Wealth Creation is the Main Antidote to Poverty

An angry reader of the Dallas Observer reacts to news that the authorities are to embark on a campaign to drive out the “trailer trash” in East Dallas, Texas, and writes to the Dallas Observer.com a sharp rebuke and side-swipe at Adam Smith. This is an example of the damage done to the moral philosopher’s reputation by those who purloined his legacy (read it at: http://www.dallasobserver.com/Issues/2005-12-29/news/letters.html):

“Trailer-Park Blues

Out of sight, out of mind: There's a deeper issue behind the East Dallas campaign to drive out the "trailer trash" ("Board of Scrooges," by Jim Schutze, December 21), and it's one that exposes what is probably capitalism's most grievous flaw and one that may ultimately prove fatal to this kind of economic system. Adam Smith, the great capitalistic theorist, thought he had the problem hammered in "A Theory of Moral Sentiments" (along with Smith's The Wealth of Nations, one of the bibles of capitalism). Smith argued that the wealthy will always take care of the poor because their consciences won't be able to weather the discomfort of routinely seeing real want and deprivation up close. What Smith couldn't know is how effective the rich and the reasonably well off would become at avoiding anyone in poverty or genuinely modest circumstances. Call it the cocooning of the privileged. This isolation of sensitivities and sensibilities is achieved by such means as gated communities, megachurches, gerrymandering the homeless--and, of course, banishing the trailer trash. Too bad Adam Smith isn't around today; a sensitive soul in many ways, he'd probably be hard at work on a book titled "A Theory of Moral Wealth."
Dudley Lynch
Plano”

Comment
Now Mr Dudley Lynch is better informed about Adam Smith than your average person, but his information about Adam Smith must have come from an unreliable source.

Smith was not ‘the great capitalistic theorist’ and neither were his books on Moral Sentiments and Wealth of Nations in any shape or form ‘bibles of capitalism’ or bibles anything else. Those who have conflated Smith into an exponent of capitalism have him into the 19th century and not the 18th century. Even the word ‘capitalism’ was unknown in usage until 1854.

Mr Lynch may be right that people ought to take care of the poor, but whether Smith ‘argued that the wealthy will always take care of the poor because their consciences won't be able to weather the discomfort of routinely seeing real want and deprivation up close’, I am not convinced. Smith favoured a form of distributive justice, something unique in philosophy up to then.

Long before capitalism appeared on Earth the entire experience of humanity was one of abject poverty and deprivation. I think it was Tim Worstall who pointed out in his Blog recently that the dreadful condition of Africa is roughly how it was for all humanity for much of the history of the human race. As a scientific analogy it may be unreliable, but it captures an important point when we discuss poverty today (nobody is arguing, least of all Dudley Lynch, that the so-called Trailer Trash of Texas are living with lower per capita income than the majority of Africans).

Poverty is the absence of wealth and the creation of wealth is its only antidote. And I do not mean the absence of money by the absence of wealth. Money is a short-term fix for alleviating poverty. It is not a sustainable policy. Taking all the wealth from the ultra-rich (of which Texas abounds) from the entire world and handing it to the people of Africa, let alone the rest of the world, would serve no useful purpose on two counts: it would simultaneously ensure that the world’s wealth – the annual output of the wealth creating process – would begin to cease to be produced and, the knock-on effects rippling outwards into the wealth of the modest rich and then the almost rich, and on downwards through the income ranges, everybody would soon become as poor as the poorest Africans, with no hope for anybody of climbing back out of poverty.

My second count is that redistributing all the wealth of the world of all the people above average world income would not make much difference to the deprivation of those below average incomes. If these two counts are unbelievable, sceptics might ask themselves how long did it take for a section of the human race to climb out of the poverty experienced by everybody else for thousands of years before the appearance of capitalism in the 19th century?

Hence, for thousands of years the observation of poverty was the norm, not the exception. Kings, Emperors, Warlords and Princes were separated from the abject poor by armed men and they held more than an aversion to having desperately poor people nearby – they held the power of life and death over anybody they chose to chastise for whim, fancy or just for the hell of it. The idea that they ‘took care’ of the poor is a selective quotation from those who preached that they should do so – who were then mostly put to death for their pains.
Dudley Lynch asserts: ‘What Smith couldn't know is how effective the rich and the reasonably well off would become at avoiding anyone in poverty or genuinely modest circumstances.’

The ‘rich and reasonably well-off’ have families and it is from within the families that these sentiments were occasionally practiced. I have commented elsewhere that the anti-poverty campaigns are peopled by the sons and daughters of the rich, not the very poor. But the drivers of the rich (the rulers of mankind, not their sometimes wayward children), with few exceptions, have always ‘avoiding anyone in poverty or genuinely modest circumstances.’

There is a large and longstanding literary tradition that writes about these practices. People in ‘poverty and in genuinely modest circumstances’ did not wander at will into what for most of human history passed for ‘palaces’ (often not much cleaner than their subjects’ hovels) and helped themselves to an audience with the ‘prince’. They were kept out by armed guards, who were not subject to a Geneva Convention, and kept back by aggressive-minded guards when the King and his retinue passed through the country, doing whatever took their fancy, including destroying the living areas of what passed for Trailer Trash in their times, beating up anybody they took a dislike to and raping any women or girl they felt like.

Mr Dudley Lynch should wake up to the reality of human history. There has always been the equivalent of “gated communities, megachurches, gerrymandering the homeless’ and, of course, campaigns to banish the trailer trash. Mr Lynch’s Irish ancestors could have told him a lot about the whippings, transportation to the American colonies, and even hangings for those of his predecessors who were caught on or near the Lord’s land with poached game in their possession.

Adam Smith (his mother’s family were landowners and gentlemen farmers in Scotland) observed the predicament of common labourers in mid-18th -century Scotland (and those totally without paid work below them). His insight was to notice the almost imperceptible rise in real incomes underway for over 100 years in Britain and to study how this secular trend, despite all its imperfections, mal-distributed gains and selfish rapacity of the very rich, was a solution to the problem and not the cause, as seen by the ‘Dudley Lynch’ types of his day, usually of a sanctimonious disposition too.

Smith did not rush out with a manifesto and a call to arms. He studied current events in an historical context. He did not afford the luxury of a narrow vision. He wrote Moral Sentiments first, but taught its contents and his political economy and jurisprudence alongside each other from 1748 to1764, and wrote Wealth of Nations later, as he refined his concepts and validated his conclusions. He saw the need to understand what was going on around him and to make his conclusions known to a wider audience, so that they, in their own way and in their own time, and with all their prejudices and foibles he recognised without him becoming depressed, would follow their inclinations and without planning or coercion, gradually lift humanity out of the vicious spiral of endless tyranny and deprivation.

What he reported was truly momentous, namely that the course of events was gradually lifting the world he knew out of the dark ages of perpetual poverty. If this continued, then the common labourer and his family would attain the living standards they sought above mere subsistence. They were already way ahead of the living standards of the richest ‘African Prince’, who had the lives of '10,000 naked savages' at his disposal. What he could not foresee – he had no idea of the pending industrial revolution, the surge in technology, and the evolution of an entirely new economic mode, later called capitalism – was that the unprecedented rise in per capita income that accompanied these developments would set ever new standards in living standards, longevity, health and education, with each generation reaching new heights materially compared to their grandparents.

Of course, it could all revert to past norms of human civilisation and that is why he believed in quiet gradualism.

In all this there are no signs that he believed that the constants of human nature would change much, despite the massive improvement in living conditions. In one reported conversation with Samuel Rogers, a poet, in 1789, Smith, in a discussion in his ‘social hours’, referred to Ann-Robert Turgot, the French économiste, whom he described as ‘an excellent, absolutely honest, and well intended person, who was not well versed in human nature with all its selfishness, stupidity, and prejudice’ (Ian Ross, The Life of Adam Smith, page 399).

Adam Smith was never naïve or blind to what went on around him, nor to what others would or could do about it.

Invisible Hands and Other Nonsense

Paul Anderson writes in ASPEN TIMES, Colorado, USA an article, “Bumps in a Flat world”, (26 December) (visit: http://www.aspentimes.com/article/20051226/COLUMN/112260005).
Anderson writes:

“In his book "The World is Flat," New York Times columnist Thomas Friedman describes forces that are levelling the global playing field. Friedman fails, however, to mention how the world is supposed become flat without the levelling of global wealth.

If Friedman's flat world is to promote the most good for the most people, then a new economic model is needed. To end world poverty, according to Nobel Prize-winning economist Joseph Stiglitz, governments should adopt the Scandinavian model for a social democratic vision instead of relying on Adam Smith's free market.The Scandinavian model describes a welfare state with an emphasis on education, which is proven to promote fast, equitable growth. Smith's "invisible hand" implies that man's innate selfish nature best asserts itself in business through libertarian-anarchist, laissez-faire freedom.”

I know nothing of Paul Anderson or his background, (nor much about Thomas Friedman), but I do know Anderson does not know what he is talking about in respect of economics.

Incidentally, the ‘Noble Prize’ he talks about is actually something different from the ‘Noble Prize’ of longer pedigree: it is the “The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”, awarded since 1969. The winners of this prize are no less distinguished than the traditional Nobel Prize winners (awarded since 1901), but accomplished journalists are usually fussy about checking their facts.

I am always suspicious about suggestions that countries with very large populations adopt radical policies already adopted by countries with very small more easily managed populations. Given that their adoption is unlikely politically and probably unworkable politically, Anderson’s solution falls at the first hurdle of overcoming the minor problem of electoral success in the West and overcoming dictatorial impediments in the East. There is no point advocating change based on unrealizable goals, or of ignoring them and merely blaming rich western countries.

China is not going to adopt the ‘new economic model’ of Scandinavia just because Joseph Stiglitz recommends it (nor is India or anywhere else). I would guess further that not even New York City, home to his Columbia University, will adopt Joseph’s ‘new economic model’. I suspect Joseph knows this, which makes his ‘solution’ a non-starter even in his own country, let alone in the non-Scandinavia world of 6 billion other people. We can add Paul Anderson, Thomas Friedman and Joseph Stiglttz to the rest of what Smith called the world’s ‘men of system’ – fanatics who know what’s good for everybody else, but dangerous to boot if they somehow get power anywhere.

Anderson’s next paragraph is so full of non-sense (I am being polite because calling it ‘crap’ would be unscholarly):

“Smith's "invisible hand" implies that man's innate selfish nature best asserts itself in business through libertarian-anarchist, laissez-faire freedom.”

Smith’s invisible hand was a metaphor, not a theory (he got it from Shakespeare’s Macbeth 3:2). It did not imply anything about “man's innate selfish nature” (Smith rejected such nonsense in his Theory of Moral Sentiments, 1759). It is about the unintended consequences, sometimes positive, often negative, from human motivations. That is all. These were not necessarily ‘best’ asserted in business. Quite the reverse, they could be highly negative in business: pollution, monopolies, dangerous working practices, fraud, gangster-ism and political corruption.

Smith did not believe in leaving ‘merchants and manufacturers’ free to do whatever they wanted. That way led to the dreadful and appalling practices such as in the East India Company, a chartered private monopoly of execrable reputation. The adjective “libertarian-anarchist” would have meant nothing to Adam Smith (what does it mean to you: left wing or right wing libertarian-anarchists?).

As for ‘laissez-faire freedom’ that was never a view of Adam Smith’s. Paul has bought into an attribution imposed on his name by people in the 19th and 20th centuries with agendas I think you would not approve.

Paul Anderson writes another sentence, showing alarming naiveté, mixed, of course, with comforting concern for people in the developing world:

“Friedman's flat world and the expansion of technology and information he cheers are tarnished by the exploitation of cheap world labor.”

I take it he does not believe that ‘cheap labour’ can have their real living standards increased merely by paying them up to the ‘expensive’ labour of developed countries? They would sell next to nothing at such wages. If poverty could be reduced by money income transfers on the scale required politicans would print more money. Because wages are cheap it does not mean that they are ‘exploited’, though their wages may lag behind the value of their productivity. Economic growth will raise their real wages and combined with technology will enable them to sell their goods and services in the richer countires.

Millions of Chinese and Indian peasants on really low incomes are switching from the land to the cities because they can raise their poverty incomes by employment in low pay jobs from doing so. This massive population shift is bringing more people out of abject poverty into relative poverty compared with columnists paid for writing for Aspen Times, but making the absolutely better off, better educated and more healthy. They have still a long way to go to raise their wages even to the levels of those on poverty wages in the US. Affording to educate their children out of their wages is their next task (impossible before in the mud hut villages of rural China and India).

Man creates wealth (real output of marketable goods and services) and poverty is the absence of wealth creation opportunities, not its cause. Paul Anderson does not understand that yet. Stiglitz apparently does understand it because we assume he has read Smith’s “Wealth of Nations”.

Stiglitz wants to persuade (presumably) the whole world, including New York City, to adopt the Scandinavian economic model, and Paul Anderson, who apparently warns achieving even this utopia is going to be too slow, believes that Marx’s prediction that the workers will “rise up to end” their “exploitation” by “a violent tectonic drama that could level the social topography” will come to pass.

If it does, it will result in absolutely no improvement in living standards or amelioration from poverty. Markets have many faults and one precious benefit: they tend to work. As Adam Smith commented to a correspondent, who wrote in haste that the war in America was not going well for the British Crown and that further reverses would ‘ruin the nation”, he told him there is a ‘lot of ruin’ in a nation. There is also a lot of ‘ruin in markets’, but once ruined they take a long time to function again. In the meantime – it lasted 1,000 years after the fall of Rome – everybody ‘enjoys’ barbarism politically and poverty economically, until nascent markets spring up again.

Paul Anderson should contemplate these lessons of the past millennia while skiing in the exclusively rich resorts of Aspen.

Once More With Feeling

James K Galbraith contributes another article to Mother Jones, similar to the one he published in November (see archive on the right-hand column for November, which contains my initial reply to it and to comments on it by Galbraith), which he must have been pleased with because the recent article contains some of the very same paragraphs, word for word, identical to his November article. The December/January article is titled: "Smith v Darwin".

Presumably the editor didn’t notice the duplication or doesn’t mind paying twice for the same material; hopefully, for the editor and the author, readers of Mother Jones do no not mind paying twice to read nearly the same articles in successive issues, if there is enough new material to make it otherwise interesting.

In typical style, James Galbraith quotes from, "The Metaphysical Club", by Louis Menand, who asserted that “God and science really don't mix. Darwin didn't invent evolution. He invented Godless Evolution” and “the purpose of On the Origin of Species was not to introduce the concept of evolution; it was to debunk the concept of supernatural intelligence—the idea that the universe is the result of an idea."

