Smith. Of course, there are risks of incompetence, non-competence and fraud from using non-professionally trained services, and dealerships and realtors can use the marketing of their services to make this clear to potential customers, and potential customers can weight up the value of paying more for lowering the risk (many house transactions and vehicle purchases go wrong as it is in the current system) by using the professionals. But the choice should be theirs to take.

The alternative is to lumber everybody with greater expense as customers and higher costs as professional – passed onto their customers – as regulations increase (check what has happened to insurance and pension costs with the advent of legally required “Independent Financial Advisors” in the UK) and will continue to increase. The costs of the ‘remedy’ for fraud become worse than the risk of facing costs from fraud.

Changing Social Responsibilities

John S. McClenahen, writing in Industry Week (Cleveland, Ohio), “Manufacturing & Society: Practicing The Principles” (“Company social responsibility, appropriately, remains a serious work in progress”), quotes Jerrey R. Immelt, CEO, General Electric Co., on his company’s “ecomagination” initiative:

"This is not just good for society, it's good for GE investors -- we can solve tough global problems and make money doing it," Immelt said.

Not so incidentally, Immelt is more than refreshingly clear. He's also challenging the economic wisdom of Adam Smith and Smith's latter-day disciples. In 1776, in "The Wealth of Nations," Smith wrote, "I have never known much good done by those who affected to trade for the public good."

Smith wrote in the mid-18th century about an economy that was primitive compared to the 21st century. His manufacturers were tradesmen, journeymen, producing relatively simple tools and products for agricultural use and households, not multi-billion dollar enterprises, mobilising thousands of employees, sub-contractors and sales staff as is common today. His markets were akin to street fairs, not today’s long and complex supply chains. Few entrepreneurs working in these older technologies were sophisticated engineers, and those that were such, were moving beyond existing technologies towards what was to become known as the ‘industrial revolution’ (though it was a ‘revolution’ more like the hundred years war than a two-week violent event).

By ‘Smith’s disciples”, Immelt, is probably referring to the likes of Milton Friedman, who characteristically rejected social concerns as appropriate for a corporation in the 1970s (he was writing a column for the New York Times weekly magazine):

“That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

Note the ‘get-out’ reference to ‘basic rules’ .. ‘law’ .. and ‘ethical custom’). Readers at the time would take away Friedman’s rejection of ‘social responsibility’ in favour of ‘profits’; he too quotes Smith’s on “affecting to trade for the public good.”

Recently, Friedman and two capitalist entrepreneurs featured in a debate on www.reasononline.com (October 2005): “Rethinking the Social Responsibility of Business”. In it, Friedman sticks to his guns but does so in a manner that widens his 1970 ‘get out’. He says the difference between his 35-year-old ‘profits only’ presentation and modern practices of some CEOs (under social and political pressure) is one of ‘rhetoric’ only.

If they spend money of philanthropy and get helpful publicity for it, higher employee morale, and better customer loyalty, etc., fine, as long as they realise what they are doing: appearing ‘to trade for the public good’, but really using another means to increase profits. If appearing ‘to trade for the public good’ enhances profits, they should do so, but seriously aiming to do so at the expense of profits would not be the proper exercise of their charge of shareholders’ cash.

Where does this leave Adam Smith’s view? The well-worn quotation comes from the “Wealth of Nations” at the end of the more famous quotation on the invisible hand. Recall that Smith illustrated the power of unintended consequences of traders preferring to invest locally than abroad, and how this helped the domestic economy to grow faster than otherwise. It affected the public good and was beneficial on those grounds, albeit unintentionally. He considered this a more powerful force than if they deliberately set out to do so. But supposing they were to set out to do so by persuading each other only to invest locally (leave how this would be done aside for the moment) would it negate the benefits of investing locally by intention, instead of unintentionally?

Of course not, but that was not Smith’s point. He was sceptical that trying to organise a persuasion campaign (in mid-18th century Britain) would be in any way as likely to as successful as leaving the traders to arrive at the same result unintentionally. Using his quotation to suggest he was against ‘trading for the public good’ on principle is a ‘stretch’.

Their very actions achieve the desired result at that stage in the evolution of the age of commerce. In a different stage of the evolution of the age of commerce – the 21st century – society faces different and Friedman’s original 1970 prescription allows for the difference:

“That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

The contents of his ‘get out’ have changed. How and to what extent that is recognised by CEOs (and legislators who decide what is ‘embodied’ in law and electors who decide what is ‘embodied’ in ‘ethical custom’) is part of the rich fabric of social life. Recognising these changes is not barred by Adam Smith’s view, and his so-called ‘disciples’ (another specious allusion) should understand the difference.

Smith Offered More than a Cost of Production Theory of Prices

Jeffrey Jean writing in Red State.org - a Republican community weblog - on 11 October 2005 (RedState.org - Maclean, VA, USA) writes a thoughtful piece on the gasoline price controversy associated with Katrina and the recent rise in world gasoline prices (“Gasoline prices- Who's to Blame?”).

I find most of the article an accurate statement of the economics of the gasoline markets. I find problematical, however, the account given by Jeffrey Jean of Adam Smith’s views applied to this situation.

First, a quote from the beginning of the article:

“We all know the causes of high gasoline prices are systemic price gouging by the oil companies; dependence on foreign sources of crude oil; Congress' lack of political courage for not passing sensible energy legislation to force more conservation measures on the public and to overcome the complete failure of the market process to bring about alternative sources of energy. Or do we? Let's start with gouging.

The reasoning here is that in their pursuit of profit, the oil companies possess the market power to willy-nilly push the price of oil to increase profits which in turn causes the price of gasoline to rise. This is the view of Classical Economists starting with the famous Adam Smith (1723-90) and on down to today.

This theory would say that price is the sum of all the individual costs up the entire production chain. Thus, oil is one of the determinants of gasoline prices. The early classical economists were aware there were problems with this theory, as it only explains certain prices and not others. Nevertheless, this theory seems so intuitive one can only hope advances in theory will eventually occur to make it a general price theory. It's not to happen. For example, if the determent of gasoline is oil, what determines the price of oil, certainly not the cost of pumping it? What determines the price of labor if it isn't the value produced by the final product?”

A close reading of “Wealth of Nations” does not support the view that Adam Smith held rigorously to a ‘cost of production’ theory of price. Smith’s theory of prices, and of supply and demand in markets, is covered in Book I, chapter VII: ‘Of the natural and market prices of commodities’. I will cover this very briefly (it is covered in more detail in my “Adam Smith”, forthcoming, for Palgrave’s “Great Thinkers in Economics” series).

True, Smith puts forward a primitive cost of production theory, which he called the “Natural Price”, in the opening sections of his chapter. If he had left it there he could justly be accused of the errors alluded to by Jeffrey Jean. However, he went on to explain why the Natural Price did not obtain at all times and, to account for this phenomenon, he advanced the idea of the “Market Price”, which dominated real markets. This is a straight supply and demand explanation, of which Jeffrey Jean’s own explanation in the article is a good example.

Profits (like prices) cannot be predicted a priori; they are the outcome of markets, not their precondition. Entrepreneurs must take a view on price and an influence in that decision would be a product’s costs, including the profit they expect. To say that they don’t do this suggests a complete non-acquaintance with business decision-making. Actual prices are determined afterwards, when the products reach their markets. From this point on the costs of production have no influence on market prices; entrepreneurs become price takers not price makers.

Changes in supply and/or demand cause changes in the behaviours of the people in the markets. Smith’s detailed explanations of these changes may reinforce the ‘look back quickly’ school of the history of economics, to confirm its inherited prejudices from interpretations of his ideas. More leisurely contemplation of what he said indicates an overlap in the contributions to price theory a hundred or more years later.

He used his ‘factor price’ model (using modern terminology) to show how the owners of the factors (land, labour and capital stock) would react to changes in their markets. None of this contradicts Jeffrey Jean’s analysis (or the distinguished contributions of Carl Menger, Ludwig Von Mises, Murray Rothbard, or Frederick Von Hayek - see the web blogs listed alongside).

We should also note that Smith’s markets were street fairs selling food, farming tools, trinkets, ‘baubles', household goods and such like, made by largely individual handicraft tradesmen and women, and not large scale capitalist factories employing thousands and retailing in vaster markets across the land. By the time that Menger, Mises, Hayek, and most certainly Rothbard, applied their brilliant minds to market pricing, the world had moved through the ‘industrial revolution’ to the mass consumer society (though I have a note inmy files of Menger explaining price changes using a horse sale as his example).

