Adam Smith and Religion

Earlier this week I critcised a piece by James K. Galbraith on Adam Smith and Deism, and James has contributed a comment. Please read it by scrolling down the page and opening the comments box. In case his interesting reply is buried, I am replying to it here because the issues raised are important.

It is not part of my 'mission' on Lost Legacy to castigate anybody for what they write about Adam Smith, though I accept I stray unintentionally into irritation on occasion. When I think I see suspect signs that a person making assertions about his legacy who is not familiar with the whole corpus of Smith’s writings, and also his family background (his mother was deeply religious – as I believe was the wife of Charles Darwin), and his personal experiences at Oxford which ended his ambitions to become a Church Minister, I suggest, emphatically, that he or she should read beyond “Wealth of Nations”. This is sincere advice, not a rude attempt at point-scoring.

That James Galbraith teaches from “Wealth of Nations” and is familiar with it is unusual and much welcomed, and I apologise for any hasty inference that he was not familiar with Smith’s political economy. However, I suggest he reads also Smith’s “History of Astronomy”, “On the Formation of Languages”, “Theory of Moral Sentiments”, “Lectures on Rhetoric and Belles Lettres”, “Correspondence” and “Lectures on Jurisprudence”, to appreciate the depth of Smith’s attachment to an evolutionary model of society, from the time of the ‘Brutes’ (the various progenitors of human kind – though Smith in common with contemporaries considered wrongly that the North American ‘Indians’ were examples of the ‘brutes’), through to the fourth age (‘at last’) of commerce. By mid-18th century this approach dominated Scottish and French Enlightenment thinking.

“That … Smith was a deist is relatively non-controversial. It may be a disputable view--I see that you do dispute it--but it is one held by a great many reputable readers, and I don't think I can be faulted for sharing it.”

Of course James Galbraith cannot be ‘faulted’ for accepting what ‘reputable’ readers of Smith have concluded, that Smith, if not religious, was a Deist. But it is also incumbent on us to read for ourselves what we accept uncritically from reputable authorities. I accepted for years the conventional view of Smith and was somewhat shocked to find he wasn’t anything like he is portrayed.

Since the 1980s all of Smith’s Works have been available in a low priced format from Liberty Fund. Smith was not Darwinian is the sense of natural selection, which operates on the individual in a species, not the species itself, but he was evolutionary in that nobody controls, manages or causes, social changes in languages, societal forms, including economics, or moral consensus. Language and learning enable social evolution to spread much faster than biological speciation. Human societies, from the first humans to the 21st century, are only 150,000 - 200,000 years old.

Further, the Deist language that he used (in the absence of Darwinian science) was coded to avoid controversy with the religious zealots (who also intimidated Darwin 60 years later), who were very much in evidence in the Scotland he lived in. In his private conversations he appears to have been relaxed (he writes in one letter about ‘whining Christians’), but in his public writings he was prudentially circumspect, in part to avoid offending his mother. After she died his revisions to ‘Moral Sentiments’ shows consistent watering down or the removal of statements inserted originally to placate religious readers or forestall religious objections. Remember also he tried, unsuccessfully, when he started teaching at the University of Glasgow to gain for permission to start his lectures without the obligatory prayers.

From his friendship with David Hume he was familiar with his scepticism and his criticism of religion, miracles and all. His knowledge of pagan Greece and Rome was used as a means to mock Deist ideas with impunity. His concerns in being asked by Hume to publish Dialogues Concerning Religion posthumously were more about the damage it might do to his own career and standing, rather than Hume’s. His circumspection regarding his mother’s feelings while alive could not have been a consideration after she had died, nor, if he was a religious believer, would his revision of his two Works and the posthumous publication of his History of Astonomy would protect his ‘soul’ after he himself died and was ‘re-united’ with her in the afterlife, which is a clear sign that he did not believe in such an eventuality. Smith also was a close friend of James Hutton, the geologist, who showed the Earth to be far older than Biblical accounts.

I take up this argument more tightly in my forthcoming book on Adam Smith for the ‘Great Thinkers’ series. For the opposite case against my above views on Smith and religion, see Jerry Evensky's excellent new book, “Adam Smith’s Moral Philosophy: a historical and contemporary perspective on markets, law, ethics, and culture,” Cambridge 2005. Evensky, however, also makes an excellent case for Smith’s evolutionary model, with which I completely concur.

Let Students Learn about Scotland's History

Today, 30 November, is “St Andrews Day”, Scotland’s National Day. Lesley Riddoch makes “A compelling case for our classrooms” in today Herald (Glasgow, Scotland) on the day that a petition signed by 1,000 Scots and drawn up by the Saltire Society was presented to Patricia Ferguson, the Education Minister in the Scottish Parliament, lamenting the decline in the teaching of Scottish history and literature in schools (I signed it too, though I rarely sign petitions).

Ms Riddoch (a feisty feminist journalist in Scotland’s media) writes:

“Forged in the Scottish Enlightenment, that ideal would inform the political theories of Francis Hutcheson, Adam Smith and David Hume and other thinkers who viewed "man as a product of history", and whose collective enterprise involved "nothing less than a massive reordering of human knowledge" (yielding, among other things, the Encyclopaedia Britannica, first published in Edinburgh in 1768 and the Declaration of Independence, published in Philadelphia a few years later). Scotland also fielded inventors, warriors, administrators and diplomats such as Alexander Graham Bell, Andrew Carnegie, Simon MacTavish and Charles James Napier, who created empires and fortunes, extending our reach into every corner of the world.”

She also gives an excellent account of Arthur Herman’s book, “How the Scots Invented the Modern World: The True Story of How Western Europe's Poorest Nation Created Our World & Everything In It”, suggesting that Scots created much of the modern world by bringing to it ideas of freedom, self-reliance and moral discipline.

Once again, I am struck by the positive slant that people in Scotland are beginning to put on Adam Smith, where once there was disdain, largely on political grounds, and this is to be welcomed. Ms Riddoch is of the Left in Scottish politics (and we do not always agree) but on the place of Adam Smith in the context of the Scottish Enlightenment she is right (a contrast I must say to those leftwing students at Adam Smith College recently, who voted to disassociate their Students Association from Adam Smith in favour of Jennie Lee).

Irwin Stelzer on Adam Smith

Irwin Stelzer, director of economic policy studies at the Hudson Institute and the author of Neo-conservatism, writes a racy piece today in The Guardian (UK), “In the showdown of David and Gordon, there's only one Goliath”. ‘David’ is David Cameron, the front-runner to be the new Leader of the Conservative Party and ‘Gordon’ is Gordon Brown, labour’s Chancellor of the Exchequer.

This paragraph is a little gem:

“Then there is the question of just what kind of society we would like Britain to become. My own preference is for the society described by Adam Smith, but the Adam Smith of The Theory of Moral Sentiments as well as The Wealth of Nations - perhaps best described as a nation that achieves the efficiencies of free trade and competition without sacrificing the moral sensibility that must underlie those policies. The Tories are very well versed in The Wealth of Nations, but my impression is that the majority are less sensitive than the chancellor to the strictures of the Smith of The Theory of Moral Sentiments.”

I am not so sure that the Tories are ‘well-versed The Wealth of Nations” because they are as liable to be selective in their quotations as politicians elsewhere, have never read the book itself, and usually have bought into the wholesale distortion of Smith’s legacy as laissez-faire capitalism.

Nor am I sure that the chancellor needs to adhere “to the strictures of the Smith of The Theory of Moral Sentiments”, as if this will ‘correct’ something he might read in “Wealth of nations”. His two books are not in opposition to each other. “Wealth of Nations” is not about a naked market economy, somehow separate from “Moral Sentiments”. They both follow a common theme and adhere to a common historical, evolutionary process.
It is not a case that “Wealth of Nations” is devoid of moral issues – in all cases where the interests of the labouring poor are jeopardised by monopoly and employer ‘combinations’, Smith comes down in favour of a moral stance and not an acceptance of blind market forces, and his whole approach to the growth of wealth is to favour it because in part of its beneficial affects on the households of the labouring poor. That Tories have not read “Wealth of nations” means they do not know about the moral compass of Smithian growth this work contains.

That very few Tories and Labour supporters have read both books accounts for the ignorant hostility to Adam Smith’s ideas and the distortions of his reputation.
However, that Irwin Stelzer has taken Adam Smith’s legacy so positively in today’s Guardian, is an excellent sign of changes in the public image of Adam Smith and for that ‘Lost Legacy’ is grateful.

Read Irwin Stelzer’s article at:
http://politics.guardian.co.uk/toryleader/comment/0,16473,1653695,00.html

Regrets we have a few

Paul McDougal contributes to a news story of a criminal act following the purchases of several items on eBay on Information Week (Business information powered by technology) (read the story at: http://www.informationweek.com/blog/main/archives/2005/11/ebay_hears_and.html)

He opens with:

“Is eBay Adam Smith's perfect market, where prices are set by the honest interaction of buyers and sellers and everyone goes home happy--or is it simply the perfect vehicle for price gouging--and much, much worse? The short supply of Microsoft's Xbox 360 means the game system is now fetching up to $1,000 on eBay. Fair enough, if a gamester really can't wait a few more weeks to play the 360 version of Call of Duty 2 or NBA Live 06 then it's their money, right? Sure, but eBay's willingness to turn a blind eye to scalping, copyright infringement and the sale of questionable goods has a darker side that proved very convenient for a creep.”

What a confusion of ideas. ‘Perfect markets’, what are they? Perfect absence of markets, are they any better? Markets are composed of the actions of dispersed human beings. There is no pre-qualification process to go through to engage in a market transaction, and I am sure Paul McDougal cannot think of one, nor anybody else, in a multi-million populated country. Even in a small village of ten families such a regime would be tyrannical and open to abuse, as well as, over the generations, open to some jerk getting round the ‘rules’ by deceit.

However, the other points in the paragraph are typical of sneers at markets. Ebay, the ‘perfect vehicle for price gouging’? I am often at a loss to understand what is meant by the notion of ‘price gouging’ and find its regular appearance in newspapers and politicians speeches strange.

A remedy for ‘price gouging’, by which its users seem to mean ‘higher prices’ than they normally expect to pay, is not to purchase. I am not in the market for ‘Xbox 360’, so $1,000 is not going to be instrumental in my decision to buy. If you are searching in such a market, and ‘cannot wait’, that, Sir, is your problem, not mine or anybody else’s. What does Paul suggest the community does about it: make the law one in which buyers determine prices?

My local football team (real football where the players kick the ball, sometimes each other, but they do not carry or catch it and run with it) charges £80 for a comfortable seat and refreshments in a comfortable lounge in the ‘corporate’ section of the ground, instead of £20 in the ordinary seats elsewhere. It’s my choice to pay four times more to watch the same game. And that is what markets are about: choice.

If buyers do not exercise the choice of not buying they accept the price chosen for the transaction by the seller. How we can meaningfully and practically intervene in the buyer’s choice is not clear. You could appeal to the seller’s sense of ‘fair pricing’, though I have never met a seller yet, who pocketing a high price who would not be even happier with a higher price. Nor, have I met a buyer yet who paying a low price who would not be happier with an even lower price.

Of course, on occasion, happily rare for most of us, addicts excluded, the transaction does not involve much choice at all. You need the object held by the seller to a degree that means you just have to complete the transaction. If the seller knows or suspects this as your situation, a high price is inevitable. Predictably, where many potential buyers are in the market at that moment, some, maybe many, will drop out; those left in will pay up. If they cannot pay, they may resort to violence, if within arms length of the seller. That then becomes a legal issue, not an economic one.

Adam Smith did not write about ‘perfect’ markets and nor did he assume, or assert, that everyone ‘goes home happy’. Paul McDougal’s mocking sarcasm mocks his own scanty knowledge of how markets work, the role of choice and, also, for those who leave any market empty handed, the role of disappointment. To which we can add the role of “buyers’ regret” – which kicks in after my local football team loses, the Xbox 360 comes down in price a short time later, and the high priced ‘gas’ in the tank is useless because the flood waters block the road out of town.

That’s life Paul, and nothing in it is perfect.

Food for Thought?

“Adam Smith’s Lost Legacy” is quoted (favourably) in a lecture given by Ian Maclean (Nuffied College, Oxford University) at MZES/Facultat Kolloquium, University of Mannheim, on 15 June 2005.

Read it: “Adam Smith and the Modern Left”, lecture delivered by Ian Maclean (Nuffied College, Oxford University) at MZES/Facultat Kolloquium, University of Mannheim. 15 June 2005. It is available at: http://www.nuffield.ox.ac.uk/Politics/papers/2005/mclean%20smith.pdf

Only caveat, Ian Maclean talks of Adam Smith's 'canons' of taxation - they were 'maxims', not canons.

Spreading the Word no 6

Economics Roundtable hosted by Professor William R. Parke of the University of North Carolina, Chapel Hill. (Contact info: bp-at-rtable-dot-net) carries the entire Lost Legacy set of Blog messages. Visit it at:http://www.rtable.net/index/rt/economics/226/ and scroll through them for handy reference.

Misuse of Public Funding?

From the Globalisation Institute Bulletin (free by email from Globalisation Institute [bulletin@globalisationinstitute.org]) the piece below is extracted:

There have been increasing murmurings about the activities of the “Trade Policy Unit” inside Christian Aid (a respectable authority on practical policies for development). The Trade Policy Unit appears to be highly politicised, which is OK in itself, but these activists reveal their politics under the cover of Christian Aid to pursue policies that make poverty worse, and more certain:

“Christian trade”

It's not been a good month for Christian Aid's Trade Policy Unit (CA-TPU) which, using DFID funding, had been screaming about "the slavery of free trade". First David Cameron and then David Davis came out and said Christian Aid's Trade Policy Unit is wrong, then the Lib Dem's Shadow Chancellor Vincent Cable was critical... and Prime Minister Tony Blair keeps saying that free trade is the answer. Martin Wolf in the Financial Times described CA-TPU's position as "incoherent".

Paul Staines, writing on the GI website, says: "In truth it seems to us as interested observers that there are two Christian Aids. There is the real Christian Aid that raises money for humanitarian causes, famine, flood and earthquakes, the Christian Aid of church and school fundraising rounds that we all know and which is widely supported. And there is the other Christian Aid found in its highly-politicised Trade Policy Unit (CA-TPU)."

‘DIFD’ is the Department for International Development, a government department funded by British taxpayers, which replaced the Overseas Development Agency (ODA). In the 1980s I was a member (later Chairman) of The UK Standing Commission for Social Sciences, which came within the ODA to represent Britain on UNESCO, and I am familiar with how government departments behave when dealing with controversial issues.

Using public funds to subsidise and fund political activists is at best ‘irregular’ and Christian Aid (a popular charity) should audit what its small Trade Policy Unit is doing and saying, and take steps to curb irregular use of public funds (I am being diplomatic here).

Meanwhile, sign up to the Globalisation Institute for regular receipt of its Bulletins.

Full Text of David Henderson's Prize Winning Article

Great News: Below is the article by David Henderson mentioned earlier , published in AntiWar.com, which I received permission to republish twenty minutes ago, and I do so with pleasure. More than 19 out of 20 articles mentioning Adam Smith in them go on to repeat inaccurate statements and attributions(theories of 'invisible hands'; 'father of laissez-faire economics'; 'minimal state sectors'; contradictions betweem 'Moral Sentiments' and 'Wealth of Nations'; only markets matter; 'Homo economicus' and 'Selfishness' drives markets' etc.,).

It is a pleasure to praise accuracy in the use of his legacy. David Henderson does this and for that he is awarded the November 'Lost Legacy' Prize. Congratulations, David, and Anti War.com. Well deserved:

"Adam Smith's Economic Case Against Imperialism

David R. Henderson

Sometimes, when I recommend that people read Adam Smith's Wealth of Nations (the full title is An Inquiry into the Nature and Causes of the Wealth of Nations), I am met with a supercilious snort, as if nothing that was written in 1776 could be relevant to today. A very common attitude seems to be, "That is sooo 18th-century." I think what it really shows is that the "snorter" has simply not read Adam Smith. Smith's book is chock-full of insights: that when competitors get together they often collude; that governments can't stop such collusion but should refrain from facilitating it; that countries with private property, free trade, and low taxes are the ones that do well; that the incentives of universities are so messed up (yes, even back then) that much less learning takes place than could; and, of more immediate interest, that imperialism doesn't work.

You read it right. Adam Smith was one of the most outspoken, clear-thinking, and well-reasoning spokesman against imperialism in the 18th century. One particular imperialist this Scotsman took on was Britain, and one particular instance was Britain's trying to hold on to the 13 colonies. Smith didn't chant some 18th-century version of "No blood for oil." Instead, he calmly and numerately toted up the costs of imperialism to the British people, estimated the benefits to Britain, and concluded that the costs greatly exceeded the benefits.
The benefits, in Smith's estimate, were the monopoly profits that British merchants had on sales to consumers in the colonies. The costs that Britons bore were the costs of using the military to defend that monopoly. Here's an excerpt from Smith:

"The maintenance of this monopoly [on trade with the American colonies] has hitherto been the principal, or more properly perhaps the sole end and purpose of the dominion which Great Britain assumes over her colonies. … The Spanish war, which began in 1739, was principally a colony quarrel. Its principal object was to prevent the search of the colony ships which carried on a contraband trade with the Spanish Main. This whole expence is, in reality, a bounty which has been given in order to support a monopoly. The pretended purpose of it was to encourage the manufactures, and to increase the commerce of Great Britain. But its real effect has been to raise the rate of mercantile profit. … Under the present system of management, therefore, Great Britain derives nothing but loss from the dominion which she assumes over her colonies." 1

Later, Smith elaborated, showing that the costs to the British government of defending the 13 colonies were greater than the benefits to the British. He wrote:

"A great empire has been established for the sole purpose of raising up a nation of customers who should be obliged to buy from the shops of our different producers all the goods with which these could supply them. For the sake of that little enhancement of price which this monopoly might afford our producers, the home-consumers have been burdened with the whole expence of maintaining and defending that empire. For this purpose, and for this purpose only … a new debt of more than a hundred and seventy millions has been contracted over and above all that had been expended for the same purpose in former wars. The interest of this debt alone is not only greater than the whole extraordinary profit which it ever could be pretended was made by the monopoly of the colony trade, but than the whole value of that trade…." 2

That's not all. Smith pointed out that the costs and benefits of maintaining the colonies were not symmetrically distributed and that this accounted for why the British wouldn't give up their colonies voluntarily. Consider this justly famous passage.

"To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers. Such statesmen, and such statesmen only, are capable of fancying that they will find some advantage in employing the blood and treasure of their fellow-citizens to found and maintain such an empire. Say to a shopkeeper, 'Buy me a good estate, and I shall always buy my clothes at your shop, even though I should pay somewhat dearer than what I can have them for at other shops'; and you will not find him very forward to embrace your proposal. But should any other person buy you such an estate, the shopkeeper would be much obliged to your benefactor if he would enjoin you to buy all your clothes at his shop." 3

In other words, Smith is saying, the costs of maintaining colonies in order to maintain a preferential trade arrangement exceeded the benefits – thus his statement that the project is unfit for a nation of shopkeepers. But the cost to the shopkeepers is a small fraction of the cost to Britain – they pay only their pro rata share – whereas the shopkeepers get the lion's share of the benefits. If the shopkeepers had to bear the whole cost of the arrangement, the benefits would not be worth it. Thus his analogy to the sucker deal that someone hypothetically offers a shopkeeper: buy me a house and I'll promise to buy all my goods from you from now on. The shopkeeper would quickly reject such a deal. But if the shopkeeper can find others to pay for the house and he pays only a fraction, the deal might be in the shopkeeper's interest. Using the asymmetric distribution of costs and benefits to explain why governments take actions that are not in the general interest – whether the special interest benefited be farmers, seniors, or Northrop Grumman – has become part of the tool kit of the modern economist, due to the "public choice" revolution started by James Buchanan and Gordon Tullock. But notice that Smith had the idea two centuries earlier.

Smith believed the British government would try to hang on to colonies by force. Smith wrote:

"To propose that Great Britain should voluntarily give up all authority over her colonies, and leave them to elect their own magistrates, to enact their own laws, and to make peace and war as they might think proper, would be to propose such a measure as never was, and never will be adopted, by any nation in the world. No nation ever voluntarily gave up the dominion of any province, how troublesome soever it might be to govern it, and how small soever the revenue which it afforded might be in proportion to the expence which it occasioned. Such sacrifices, though they might frequently be agreeable to the interest, are always mortifying to the pride of every nation, and what is perhaps of still greater consequence, they are always contrary to the private interest of the governing part of it…." 4

Smith even predicted the Revolutionary War and implicitly predicted its outcome. He wrote:

"[I]t is not very probable that they will ever voluntarily submit to us; and we ought to consider that the blood which must be shed in forcing them to do so is, every drop of it, blood either of those who are, or of those whom we wish to have for our fellow-citizens. They are very weak who flatter themselves that, in the state to which things have come, our colonies will be easily conquered by force alone." 5

Wise words from a wise man.

Notes
1. From Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, ed. Edwin M. Cannan, Chicago: University of Chicago Press, 1976, Volume Two, Book IV, Chapter VII, Part III, pp. 130-131. Available online at: http://www.econlib.org/library/Smith/smWN.html. 2. Ibid., Volume Two, Book IV, Chapter VIII, p. 180. 3. Ibid., Volume Two, Book IV, Chapter VII, Part III, p. 129. 4. Ibid., Volume Two, Book IV, Chapter VII, Part III, p. 131. 5. Ibid., Volume Two, Book IV, Chapter VII, Part III, p. 138.

Copyright © 2005 by David R. Henderson. Permission automatically granted to use in whole or in part as long as publication, author, and title are attributed.