Such sweeping summaries leave much to be desired. If Origin of Species had a purpose it was to explain natural selection as an idea and to register the claims of Darwin to have been the author of the idea based on his research in HMS Beagle. I recollect nothing in Darwins' Origin of Species about him 'debunking' God.

Darwin’s concerns were primarily about how the religious body of opinion (including his wife’s) would take to a scientific statement that appeared to call into question the Biblical teaching on the origins of humans, which is why he delayed publication of his theory until prompted, accidentally, to publish because of Wallace’s discovery of the same hypothesis and his intention to publish his ideas to the Royal Society, pre-empting what Darwin had concluded years before.

“Economists” asserts Galbraith, “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."

This conclusion is quite inappropriate, as I suggested last month in reply to the same paragraph by Galbraith. As then, I appeal to Galbraith to read the passages from which he takes his selective quotation. Smith is writing about what he considered was the ‘natural’ and appropriate evolutionary line of the development of a commercial society. From investment in agricultural improvement, he saw ‘merchants and manufacturing’ as the next destination of investment (commerce) and then in ‘distant sales’ domestically, and finally in the ‘carrying trade’ and overseas. This progression would increase domestic wealth creation first and world trade second.

All capital stocks diluted from investment in domestic output retarded domestic investment. The concept of absolute advantage, allied with the international division of labour, was at the heart of his ideas about the benefits of international trade. He was not what today is described fashionably an ‘anti-globalist’.

The reference to the invisible hand is a metaphor, not a theory of markets, nor an allusion to religion. Smith was not a deist. He borrowed the metaphor from Shakespeare (Macbeth: 3.2). It has been made a theory by 19th -, and particularly 20th -, century economists pursuing different agendas in support of the notion that any regulation of markets is not a good idea, a wholly non-Smithian policy.

That Veblen, “The greatest American economist”, turns a single metaphor into a theory, is more a comment on Veblen’s style than an authoritative judgement on intelligent design and Smith’s meaning. Apparently, Galbraith has a theory about Smith and his happy to keep repeating it. If Smith had never mentioned his single use of the invisible hand metaphor it would make not a jot of a difference to anything in “Wealth of Nations”. It was a comment on the unintentional consequences of human motivations and never a theory of how markets work (fully explained in Book I.vii).

By the time Veblen was writing (19th-20th centuries), Smithian political economy had been abandoned and the profession had moved in to economics en route to mathematics. Anything ‘sublime’ in economics had nothing to do with Adam Smith. All his works are parts of an evolutionary view of society, its growth and development. What the modern economists have made of the invisible hand is entirely their doing, not Smith’s.

He certainly centred on the individual working in concert (though not always in tune) with others to create, unintentionally, language, divisions of labour, differing means of procuring subsistence, different societal forms, the arts and knowledge, and what we call today markets. His consciousness that societies could grow and then decline; that ‘progress’ was never continuous or assured, and that they could ‘crumble into atoms’ were evidenced by hi understanding of history. For Smith, the fall of Rome was real; it showed the fragility of civilisation.

Smith taught and wrote about the fragility of human endeavours and the conditions conducive to their capacities for limited progress. He was not optimistic of the outcome; his appreciation of venality of the ‘rulers’ of mankind, the mendacity of men of influence and the ‘ignorance’ of the common majority were characteristic of his appreciation of the obstacles in the way of the achievement of his modest proposals for change.

James K. Galbraith claims to be familiar with Smith’s works. This is not yet supported by what he continues to assert about their contents.

On Managing Public Sector Strikes

Two Blogs today cover the New York transport strike and it aftermath. One is from a sympathetic union site: “Strike Postscript: In Appreciation of Public Employees by Jordan Barab, reprinted from Confined Space” (http://www.nathannewman.org/laborblog/archive/003598.shtml) and the other “Building Credibility Through Battling Public Sector Unions: The Case of NYC’s Mayor” by Matthew Kahn (http://greeneconomics.blogspot.com/2005/12/building-credibility-through-battling.html).

On Jordan’s article, I see running through it an indicator of how to bring reality about public sector remuneration strategies into perspective when they are subsidised by taxpayers: market testing by breaking their imposed monopolies with competition from both public and private operations. On Mathew’s article, I can only say: ‘Oh, dear!’ Playing winners and losers is not helpful – there is still much damage to be done by ‘after-strike disturbances’ and the Mayor’s ‘credibility’ is of trivial interest at this stage.

A reader wrote to me yesterday and made thoughtful observations and asked questions about the content of my postings, to which I have replied. The gist of my responses follow:

My experience of managing strikes from an employers’ point of view is that the unrestrained rhetoric of unthinking public officials usually makes matters worse. This is clearly the case in New York. I also base my approach on Adam Smith’s assessment of the mid-18th century situation where the circumstances of the labourers (next to no resources to stand a strike with no pay and near subsistence wages) was not favourable for them, hence the violent exchanges of, literally, desperate men, and the fact that the law was stacked against them (jail, transportation to the American colonies or, in the event of violence, hanging).

Today, these draconian circumstances do not apply in the USA, and certainly not among public employees. However, the rhetoric of desperation on both sides is only a few steps away, if translated into action, leading to the kind of behaviours exhibited by Chinese totalitarian forces recently against demonstrators in Dongzhou, which I assume all Americans (especially Mayor Bloomberg) condemn.

My comments were directed at reigning in the dangerous rhetoric of some of the players. It only exacerbates an already emotional situation and it ignores the range of commitment from militant to reluctant among the strikers to the action they have been persuaded, or forced by peer pressure, to undertake. This range of commitment is the key to undoing the strike action quickly, or quicker than the alternative.

I am aware that there are laws against transport workers striking and I consider them in all probability to be a necessary and correct backdrop to management of a public service and a factor in the situation. This does not preclude sensitive action when a wildcat strike occurs, led by a militant union leadership. When they do occur, or threaten, it is incumbent on the employers to consider carefully their best response. To defeat such strikes requires careful preparation. To react emotionally when they surprise you is not wise. Nor is caving in quickly to the union’s initial demands.

To defeat strikes requires time to the build up resources, including PR, and to this end the immediate response is to contain the dispute to negotiation until you are ready and not to be provoked into precipitate actions that create an excuse for the militants to call a strike, i.e., ‘keep ‘em talking’ until you are ready.

If a strike occurs, the closest possible working relationship between the employers and the politicos is required so that everybody ‘sings from the same hymn sheet’. No wild statements, threats and bravado, thank you. The campaign has to be managed. An ‘open door’ to continuing negotiations is paramount – this creates questions in the families and among the strikers as to why a strike is necessary – few workers like striking – and the option of continuing negotiations (unconditionally) saps morale and puts pressure on the militants, as does a judiciously timed invitation for employees to return to work of their own volition. This means maintaining the right to direct communication with all employees, including those who are members of the union. Speaking to employees only through the union leaders and the media is unhelpful – the militants never present the employers case fairly and the media is interested in advertising not the merits of what’s going on.

The deficit funding of NY Transport is an major issue and it has to be played as such. ‘Fellows, we have a problem’ is the tune to play, and the ‘we’ includes the transport employees.

The ‘illegal’ nature of the strike is not an issue – step well clear of making it one; getting them to desist from striking is the main strategic goal, without giving in (that would make the problem worse). Predictably, unions and sympathetic commentators claim that it costs money to provide safe, excellent public services and use this to defend all and any accretions in remuneration, health and pension packages. But protecting high-cost public services with monopolies and preventing private operators is not essential; even operating a public service with public officials is not essential, as Adam Smith indicated in “Wealth of Nations” (Book V).

‘Replacement bus drivers are easier to find than replacement air traffic controllers’ sounds great confrontational copy, but it devalues the worth of your employees – we want to boost their self-pride not devalue them! If public employees are told they are worthless by their employers, what have they got left but to hit hard against those who consider them worthless? The militants play to that tune (plus in NY allegations of racialism) and it hardens wavering strikers. The task is to undermine the militants, not bolster them. References to the air traffic control dispute need to be downplayed at an early stage, not mainlined – what else is it but a threat, not a strategy? For it to become a strategy it needs careful preparation, not impetuous delivery.

On the issues in the dispute I have nothing to say as I am not briefed on them. I am not expressing any views on their merits or otherwise. If the union is out of control or impossible to deal with, then prepare properly to defeat them; don’t get suckered into an ill-prepared anti-strike strategy that you do not ‘win’ whatever the outcome. The majority of a workforce are decent not militant; don’t make them militant by ill-considered outbursts, nor try to ‘buy’ them off by giving in to unsustainable demands.

That, in short, is what I was trying to say in my postings. It is a point of view at least worthy of being considered.

How to Teminate a Strike 1

CNN reports that there is a return to work of the striking transport workers, while negotiations proceed.

Is this not the better result than threats of jailing union officials, $1 million dollar fines and two days pay docked for one day’s strike?

If only employers would learn (or hire better advisors!) and union leaders refrain from exercising impetuous coercive power in pursuit of excessive promises to members.

Of course, it may still fall apart. A period of silence is advised from both sides until the discussions are concluded (NB: that includes a politicians and media commentators).

How to Prolong a Strike 2

The New York Daily News (22 December) reports (from FEE -- inbrief@fee.org):

The NYC Transit Strike in its Third Day

“The leaders of the union behind New York's crippling mass transit strike met transit authorities on Thursday for the first face-to-face talks since workers walked out on the job two days ago, local media said.” (New York Daily News)

The brute course of events in strike management often mocks the careless rhetoric of the parties. Yesterday I criticised the statement of Mayor Bloomberg that there would be no negotiations with the strikers’ union until they returned to work. Next day, the Transport Authority is in negotiations with the strikers’ union - and they are still on strike.

This, not entirely unexpected event to those who have watched the course of ‘crippling’ strikes, underlines my point about the futility of public figures making such ‘no negotiations under duress’ type statements.

Empty threats exposed as bluster and bluffs reinforce strikers’ morale and prolong the strike. Many of the strikers may be wavering in the strike decision but they are kept on message by union leaders who point to such turnarounds as evidence that they are 'winning'. Better not to give out that message.

It would have been better for the mayor, in consultation with the Transport Authority, to announce that the ‘door is always open’ to negotiations and the strike is ‘unnecessary’, etc. This undermines union solidarity and creates problems for the union leaders.

Instead, I note from the New York Times, that worse blunders were made yesterday by the media denouncing the strikers as ‘rats’! The strike leaders were quick to turn such shameful rhetoric into racial abuse, link their action to Martin Luther King and Rosa Park - what images that creates in the minds of the workforce(!) as it deepens their sense of solidarity.

Who is (mis)advising the New York authorities? What is their strategy? Were they prepared for the strike?

If they ‘win’ in these circumstances they pile up grievances and lose in the month’s ahead.

FEE adds a comment:

"What is euphemistically called collective bargaining by union leaders and pro-labor legislation is bargaining at the point of a gun. It is bargaining between an armed party, ready to use its weapons, and an unarmed party under duress. It is not a market transaction." -- Ludwig von Mises

I shall refrain from commenting on this assertion until I read more on Mises’ analysis of collective bargaining (I am now at the halfway stage through Human Action).

As for ‘unarmed’, it seems from this distance that $1 million a day fines, loss of two-days pay for everyday they strike, and threats to jail the leaders hardly warrants the adjective unarmed. The employer’s are certainly ‘under duress’, which is what strikes aim to cause, a point noted by Adam Smith in the quotation In yesterday’s post.

Smith on Strikes

Following on from the previous comments on the New York transport strike, the Fund for Economics Education (FEE: inbrief@fee.org) reports from the Washington Post reports on the recent ‘disturbances’ in China where a village in Dongzhou mounted protests (a ‘strike’?) against their various grievances. The communist authorities reacted in the usual robust manner against dissent, i.e., a few degrees further along than the rhetoric exhibited by the New York authorities. Now the communist authorities appear to have gone much further from their initial denunciations of the protesters to outright repression:

“Chinese Repressed Again in Dongzhou” ((Washington Post, Wednesday 21 December)

“Two weeks after a protest that culminated in gunfire and bloodshed, the rebellious farmers and fishermen of Dongzhou have been reduced to submission. Authorities have sealed off the seaside village and flooded its streets and lanes with police patrols, residents said, and an unknown number of men have been summoned by a knock on the door and hauled away for interrogation.”

Lest readers dismiss as total exaggeration the parallels I suggest between the reaction of the authorities in their rhetoric to events in New York and that of the communist state functionaries in Dongshou, they should consider how Smith wrote about the incidence of strikes in 18th-century Scotland:

“Such combinations (of masters), however, are frequently resisted by a contrary defensive combination of the workmen, who sometimes too, who sometimes too, without any provocation of this kind, combine of their own accord to raise the price of their labour. Their usual pretences are, sometimes the high price of provisions; sometimes the great profit which their masters made of their work. But whether their combinations be defensive or offensive, they are always abundantly heard of. In order to bring the point to a speedy decision, they always have recourse to the loudest clamour, and sometimes to the most shocking violence and outrage. They are desperate, and act with the folly and extravagance of desperate men, who either starve, or frighten their masters into an immediate compliance with their demands. The masters upon these occasions are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen. The workmen, accordingly, very seldom derive any advantage from the violence of those tumultuous combinations, which, partly from the interposition of the civil magistrate, partly from the superior steadiness of the masters, partly from the necessity which the greater part of the workmen are under of submitting for the sake of present subsistence, generally end in nothing, but the punishment of the ringleaders” (“Wealth of Nations”, I.viii.13: page 84-85).

The resort to the courts and the immediate imposition of $1 million per day fines on the union, the refusal to negotiate the demands of the union until its members return to work and the media pressure brought by the Mayor and others on the strikers (creating an atmosphere of vilification, justified or not) are reminiscent of the fate of strikers in Smith’s day.

Ringleaders were not just imprisoned; they could be whipped through the streets of Edinburgh and transported, up to 1783 to the American colonies and Australia thereafter, or if found guilty of violent acts (arson or murder), they could be hanged.

Hence, when we condemn the Chinese communist authorities let us spare a thought for the emotional reaction of politicians when something goes wrong with the negotiating process in New York, and let’s endeavour to keep a sense of historical perspective while we celebrate our liberties.

How to Prolong a Strike

New York is experiencing its first transport employees’ strike since 1980. Without wishing to interfere in a dispute, of which I know nothing, I want to comment on the predictable reactions of the authorities to what is a thoroughly unpleasant experience for many tens of thousands of people affected by the strike.

The purpose of any strike is to cause maximum disruption to an employer and in transport that means causing maximum disruption to citizens caught up in the effects of the strike. That is why strikes are called close to major holiday periods , or, in this case, during winter weather, or in other cases, when a construction deadline is looming (building an Olympic stadium or constructing a stage set close to opening night).