Smith’s association with the ‘labour theory of value’ should not be taken too literally (he was definitely not a ‘proto-Marxist’) and his awkward presentation of Natural and Market prices should not be judged by the sophisticated analyses that became possible over 100 years later from a group of very bright economists, each with access to each others work.

I am working on this section of my new book at present and hope it helps to clear up a too easy dismissal of Smith’s contributions.

Correct Use of Smith's Views on Monopolies

Vinod Dhall, writing in The Economic Times, India (http://www.indiatimes.com) writes a most interesting article on cartels (11 October 2005), leading with a most famous quote from “Wealth of Nations”:

“Adam Smith wrote in 1776 in The Wealth of Nations, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”. Today, we know such collusive conduct simply as a cartel.

In competition law, cartels are regarded as the most pernicious form of violation. They cheat unsuspecting consumers, and create market power, waste and inefficiency in markets. Their conspiratorial nature lends them a criminal colour. An OECD survey indicated that in just 16 cartel cases, the commerce affected exceeded $55 bn world-wide. Considering that the cartel mark-up can be as high as 50per cent or more, it gives an idea of the magnitude of the harm done, including to poor or developing countries.”

Then follows a list of example of recent cartel scandals among several private sector organisations, together making a striking indictment of the proclivity of modern ‘merchants and manufacturers’ to act suspiciously and promote monopoly and cartel interests at the expense of consumers as Smith noted. These are part of the very good reasons why Smith did not endorse the extreme advocacy of laissez faire policies in respect of business, contrary to erroneous assertions (beginning with John Stewart Mill in 1849 and the editor of The Economist) that his political economy is synonymous with laissez faire, still widely believed and taught in academe (at least by those - the overwhelming majority - who have never read his books) and among politicians.

Disregard for consumers – the ultimate people for whom all production is undertaken (WN IV.viii.49: p 660) – is not confined to some businesses. It is also rampant in government and its agencies, whose disregard for consumers (and the same people as electors) is legion.

Supporters of big government love quoting Smith on the inequities of rogue ‘merchants and manufacturers’ but seldom question the sometimes pernicious role of state employees in their many rip-offs of the public committed in the name of Government, unless, of course, the employees concerned, and their Ministers, are in government and the politicans who comment are waiting to change from being the Opposition into a becoming the Government.

An Accountant Does Not Like Flat Tax!

William Lucie-Smith, an accountant, writing in the Trinidad & Tobago Express - Port-of-Spain, Trinidad and Tobago, on Monday, October 10th 2005 asks is ‘Our Taxation System Fair?. He thinks not and argues against a flat-tax:

“The basic principles of taxation have not changed much since Adam Smith enunciated them in 1776 in his seminal work The Wealth of Nations. Smith gave four basic "canons'' of taxation-equity, certainty, convenience and efficiency.”

Comment

Adam Smith in “Wealth of Nations” reported on four “maxims” (not “canons”!), which had been recommended "more or less to the attention of nations” (WN V.ii.b.7: p 827). In short the four maxims were not devised by Adam Smith and the myth that they were probably came from the same source of second-hand lecture notes Mr Lucie-Smith uses that miscalls them as his “canons”.

“The principle of equity, has over the years been accepted to mean that tax systems should be progressive i.e. individuals should bear a greater burden the more they are able to pay it by reason of their income or their wealth.”

Comment

The problem is that the ‘principle of equity’ when unconstrained leads in practice to steeply rising proportions of taxation that have different and decidedly unhelpful side-effects that lead to the growth of a secondary industry in taxation advisers, consultants and experts who add to collection costs, but not to wealth creation, and are heavily populated by, er, accountants (of which profession, Mr William Lucie-Smith, is a member).

Having recounted past taxation policy in Trinidad and Tobago, Mr Lucie-Smith describes the problem created by the slavishly following the ‘principle of equity’:

“income tax rose to 70 per cent, corporation taxes (including unemployment levy) were 50 per cent. These taxes also included taxes on dividend income and interest income that are now exempt. Clearly the burden of tax was far too high and as a result was a major deterrent to both economic growth and savings. Together with a shortage of foreign exchange this contributed to capital flight.”

Comment:

Yes, indeed Mr Lucie-Smith. The past tells you where you are going if you revert to the same taxation policies. All governments in history, I can think of few if any exceptions, resort to increasing taxation rates, with spurious but credible arguments in their favour at the time (there is nothing like crying “equity!” for electoral success, though it leads to economic failure).

Do you see the connection between highly progressive tax rates, high corporation taxes, high dividend taxes and poorer economic performance. Of course you do: you identify them as a “deterrent to both economic growth and savings … and capital flight”. Then why on earth do you propose more of the same!

Mr Lucie-Smith continues:

“The flat income tax treats the billionaire and working man the same way.”

Comment:

True but that is not the end of it. A billionaire earning $10 million at the proposed flat tax of 25% pays $2.5 million in income tax; a working man earning $10,000 pays $2,500 in income tax. They pay the same proportion but not the same amounts.

Moreover the consequences for the economy are also different. The income tax is nominally paid by the working man – it is actually charge on employing labour, because the net income of the working man is what counts and if that drops too low he likely will not continue working, preferring ‘unemployment’ to working at ‘starvation’ wages; the billionaire’s income tax is paid by her entrepreneurial businesses and at a flat tax she has every incentive to increase her business activities; to invest in new enterprises, not consume it, and to increase her savings and to bring her overseas income back to Trinidad and Tobago (reversing capital flight). She might also dispense with the tax avoidance (even evasion) advice of accountants.

“I would suggest that in our economy a more progressive system is required in which higher incomes are charged at higher rates. I certainly do not think the flat 25 per cent tax is fair and would have liked to see a higher basic allowance, but maintenance of the 30 per cent range for higher incomes.”

Comment:

Of course you would Mr Lucie-Smith. Calling a flat tax ‘unfair’ gives you a free pass to your colleagues' earnings from giving tax advice to beleaguered billionaires, which they are guaranteed if the government adopts your progressive tax policies, and to continue earning for bigger fees as the tax rate rises back towards 70 per cent.

Fine. I have nothing against you making a living for your colleague (persish the thought that you would be enaged in such activities), and if the people of Trinidad and Tobago vote for it, that is their right and their business, not mine.

Meanwhile, please desist from associating these policies with Adam Smith. He was more interested in growing real wealth, measured by the annual production of goods and services, raising real wages, and spreading opulence to the common poor, that stuffing the rich, slowing down the economy and causing capital flight (and lucrative work for tax advisors)

Blog Readership Growing Gradually - in the Smithian manner

Some facts about Adam Smith’s Lost legacy Blog:

The largest number of visitors is resident in the USA (mainly in California; plus 29 other States)

The second largest group is resident in China (mainly in Beijing, followed by Guandong)

The third largest is in The Netherlands

The fourth is the UK

On Sunday past we had the largest number of visitors since we started

Over 1,200 visitors a week read over 3,000 page views.

Many thanks to all of you for reading the Blog.

Comments are welcome.

Problems at t’Mill

Much of my info on things written about Adam Smith comes through my University and today they had a ‘power surge’ or ‘shortage’ something, that shut the entire campus down, and my Adam Smith ‘alerts’ with it (it's that precautionary principle again).

Thus, I am bereft of material to choose from.

Apologies. It is an opportunity to practise stoic virtues in the Adam Smith manner – what cannot be influenced we should accept without whining.

However, I am speaking at a meeting of the “Friends of the Innerpeffray Library” (a gathering of people interested in Scottish themes and history) in deepest Perthshire, near Crieff, on Wednesday evening, 12 October, on the theme of “Adam Smith’s Lost Legacy”.

I will post my 40 minutes address later this week when my Technical Director (my daughter) next visits.

I will also be mentioning at Innerpeffray, Adam Smith’s College in nearby Kirkcaldy, Fife, in praise of its foundation (20,000 students making it the third biggest in Britain, and surely en route to University status).

In the meantime, I hope the University campus re-opens soon.

Kenya Correct; Chicago Very Incorrect

In a non-attributed information piece in the “The Standard”, Nairobi, Kenya, the authors states:

“It is the classical economist Adam Smith who taught the doctrine of taxation not punishing the producer but being passed on to the consumer.

The argument is that whereas production creates utility, consumption enjoys using the created utility.

Therefore consumers must pay for using the produced utility.”