A University Teacher makes a Monumental Error About Adam Smith

James K. Galbraith, teaches economics at the Lyndon B. Johnson School of Public Affairs at the University of Texas-Austin., and he previously served in several positions on the staff of the U.S. Congress, including executive director of the Joint Economic Committee. He has an article published in “Mother Jones” (28 November): “Smith v Darwin”, carrying the sub-title: “Like Intelligent Design, the idea of the Invisible Hand stubbornly persists in the face of overwhelming evidence.”

Not having any sympathy for the Intelligent Design movement in the USA (otherwise known as ‘creationism’, via a back door), I approached this article with mixed feelings. My reading of Adam Smith suggests exactly the opposite conclusion, but then I base my assessment on what Adam Smith actually wrote and not on what the Chicago school of economics, with help from Paul Samuelson, transformed Adam Smith’s ideas into, an axiomatically self-interested obsessive theory, also known as ‘Homo economicus’.

To miss the point that Adam Smith brought to all of his work, whether on the origins of languages, the history of astronomy, the history of human society, the development of human kind through the four stages (gatherer-hunter; shepherd, farmer and commercial society), the origins of the division of labour, the evolution of moral sentiments through the impartial spectator and what we now call socialisation, is an error of the highest magnitude, indicating that James K. Galbraith, whatever his other merits, has not read Adam Smith’s actual Works. Smith was steeped in the evolution of human society. He did not anticipate the origin of species, but he certainly did anticipate the evolution of human society.

He writes:

“Economists, on the other hand, have been Intelligent Designers since the beginning. Adam Smith was a deist; he believed in a world governed by a benevolent system of natural law. Consider this familiar passage from Wealth of Nations, published in 1776, with its now mostly forgotten anti-globalization flavor:

"By preferring the support of domestic to that of foreign industry [every individual] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention…. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it."

What a misreading of a passage in “Wealth of Nations”! It is actually part of Smith's evolutionary approach and nothing to do with “globalisation” (please read the whole chapter, not just a quotation). He argued that capital stock would first be used in agriculture, then in domestic manufactures and finally in foreign trade, each phase spilling over its surplus capital into the next stage as it progressively developed (he was actually somewhat disappointed to observe that the neat sequence was not followed in Europe; ‘too much’ was going into manufacturing and not enough into ‘improving agriculture’).

His point in this passage was that holders of capital stock prefer to develop locally first because of the scarcity of capital stock and the risks of distant ventures (it was the turbulent 18th century!). He had no doubt that overseas ventures would feature in due course (otherwise there would be little growth towards home opulence if activity was confined to a locality only, and his theory of absolute advantage would be redundant).

I have argued in “Adam Smith’s Lost Legacy” (Palgrave, 2005) that Smith’s alleged Deism is in doubt, as most certainly were his alleged religious beliefs, and I develop this theme in my forthcoming book on Adam Smith for Palgrave’s “Great Thinkers in Economics” series.

James writes:

“Smith's Creator did not interfere. He simply wrote the laws and left them for events to demonstrate and man to discover. The greatest American economist, Thorstein Veblen, observed that "the guidance of…the invisible hand takes place…through a comprehensive scheme of contrivances established from the beginning." What is this if not Intelligent Design?”

To describe Thorstein Veblen as “the greatest American economist” is overly generous (which is an opinion and as such is open to debate), but to bring in the isolated metaphor of the invisible hand as if it was a theory or an explanation of anything is gratuitous exaggeration.
Smith used the same metaphor three times only, in three separate works: ‘The History of Astronomy” (1743-48 and first published posthumously in 1795), where it refers to pagan superstition, code for all religious belief); ‘Moral Sentiments’ (1759), where it refers to the distribution of surplus product on feudal estates which maintained retainers, and serfs, in much the same amounts as would be produced by them if the land was divided equally; and in “Wealth of Nations” (1776) in respect of human motivation (nothing to do with markets). In fact, the metaphor was not Smith’s; it was Shakespeare’s (Macbeth: 3: 2), ‘thy bloody and invisible hand’. James K. Galbraith is reading too much into the presentation of a metaphor in secondary sources and not enough into Smith’s actual use of it.

Whatever the value of Veblen’s critique of economics, post-Darwin, the subject had moved on a great deal from the political economy of Adam Smith (he died in 1790). Far from there being “too little … material process and ‘cumulative or unfolding sequence’ ”, all of Smith’s extant works say exactly the opposite. James should read his “Lectures in Jurisprudence” and be ready to be amazed at the extent of Smith’s analysis of ‘material process’ and ‘cumulative and unfolding sequence[s]’.

James K. Galbraith continues:

“Evolutionism, in the Darwinian form that cannot be reconciled to God's design or even to the Invisible Hand, remains a pure—if I were religious I would say sublime—product of free human thought.”

I agree, I agree! If you end the confusion about Smith’s evolutionary assessment of society with alleged religious design you might just come to appreciate the ‘product of [his] free human thought’.

The only reason the invisible hand metaphor “stubbornly persists in the face of overwhelming evidence” is because people like James K. Galbraith have bought into the false prospectus that it is something far more important or relevant to Smith’s thinking than it ever was to him. For the cause of this misinterpretation, don’t look to Adam Smith, look to how it has been presented in Economics 101 all over the USA.

Nobody who reads Smith’s actual Works in the whole can possibly hold to a view of Smith as the “High Priest of Capitalism”, “Father of Laissez-faire”, advocate of “Selfishness and Greed”, founder of the sole motivation in a society based on “self-interest”, author of two contradictory Works, “Moral Sentiments” and “Wealth of Nations”, and advocate of the “minimal night-watchman state”.

As for intelligent design and creationism, taking his writings out of the context of the repressive religious climate of mid-18th-century Scotland (much like today’s Iran), with zealots patrolling within earshot and sight of everything anybody in public life said or wrote for the faintest sign of apostasy, due allowance must be made for how Smith expressed himself prudently.

My challenge to James K. Galbraith is to read Adam Smith’s Works and not to rely on second- or third-hand accounts of his writings. I say, no more; for goodness sakes James, do Smith the justice and the courtesy of condemning him for what he did write, not what you have heard he wrote.

Smith on Colonies, Empire and War - Winner of the November "Lost legacy Prize"

David R. Henderson, a research fellow with the Hoover Institution and an associate professor of economics in the Graduate School of Business and Public Policy at the Naval Postgraduate School, writes on Adam Smith’s attitude to colonies and Empire in Anti-War.com ( read the full article at: http://www.antiwar.com/henderson/?articleid=8159)

Entitled, “Adam Smith’s Economic Case Against Imperialism” it correctly summarises his views on the then current ‘disturbances’ in the American colonies. While Smith was careful how he phrased his sympathy for the rebellion against the British Crown it is fairly clear where his sympathies lay. His case against going to war to hang onto the colonies was economic: it cost £170 million to defend a colonial trade worth £20 million.

From Smith’s “Lectures in Jurisprudence” (1763-4; first published nearly a hundred years after he died and reprinted in the Glasgow edition of the Works and Correspondence of Adam Smith, Liberty Fund, 1982) we see his adherence to liberty and democratic, essentially republican, values: independent judiciary; laws made by the legislature, not judges or the executive, i.e., the separation of powers; Habeas Corpus; trial by jury; power of impeachment of the Executive by the legislature; regular and frequent elections to the legislature, all of which featured strongly in the US Constitution from 1783.

David Henderson makes an excellent read and you are strongly recommended to visit Anti-war.com at http://www.antiwar.com/henderson/?articleid=8159

One comment may be in order. Adam Smith was not a pacifist. Several of his male relatives on his mother’s side were soldiers and he speaks highly of ‘martial values’ in both “Moral Sentiments” and “Wealth of Nations”, despises cowardice, preferred a standing army to a militia (except when the militia had been in the field for long enough to be as good as or better than a standing army) and generally considered a soldier’s life ‘honourable’.

Henderson quotes Smith’s views on policy in fighting certain wars which he regarded as wrong headed. On the issue of the ‘first duty’ of government, that of protecting society “from violence and invasion of other independent societies’ by means “of a military force”, he was unequivocally supportive (WN: Book V). The failure of Rome to defend its people from the invasion of the barbarians led to a thousand years of the ‘dark ages’, the destruction of civilisation, and the spread of rapine and disorder, amidst countless local wars.

Usual Service from Roy Hattersley

Roy Hattersley, a former Labour cabinet minister in the 1970s, writes in his usual column in The Guardian, 28 November, his usual controversial piece putting the world to rights, as he sees it. On this occasion too he manages to argue a case with his usual aplomb and total disregard for his contradictory notions, but with his usual total conviction.

The subject is the price of gas – not the kind that goes into US SUVs; the kind that fires power stations. Mrs Thatcher’s governments that followed the ones that Roy Hattersely served, de-nationalised the gas industry and called it privatisation. Continental governments did not follow suit. Theirs remain under state control.

Now that gas prices and supplies are under pressure – there are fears of a cold winter ahead – the privatised British gas industry is under siege. British gas supplies come from both its North Sea gas fields and from the Continent through the UK-Belgium ‘interconnector’. Hattersely observes:

“The British gas market is so "liberalised" that we have to compete for the limited supplies that are available - expensive liquid imports complimenting diminishing North Sea reserves and whatever share of European production comes our way along the UK-Belgium Interconnector.”

He inserts his first hook:

“At the other end of the Interconnector, other governments are doing their best to protect domestic and industrial consumers - whatever Adam Smith may say on the subject”

And how are the nationalized gas suppliers on the Continent ‘protecting’ their consumers?

Why, acting as monopolists and selfishly (there is not other word to use around the likes of Roy Hattersley, who usually doles out the word with no consideration for repetition) refusing to supply gas to their British partners. This behaviour is hardly an exhibition of fraternally solidarity with a fellow member of the European Union. Does Roy Hattersely criticize the behaviours of the state monopolies (he would certainly be trumpeting his criticism if private monopolies did the same)? Not a peep, not a word, not even an iota of reproach.

Worse, Hattersely turns the world and the problem on its head:

“But the problem that British gas consumers face is not the result of a surfeit of state control.”

Excuse me, Roy, but the source of the problem is on the Continent where there is a surfeit of state control and where that state control is depriving Britain of access to gas supplies. Unless, of course, silly me, Roy is blaming the victim not the perpetrator, a stance he usually would condemn when the same ‘method’ is used to blame the poor for being poor, the illiterate for being uneducated, and the victim of rape for being ‘provocative’. Indeed, he confirms his prejudices with the remarkable admission:

“There was a time when the Labour party would have regarded their behaviour as no more than common sense.”

There you have it. State monopolies acting as rampant monopolists against the fraternal relations of other friendly countries are acting with “no more than common sense” when they do so. In the heart of every socialist a nationalist socialist slumbers until stirred to disclose itself, not an internationalist.

His second hook is another go at the victim. Gas prices are:

“…the product of a doctrinal devotion to private enterprise. When fuel bills go up next year, we will all be paying the price of privatisation.”

So it’s the public’s fault for voting to end Roy’s Cabinet career by electing Mrs Thatcher. Defeated politicians nurse for decades their dreams of quiet vengeance for their grievances from loss of office. How Roy’s sense of vindication for those long years in the political wilderness must have risen in his bosom, even a tear in the eye may have blurred his vision, as he wrote those words.

He does not mention his ‘doctrinal devotion’ to state control; no regret that his Continental pals (Roy was foremost among others in the British campaign to join the EEC/EU) are acting in a selfish manner; only a jibe at the lady who defeated him.

He concludes with a reinforcement of his ideological flanks:

“Nobody in their right mind thinks that it is possible to renationalise gas or any of the other public utilities. But the argument in favour of bending the rules of the market towards a regard for the national interest is irrefutable. Our colleagues in the European Union do it. So it is clearly possible. Only ideological prejudice stands in the way.”

Nationalisation is the discredited panacea of the governments Roy Hattersely voted for and served in; it is the socialist remedy that dare not mention its name. So he goes for the second-best socialist remedy: “bending the rules of the market” and claims this ‘argument’ is ‘irrefutable’. Strong stuff indeed. His ‘argument’ relies solely on the evidence that others do it (the alibi of everybody caught speeding, or cheating on their taxes, or their spouse). And note how the people acting against British interests are now our ‘colleagues’ – some colleagues! Not the kind you can really trust, are they Roy.

Still, he does not tell us how the Labour government is supposed to ‘bend the rules’. Yet he opened his piece with a mocking criticism of the Tory leader, Michael Howard, for doing exactly the same:

“Last Wednesday in the House of Commons, Michael Howard - barricaded in the last refuge of opposition leaders who have nothing much to say - called on Tony Blair to do something about rising gas prices and threats to supply without explaining what that something might be. Apparently he had forgotten why ministers are powerless to act.”

Roy clearly misses the knock-about exchanges of his House of Commons days. It’s all a jolly good jape, lads, smirking while we knock the PM (ours too) or the Opposition leader, loud guffaws all round. But what about policy? What exactly is Roy suggesting? Has he anything constructive to say, or is it just more of his opinionated nostalgia?

Adam Smith did not resolve the problem of public or private management of state industries, but he did know what he was against in monopoly, whether of the state or private kind. He was against them, and favoured competition in conditions of Natural Liberty and justice.

Monopolies, plus so-called ’national interests’, usually lead to strife and war. I would have though Roy would have agreed with Smith at least on this. Europe has seen plenty of evidence of the alternative.

Political and Economic Illiteracy

‘Gene’, an American living in the UK, posted on “Harry’s Place” (http://hurryupharry.bloghouse.net/), the following today on the politics and economics of petrol (aka ‘gas’) under the heading ‘Oil companies and Congress enable Chavez propaganda coup’.

"A couple of observations about President Hugo Chavez's program to provide heating fuel at discounted prices for low-income customers in Boston through the Venezuelan-owned oil company Citgo.

--No one should believe that Chavez is more concerned about helping the American poor than he is about scoring propaganda points against the USA. But it would be disgusting for anyone who can comfortably afford to heat his home to criticize anyone who can't for accepting Citgo's help.

--By earning enormous profits at a time of record-high fuel prices-- prices that for many Americans this winter may mean a choice between heating and eating-- US oil companies make it possible for Chavez to score these points. So does Congress by failing to enact a windfall profits tax for the oil industry.

Senator Byron Dorgan, a North Dakota Democrat, has sponsored a bill that would tax profits when oil is above $40 a barrel and rebate the money to taxpayers. The Senate rejected the measure... 64-35.

Senator Charles Grassley, an Iowa Republican, has asked oil companies to donate 10 percent of their profits to help families pay heating bills. The world's five biggest publicly traded oil companies earned a combined $33.4 billion in the third quarter.
Outside of Citgo, the oil companies have refused Grassley's request.
Some US oil executives and politicians ought to be ashamed of themselves. Of course they won't be.”

Comments:
“By earning enormous profits at a time of record-high fuel prices” is a statement of the blindingly obvious. Profits are high because fuel prices are high, all the way through the world's fuel chain. As stocks fall and replacement stocks rise, profits will fall. When fuel prices eventually fall, stocks will eventually sell at a loss below their bought-in prices until these stocks are used up and new stocks purchased at the new lower prices. Hence, the usual price reduction drag whenever this happens.

Is the remedy one of imposing government windfall taxes on the oil companies? This is a double bind. The other – and major gainer – of rising fuel prices, of course, is the government in the tax imposed on, er, fuel prices! This windfall tax gain will continue while oil pirces are high irrespective of costs. Whatever the oil companies rake in from windfall profits (which in due course become windfall losses), the government rakes in from their windfall tax gains, and for which there are no losses. This, incidentally, is why Chavez can afford to play games with gullible US public opinion – it is paid from the additional tax gains his government makes from high world fuel prices.

Senator Byron Dorgan, a North Dakota Democrat, is playing populist politics, which are always short-term with long-term consequences. He wants to add to the windfall gains the government makes from oil price increases a share (everything above $40) of the temporary windfall gains of the oil companies by increeasing their taxation to the government. How this benefits the US consumer is not explained. How would the rebate be distributed? How much of it would be re-distributed to consumers or tax payers and when? A means test – the rich can afford the higher prices, so only the poor get the rebate? How much would go into administration to identify the beneficiaries? More Federal Commissions and new agencies? Or Federal and State enforced cuts in pump prices? How many inspectors would that require? Or would the high costs of the policy simply be deducted from the confiscated windfall profits?

Senator Charles Grassley, an Iowa Republican, wants a 10 per cent deduction from oil profits “to help families pay heating bills”. Really? Who administers this distribution and at what cost? Who identifies the US families that would be eligible? Federal or State government? What rights of appeal would there be for those above the cut off line? Whenever has allowing governments to select revenue from their pork barrels been either an efficient or fair use of government power? What is the expected rate of litigation over these issues?

The fact that so far Senate has rejected such populist nonsense is small comfort. A vote against of 65-34 is worrying; it should have been 99-1. Economic illiteracy is one thing. But illiteracy about the tax and spend (or spend and tax) behaviours of government is quite another.

Lastly, I have advised that the Chavez ‘problem’ should be left alone to wither away as his ‘socialist’ policies impoverish the country and alienate the people. Opportunist populism should be ignored. Do Nothing! Don’t repeat the mistake of past policies with Castro that would give Chavez a political lifeline by doing something – anything – that keeps him in power.

For a country that claims close affinity with Smithian markets (albeit of a distorted kind from the miss-users of Smith’s Legacy), I am astonished that some of the members of its highest office advocate doing exactly what Chavez and is ilk do when they interfere in the economy. It will have the same disappointing results.

Gratitude Compatible With Market Economies

Gregory Rodriguez writes in Los Angeles Times (27 November) on “An attitude of gratitude”, broadly around the US National Holiday of Thanksgiving and raises an interesting point from Adam Smith’s “Moral Sentiments”:

“But perhaps most compelling are the words of Adam Smith — yes, the very economist who argued that self interest was a more powerful force for good than benevolence. Smith considered gratitude to be a crucial source of social civility and stability. He wrote that "the duties of gratitude are perhaps the most sacred of all those which the beneficent virtues prescribe to us." And while he believed that the market should be driven by self-interest, Smith nonetheless knew that a healthy society required its members to be more intimately linked. He even seemed to understand that the cold calculations of a market economy sometimes undermined the conditions that gave rise to the spontaneous expression of thanks.

Perhaps this is why — in our hyper-capitalist society — Americans appear more eager than ever to claim the simple pleasures of gratitude. Over the last decade, there has been an explosion of books on the subject. Psychologists are now finding that an attitude of gratitude can have beneficial effects on an individual's emotional well-being. In 1998, a Gallup poll found that 95% of respondents said that expressing gratitude made them feel at least "somewhat happy," and more than half said that it made them "extremely happy."

Comment:

First, be clear, Smith’s assessments of the virtue of benevolence had to do with the human condition of living under conditions of scarcity. Nobody – other than the Deity - had sufficient goods to spread thick enough to donate to others at a level that would make much of a difference, and certainly no where as near as much as are provide by markets and the division of labour. This did not make markets morally superior to the virtue of benevolence; only more efficient.

The virtues, as Gregory Rodriguez notes, were a powerful “source of social civility and stability” and no society without them would be as pleasant as one that had them. Smith did remark that society could, however, endure for some time without “any mutual love or affection” and could still be “upheld by a mercenary exchange of good offices according to an agreed valuation” (TMS II.ii.3.2, Page 86).

Smith’s approach to the duty of gratitude was to deny the proposition that humans should be motivated by religious principles alone (just because others say that God commands it). The duty of gratitude and the other virtues, instead, should be decided according to “from regard to general rules” and from the ‘natural agreeableness or deformity of the sentiment or affection”, subject to “the looseness and inaccuracy, of the general rules themselves” (TMS III.6.i. page 171).

It is not just a question of duty alone, but also from the “passions themselves”. Gratitude, as with the other virtues, the general rules which determine their “good offices” “are in many respects loose and inaccurate, admit of many exceptions, and require so many modifications, that it is scarce possible to regulate our conduct entirely by a regard to them” and “a very strict and literal adherence to them would be the most absurd and ridiculous pedantry.”

Smith said gratitude was “perhaps” the virtue in which the “rules are most precise and admit of the fewest exceptions” and he then elaborates on the difficult questions of how to apply the general rules to all the circumstances in which we may ponder on their suitability for each occasion.

The quotation that Gregory Rodriguez includes in his article follows these questions (TMS III.6.9, page 174) and Smith goes on to point out that the “actions required by friendship, humanity, hospitality, generosity, are still more vague and indeterminate” than those applying to gratitude. This sets him up to make clear that the virtue of justice is different in that it “admit[s] of no exceptions or modifications” and for an elaboration on this theme in the rest of the chapter.

Rodriguez asserts that Smith “even seemed to understand that the cold calculations of a market economy sometimes undermined the conditions that gave rise to the spontaneous expression of thanks”, which I think creates a non-issue because Smith makes very clear that he thoroughly understands the roles of the virtues, especially that of gratitude, in society and that nothing in commercial society, ‘cold or hot’ modified their application and practice.

That US society, in its “hyper-capitalist society”(?), people “appear more eager than ever to claim the simple pleasures of gratitude” is not surprising to anybody acquainted with his “Moral sentiments” and “Wealth of Nations”. That readers of the Los Angeles Times may need to be reminded of these points is understandable – US academe is the main source for misleading ideas about Adam Smith emanating from Paul Samuelson of MIT and Chicago University. They have only been told about one version of Adam Smith (Homo economicus) who differs in great measure from the Adam Smith of Kirkcaldy.

Read the excellent article by Gregory Rodriguez in LA Times at http://www.latimes.com/news/opinion/sunday/commentary/la-oe-rodriguez27nov27,0,5488236.column?coll=la-sunday-commentary

Selfishness is Not Synonymous with Self Interest

Mark Tinker, and economist, writes an article entitled: “Expert View; It's better to go nuclear than ask people to be nice”, adding a subheading: “The real world is pushing the politicians to adopt the US way”.