Nothing encourages the solidarity of the strike among the strikers more than visible evidence that the strike is having maximum effect. TV pictures of long queues (‘lines’ in New York), cameo tales of extreme discomfort to families, disappointed commuters, theatre goers and unfinished sites, may horrify public onlookers, but they boost the determination of the strikers. Business spokespeople claiming the strike is costing billions, politicians expressing sound-bite rage and crying babies do much the same thing.

The intention of these public statements and images are to ‘shame’ the strikers back to work. The unintentional outcome is always to boost the strikers’ morale. Those militantly supporting the strike action receive comfort from the success of their strike action (its immediate impact not the eventual outcome) and those strikers less convinced that the strike is appropriate are encouraged to hold the line a little while longer because 'the employer is bound to cave in with the evidence before them that stubborn resistance is pointless' (or words oin unions peeches to that effect).

Of course, it does not always work out like this. The conduct of the employers, politicians and authorities is scrutinized by the media and assailed by supporters of the strike and the usual sympathizers of the strikers ‘driven to strike by obstinate bosses’.

Take this report from CNN today:

“State Supreme Court Justice Theodore Jones found the union in contempt of court for ignoring two injunctions barring its workers from striking. New York's Taylor Law forbids transit workers from striking, and the city and state had pressed the judge to impose a hefty fine.

"There are no winners in the strike," Bloomberg said Tuesday. "Everyone is a loser here."
He lambasted union leaders, saying they had "walked out on New York City," and adding there will be no negotiations with the union until workers return to their jobs.”

The union is already appealing against the fine and, no doubt, adding the fine to its terms for settlement should it be imposed (a regular occurrence in Australia where included among the settlement terms there is usually 'payment to the strikers for their lost pay'). But, note the last sentence attributed to Mayor Bloomberg: ‘adding there will be no negotiations with the union until workers return to their jobs.’ It sounds great; it is no doubt sincerely meant, but is it a good move?

To the original grievances of the union, this adds a new grievance: the merits of their right to take strike action. Be sure this is not a moot debating point carefully considered by a panel of sensible onlookers. If it is calculated to weaken the strikers’ solidarity it may do anything but weaken it. Union leaders addressing the strikers can work up a lot of rhetorical mileage out of the ‘right to strike’ against ‘injustice’, and so on. Wavering strikers can quickly be brought back into line in emotional appeals to vague notions of justice.

Remember, in such conflict the object of the employers (and those opposed ton the strike) is to weaken union solidarity, not strengthen it, and this is done best by focussing on the merits of the strikers’ case and not by allowing a non-issue to bolster doubts about whether the strike will achieve their case.

Adam Smith commented on the way the 18th-century law in Britain worked against individual labourers in matters of resisting wage cuts or raising wages, but not against masters who combined together to enforce wages cuts or resist wage rises. He did not take sides specifically in any particular dispute, but neither did he hide the brutal facts. My comments do not take sides in the New York transport dispute. They comment on the public reactions by people from whom we expect a constructive response to such difficulties, but, as is usual everywhere, we get actions that are more likely to worsen or prolong the situation.

Just as it is a fundamental right in a democracy for workers to have the ‘right to strike’ it is also a fundamental right of employers to seek to prevent strike action and, in ultimo extremis, the right to seek to ‘break’ strikes that occur, provided both actions are within the law. One of the main weapons in breaking strikes is to undermine the morale of the strikers. Forgetting this usually leads to policies and behaviours that bolster the strike when different policies would unsettle the solidarity of a large group of employees whose ‘solidarity’ is thinly and unevenly spread.

Neither Smith nor Marx 'Paved the Way for Globalisation"

Dr. Ralph Lynn, a member of the Board of Contributors, Central Texans who write columns regularly for the Tribune-Herald and a retired professor of history at Baylor University writing in WacoTrib.com repeats the well worn distortion of a now famous saying:

“The “good old boys” running this show are not bad people. They are just making the mistake made by “Engine Charley,” the genial General Motors chairman of 40 years ago. He assumed that what is “good for General Motors is also good for the country.”

What Charles Erwin Wilson, CEO of General Motors, actually said is not quite what he is believed to have said in reply to a question from the Senate Armed Services Committee, if as secretary of defense he could make a decision adverse to the interests of General Motors, Wilson answered affirmatively but added that he could not conceive of such a situation "because for years I thought what was good for the country was good for General Motors and vice versa", (The New Dictionary of Cultural Literacy, Third Edition. Edited by E.D. Hirsch, Jr., Joseph F. Kett, and James Trefil. Copyright © 2002 by Houghton Mifflin Company).

He was referring to an affinity of interests between the country (USA) and GM, which is not quite the same as arrogantly imposing on the USA whatever was good for GM.

Dr Lyn’s article has several ‘not quite’ right references to other matters, including the role of Adam Smith, opening with:

“More than just a bit oddly, both Adam Smith, the patron saint of big business people, and Karl Marx, whom these businesses people detest, paved the way for globalization.
In the big-business, simplified view, Adam Smith exalted individual enterprise free from government controls.”

Adam Smith as the patron saint of ‘big business’? Not something that Smith was familiar with, except in the case of the East India Company whose appalling behaviour he condemned wholesomely in “Wealth of Nations”. Smith was not a friend, never mind a ‘patron saint’, of ‘big business, a phenomenon of which he had no knowledge and did not write about.

His vision of the future was that of a growing commercial society, soundly based on an improved, and improving, agriculture in Britain. Of the United States economy he envisaged that it would be the strongest in the world, having overtaken Britain, sometime around the 1880s (Wealth of Nations, IV.vii.c.79: page 625) and would (‘should’) be based on agriculture and not industry. How Smith ‘paved the way for globailisation’ is not explained.

That Karl Marx allegedly also ‘paved the way for globalisation’ appears to depend on a spurious association of a German philosopher scribbling away and the quite separate development of capitalism:

“The Karl Marx contribution is a welcome surprise to the business people. This because Marx wrote little about socialism while discovering and praising the unequaled talents of big businesses in the production of goods and services.

Marx foresaw that the business people would reverse previous economic history: Instead of being controlled by governments, they would control the governments – all so successfully that an impressive recent study says that the entire world now shelters 587 billionaires.”

Smith, who did not foresee capitalism, and Marx, writing amidst its early manifestations, ‘foresaw’ business people controlling governments, somehow ‘paved the way’ for what happened two hundred years after Smith died and a hundred years after Marx died!

We can safely assert if neither Smith nor Marx had ever lived or written their books, capitalism would have appeared in almost exactly the same form it appeared anyway. Societies do not develop in a particular way because philosophers speculate about them. Smith, with characteristic modesty, said philosophers ‘do nothing but observe everything’, and Marx exhibited futile activism (and typical arrogance) in announcing that the task of philosophers was not to ‘understand but the change the world’.

“Wealth of Nations” was the result of observations of mid-18th-century Britain, looking backwards to the Europe of ancient Greece and Rome rather than forwards to the 19th century; “Capital” was an elaborate analysis of 19th-Century capitalism demonstrating that its author did not understand what he wanted to change.

Dr Lyn ends his piece to the theme of ‘greed’ (‘Systemic greed and inability to foresee unintended consequences’). He too is closer to wanting to change the world than to understanding it. I suggest, respectfully, that he read “Wealth of Nations” and “Moral Sentiments” if he wants to do the latter.

Read Dr Lyn’s piece at: http://www.wacotrib.com/opin/content/news/opinion/stories/2005/12/19/20051219waclynn19.html

Apologies and an Explanation

My attention to Blogging duties has been under strain last week and this (perhaps into next week too!) due to my continuing obligations since retirement from fulltime employment at the Business School in the matter of grading MBA Elective examinations in Negotiation. Near on 200 MBA students chose my Elective class this semester and I am grading their efforts, as always subject to the perusal of my work and their efforts by External Examiners from other British Universities, as is the British system - the relative autonomy of faculty in other countries is not copied in UK academe.

Hence, when I get a chance of a welcome break during the grading day - also interrupted by necessary social obligations associated with this time of year in the 'West' - I seize it to read through e-mails about Adam Smith and the ultra-useful summary of economics Blogs on Economics Roundtable (at http://www.rtable.net/index/rt/economics/recent/), the indespensable tool for all economists wishing for access to the best of economics Blogging, and select a subject for comment. All too quickly the time available slips by and I must return to grading. Fortunately, the number of articles misusing Smith's legacy has not been high this past few weeks.

Apologies, therefore, for scanty postings recently. I hope to return to a fuller programme by next week.

Any comments to: gavin [at] adamsmithslostlegacy.com

Incidently, Heriot-Watt University, where I was employed as a Professor from 1982 until March this year, has awarded me the title of Emeritus Professor. I am genuinely honoured and humbled by this unsought award. Academics, even economists, are not just driven by the mores and motives of homo economicus - and I have long doubted that anybody else is either.

Bureaucratic Barriers and Bribes in Developing Countries Cause Poverty Too

Tim Harford writes: ‘Yes we have no bananas. We just can’t ship them’, in the New York Times, 17 December. His article contains some facts that need the widest dissemination to all those concerned about the poverty of poor people in developing countries, which has nothing to do with the protectionist agriculture regimes of Europe and the USA.

Harford cites the problem of getting exports from a developing country to their borders and onto a ship to a developed county’s markets (should the developed country allow them in tariff free!):

“If our picker wants to sell his bananas abroad he first has to get them onto a ship bound for America or Europe. That takes 116 days, and an incredible 38 signatures - each one an opportunity for some official to collect a bribe. Something is rotten here, and not just the bananas.

Sub-Saharan African exporters face, on average, delays of nearly 50 days for each shipment. They must get roughly 20 signatures on eight or nine separate customs forms.”

This is a common problem with trade from poor countries, made worse by having to go through similar bureaucratic problems when exporting to a neighbouring poor country that is saddled, typically, with bribe-prone officialdom.

“India's commerce minister, Kamal Nath, has called for rich countries to "eliminate export subsidies as fast as possible." And so they should, but Mr. Nath might take note that an Indian exporter needs to collect 22 signatures on 10 documents - that puts India in the bottom 20 countries in the world for letting its own entrepreneurs trade across borders. Celso Amorim, Brazil's foreign minister, has condemned farming subsidies as "the most harmful single piece of commerce." The subsidies are indeed repugnant, but Brazilian exporters need 39 days to get their produce onto a ship, too long for some agricultural goods.”


Read the full article at Private Sector Development Blog: “a market approach to development thinking”:

http://psdblog.worldbank.org/psdblog/2005/12/yes_we_have_ban.html#more

The New Mercantile Political Economny

Tim Worstall , today’s Times (UK: 17 December), writes a barely contained blast, “Wake Up, Smell the Manure”, in a tone of well-deserved sarcasm, at Zac Goldsmith, son and heir to the Goldsmith millions. Tim asserts that Zac’s views on the declining cost of food lack intellectual content, (he certainly knows little about economic history. Zac is an ecology activist in the anti-globalist movement – a movement, we should note, that contains more sons and daughters of the western-educated, well off middle-class than it does starving poor farmers suffering from European and US agricultural protectionism (a policy they want to impose around the world into all economics sectors).

Sample this opener of Tim’s:

“THE COST of the food on your table has been falling since Neolithic times. Thanks to the onward march of technology — inventions such as fertiliser, the horse collar or exciting methods of turnip weeding — yields have been increased over the past 10,000 years, so reducing, for example, the price of each extra turnip produced.”

Zac Goldsmith concludes from falling food prices that this is a horrendous mistake and, presumably should be reversed. Tim Worstall (rightly) will have none of it. He puts it beautifully:

“Because of that the 98 per cent of us who are not farmers gain. This is as it should be: ever-greater quantities of ever-cheaper food are what have driven the growth of civilisation over the centuries. Moving from 100 per cent of the people scraping away in the fields to only 2 per cent is what has allowed some of us to become international financiers, editors of ecology magazines or the legatees of billionaires.”

We hear much the same thing from defenders of manufacturing at the fall in employment in the manufacturing sector. Yet falling employment in domestic manufacturing is not a sign of the end of civilisation, especially when manufacturing output is higher than it was. It’s a natural consequence of labour productivity. There is no ordained share of national product that must go to agriculture, manufacturing and services for all time.

In Adam Smith’s day, agriculture was around 50 per cent of national product. After Smith died in 1790, commercial society was joined to the technological revolution that turned employment from the former dominant agriculture to the new and soon to be dominant industrial sector. In the 20th century, the post-industrial era was well under way. Not surprisingly, Zac Goldsmith is unlikely to lament the decline in industrial employment. But the rise and decline of these sectors is part of the process of economic development, though Zac regrets all aspects of economic growth.

Smithian economists prefer to celebrate the shifting shares of national product. There are ‘too many’ farmers and ‘too many manufacturing jobs’, not too few. Trying to freeze employment in any of these sectors is the new mercantile political economy. Its instrument is the State; it supporters naive; its vision reactionary. Tim’s dismissive tone of Zac is exactly right.


You must read Tim’s article (at http://www.timesonline.co.uk/article/0,,3284-1922567,00.html) and also visit Tim's Worstall's Blog by clicking the link in the lefthand column.

Nothing 'Tricky' in Smith's Criterion for Public Projects

Business Day (Thailand’s Business News in English) 15 December, carries an article by Dr Biswas: ‘A cautionary tale of the role of government in commerce’.

Dr Biswas writes:

“It is generally conceded these days that free markets, the basis of capitalism, are good things. Yet, even Adam Smith, in Wealth of Nations, realised that there are limits to the social goods that free markets can deliver.

Smith suggested that the proper roles of government were in the defence of society, administration of justice, facilitating commerce and promoting the instruction of the people. … But facilitating commerce is a tricky one. What does this mean? And what should government get involved in?

Some capitalist thinkers feel that the government should only get involved in areas of market failure. This often occurs where socially essential goods and services such as education and health care must be delivered to people who cannot afford to pay market rates. In an area such as education, for example, making sure that all citizens in a country have a proper basic education has a large social benefit, yet it may be difficult to create a profitable business providing education to poor kids. Hence, there is agreement that government must be involved in the education of poor children.

How does this apply to facilitating commerce? Roads, bridges and airports all facilitate commerce, and most people would agree that government has a role in developing major infrastructures such as these.”

Comment:

It is not clear why Dr Biswas uses the phrase ‘even Adam Smith’ as if this is remarkable, when the fact is this can only be surprising to someone who has not read “Wealth of Nations” and who holds to a view of Adam Smith (as taught in Economics 101 in many campuses and endlessly repeated by journalists) that bears no relation to his Works.