This is a neat way of expressing it. It is nice to see adherence to the virtues of classical economics in Kenya. Now, if we could read the same in the USA that would really be exciting news.

I have come to the conclusion that the main source of errors in Smithian economics is from US campuses. Deirdre McCloskey’s pamphlet, “The Secret Sins of Economics”, mentioned here yesterday, reports that the University of Chicago – for many the home of Freidmanite economics – closed down its courses in the history of economics some years ago. That must be an act of wilful intellectual vandalism of the highest order.

As the brightest and best Chicago economists spread round US campuses on graduation, we can expect continued ignorance of the man whom they otherwise speak of in hushed tones, while quietly spreading nonsense about his political economy, invisible hands, laissez faire, and all.

Adam Smith College Latest

Latest news on the tepid fracas at Adam Smith College in Kirkcaldy (birth place of Adam Smith), where thirty students out of 20,000 in the third largest UK college voted to change the name of the students’ association to the “Jennie Lee Students’ Association”, is quite good.

My letter on the subject was published in Monday’s Scotsman, among other things challenging the student leader to list the views of Adam Smith which, allegedly, were contrary to students’ ‘values’. So far there is total ‘silence’ from Mr Muirhead.

In today’s Scotland on Sunday three other students have their letters published. A paragraph from each letter makes happy reading about the level of understanding of Adam Smith’s excellent values:

“If Murdo MacLeod [the SOS writer of the story] had spoken to any other students he would have realised that many were not even aware of the changing of the name of the association and would have objected if given the chance” (Stephanie Manthrop).

Methinks, Mr Muirhead and his co-thinkers will face a stormy time in future for taking such important decisions without consulting the student body. As a former Senior Union Vice-President of Students Association at the University of Strathclyde, I would advise Mr Muirhead, if he intends to continue to lead students, he should never get too far ahead of their opinions so as to open himself to the accusation of taking their support for granted.

“The minority who voted against Adam Smith seem oblivious to the philanthropic nature of the economist, known for funding schools for the impoverished children in the town of his birth, and instead focus intently on the Thatcherite propaganda that tarnished Smith’s reputation. They are ridiculously uninformed” (Kate Melville).

Adam Smith was so concerned about the lack of education of poor children that he advocated a national schools’ system – a school in every village – funded mainly by the State, as was operating, imperfectly, in Scotland.

“A group of 30 students from the student’s union voted to change the name of the union from Adam Smith to Jennie Lee – their reasons being that they felt Adam Smith was a capitalist and too rightwing to represent the union.

If they had studied their history they would have realised that Adam Smith, in fact, strove hard to make life better for everyone from all walks of life” (Christine Wright).

If these views are representative of the students of Adam Smith College, then my earlier hopes that the opening of the newly merged college under his name presages an increase in awareness in Fife of Adam Smith’s true legacy.

Katie Grant, writing in the Sunday Times (Scotland) on the subject says:

“We live in dumb and dumber times. It is almost wilfully forgotten these days that one of Smith’s most important contributions to society was his ability to articulate the notion that “sympathy” — a full consciousness of others — underpins morality and that a society without morality is not really a society at all.

Smith did not think of this sympathy as some kind of wishy-washy “I feel your pain” soundbite. In his eyes, sympathy was only valuable when generated in the heart of an “impartial and well-informed spectator”. That such spectators were, inevitably, ideal rather than real gave rise both to his warnings about the cost to society of human selfishness and to his theories as to how it could be harnessed to the public good.

I wonder what the revolting students find objectionable about that. Perhaps Smith’s suggestion that people should be well informed annoyed them? Whatever it is, too many people also don’t bother to discover that the full title of Smith’s most famous book is An Inquiry into the Nature and Causes of the Wealth of Nations. It was written as an enlightened investigation, not in praise of wealth as the students seem to assume.”

That a journalist is so well informed about Smith’s moral philosophy is extremely encouraging when so many professional economists remain uninformed of his political economy, let alone completely uninformed of his “Moral Sentiments”.

To the extent that student readers of the Sunday Times follow up on the “impartial spectator”, then our thanks go to the ignorant gesture politics of the thirty student activists (maybe even some of them will investigate the real views of the real Adam Smith?) for unintentionally provoking this reaction.

Implications of Profit

Webpronews.com publishes an exchange about a foundation to promote ‘social impact’. It (slightly edited) is not always clear about its context, but it mentions Adam Smith and I comment on that:

"Started a foundation. Trying to make the world a better place in the traditional way. Started thinking that if you want to have an impact in the real world, why do you have to in this sector? When you look at eBay, after 10 years, 150 million customers have learned they can trust a complete stranger. That a business can have this very social impact of a slightly higher level of trust was intriguing. JBat: Now in the VC Biz? A little different, it's a mission based fund. We are about fostering individual self-empowerment. The fund is $400M, all my money, going to do something good with this, investing over 5 years. Looking for businesses that can only be successful if they have a positive social good. We are building tools with new technology to bring people together. Adam Smith: given the right environment with people pursuing their self interest leads to an increase in the general welfare. In fact, look at the profit generated in an economic system, if the environment is right, then the existence of profit is evidence of general welfare. If the baker can sell bread to a shoemaker, he can feed his family, and also apply the profit to buy shoes. It's more complex than that, but the principle holds true. We look for three things: does it have a level playing field? does it foster interaction, connecting and communication around shared interests? do the participants have a sense of ownership for what is going on? Then we look at the business model. Is there a revenue model that can only be successful if it maintains the three values and enables the social impact. For instance with a business about trade, and you need people to trust one another, the model predicated if the trade going through. We are pretty rigorous (I can testify to that) in due diligence. Tighter screen because of the mission fit, which also limits the number of opportunities. We are doing this for a social impact on the world. Need to examine the business model that has the social impact. In the social sector there has been a lot of work on trying to measure the social return. Some things easy to measure (how many people did you feed), but the game changing things you can't measure. Going back to Adam Smith, with the right environment (criteria for investment), then evidence of profit is fulfilling the mission.”

Comment

Looks interesting. Assuming the “right environment” includes the rule of law and independent justice, at the first level “people pursuing their self interest leads to an increase in the general welfare” is fair enough and representative of Smith’s views. However, he went a lot further and this must be understood in case false images produce wrong approaches.

Smith focussed his early chapters of “Wealth of Nations” on ‘the propensity to truck, barter and exchange’. (WN I.ii.2: page 26-27) In commerce, its characteristic even today is on parties negotiating to exchange something voluntarily. If we look at the act of negotiation we find a familiar mechanism, which I call the ‘impartial competitor, reflecting the role of the impartial spectator in “Moral Sentiments”.

His famous exposition, and most famous quote, is:

“It is not from the benevolence of the butcher, the brewer and the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities but of their advantages.” (WN I.ii.2; p. 26-7)

This is the most misunderstood statement of Adam Smith (among many other competing candidates). Even the great George Stigler misread it.

If two parties to a transaction care only for their self-interest, there would never be a negotiated agreement. The seller would always open higher and not move, and the buyer would open lower and not move either. If there is to be a single agreed price either or both of them have to move because negotiation is the management of movement. The dynamics of movement involves each party addressing the interests (or ‘advantages’) of the other. They have to modify their own self-interest by serving the self-interest of the other.

The buyer gets her family’s dinner and the butcher, brewer and baker, receive income to buy whatever serves their self-interests. In competitive markets the penalty for not moving is for the seller to lose to a competitor and the buyer to have to try again with another seller. Hence, like the impartial spectator modifying the display of excess passions, the excess demands of negotiators are modified by considering the other’s self-interest as well as their own.

I agree with the writer’s statement that “If the baker can sell bread to a shoemaker, he can feed his family, and also apply the profit to buy shoes” but just in case this is read as a one way gain to the baker, etc., let me add the rider: “If the buyer’s family receives bread at an acceptable price (constrained by open competition), they can restore their health needs and return to earning their living the next day; if they purchase their bread at a price that reduces their real income (what they can buy with their wages) they may miss out on being able to afford meat from the butcher, which reduces the butcher’s ability to buy shoes, or whatever.”

The agreed price has impacts all round and any hint of monopoly exercised by the baker undoes the benefits of markets. Raising prices and thereby profits through monopoly restrictions has a deleterious effect on the growth in wealth, warned Smith. Unrestrained self-interest need not result in improving the general welfare. The best restraint on self-interest is not regulation, but competition. In this sense, ‘evidence of profit’ may have more than one implicit meaning.