The article is published in the on-line “The Independent” (UK) on 27 November, and you access it at:
http://news.independent.co.uk/business/comment/article329485.ece

Mark Tinker writes:

“Sorry to say it, but the "if only everybody would be nice" route never works. People are selfish. Fact. Adam Smith recognised this back in the 18th century, and the underlying philosophy of his work is that incentives matter and that society is best served if selfish interests are channelled for the common good. The role of government here is to prevent the abuse of this - the formation of cartels and monopolies - but also to allow innovation to deliver the solution. In effect, carrots are better than sticks.”

In this short space he makes a number of common errors about Adam Smith. I cannot comment on his conclusion that the " ‘if only everybody would be nice’ route never works”, as it is one of those hopelessly generalised statements that passes for ‘worldly wisdom’ in tiresome chatter from people claiming to be graduates of the ‘school of hard knocks’, as heard in dinner parties, bars and those hopeless radio station phone-ins.

Smith most certainly did not believe that “People are selfish”, nor is it a “. Fact”. And nor is it correct to allege that “Adam Smith recognised this back in the 18th century” (what a travesty that is of Smith’s “Theory of Moral Sentiments”!

I think Mark Tinker should apologise for besmirching Smith’s reputation and not for concerns about upsetting people with his version of the truth about life in the ‘real world’. It was Bernard Mandeville who considered selfishness to be the prime motive of humans in his “Fable of the Bees”, which Smith criticised in “Moral Sentiments” (‘Of Licentious Systems’, VII.ii.4.114, pages 306-314).

That selfishness abounded was not the same as asserting that it is the sole or dominant motive. Smith’s point was that humans have mixed motives, not a dominant want. This was the gist of his criticism of Francis Hutcheson's idea of 'pure' benevolence.

Self interest is not the same as selfishness any more that eating is the same as gluttony. To claim that “the underlying philosophy of his work is that incentives matter” in one statement, but to start his conclusion with a modest proposition (“incentives matter” – it would be odd if they didn’t) and add that to a controversial assumption “that society is best served if selfish interests are channelled for the common good” is another statement. Tinker buries the implausible – we are all selfish to the core – in with the untrue - that ‘selfishness’ and ‘self interest’ are synonyms, and does this is the name of Adam Smith!

Self-interests are not ‘channelled for the common good’ by any outside agency (including ‘miracles’, ‘gods’ or the State). The self interests of individuals are mediated by social contact, some aspects of which may also be through markets. The same process operates. To live harmoniously amidst strangers – and dependent upon them in degrees of proximity as friends, acquaintances and far vaster number of strangers we are not rampant egoists. The mechanism of the impersonal spectator mediates upon us in our behaviours so that we temper our behaviours to what the impartial spectator can go along with.

Justice curbs behaviour that offends others if our conscience does not, and society imposes merited punishment upon us if we stray over boundaries of acceptable behaviour through formal legal punishment in the extreme cases and informal social isolation or exclusion in less important cases.

To remain functioning despite total dependence on others for everything we need to survive at standards above beggardom, we participate in markets. Any tendency to selfishness is curbed by the need to persuade the owners of things we want to exchange them for things we have – negotiation. To achieve agreement with others we must mediate our self-interests to the extent that we address the self-interests of the other parties. This is an everyday occurrence.

Governments do not “prevent the abuse of this”, i.e., in Tinker’s words “[channelling] selfish interests for the common good”. For one thing, governments are often the cause of distortions of the private mediation of each party’s self interest in their private dealings, especially when they promote state-owned monopolies or give licences (it used to be Royal Charters) to private monopolies. What did most of Mrs Thatcher’s 'privatisations' become, as the Treasury exercised its powers to maximise its revenues, but the substitution of state monopolies by private monopolies?

Adam Smith was aware in excess of the potential for depredations upon Natural Liberty by legislators acting in the ‘public interest’ to disguise their acting in the sectional interests of specific producers.

The state does not protect us all from the potential selfish depredation of everybody else – what an alibi that is for disenfranchising us all from the ever present moral sentiments of the overwhelming majority of us and from the mediation of markets that bring disparate strangers into harmonious relationships.

Tinker creates a parody of Smith’s views on self interest. In doing so he sullies the case for nuclear power, but that is another debate and one in which I agree with Mark Tinker.

Labour Theory of Value and other Mumbo Jumbo

In what appears to be a book review, Terry Bell, expostulates on Adam Smith, somewhat obscurely. The book is “State of the Nation”, edited by Sallela Buhlungu, John Daniel, Roger Southall and Jessica Lutchman, The Human Sciences Research Council, price Rand 194. The 'review' appears in the Sunday Independent, Johanesberg (read it at: http://www.sundayindependent.co.za/index.php?fArticleId=3011637&fSectionId=1083&fSetId=).

“There is also the uncritical acceptance of a comment attributed the Anglo American's Bobby Godsell that the labour theory of value was a creation of Karl Marx and needed to be buried. This is not only ahistorical, it raises one of the fundamental questions of economic theory that needs to be interrogated to make real sense of the current state of national and global economics.For the record, and in vindication of [Margaret] Legum's comment: the labour theory of value was developed by Adam Smith, father of liberal, laissez-faire economics, who died 28 years before Marx was born. It is a fundamental theory underpinning an ideological rump based on some metaphysical mumbo-jumbo about an "invisible hand".

Comment:
From the context of the review, the above appears out of nowhere (heavy sub-editing to make space?). My comments are directed at what it says, not what the reviewer was trying to say about the book he was reviewing.

In correcting Bobby Godsell’s error in crediting Karl Marx with the labour theory of value, Terry Bell mistakenly hands that accolade to Adam Smith, who was not ‘the father of laissez faire economics’ - that accolade belongs to the French Physiocrats or ‘economistes’. (Given that Smith never used the words ‘laissez-faire’, he was a remarkable ‘father’ of a theory, indeed.)

It was John Locke who advocated a labour theory of price and Smith took the same ideas but did not develop them. I deal with this issue in my forthcoming book on Adam Smith for Palgrave’s Great Thinkers in Economics series, due in 2007. Smith’s theory of prices was part of his theory of commercial markets, which are rooted clearly in supply and demand analysis and a theory of distribution incorporating three factors, not just labour (rent and profits).

Whether “it raises one of the fundamental questions of economic theory that needs to be interrogated to make real sense of the current state of national and global economics” is beyond comment, as it is not clear what Bobby Godsell, Margaret Legum or Terry Bell are saying, or why.

That the labour theory of value was a dead-end, though in the strict sense used by Locke and Smith – that labour was the sole source of value in a primitive society, such as in a gatherer-scavenger and small game hunter society - before the advent of sophisticated tools, property and big-game hunting, a statement to Locke's or Smith's effect was and remains unexceptional. Once property appeared and the division of labour, a single factor, for example labour, could no longer remain the sole source of value. Ricaredo and Marx tried to develop the dead-end into a highway for understanding, but failed.

Karl Marx’s metaphysical formulation of his labour theory of value was pure verbiage (‘crystallised’ labour and the vacuous idea of ‘labour power’, etc.,) without content that ended up with exactly the same elements in price as ignorant merchants, artificers and capitalists based their costs on: the sum of wages, raw materials, and wear and tear of machinery, buildings and rent.

Prices were determined by what people paid for the products; if they paid sufficient, the ‘projector’, ‘entrepreneur’ or ‘capitalist’ made a profit; if they didn’t they made a loss. Marx mystified the process by calling it ‘surplus value’, but ends up with the same price (and profits) as standard accounting.

The other example of mystical verbiage being imposed on economics is that of the ‘abolition’ of interest in banking. Exactly the same process is undertaken to hide the reality to avoid calling it ‘interest’ – the amount paid back is the loan plus ‘administrative charges’, which in real banking, as practised by ‘anti-interest’ theologies, track normal interest rates with remarkable exactitude.

Terry Bell manages to link the labour theory of value to another of the misleading attributions to Smith:

“It is a fundamental theory underpinning an ideological rump based on some metaphysical mumbo-jumbo about an "invisible hand".

The invisible hand was an isolated metaphor about the consequences of human motivation. It was never part of an ‘ideological rump’ in Smith’s “Wealth of Nations”; it was never a ‘theorem’, a ‘concept’ or a ‘theory’ of markets. It was a simple but crude metaphor.

That some 19th and – many - 20th century economists made it more than it was, and journalists with dim memories of Economics 101 tutored by non-readers of Adam Smith (and their dimmer memories of their distant classes in economics), have given the metaphor an aura it does not deserve is one of the major problems in trying to restore Adam Smith’s legacy to its proper place in the history of economic thought.

Advice about Adam Smith for France

William Lyons, Arts Correspondent of the Scotsman on Sunday, writes a short piece, 27 November, “Study Adam Smith to solve crisis, Chirac told”. The theme is the difference between the consequences of the Scottish Enlightenment for Britain and the French Enlightenment for France, from a speech by Arthur Herman (“How the Scots Invented the Modern World”) to the Royal Scottish Academy.

Herman said: “What we are witnessing in France are the implications of an Enlightenment that stressed the growth of power in the state and the role of the community over the individual.” In Contrast Scots can say: “Look, we have within our own past the principles and ideas that can be used to revitalise Western Europe.”

"Adam Smith should not just be read by emerging democracies in the Middle East, it should be read by Jacques Chirac."

Dr Madsen Pirie, president of the Adam Smith Institute, said: "If the French paid more attention to the principles of Adam Smith, they would maybe have the economic growth which is the best antidote to civil disorder. It is a fact that in economies that are experiencing growth there are more opportunities created, which leads to more jobs. This situation avoids the current despair many people feel in the suburbs of France."

Comment:

Media interest in Adam Smith continues to grow in Scotland (Dr Pirie’s colleague, Eamonn Butler, Director of the Adam Smith Institute, has a piece in The Business on railway privatisation in Europe) and this is gratifying, compared to the situation a year or more ago.

Visit the Adam Smith Institute by clicking on the button on the left.; and read the full article in Scotland on Sunday at: http://news.scotsman.com/education.cfm?id=2310592005

Incidentally, booth Drs Pirie and Butler's suggestions are are excellent - now, if only the French President and the French railways (SNCF) would take a few moment s to consider them seriously.

Origins of Fascism in a Denial of Smithian Markets

Roderick T. Long gave a talk at Ludwig von Mises Institute Conference on Fascism, 7-8 October and this is reported at http://www.mises.org/story/1957. Roderick Long teaches philosophy at Auburn University and is editor of The Journal of Libertarian Studies. I recommend it to anybody interested in politics and governance.

Among his many interesting comments this paragraph caught my notice:

“The partnership between the official state apparatus and the nominally private beneficiaries of state power was a familiar theme for 19th-century libertarians like Frédéric Bastiat and Gustave de Molinari, who extended and radicalized Adam Smith's critique of mercantilist protectionism as a scheme for benefiting concentrated business interests at the expense of the general public.”

This set off a train of thought. One of Smith’s trenchant German critics was Frederic List (mid-19th century) whose main complaint was that he perceived in Smith’s “Wealth of Nations” not a critique of mercantile political economy but a hypocritical message about free trade which was, he believed, a determined ‘plan’ of the English (sic) commercial class and government to pursue policies that would enrich England at the expense of the rest of the world by subjecting them to economic policies in favour of England. Even absolute and comparative advantage theories (Smith and Ricardo) were nationalist devices to cheat the gullible into trade treaties with England that would ruin them and make them dependents rather than partners.

What is significant about these rants (there is no other word for it) was that List advocated that the several states of divided Germany should unite to emulate the same policies he ascribed to Smith as a means of enriching a new German State and making it a world power. Reading from the vantage point of 20th century experience we can see in List the early signs of a German nationalism already groaning under the psychic burdens of imagined grievances that fuelled the rampant nationalism of the Nazis in the early 20th century.

Smith’s critique of mercantile political economy was not a sham; it was sincerely held, and Smith had no conceptions of a rampant nationalism ascribed to him by List. Fascist political economy imbibing ‘corporatism’ (the authentic voice of Mussolini’s version) had no affinity with Smithian markets and his insistence of Natural Liberty.

Statism in all its forms, from 19th century socialists through Marxist communism and fascism and the demented version in Hitler’s National Socialism, are the absolute denial of free markets, international trade, open economies, liberty. Smithian markets are anathema to nationalism in any of its forms from the malign to the malignant.

When this Remedy is Worse than the Problem

George Matafonov, of moralcompas.org, writes a most interesting piece in OhmyNews, an English language edition published on line in South Korea, entitled: “Superbrats: offspring of the market, the implications of the market becoming the central institution of society” (25 November).

His thesis is that the ‘market’ has come to dominate all aspects of social life and this manifests itself in declining discipline among children, who become ‘brats’ in the process, and in manners generally. You can read the article at: http://english.ohmynews.com/english/eng_section.asp?article_class=8 and follow his argument more closely than I can articulate it.

My attention is drawn, however, by George Matafonov’s centring much of his argument on Adam Smith and how, the ‘father of economics’ never intended this to happen:

“The roots of market morality in its current format go back to Adam Smith, the father of economics. But the extension of the market morality outside the market was not what Adam Smith intended. In fact, he would be probably turn over in his grave if learned that his homily about the butcher, the brewer and the baker is forming the basis of a new morality surpassing the significance and impact of even the golden rule of the great prophets of the past. In the Wealth of Nations he wrote:

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. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizens.

This is probably the most famous statement of the efficacy of self-interest where Smith concludes that since humans always act out pure out of self-interest, we should always appeal to their self-interest first and foremost. To do otherwise, is the province of unscrupulous beggars. But Smith was not promoting unfettered self-interest and not even rational self-interest, after all he was a moral philosopher, but he was promoting self-interest providing it was within the confines of the market where it would be subject to competitive forces which he likened to the invisible hand of God. Smith, however, never envisaged the morality of the market based on self-interest and competition would start to erode and replace the traditional morality of society based on selflessness and humility. He failed to see this consequence because he also never envisaged that belief in God and the influence of the Church would give way to the modern secular society. And because traditional morality was so strongly linked with idea of God and the Church that it too waned and created a climate of moral relativity.”

We must be grateful that George Matafonov recognizes that the connection he draws between Adam Smith and what he considers to be happening around him was not something that Adam Smith encouraged or carelessly did not think about. That much is common ground between him and ‘Lost Legacy’. What is not common ground is his travesty of Smith’s political economy, his only partial appreciation of Smith’s “Moral Philosophy” and, well, his selective version of society’s defects as if they have just appeared in the 21st century. Even a slight acquaintance with history, including Asian, would inform him that the characteristics he attributes to market forces entering into the domain of non-market relationships have a long history in almost all known societies, long before our dinners came from butchers, brewers and bakers.

Human behaviours are universal in all peoples and in all past-societies. Greed, selfishness, bad manners, appalling disrespect for revered behaviours in and around the family and neighbours has a long history. Reaction to the behaviours of the young are often an ‘age thing’; each generation looks back on social changes with abhorrence, forgetting that for every example of good manners and mutual respect they remember so fondly, there were levels of crime and barbarity ever bit as prevalent as now. Smith noted in “Moral Sentiments” (V.2.15: page 210) that in the high civilization of ancient Greece it was a common practice, not commented on negatively, for infanticide to be practiced, a greater barbarism Smith could not imagine. He also noted (III.3.13, page 142) that “we are commanded to honour our fathers and mothers” but “no mention is made of the lover of our children”, drawing the observation that “nature has prepared us for this latter duty”.

Smith’s observation of market relationships is quite the reverse to the common interpretation of the famous passage about the “butcher, the brewer and the baker”. The passage is not praising the triumph of ‘self-interest’ or advocating of ‘selfishness’ and greed. The plain fact is that due to scarcity, no man had sufficient material goods to distribute to others out of benevolence even should he be inclined to do so. Man lives in scarcity not abundance, because all goods require labour to create them for distribution, and no man has the time nor the means to create for himself all the goods and services he needs, even at a low level of subsistence and without any covetous inclinations. All men thereby are inter-dependent on the labour of each other, whether they lived in a primitive low-technology society or in modern-day high-technology societies, such as in South Korea.

Smith’s point about markets (remembering that he envisaged commercial societies fairly primitive in the scope of their products and their divisions of labour) was that markets were successful distributors of the bounties of nature and the fruits of labour compared to those that had preceded them (and, by implication might be conceived to follow them, a task Smith never tried to undertake). His analysis of how markets work was sufficient for the purposes on mid-18th century Britain.

The alternative to market creation and distribution was the age-old choice between plunder or trade, and all systems short of trade through the ‘butcher, the brewer and the baker’ were likely to be, and history showed them to be, tyrannical. The feudal lords distributed subsistence to their armed retainers out of the surplus their serfs produced under the ever present tyranny of those over them and their families. If George Matafonov believes he has a problem with the ‘indiscipline’ of modern ‘brats’ he can contemplate his chances of enjoying life subject to the discipline of dictators and their retainers.

The decline in behavioural standards in any particular period is a mirage. “Moral Sentiments” is about how society socializes the young within families, schools and work. Moral sentiments, says Smith, have their roots in the all sections of society, even “the greatest ruffian, the most hardened violator of the laws of society, is not altogether without it” (TMS, I.1.1, page 9). From the inter-linked social circles of individuals and their family, friends, acquaintances and the, far greater, body of strangers, societal cohesion is possible (and preferable to indignant campaigns to force people of all ages into conforming with a particular set of behaviours that call for the disciplining of children, which really means the disciplining of parents too).

Those who would seek to achieve these ends are misguided. I have long expressed the view that everybody knows how to bring up other people’s children, know how all other people should behave and know how the world would be better if only everybody behaved like the persons who hold these views. I do not know the age of George Metafonov, but he might gain some insight into the implications of what he advocate by taking a longer view of, and a closer look at, history than he appears to have done. Markets have not changed human nature; it was far bloodier and licentious in ancient Rome, far more horrible in mid-19th century Britain and unspeakably awful in mid-20th century Russia and China.

Some children have spats with their parents (and their parents with their parents) and with each other; fortunately most grow out of it (around 25). Age wins as youth age. Smith was relaxed about this and so should we.

Smith's Unhappy Years at Oxford

Business Week (online) 5 December carries a feature on the University of Oxford, apparently in turmoil as faculty reacts to administration’s attempts to get it to move into the 21st century:

“Shaking Up Oxford Businessman John Hood plans to reinvent the university. And the dons are fighting back.

With Oxford remaining one of the two most prestigious universities in Britain, many wonder why there's any hurry to change, and some doubt that a seeming nobody from the University of Auckland has anything to teach them. Cambridge bests Oxford in some surveys, but few think any Continental European institution can touch Oxford. Admission slots at the university that has educated some 25 British Prime Ministers, including Tony Blair and Margaret Thatcher, as well as titans like Adam Smith and Christopher Wren, are in greater demand than ever. An Oxford education is still the best ticket to the upper reaches of British government and business. The individually tailored tutoring that goes on in the colleges is superb.”

It is not my place to comment on the current internal affairs of another British University. My comments are directed at lumping the modern excellence of Oxford with what it did for Adam Smith between 1740 and 1746. If Smith was a titan, he owed very little to it of education at the then university (Balliol College), where he spent six unhappy years and, frankly, had to teach and tutor himself.

Smith attended Glasgow College (the university) from 1737-40 and taught there from 1751-63. The contrast is remarkable between the two institutions. At Glasgow the faculty taught many hours per week (from 7.30 am to just after 1.30 pm). The public classes contained about 100 students, some younger than 14 (the age that Smith left Kirkcaldy for Glasgow). They were ‘examined’ by their tutors each day in subjects associated with their classes, for which they wrote essays.

At Oxford there were two lectures a week and twice daily prayers (the faculty were ordained ministers of the Church of England). Beyond that students were left to their own devices. Years later Smith wrote in “Wealth of Nations”:

“In the university of Oxford, the grater part of the publick professors have, for these many years, given up altogether even the pretence of teaching’ (WN V.i.f.8: page 461).

He also referred in tones that showed irreconcilable contempt for English universities, several of which has become “sanctuaries in which exploded systems and obsolete prejudices found shelter and protection, after they had been hunted out of every other corner of the world” (WN V.i.f.34, page 772).

Smith went to Oxford without taking his MA at Glasgow (which was a condition of obtaining the £40 a year Snell Exhibition – a handsome sum that a frugal person like Smith could live on), but on leaving before his nine years were completed (six for his MA ; he abandoned the 3 for his ordination when he decided not to proceed to be ordained into the Church), Oxford awarded him its “AM” (now MA) in 1746, carefully recorded in Glasgow’s records when he was nominated for a Chair in 1751. It is this recorded statement that created the myth that Glasgow had awarded him his MA in 1740, a point missed by some of his biographers.

So badly were Adam Smith and the seven other Scotch students treated at Oxford that he wrote of it with contempt and anger, even 30 years later, and he never returned to Oxford, though he journeyed near the area. Balliol was a centre of Tory belief in the divinity of kings, while Smith was a Hanoverian, like his father, and he became a target for bullying from some pro-Jacobite English students and Masters (1745-6 were the years of the Scotch rebellion in favour of restoring a deposed monarch, an adventure with which young Smith firmly disagreed).

So to claim Adam Smith for Oxford as an example of its undoubted modern educational qualities today is a bit much.

Invisible Hand no 25

Mick Brooks, a Marxist, writes on intellectual property rights (“a modern day enclosure of the commons”) for Independent Media Centre of San Francisco, California (22 November).
In his trenchant piece (ignoring his slight tendency to rant) he tears into capitalism as the source of everything that’s ‘wrong’ with the world and sees it as a threat to the survival of the Earth itself as a habitable place for humans. This, of course, ignores the sad fact that the world’s worse polluters and environmental destroyers featured strongly in the former Soviet Union and in the current China, symbolized by the decaying Soviet nuclear fleet in the waters off Arctic Russia.