Nor is it clear why ‘facilitating commerce, is a tricky one’. It was not a ‘tricky one’ to Smith and should not be to readers of “Wealth of Nations” or ‘Lost Legacy’. He is quite clear of his criterion for public investment in ‘facilitating commerce’:

“The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those publick institutions and those publick work 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 to any individual or small number of individuals and which it, therefore cannot be expected that any individual or small number of individuals should erect and maintain’ (Wealth of Nations, V.i.c. page 723)

What is the ‘tricky’ problem with that clear criterion? As Smith was writing in the mid-18th century his concerns about ‘individuals or small number of individuals’ was on an entirely different scale to the availability of capital for such projects in the 21st century. That does not prevent governments with vast tax raising and borrowing powers investing in public projects that could be undertaken by private companies but which they choose to undertake as publicly financed projects.

The United States has undertaken all coastal and river dredging schemes using the US Army Engineers as the state monopoly constructor and operator for decades (they built the levees that were breached in the recent Katrina incident outside New Orleans), when other countries demonstrate that the use of private dredging contractors is perfectly feasible and as reliable.

Britain’s privatised BAA, the owner and operator of the UK’s main airports and former state monopoly (now a private monopoly), can and does construct major terminals and runways using privately raised funds. Of course, BAA makes cases for access to tax payers’ funds and grants, but that it a facility dictated by government (and European Union) policy, or their acquiescence in making such funds available, and is not an economically necessary criterion in Smith’s sense. In his day, harbours, bridges, canals and roads formed a formidable agenda of needed public works to facilitate commerce.

Privately sourced funds are available for new airport projects in the USA, but they are sometimes stymied not by the absence of ‘individual or small number of individuals’ to undertake them without government funding. The main problem is government regulation (local and national) that use zoning laws and permissions preventing projects they disagree with for various reasons, including their other local past investments in an airport elsewhere and ‘cosy’ relationships with other private airlines. (I discussed a case here some months ago in Texas.)

Dr Biswas goes on to discuss US energy deals (Enron) and I am not tempted to follow him because my knowledge of the details is less than adequate. It may be regarded as a purely modern phenomenon pre-dating by a couple of centuries anything Adam Smith could have written about.

Those more competent in US energy in the past few years can follow Dr Biswas at:

http://www.biz-day.com/read/bank_and_finance/15_dec_05/g2c34-9/cautionary_tale_of_role_of_govt_commerce.htm

Smith's Good Sense and Humanity on the Removal of Tariffs

Division of Labour is one of the best of the economics Blogs (visit by clicking it in the list to the left or via: http://www.divisionoflabour.com/) and Robert Lawson one of its regular contributors. Yesterday he wrote:

“For some time, the statist left has been trying to co-opt Adam Smith by saying he wasn't really the supporter of free markets that some claim he was. Granted Smith was no anarcho-capitalist, but to associate Smith's name with the anti-trade, pro-union, left (e.g., Ohio Congressman Sherrod Brown) is truly sickening.”

This, of course, caught my immediate attention because ‘Lost Legacy’ is about protecting Adam Smith’s Works from distortions from whatever source (‘Right’ or ‘Left’, or just plain ignorant) in a bid to restore his true legacy to what he intended it to be. I followed the reference to Sherrod Brown and will comment upon it.

Sherrod Brown writes “Adam Smith’s Soft Side” in “The Globalist - dedicated to global understanding” - on 14 December, and it open with (read it in full at: http://www.theglobalist.com/storyid.aspx?StoryId=4677)”

“In the global trade debate, Adam Smith is usually heralded as perhaps history’s greatest proponent of capitalism. Against that backdrop, U.S. Congressman Sherrod Brown, author of "Myths of Free Trade," has a surprising finding. He argues that, contrary to the teachings of Smith's 20th- and 21st-century apostles, the Scottish philosopher more often than not sided with workers.”

This reverses the usual accolade from extreme ‘laissez faire’ capitalism of Adam Smith being a ‘patron saint’ of selfish unrestrained behaviours (sometimes called ‘Libertarianism’ and Ayn Rand individualism). Whilst it is useful to swing the pendulum in the other direction on occasion we should also be careful not to make errors of a different kind.

This is especially true when quotations are selected to purvey a specific view, torn out of their context. Jacob Viner’s world weary sarcasm bites when he opines that ‘an economist must have peculiar theories indeed who cannot quote from [Wealth of Nations] to support his special purposes’ (Adam Smith and Laissez-Faire’ 1928, page 126).

Smith was a moral philosopher and as such his role was ‘to do nothing, and observe everything’. Reading his prose it is easy to misread by imparting an emphasis he did not intend that he was ‘taking sides’ when he was not. He observed that workmen sometimes tried to form combinations to protect or enhance their interests and that employers resisted such attempts. Smith was intimate with a number of employers and at their dining tables, in their ‘social hours,’ they expressed candid views as well as revealing their collective response to labourers ‘clamouring’ for higher wages or against wage cuts.

His observations that public combinations of labourers were illegal, and harshly treated by local magistrates’, in contrast to the ‘secret’ conspiracies to form combinations among employers, expresses sympathy for the plight of the labourers and implicit opposition to the secret combined activities of the employers, but it remains an observation from a decent person, a moral philosopher, and not a call to action. That was not Smith’s way. The Philosopher observes and reports; society heeds or ignores; other philosophers in due course will comment on the consequences of what happened, or didn’t.

Sherrod Brown makes numerous short points in the extract of which a look at their context would make sufficient comment to ‘touch the tiller’ back towards the centre. One theme is worth tackling because it incorporates some of the errors of the people he criticises. I refer to:

“[Smith] believed that his invisible hand could do great harm to a nation and its citizens “unless government takes great pains to prevent it.”

and:

“Regulation of the invisible hand and direction from the government — especially in the areas of commercial navigation, national security and military preparedness — were of paramount importance.”

These assertions about the invisible hand do not appear in “Wealth of nations”; they are extrapolations from conventional teaching in some US campuses about the role of the invisible hand – a lonely metaphor used once by Smith in “Wealth of Nations” – which was not a theory of markets or anything directly to do with markets, but a metaphorical comment on the outcome of human motivations in favour of watching over their capital stock rather than risking it in ventures abroad or in the ‘carrying trade’.

Hence, it is a mystery as to what Brown means by something that does not exist could ‘do great harm’, and what ‘harm’ it does not do could be prevented by government. What, presumably, Brown is referring to is a policy of laissez faire could do great harm (monopoly pricing), with which Smith would agree, which is why Smith never advocated laissez faire, and nor did he identify a role for an invisible hand. Smith, likewise, would find it incomprehensible for there to be ‘regulation of the invisible hand’. It certainly had no role in Smithian markets! These were fully understood by Smith and were not regarded as in any way mysterious, miraculous or inhabited by invisible hands.

Sherrod Brown writes, under his sub-heading: “The merits of tariffs”:

“He believed that tariffs serve a useful purpose. He expressed caution when a nation contemplates lowering tariffs, for an immediate and precipitous reduction could throw large numbers of people out of work.

And he expressed little caution about temporary retaliatory tariffs when one nation had erected major barriers against another to harm that nation.”

A finer misstatement of Smith on tariffs could hardly be made, giving an misleading impression of Smith’s views on tariffs. In a regime of tariffs (the taxation of imports) of course tariffs have a role – to collect the taxes. He preferred no tariffs to tariffs as a general principle, but he understood their role and the consequences their existence had for policies to remove them. Smith was not writing a mere textbook on economics. “Wealth of Nations” was a report (I have called it a one-man Royal Commission) on what he observed associated with the question of what was the nature and causes of the creation of wealth in the form of what we call GDP, and not mere money or bullion.

Tariffs kept out of the domestic market lower priced, perhaps better quality, goods for consumption. This diverted expenditures from accessing lower priced goods and, therefore, encouraged more expensively produced domestic goods which lowered the distribution of capital stock to more domestically productive industries. In sum, the net growth in domestic product was lower than it needed to be, which inhibited rising real incomes, employment and net annual revenue.

Smith’s policy conclusion was to remove tariffs. However, he was not alluding to blackboard exercises in static diagrams, nor assuming instant velocities of change from tariffs to no tariffs. Smith was a moral philosopher not an abstract mathematical economist, nor a fanatical ‘man of system’. He was aware at all times of the disruptive consequences of sudden changes. His actual reference to his expression of caution was:

“Humanity may in this case require that freedom of trade should be restored only by slow gradations, with a great deal of reserve and circumspection. Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured in so fast into the home market, as to deprive all at once many thousands of our own people of their ordinary employment and means of subsistence. The disorder that this would occasion might no doubt be very considerable” (Wealth of Nations, IV.ii.40, pages 468-9).

That is quite different in its implications (explicitly stated!) than Brown’s claim of Smith seeing ‘merits in tariffs’! Key words used by Smith, showing his character, are ‘Humanity’, ‘slow gradations’ and ‘our people’ (not anonymous factors of production). Smith was for a decent society in which those who changed arrangements took account of the immediate consequences of precipitate actions. He was not blind to the ‘skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs’ (Ibid. Page 468). [In this context I should remind you that Sherrod Brown is a US Congressman from Ohio.]

Those who impose tariffs instantly do so with predictable consequences from those losing their jobs and ‘subsistence’, which in the mid-18th century meant instant destitution; Smith was aware that the same consequences would appear for those affected from their instant removal. To cast doubt on his longer-term intentions for their gradual removal is, well, er, political rhetoric of a dubious kind.

One last point. Sherwood Brown introduces some of the ideas of Frederick List, a 19th century German national economist, and it should be noted, a fairly robust critic of Smith and “Wealth of Nations” in his book: “The National System of Political Economy" (1841). He was at the front-end of the growing German nationalism of that period that bore its nasty fruit in the 20th century. He saw Smith as a crafty ‘English’ (sic) nationalist – he meant ‘British’, but did not recognise the difference), whose ‘Wealth of Nations’ sang the praises of free trade whilst surreptitiously serving the selfish national interest of England at the expense of those nations that were conned foolishly by it, such as Portugal and certain independent German states.

List and Smith are at opposite ends of the spectrum on free trade. First Brown traduces Smith’s real views on free trade – firm in principle, adaptable in the transition for reason of humanity – and then brings in List to carry on Smith’s alleged views into ‘national capitalism’, the ante-chamber for autarky and ‘national socialism’. At least we can see where Brown’s interpretations are leading.

A Chancellor Speculates about Ideas

The Hugo Young memorial lecture was given by Gordon Brown, UK Chancellor of the Exchequer, on liberty and the role of the state, at Chatham House, 13 December.

"All for ourselves and nothing for other people" is "a vile maxim," wrote Adam Smith. Coming from Kirkcaldy as Adam Smith did, I have come to understand that his 'Wealth of Nations' was underpinned by his 'Theory of Moral Sentiments', his invisible hand dependent upon the existence of a helping hand."

Comment
In referring to the ‘vile maxim’ Smith associated this ‘vile’ behaviour with the ‘rulers of mankind’ and from the perspective of mid-18th-century Britain the history of rulers of making was not very encouraging for more optimistic assessments of their behaviours. Classical Rome and Greece provided enough examples of the ‘vile maxim’ in practice, as did the history of medieval Scotland and the rulers of absolutist Europe.

Gordon continues:

“Of course Smith wanted people freed from the shackles of obedience to Kings and vested interests, hence the 'Wealth of Nations' but while he wanted people freed from the old constraints he certainly envisage people free of civic bonds and civic duties, hence his theory of moral sentiments.

Whenever we feel the fate of others is our personal responsibility we are less likely to stand idly by," he wrote. For Smith the moral system encompassed the economic system, generating the responsible virtues of industry honesty, and reliability - and the stable associations in which we accept our responsibilities each to one another, habits of cooperation and trust, the moral sense upon which the market depended.

So he always believed that the centre of a town is far more than a marketplace. And it is true to say that, even when enlightenment philosophers - like Smith - stood under the banner of freedom, they did not argue that their view of freedom gave men immunity from their responsibilities to serve their society: the British way always more than self interested individualism, at the core of British history the very ideas of 'active citizen', 'good neighbour', civic pride and the public realm.

So there is indeed a golden thread which runs through British history of the individual, standing firm against tyranny and then of the individual participating in his society. It is a thread that runs from that long ago day in Runnymede in 1215 and on to the Bill of Rights in 1689 to, not just one, but four great reform acts within less than a hundred years. And the tensile strength of that golden thread comes from countless strands of common continuing endeavour in our villages, towns and cities, the efforts and achievements of ordinary men and women, united by a strong sense of responsibility, who, long before De Tocqueville found civic associations to be at the heart of America, defined Britain by its proliferation of local clubs, associations societies and endeavours - a Britain where liberty did not descend into licence and where freedom was exercised with responsibility.”

[Some of the above wording seems to have' awkward' construction, I suspect from the Guardian's editing, which is not too good at the best of times.]

Comment:

Gordon Brown builds his case for a social dimension of individual behaviour around ideas of ‘building’ these dimensions consciously through intentional programmes of government (soon to be ‘his’ government?), albeit where appropriate in alliance with the non-governmental agencies of the informal voluntary sector, with its traditional proliferation of voluntary societies, of which Britain has always be strongly endowed (there has always seemed to me to be a voluntary club, charity or campaign lurking somewhere for every imaginable issue that has ever surfaced in Britain).

Given the number of quotations from eminent philosophers, writers and historians included in Brown’s lecture it is difficult to give an assessment of his paper – it certainly is a fitting tribute to Hugo Young – but what it means in practice is not easy to determine. He sets out the principles upon which action might be realised and therefore it is unexceptional and, presumably, uncontroversial, except to followers of Ann Rand’s extreme individualism and proponents of massive state determined provision.

We must await the development of the details, perhaps during the first premiership of Gordon Brown.
Read the article at: http://politics.guardian.co.uk/labour/story/0,,1666546,00.html

From an Idea of Adam Smith's?

Star-Telegraph Staff Writer, O. K. Carter (11 December) contributes an article, ‘Taking a Hard Look at the Economy’ by Market Street, an economics consultancy, for Arlington Council, Forth Worth, Texas, USA, about local economic prospects. Broadly, the consultants applied ‘cluster theory’ to the types of business sectors the town wishes to attract.

Consider this extract:

“Cluster theory, incidentally, holds that economic development in some areas tends to proliferate because of a kind of synergy of interconnected groups within a related industry. Think of this as sort of being like the proliferation of auto dealerships and supporting endeavors along Interstate 20. A proliferation of like businesses attracts a big customer base as well as lots of skilled workers. The close proximity also creates a competitive mechanism in which best practices are learned, new technologies or strategies evolve and from which customers or clients receive a benefit. It's pure Adam Smith stuff made more technical, proof once again that Smith was considerably smarter than your average economist.”