A Thought-Provoking Gem of a Little Book

I came across a little gem of a book (58 pages), The Secret Sins of Economics by Deirdre McCloskey (Prickly Paradigm Press, Chicago, 2002) during the course of ordering from Amazon her book, The Rhetoric of Economics, 2nd edition, University of Wisconsin Press, 1998. I read the pamphlet this afternoon when watching Scotland beaten by Belarus in a World Cup qualifying football match that proved too much to bear...

What a scorcher! Working in close detail on Adam Smith’s works and picking up any professional journal while doing so, the contrast is stark. You can put this down to 200 years additional work of a scientific nature, or to a complete change in approach. While Smith’s “Wealth of Nations” teems with people closely involved in what is happening to them, today’s economic science seems to have dropped people from the subject entirely. If people are mentioned, they are automatons without the full range of recognisable human characteristics.

Anyway, my current research and writing topic in my new Adam Smith book (for Palgrave’s “Great Thinkers in Economics series”) is what is sometimes described as his “labour theory of value”, though I do not think it should be described as such, nor as ‘proto-Marxist’. Knowing the approach of Karl Marx in “Capital”, I could not help but be struck by the non-scientific approach of Marx to prove his labour value theory is also, albeit, a negative confirmation of McCloskey’s criticism of majority trends in modern economics (deductive theory without content).

What Marx and, what McCloskey calls ‘Samuelsonian’, economics have in common is that Marx wraps his claims to ‘science’ in verbiage without people and the ‘Samelsonians’ wrap their scientific relevance in abstract mathematics also without people.

The opening chapters of Capital are notoriously ‘difficult’ (‘explained’ to me many years ago by a tutor that Marx suffered from a nasty attack of carbuncles while writing these chapters) and they use an invented language, where words mean whatever he wants them to mean; modern journal contributions also are often ‘difficult’ too, and use notation that can also prove whatever their authors want them to ‘prove’ by loading the premises anyway they want to.

It seems economics has been captured by an approach to ‘science’ that led Marx to the dead-end of communism and millions of dead, and the best brains in ‘Samuelsonianism’ to the dead-end of nothingness, leading to an analytical paralysis when we have so much to do to address the real problems of real people. Thankfully, the Samuelsonians don't actually kill anybody, except perhaps from boredom.

As far as I can see, at present, a better hope for economics is to be found in the recommended Blogs listed on this page. When I have read McCloskey’s other book on ‘Rhetoric’ I will report on its content.

Guest Contribution from Nicholas Gruen

Nicholas Gruen (see his bio in his contributions to the Article button on the Lost Legacy’s main blog page) composes a piece, “Outline of points on Adam Smith” for a radio interview for an Australian Broadcasting Corporation series, “All in the mind”.

I reproduce it in full , with permission, because it summarises the most correct expression of Adam Smith’s true Legacy that I have seen for many a year. Any differences I might have are mere quibbles (e.g., I think calling markets ‘miraculous’ is an exaggeration, etc.; I prefer Smith's description of regarding them with 'Admiration', as explained in his "History of Astronomy") when set against the general perspectives Nicholas Gruen demonstrates:

“Looking Out for No.1, that they keep an idea sort of for the invisible hand of the
market place that will somehow take your own self interest and turn it into good.
That is you know from Adam Smith’s famous theory of moral sentiments. So there’s
this notion that if I’m just looking out for myself, for my own individual self interest,
that everything will work out well in the end for all concerned. And of course we know
that that market, free market ideology has proven to be incorrect, false, completely
mistaken.”

"Q: How does that popular summary of Adam Smith strike you as a summary of his thought?
R: The common understanding of Smith is quite wrong. Certainly Smith saw self-interest as an important motivator in human affairs. He opposed a lot of Christian political and economic thought which simply exhorted people to be less selfish and more benevolent. Smith wanted to take the world as it was. So he was interested in how in the actual world the evils of self interest – or what he called self love – were tamed in real life and how they might be tamed better.

Q: He had a theory of society that some people say comes before his economics. How did self interest fit in to his theory of society?
R: Smith’s most famous book in his own lifetime was his Theory of Moral Sentiments. It asks a question. He begins with a picture of a baby or a young child not unlike Freud as a ball of pure egotism – of self love. And he asks “how is it that this self love” becomes a law abiding, other regarding citizen. Smith’s answer is simple but also deep. He says that the child encounters approval and disapproval and likes the one and hates the other. This leads to the development of a conscience which Smith likened to an ‘impartial spectator’. As the child grows to adulthood they also learn that tricking people into approval is unsatisfying – they crave deserved approbation. And the craving for deserved approbation is the social foundation of the rise towards virtue.
Another way of explaining it is to explain another misconception about Smith – that he was a crude individualist. Smith’s theory says that people acquire quite central ingredients of their character, indeed their minds, from society.
Smith says it’s impossible for a human to grow up outside of society, but if it were, he couldn’t even think of his own conduct any more than he could think of the appearance of his face without a mirror.
Bring him into society, and he is immediately provided with the mirror which he wanted before. . . .Bring him into society, and . . . he will observe that mankind approve of some of [his passions], and are disgusted by others. He will be elevated in the one case, and cast down in the other his desires and aversions, his joys and sorrows, will now often become the causes of new desires and new aversions, new joys and new sorrows: they will now, therefore, interest him deeply, and often call upon his most attentive consideration.

Q: You argue that there’s new experimental evidence that Smith was right.
R: Yes. One of the implications of Smith’s system is that children start selfish and that socialisation makes them less so. Economists have quite recently done experiments which provide with some hard data on this.
They look at how people respond to specific games in which there is a tension between possible social obligations and naked self interest. One game is the Ultimatum Game. It’s simple. Two players get a pool of money – say ten coins. One player is invited to split the money between themselves and the other player. If the offer is accepted the two players split the money between them as proposed. If the offer is rejected the players get nothing.
The experiments I’ve seen showed around thirty percent of grade two children offering their partners three coins out of ten or less. This was down to about 10% three years later, five percent in grade nine and next to nothing in grade 12.

Q: But didn’t Smith believe in self interest governing markets?
R: Where the Theory of Moral Sentiments is a sketch of what people and society are like and what holds them together, the Wealth of Nations is a scientific treatise on what makes countries prosperous. Yet at a deeper level the two books are about the same thing – the constraint of self interest.
Smith is attracted to markets because they mediate and thus transform self interest – into something with a passing resemblance to its opposite – cooperation.
In a very famous passage Smith says this – but listen closely to what he says.
It is not from the benevolence of the butcher the brewer, or the baker that we expect our dinner, but from their regard to their own interest. 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.
If you listen carefully, what we see is not the assertion of one person’s self-interest over the other but the mediation of that self-interest – by that of the other. In lectures Smith gave which became the Wealth of Nations he was more explicit. The merchant who attends only to his own self-love will get nowhere.
Mere self-love is not sufficient for [his success], till he applies it in some way to your self-love.
Smith sees conduct in a market as the fitting kind of exchange between strangers. It enables them to co-operate without presuming too much on each others’ benevolence. And yet they need only consider their own interest to have it transformed into an interest (not a love mind you, but an interest) in what they can do for others.
I really think it’s hard to understand how remarkable this seemed to Smith or in fact really is in our own world, so pervasive has the market become, so much to we take it for granted. I think of Smith’s economic theory as akin with EM Forster’s great injunction at the end of the novel Howard’s End. “Only connect”. It’s a theory of connection between people. And if we ask about the problems with government, one of the fundamental problems is that, for all the mechanisms of accountability that we try to build in, if we have a problem, if we have a need, it is very hard to find someone to connect with – someone to whom we can turn and try to interest them in addressing our self-interest by making it worth their while in their own self-interest.

Q: Smith argued that markets improved virtue. How?
R: Well, they lead people – even total strangers – to have a certain regard for each other. It’s true that this is not the benevolence of a saint, but it is a start in human interaction. Markets mean that at a fundamental level people engage with each other and their needs.
Markets also reward
· prudence, the habit of thinking and planning ahead.
· probity and a certain honesty of dealing. Because if you get lied to once, you’ll buy your bread or your beer from someone else.
They do something else. Market relations are relations of dignity between two free people. One may be richer than the other, perhaps much richer, but it is nevertheless an exchange which is dignifying because it is an expression of free people’s choice in a situation – and not one of naked power. Immediately after the passage about getting one’s dinner from the butcher, the baker and the brewer, Smith compares this with the way animals and beggars must coax and court and flatter others to get their daily bread.
And Smith saw what he called ruder or more primitive societies as characterised by the exercise of naked power
So in addition to the ways in which commerce ‘softens’ behaviour it also diffuses power throughout the community much more and so there is less exploitation of power.
This is the essence of Smiths’ objection to monopoly. He saw it as inefficient, but more importantly he saw it as immoral, a hankering by the rich for their easier more primitive life of power over others, rather than a shared accountability to consider others needs.