Sprinkled throughout his article there is a plethora of quotations from Marx’s Capital and from other contributors. It is, however, readable and racy, and I suggest you judge for yourself by visiting the site at: (http://sf.indymedia.org/news/2005/11/1722361.php)

However, among his appeal to authorities he writes:

“On the one hand Hardin uses his Malthusian perspective to refute the notion that rational (that is utility maximising) individuals will produce an optimal equilibrium. This is often called Adam Smith's invisible hand theorem and is the classical justification for laissez-faire capitalism.

Compared with Adam Smith's optimism about harmony and progress (under capitalism) though, for Hardin to adopt instead Malthus' pessimism about the eternal condition of humanity may be regarded as a step back. On the other side, the reason the invisible hand of the market doesn't work in the case of the commons according to Hardin, is because there is an incentive for greedy individuals to overgraze their animals, since the cost is borne by others. All suffer as a result.”

The errors in the above are not Mick Brooks’ fault. He was clearly educated in economics in or near to US academe, which has completely misrepresented Adam Smith's legacy. There is no such ‘invisible hand theorem’ in Adam Smith. A ‘theorem’ consists of more than a lonely metaphor, which was not even Smith’s – it belongs to Shakespeare (Macbeth 3:2).

That it might be a ‘classical justification for laissez-faire capitalism’ is arguable, provided Brooks defines what he means by ‘classical’, ‘laissez faire’ and ‘capitalism’, all sprung upon the profession in the mid-19th century not in the mid-18th century. For Smith ‘classical’ meant the products of the Greek and Roman languages two millennia earlier; he never used the words ‘laissez faire’ though some 18th century French economists did; and he did not know of the word ‘capitalism’, first used in English in 1854 (Thackery, Necomes II), nor the phenomenon, which is a back-projection of a modern name onto the distant past.

Smith was optimistic about the progress of opulence, especially for the labouring poor, through the growth of the net revenue of the commercial economy in conditions of Natural Liberty. What he might have written about the technological changes and the joint stock companies of the 19th century we can never know, as he didn't know anything about the future over the horizon.

Outsourcing is Good for the Global Poor

Tibor Machan, R. C. Hoiles Professor in Business Ethics and free enterprise at Chapman University, Orange, California and co-author of “Libertarianism: for an against” (Rowan and Littlefield) writes brief commentary: “Whether we admit it or not, we all outsource” in Desert Dispatch, Barstow California.

He opens with the news that IBM is shedding 13,000 US jobs and creating 14,000 jobs in India and comments on this news:

“Some lament this, but I, for one, am mystified why anyone would consider it bad news. It is great news, for Indians looking for decent jobs; it's good news, also, for IBM and other firms that can benefit from the skills and education of Indians, where in previous times they couldn't and those in India had to go hungry or take jobs with very low pay. It is also wonderful news to customers of IBM, who now can spend their saved money elsewhere and thereby create more jobs.”

That is spot on and well put. What a change from so-called friends of labour who lambaste jobs moving to India or China (‘where’s your humanitarianism, the noo?, as we say in Scotland). Labour unions and socialists are often strong on international solidarity, but it seems they are ruthless defenders of particular workers interests, mostly those in their own country, and for MPs those in their own constituency. They also preach about the developed world not doing enough for the poorer world, but oppose the one thing that does more for the poor than all the handouts, grants, aid and charity put together, namely the opening up of markets for the flow of products between countries. India and China are cases in point (as were Japan, South Korea, Taiwan and Brazil before them).

Tibor Machan notes the interdependence of people in markets and how they relate to each other, most of whom are unknown to the beneficiaries:

“…people who work for us are almost always strangers, not friends and family, and we interact with them for a limited but mutually beneficial, namely commercial, purpose. That's mostly it; although one can come to befriend one's butcher or hairdresser or even auto mechanic and in time even start to date one of them.
These categories are not rigid or fixed. But in the main, commerce is carried out with personally unknown individuals, and they and we ought all to be fully aware that in such relationships loyalty is very secondary. What counts for most is whether a good deal can be struck.”

Yes, negotiating parties can take a ‘transaction only’ approach, in which the ‘good deal’ is the dominant criterion. They can also take a ‘relationship’ approach in which strong relations produce customer and brand loyalty and, perhaps, higher prices for more personal services. Both approaches are common in markets.

He concludes:

“It isn't all that new a phenomenon in any case and has been supported by intelligent economists for years, one of them being, of course, Adam Smith himself. His "The Wealth of Nations" could use a bit of study by the likes of those whom [we are] trying to educate about the elementary economics of the situation. It might make them happier about this global development.”

Now, I cannot disagree with that assertion.

A Missed Opportunity to Experiment and Improve State Provision

Sushila Ramaswamy writing in The Statesman ("the first completely customisable news site on the web" in India), 22 November, on “Quota Questions: the overriding importance of merit emphasized in court verdict” concludes the piece with:

“The private sector has a small identifiable role under state regulations. The overwhelming majority of students would continue to study in state aided institutions. The private sector can only supplement the state in higher education but cannot replace it or become an alternative. This fact is even acknowledged by the father of laissez faire economics, Adam Smith. However, the private institutions should be allowed to function with minimum of state interference and elimination of quotas.”

Comment:

The details are complicated and state sponsored intervention by the regulatory bodies involves committees of retired judges and accountants ‘of repute’ deciding on the appropriate fees for private educational colleges, on proper quotas for students from poorer families and on selection on merit by students passing state entrance examinations.

By restricting the role of private colleges to be a ‘supplement’ to state provision, this automatically builds into education providers from the state a guarantee that they need not worry about competition and, thereby, they need not be too active in raising their own standards or innovating. Whereas the threat from a really efficient and educationally sound private college system could replace their over-staffed, subsidised and lethargic state colleges, and would work to keep them actively pursuing excellence.

An opportunity missed I suspect, but that is India; a regulation-rampant society forgoing opportunities to shake-up its subsidised state sector, instead of opening up the education sector to new initiatives and the possibility of subsidy switching.

I know of no acknowledgement by Adam Smith (who was not the ‘father of laissez faire economics’!) that private education could not replace or become an alternative to state education. The 18th century situation was quite different. The state was hardly involved in education; colleges were funded by bequests and endowments, plus what the staff could earn in student fees. It was the late 19th century that introduced state funding on a major scale. I suspect that Smith have preferred a voucher system to state monopolies.

Smith’s attitude to public funding was to advocate it where no private individual or group of individuals could raise the necessary capital and earn profits on the scale required (“Wealth of Nations”, Book V). The management of such projects once erected was left open to whichever was best (comparative experimentation?) and the most honest. The initial, continuing or final proportions of state or private management were left open. Smith did not acknowledge a state majority as inevitable or permanent except in the cases of the Mint and the Post Office.

Looking at India from the outside, I think they should test which works better by experimenting – the country and the population is large enough for valid testing. Meanwhile, they should leave misconceptions about Adam Smith out of their deliberations.

More on Self Interest and Altruism

Over on the Productivity Shock Blog (www.productivityshock.com) Jason Briggeman discusses some experimental work of professor Ernst Fehr (University of Zurich, Institute for Empirical Research in Economics), delivered at a meeting of the Southern Economics Association on the week-end in Washington.

Fehr uses a version of the game discussed in the previous post,this time called the Ultimatum Game. Fehrs data showed:

On average, player A offers 40% of the pot to player B.
Player B rejects all offers of 5% or less, but accepts all offers of 50% or more. Between 5% and 50%, the larger the offer, the more likely that B will accept.

Jason Briggeman comments: “To put it mildly, those results are open to other interpretations.” He then offered a different interpretation amounting to a ‘proof’ of self-interest being the motivation:

“Offering about 40% maximizes A's expected return given B's expected behavior. (This assumes that Player A has rational expectations about B's behavior, but that is a good assumption considering that few people are surprised by the research results.)
My proof that Player B acts from self-interest is necessarily indirect, but it's pretty simple:
If self-interested motivation really were disproved by the fact that B sometimes rejects A's offer, then altruistic motivation would certainly be disproved by the same fact.
B's near-universal rejection of 0% offers and near-universal acceptance of 50-50 splits cannot suffice to prove egalitarian motives, because by the same logic B's near-universal acceptance of (extremely rare) 100% offers would prove self-interest.

Since the evidence for B's altruistic and egalitarian motivations is so weak, and considering that self-interested motivation readily explains almost everything else in such games (e.g., player A's behavior in this game), Q.E.D.”

Fehr’s own explanation is quoted by Briggeman:

“If others know that I am content with a small share, they are likely to make me low offers; if I am known to become angry when facing a low offer and to reject the deal, others have an incentive to make me high offers. Consequently, evolution should have favored emotional responses to low offers. Because one-shot interactions were rare during human evolution, these emotions do not discriminate between one-shot and repeated interactions. This is probably an important reason why many of us respond emotionally to low offers in the Ultimatum Game. We may feel that we must reject a dismal offer in order to keep our self-esteem. From an evolutionary viewpoint, this self-esteem is an internal device for acquiring a reputation, which is beneficial in future encounters.”

I have my own suspicions of altruism as an explanation for much, except in the form of reciprocation (when it ceases to be pure altruism). Reciprocation, unlike negotiation, is an implicit transaction: to do you a favour of some kind and I expect a favour in return at some other time in the future. Should the favour not be reciprocated when it is appropriate for you to do so, I shall pass on any opportunity to do you another favour. The sequence of reciprocal favours terminates with you.

Chimpanzees appear to practice this exchange in that portion of their mutual grooming sessions that are voluntary (others are compulsory). They groom certain members of the group but not others, and the ones they volunteer to groom are the chimps that have groomed them in the past. I suggest that reciprocation behaviours preceded negotiation behaviours where the transaction is explicit (‘Give me some of what I want and I shall give you that which you want’, as Adam Smith expressed it in “Wealth of nations”). While implicit reciprocation exchanges can occur without speech and language – the chimps – there are benefits in having speech and language for explicit negotiation transactions.

The division of behaviours into either pure altruistic or pure self-interest is part of the problem in discussions of evolutionary ‘fitness’, as is self-interest as it is understood in economics. Humans practise mixed motives in their behaviours. We get into tangles when we interpret from familiar chains of reasoning (like Bernard Mandeville) to produce ‘altruism is really self-interest’.

In my view, Adam Smith was more accurate when he made his famous quotation that we will be more likely to transact for our dinner from the Butcher, Brewer and Baker by appealing to their self-interest (offering them money) than to their benevolence (nobody, other than the Deity, who has everything, can altruistically supply our dinners for our lifetimes, and then at an extremely low standard of living). To serve our self-interest – our eating to survive and reproduce – we serve the self-interest of others. That part of the exchange transaction is usually overlooked by economists – if the parties to a negotiation remained trapped in their own self-interest they would seldom complete their transaction.

Back to Fehr’s claims and Briggeman’s ‘proof’. Transaction behaviours, the origins of which Smith did not speculate about, though he linked them to the faculties of languages and reason, were not one-off events. They were learned over many transactions and many examples of their alternative, violent plunder. If Ultimatum is played repetitively the number of failed transactions declines – people learn how to make the outcomes more reasonable (though still unequal). I mentioned in the previous post about sellers almost always quoting a higher opening price for an object than buyers offer as their opening price. (I should also add that no matter how high a price a seller receives for something they would be happier with still more; and no matter how low a buyer pays for something they would prefer to pay even less.)

Fehr misses something he should have known as his institute studies labour relations, namely negotiation behaviour; Briggeman’s proof is a logical ('Miseian' in scope) statement (I am reading ‘Human Action’ presently and have covered so far only one third of it), which like all logic depends on the premise. I am not happy with his premise, as the above shows.

Once Again "Das Adam Smith Problem"

Pedro Swartz, professor at the San Pablo CEU University in Madrid, Spain and associate fellow at the Cato Institute, re-visits the so-called’Das Adam Smith problem’ in Spain Herald, 21 November, (read it at: http://www.spainherald.com/2068.html).

“In 1998, Nobel Prize winner Vernon Smith wrote an article titled “The Two Faces of Adam Smith” in which he contrasted Smith’s two theories with experiments carried out in a computer laboratory with real people and real money. In the “dictator game” one of the players receives 100 dollars and can decided how to divide it with another player; if the second player rejects what he is offered, both walk away with nothing. According to the theory in “The Wealth of Nations”, an acceptable division would be $99 to $1, given that the second player should not reject it as $1 is better than nothing. But in the games, the receiver often rejected much greater sums because he considered them unfair. Moreover, when the “dictator” could chat with the receiver, he tended to offer a higher amount than when the game was played anonymously.”

Vernon Smith’s dictator game is well known in negotiation courses in the US (less so in the UK). They are not decisive because there are several explanations for what is happening, observed over many plays of the game both inside and outside the computer laboratory. I have played it and observed it, and numerous variations of it. That many people do not accept the 99-1 dollar offer is not unique. In the whole area of the influence of past costs on decisions few choose the marginal additional cost over ‘bygones’ as being decisive.

Incidentally, “Wealth of Nations” does not contain a ‘theory’ that “an acceptable division would be $99 to $1”. That is purely speculation based on the modern interpretation of Chicago economics (sometimes presented inaccurately as Adam Smith’s).

Unfairness is one explanation for rejecting any offer not close to 50-50. There is also the version of repeated plays of the game, in which players tend to search for ‘better’ offers and, interestingly, the ‘dictators’ tend to make ‘better’ offers (remember they get nothing too if their offer is rejected).

When conversation is allowed – a proto negotiation situation – offers tend to improve. This is part of the dynamics of negotiation; negotiators prefer to make net gains rather than absolute losses and the process is one of mutual exchange of offers and demands. Smith accurately calls this bargaining: “Give me that which I want and you shall have this which you want” (“Wealth of Nations”: I.ii.2. page 26).

One might also wish to consider these points in the context of knowing that experiments show, using real people (not just graduate students), that when people are asked separately to set a price for something (even the most trivial item in a poor condition – a chipped cup) those designated as seller always (or as near as) set their selling price higher than the price set by those designated as buyers. This is also anonymously. They appear to give themselves negotiation room in both roles.

I think Professor Swartz is incorrect in his summary of the experiments as being evidence for the ‘Adam Smith problem’. “Moral sentiments” does not present a theory of human behaviour different from “Wealth of Nations”.

Pedro Swartz concludes:

“Vernon Smith argued that Adam Smith had intuitively discovered two types of co-existing human behavior: positive reciprocity in face-to-face exchanges and self-interest in impersonal exchanges on the economic market. When dealing with people we know, the Scottish master’s theory of moral sentiments comes into play. On the other hand, when the exchange is made between strangers, individuals look first to their own self-interest. In direct relationships, non-monetary reciprocity is operating, enforced by social sanctions. In the economic market, remuneration is monetary and repression of incompliance is provided by commercial or legal penalties. This is how free societies function.”

Society is more than the summation of its wealth (its annual output of goods and services); it also consists of the influences of its history, it systems of justice, its governance, its arts and literature, and so on. Two personalities active in the same body would not be stable. People manage to be most interested in their closest relatives and near indifferent to anonymous strangers (on most occasions).

The social cohesion arising from the causes that Smith analyses in “Moral Sentiments” is closely linked to the economic cohesion of “Wealth of Nations”:

“Society may subsist among different men, as among different merchants. From a sense of its utility, without any mutual love or affection; and though no man it is should owe any obligation, or be bound in gratitude to any other, it may still be upheld by a mercenary exchange of good offices according to an agreed valuation” (“Moral Sentiments”: II.ii.3.3: page 86).

That people have some “interest in the fortune of others” (“Moral Sentiments”: opening page), as quoted by Swartz, is stated by Smith to be despite a person’s ‘selfishness’ (“how so ever a man be supposed”). This is Adam Smith’s opening sentence to his volume explaining how such sentiments towards others cement society’s cohesion. Far from this being contradicted in “Wealth of Nations”, the same cohesive force operates. Our sentiments are strongest towards our immediate family and then dilute as ‘distance’ increases – acquaintances, strangers and anonymous others. Markets connect people in chains of anonymity and we express our self-interest by serving the interests of others (“Give me that which I want and you shall have this which you want”!) who appear in front of us when we make selling or purchasing decisions.

Why 19th century German economists launched “Das Adam Smith Problem” would provide a useful research topic. Perhaps they were schooled in Frederich List’s (1854) intemperate polemic against Adam Smith’s political economy, seeing it as an “English” (sic) assault on the rest of the world’s economies, disguised as ‘free trade’, and they were part of the increasing nationalism of the German states, flowering in the next century.

Trust is a Hormone?

Terrence Kealey in today’s Times (21 November) writes a speculative piece on the biochemistry of trust and introduces me, at least, to the hormone oxytocin. I am not completely convinced by the argument. Consider this extract:

“But the basis of wealth is trust. Only if people can trust each other will they trade, and without trade there is no wealth. Yet, if they can, rational people will cheat and not honour their contracts…”

The first part is fine, but once Terrence Kealey turns to describing “rational” behaviour I am left uneasy. Keeping the discussion solely to behaviour to do with economic relationships his point carries conviction but if we were to switch to behaviour to do with more serious crimes (for fraud is a crime) I wonder how many would share his clinical description of what is rational.

Would, for instance, engaging in rape because of self or induced eroticism be encompassed in rational behaviour? A taxi driver sees an opportunity to overcharge a foreigner and takes it; he sees an opportunity to rape a passenger and takes it? Just because a behaviour has a reason, be it selfishness or lust, is it rational?

The second part of the extract above continues: “… which is why people try to avoid doing business with those determinedly rational people, the taxi drivers, businessmen and politicians of large parts of Africa. It is because he supposed that all people were as rational as African taxi drivers that Thomas Hobbes believed in tyranny, because only tyrants could enforce contracts: “Covenants without the sword are but words.”

I agree that contracts need enforcement. They need enforcement, nowadays through legal process, not with a tyrant’s sword - Friedrich Nietzsche spoke of the earth being drenched red with the blood of humans who failed to keep their promises. Keeley continues:

“Adam Smith feared that Hobbes was right, but he also understood that human beings had concepts such as fairness and trust which could override rationality and so enforce contracts: “Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.”

I find this argument a muddle. Keeley describes criminal acts as ‘rational’ and implies that self-restraint is irrational, or at least non-rational. Breaking contracts is a peculiar form of rationality if it discounts to zero the consequences of the ‘rational’ action. Burning a house down to keep warm is not rational even if the likelihood of judicial punishment was near zero, if the consequence of the fire is that the person is exposed to minus 10 degrees temperature in the depths of winter.

Prisoner’s dilemma shows that defection makes the players worse off compared to co-operation, but that the inability to trust leads individuals to the defection that makes them both worse off. Introduce justice into the context – and Adam Smith always understood the importance of justice for the working of markets and for society (‘without justice it would crumble to atoms’, “Moral Sentiments”). I suggest Keeley confuses rationality with the passions.

The reporting on the hormone oxytocin is interesting:

“Today we increasingly understand that neither fairness nor trust are abstract ideas — rather, they are rooted in biochemistry. And in a paper published recently in Nature by a group of neuroeconomists led by Michael Kosfeld in Zürich, oxytocin was recognised as a hormone of trust.”

Selfishness is one of the passions and humans access many passions; we have mixed motives behind our behaviours. Smith criticised those (e.g., Francis Hutcheson) who saw only the worthy passions as appropriate for behaviour. He also criticised Bernard Mandeville (“Fable of the Bees”) for focussing solely on the passion of selfishness. “Self-love”, said Smith, “is not enough” (Lectures in Jurisprudence). Modern economists based the entire edifice of mathematical models of behaviour on the sole premise of selfishness (misknown as self interest).

That neuroeconomists follow suit does not validate their conclusions.
Keeley concludes:

“The problem of explaining human co-operation has long troubled philosophers. Economists and psychologists have tried to explain it by game theory, and they have demonstrated how rational but selfish people will learn to co-operate in their common interest. In other words, they believe: “We must hang together or we’ll hang separately”. Terms such as zero sum or non-zero sum games are now part of every educated person’s vocabulary.”

Those who have problems explaining co-operation are in difficulties because of their assumptions that it is rational to behave selfishly and with criminality. The assumption causes the trouble Keeley says they feel. Game theory does not alter the assumption. In Prisoner’s Dilemma, the absence of trust, leaves the players with no choice but to defect: ‘I defect not because I want to but because I must”. This is quite different from the motive of the rational selfish player: ‘I defect not because I must but because I want to’. The difference highlights my concerns with the rationality assumption driving selfish criminality.

Trust arises from a learning process. It has nothing to do with rare acts of altruism. Trust to become a regular behaviour requires reciprocity – it has to work for it to pay off into repetitive behaviours. A single trusting player in a community of selfish egoists would not survive; but two trusting players would not just survive, but would breed (reproduce) successfully. They would out survive the egoists because of their small advantage. Reproductive advantage is the key to natural selection.

“Biochemistry is therefore showing that we are not solely selfish, strictly rational people who co-operate only because of the enlightened self-interest of game theory. Rather, we possess molecules such as oxytocin that produce genuine altruism and even self-sacrifice. Oxytocin, in short, is a molecule of virtue.”

I agree: we are “not solely selfish, strictly rational people who co-operate only because of the enlightened self-interest of game theory.” I am not sure that ‘enlightened self interest’ properly explains the learning process, or that a hormone released, apparently, during orgasm explains why two individuals in the stone age – may be beforehand, during the million years or more of the Brutes preceding the appearance of the first Homo sapiens – exchanged some things instead of violently trying to seize them from each other.

With property, said Smith, government enforced property rights, at first lightly as befitted the primitive sense of property in the gatherer-hunter economies of the time. By the time property reached today’s complexity, justice was a deep part of the social fabric. As children socialise they learn about both trust and justice. If they experience dosages of oxytocin while learning that is interesting and worthy of research and reporting, but it is going too far to assume that the entire edifice of human activity is down to a hormone.