My first reaction was to scan from memory whether Smith ever outlined a crude version of cluster theory and decide that it was implausible that he did (I can well believe that a modern economics graduate would make anything simple ‘more technical’). However, on thinking about it I could see it was a plausible assessment by Staff Writer Carter.

What was a Smithian 18th-century market but a ‘cluster’ creating ‘synergies’ for the sellers who congregated in a single location at set times of the week and for the buyers who visited the location knowing they could search for what they wanted with an economy of effort compared to travelling all round the neighbourhood to individual stalls.

Edinburgh in the 18th century had designated areas for markets in specific items (their names survive today in street names such as Haymarket, Flesh Market Close, Lawn Market, and Grassmarket, with others, such as Horse Market known from old prints showing scenes from their market days. If you wanted to sell a horse, work with horses, or buy one, you knew where and on which specific days to go to achieve your goals.

Bringing suppliers into close proximity brought competition (or the possibility of competition) and congregating large numbers of potential customers also brought competition. Smith appreciated both points, though he was well aware of the practices that edged towards monopolies in the behaviours of traders gathering in the same place for ‘diversion’ and of town councils which organised the managed the markets.

Modern cluster theory is an extension of these early observations of Adam Smith (and, of course, others). At some point – measured by their ‘Location Quotients’ – the congregation of particular businesses adds to their economic strengths in employment, R&D, information flows, emulation of best practices, finer divisions of labour and continued expansion. Where this creates comparative advantages for localities in specific business sectors there are net inward flows of revenue into the locality, adding to local economic growth and development.

Read the aticle from Star-Telegraph.com at: http://www.dfw.com/mld/dfw/news/13383628.htm

Andrew Neil on Hayek's Contribution to Solutions to Today's Problems

In one of those remarkable essays that are published from time to time because they shake the thinking of thinking people, Andrew Neil, the Executive Editor of the group of newspapers owned by the Barclay brothers, that includes the Scotsman, the Daily Telegraph and The Business, authors an innocuously titled essay, “What China can teach the West”.

I approached it with the usual semi-interest reserved for familiar themes that appear and re-appear and do not say much that is new. That China is undergoing a major social, economic, and no doubt in due course, a major political transformation is hardly news any more. If you visit China you see it happening before your eyes. Having visited Shanghai and the Pearl River delta in south China if the sheer size of the development does not create a mouth opening awe I suspect nothing will – think modern Hong Kong, only covering hundred of square miles.

However, the article is not really about China alone, nor is it a dreary repeat of all the other wonder-struck travellers’ tales, rolled out to fill space in busy newspapers and tv schedules. In fact, it is only tangentially about China in reality. It is about Britain and Europe, and about fundamental philosophical differences between alternative futures for the next 50 years.

You know this is something different in the first few paragraphs. They catch your mind and make you sit up, eyes wide with attention. I take the liberty of extracting the opening four paragraphs (and risk a copyright suit, perhaps, but in the spirit of Andrew Neil’s theme I am willing to risk the lawyer’s letter).

“OF all the great insights that Friedrich August von Hayek bequeathed to us in his work, one in particular shines out today. For its truth has never been more evident, its application never more universal. It is that running through the ideological and political divisions of human history are two distinct and different ways of looking at the world. Between them is a deep and irreconcilable divide. One Hayek called constructivist rationalism. The other he called evolutionary rationalism.
Hayek spent a lifetime arguing that constructivist rationalism is economically and philosophically flawed because it assumes that “all social institutions are, or ought to be, the product of deliberate design”. Hayek later famously called this the Fatal Conceit .
Those who follow this route believe they have it within their power to build, organise and mould society so that it conforms to their concept of what is just and efficient. But it leads, he argued, to economic decline, poverty, social regression and, in extremis, famine, starvation and the collapse of civilisation. Historic examples of this mindset, said Hayek, included Sparta, the French Revolution, communism in general and the Soviet Union in particular, fascism, Nazi Germany – indeed all the tyrannies that blighted the 20th century. As Hayek famously put it, it is the Road to Serfdom.
Hayek favoured “evolutionary rationalism”. It understands that there “exists orderly structures which are the product of the actions of many men [and women] but are not the result of human design”. Hayek believed this the right approach because it is compatible with the teachings of economic science and goes with the grain of human nature; for these reasons, he thought, it leads to prosperity, progress and the flourishing of humanity.”

You must read it for yourself in full at:

http://www.thebusinessonline.com/Stories.aspx?What%20China%20can%20teach%20the%20West&StoryID=04007447-420D-41B3-ADC3-338E68C0F5EC&SectionID=F60D3E05-7185-44CB-BB45-97AC94420FD5

My original interest was occasioned by seeing a reference to Adam Smith, assuming that it would be a remark abut the “Wealth Of Nations” applied in Communist China. Here is the actual reference; note how wrong I was:

“Hayek’s work is part of a long and illustrious tradition which includes the great philosophers of the 18th century Scottish Enlightenment – David Hume, Adam Smith and Adam Ferguson. His great achievement was to adapt this tradition to the circumstances of the late 20th century and beyond. An early and influential proponent of the alternative, constructivist view was Rene Descartes, the 17th century French philosopher, who famously claimed to have proved that he existed by virtue of being a sentient being. The problem with the Cartesian view when applied to political organisation and economics, said Hayek, is that it gives the green light to unlimited, hubristic social engineering.”

For those unfamiliar with Hayek’s works this article will introduce you to a modern version of Smithian political economy, or rather, so as not to provoke friends from the numerous Hayek and von Mises’ Blogs on the Internet into frenzies about my misreporting what they are about, an alternative to Smith’s analysis of mid-18th century commercial society (a model well-short of the capitalist based societies that evolved in the 19th-21st centuries).

‘Evolutionary rationalism’ fits in well with Smith’s evolutionary approach to his model of society, as set out in his ‘History of Astronomy’, ‘Origins of Languages’, ‘Theory of Moral Sentiments’ and ‘Wealth of nations’. Hayek and von Mises had an additional two hundred years of change to contemplate and to develop their theories of society. I am approaching half way through von Mises ‘Human Action’ and I read through Hayek’s various volumes some years ago. You can read their current thinkers’ approaches in the Blogs listed in the left-hand column on this page.

To get started read Andrew Neil in The Business now.

His article is the 14th Annual Hayek Lecture delivered to the Institute of Economic Affairs on 28 November

Good Sense on Free Trade

Another brilliant piece by Razeen Salley, London School of Economics, on free trade and development, Business Day, Johannesburg, South Africa: “Fear the New Protectionism” (http://allafrica.com/stories/200512070137.html)

“FREE trade is under threat in the early 21st century. Protectionism lurks everywhere. The US, European Union (EU) and Japan are loath to open their agricultural markets. China-bashing has replaced Japan-bashing in the US and EU. Their governments do their best to keep out cheap Chinese-made garments retailers want to sell and consumers want to buy.”

Comment:

Absolutely right. Lower priced imports than can be produced domestically raises the real wages of workers and release capital for those projects that the country has an advantage in. Smith saw this as a theory of absolute advantage in the last quarter of the 18th century; Ricardo developed it as a theory of comparative advantage in the first quarter of the 19th century.

“So where does free trade stand today? What are its prospects? The core arguments for free trade are as compelling today as they were when the philosopher Adam Smith set them out more than two centuries ago. These I call the free-trade trinity -- prosperity, freedom and security. The economic case for free trade revolves around a specialised international division of labour, unencumbered by artificial restrictions, that allocates resources more efficiently and leads to long-term productivity gains. All-round growth and prosperity are its results.

The moral case for free trade centres on individual freedom. It is individual choice and entrepreneurship that drive international commerce, and the resulting prosperity creates better life-chances for those previously deprived of them. And free trade contributes to a more secure international political environment. By forging commercial bonds among nations, it fosters better understanding among the diverse peoples of the planet.”

Comment:

Spot on again.

“Second, pervasive restrictions on the cross-border movement of labour must be loosened. That also promises huge gains for developed and developing countries. Given its political sensitivity, it can only be achieved gradually and piecemeal. But it should be at the heart of a 21st-century free-trade agenda.”

Comment:

Very Smithian: gradualism, measured steps taken with humanity, not all at once in one giant revolutionary step that creates disorder.

“This throws up two points. First, the modern conventional wisdom has it that free trade abroad can be combined with "big government" at home. This view forgets that free trade is part and parcel of free markets -- part of a constitutional whole that includes limited government and laissez-faire policy at home.

Second, 21st-century free trade should rely less on bureaucratic international trade negotiations and more on the 19th-century method of unilateral liberalisation. This is done by governments acting autonomously, and spreads internationally by emulation. The World Trade Organisation and other international trade agreements can be helpful auxiliaries, but their importance should not be exaggerated.”

Comment:

Ignoring the remark about laissez-faire, by taking it in its minimal meaning, and not as a free for-all for anything goes, because businesses, as well as government agencies and labour organisations, must be watched closely for signs of monopolistic urges, we can appreciate the suggestion of unilateral action, rather than trying to proceed through decision systems enshrined in a 143 nation unanimity where any single country has an almost irresistible incentive to exercise a ‘blackmailing’ veto for its own gain (egged on by NGOs who oppose free trade, markets, smaller governments and capitalism).

Ripping-off Round the Clock

Adam Smith railed against monopoly practices and motivations among ‘merchants and manufacturers’, legislatures that gave private joint stock companies legal cover in Royal Charters and laws that prohibited imports or free trade.

The Daily Cardinal, Maddison, Wisconsin (USA) carries a column on a practice that appears to be a clear breach of Adam Smith’s views on monopoly. Perfectly legal, I am sure, otherwise in the ever litigious US somebody would have taken the companies concerned, ‘Clear Channel’ and ‘Ticketmaster’ to their day in court by now.

Matt Hunziker, 8 December, (The Daily Cardinal) write under the heading, "Clear Channel ruins concerts, lives":

“To summarize the late 18th century, the newly independent United States had a run-in with a British invasion (not to be confused with Beatlemania), there was an awful pun about France losing its heads of state and, of course, Adam Smith published “The Wealth of Nations.” The book’s central focus on an “invisible hand” was ahead of its time for science fiction, but Smith’s ideas about the principles of supply and demand and competition have shaped our modern capitalist economy.According to capitalism, competition should insure good service and prices. When an industry is under the control of a monopoly, however, these principles no longer apply, due to the large companies’ complete market domination and doubled rents.”

A fair summary for a journalist (I resist the temptation to nit-pick when the author’s point is quite apposite and worthy of wide reading).

Hunziker continues:

"Such is the current system governing the live music industry, where the average price for a concert ticket has doubled in the last eight years to around $54 and musicians’ freedoms are deteriorating.While one can hardly blame music venues for having monopolized the live performance market (YOU try getting the Rolling Stones to play in your walk-in closet), music fans everywhere have­—for years now—found a more deserving target for their pathos in the duo of media-giant Clear Channel Communications and Ticketmaster, which, for the uninformed, is a kind of automated service that takes your money in exchange for causing you physical pain.These two companies have played a large role over the last decade in bleeding concert-goers dry through a certain kind of underhanded corporate bastardry known as exclusivity agreements.”

The monopoly (really with two of them, probably a duopoly) comes from the companies having pre-booked on an exclusive basis the most suitable US venues for live music. Any music promoter wishing to book her live bands and top singers must book through the exclusive intermediaries and not direct with the venues. Of course, the venues receive a guaranteed income from their exclusive agreements with the intermediaries, and also, of course, the promoters pay an enhanced price for their booking of the venues, but the promoters pass these increased rental charges onto the concert-going public in higher ticket prices.

The venues, the intermediaries and the promoters gain (or do not lose), but the consumers lose out in the difference between the monopoly-induced ticket prices and what the ticket prices would be if there was competition involved in the chain of transactions. Consumers already pay top prices for top events; monopoly adds another layer of cost to the already top prices.

We can be sure, Adam Smith would not have approved of these arrangements. Neither, Is suspect do the fans.

Read the whole column by Matt Hunziker in the Daily Cardinal at:(http://www.dailycardinal.com/article.php?storyid=1028023

What are You Saying?

In reference to the previous item, we have a comment from the Blog Economist’s View from Mark Thoma that is slightly worrying, especially from the comments it attracted (read the piece, including a transcript of the HYT article) at: http://economistsview.typepad.com/economistsview/2005/12/greener_grass_o.html

I am not entering a debate that properly belongs to the US electorate, but I do not believe I am not being too sensitive, and certainly not ‘politically correct’ (a euphemism for not thinking, just sloganising), when I sense a whiff of prejudice in the approach of Mark, and his correspondents. If I am wrong; apologies.

The point is that the free movement of labour, capital stocks and goods among nations makes good sense in the efforts to improve net wealth. This is the Smithian position on labour migration and I agree with it. It is about the only thing I can say that has been an unambiguous benefit of the European Union in recent years (my youthful illusions that there would be greater benefits from the original Common Market were, er, youthful illusions that came in touch with German and French real politique).

A Gem on the Free Movement of Labour

In today’s message from the Foundation for Economics Education (FEE) there is a timely piece on the free movement of labour between countries, quoting from the New York Times. This is a ‘hot’ political issue in the US at present. Adam Smith, rightly, was not worried about the free movement of labour – or capital stock – among countries and it was one of his conditions for realising the full gains from Natural Liberty. It is therefore part of his legacy.

FEE gets it absolutely right:

“Working Mexicans Cross Border, Study Says”“A report about the work lives of recent Mexican immigrants in seven cities across the United States suggests that they typically traded jobs in Mexico for the prospect of work here, despite serious bouts of unemployment, job instability and poor wages. . . . Unlike the stereotype of jobless Mexicans heading north, most of the immigrants had been employed in Mexico, the report found.” (New York Times, Wednesday)

It takes prodigious twisting of logic to find a threat in people seeking better lives.”

Check it out at: FEE--In brief [inbrief@fee.org] It is well worth while for the occasional gem like this one.

Trash May be Better than Markets?

In the Vermont Cynic, 6 December (The independent newspaper of the University of Vermont) there is a great article “Talkin' Trash” by Hazel Ryerson: “An economic explanation of why trash cans might allocate resources more efficiently than the market system.”

If there is a prize for the most entertaining essay in a student newspaper, Hazel Ryerson deserves it with Oak Leaved Clusters and Bar. It is a must read for all jaded economists, who stride off this morning to teach Economics 101 for the umpteenth time with the thought, “once more with feeling”.

It is a must read, so get over to: http://www.vermontcynic.com/media/paper308/news/2005/12/06/BusinessAndEconomics/Talkin.Trash-1122396.shtml?norewrite&sourcedomain=www.vermontcynic.com

A sample:

“We definitely know Adam Smith was on to something when he wrote The Wealth of Nations. Unfortunately, today, too many people get their dinner not from benevolence or the self interest of the baker, the brewer and the butcher but from their back ally rubbish bins. Many of us when growing up were probably told that in the name of the poor we should not waste food. Ironically there are many desperate poor souls who must go shuffling through trash bins for a meal, and those same people actually hope food is "wasted."