Q: So does a coherent picture emerge of Adam Smith’s picture of humanity from his work on morals and on markets?
I’ve argued that all things considered Smith’s picture of humanity in both of his great books isn’t homo-economicus – the naked and ugly pursuit of self-interest over others’ interests. I call it homo-dialecticus. Smith believed that people were inherently communicative. Their lives are a conversation.
· Internally with their consciences or the impartial spectator who in fact embodies the mores of their society.
· Externally in markets where the mutual self-interest of all is mediated, and each person’s self interest is conditioned, and contained by that of others.
Moreover I think he’s right. Whether you vote for John Howard, Kim Beazley or Bob Brown, markets really are a miracle of modern times. They don’t solve all our problems and there are ways we can help them work, but the way they engage and connect people with each other in solving mutual problems is a remarkable thing and something we tend to take for granted. They’ve not just brought us to the edge of eliminating physical need. They may not lead people to love each other, but they do induce them to help each other.
The society that really embodies naked self interest is not the market society but the anarchic societies within failed states. Where people are murdered and plundered on a daily basis. That’s naked self interest.

Q: And you argue there’s experimental evidence that Smith is right here too. That markets improve morals.
R: The ultimatum game was invented in 1982. Until 1996 it was thought that there were not large cross cultural differences in peoples behaviour. In particular that despite the ideas behind economic theory very few people behaved without some sense of fairness in the game. In 1996 researchers turned up a small scale society which with much less pro-social instincts – at least as demonstrated by the ultimatum game. That led to a very well funded and very sizable cross cultural study of 15 small scale societies looking at societies like the one surveyed in 1996. And guess what?
The researchers found a strong correlation. The greater the level of prosociality expressed in experimental games, the higher the degree of market integration of those communities. So the experimental evidence suggests what Smith argued, that markets induce pro-sociality. They make co-operation between strangers – rather than conflict – the norm. That is surely a miraculous achievement."

© Nicholas Gruen 2005 (All Rights Reserved)

Enquiries and permissions to reproduce to Nicholas Gruen: nicholas@gruen.com.au

Apologies

Apologies for fewer blogs these past 12 days but I have been tied up in my other job - negotiating contracts for clients - and necessarily this has taken up much of my time.

Thankfully the deal is now concluded and I can get back to my 'day job', starting tomorrow (Saturday).

Thanks for your patience.

Gavin

Profits Are Not Known A Priori

In Raise the Hammer: www.raisethehammer.org we find: "Unveiling the Gas ‘Conspiracy'," by Trevor Shaw

“Adam Smith, an eighteenth-century economist, used the analogy of the baker. A baker doesn't provide bread out of charity but out of self-interest. In other words, if there is a lack of profit, the product isn't provided.

Regulating gas to an arbitrary price to keep it affordable for everyone will only put gas retailers out of business. Paying $2.50 per litre will be better than not having any gas at any price. Price capping will also have the same effect, temporarily closing gas stations for the duration of the price-cap.

Adam Smith's analogy isn't really applicable to oil extraction. Bread is a manufactured product, produced from raw grain and ovens that are made possible from energy. Bread is produced, but oil is extracted. The so-called 'invisible hand' of the free-market can't slide in and produce more oil in the ground.”

Comment:

In Smithian markets the baker, or any other supplier of economic goods, does not know if there will be a profit. Trevor Shaw gets the sequence back to front; he talks as if the knowledge of the profit to be made is known a priori. A moment’s thought would expose the error of his (all too common) assertion.

Before there can be a decision as to whether a profit will be made, the customer and the baker have to negotiate a price for the bread. This cannot be decided by the pure self-interest of either party acting in isolation from the other. If they operated on that basis there would be no bargain concluded: the seller would demand a higher price and the buyer a lower price.

There can only be one price in a bargain and the evidence of the real world suggests that this tends to be lower than the seller would demand, if his self-interest was unconstrained, and higher than the buyer would offer if her self-interest was unconstrained. The settlement price is achieved by the parties mediating their self-interest by each taking account of the self-interest of the other.

Of the second paragraph I quote it only for context.

“Bread is produced, but oil is extracted”. Surely this is not a distinction that makes a difference. “Raw grain” is “extracted” from what is grown, an amount subject to seasonal variations. Once the season’s crop is collected, its supply cannot be increased until the following season, a slightly different but essentially the same as saying once an oil field’s oil is extracted by its current technology over a ‘season’ it supply cannot be increased until the next season or until exploration produces, in due course, a net addition to supply. Similarly, in the case of the capacity of existing bread ovens.

“The so-called 'invisible hand' of the free-market can't slide in and produce more oil in the ground.”

Well, we certainly agree with the use of ‘so-called’ in relation to the invisible hand, but Trevor Shaw’s use of ‘so-called’ misses the point. Adam Smith’s use of the invisible hand metaphor (Shakespeare’s actually: Macbeth: 3:2) had nothing to do with markets, for bread or oil. It was about human motivation (“Wealth of Nations”, IV.ii.9, page 456) and it said nothing about what causes changes in supply or demand. It is not involved in ‘sliding in’ to produce more of anything particularly.

Incidentally, for accuracy, Smith’s reference to the baker (actually “the butcher, the brewer and the baker”, “Wealth of Nations, I.ii.2: pages 26-7) was not an ‘analogy’ (to what was it an analogy?). It was a straight statement of an example of an everyday transaction in markets.

Adam Smith and Natural Selection

Over on Canadian Econoview, ‘BSF’ opens a piece on ‘Adam Smith and Natural Selection’ by mentioning the piece I wrote recently (September) on the current ‘debate’ in the US on Intelligent Design and Evolution.

After quoting “Moral Sentiments” (V.i.5.10. page 77) on the ‘author of nature’, BSF asks:

“Isn't it lucky, Smith's saying, that we just happen to enjoy, for their own sake, a whole mess of activities which just happen to be essential for our individual survival and for the continuation of the species?Is it really a big jump from there to the idea that our species only continues to exist because we happen to possess those traits, and that any species which didn't posses them would have long ago died out?”

Read the full post (http://canadianeconoview.blogspot.com/2005/10/adam-smith-and-natural-selection.html) and the reference to “Moral Sentiments”.

My own ‘answer’ to “BSF’s” questions would be to comment that natural selection works on the individual and not the species, and that those traits that Smith notes are not based on ‘reason’ but on incentives at the individual level (the ‘passions’) – reason is too slow and unreliable to fulfil such important tasks:

“Nature has directed us to the greater part of these by original and immediate instincts. Hunger, thirst, the passion which unites the two sexes, the love of pleasure, and the dread of pain, prompt us to apply those means for their own sakes, and without any consideration of their tendency to those beneficent ends which the great Director of nature intended to produce by them.” (TMS, page 77)

Any individual or species that failed satisfy hunger, quench thirst, avoided sex, hated pleasure and enjoyed pain, would certainly die out. Presumably, all species meet these necessary but not sufficient conditions in normal times. The 18 or so versions of the Hominids, the predecessors of Homo sapiens, all presumably met the necessary conditions – most of them lasted a lot longer than Homo sapiens have so far, counting in millions of years against our mere 200,000. Likewise, with the others, some of which have lasted over 100 million years.

Other factors must intrude for a species to die out other than those imposed by the ‘author of nature’, which is another argument against the fantasies of ID.

Ceck it out with Canadian Econoview. It’s a good read.

Limits to Economic Man

In Tech Central Station, Arnold King has an article, ‘Economic Man’ Vs. ‘Status Man’ (6 October 2004), the gist of which is that the concentration on status (among peer groups and as a differentiator of self from others not in the peer group) is detrimental in a zero-sum sense, and that a resort to increasing the influence of economic rational calculation would lead to a better society, especially as economic gains are non-zero in the benefits they bring to everybody.