For one thing it would not explain why for millennia oxytocin was a minority activity in the age-old contest between plunder and trade, nor why it was so little in evidence during seventy years of State socialism. For another, why does trust operate so well, as it does, in market economies? Disparities in oxytocin production in the various populations? Or was Smith more perceptive?

Letter in The Business (UK)

My Blog piece last Sunday on an article by John Blundell in Britain's weekly, The Business, became a short letter which this Sunday's The Business has published today.


"Free trade and the victims of protectionism

Sir – I agree with the drift of John Blundell’s message “EU cows are paid more than third-world families” (13/14 November). But is it true that “David Ricardo and Adam Smith and others laughed mercantilism off the stage of respectable ideas”?

The idea of David Ricardo laughing is somewhat unlikely – his Principles of Economics is as difficult as Karl Marx’s early chapters in volume 1 of Capital.

And Adam Smith’s writings on mercantile political economy (he never used the word “mercantilism”) are among the most angry, sharply polemical and high-blown of his rhetoric in Wealth of Nations. He considered mercantile policies an outrageous pretence to be defending national interests when in reality they defended the squalid self-interests of producers, not consumers.

The free trader case is lumbered with phoney “free traders” who speak on our behalf while running the world’s most destructive protectionist economies, namely in the European Union and the United States. Anti-free traders only have to point to EU/US agricultural protectionism to shrug off free trade attacks as being hypocritical – which they are.

Smith and Ricardo won the intellectual argument, but politicians and the special interest groups of subsidised farmers threw that advantage away. Nobody’s laughing, least of all the victims of protectionism.

Professor Gavin Kennedy, Edinburgh"

Smith as an Informed Sceptic

Tibor R. Machan, Professor Emeritus, Department of Philosophy, Auburn University (Montgomery, Alabama, USA) writes in Free Market News Network (Pompano Beach, Florida, USA with its Executive Offices in Montral, Canada), 18 November: “Is Classical Liberalism based on Skepticism?”

“Was Adam Smith a skeptic? In his Theory of Moral Sentiments, be it sound or not, he doesn’t appear to be one at all. All kinds of moral virtues are affirmed, quite confidently, in that, Smith’s favorite, book and there are passages about morality in The Wealth of Nations which show no less confidence in our ability to know a thing or two about right and wrong.”

Comment:
I have no wish to enter into a debate on the question posed by Professor Machan at the head of his article. However, I would like to make a comment on his question about Adam Smith, and, en passant, on his side remark about the ‘soundness’ or otherwise, of Smith’s philosophy in “Moral Sentiments”.

Smith did not simply assert as an article of faith that humans knew about the differences between right and wrong, as if he accepted or believed that these concepts were true a priori. He did not believe that humans were born with a moral sense alongside the other senses of sight, sound, smell and touch, though his tutor and mentor, Francis Hutcheson, believed in such a notion.

His theory of moral sentiments allowed for a learning process – nowadays called socialization – from close adults (in proximity not status), other children and other adults as we grow up in their company or are affected by them. The device of the ‘impartial spectator’ (conscience) acted as a standard which itself was influenced by what is learned about how others, as well as ourselves, react to certain behaviours. Notions of right and wrong are both learned and modified by our own behaviour and the behaviours of others.

Over time notions of right and wrong are subject to change; group norms change, albeit slowly over a generation or longer. What was acceptable behaviour in the 18th century may not be acceptable two hundred years later. On the cusp of changing social norms, a rise in tension over what is or is not acceptable may be experienced. This may be a source of scepticism among some, both the stalwarts for the status quo and the demanders for change. Elements of hostility for and against such changes may become evident.

When Smith was writing “Moral Sentiments” (1754-9), many questions in moral issues were considered to have been broadly settled, heavily influenced as he and others were by classical philosophy, backed by two millennia of acceptance. It is evident in his work that he was also critical of past ideas, including some of the ideas he had been taught recently by Francis Hutcheson, for example, Hutcheson’s ideas on the role of ‘benevolence’ and the claimed impossibility of there being mixed motives in a worthy action.

Now, whether Smith’s moral philosophy is ‘sound’ or not is a matter of opinion, but it was a deal sounder that some of the philosophies that preceded it, and towards which, Professor Machan’s ire may be better directed. Smith and Hume did not agree on all philosophical questions and they debated them fiercely during their many conversations in Edinburgh and Paris. They also agreed on much, including on questions of political economy.

In a period of the kind of intellectual ferment that typified the Scottish Enlightenment, scepticism about many things were a defining characteristic of its contributors. I do not consider that we are living through a period of similar intellectual ferment; what passes for the ferment in ideas today seems more akin to mere politics.

Two Smiths Think Alike

“Vietnam vet has used lessons learned in combat to build Fedex into a global empire, writes David Litterick” in today’s Daily Telegraph (UK), 19 November.

“The military efficiency of the operation would come as no surprise to anyone who has met Fred Smith, the chairman and chief executive who founded the company and an entire industry 30 years ago. A former marine, he has testified to how his time in the military developed his leadership skills and helped him build the firm into the second largest aircraft fleet in the world.

It's all a far cry from the company which started one night in 1971 with just 14 aircraft carrying a measly 184 packages, but then at the time few thought his new venture would succeed. Smith is not keen on talking about the past, particularly the Yale thesis which has now become legendary. But the story shows how ahead of the curve he was when he argued that an ever more computerised world would demand a reliable overnight delivery service.”

Comment

Fedex at $30 billion is one of the world’s largest parcel delivery services in the world, along with DHL, UPS, Deutsche Post, TNT, and numerous other state-owned postal services. It is now opening its second global air-hub after Memphis, USA, in Southern China.

"The growth in trade has been the engine that has increased the wealth of the world - no question. It's been tough on individuals who are in professions and in locations that get far more efficient competitors, like Delphi or GM, but that's what Adam Smith figured out two centuries ago.”

Adam Smith considered the future of the ‘carrying trade’ important enough for it to be an economic sector in its own right, after the home trade and foreign trade.

“All wholesale trade, all buying in order to sell again by wholesale, may be reduced to three different sorts. The home trade, the foreign trade of consumption, and the carrying trade. The home trade is employed in purchasing in one part of the same country, and selling in another, the produce of the industry of that country. It comprehends both the inland and the coasting trade. The foreign trade of consumption is employed in purchasing foreign goods for home consumption. The carrying trade is employed in transacting the commerce of foreign countries, or in carrying the surplus produce of one to another.” (Wealth of Nations, II.v.24, page 368)

Fred Smith, FEDEX CEO, makes a point about physical products that is significant for his business:

“Alan Greenspan likes to point out that the US economy has grown by factor of five since the end of World War Two but that the aggregate weight produced by the economy hasn't increased at all. Everything is getting lighter. An increasing percentage of manufactured goods are high-value-added and technology products and these tend to be easy to transport.”

Whereas Adam Smith remarked on the weight to value problems of the 18th century carrying trade acting to inhibit production for distant sale (hence his support for publicly funded programme of road, canal and harbour improvements), the modern global economy has a reverse relationship between weight (important in air transport) and high-value per unit freighted (important in modern business).

Today the main problem is not technology, but institutional barriers to trade with heavy restrictions on air travel aimed at protecting national sensitivities as seen in foreign ownership regulations, the ‘five freedoms’ rules about entering foreign airspace and in outright ‘closed sky’ national laws. Fred Smith (like Adam Smith) has come to the correct conclusion:

“The more trade barriers can be brought down the better.”

Read the full article by David Litterick on Fred Smith of FEDEX at:
http://www.telegraph.co.uk/ (free subscription)

Invisible Hand no 24

Don Boudreaux (18 November) write a Blog piece: “Are Humans Genetically Disposed to Pray to the State?” commenting on an article in Atlantic Monthly by Paul Bloom suggesting that ‘our minds are evolved to anthropomorphize events and institutions.”

Don Boudreaux writes:

“Just as it is perhaps inevitable that most people will continue to believe in a supernatural god, it is likely that most people will remain blind to the invisible hand. (It’s not called the "invisible hand" for nothing.) And just as it is appropriate to insist on scientifically sound explanations for natural phenomena such as volcanic eruptions, hurricanes, and acne outbreaks, it is appropriate to insist on scientifically sound explanations for complex phenomena such as rising prices, trade patterns, and differences in incomes across households. Explaining such economic patterns by resort to intentions (such as “greed”) is religion, not science.”

Comment
I find the first sentence rather odd (please read the whole article because my comments concentrate on a very small part of it and it very interesting: http://www.cafehayek.com/).

Belief in “a supernatural god” is often attributed to Adam Smith partly because he is associated in popular thinking with using Shakespeare’s metaphor of the invisible hand (Macbeth, 3:2) in “Wealth of Nations” (though only once and not directly about how markets work). His use of the invisible hand metaphor is quoted a ‘proof’ of Smith being at least a Deist, if not a believer in the Christian religion.

This is not evidence, I would have thought, of Smith, or anyone else, being ‘blind to the invisible hand’. If anything it must be a case of the reverse: belief in supernatural beings and invisible hands seem to go together. I am referring here to the connection in the sense of the attribution made by the many who talk of the ‘miracle’ of markets and such like (which I regularly criticize here).

The second part of the paragraph is correct in my view and accords with Adam Smith’s philosophy as expressed in his “History of Astronomy” (written between 1743-48). Smith saw philosophers searching for the ‘connecting events’ between phenomena and his work from then on until he died was precisely based on that objective.

All supernatural beings are beyond scientific study; they are based on faith that an invisible being, or beings, with ‘invisible hands’ operate or operated to initiate natural phenomena operating in ways which can be studied scientifically, though the invisible beings cannot. Apparently, religions believe that the closed system of the natural universe had an unseen first cause (maybe with a continuing role).

Given the scathing comments of Smith in his essay, the “History of Astronomy”, on “vulgar superstition”, I am not convinced that he was even a Deist.

More Visitors and More Page Views at Lost Legacy

The highest number of daily visitors to 'Lost legacy' was 197 on Tuesday and a total of 1,345 this week, viewing a total of 5,850 pages (a record since March).

More individuals are emailing the site (gavin - at - adamsmithslostlegacy.com) with questions, comments, bits of relevant information and the odd spot of praise.

Encouraging as this is, I want to do better for readers. Any views on how this might be achieved are most welcome (critical or otherwise).

Absent from the Blog Today

I am away out of touch with the Internet today, until Thursday morning, for a Black Tie dinner in honour of Heriot-Watt University's retiring Chancellor, Lord MacKay of Clashfern.

Normal service will resume when I return.

Gavin

John Nash and Adam Smith

An unsigned piece in The Republican: “Old adages fail in handicapping ‘new’ NFL” makes a tail-end reference to a movie that in turn has a script writer having the main character mouthing something alleged to have been said by John F. Nash, the mathematical genius who, among many other claims to fame, provided a mathematical solution to the “Bargaining Problem” (Econometrica, vols. XVIII, 1950 and XXI, 1953):

“I think back to a line uttered by Russell Crowe, playing mathematician John Nash in the movie "A Beautiful Mind" - "Adam Smith needs revision." Translated, it's time for new thinking to replace conventional wisdom. Now more than ever, you must think outside the box to win.”

As you may know, my other academic interest beside Adam Smith is in the science and practice of negotiation. I have spent 33 years researching, writing, teaching and consulting in bargaining behaviours, and, of course, I am familiar with John Nash’s work in this area (it features in my MBA elective course in Negotiation and is regularly visited by students in their examinations).

When I saw the film, “Beautiful Minds”, I enjoyed it, except for the references to Adam Smith. I am not at all sure of the authenticity of this attributed statement (I know that much of the portrayal of Nash was ‘economical’ with the truth – but it is a good movie nevertheless), and if it is true it must have followed from a misunderstanding by Nash of Smith’s philosophy.

The Nash ‘idealised’ solution to the Bargaining Problem is about the properties of a solution and not about the processes by which solutions to real world bargaining problems are found.

The assumptions of his solution model impose strict conditions: the two bargainers are ‘highly rational’; that ‘each can compare his desires various things’; ‘they are equal in bargaining skill; and that ‘each has full knowledge for the tastes and preferences of the other’. From these assumptions, a mathematical relationship (using ‘numerical utility’ theory) is built based on the ‘desire of each individual to maximise his gain in bargaining’.
The bargaining solution is the one that maximises the product of the net gains in utility to each individual for their bargaining.

If we take Adam Smith’s supposed assumption of utility maximising individuals (this is the version promoted by the University of Chicago and generally accepted across US campuses populated by mathematical economists) it is difficult to see how ‘Chicago’ economists would be different from ‘Nash’ economists.

It might be that Adam Smith could be considered different; he studied the process of ‘truck, barter and exchange’ and showed how two individuals, to achieve their own self-interests in the outcome would do so by serving the self-interests of the other party and not just their own – if they considered only their own they would deadlock. But Smith was not measuring the optimum outcome, nor specifying assumptions that imply what that outcome would be.
The Nash solution (especially in his second 1953 article) requires co-operation to achieve the optimum solution because all sub-optimal solutions leaves one or both bargainers worse off. Their maximisation desires force them to co-operate.

I conclude that the script writer was wrong: Adam Smith does not need revision, at least on this matter.

Incidentally, when Rand economists in 1952 made their discoveries associated with the Prisoner’s Dilemma game, showing that the majority of players did not find the ‘co-operative solution’ (in my experiments with managers in the 1970s-80s, only 8 per cent of pairs played ‘co-operate-co-operate’, the rest, 92 per cent, played ‘defection’) they wrote to John Nash asking him to comment, given this outcome and they suggested that the Nash solution was not the common solution. He did not reply. Maybe Nash needs revision if his solution is treated other than as an ideal?

Adam Smith Institute: spot on as usual!

More Luncacy from the Government?

"Charity begins in schools" by Sarah Womack, Social Affairs Correspondent, The Daily Telegraph, 16 November:

"Plans to encourage a charitable culture among young people by giving every secondary school £500 to put towards its own charity bank account were described as ridiculous economics last night.

The Government's initiative, to be announced today, involves schools topping up the accounts with their own fund-raising efforts.

The schools will have responsibility for managing the fund held by the Charities Aid Foundation.

But the Adam Smith Institute, a free-market think-tank, said charity was about "giving away your own money, not someone else's - that is taxation".

Self Help in Africa: the better road to prosperity

Mercatus Center (George Mason University, USA)

Enterprise Africa! [Mercatus@gmu.edu]

Below is a report in the recent Newsletter from the Mercatus center that every economist should read (better still, you should subscribe free to the Newsletter).

So much of the development discussion talks in billions of dollars, at macro-level politics and easily gets swamped by the wrong focus and not a little despair: billions go into Africa and little of fundamental value changes (corruption, state incompetence, Aids, richer countries and their protectionism, ideologies and anti-globalisation, etc.).

Smith wrote about the UK economy in its commercialization stage in the 18th century. It too was plagued by macro-politics, corruption and bad government. But he saw the underlying trends were towards opulence and liberty. What Africa might need, more than all the remedies tried so far, is a re-focus to the micro-level, to the real impediments that are removable relatively easy and to the encouragement of individual entrepreneurship.

George Mason University staff are doing a fine job is researching the problems at this level. Help spread knowledge of this approach and its simple message. Set the people free; remove obstacles to their self-help; clean up local government and support honest people with justice. Read “Wealth of Nations”.

“Barriers to Entrepreneurship in Langa Township
While in South Africa, the Enterprise Africa! research team interviewed entrepreneurs to get an impression of how they are contributing to the reduction of poverty in their communities. The story of Vick and Nam (below) is typical of the experiences of many budding entrepreneurs who are trying to improve life in the township.

Filed by Karol Boudreaux: Vicky and Nam Mangaliso are brother and sister. Together, they run the Nomzano Butchery in central Langa Township, Cape Town. The day we visited them in October, their shop was doing a steady business. Most customers were at the counters of the clean, attractive store. They wanted something from the wide assortment of meat that Vicky and Nam sell. A few others were sitting in the covered patio area, enjoying a nice brai (barbequed meat).

Vicky and Nam inherited Nomzano from their parents, who worked hard and built a number of businesses. Until the kids took over, though, the place was a bit lackluster. Once Vicky (27) and Nam (28) took the reins, things began to change: they covered the walls in the store will bright white tiles, increased the area for display counters, and expanded the seating area outside. They made the store and their products look better, and the residents of Langa have responded—on weekends, the place is packed.

With a fresh vision and the energy and drive that come with youth, Vicky and Nam are making real improvements to their store and to their community. But, they also face real barriers to growth—barriers that limit their ability to do even more. Consider just a few of the problems:

· Vicky and Nam have a great meat supplier, but the company, fearful of crime, won’t make deliveries in Langa. This means they are forced to get their meat from a middleman. Naturally, this raises costs for Vicky and Nam and, in turn, for their customers. If the local authorities did a better job at law enforcement, Vicky and Nam would be able to provide their products to customers at a lower price.

· Problems with crime in this part of Langa mean that Vicky and Nam close the shop earlier than they would like. Closing early means that they sell less and that customers have reduced opportunities to get the meat they want when they want it.

· Nomzano is located on Council property – this means that local government authorities, not Vicky and Nam, own the property. So, every time Vicky and Nam want to make a change to the structure, they have to go through a time-consuming application process. So far, they have been able to expand, but they’d be freer to make changes that their customers want if they were able to purchase this property. It’s not clear why this property hasn’t yet come up for sale.

· The local authorities seem unable to maintain access roads to the shop and don’t do a great job of collecting trash. This also imposes extra costs on Vicky and Nam. Because the council doesn’t do its job, they must spend money to get rid of insects and vermin.
With the good management provided by Vicky and Nam, Nomzano Butchery is growing.

Imagine how much better things could be, though, for the Mangalisos and for their customers if the institutional environment in Langa were improved. Their story, like many others we heard on our recent trip, highlights a key concern in South Africa: local governments need to work much harder to create a safer, cleaner, and less corrupt environment for all of their citizens.

Turgot Latest

Through today’s mid-day post comes a copy of Professor Ronald L. Meek’s (ed.,) “Turgot on Progress, Sociology and Economics” (Cambridge University Press, 1973). It includes his (I expect reliable) translation of Turgot’s Reflexions (1778)! Profess Meek was in the team that editedd the Glasgow Edition of Adam Smith's Works and Correspondence.

I have yet to see a French edition, preferably 1788 (just to close the circle – a necessary step in detective work and academic research) to check the originals.

Anybody who can help is most welcome to contact me (gk – at – ebs.hw.ac.uk)

Smith on charity

In Timesunion.com, staff writer, Kate Gurnett, writes: “Tapped out as time for giving nears: Charity operators fear donations for recent catastrophes could cut into holiday largess”

“That notion, of the wealthy chipping in, is backed by 18th-century economist Adam Smith, who believed that capitalism and charity go hand in hand. Smith argued that capitalism requires a network of trust to function; capitalists must have a moral sentiment of caring for others.

That's why leading 19th-century industrialists from Carnegie to Stanford to Vanderbilt launched libraries, concert halls and universities, Baker said. "It was traditional to give back in some form."

Not quite. Smith believed that people in an opulent commercial society would engage in charity. He did so himself, quietly, by giving much of his high £900 annual income (for the 18th century that was a good living) to relatives and others fallen on difficult times. When he died in 1790 his estate amounted to £400 in cash and his large library. The rest he gave away, living his whole life frugally and encouraging others to do so too.

Society needed a network of trust and people had moral sentiments for others, but this had nothing particularly to do with the phenomenon of ‘capitalism’, which did not appear until the 19th century and of which he knew and wrote nothing. Charity is not something that ‘capitalists’ have to do; all members of society have this obligation, even duty.

Kate Gurnett’s full article is at: http://timesunion.com/AspStories/story.asp?storyID=419607&category=REGIONOTHER&BCCode=&newsdate=11/15/2005

Interesting development on Turgot?

From earlier posts readers will know I have been reading Turgot recently in connection with my forthcoming new book on Adam Smith Palgrave’s Great Thinkers in Economics series).

Brief recap:

I bought a copy of what purported to be a translation of Turgot’s “Reflexions sur La Formation et la Distribution des Riches” (1766/1788) by Kenneth Jupp, 1999, Othila Press, London, published as “The Formation and Distribution of Wealth: reflections on capitalism”. My commentary on the accompanying Introduction and an article by Malcolm Hill on Adam Smith regarded them as tendentious. Details of the translation are scarce and the translator admits it is not a strictly scholarly translation.

This disappointment led me to purchase I. C. Lunberg’s “Turgot’s Unknown Translator: the Réflexions and Adam Smith’ (1965), Nijhoff, The Hague. This produces circumstantial, but not decisive, evidence that Smith translated a copy of the 1766 (or the 1770, Du Pont edition) version of Turgot’s little book and it gives exhaustive details of the various translations into English and German, and such variations between the 1766, 1770, 1788 and later versions of Turgot’s book.

I still had not read a reliable version of Turgot’s Réflexions, so I purchased the translation by William J. Ashley (1898), claiming to be a translation of the Du Pont de Nemours’ edition, published in Ephemerides du Citoyen, Paris, 1770, and in Œuvres de Turgot, 1809-11. Ashley translated from both the Ephemerides (1770) and M. Robineeau’s, 1889, version (in Petit Bibliothèque Economiques).

A quandary

Once again I am in a quandary because Lunberg is critical of Ashley’s translation and I am of Jupp’s. And I have still to access a copy of Turgot in French to satisfy myself on several points. Turgot’s original texts are rare.

Meanwhile, a most interesting issue has arisen from my reading of Ashley.

Several times a month I have cause to criticise the association of Adam Smith with the phenomenon of ‘capitalism’, even the word itself which was not used in English until 1854 (Oxford English Dictionary vol. iii). The first recorded English usage of ‘capitalist’ is in 1792 (Smith died in 1790).