Comment:

Much more than food is wasted (i.e., dumped). Vast amounts of material products become surplus to requirements and are dumped. Where the disposal is marketable, the goods go through a process of re-sale (marked as ‘seconds’ in the UK) through ‘Surplus’ shops, or a system of paid disposal operates via garbage disposal firms.

Hazel Ryerson notes that informal re-sorting of rubbish bins by hungry bargain hunters is an activity undertaken between the disposal by the former owner’s of the goods and its collection by paid garbage removers, who take it to an incinerator or dump it in a landfill.

“It sounds sad that people have to go to the trash to get food, but landfills and garbage bins are actually places where resources are allocated efficiently. If someone throws a product out then it is obvious they did not want it, but if someone goes and braves through old smelly coffee grinds, garbage water, sharp discarded razor blades, and the threat of disease to get that product there is no doubt they wanted it desperately.”

Comment:
A symmetry of needs! The former owners need to get rid of the rubbish; the bargain hunters need to eat!

It is also a bye-product of general garbage disposal. More than food is dumped. Soiled, worn and faulty goods are dumped. On television last night in a programme about the aftermath of the Tsunami, there was the story of little boy survivor who lost the rest of his family except his mother, and he spent time each day at the place where the trucks with the tidal debris were dumping all manner of things to clear the destroyed villages. He collected burnable wood and anything metallic, and said he sold these items for cash each day to give his mother money for food.

There was a market operating, but not at sorting the debris between saleable (therefore usable) goods and unusable rubbish. That task is left to unemployed youths and to boys who should be at school (what school after a Tsunami?).

“The pricing system is not totally without merit it is after all good at getting an exact measurement of desire, but the garbage system proves that money is not totally accurate, as people will pay for things they do not want and throw them out, while others will not pay for things they do want and search the trash. In this way the pricing system allocates resources to people who do not want them and deprives them of people who do.”

Comment
Society used to have a serious problem with household garbage – it was simply thrown into the street, to the Edinburgh cry of ‘gardy loo’ (a Scot's corruption of the French 'Gardez vous'), or piled near-by (a feature today of Third World shantytowns). In Smith’s 18th century Edinburgh, the streets were strewn with stinking garbage (causing those who could afford it to hold a perfumed handkerchief to their sensitive noses as they stepped through it). One of the earliest tasks of town administration was the removal of ‘night soil’ and other rubbish by men paid by local taxes.

Hazel Ryerson offers two solutions to the problem that “capitalism” as we know it “is so seriously flawed and is in need of fixing”: one: is “to tax the sale of goods to the wasteful, and to subsidize food to the desperate”; and to prevent cheating by making sure that “only the desperate get government food” by making that “food healthy, but also to make it taste awful, so only people who need it to live will come get it.” Almost pure Jonathan Swift!

At this point I began to suspect this was a parody, written for a laugh, especially when she added: “and to pay for this the government could tax garbage collection to make people think twice from about buying more than they want.” If taxing garbage was successful it would end surplus food in rubbish bins and deprive the hungry of sustenance; if the tax was high enough to feed the poor, irrespective of what was thrown out as rubbish, it would promote cheating by illicit dumping in neighbours' bins or in the neighbourhood generally.

But it is still a good read and a laugh. Thank you Hazel for that. Now back to exam marking!

The Kirkcaldy Adam Smith had Nothing in Common with 'Geko'

Towfique Hassan, Secretary General of BTMA, (sorry, no information on what ‘BTMA’ is), writes in The Financial Express, India, 7 December, and article on “Social Responsibility of Business Firms”:

“The villain of the film "Wall Street" started a speech with the word "Greed is good". The most charitable explanation of this statement was that it was a reaffirmation of Adam Smith's economic philosophy. Smith argued that the pursuit of self interest in a competitive market would ensure the common good. However, it is a doubtful case for the villain of "Wall Street", because he ruthlessly sought power and wealth and was prepared to trample on anyone who got in his way.

Should self interest be the sole objective of business or should there be an acceptance of organisation's responsibility to society? Economists like Adam Smith or Milton Friedman reject the notion about a business organisation's responsibility to the community. They argued that all we should expect from them is efficient profitable production, creating jobs and providing goods and services at the price and quality that the customers desire.”

It would be difficult to get into two paragraphs more errors about Adam Smith (why he thinks he is being ‘charitable’ is not stated). Milton Freidman may hold such views – after all, he is a ‘Chicago economist’ loosely connected to an ‘Adam Smith’ created in the image of someone residing in the mind-set that has since spread around almost the entire US academe, but not, definitely not, related to the man from Kirkcaldy, Scotland.

Adam Smith never advocated or excused ‘greed’; he regarded the vice of greed as anathema to good behaviour in “Moral Sentiments” and never accepted greed as appropriate in “Wealth of Nations”. Towfique Hassan confuses self-interest with selfishness; by extension he seamlessly slides into incorporating self-interest in greed. I expected him at this point in his article to link his sorry error into the invisible hand, but he disappointed me.
Greko, the character (Michael Douglas) in “Wall Street” is described as being Smith-like “because he ruthlessly sought power and wealth and was prepared to trample on anyone who got in his way.”

Contrast this assertion with what Smith actually wrote:

“In the race for wealth, and honour, and preferments, he may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end” (TMS, II.ii.2.1, page 83).

The assertion from Towfique Hassan lacks credibility. Greko’s ‘trampl[ing] over everybody” would not have been endorsed by Adam Smith (Milton Freidman can speak for himself).

Or, to take a general stance on causing harm to others:

“Society, however, cannot subsist among those who are at all times ready to hurt and injure one another” (TMS II.ii.3.3, page 86).

Causing ‘harm’ is quite a wide remit, and in modern terms would include polluting downstream fisheries, water consumers, and the other victims of the dumping of poisons to cut costs, the arbitrary dismissal of employees without fair treatment, the insistence on unsafe work practices that injure, maim and debilitate employees, the use of ‘company stores’ that cheat employees of their wages and the acceptance of bullying, sexist and racist behaviours that cause stress and offence. No Sir!; the ‘pursuit of self-interest’, without qualification, does not lead automatically to the ‘common good’, and Smith never said or implied that it was.

It is difficult to assert that Adam Smith endorsed such sweeping statements as to counter-poise the questions of whether “self interest [should] be the sole objective of business or should there be an acceptance of organisation's responsibility to society?” His “Wealth of Nations” constantly warns against the self-interest of monopolists that drives them to work against the interests of society with restrictions on supply, the misdirection of capital stock into lower-growth inducing activities, which growth Smith considered an important role for commerce in producing an opulent society. Nor did he think kindly of the Masters whose behaviour drove poor labourers into subsistence and below in their quest for extra self-interested profits, merely because they could do so and had the law and the magistrates on their side covering their nefarious behaviours.

“They argued that all we should expect from them is efficient profitable production, creating jobs and providing goods and services at the price and quality that the customers desire.”

The only economic force that could achieve those results was competition and free trade. And, in Smith’s view, it also necessitated liberty, the rule of law, justice, and social stability. It was not conceived as a carte blanche to do whatever ‘merchants and manufacturers’ were pleased to do, or could get away with.

Given the small size of the non-agricultural productive sector in mid-18th-century Britain and the absolutely small size of profitable activity, it was too early in the evolution of commercial society for the role of profit to be seen as a source of state finance, private capital investment and social capital. The problem of industrial pollution was nowhere near the scale it was to become in the 19th and 20th centuries. It is an open question whether Adam Smith would have regarded, what we can now negative externalities, as an acceptable price for economic growth.

It is therefore wrong of Towfique Hassan to assert that Adam Smith represented a view of society hostile to responsibility beyond that of making a grubby profit at any social cost.

Building a Nation By Paddling your Own Canoe

The Woodstock Sentinel Review (Ontario, Canada)(http://www.woodstocksentinelreview.com/story.php?id=200384) 6 December:

“Sargent prepared for record 11th campaign” by Bruce Urquhart – Political Reporter.

“Kaye Sargent has spent more time on the campaign trail than any other Oxford candidate, but even after 25 years of politics, her passion for the Libertarian Party of Canada’s message has not waned.

While Sargent wouldn’t describe herself as a "political person," she does believe in her message, which, simply put, places civil liberties above the needs of the state. With the roots of the Libertarian philosophy dating back to 17th century thinkers like John Locke and Adam Smith, Sargent said her party was derived from a rich tradition. "We have a whole philosophy behind us," she said.”

Comment:

Smith did consider it necessary on some occasions for the individual to submit to the ‘needs of the state’. Defence was a clear case; the Navigation Acts were another. And this highlights the difficulties for purist interpretations of political principles and practice. The real question is where is the balance to be struck? In this frame, Kaye Sargent performs a useful service in calling for the pendulum to swing much further towards the state excusing itself from so much intervention, at the behest of legislators and their constituents, it should be noted.

"We have to be protected against the intrusiveness of those not out for our best interests," said Sargent, who criticized the "size and power" of the federal government. "It’s not of their business at all. If you’re not hurting someone, you should be free as an adult to paddle your own canoe."

Comment
What strikes me in this passage is the statement one of my tutors in British constitutional history used to repeat (many times) in explaining why the French Canadian influence had succumbed to British influence in the 18th century. He delighted in pointing out that the French colonists, largely of agricultural stock and skilled hunters and trappers, showed conclusively that “you can’t build a nation by paddling your own canoe”, especially when up against the Red Coats in a professional standing army, which I suppose, Kaye Sargent is saying, was the ultimate interference in the peaceful lives of citizens.

Urquhart’s report continues:

“The only other areas in which the party would tolerate government involvement include the arbitration of "disputes" between individuals and the protection of property rights and voluntary trade. While some have accused the Libertarian Party of being "unfeeling," Sargent said its philosophy was more about "people helping people" on a more individual level rather than relying on government largesse.”

Comment

Yes, Adam Smith probably could go along with that sentiment. While I believe there are many practical problems with implementing such a large agenda of change, should I live in Kaye’s constituency I would probably vote for her – the legislature would be better for the presence in it of Kaye Sargent, one against the many who need shaking out of their complacent acceptance that everything in the way things are done now is the best of all possible outcomes.

Absurd Nonsense from 'O'Reilly'

You will always meet people like the one in this piece who knows ‘someone’, often ‘highly-placed, or close to someone who is highly placed, who has the ‘insider’ information that gives the ‘real story’ behind the ‘conspiracy' headlines, and claims glory for themselves).

Almost always they are talking, er, rubbish (‘crap’ is too vulgar for an economics Blog). The item has been published elsewhere but this extraction comes from Power Blog of the Acton Institute (‘power tends to corrupt and absolute power corrupts absolutely’). It was posted by Marc Vander Maas (5 December) as ‘The Most Ridiculous Item of the Day”:

“I know I’ve been enjoying the falling oil prices of late when filling up my minivan’s gas tank. At the height of the post-Katrina and Rita oil price spike, I was paying upwards of $70 to fill the thing up. Now that things have calmed down a bit, I’m even hoping to see gas drop back down to that magic $1.99 level or lower.And who do we have to thank for these lower costs? At first blush, I’d say Adam Smith. But I’d be wrong. It turns out that one man singlehandedly took on the high-price beast... and won.

That man?

O’Reilly."

Comment:
To get the measure of this man O’Reilly (I think he is in the media) read this exchange:

“CAVUTO: Okay. Gas prices are down a lot. Why do you think that is?

O’REILLY: Because they’re afraid they’ll go to jail. And those C.E.O.s who manipulated them–

CAVUTO: Why are you sure that they manipulated them?

O’REILLY: I have guys that are inside the five major oil companies - my father used to work for one of those oil companies, by the way - who have told me that in those meetings they look for every way to jack up oil prices after Katrina, every way. When they didn’t have to. And they got scared because in my reporting and some other reporting, they said –

CAVUTO: Wait, you’re taking credit for gas prices being down?

O’REILLY: My reporting and reporting of others.”

Marc Vander Mass offers the following comment:

Hmm. Perhaps tomorrow night’s “Unresolved Issues” segment on The Factor will focus on Bill’s incomplete knowledge of the law of supply and demand.”

Comment:
To which I append my own comment (apologies to Lord Acton):

“Ignorance makes people look sillier; absolute ignorance makes them look silliest”

Clear Thinking on Legislative Interventions in Development

Fred L. Smith, Jr., president and founder of the Competitive Enterprise Institute, a free market public policy group established in 1984, contributing to a three-way discussion in the Wall Street Journal (online), 6 December: “Corporate Social Concerns: are they good citizenship or a rip-off fro investors?”, writes:

“As civilization advanced from closed autarkic communities to the (relatively) open economies of today, it was necessary to go from the "deal with your own kind, marry your own kind" nativism of the past to the "treat a stranger as a friend" anonymous market transactions of today. As Adam Smith noted, we do not have to like our butcher (or he us) to enjoy the benefits of trade. The desire to feel good about the lineage of every transaction -- was this coffee grown by badly treated workers in a polluted environment where governments oppress their citizens -- would move the world back toward the poverty of the past.”
The market reduces transactions costs by treating a product as what it is -- a price and a quality -- the means by which it was produced and processed are irrelevant. This is a basic premise of free trade - a rule of the WTO (the PPM rule). The CSR movement would move us back toward the "deal only with PC-family members" and would lead to massive economic losses.
Trade -- and globalization generally -- do not directly address all the great values of our day. But the wealth creation effect of globalization makes it possible to have a world that is cleaner, fairer, healthier and less racist/sexist. That's not a virtue to be discarded to appeal to utopians.”

Comment:
An example of profound clear thinking from Fred Smith, especially in that first paragraph. Markets, through the division of labour, are anonymous. But we have come a long way from the simple commercial, mainly localised markets of mid-18th-century Britain. Even the great supply chain in “Wealth of Nations” (WN I.i.,11, pages 22-23) needed to produce the simple labourer’s coarse woollen coat took no interest in how its elements were produced and under what conditions and wages of the other labourers.

The 19th-century ‘industrialisation’ of Britain brought with it what poets called the ‘dark satanic mills’, and women and children worked in mills and mines for ‘low’ wages (the alternative was no work and no 'pittances', and no 'welfare state'). Legislation was passed (against resistance) to limit hours, to impose through the Factory Acts (its chief Inspector, Leonard Horner, was also the founder of the predecessor institution that became Heriot-Watt University), health and safety measures that both added to employment costs and to safer working by labourers.