He refers to minorities who waste themselves and their lives in street gangs, etc., deliberately under-achieve in education, and pull down those in their peer groups who break the ‘rules’ by trying to better themselves. The case is compelling.

Adam Smith had plenty to say about this topic in “Moral Sentiments”. He showed the positive things about human behaviour (sentiments for each other, self-appraisal of one’s conduct by consultation with the views of the ‘impartial spectator’ or conscience) and also the negative things (overly interested in the foibles, lives, tragedies and gossip of the ‘High and Mighty’, the ‘celebrities’, and the rich and powerful, as against the same events affecting their neighbours). He mentioned these habits of the ‘celebrity-struck’, without prescribing against them in the manner of Arnold King; he simply commented about these proclivities as a prelude to understanding just how deeply ingrained they were in the population, and something that should be understood by those who would try to change things.

Smith drew a distinction between being ‘praised’, or seeking ‘praise’, and of being ‘praiseworthy’. The status seeker craves praise, whether they deserve it or not. The moral person strives to become praiseworthy whether they are praised or not.

Smith saw the status seeking person’s foibles as part of the bonds that stabilised society and the parts of it. The ties that bind are often the ties that keep that portion of society that adheres to its local norms in a locally-stable status quo. Replacing street gangs without something in their place is not necessarily a step towards local harmony. Upset the balance between 'territories' and there is deterioration in public safety while the remnants ‘sort it out’.

Arnold King’s other point is that “economic motivation would represent a step up from status-seeking.” The plain fact, recognised by Adam Smith, is that such a ‘step up’ is not going to happen and it cannot be enforced.

‘If only the world was not like it is, what a wonderful world it would be’ believes every ‘man of system’, and too many of them end-up trying to enforce through violence what they cannot obtain by agreement.

Worse, using Smith’s theory of status (compatible with what Arnold King critiques about status seeking), we can safely assert that all ‘men of system’ nurse their fantasies of the ‘better world’ they envisage in concert with those who agree with them, forming an exclusive status group of their own!

Take a Look at Utopia

In one of the lively and readable economics Blogs available (check our current list of them on the left column), Marginal Revolution (www.marginalrevolution.com), Tyler Cowen reports that Thomas More (16th century) appears to present an early (if not the earliest) version of the Pareto’s Compensation Principle:

“...another [advisor] advises him to prohibit many practices with heavy fines, especially those that are contrary to the public interest, noting that later he can make a monetary arrangement with those whose interests are hurt by the laws and that thus he can win the gratitude of the people and make a double profit, first from fining those whom greed has led on into his trap and then by selling dispensations to others...”.

He adds: “The book is an early classic of social science, and a precursor of Smith's TMS, but read it from back to front.”

You can order “Utopia” at a most reasonable price for Amazon.com. Congratulations to Tyler Cowen for news of this gem. Makes all that reading of Kaldor-Hicks in Welfare Economics worthwhile.

The Constant Dilemma: Left, Right or Smithian

“A bit of the old Adam” by William Rees-Mogg, TheTimes 3/10/05:

“The terms “left”, “centre” and “right” to describe political alignment came in only with the French Revolution, and are said to be derived from the seating arrangements of the French National Assembly in 1789. The Oxford English Dictionary explains that the nobles took the position of honour on the President’s right, and the Third Estate, representing the people, took the position on the left.

Oddly enough, there is a lone quotation from Shakespeare that suggests that “right” may already have had its political meaning two centuries earlier. In Act 11, scene 1 of Coriolanus, the patrician senator, Menenius Agrippa, is teasing the Tribune of the People. He refers to himself and his friends as “us o’th’ right-hand file”. Every ten years or so I have written an article asking whether anyone can explain “The right-hand file” in terms other than the “left-right” divide in politics.”

Comment:

Good point, and thoughtful too. The “left-right divide” may well be something to so symbolically with the “right”, the most favoured ‘sitting on the right hand side of God’ and the “left” the proper place for the others, lesser people altogether.

Rees-Mogg goes on:

“The Wealth of Nations is a subtle and well-considered book, nothing like the crude laissez-faire tract it is imagined to be by bishops and other people who have never read it. Yet it is not only the foundation of classical liberal economics, but of modern conservatism. So far as I know, Adam Smith has not yet been mentioned by name in the current Conservative leadership contest, but David Davis has introduced an argument that is clearly derived from Smith’s thought.

Mr Davis argues that free-market systems can deliver better social services than state bureaucracies. Free-market systems are more productive and respond better to the needs of customers. Whether one is dealing with hospitals or schools, an element of choice creates competitive pressures that can be expected to improve outcomes. Market systems do not provide less welfare than state socialist systems, but more and better welfare at lower cost, and therefore at lower taxes. I think this argument is correct, but in modern terms it is unquestionably regarded as right-wing. Why was it left-wing in the 18th century and why has it become right-wing now?

It is not just Adam Smith or economic theory that have moved from left to right. Apart from Gordon Brown, most of us who have been influenced by the Scottish Enlightenment are now perceived as holding right-of-centre views on liberty itself. Even the American Declaration of Independence is now quoted far more often by conservatives than by socialists.”

Comment:

This follows an interesting passage on Adam Smith and Samuel Johnson not “taking to each other”, though Johnson told Boswell that he have ‘hugged Smith’ if he had known he did not like blank verse, so their breach was not too serious. We should also note that this statement by Rees-Mogg is a big improvement on when he last addressed the subject of Adam Smith (see Archives: April: "A Distortion of Smith's Doctrine of Freedom") and I had occasion to comment.

I will not comment of the internal affairs of the Tory party here but will on why there has been a shift in the spectrum of the right-left divide, though such discussions get really confusing when applied carelessly. During the collapse of the Communist Party in Soviet Russia, I was always uneasy with the designation of the reformers (Gorbechev, etc.,) as the ‘rightwing conservatives forces’ and the old guard Communists as the ‘leftwing forces’, when I would have regarded the old guard as the conservative reactionary forces.

However, I think the explanation is that the spectrum as a whole has shifted since the 18th century. Smith no doubt was regarded as of a Whigg-ish disposition opposed to rightwing reactionaries who believed in the fictions of the divine right of monarchs. To be in favour of Natural Liberty and constitutional monarchy was certainly not conservative or ‘rightwing’. But then followed the appalling Terror of the French Revolution from 1793, mirrored in an outburst of almost panic-stricken reaction in the British Establishment which instituted a great deal of oppression and judicial revenge on anybody who appeared to be in the slightest degree seditious.

Adam Smith died in 1790 but prominent supporters, such as Dugald Stewart, his first biographer, were ‘interviewed’ by representatives of the judiciary to explore the extent to which Smith, and his works, were likely to cause unrest among the common poor and add to public agitation. From Stewart’s account it was a testing time for him and his family (see “Adam Smith’s Lost Legacy” and how it almost stalled Stewart’s eulogy to Smith in the midst two meetings of the Royal Society of Edinburgh, in 1793, and how it caused him to modify his eulogy to mollify those intent on finding something seditious in “Wealth of Nations”).

Several prominent friends of Smith’s recanted, effectively, and relations with Edmund Burke cooled somewhat. See too William Playfair's edition annotated edition of the "Wealth of Nations", 1806.

In the intervening years, the ‘left’, since it became socialist or communist, became enamoured with the power of the State and its governments which sacrificed Natural Liberty (free markets within the law) in favour of State ownership, national planning and antagonism to the private sector, i.e., not the Smithian agenda. The baton was picked up by the rightwing Tories, though not implemented in any recognisable Smithian manner (e.g., substituting public with private monopolies regulated by the state instead of competition). The Blair government took over this agenda, driving the Tories in defeat to adopt more extreme market stances, which are not Smithian (the myth of laissez faire, etc.,).

The ‘right of centre’ views held by William Rees-Mogg are not ‘rightwing’ counter-poised to ‘leftwing’ New Labour; they overlap as both shade into of a general rightward shift of UK politics. Distinguishing among the ‘rightward’ trends to find the radical Natural Libertarian Smithian strains is hopeless. A rump of Marxist and socialist refugees, who lost an ideology with the fall of Soviet Communism and now seek a route to revival via masquerading as ‘environmentalism’, represents the convalescing ‘left’.

What Blair/Brown, or Rees-Mogg and the contending leaders of the Conservative Party, make of their duopoly of the ‘right’ part of the spectrum is yet to be seen. Brown at least begins with his recent grasp of the Smithian mantle and Blair is advised to choose the ‘Third (Smithian) Way’. How close either of them will be to the radical Adam Smith is not clear yet.