Ashley translates Turgot in several places (p.54, 56, 57, 64) to say: ‘Capitalist Undertakers’ from ‘Capitaliste Entrepreneurs’. If this is from the 1770 edition of Turgot that would bring forward the use of the word ‘capitalist’ by 22 years and well within the time of Adam Smith. If it was in daily use among French economists it is likely that Smith would have heard the word and understood its meaning, though he did not translate it into English in his own Works.

I need to see the 1793 English translation on Réflexions (the edition allegedly translated by Smith) and the 1788 French edition, to check on the French language in these passages and on their translation into English. Not having access to either at present that is my quandary.

It may be sometime before I can access these editions.

Is there a reader with access to the 1793 (English), the 1788 (French), the 1889 (Robineau) editions, who could copy out and send to me the following ‘chapter’ headings from any or all of these works: LXI, LXI, LXIII, LXIV LXX, XCIII, XCIV?

Yes, I know it is a lot to ask, but I assume most readers of ‘Lost Legacy’ are interested in Adam Smith and have some access to good libraries on the history of economic ideas. I will, of course, continue my search in Edinburgh and I shall report if I find anything related to the issue: did Adam Smith have access to, was he familiar with, or did he read the word ‘capitalist’ from his connections with Turgot and other French economists?

Admittedly, it is a small point, but, like so much in research, many highways and byways lead from the road the researcher is on, most going nowhere, but occasionally one leads to something else that is important (though down these diversions lie the wreckage of many unfinished PhDs)

Any ideas you may have are most welcome: email to gk –at- ebs.hw.ac.uk

Thanks

Alan Greenspan gets it right - for once

I have criticised Alan Greenspan several times here for attributing to Adam Smith notions and ideas he never had, such as advocacy of ‘capitalism’, laissez faire and theories of invisible hands. But, credit where credit is due, Mr Greenspan refers to Adam Smith for once without error. Speaking via video conference links to international bankers at a conference organized by Banco de México, he said in the course of his speech on “Stability and Growth: the role of the Central Bank”:

“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 an economy less dependent on the actions of macroeconomic policy makers, whose responses often have come too late or have been misguided.”

No complaints, no quibbles, only belated praise for his correct appreciation of Smith’s legacy, unlike his previous efforts. You can read the entire Greenspan speech at:
http://www.npr.org/templates/story/story.php?storyId=5011709

'Lost Legacy' Elsewhere

'Lost legacy' is quoted over on the Globalisation Institute's Blog by William Danzek: "Did Adam Smith find protectionism a laughing matter?"

Yesterday I commented on an article in The Business by John Blundell on protectionist policies that led to EU subsidies for cows greater than the incomes of poor families in the developing world.

You can read the quotation at: http://www.globalisationinstitute.org/blog/

Nice to see the premier free trade blog spreading the word and appreciating something from one of the minnows (as yet).

Was Smith Religious?

David R. Francis writing in the Christian Science Monitor (Boston, Mass.), 14 November, under Commentary: Economic Scene: A Weekly Column: “It’s true: Churchgoers are wealthier “, discusses recent research into the relationship between attending church (or temples or mosques). You can read the full article at:
http://www.csmonitor.com/2005/1114/p15s02-cogn.html

Two paragraphs caught my attention:

“Economists have long had an interest in religion. Adam Smith's first book, written in 1759, dealt with human motives and activities under "a beneficent Providence." The Scottish professor of moral philosophy's second book, "Wealth of Nations," published in 1776, is regarded as the basis of capitalism.”

“Given their training, economists tend to think of religion as a type of market (as did Adam Smith) affected by both selfish interests and altruism.”

Apart from the usual problematic misstatement: "Wealth of Nations," published in 1776, is regarded as the basis of capitalism” and my usual comments ‘regarded by who’, and how was a book written in mid-18th century the ‘basis’ of a socio-economic phenomenon a century later?

Books do not create socio-economic systems; these evolves out of the existing socio-economic systems already in place and already undergoing processes that do not read books.
However, it is upon the religious interpolation into Smith’s 1759 Work that I wish to comment.

The case for a religious frame in Smith’s “Theory of Moral Sentiments” is not hard to make, given the way Smith wrote it and the language he used. Almost all interpretations of Smith’s Works find only a puzzle: was he a Christian or a Deist? They do not challenge the entire assumption of religiosity in his thinking.

The clearest statement of ‘Smith as a religious Deist’ is to be seen in the recent (brilliant) book by Jerry Evensky, “Adam Smith’s Moral Philosophy: a historical and contemporary perspective on markets, law, ethics, and culture” (Cambridge University Press, 2005: ISBN 0-521-85247-1).

Almost alone (itself a sign of scholarly risk) I have taken a different tack. I think Smith’s Works must be read in the historical context in which he wrote, in terms of both his family (his mother) and his community (Scottish public life in the 18th century). To read his text solely from the point of view of what the words say, and to disregard known aspects of the world in which he moved, is to miss out important, and ultimately, decisive circumstances that caused him to write in a certain manner.

I made a first attempt to cover this ground in “Adam Smith’s Lost Legacy” (2005) in chapter 8: “The religious climate”, but space precluded fully developing this theme (it was already 135,000 words in manuscript and the publisher’s limit was 70,000 words – I eventually managed to cut it to 92,000 and in the course sacrificed aspects of my arguments).

Briefly, Smith was not a natural rebel like his friend David Hume. Smith played by the rules, he did not rock the boat, he avoided head-to-head controversy and showed deference to the ‘great orders’ of society, and, advised other prudent men to do the same. He was brought up in an intensely religious household, under the close loving moral guidance of his widowed mother towards whom he was totally devoted.

He had disappointed her by not pursuing his original intention of being ordained into the Church as a Minister to serve in Scotland and instead left Oxford in 1746 to return to his mother’s home and seek employment as a tutor. He remained close to her all his life until she died in his household in Edinburgh in 1784. His mother’s influence can be seen in almost every step in his career from unemployed graduate to his first professorship in 1751, from her family contacts to the men who used their influence to promote his advances.

One necessary aspect of his behaviour throughout all his life was that he did not excite opposition from the religious zealots, of which Scotland had more than its share). These people patrolled the highways and byways of social life seeking signs of dissent and apostasy, and publicly humiliated those who fell foul of their paranoid theology. Smith lived within an intellectual open prison dominated by the clerics and the self-appointed guardians of religious (Christian) Protestantism to a degree seldom appreciated today (Iran is possibly a modern near example of the religious atmosphere in 18th century Scotland).

His works teem with hints that he was writing within this prudent straight-jacket. His public friendship with David Hume was one such broad hint, probably the boldest he made, though he was later to disappoint Hume in not agreeing in 1776 to posthumously publish the dying David’s ‘Dialogues concerning Religion’, but, as ever, the gentle David forgave him.

He carefully preserved, and saved from the fire that engulfed almost all of his unpublished papers in 1790, his own ‘juvenile’ essay on the ‘History of Astronomy’ (1743-48), which is another strong hint of his antipathies towards religion. He did not publish it himself, but It was published posthumously in 1795. In it he attacks ‘polytheism, and that vulgar superstition which ascribes all the irregular events of nature to the favour or displeasure of intelligent, though invisible beings, to gods, demons, witches, genii, fairies.’ Left unsaid is the accusation that the fallacies of Deism and Christian orthodoxy are just as guilty of the same superstitions, but no zealot could make a case to that effect the way it was written.

Each revised edition of “Moral Sentiments” successively diluted aspects of the religious imagery used throughout, most noticeably in the last revision of 1790, some years after his mother had died and his own death was near. Similarly, in “Wealth of Nations”, his last revised edition, completed just before he died, shows increased boldness in his attacks on mercantile political economy, going well beyond the ‘self-command’ he had practised in earlier editions and in his relationships with the men of influence in and around the British government.

Having chosen to make himself ‘busy’ from 1778-1790, in what was a ‘non-job’ for a philosopher as a Customs Commissioner, to avoid having to publish his Lectures in Jurisprudence containing his insights into the consequences of the US Constitution for the governance of Britain, he relaxed his self-censorship of his two great books enough to indicate the restraints he worked under all his adult life.

I have incorporated some of the arguments for these views in ‘Adam Smith’s Lost legacy’ and I will cover the ground more abundantly in my forthcoming book on Adam Smith for Palgrave’s series of Great Thinkers in Economics.

No Laughing Matter

John Blundell, Director General of the Institute of Economic Affairs (whose New Rural Economy is published on Monday), writes a trenchant piece, “EU cows are paid more than third-world families” in The Business today.

“The notion that “self-sufficiency” is an ideal to be attained is the opposite of good economics. We can grow our own crops and our own trees if we have a comparative advantage in doing so. If not, we are far wiser to import our food and wood. This intellectual battle was won when David Ricardo and Adam Smith and others laughed mercantilism off the stage of respectable ideas.”

I agree with the drift of Blundell’s message – highly appropriate for a Sunday newspaper, even a quality one like The Business – but I am still going to quibble, just for the record.

David Ricardo is not known for his less than terribly serious approach to economics. The idea of him laughing is somewhat unlikely – he wrote a very, very serious book on Principles of Economics, as 'difficult' as Karl Marx’s early chapters in volume 1 of Capital.

As for Smith his writings on mercantile political economy (he never used the word mercantilism) are among the most angry, sharply polemical and high-blown of his rhetoric that he ever wrote. He was truly an angry man when it came to mercantile policies, considering them to be near outrageous in their supposed defence of the interests of the nation, but in fact were articulating the squalid self-interests of ‘merchants and manufacturers’ (Book IV, "Wealth of Nations", ‘Of Systems of political oeconomy’, pages 428-688).

Smith admitted his polemical style in Book IV was a ‘very violent attack’ upon the ‘whole commercial system of Great Britain’ (Correspondence, Letter 208 to Andreas Holt, 26 October 1780, page 251). He wasn’t laughing.

True, latter-day protectionists deserve a battering (intellectually) and no doubt the odd smile at their idiocies too. But to some extent we free traders are lumbered with the phoney free traders who speak on our behalf, while running some of the most destructive protectionist economies known to humankind, namely in the rabid protectionism of the EU’s and the USA’s agricultural sectors (to which the lunacy of subsidising cows to an extent greater than the incomes of poor farmers in the unwealthy countries of the developing world, is well made by John Blundell). Anti-free traders only have to point to EU-USA protectionism to shrug off free trade attacks as being hypocritical – which they are.

Smith and Ricardo won the intellectual argument, but politicians and the special interest groups of subsidised farmers threw that advantage away. Nobody’s laughing, least of all the victims of protectionism.

Read John Blundell's piece at: http://www.thebusinessonline.com/

Reading "Wealth of Nations" a Rite of Passage?

William Grimes of The New York Times has his review of Last Gentleman Adventurer: coming of age in the Arctic: Edward Beauclerk Maurice (Houghton Mifflin) republished in Financial Express (India), 13 November. Grimes heads his review as: a “March to Manhood: an enthralling account of a schoolboy’s stay among the inuits of Canada.”

It opens:

“In 1930, a desperate year, Edward Beauclerk Maurice, an English schoolboy, took a desperate step. Inspired by a documentary on the Canadian Arctic, he signed up for a five-year apprenticeship with the Hudson’s Bay Co.

Under the agreement, he would be posted to one of the company’s six trading posts on Baffin Island. At 16, he became, in the words of the company’s original charter, a “gentleman adventurer”.

The Last Gentleman Adventurer is the enthralling account of Maurice’s stay among the Inuit of the Far North, and his evolution from the callow, accident-prone youth the local Inuit called “the Boy” into the skilled hunter, amateur doctor and trader they renamed Issumatak, “One Who Thinks.”

Among the other interesting tit bits of Edward’s life in the Arctic we have:

“Searching for reading material at his first post, Maurice’s choices ranged from Adam Smith’s Wealth of Nations to a thriller, Blood Ran Down the Bishop’s Face.”

Now that has got to be among the most unusual references to Adam Smith you are likely to see. “Wealth of Nations” apparently was on a shelf in his first trading post, but whether he chose it or the thriller is not stated. He probably would have had to read the thriller a dozen times to get the same amount of reading time from the “Wealth of Nations”.

Or he could have looked up Smith’s comments on his employers, the Hudson Bay Company (Book V, pages 743-4), and reflected on Smith’s cogent reasons for why he did not think the Hudson Bay Company was likely to have many competitors in the “miserable, though extensive country”, and why he thought it unable to make higher monopoly profits despite it nominal ‘monopoly’.

As to the thriller’s merits or attractions, I have no information.

Read the review at:
http://www.financialexpress.com/fe_full_story.php?content_id=108454

Good Thinking from the Newt!

There is an interesting exposition of a correct Smithian response to a real world situation in today’s Washington Post from a notable conservative. He at least understands Adam Smith’s legacy and refrains from the usual distortion we have come to expect from this quarter on matters pertaining to markets.

The problem is the growth of speciality hospitals in the USA. These specialize in certain procedures (heart disease, for instance), treat the ‘easy’ cases, but pass on ‘difficult’ cases to local Community Hospitals. This boosts individual doctors’ incomes and hospital profits but burdens those landed with the ‘awkward’ cases with greater expense without compensatory incomes from easier cases.

“A Health Threat We're Not Treating: Don't Let Doctors Rig the Market for Specialty Hospitals by Newt Gingrich, Washington Post (12 November 2005).

“The greatest dangers arise when doctors have a direct financial interest in a specialty hospital. It's just human nature for them to increase their own income by the simple act of giving the specialty hospital -- with which they are associated and from which they draw compensation -- all the easy and inexpensive cases, while sending everything risky and expensive to the larger community hospital. It's not hard to see the financial damage this could do to community hospitals

As a free-market conservative I strongly favor competition. In fact, I think Adam Smith's description of markets creating more choices of higher quality at lower cost was one of the great breakthroughs in human productivity. His publication of "The Wealth of Nations" in 1776 was as liberating as our own Declaration of Independence the same year.

Yet Smith recognized that sellers often try to create phony markets. He warned that when businesses get together they are often conspiring against the consumer. Businesses can see a financial interest in rigging the market so that it minimizes competition or sets prices. This same temptation to conspire against the consumer can be found in the emerging specialty hospital movement.

Congress should act now to protect our health system by establishing the right rules for fair competition.”

Comment

I agree with Newt Gingrich's approach (I thank him for not relying on the usual false attribution of laissez faire to Adam Smith; an approach worth copying by other conservatives) though I cannot comment on his remedy (Congress establishes rules for 'fair competition') until I see the details of what he proposes.

Separating doctors as employees from rights to ownership in an enterprise appears to me to be difficult to legislate about without causing problems of supervision, legal oversights and unfair penalties. However, the problem should be addressed, though it is probably present in other sectors too. Worth watching, in my view.

[Newt Gingrich, is a former Republican representative from Georgia and speaker of the House. He is the founder of the Center for Health Transformation.]

What a Muddle!

Cascadia Scorecard Weblog (‘Northwest Environments Watch’s take on the news that really matters’) carries, 11 November, a review (“Don’t Steal This Book") of a review by Witold Rybczynski, “Suburban Despair Is urban sprawl really an American menace?” of a book by Robert Brugman, “Sprawl: a compact history”. Yes, it is a complicated trail! (http://www.slate.com/id/2129636/)


"But the book (or perhaps just the review -- I don't know who's at fault) draws the opposite conclusions:

What this iconoclastic little book demonstrates is that sprawl is not the anomalous result of American zoning laws, or mortgage interest tax deduction, or cheap gas, or subsidized highway construction, or cultural antipathy toward cities. Nor is it an aberration... Sprawl is and always has been inherent to urbanization. It is driven less by the regulations of legislators, the actions of developers, and the theories of city planners, than by the decisions of millions of individuals—Adam Smith's "invisible hand."

How's that again? It's one thing to claim that the impulse to spread out is both common and understandable. It's quite another to say that policies that quite clearly encourage and subsidize sprawl are irrelevant to how cities grow. The former is defensible; the latter is laughable; and how you move from one to the other is beyond me.”

Comment

It is not clear to me either how Adam Smith’s lonely metaphor creeps into the causes of urban sprawl. If we are looking to the actions of ‘millions of individuals’ as the cause of something like sprawl then that is no explanation at all. The people concerned do not all pull in the same direction – some add to sprawl, others help to contain it. In which direction is the so-called invisible hand pulling? If in both directions, it is not an explanation; if in one or the other directions we need to know which to make an assessment of its value as an explanatory cause.

Read the review of the review at:

(http://cascadiascorecard.typepad.com/blog/2005/11/dont_steal_this.html)

Greed is Not Good

ABC News, 12 November, carries a report on greed having, allegedly, a positive influence - you might remember Gordon Geko, aka Michael Douglas, saying ‘greed is good’ in Oliver Stone’s movie, Wall Street, in 1987.

John Stossel (quoted on Lost Legacy a couple of times) and Marc Doran develop this theme for ABC News. They give small scale, micro examples of reaching low achievers in a New York ‘sink’ School with motivating stories about making money, legally: “When Greed is Good: money motive can create better public services and revitalize classrooms”.

They quote:

“Economist Walter Williams says we usually benefit more from for-profit companies. "Normally in our country," he said, "those areas where people are motivated the most by greed are the areas that we're the most satisfied with — supermarkets, computers, FedEx. Those areas where people say we're motivated by caring are the areas of disaster in our country, such as education, the post office, city garbage collection, police services."
I'd add my own selection: the Department of Motor Vehicles. Again and again, these agencies that are supposed to help us, don't serve us as well as people driven by what Williams called greed.

I'd call it enlightened self-interest, and self interest does a lot of good things. In 1776, Adam Smith explained how pursuing profit helps others: "He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention."

‘Greed’ is an emotive word that gets the listeners’ attention – something important when dealing with low-esteem people with short attention spans. But Adam Smith did not teach in favour of greed. ‘Self interest’ is not another word for ‘greed’ in Smithian markets.

His reference from “Wealth of Nations”, quoted above, was not about pursuing profit but about risk averse motives leading a trader to prefer to keep his capital-stock nearby in his neighbourhood, rather than send it abroad where he cannot watch over it so well. The effect of keeping capital-stock in a national economy, rather than in another country’s economy, was to raise the rate of growth (the physical goods produced annually in a country) in the home country to the betterment of the nation. This passage goes onto make the invisible hand reference.

Self-interest can do ‘good things’ and it can also, never forget, do ‘bad’ things too. Examples of the latter include self-interest driven motives to opt for monopoly pricing, to curtail supply and to eliminate competition, of which “Wealth of Nations” gives many other instances and examples. More modern day examples would include actions that add to pollution of the environment, unless detected and penalized by the law.

Left to themselves (the policy of laissez faire, which Smith never supported) self-interest alone can cause serious defects from selfish and greedy people thinking it is the same as greed.

Read the full story at http://abcnews.go.com/2020/Business/story?id=1304577 Includes video clip from the tv programme.

Do Nothing 2!

Russell Roberts nails the economics on Café Hayek (11 November), the economics Blog that consistently gets the appropriate policy right. Russell spots the following in the Washington Post, which shows that while the usual knee jerk reaction to oil price spikes caused by events like Katrina is to rage about ‘price gouging’, given a period of time for reflection, the truth finally comes out:

"When oil prices spike, it is because of scarcity -- for example, scarcity caused by hurricane damage to petroleum infrastructure on the Gulf Coast. The best way to manage that scarcity is for producers to make a special effort to get oil to the market and for consumers to make a special effort to cut back. Higher prices encourage both of those responses; rather than complain of price gouging, Congress should celebrate price signals. By contrast, controlled prices create no pressure for extra production or conservation. They just create gas lines: Witness the 1970s.

A tax on windfall profits is less counterproductive but still bad. For one thing, it's not as though the profits are socially useless. Even in the absence of a special tax, they generate regular tax revenue for both federal and state governments as well as dividends for retirement plans. For another, the profits are a spur to new investment; taxing them reduces the return that companies will expect to make on new oil finds or refineries, with the result that there will be less oil and gas available in the future and hence higher prices."

The title of the editorial is the lovely, "A Call to Inaction."

I like the editorial on this subject. I recommend the same thing over Venezuela; let events take care of the wonderland of Marxist illusion and economics take care of price spikes. Do Nothing!

It doesn’t do any good to be always doing something about everything; do less about most things, nothing about something’s and a lot where the doing something specific will help (like emergencies). Knowing the difference among these options is what legislators are supposed to have competence in; that they clearly don’t (in all political systems) is a sign that they should think before they bray for action and resort to populist stances.

At his point those US Senators, braying like spoilt children for ‘profits taxes’ and price controls, should quietly slip out of the limelight and sit in the park for a couple of hours, contemplating their foolish self-imposed idiocies.

'Wage Gouging' Exposed!

In today’s ‘In brief’ from The Foundation for Economic Education, there is a brilliant little piece showing the idiocy prevalent in parts of the US legislature (the same idiocies are latent in the House of Commons – yes, the 'usual suspects', lamentably, on both sides of the Chamber).

Apologies for the unscholarly language but recent antics by some US Senators against oil companies under the banner of ‘price gouging’ shows their illiteracy in how economies work, when they are doing what they do best in moving the quantity supplied into line with sudden surges in the quantity demanded, has reached avoidable and self imposed crisis levels among some legislators.

“Worker Scarcity Boosts Pay in New Orleans11/11/05“Burger King is offering a $6,000 signing bonus to anyone who agrees to work for a year at one of its New Orleans outlets. Rally's, a local restaurant chain, has nearly doubled its pay for new employees to $10 an hour. . . . Ten weeks after Katrina, government officials and business leaders worry that a scarcity of able-bodied workers is hampering the area's recovery. In their desperation, they are using a variety of tactics to attract workers.” (New York Times, Friday) Wage-gouging!"

If the above mentioned Senators had their way there would be Senate inquiries afoot with ‘experts’ advising the worthy legislators to impose a special super-wages tax on the employees for accepting such 'ludicrously high' wages ('profiting from misery', etc.,) and expounding rabid, foaming at the mouth, indignation-laced demands to subject them to public pillory.