With free press and the freedom of association and assembly, conditions compatible with Adam Smith’s Natural Liberty, electoral and other pressures exert themselves on work conditions considered well below those practised (and afforded) in the developed economies. Much agitation for removing ‘sweat shops’ (a trade union euphemism for any workshop likely to compete with the well-protected work environments of a high-wage developed country) is ‘protectionist’ in its motivation and not purely driven by concern for those affected, as was much of the agitation by sympathetic individuals from the agricultural interests in the 19th century who agitated from shorter hours in mills and mines.

Many of those campaigning against ‘cheap’ and ‘sweated’ labour show no awareness of the poverty of alternatives facing those who work in such places. One reporter on BBC radio, with long experience of India, told the story of a young Indian boy, 12 years old, who was ‘rescued’ by western agitation on a MNC producing sports goods for the equivalent of a few pence a day. Before getting the local job in the ‘sweat shop’, the reporter knew him as a ‘rent boy’, to which ‘living’ he was compelled to return when the ‘sweat shop’ was closed.

It is not just the costs of production that rise when standards in one place are imported into another. The surer way to raise people out of poverty is to allow economic growth and the division of labour to do their work. It is significant that in the closed political economy of China, as it industrialises and brings millions from the countryside into factories, there have been regular recent reports of labour ‘unrest’, including demonstrations, strikes and violence, aimed at raising wages and acquiring other rights (many of the larger modern plants use high-tech equipment, which requires clear, air conditioned environments). These are natural, and expected, developments; in tiem they win something, but not at once.

Fred Smith’s general point is correct; wealth creates remedies to poverty. The questions are: at what pace and what price to the lives of people and their environment?

Evidence on the Religious Climate Affecting Adam Smith

Virtue on line: ‘The voice for global orthodox Anglicanism’ (4 December), carries a review: The Elizabethan Prayer Book, Edited by John E. Booty, Virginia/Folger. 427 pp. $29.95, by Michael Dirda, a critic for Book World (© washingtonpost.com)

In part of his thoughtful review Michael Dirda reports:

“Bunyan also uses such surprisingly modern phrases as "spending money" and "Were you doers, or talkers only?"And he ends Part One with a chilling sentence. Ignorance has arrived at the Celestial City and knocks on the door. So very close to his heavenly goal, he nonetheless lacks the proper "certificate" and is suddenly, unexpectedly damned, bound hand and foot, and thrust by angels through a door in the side of a hill. Writes Bunyan: "Then I saw that there was a way to Hell, even from the Gates of Heaven, as well as from the City of Destruction." On which harrowing note he brings his original vision to a close: "So I awoke, and behold, it was a Dream."Such declamatory moments remind us that Bunyan passed much of his life, when not in prison, preaching in the open air. In our era of so much bland speech-making, we sometimes forget about this sheer power of oratory. Great preachers even now preserve its tradition, one in which human elocution alone, backed by passionate conviction and a desire to save souls, can bring people to tears, to their knees or to their feet. Think, for a supreme example, of Martin Luther King Jr.The almost legendary 18th-century preacher George Whitefield was so magnificent a speaker that the atheist philosopher David Hume declared that he would travel 20 miles on foot to hear him. Once, every high-school student read, with growing terror, the rolling periods of Jonathan Edwards's sermon "Sinners in the Hands of an Angry God." After describing the horrors of the pit, he reminds us of the sharp precariousness of life:"The bow of God's wrath is bent, and the arrow made ready on the string, and justice bends the arrow at your heart, and strains the bow, and it is nothing but the mere pleasure of God, and that of an angry God, without any promise or obligation at all, that keeps the arrow one moment from being made drunk with your blood."

Comment:

Though Michael Dirda does not say so, David Hume had such a gentle disposition (he never criticised any reviewer of his writings, no matter how rude and ignorant their words) that he had many friends among the ministers and elders of the Scottish Church during his lifetime, all of them aware of his views on religion and religious mysticism, and of his honest, open nature. Many of whom, right to the top of the Church, were unwilling to castigate and denounce him in the same distasteful manner as did some of their ‘Christian’ brethren.

Indeed, when the zealots tried to ‘excommunicate’ him, a wholly disastrous social edict but of no philosophical importance, his friends in the Church rallied to his defence and the zealots lost handsomely, with not a little gentle mocking for their pains.

It was not for nothing that he was called ‘Saint David’ by many who knew him.

I have raised the issue of 18th-century Scotland’s religious climate in ‘Adam Smith’s Lost Legacy’ (Palgrave, 2005) and here on the Lost Legacy Blog. The passages quoted above show a glimmer of the religious climate of ‘hell and damnation’ preaching that pervaded life in the Kirk that dominated Scottish social and family life throughout Smith’s lifetime. The reviewer’s purpose in quoting the prose had a different purpose, namely to illustrate the excellent use of the English language by some members of the Church of England; the ‘Calvinist’ inspired, Presbyterian Church in Scotland was more prone to alarmism about the furies of Hell than some of their southern neighbours.

For many of his contemporaries, particularly his beloved mother, the threat of Hell’s fire, mitigated only by an elsuive Heaven’s promise, was a very real, present and personal danger, under which most, including Adam Smith, were intimidated into compliance or prudence about causing the offence to the zealots. There are many signs of this in Smith’s “Theory of Moral Sentiments” and clues to his indirect criticism of religious doctrine in his surrogate condemnation of the pagan superstitions when his real target was religious superstition. On the death of his mother, Margaret Douglas (and later his cousin, Jane Douglas) he averred to no words about them being in Heaven, or that he would meet them again in what preachers called the ‘afterlife’.

Modern readers of Smith’s Works should take their context into consideration when they assert that he was a Deist and that a religious theme runs through his philosophical and economics writing.

Smithian Economic Change is Not Instantaneous

Barbara Gomolski, a vice president at Gartner (“the world’s largest Information Technology research and advisory company”), where she focuses on IT financial management, writes in Computer World (New Zealand) that “the rising price of oil may impact IT budgets” (“Oil and IT recovery) 5 December:

“You may think I’m waxing environmental here; I’m not. In fact, I’m a pretty fervent capitalist and Adam Smith economist, believing that a free market economy is inherently self-correcting, and that minimal government intervention in business matters is best. I don’t drive a hybrid car and one of my vehicles gets downright atrocious mileage."

Reading Adam Smith on markets she should know that the ‘self-correcting’ markets do not do so instantaneously. The adjustment process is not at the speed of infinite velocity, though much comment on markets seems to assume such ‘self-correcting’ velocities operate. Adjustment takes finite time, weeks or months, not days of minutes.

Smith’s example in “Wealth of Nations” (WN I.vii) takes a season or more as labourers withdraw or cut their hours from the venture that cannot pay their wages, landlords withdraw from or cut their land committed to the venture that cannot earn their rent and stockholders hold back their stock or cut their commitments to ventures that do not earn prices sufficient to meet the natural distribution of revenues to those complicit in the venture; the opposite occurs when market prices rise above natural prices.

“Still, this oil issue is turning me into an environmental pragmatist. Simply put, the imbalance in oil prices disturbs my economic sensibilities. I’d rather see the discretionary dollars of individuals and companies going into new IT initiatives (or even capital equipment) than into the pockets of the oil companies. I’d rather see IT organisations take on more staffers than watch the pay of oil industry executives climb.”

How quickly does she think the process would self-correct itself? We are only into the early months of the price signals. It is too early to say where the discretionary dollars of individuals and corporations will go, or are going. And remember, for every dollar going into the “pockets of the oil companies”. More dollars are pouring into the coffers of governments in oil taxation – what are they doing with these windfalls?

It is already claimed by BP that it is increasing by substantial amounts expenditures on non-oil energies, funded no doubt by increased flows of revenue from the current oil shortages, themselves occasioned, not by oil company ‘greed’, but by the booming demand for oil to fuel the rapid expansion of Indian and Chinese economic growth.

To miss these simple facts is to misread an elementary conclusion surely appropriate for the “the world’s largest Information Technology research and advisory company” and for someone who claims to be “a pretty fervent capitalist and Adam Smith economist, believing that a free market economy is inherently self-correcting, and that minimal government intervention in business matters is best.”

Evolution of Exchange

I am reading Ludwig von Mises’ Human Action (1949; rev ed. 1963 pages 194-5) at present and from my notes I have a reference to something that struck me at the time of reading it as rather not quite right, the memory of which was sparked by yesterday’s debate about Fehr’s Ultimatum Game.

I have already mentioned in an earlier Blog that I am not entirely sold on the idea that from logical deduction we can derive complete and accurate conclusions about all human behaviour, especially when we are treating with human social evolution, and that it is ‘safe’ to ignore induction as a method of analysis (I may have taken this wrongly from what I have read and am ready to stand corrected). Economists should know that we occasionally should ‘look outside study windows’ to check we are not fantasising about the real world, or that we have not made an inference from false or incomplete premises. I am always mindful of Galileo’s empirical test at Pisa of the deduction that objects falling under the influence of gravity did so in relation to their mass.

Here are the relevant passages from Mises:

“The exchange relation is the fundamental social relation. Inter-personal exchange of goods and services weaves the bond which unites men in society. The societal formula is: do ut des. Where there is no intentional mutuality, where an action is performed without any design of being benefited by a concomitant action of other men, there is no interpersonal exchange, but autistic exchange. It does not matter whether the autistic action is beneficial or detrimental to other people or whether it does not concern them at all. …

… Hostile aggression was a practice common to man’s nonhuman forebears. Conscious or purposeful cooperation is the outcome of a long evolutionary process. Ethnology and history have provided us with interesting information concerning the beginning and the primitive patterns of interpersonal exchange. Some [Mises refers to Gustav Cassel, The Theory of Social Economy, 1932] consider the custom of mutual giving and returning of presents and stipulating a certain return present in advance as a precursory pattern of interpersonal exchange. Others consider dumb barter as the primitive mode of trade. However, to make presents in the expectation of being rewarded by the receiver’s return present or in order to acquire favour of a man whose animosity could be disastrous, is already tantamount to interpersonal exchange. The same applies to dumb barter which is distinguished from other modes of bartering and trading only through the absence of oral discussion.

It is the essential characteristic of the categories of human action that they are apodotic and absolute and do not admit of any gradation. There is action or nonaction, there is exchange or no exchange; everything which applies to action and exchange as such is given or not given in every individual instance according to whether there is or there is not action and exchange. In the same way the boundaries between autistic exchange and interpersonal exchange are sharply distinct. Making one-sided presents without the aim of being rewarded by any conduct on the part of the receiver or of third persons is autistic exchange. The donor acquires the satisfaction which the better condition of the receiver gives to him. The receiver gets the present as a God-sent gift. But if presents are given in order to influence some people’s conduct, they are no longer one-sided, but a variety of interpersonal exchange between the donor and the man whose conduct they are designed to influence. Although the emergence of interpersonal exchange was the result of a long evolution, no gradual transition is conceivable between autistic and interpersonal exchange. There are no intermediary modes of exchange between them. The step which leads from autistic and to interpersonal exchange essentially was no less a jump into something new and essentially different than was the step from automatic reaction of the cells and nerves to conscious and purposeful behaviour, to action.”

It is most unlikely that there was a ‘jump’ from non-exchange to exchange in the social evolution of human society, as stated firmly above. There were gradations brought about changing circumstances in hominid groups after the speciation from the common ancestor. These were gradual and not sudden. The initial speciation did not change all characteristics of the first hominids from the common ancestor of the hominid and the chimpanzee species. Given that natural selection operates on the individual and not the species a sudden jump seems most improbable. A change in one aspect of an individual’s ‘DNA’ took time to spread through its children and their children, and was reinforced over generations and built upon until a separate species was formed. The original biological change did not need to have an immediate and direct affect on the social change in behaviour.

Looking at exchange behaviour, I mentioned the discretionary grooming conducted by chimps on those who groom them in return and that the instances of sequential reciprocal grooming may be separated by many days, and not necessarily conducted by immediate return in the same session. I believe something similar occurs with certain bats. Taking the full cycle of the reciprocal exchanges, the groomers expect a return of grooming from those they groom, otherwise they do not groom again; it appears there is ‘no such thing as free groom’.

Biological evolution in the hominids led to certain bodily ‘gateways’, one of which was the growing brain size of the hominid species (I believe about 18-20 separate hominid species have been identified so far from fossil evidence). Hominid brains grew from a chimp size of c.340cc towards the human brain size of 12-1,400cc in several million years (I am speaking from memory here; my original ms is in another place). This had profound social effects, the main ones arising from the need to increase food intake to feed the ‘ravenous’ energy needs of the growing brains and a longer period of baby growth outside the womb while the brain and the skull grew. This altered hominid social relations, undermined the monopolistic sexual dominance regimes of alpha males over the band’s females (and males). It also changed female menstrual cycles, and had other sex related consequences, of which upright walking in place of a crouching gait also contributed.

For males the ‘party was over’. Up to then, females fed themselves and the children; males fed themselves. This arrangement changed and where it did pairs in the bands, and from this the bands themselves, continued to multiply; where it did not the band suffered local extinctions. That most hominid species did not adapt explains their extinctions, even after a million years plus of their successful terms as viable species (humans have clocked up only around 200,000 years so far).

The first shift in the non-exchange relationships was to the implicit exchange of food for the band’s population for general male, as opposed to minority alpha male, access to females during this evolutionary phase which lasted several million years. The exchange (crudely of subsistence for sex) was implicit because access was immediate but reciprocation in food supplies was longer term. This raised problems of ‘defections’, which could vary in degree and scale from individually poor, intermittent and non-existent, productivity on behalf of the females and children, and other males, in the band to below average ‘efforts’ compared with the efforts of others to comply implicit deal. Add in the usual inducements to grievances from jealousies, perceived slights and other sub-norm behaviours, we need not assume ‘harmony’ or ‘golden ages’. The ‘defection’ problem would be exacerbated in periods of scarcity (over the period, there was more than one ice age and its consequences to contend with) and where there was no enforcement of the ‘deal’.

As the burden of gathering-scavenging- hunting (itself a multi-million year process of change) grew so did enforcement of the exchange, by the other males in the band on those males that enjoyed access but were not active enough in supplying food. As the scale of scavenging, and later the hunting of bigger game intensified, it increased the degree of co-operation required to secure the meat protein in the band’s diet, causing the exchange to become less implicit and more explicit.

This evolved towards the conditional proposition: ‘If you have access, then you must supply food’, or, in modern terms: ‘If you supply food then you may access.’ Alongside these exchange relationships, ‘gifts’ between bands, and, eventually, trade as we would recognise it, appeared. Of course, in the picture there was also violent plunder, vendetta, and the usual interpersonal violence we find in all human groups.