From the Department of Weird Interpretations of Adam Smith

In Executive Intelligence, 7 October 2005 Issue:

"From Kant to Riemann: The Shape of Empty Space"

by Lyndon H. LaRouche, Jr.September 10, 2005

"Leibniz-hater Kant reflected his father's Scottish origins in the worst possible light, in his role as the intellectual lackey of the mentally unstable David Hume, until the concluding decades of Kant's own life. Then, Kant openly broke his official intellectual ties with Hume, and subsequently produced the series on the subject of so-called "Critical Philosophy" published during the 1780s and early 1790s.The pivot of Kant's break with Hume had been the implications of the American Revolution's Leibnizian philosophical triumph over the Anglo-Dutch Liberalism represented by John Locke and, more immediately, Hume, and by the hater of the American Declaration of Independence, Lord Shelburne's lackey Adam Smith. The implications of that are underlined by the fact that Smith's most celebrated writing, his so-called The Wealth of Nations, is a propaganda tract which was predominantly a ranting spew of hatred against the cause represented by the U.S. Declaration of Independence."

That has got to be the weirdest interpretation of Smith's "Wealth of Nations" on the subject of American independence that I have ever read. It is so off line as to be a parody, and a mischevious one at that. Smith's entire Lectures on Jurisprudence (1763), extolling the virtues of democratic governments, republican even, habeas corpus, trial by jury, election to parliament, separation of powers, opposition to the divine right of monarchy, independence of the judiciary, and, of course, Natural Liberty, suggest that Lyndon H. LaRouche, Jr, is eccentric in his world views, unless the US Declaration of Independence he reads is not the one I read (and the Founding Fathers wrote).

Let Debate Begin

In line with my hopes yesterday that the new Adam Smith College (a merger of two local technical colleges) presaged a renewed interest in the works of Adam Smith, its students (or rather 30 of them, out of 20,000) have voted (unanimously!) to name the Students’ Association (an official, but independent, organisation formed in all colleges and universities to represent the interests of students, nominally to run college funded welfare, food and accommodation services, etc.,), as the “Jennie Lee Students Association”, named after a local early 20th century socialist MP, high up in the pantheon of the Labour Party, and not, as is normal, after the name of the college or university.

A student activist, Paul Muirhead, gave what can only be described as a most extraordinary explanation for this decision, at least according to Tom Brown (Sunday Times) and Murdo Macleod (Scotland on Sunday):

“We didn’t feel that Adam Smith represented the values a student association should stand for.

He is associated with socio-economic policies that work against the people, that were synonymous
with Thatcherite and Reaganite governments.

Jennie Lee would be an excellent role model for the students because of the courage and conviction
she showed in achieving the aims she believed passionately in.

This isn’t an attack upon Adam Smith as a person, but upon what his name has come to represent.
Adam Smith’s name is linked to exploitation and greed.”

Now before I tackle some of the strange ideas in Paul Muirhead’s explanation, I should make clear that what a Students’ Association calls itself is the absolute right of its members to decide. I believe that to be a proper and general principle in the governance of a college. Of course, choosing the names of particular people opens up prospects of continual controversy among their members. People who are not sympathetic to Jennie Lee (on political not personal grounds; she was throughout her political career a well-loved person), because they hold to different non- and anti-socialist politics, could strive to change the name to somebody else’s, and, if successful, cause a counter-reaction to change it back, and so on ad infinitum.

But that is the usual stuff of student gesture politics and those who have spent many years on the campus will treat these little contra-tempts on the fringes of student life with all the stoic equanimity they can muster.

Mr Muirhead’s assessment of Adam Smith is so wrong it is hard to believe anybody could come to those conclusions other than via second-, third- or higher-hand assertions from somebody who never read either of Adam Smith’s two books, ‘Moral Sentiments” or “Wealth of Nations”. It is absolutely obvious that Mr Muirhead has not yet read them too.

Interestingly, Mr Muirhead and his 29 colleagues do not base their case against Adam Smith on what he wrote, or said in his lectures, either in Edinburgh (1749-51) or Glasgow (1751-64), or his correspondence, or his advice to Government Ministers while he was alive (1723-90), which are the only things he is answerable for, but they take their stance on what Adam Smith’s name has ‘come to represent’ over 200 years later! For serious students this is an extraordinary stance to take and we can only hope that with maturity they will realise how uncomfortable their posture appears.

Adam Smith never advocated, excused or endorsed greed in any form. Throughout his works he held contemptuous the ‘vile’ behaviour of the ‘rulers of mankind’, the propensity of ‘merchants and manufacturers’ to monopoly and to conspiracies ‘against the interests of consumers’, he described a government of such people the ‘worst’ that could happen, and, if he had a fault, it was his pessimism that these would not be changed quickly (a view endorsed by experience; but that is hardly the fault of Smith’s; after all Jennie (later Baroness) Lee was a minister in the Wilson government that exhibited some of the features criticised by Adam Smith).

The main charge against Adam Smith appears to be that “He is associated with socio-economic policies that work against the people, that were synonymous with Thatcherite and Reaganite governments.” That Prime Minister Thatcher and President Reagan’s administrations masy have liked rhetorically to associate Adam Smith with their policies, may be popularly believed. However, it would make an interesting term essay for Mr Muirhead and his 29 colleagues to write 2,000 words each identifying both which policies they pursued in the 1980s that can be credited to Adam Smith’s Works, and, even more interestingly, which they pursued that were contrary to his Works. A clue for the latter would include protectionist agricultural regimes and legal actions to weaken trade unions.

Readers of Lost legacy will know what is thought of the people who purloined Smith’s legacy in the 19th and 20th centuries and distorted it for uses which were contrary to his intentions, the words he used and what he meant. But, again, that is no excuse to damn a person for speaking truths, ‘twisted by knaves as a trap for fools’, even if it happened long before we, and the students, were born.

Educated people are expected to rise above the tabloids to that of informed assessments of people and their ideas. Students, who are in mid-course, are especially vulnerable to picking up ideas and notions without checking the original sources (as their tutors should remind them).

By naming the college in Adam Smith’s name they are honouring a world-renowned figure in the history of ideas and a leader of the European Enlightenment (perhaps Mr Muirhead should contemplate what Adam Smith and others, like David Hume, were fighting against in their advocacy of Enlightenment, a wholly radical struggle against the forces of reactionary darkness which Mr Muirhead now, thankfully, is not subjected to, er, thanks to people like Adam Smith, whom he believes does not represent the 'values' of his students; a most shocking charge born of, apologies but I can only describe it as ignorance).

This is an opportunity for Smithian-minded people to engage in the modern debate to restore his legacy.


PS: Murdo MacLeod's (Scotland on Sunday) piece carries a small summary of Adam Smith's life. It includes the following:

"In his seminal work, The Wealth of Nations, he studied the "invisible hand of the market" and the book later became ther foundation of free-market economics".

Smith never studied the "invisible hand of the market". The metaphor referred to the unintended consequences of human motivation and did not refer to markets, of which he wrote much, explained how they worked and why there was nothing mysterious about them. No wonder young students are easily misled.

Beware the Doomsters (especially masquerading as environmentalists)

Marxist thinking about the future has always been accompanied by deeply pessimistic forebodings of doom. Apart from the mysticism with which its founder wrapped his analyses, beginning with the commodity, like some old-Roman soothsayers looking for auguries, so John Foster Bellamy, reports ‘signs’ of an impending catastrophe from of predictions based on a collection of vague propositions (all that’s missing is the heavy thunder and lightning on the eve of the Ideas of March).

John Bellamy Foster (Monthly Review) finds his auguries using the language of ‘virtual certainty’…’ soon be crossed’…‘portentous implications’ … ‘growing worries’…’ worst case scenario’… ‘led scientists to conclude’ … ‘It is now clear’ … ‘within a few years’ … ‘confronting diminishing and ever more difficult to obtain’ … ‘facing global water shortages’ … ‘a bubble economy based on the unsustainable exploitation’ … ‘species extinction rate is the highest in 65 million years with the prospect of cascading extinctions as the last remnants of intact ecosystems are removed’ … ‘threatened with rapid annihilation’ … ‘ecological collapse of past civilizations’ … which is ‘now increasingly seen as extending to today’s world capitalist system’.

Foster's conclusion: “The most developed capitalist countries have the largest per capita ecological footprints, demonstrating that the entire course of world capitalist development at present represents a dead end.”