Fortunately, working people in the US have more common sense that some of their legislating ‘betters’.

Note: reading the daily FEE ‘In brief’ produces loads of gems like the above. Enquire from: (subscribe free from: inbrief@fee.org)

The Foundation for Economic Education is at: 30 South Broadway, Irvington, NY 10533, USA.

Those teaching economics anywhere in the world will find loads of practical discussion topics from this source to liven class discussions.

Public Works Are Not Exempt from Market Forces

Unison (Irish Independent) carries an article “Accountants shouldn’t decide infrastructure” (10 November) making the case for public investment in infrastructure even though accountants (‘bean counters) would assert that it would not make an economic profit.

In the midst of putting the the case, the anonymous author asserts, without elaboration, the following reference to Adam Smith:

“Yet even the father of modern capitalism, Adam Smith, believed that public works should be exempt from market forces.”

I shall step over the incorrect attribution “the father of modern capitalism” (see previous posts) and examine what Adam Smith did say about what we know today as infrastructure projects. I suggest it was a bit deeper than ‘exempt from market forces’.

In Book V of “Wealth of Nations” (‘Of the Revenue of the Sovereign or Commonwealth’), pages 689-947, Smith regarded the ‘expence of publick works and public institutions’ as the third and last duty of the commonwealth (Defence and Justice being the first two duties).

He suggested that the commonwealth should erect and maintain those institutions and works

‘which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expence of any individual or small number of individuals, and which it, therefore, cannot be expected that any individual or small number of individuals could erect and maintain’ (p 723).

Though the above ought to be clear enough, some treat this as an absolute mandate for the public authorities to ‘erect and maintain’ all public works and institutions. This is not correct. Because at a particular moment ‘the performance of this duty’ requires ‘very different degrees of expence in the different periods of society’, different options are available when deciding how to fund particular public projects. As always, it all depends on a case-by-case basis.

Some public works are ‘necessary for facilitating Commerce in general’ (p 724). As the ‘annual produce in the different periods of society’ increases the expense of carrying out this duty. As the country grows more opulent it becomes possible to defray the expense of public works by different means, including ‘small tolls’, ‘lock-duties’, small ‘port-duties’, state-backed coinage (which ‘defrays its own expence’ or seignorage’) and state post-office services.

Smith also explored different forms of public or private management of infra-structure projects and their problems (indolence of public commissioners and cheating by private operators – ‘mean and improper persons’ - the ‘abuses of which … have in many cases been very justly complained of’, p. 726).

That the commonwealth should fund public works unquestionably is a duty of government use of taxation as long as no ‘individual or small number of individuals’ could make it profitable. That users of the public works should contribute to their expense is unquestionably an acceptable practice. How they should be managed is a matter of utility – which set of persons does it better? As society grows in opulence the private investment funds available for projects, including major public works, increase in their availability. The absolute need public funding becomes less mandatory. Markets re-assert themselves.

In more modern terms, the state may fund the erection and maintenance of an airport, but as air traffic grows beyond a point, the government may privatise the airport and hand the responsibility for erecting further runways and terminals over to private investors. This is perfectly consistent with good sense and Smithian market economics.

For this reason, I would severely qualify the assertion that “Adam Smith, believed that public works should be exempt from market forces.” He did no such thing.

What was a necessary source of funding in mid-18th century Britain was not an absolute rule for all time thereafter. Adam Smith’s legacy was not a set of cardinal rules, forever unchangeable and locked into 18th century circumstances. Those countries that are, relatively speaking, slowly emerging from 18th century conditions in capital accumulation (I am not referring here to Ireland!) should consider Smith’s assessment of the viable source of capital for their necessary public works; those well beyond such early and primitive sources of capital accumulation have more options for securing the funds from private or public sources.

In both circumstances, Adam Smith had something worth considering from his legacy, and he did not exempt for all time public infrastructure projects from market forces.

Reality is More Complex than Some Imagine

Julian Brookes, the editor of MotherJones.com (San Francisco, California) interviews John Ralston Saul on the telephone. The interview can be read at: http://www.motherjones.com/news/qa/2005/11/saul.html

John Ralston Saul wrote “The Collapse of Globalism” along the lines of presenting a largely straw man and then attacking it furiously on all matters, large and small, connected and unconnected, good and bad analogies and partial pictures of what has happened in practice. It is short of being an exposure of a global conspiracy by malign forces – the rich and powerful – who ‘rule the world’. Fortunately for readers, almost alone, Saul has seen through the deceptions of the ‘global conspirators’ and exposes them to his readers with the convincing clarity of the ‘man they could not fool’. If Saul’s book was written as fiction, the ‘hero’ would fight against the odds and the perfidious duplicity at great risk to himself until with a mighty heave he brings the evil ‘global conspirators’ to a richly deserved denouement, and the eternal gratitude of the entire world.

The picture of the world upon which Saul casts his gaze is much more complicated than he imagines. There are multitudes of sometimes overlapping power centres, few of them centralized into a single power centre. International agencies operate in an uncoordinated manner, as they must: the UN and its sub-agencies, the World Bank, the IMF, the WTO, EU, NAFTA, CAFTA, ADP, NATO, etc., national governments, regional associations, national state agencies, private corporate bodies and their trade associations, trade unions, political parties, insurgency forces, NGOs, lobbyists, pressure groups, international and local media, religious organisations, sporting bodies, cultural associations, PTAs, producers, consumers, residents, citizens, electorates and the rest.

Saul’s vision is that powerful private global corporations sit at the top of these local centres of power and their writ rules the world through ‘globalism’, the new ideology, a religion even.

Into this milieu of largely competing sources of power, the global corporation allegedly has ruled supreme for thirty years and has been exposed as a non-solution to the world’s problems (these latter are not defined, but has something to do with the failures of Keynesian orthodoxy from the post-war years). Now it has been said that a ‘week is a long time in politics’ (Harold Wilson, UK PM) but the time scale for a change in the world’s economic structures is much greater than a mere thirty years; try a century or more. The idea that a few individuals in a few global corporations can adjust crucial economic parameters, motivations, incentives and penalties, and literally change the world, is only believable in university classrooms and libraries by those who have lost contact with ‘the ways of the world’ (as Adam Smith expressed it).

People are not wooden chess pieces, as Smith also said in a famous passage (“Moral Sentiments”, VI.ii.2.17, pages 233-4). They do not act like automatons and change instantaneously their multi-motivated behaviours to accord with a view of the world that believes human actions and reactions to changing circumstances operate with infinite velocity. Some, many, sometimes everybody, will resist having to change at all. Zealot driven fanatics try to overcome resistance to their strictures with violence, mental and physical. Smith cautioned against such behaviour. ‘The man of public spirit is prompted altogether by humanity and benevolence’ and ‘When he cannot conquer the rooted prejudices of the people by reason and persuasion’, he will not attempt to subdue them by force’.

Those who are ‘wise in their own conceit’ have great expectations of the good or ill effects of what they propose or oppose. To assume that the adoption of a policy of, for example, free trade, will be transmitted into all its beneficial or negative consequences instantly (or 'ever'), Smith said, was ‘utopian’ (“Wealth of Nations”, IV.ii.42: page 471).

In the real world, the array of power centres, mentioned above, are divided, some sharply, on any policy that is adopted by any one or all of the other power centres. Inevitably, some swoop on ‘difficulties’ in one area to pursue their agendas from another area, which is what was really behind Asian governments adopting certain policies after the collapse of the Asian financial markets, much of it fed by local Asian pyramid type speculation in property development (some of it corrupt, and close to the centres of political power) and by overseas financial speculators (a breed of financial expertise that pre-dates by a long time the temporary political ascendancies of Thatcher or Reagan!).

Even the practice of so-called globalism is distorted. Among the most obvious is the continuation of agricultural protectionism in the European Union and the United States, and, it must also be remembered, the continuation of intra-developing countries protectionism on each other – intra-African trade is miniscule. This is not by design, but by the rooted prejudices of groups within each country’s political system. Opening up to total free trade in all countries for all products is not practical and neither has it happened in 60 years, hence to pretend to measure the success or failure of a policy on the basis of thirty years of continuing protectionism, with elements of free trade, is problematical.

The cases of India and China are interesting. They opened their markets (slowly) and de-regulated some aspects of their controlled economies. It is raising living standards at a faster rate than anybody expected. Their experience is no different from that of non-British nations joining industrialisation in the 19th century – they all got richer, not in money (a mercantile fallacy exposed by Smith) but in real incomes, i.e., what they bought each week.

Of course, national political elites articulate these events as their national or personal succesess, but this has more to do with their rooted local prejudices than reality. So it was in 19th century Germany, as the writings of Frederic List (1854) amply demonstrated. The fact remains that access to world markets has lifted millions of poor Indians and Chinese out of dire absolute poverty, because wealth creation – the production and sale of real goods, not mere money accumulation – through successive rounds of increasing divisions of labour, 'truck, barter and exchange', and re-investment in enhanced amounts of productive capital (not mere money accumulation) spreads Smithian ‘opulence’ faster than aid, grants and charity ever can.
Saul’s prognosis for the real problems of the world’s economies is a dead-end. It gives fanatics, mainly refugees from the collapse of Marxian communism and their younger activists, an excuse to disrupt WTO and G8 meetings (as if these events are world shattering in their implications). Along with all the other obstacles to expanding markets, many in the richer western economies, are encouraged to persuade their political representatives to block ‘foreign’ imports on the spurious grounds that lower cost imports from the developing and the developed world somehow harm their consumers by raising their real wages, when, in fact, it only temporarily harms some producer groups. Smith favoured ‘transition’ periods for those affected negatively on grounds of common humanity. He was a realist not an ideologue.

Take a longer view. Calm down. Count the good news and set it against the bad. Above all don’t panic. There is no conspiracy, there are no hidden enemies and there are no malign forces working for our destruction, except in racy fiction.

Maxims not Canons

O. P. Srivastava in the Economic Times, India (part of India Times), 9 November, writes an article: “Junk the loose canons of taxation”.

Fair enough, a point of view upon which we could possible agree if we read what he proposed in them should be ‘junked’. However he writes at the head of the article:

“Adam Smith, author of economic science had formulated an important set of principles, which he called “canons of taxation”. They were the canons of equality, certainty, convenience and economy. He was basically concerned with the ways in which an economy could increase its productive capacity and thereby receive a higher rate of economic growth.”

It is a common error (originating not where I know of) in respect of what Adam Smith wrote, to refer to his “canons of taxation”. He did not use such a word. He reported them as “maxims” not canons.

Nor did he formulate the maxims himself. He was quite specific on this point. Smith wrote in reference to the maxims he had summarised: the “foregoing maxims have recommended them more of less to the attention of all nations” (“Wealth of Nations”, V.ii.b.7: page 827).

In other words, Smith reported on the generally accepted maxims of taxation; he did not invent them, nor call them canons.

The Law and Competition

Peter Gordon writing in The Standard, Hong Kong (“China’s Business Newspaper”), discusses the government’s proposal for a ‘fair competition law. Much of what he writes is a frank assessment of actual competition in markets and I would agree with him on many points.

For example, he opens with a statement from Hong Kong’s Chief Executive Donald Tsang who said: "we do not want to see a situation where a few big companies, whether local or international, can corner the market, fix prices or engage in bid rigging." Now if that same rule applied to the burgeoning growth of large ex-state enterprises in China it would be exceptionally good news. Britain did not quite manage it with its privatizations that created private monopolies in place of state monopolies in the 1990s.

However, Peter Gordon makes some of the usual errors when referring to Adam Smith, though he has a right to his opinion and how he expresses it.

He writes:

“The economic issue is primarily one of efficiency. It's through competition that companies become efficient; competition forces them to pass on these efficiencies in lower costs; and lower costs benefit the economy as a whole.
There's no rule that businessmen have to like this. Indeed, businessmen usually do their best to avoid competition. This is, arguably, their job: businessmen can try to avoid competition by developing new goods and services, by knocking their competitors out of the market through better or less expensive goods and services by - in other words - competing.”

You could not get it clearer than that. I can also testify that I have never met a business leader yet who likes competition, and I have met many who loathe it and do their best to eliminate it. The rule of law is needed to prevent firms and the people in them from doing all they can eliminate competition, fairly or unfairly. In this context, the antics of British Airways some years back to undermine rival airlines on the Atlantic routes spring to mind.

Peter Gordon continues:

“It's this market mechanism that makes economies work to the benefit of us all. As Adam Smith, the patron saint of laissez-faire economies, wrote: "It's 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."

“Adam Smith, the patron saint of laissez-faire economies”? Oh, dear. He was neither a ‘patron saint’ of anything, nor ‘laissez faire economies’, words he never used. That ‘honour’, if it can be called such, or more correctly, idealistic illusion, belongs to a number of French économistes in the mid-18th century, sometimes known as the Physiocrats, and it was never accepted as a policy by Adam Smith.

“Furthermore, sometimes businessmen don't compete as they should, but instead collude. Smith also wrote that "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."

As Peter Gordon is aware of this comment by Smith on the non-competitive proclivities of business people, it should cause him to reflect on the contaminated inclinations of his nominated so called ‘patron saint of laissez faire’. Smith's “Wealth of Nations” is replete with warnings about allowing business people (‘merchants and manufacturers’) alone to do whatever they pleased.

Peter Gordon’s conclusion is most apposite:

“A competition law, therefore, should serve to restore competition where it's lacking.”

Yes, indeed! That is why laissez faire is a false doctrine and why Smith had nothing to do with it. Competition has to be enforced by the law otherwise it degenerates into monopolies or, if the State monopolises economic activity, only the law can free people from the effects of State monopoly and its (always) associated totalitarian or authoritarian government.

France Not on the Verge of 'Ruin'

John Hinderaker of http://Powerlineblog.com quotes from Ralph Peters "who predicted the French riots, and now he diagnoses them; his perspective is so hostile to the French that he almost seems pro-rioter":

"As I wrote in my last book, this violence was inevitable. Continental Europe has no model for integrating immigrants into the social and economic mainstream. Instead of creating tomorrow's jobs, Europe protects yesterday's. Talented young Europeans struggle to come to the United States to work (but they'll settle for Britain). And "Old Europe's" prejudices go deeper than those in our Deep South of 50 years ago. "

Read the rest of this most insightful piece.

John Hinderaker adds:

"I think it was Adam Smith who said that there is a lot of ruin in a country. It's hard to say how close France has come to using up its allotment."

Yes, Smith did write that there was a 'great deal of ruin in a Nation' (Ross, Ian, The Life of Adam Smith, 1995, page 327). The gist of Smith's point was to caution Sir John Sinclair, who appeared somewhat panicky about the course of the war in the American colonies going badly for Britain and had exclaimed that more of thse reverse would 'ruin Britain'. Smith did not think the loss of the colonies would 'ruin Britain'.

I would caution that the 'disturbances in France' are nowehere near 'ruining' France. Aimless discontent is unlikely to bring down French society, which has great depths of solidarity within it. Sometimes the media gives prominence to events that look more frightening than they really are. Note that the French state has not yet begun to react, the CRS are in their barracks, the police are hardly stretched and the army is not yet deployed.

The underlying problems remain, however. These will take time to address. France has time.

Dr Vaknin's Muddle in Markets

Sam Vaknin, PhD, offers “Anarchy as an organizing principle” on http://globalpolitician.com, 6 November 2005. It contains a fair amount of hyperbole:

“The recent spate of accounting fraud scandals signals the end of an era. Disillusionment and disenchantment with American capitalism may yet lead to a tectonic ideological shift from laissez faire and self regulation to state intervention and regulation. This would be the reversal of a trend dating back to Thatcher in Britain and Reagan in the USA. It would also cast some fundamental - and way more ancient - tenets of free-marketry in grave doubt”.

It develops the usual problematical assertions about Adam Smith:

“Markets are perceived as self-organizing, self-assembling, exchanges of information, goods, and services. Adam Smith's "invisible hand" is the sum of all the mechanisms whose interaction gives rise to the optimal allocation of economic resources. The market's great advantages over central planning are precisely its randomness and its lack of self-awareness.Market participants go about their egoistic business, trying to maximize their utility, oblivious of the interests and action of all, bar those they interact with directly. Somehow, out of the chaos and clamor, a structure emerges of order and efficiency unmatched. Man is incapable of intentionally producing better outcomes. Thus, any intervention and interference are deemed to be detrimental to the proper functioning of the economy.It is a minor step from this idealized worldview back to the Physiocrats, who preceded Adam Smith, and who propounded the doctrine of "laissez faire, laissez passer" - the hands-off battle cry. Theirs was a natural religion. The market, as an agglomeration of individuals, they thundered, was surely entitled to enjoy the rights and freedoms accorded to each and every person. John Stuart Mill weighed against the state's involvement in the economy in his influential and exquisitely-timed "Principles of Political Economy", published in 1848.”

Listing the errors, omissions and exaggerations is a duty, but not the happiest of tasks:

Adam Smith’s “invisible hand” is not “the sum of all the mechanisms” giving “rise to the optimal allocation of economic resources”. The invisible hand was a lonely metaphor, not a theory, not something that existed or exists. There are no invisible hands, except in pagan religion, and among sound-bite driven journalists. How markets work is not miraculous or mysterious; they are fully understood understood (as are rainbows).

Acts of “any intervention and interference” are not “deemed to be detrimental” by all economists, and certainly not by Adam Smith. Smithian markets operate within the rule of law and the necessary interferences of a vigilant legislature, eyeing attempts by ‘merchants and manufacturers’ to create monopolies and in many other ways to cheat consumers. If participants commit crimes they should be sent to a court of law; recent cases are good news for the rule of law.

Laissez faire, advocated by the Physiocrats (or rather some of them – not Turgot), was never advocated by Smith because he understood market failure (in public goods, education and health). That John Stuart Mill joined the clamour for laissez faire in 1848 is no responsibility of Adam Smith (who died in 1790).

“Market participants go about their egoistic business, trying to maximize their utility, oblivious of the interests and action of all, bar those they interact with directly.”

Question: what is Sam Vaknin complaining about when market participants transacting with people direclty do not subject them to their ‘egoistic business’, or their passion for ‘maximising their utility’ even though they may be ‘oblivious’ to all the others they do not transact with? He is so close to presenting the authentic view of Smith, but he blows it.

If all market transactions are not in play to ‘egoistic’ ‘selfish’ maximisers, why is their ‘indifference’ to those they do not transact with a problem? If we enjoy our grandchildren growing up, but not to anything like the same extent those millions of other people's grandchildren whom we do not know, how are we deficient? Why would society collapse because that is how people behave, as Smith showed in "Moral Sentiments" (1759)?

It would be a serious problem if market participants did behave as egoistic maximisers towards those with whom they trade; it cannot be a problem at all in a Smithian market, or indeed in Vanin’s version of a market, if they do not so misbehave. If all participants deal with each other without expressing their ‘egoistic’ tendencies, if they mediate their differences and interests and aim for less than ‘maximising’ their ‘utility’, and if they are not ‘obliovious’ to each other, what exactly is Vaknin complaining about?

Everybody is in some market (though not in all), and nobody is excluded from all markets, it follows that Vaknin’s picture of markets can hardly be improved upon. This contradiction makes his assertions somewhat strange:

“This noble propensity seemed, alas, to have been tampered by avarice and narcissism and by the immature inability to postpone gratification.”

Markets never changed human behaviour – Smith and David Hume considered behaviour to be a constant across all ages and all forms of economic structures. If people were given to ‘narcissism’ and the ‘immature inability to postpone gratification’ in ancient Greece and Rome (as they were with a vengeance), there is no reason to believe they would not be in mid-18th century Scotland, or 21st century USA.

Oh, No He Didn't!

Jim Stanford, an economist working for the Autoworkers union in Canada, writes a lively piece in the Globe and Mail, 7 November, headed “Rage against the machine”, an account of his frustration from being stalked by phone calls generated by an automatic machine in pursuit of a debt that somebody owed who had lived in his home before he moved in.

I am sure most of us have been there, and still suffer from, such intrusive phone calls trying to sell something, often at meal times, . Hence Jim, Stanford should start with a lot of sympathy in his quest to rid such nuisance calls from his life.

However, he lost mine at the first paragraph:

“Anyone who has read Adam Smith knows that in a free-market system, the pursuit of private profit always leads to the enhancement of the collective good. The inherent human desire to make a buck, channelled through the unfettered forces of supply and demand, will ensure that resources are optimally allocated and efficiency is maximized, for the good of us all.”

That is not what Adam Smith said, nor implied. It may well be what Jim Stanford was taught by his tutors during his economics' classes, but I think I can safely say that they never read this in Adam Smith’s “Wealth of Nations”, and neither did Jim Stanford, assuming his tutors and Jim ever read Smith’s books at all.

The pursuit of profit does not ‘always’ lead to ‘enhancement of the public good’, because private profit can also lead to the enhancement of private not public benefits, as in monopoly profits at the expense of consumers, fraudulent profits at the expense of the victims of fraud, and anti-social profits from polluters passing their costs onto others.

Comments on Turgot and Smith

I have just finished reading I. C. Lunberg’s “Turgot’s Unknown Translator: the Reflexions and Adam Smith” (Nijhoff, The Hague, 1964), which is a most interesting exegetical study into a problem of the identity of the first translation into English. Dr Lunberg, having marshalled the evidence with forensic intensity, concludes that it was Adam Smith who translated Turgot’s essay. At this stage I cannot comment on that conclusion, as I have to consult the originals first, though I think the evidence is somewhat better than circumstantial.

On the evidence of Smith’s use of language when discussing the nature of ‘capitals’ and his use of ‘a capital’, ‘the capital’ and use of exact translations from Turgot’s pamphlet, Dr Lunberg makes a formidable case. Only in the total absence of correspondence between Turgot and Smith is there doubt in my mind, though the fact of Smith’s use of indicative, or ‘marker’, language shows that he had read Turgot in the original French. He could have translated from the 1766 first edition of Réflexions, or from the 1769-70 version, edited by Pierre-Samuel Du Pont in his Ephémérides du Citoyen (a copy was in Smith's library) for his own use in “Wealth of Nations”.

Whether Smith circulated his translation or notes to friends, which were printed anonymously in English in 1793 (Smith died in 1790), is ‘not proven’ yet, as we say in one of the law court verdicts in the Scotland.

Lunberg’s masterly analysis caused me to re-read today the edition of Turgot’s Réflexions, translated and edited by Kenneth Jupp (“The Formation and Distribution of Wealth: reflections on Capitalism”, Othila Press, 1999) and my disappointment with it, mentioned earlier on this Blog, has deepened.

Take this tendentious (at least, I hope, to regular readers of ‘Lost legacy’) paragraph from Jupp’s booklet, written by Malcolm Hill:

“Look after yourself and your family and an invisible hand will look after society’ say modern admirers of Smith. Smith did not write anything so brief. However the paraphrase fairly reflects his view” (page 69).

This assertion is tosh.

Excellent Example of Smith's Legacy

Duane D. Freese, a columnist on Tech Central Station (“where free markets meet technology”) writes an excellent piece on Rosa Parks, “Courage and Principle” (3 November 2005).

Read it in full at http://www.techcentralstation.com/110305F.html

“Rosa Parks proved that when she said no to giving up her seat to a white man in the colored section of a Montgomery, Ala., bus in December 1955.

Nearly a half century later her body lay in state under the nation's Capitol Dome demonstrating the importance of her courage in taking such a simple act.”

What is so good about Duane’s approach to the historic incident that presaged the end of the shame of the then US environment of racial discrimination against the descendants of former slaves, contrary to the US Constitution nearly 100 years after the ‘civil war’ (‘war between the States’ as some still call it), is not just his measured critique of that period of US life, but also his linking his critique so neatly to the teachings of Adam Smith.

“Her rejection of the bus system's attempt to dispossess her of her seat was in line with what John Locke in his Social Contract theory would argue was the right to object by any individual denied his basic property rights, which governments are originated to defend not offend. Or, as Adam Smith in Lectures on Jurisprudence, declared:

"The first and chief design of every system of government is to maintain justice: to prevent the members of society from encroaching on one another's property, or seizing what is not their own. The design here is to give each one the secure and peaceable possession of his own property."

Her action, in short, was in keeping with the founders of the nation, when they rejected the boarding of British troops in people's homes and objected to "taxation without representation." It is what Thomas Jefferson declared as the reason for the nation's separation, that King George III was violating the natural law that "all men are created equal, endowed by their creators with certain inalienable rights, life, liberty and the pursuit of happiness." What happiness can be pursued if government can simply take away what by right is yours?”

The quotation from Smith’s Lectures in “Jurisprudence” (available at a most reasonable price from Liberty Fund, Indianapolis, Indiana – try Amazon) is from i.I, page 5: a Lecture he gave on Friday 24 December 1762.

It is a most interesting point about Smith’s legacy that its central principles, enunciated in his Works, make a solid and principled case against a breach of justice when the justice system fails its citizens.

Justice is about the legislature not allowing the government (the Executive) to pass laws that breach the principle of justice and the judiciary upholding the inalienable right of the citizen to the quite enjoyment of her property rights.

Of course, where the judiciary is in league with the Executive and is supported by the legislature in a clear breach of Natural Justice, Rosa Parks, and the millions she represented, have a right to challenge all three elements of the governance of their democratic country. It is to the great credit of the USA that these appalling errors were corrected, largely peacefully and with dignity on all sides of the controversy, where in other countries such sharp divisions have lapsed into ethnic chaos, and in some unahppy circumstances, into genocide. People who see nothing good in America should quietly reflect on this example.

I found his a compelling case and congratulate Duane D. Freese on his excellent article and Tech Central Station for publishing it.

Is it a sure-fire candidate for the Lost Legacy Monthly Prize?

Encouraging Steady (small) Rise in Visits

Site visits to "Lost legacy" are increasing in a truly Smithian fashion - slowly, but consistently.

Daily visitors are averaging around 130 (top 185 - lowest 124). Noticeably, the number of page views per visit in increasing by about a third. Last seven days it was 4,984 - approaching 5,000!

This is encouraging. Any ideas to expand the number of visits and to entice them to read more pages are most welcome (critical and otherwise). Any feedback?

You can email me at: gk - at - ebs.hw.ac.uk

Thanks

Gavin

New Light on Turgot's Influence on Smith?

Last month (October 15) I wrote about an edition of Turgot’s “Réflexions sur la formation et la Distribution des Riches” (Reflections on the creation and distribution of Wealth, 1766) and how its translator had managed to link both Turgot and Smith to the development of ‘capitalism’ nearly a 100 years before the word (and the phenomenon) were invented.

I am now in the midst of reading (plus the other items on my desk) a most interesting little volume entitled: “Turgot’s Unknown Translator: the Reflexions and Adam Smith” by I. C. Lindberg (Martinus Nijhoff, The Hague, The Netherlands, 1964). The gist, so far, is that an early translation of this interesting, and seminal account, may have been undertaken by Smith. This is exegetical analysis (forensic in its detail) of a very high degree.

I will report when I have finished it (68 pages to go). If anybody knows anything about Lindberg’s volume, or himself/herself, I would be most grateful for any information.

In the Tapei Times, Taiwan

The Tapei Times Tuesday, Nov 01, 2005,Page 8, published my response to the article on Thomas Schelling going ‘beyond the invisible hand’. You can read it at:
http://www.taipeitimes.com/News/editorials/archives/2005/11/01/2003278301

“What Adam Smith meant
By Gavin Kennedy
The New York Times article, "Nobel-winning economist looks beyond the invisible hand" (Oct. 30, page 12), misunderstands Adam Smith, who did not have a "theory of the invisible hand." This is an invention of modern academe.

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

The pursuit of self-interest also promotes unintended malign consequences. Merchants and manufacturers, wrote Smith, tend to promote monopolies and reductions in supply to raise prices against the interests of consumers. Self-interest does not automatically promote "the greatest good for all." It all depends on the circumstances; hence, Smith did not make the metaphor into a theory.

Anyway, the metaphor was originally Shakespeare's from Macbeth ("thy bloody and invisible hand").

The author of the article distinguishes between absolute and relative performance in the game of hockey. "Absolute" here means what everybody might do (if they are compelled somehow, but otherwise do not), and "relative" means what some individuals might choose to do because they value one outcome (safety) over another (winning).

The distinction is precisely Smith's point precisely: 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 by doing so everybody would promote "the greatest good for all."

But humans do not play the game this way, neither in society nor in hockey. Smith knew that and never concluded that they would. It may be that this is "the standard presumption in [modern] economics," but it never was a presumption of Smith's Wealth of Nations. So whatever Schelling went "beyond," it was not a turn away from Smith. Schelling's work, more correctly, was a return to Smith's approach.

Invisible Hand no 26

In this week’s New Statesman (UK) Patrick Hoskins, financial editor of The Times reveals scandals in the financial services industry.

Read the article at (subscription): http://www.newstatesman.com/nssubsfilter.php3?newTemplate=NSArticle_Economy&newDisplayURN=200511070016


Patrick Hosking’s case against the mess in financial services is fairly compelling. However, his inclusion of comments about Adam Smith’s views in the article is quite unfortunate:

“Bankers, insurers and investment professionals wax happily about the near-mystical way that individual choices, though selfish in themselves, lead collectively to the best of all possible worlds.

Yet it is in the financial services industry, above all other sectors of the economy, where Adam Smith's "invisible hand" goes wonky.”

Whatever bankers, insurers and investment professionals may ‘wax happily’ about the ‘near mystical way’ of markets, that was never a view attributable to Adam Smith. True, it is a fairly common interpretation of Smith’s views but not one based on his writings, either in ‘The Theory of Moral Sentiments’ (1759), nor in his better known, but not more important, “Wealth of Nations” (1776).

There is nothing ‘mysterious, ‘mystical’ or ‘miraculous about Smith’s analysis of markets. Indeed, the invisible hand, mentioned only once in “Wealth of Nations” (WN VI.ii.9: p. 456) was not about markets, but about a special case of human motivations assisting domestic economic growth. There is no theory of invisible hands in Adam Smith (it was Shakespeare’s metaphor actually: Macbeth 3:2).

On numerous occasions in “Wealth of Nations” he rails against the perfidious proclivities of ‘merchants and manufacturers’ to monopolise, rig supply, raise prices and cheat consumers. Smith’s markets are not ‘wonky’; the people in them were, and some clearly still are.

Self-interest in Smith’s accounts does not automatically lead to the ‘best of all possible worlds’ – it can and does often produces worse outcomes. He warned that selfish players have to be watched with vigilance and the best form of vigilance is open competition, the application of law and the firm remedies of justice. This is why he never advocated laissez faire. If the law in financial markets is lacking, that is not reason to score cheap points against Adam Smith and his legacy.

Another Doomster Who Misunderstands Economics 101

Eric Sprott, CEO, and Sasha Solunac an analyst, are at Toronto-based Sprott Asset Management Inc. They have posted a piece in Financial Post (Canada) on oil prices and the latest in ‘peak oil’ hysteria (‘its going to happen someday and will be awful; not if, but when, etc.,’). Now I am not going to get dragged into discussing ‘peak oil’ and its assorted consequences. My interest is in their dragging Adam Smith into their rant, er, sorry, problematic conclusions.

“Mr. Foster [author of two editorials criticising peak oil alarmists] apparently relies on blind faith in "free markets" and "human ingenuity" to avert an energy crisis. Furthermore, according to Mr. Foster, any attempt by governments, through energy policy or otherwise, to do anything about the looming crisis is wrong. He likens such actions to those of "old Soviet planners" and attempts to turn the peak-oil problem into a left-versus-right ideological debate. Unfortunately, we believe that laissez faire in this instance is tantamount to a head-in-the-sand approach that accelerates the problem rather than alleviating it.”

Comment
The use of laissez faire tells us where they are going, and they go there.

“Don't get us wrong. We are proponents of free markets a la Adam Smith. However, and unfortunately, oil is not a widget that can be produced freely depending on supply/demand signals.”

Comment:
Sorry, Eric Sprott and Sasha Solunac, but ‘producing freely’ is not the role of supply and demand. Indeed, the process by which supply or demand, speaking loosely, adjust to each other is not instantaneous – they do not have a capacity for an infinite velocity in their adjustments – their effects lag rather than act immediately and it is in those lags that they take effect.

“Therefore, to ignore the fact of peak oil and "let the markets decide" is naive at best and disastrous at worst. Human history is replete with examples of mismanagement of resources when left in the hands of the free markets. One example that immediately comes to mind is the Newfoundland cod fishery.”

Comment
Excuse me, Eric Sprott and Sasha Solunac, but there was never a market in Newfoundland cod fishery; nobody held property rights in the cod and that was the problem. It is called the ‘Tragedy of the Commons’ and was discussed in the 18th century by David Hume, and since by many others.

Cod fishing when the cod is treated as a free good is bound to lead to over fishing. It is not a contradiction with supply and demand, nor is relevant to the operation of the price mechanism on a private good like oil. Quite the reverse, if oil prices are unconstrained, the price mechanism would be the most efficient and effective way to reduce the quanity of oil demanded in line with the fall in supply from anything like ‘peak oil’, and with least disruption (which is not the same as no disruption).

“Sorry Adam Smith, but individuals acting for their own benefit do not always produce an outcome that is best for the whole. In this case, laissez faire failed and we are now without the cod that was once considered boundlessly abundant.”

Comment
Sorry Eric Sprott and Sasha Solunac but Adam Smith never said that “individuals acting for their own benefit do not always produce an outcome that is best for the whole.”

You have misread or misheard what Smith actually said. He was well aware that individuals pursuing their self interest do not necessarily, or always, produce the best outcome – consider his strictures against ‘merchants and manufacturers’ who create monopolies, restrict supplies, raise prices and reduce the real incomes of wage earners. You make your case only by exaggerating his policies. Incidentally, he never used the words laissez faire.

The absence of property rights in cod caused it to be over exploited. With property rights established, cod would become an economic good – excess demand at zero price – and with a price on its extraction, the quantity demanded would be brought into line, with a lagged adjustment for the owners to police their property rights in the cod, and it would remain renewable. If cod became scarcer in a season, the price would rise and fewer extractions would be made as people switched to consume alternatives. It has nothing to do with so-called laissez faire. In fact the exact opposite. Higher prices for economic goods like oil curtail the effective quantity demanded!

Eric Sprott and Sasha Solunac could take up the bet with John Tierney of the New York Times if they are so sure that economists have got ‘peak oil wrong. Mr Tierney has bet that oil prices (or any commodity) will be the same or lower in real terms in 2010 as they are today (see the archive article on this blog under August, from the options on the right column). He is as confident as Julian Simon was in the great oil price hike in the 70s; Simon took a $1,000 dollar bet that they would be the same or lower and won. Tierney is so confident that he is right that he will take any amount of bets to the contrary. And Tierney has also extended his bet challenge to anybody:

‘If you think the price of oil or some other natural resource is going to soar, show me the money.’”Now, why don’t the doomsters, panic merchants, scare mongers and environmentalists rush their bets to Tierney – he can be found on email: Tierney(at)nytimes.com – but somehow I do not think he will be kept busy covering his bets.”

Meanwhile, if peak oil is reached tomorrow, next month, next year or next decade, and if politicans allow the price to adjust as supply falls, the quanity demanded will eventually fall as consumers ration their purchases, starting with the poorest, and begin to switch to alternatives, which producers have strong profit incentives to search for and make available, and even more consumers switch (rich and poor alike) as the options became available.Politicans – and doomsters – can inhibit the adjustment by imposing price controls, planning and prohibitions.

Read the full article:
National Post (‘a better read’)
http://www.canada.com/national/nationalpost/financialpost/story.html?id=ddafd7d0-8763-4943-9dc8-c6ae759f3b83

A 'Search' for a Dead-End

In a review of “We Jews: who we are and what we should do”, by Rabbi Adin Steinsaltz (Jewish.com - ‘if only Moses knew…’), Atlanta, Georgia, 1 November, Jay Michaelson writes:

“Only rarely does Steinsaltz attempt to give evidence for his assertions that there is an essential theocentrism to every Jewish soul. At one point, he claims that Marx, Freud, and Einstein demonstrate that, even absent a traditional Jewish culture or religiosity, a quintessentially Jewish "search for unifying principles" is inherent in every Jew. Setting aside the close familiarity with Jewish culture which all three thinkers did, in fact, possess, one could obviously ascribe the same "search" to Adam Smith, Immanuel Kant and, Stephen Hawking, none of whom were, or are, Jewish. Elsewhere, Steinsaltz attributes Jewish survival in diaspora to the Jewish aptitude for faith, even though he readily admits that most diaspora Jews assimilate into other cultures. Perhaps it goes without saying, though, that a committed, faithful Jew's analysis of the essence of Jewish identity will be colored less by empiricism than by faith and tradition—even if it pretends to be otherwise.”

My problem with treating human characteristics through dispersed generations (from Marx, mid-19th century to Einstein early-20th century) is that the ‘physics’ of such a transmission system sufficient to impose a similarity of thought on disparate people involved a ‘search for unifying principles’ is obscure to say the least. Hence, I find racial theories so absurd.

I agree with the reviewer's comment on Smith, Kant and Hawking. Smith considered the evolution of philosophy as arising from the search to explain discordant events that troubled those of a philosophical inclination. It had nothing to do with race; most philosophers were not Jewish and most had no 'connections' (hidden or otherwise) with each other.

Invisible Hand, no 25

Farraz Khan, a columnist, in the Daily Texan (“Serving the community of The University of Texas at Austin since 1900”) 1 November writes:

“Personally, I advocate Adam Smith's philosophy of self-interest as the invisible hand guiding individuals toward success. Its practical application proves it to be the most preferable system of economics. However, temperance is a virtue that cannot be ignored.It is necessary for the individual to find a balance between self-interest and social obligation, because true individual success ultimately resides in personal and social harmony. Through this process, one is able to determine that pure and lasting happiness is not derived from a Lexus or an Armani suit, but rather from doing something worthwhile, from using one's power to help humanity. Indeed, money used to help a family live another day is better spent than simply filling the coffers of a dead guy.”

Regular readers will anticipate what I usually say about Adam Smith’s alleged philosophy of ‘self interest as the invisible hand guiding individuals towards success’. If Farraz Khan reads Adam Smith that way, and believes it, it is not difficult to see why he qualifies what he has written. The misinterpretation is his, not Adam Smith’s

Smith in “Moral Sentiments” makes many qualifications on the error of seeing self-interest as the sole, or even the main, goal of people. ‘Self-love is not enough’!, writes Smith in “Wealth of Nations” (Book I, Chapter 2) and in his Lectures on Jurisprudence. He never had a materialist philosophy of consumption in the sense Khan criticises is prevalent in modern society. He sternly criticises the lust for ‘trinkets and baubles’ and such like. He shows in “Moral Sentiments” how it eventually brought down the power of the feudal lords; and how it holds back sharing in prosperity for the common poor in “Wealth of Nations” because prodigality, in place of frugality, slows down economic growth.

Farraz Khan’s summary of his own outlook is neatly put:

“In the end, the rejection of this materialistic philosophy would allow for greater personal satisfaction. It would allow people to realize that their lives mean more than their financial statements would indicate. It would provide them with the opportunity to list their priorities in the order of what is really important. It would help establish the true foundation of happiness.”

Check the article for yourself at:
www.dailytexanonline.com/media/paper410/news/2005/11/01/Opinion/Lessons.From.Dead.Celebrities-1040539.shtml

I cannot see Adam Smith disagreeing much with those later sentiments of Farraz Khan, though he would query why he brings the invisible hand into his earlier declaration.

Not a Quote from Smith

Alix Nyberg Stuart, a columnist on “CFO Magazine” (‘tools and resources for CFOs’) and one of its Senior Writers, has an article, “Market Magic: Internal markets can solve thorny allocation problems and predict the future”. It is about firms using internal markets to improve their allocative efficiency.

This a theme that Ronald Coase (1937) wrote the seminal article asserting that the Firm itself exists because there are transaction costs which a firm can reduce rather than leaving such decisions to markets where transaction costs are higher. However, read Alix Nyberg’s Stuart’s article at: http://www.cfo.com/article.cfm/5077917?f=home_featured and consider his case.

My concern is with his statement:

"Man is an animal that makes bargains," observed the great 18th-century economist Adam Smith."

The words in quotation marks in his article are an imaginative interpretation of what Smith said, albeit powerful in a literary sense, but not strictly what he said. They should be credited to Alix Nyberg Stuart not Adam Smith.

I like the sentence as a summary interpretation of Smith’s Chapter 2 in “Wealth of Nations”, but I would not be happy to see them ascribed to Smith by readers of Stuart’s article, because there are enough attributions to Smith that are dead wrong without adding more, no matter how close they might be from being strongly implied by Smith’s own words.

On Beer, Benevolence and Markets

Kanika T. Bhal, is associate professor, Department of Management Studies, IIT Delhi, writes in today’s Business Standard, New Delhi, India (1 November!) on the “Social Responsibility of business” on Corporate Social Responsibility (CSR) and includes the following:

“Asking businesses to show proof of social responsibility assumes that business as an institution falls below the “ethical standards” unless demonstrated otherwise. The perception of a business leader as selfish and exploitative and the belief that profits serve only businessmen, require businesses to make conscious efforts to step up CSR activities and make them more visible. Ironically, this perception is held not only by CSR advocates but also by business executives themselves — a fact evident in their public speeches, annual reports, and proclamations of charity. This assumption, however, needs to be checked. When Adam Smith, a professor of moral philosophy, talked about the benevolence and self-interest of the butcher and the baker, he knew that benevolence was in short supply but self-interest abound. Ideologically, markets translate the interests and values of the majority into business activity and serve the utility of “maximum good of maximum numbers”, through participation and inclusiveness — much revered contemporary values.”

Professor Kanika T. Bhal quotes Smith, as many do in the Middle East and Asia, and refers to a truncated duo of the “Butcher and the Baker”, dropping reference to the “Brewer”. I assume this has something to do with religious prohibitions on alcohol, though it appeared in Smith’s sentence in “Wealth of Nations”, and he considered beer an integral part of the diet of a common labourer, such was the paucity of other food in the mid-18th century for such people (the majority). I cannot agree to such censorship; writing the word 'alcohol' does not man you are drinking it or approve of it, any more than writing the word ‘killing’ means you kill people.

However, the point he makes is partly right. It was the shortage of benevolence caused by the shortage of the means of being benevolent (economic goods are scarce compared to the many needs of others) that made reliance on benevolence for dinner, and all other requirements, a futile quest. This did not stop acts of individual benevolence, or the virtue of beneficence, from being offered by virtuous people.

Smith regarded benevolence as being the supreme virtue. Perfect benevolence would enable a divine to communicate with the ‘Deity’ (TMS VII.ii.3.2: page 300), but only the Deity, who controlled everything and required nothing external to Him, could be permanently benevolent, while “so imperfect a creature as man” is inadequate to the task because his “existence requires so many things external to him, [he] must often act from other motives” and, therefore, he fell far short of such heights of perfection ("Moral Sentiments", VII.iii.3.18: page 305).

I am not sure how “Ideologically, markets translate the interests and values of the majority into business activity and serve the utility of “maximum good of maximum numbers”. Markets are the outcome of the uncoordinated actions of uncounted numbers of humans and they have no ‘ideology’ to ‘translate’. They are not mysterious or miraculous, as Smith shows in "Wealth of Nations", Book I).