This is an interesting inversion of Karl Marx’s prediction about capitalism: his increasing poverty of the labouring poor is now turned into a current Marxist prediction that people living in capitalist societies will thirst to death from their increasing wealth or choke to death from pollution, and similarly for those tens of millions of Chinese and Indian poor now joining market economies through international trade (which Foster considers a bad thing for their future, a position he takes from the vantage point of rich Massachusetts, not a poor peasant's paddy field).

In this regard, Foster, quotes from a book review: "One in four people in the world today do not have access to safe water.” (Bill McKibben, New York Review of Books, September 25, 2003) My question is not on the accuracy of that statement, it may well be true, but it would be interesting to have the data that shows, how many out of four or ten people in the whole world had access to safe drinking water 50, 100, 200 or 2,000 years ago, without water purification, piping and taps in or near the household? (Remember, males regard in pre-market societies, collecting and carrying water unambiguously a woman’s job, and where the water supply in poor countries is supplied by the State, it is pretty toxic for all that.)

Foster moves his appeal to: “many environmentalists now believe that technological revolution alone will be insufficient to solve the problem and that a more far-reaching social revolution aimed at transforming the present mode of production is required.”

A most interesting idea: because ‘many [anonymous] environmentalists’ believe something, it must be true! Could it be that they have an interest in asserting any belief that justifies their pessimistic beliefs? That in itself is no reason to believe anything that ‘many’ of them believe.

The answer lies, Foster believes in the work of the “Global Scenario Group (http://www.gsg.org), a project launched in 1995 by the Stockholm Environmental Institute to examine the transition to global sustainability”. The Global Scenario Group, as its names suggests, “employs alternative scenarios to explore possible paths that society caught in a crisis of ecological sustainability might take." We used to use the same scenario methodology in defence strategy during the Cold War and, in retrospect, we wasted many hours work using fixed projections into the unknowable future - everybody missed the collapse of Communism, as a team I worked with on a three-set scenario, a few months before it happened in 1989. Ever since, I have been a sceptic about scenarios except as a easy way to complete a seminar paper, whose half life tends to be no longer than the first event of the first scenario.

Their culminating report presents three classes of scenarios: "Conventional Worlds, Barbarization, and Great Transitions.” Each scenario is associated with a different thinker: not surprisingly given the level of ignorance about Smith, “Market Forces” is associated with Adam Smith and what a picture they use to paint Smith’s markets:

“Market Forces stands for naked capitalism or neoliberalism. It represents, in the words of the Great Transition report, “the firestorm of capitalist expansion.” Market Forces is an unfettered capitalist world order geared to the accumulation of capital and rapid economic growth without regard to social or ecological costs. The principal problem raised by this scenario is its rapacious relation to humanity and the earth.”

And this spectre is associated with Adam Smith! Which ‘Adam Smith’ are they talking about, given that the Adam Smith of 1723-90 never wrote or suggested anything remotely like what Foster includes in this sorry parody of the Adam Smith in “Wealth of Nations”?

With this assessment, Foster is surely drinking something too strong for his case:

“Market Forces leads inexorably to ecological and social disaster and even collapse.”

His alternative? Try this:

“Put simply, my argument is that a global ecological revolution worthy of the name can only occur as part of a larger social—and I would insist, socialist—revolution. Such a revolution, were it to generate the conditions of equality, sustainability, and human freedom worthy of a genuine Great Transition, would necessarily draw its major impetus from the struggles of working populations and communities at the bottom of the global capitalist hierarchy. It would demand, as Marx insisted, that the associated producers rationally regulate the human metabolic relation with nature. It would see wealth and human development in radically different terms than capitalist society. In conceiving such a social and ecological revolution, we can derive inspiration, as Marx did, from the ancient Epicurean concept of “natural wealth.”

One question: what if Foster's ‘socialist revolution’ failed to ‘generate the conditions of equality, sustainability, and human freedom’ he hopes of it?

And this:

“It must put the provision of basic human needs—clean air, unpolluted water, safe food, adequate sanitation, social transport, and universal health care and education, all of which require a sustainable relation to the earth—ahead of all other needs and wants. Such a revolutionary turn in human affairs may seem improbable. But the continuation of the present capitalist system for any length of time will prove impossible—if human civilization and the web of life as we know it are to be sustained.”

So there we have it: “improbable socialist revolution" might not work (apologies to all those millions, even billions, who die from it) but don’t worry, you were doomed anyway because Foster and the Marxists believe you are (as their predecessors believed capitalism was about to collapse in the 19th and 20th centuries, and Soviet Russia believed their brand of socialism would 'bury' capitalism).

Thus, the latest in chic Marxism, masquerading as environmentalism, with which it profoundly disagrees but, because it remains congenitally hostile to markets to an even greater extent, it is prepared to run with the environmentalists up to a point and then swoop in with is socialist agenda. This reckless pessimism ignores the last century’s experiments with socialist planning which should have been enough to convince them of its failures (at some high cost in human lives destroyed by their Socialist State machines and their planned misery).

That Smith is mixed-up in the minds of the scenario builders in (wealthy) Stockholm is a great pity. They could read what Smith actually wrote about the stationary society in “Wealth of Nations” (Book I.ix.14, page 111; I discuss it in Adam Smith’s Lost Legacy, chapter 50). Meanwhile they should attribute their extreme characterisations of capitalism in their scenarios to themselves and leave Adam Smith out of it.

As for Mr Foster, he should also present his Marxian ideas under his own banner and not slip them in under the false flag of environmentalism (which at root he considers insipid, utopian and off-track).

Note: As it happens, I am reviewing a recent book on Marx’s Capital. I shall post the review here when it is ready and, in it I hope I will have addressed Marx's errors in economics from a Smithian perspective in more detail and more purpose than there is space for in a Blog.

A Name Not an Icon

More on Gordon Brown at Adam Smith College, Fife in The Guardian written by Donald Macleod (30 September) from Brown’s speech as the new Chancellor of the College:

"You can see the frightening range of competition facing our industries and services in every part of the country and every part of continental Europe.

"We are, I know, witnessing the biggest and most dramatic industrial and economic reconstruction that has taken place in our time since the industrial revolution," he said.

Mr Brown added: "Half the world's manufacturing is going to be done in developing countries in a few years' time whereas a few years ago 90% of manufacturing was in Europe and America. The question is how will we, Britain, succeed in this new economy?

"It is an economy where for Britain to succeed we will have to upgrade our skills, we will have to raise our game, and the key to our future will be competing not on low pay but on high skills, indeed one of the creative talents of all our people."

That sums up what’s at stake for the currently industrialised economies – they will have to become pots-post-industrialised and had better start preparing for it now, not with ‘plans’ and ‘strategies, not with state or quango-state sponsored ‘picking winners’ and all the usual failed nonsense of yesteryear, but by taking off the burdens of bureaucracy and corporate taxation of enterprise – if there are viable business alternatives in the offing, leave it to businesses, existing and so-far unthought-of opportunities, to find them.

I fear it will be more of the same old menu – worthy committees set up to do expensively what people can do themselves when they are motivated to do so. This means dismantling parts of the state financed interventionist structure (abolish the department of industry – as relevant as a department of Heraldry was to counter the decline of feudalist agriculture as the new commercial society emerged in the 17th and 18th century) and also reviewing the size of the State at all levels of society – an especially big task for the continental capitalist economies who have gone furthest in spending the fruits of earlier decade on job-eating intervention, instead leaving the wealth creators to invest in future success.

The last paragraph of Macleod’s piece is the usual sting in the tail from The Guardian:

“Kirkcaldy-born 18th century economist Adam Smith is best known for his book The Wealth of Nations, and was adopted as a Thatcherite icon by Conservatives in the 1980s - not a view shared by Mr Brown.”

It’s not a view shared by Lost Legacy either. Sure the Tories made a fuss about Smith in name; one Cabinet Minister, Sir Keith Joseph, described as the party’s ‘intellectual’, going so far as to issue copies of “Wealth of Nations” to his senior civil servants. Their reactions are not recorded.

But the senselessness of this act is that the Conservative Cabinet, including Sir Keith, then studiously ignored Smith’s ideas in the production of the many Acts of Parliament they passed through the House of Commons. (Not even School vouchers!) Smith certainly was not a conservative icon in the Thatcherite mould, and neither, I suspect, will he become one in the Brownite (or even Blairite) mould.