We should not forget that a person, of unknowable motivation to others, who donates a favour (chimps grooming; hominids hunting small game), to a second person may affect the thinking of the receiver, who for whatever reason, accident or positive motivation, reciprocates and discovers that the reciprocated favour is returned, again without any conscious intention, may start of a cycle of reciprocation. The ‘autistic’ action generates realisation that the scope for mutually beneficial action can be opened. With growing brain size (an imperfect surrogate for intelligence) it helps to process this realisation. If chimps could do this, so could the more intelligent hominids.

Yesterday’s account of implicit reciprocation in the exchange of favours dealt with the division between giving without expected favours returning and giving with unenforceable expected favours returning. The motives of such actions, of their nature are discernible before the return or non-return, only afterwards. Judge people on what they do, not on why they say they do it.

What Mises calls ‘autistic’ exchange becomes ‘interpersonal exchange’ in the disappointment (anger) at the expectations of the implicit exchange being frustrated. That it became ‘socially necessary’ for the survival of individuals that their increased appetites were met by implicit exchanges becoming enforced was a change in behaviour of immense significance. Interpersonal exchange evolved gradually; where it faltered, or never started, it caused the elimination of those individuals and groups that failed to adjust, assisted by thousands of years of repeated ice-ages that added selection pressures on food subsistence and sexual access, which had unforeseen (at the time) influences on reproductive success.

Bands of individuals, who lived long enough to breed and to bring sufficient of the children to adulthood, survived extremes of climatic change; the others didn’t.

The rest, as they say, is (our) history.

A Tax Reform Too Far?

Mark Braund writes in today’s Guardian (UK) a piece, “Must Try Harder”, (http://politics.guardian.co.uk/economics/comment/0,11268,1656759,00.html)
“We will never make poverty history until we rip up the tax system”.
In it puts a modern version of Henry George’s ‘land value taxation’, which some see as the solution to all manner of problems in society’s economic basis, particularly that of poverty.

Having been, for a number of years, a colleague of Dr Roger Sandilands, who was an enthusiastic believer in Henry George’s ‘LVT’ (he had custody of an ornate wooden chair presented to Henry George on a visit he made to Glasgow), I do not feel any particular need to debate the merits or otherwise of his prescriptions for changing the taxation system.

I prefer to take ‘route one’ towards that goal – lessen the tax burden by more than half – than go through the social upheaval implied in LVT, which because of the narrowness of the land base for taxation in GDP terms it would amount to confiscation on a large scale. Taxing less seems a surer way to achieve a more harmonious society. At this point, Adam Smith’s warnings against ‘men of system’ seem particularly apposite.

Here are two extracts from mark Braund’s article:

“It was clear to Adam Smith that any philosophy for a fair society needed to acknowledge the economic forces that determine the distribution of economic opportunities and therefore wealth. It was Smith's near contemporary David Ricardo who made explicit what was becoming obvious: if the ownership of land and natural resources is grossly unequal, then wealth and wellbeing will be the privilege of the minority. And as the economy develops and more wealth is created, the gap between rich and poor will widen. This is an inescapable conclusion of classical economic theory, and although the world has moved on since Ricardo's day, the fundamentals remain the same”

And:
“Instead of arguing over how much we should tax, we should be asking why an economy based on free markets and private enterprise is so incapable of delivering opportunities and security for all. This brings us back to classical economics. If access to the land and natural resources upon which economic activity depends is concentrated in the hands of the few, the many will struggle to find adequate life-sustaining opportunities. This conclusion drove Ricardo to despair. Two centuries ago there was no possibility of persuading the aristocracy that wholesale changes in land ownership were needed to reduce poverty. After staggering economic and technological advance but still no end to poverty, we may be more receptive. But we still need a mechanism to widen access to economic resources without threatening individual freedom.

A neat solution was proposed more than a century ago by an American economist named Henry George. Today, his followers are subjected to unfair accusations of intellectual naivety by the economics mainstream. But his ideas deserve a hearing because they adhere to the essential truths of classical economics, and because they promise an economy in which individual freedom and social justice become co-dependent rather than mutually exclusive. For George, the key to transforming the economy lay in the tax system. He argued that instead of taxing effort and enterprise through taxes on incomes and profit, we should tax ownership and the exploitation of natural resources.”
Comment:

Braund’s point: “… any philosophy for a fair society needed to acknowledge the economic forces that determine the distribution of economic opportunities and therefore wealth.”

Adam Smith’s “Wealth of Nations” considered that the increasing division of labour as the economy grew (in conditions of Natural Liberty, which meant freedom from the insidious monopolising influences of some of those who participated in it) and the continual extension of markets, was the route to raising incomes of the poor – abolishing poverty comes from creating wealth in the form of the annual production of goods and services. The ‘wealth of the rich’, as a bye-product of economic growth, for Smith (and in my view should also be for us), was a price worth paying if the mass of labouring poor were lifted out of poverty and able to feed, cloth and shelter their families, have them educated and healthy.

While envy is inevitable, I do not think the rhetoric of anger at what can only be changed by the destructive violence that leads to the equality of total deprivation for all. It is far easier to destroy an economy in months than it is to let it take the long road to prosperity. Braund seems to accept this when he writes:

“Two centuries ago there was no possibility of persuading the aristocracy that wholesale changes in land ownership were needed to reduce poverty.”

What does he see as the consequence of this inability to ‘persuade’ the aristocracy? In what sense were the accumulated trinkets and baubles (as Smith expressed it contemptuously) of the ‘aristocracy’ a barrier to economic growth? The landowning aristocrats were hardly players in the ‘causes of the wealth of nations”. Agriculture represented fewer than 50 per cent of GDP in Smith’s time and was a declining force throughout the 19th century. Now this sector accounts for about 3 per of GDP in Britain and the country is littered with ‘stately homes’ of no real economic meaning, except as expensive ‘piles’ and monuments to the flattery of ‘ancient families’.

Mark Braund’s professional work as an economic advisor to the Mozambique government may have tipped his attention into over emphasising the importance of land, agriculture and mineral extraction as a cause of the growth of wealth – these are themes akin to the French Physiocrats also playing in the background as I read his essay.

Absolute poverty is not a problem in the UK (certainly on anything near the scale it was in the 18-19th centuries and as it is in Africa in the 21st). Relative poverty is always a problem, but an emotional one. But so is the road to reducing and eliminating relative poverty in the size of the public sector and the taxation regime that is required to support it. Redistribution is one policy that acts to counter this problem, but it cannot sensibly be the only or the major policy. If all the ‘wealth’, which Braun calls ‘obscene’ (a word that springs too easily to the mouths of those spouting empty rhetoric about anything they disapprove of), were redistributed by punitive taxation and the confiscation of property by legal means or tolerated looting, the very poorest would not be but a trinket better off, and then only for the moment.

Wealth creation is not a once-only action (would that it was!). It is the slow, gradual and continual accretion of the annual output of goods and services, during which the value-added is distributed to those who labour and those who own the means of production and the raw materials they process. Opening up an economy to trade, both internally and externally (including with neighbours in Africa), and reducing as quickly as administratively convenient and practical the barriers that stand in the way of free commerce (all those licences, permissions, petty bribes and pay-offs, both legal and criminal), is the Smithian road to opulence.

It won’t lift all the labouring poor immediately into opulence, but it might within two or three generations lift most of them out of absolute poverty and into health, education and dietary sufficiency. That process is now under way in India and China on a grand scale, and in the ex-communist countries to a lesser, and slower, extent; it has already achieved much in Taiwan, Singapore, Malaysia and South Korea. Elsewhere it is stymied for reasons we are all familiar with - political tyranny, civil wars, genocide, corruption at all levels, bureaucratic administration, religious barriers, gender biases, unequal, even fraudulent, legal systems and so on (see Amartya Sen's books) – and all of them endemic in the countries concerned and not imported or imposed from abroad.

If the ‘West’ contributes to the problem it is from tolerating the above barriers to wealth creation, including by its avoidance of causing diplomatic upsets by exposing their true and very real causes (with few exceptions, for example in Zimbabwe, where the regime is so awful, even the Foreign and Commonwealth Office comments critically) .

When Will They Ever Learn?

Thomas DiLorenzo (tomd@mises.org ), a member of the senior faculty of Mises University and a professor of economics at Loyola College in Maryland writes a piece of “Four Thousand Years of price Control” on Mises.com Blog (click to read the article in full in list of Blogs in the left column). In it he refers to a book, “Forty Centuries of Wage and Price Controls” by Robert Schuettinger and Eamon Butler, first published in 1979. Eamonn Butler is our friend on Adam Smith Institute’s Blog, also listed in the left column.

Two extracts make the point well:

“In Babylon some 4,000 years ago the Code of Hammurabi was a maze of price control regulations. "If a man hire a field-labourer, he shall give him eight gur of corn per annum"; "If a man hire a herdsman, he shall give him six gur of corn per annum"; "If a man hire a sixty-ton boat, he shall give a sixth part of a shekel of silver per diem for her hire." And on and on and on. Such laws "smothered economic progress in the empire for many centuries," as the historical record describes. Once these laws were laid down "there was a remarkable change in the fortunes of the people."

Ancient Greece also imposed price controls on grain and established "an army of grain inspectors appointed for the purpose of setting the price of grain at a level the Athenian government thought to be just." Greek price controls inevitably led to grain shortages, but ancient entrepreneurs saved thousands from starvation by evading these unjust laws. Despite the imposition of the death penalty for evading Greek price control laws, the laws "were almost impossible to enforce." The shortages created by the price control laws created black market profit opportunities, to the great benefit of the public.”

Price controls never work well. Yet, some US Senators in each party are advocating them now for the temporary spike in oil prices following the hurricane season. How much historical experience do they need?

Thanks to Voluntary Exchange (“It's as intrinsically human as opposable thumbs”) for drawing my attention to the article, which you can read at: http://voluntaryxchange.typepad.com/voluntaryxchange/2005/11/4000_years_of_p.html

By the way, Thomas DiLorenzo is the author of How Capitalism Saved America (Crown Forum/Random House, 2004)--which is the Smith Prize winner for 2005--and The Real Lincoln (Three Rivers Press/Random House, 2003).

Response to Jason Biggeman: "self love is insufficient"

I am not clear that Jason Biggeman (Productivity Shock) and I agree about what we disagree about!

I am advocating ideas I developed a number of years ago in my unpublished (as yet) ms on: "The Prehistory of the Deal", which looks at the social evolution of bargaining from the speciation of the "Brutes" (Hominids) from four to six million years ago and then from them to Homo Sapiens about 200,000 years ago. I intend to return to this project when I have finished my current book on Adam Smith for Palgrave’s ‘Great Thinkers’ series.

While altruism is a familiar theme (as correctly defined by you) in anthropology I have never been comfortable with the idea of altruism as a general component of human behaviour. This centres on human motivation, I agree, but in practice 'reciprocal altruism', as I observe it, more with sarcasm than as a definition casts doubt on the idea that so-called ‘altruistic’ actions are truly altruistic. They may be altruistic for saints, but there are precious few saints around and certainly not enough of them to populate a regime of benevolent donors (apart from the fact that all economic resources – anything that has excess demand at zero price – are scarce).

The dominant behaviour among humans is exchange, not ‘selfless’, nor selfish, actions, best described as ‘plunder’, and benevolence has restricted scope in a world of scarce resources. But neither is unmitigated self-interest dominant in exchange in practice because pure self interest also has restricted scope – it leads to deadlock in negotiation (which is the dominant behaviour in exchange). My special interest for thirty years has been in negotiation, observing, participating and thinking about the negotiation process.

In the Ultimatum game, and its derivatives, 99-1, the pure self interested choice of offer of Player A, is deadlock, or no deal; both get nothing. What some economists claim is ‘rational’, i.e., Player B ‘should’ (would?) accept this offer is contrary to experience, and not only in the Ultimatum Game, but also in the negotiation process. Add competing opening offers in Ultimatum and the self-interested behaviours of the Players change. The question sooner or later dawns on Player A (who initiates the first and only offer): ‘how much of the amount on the table am I will to give up to Player B to avoid gaining zero?’ Similarly, for Player B the question becomes; ‘How little of what’s on the table am I willing to accept the avoid getting zero?’ Humans are sentient beings.

Accepting the only offer of 99-1, under the rules of the game, is equivalent to a negotiator accepting the first offer, a possible but unlikely outcome in practice, and, though sometimes observed from the naiveté of real world Player Bs, or when Player A’s first offer on such occasions is well beyond the boundaries of Player B’s negotiating range, it is still a normative mistake on Player B’s part. ‘Always challenge first offers’ is well founded normative advice to negotiators in explicit exchange transactions. It is also the case that some people decline the offer of even a needed favour precisely to avoid being under an obligation to the donor for some other reason.

Look at the process involved in the real world when we do somebody a favour. Whatever the motive for doing such an act, and some people claim to be acting selflessly in their intentions, it is not the critical moment to make a judgement as an economist (I respectfully submit). It is not what motivates one to do the act initially but what happens next that defines the nature of the act. What happens in the complete or the interrupted exchange is decisive; field observers should continue watching.

So, Person A does Person B a favour (however defined and whatever its content). No explicit exchange takes place in that first step, nor need any implicit expectation be present, though socially implicit expectations are present.

Empirical test: ask subjects to complete the sentence (or its local language equivalent): ‘One good turn deserves ……….’.

If you completed the sentence as you read it, you make my point. By its nature it need not be formulated as an explicit expectation that the favour will be returned, though I have been challenged indignantly and forcefully, by some people when I assert these points thus far, who defend their pure motives for donating a favour of act of kindness and resent my ‘insult’.

Now, what happens subsequently when Person B has an opportunity to do person A favour, but for whatever reason Person B does not reciprocate in proportion to Person A’s original favour? I submit, from observation not rational deduction, that most of the people in the Person A group (those doing the initial favour) are likely to feel resentful, some hotly so. Not all of them, of course, though those who do not are likely to be a declining number of the set of Person As; some few will never feel resentful, let’s call them the ‘saintly set’. Most Person As are not in the saintly set. Therefore most of us cannot be classed as ‘altruistic’, as defined, once the favour can be but isn’t reciprocated.

Consequently, most of the ‘non-saintly set’ of Person As will not repeat subsequently any favours towards those Person Bs who populate the set of ‘non-reciprocators’. The non-saintly set of Person A types justify their resentment by reference to their implicit expectation of a favour being returned in proportion to favours given to them ‘freely’: 'It's only fair', 'What a mean person she is', ‘ the dirty rotten swine’, ‘ungrateful slob’, and so on.

By reference to research into chimpanzee behaviours (R. Dunbar, etc.,) it was observed that chimps groom those, for whom they have discretion about grooming, who have groomed them in the recent past and, crucially they do not discretionally groom those who have not returned the favour of grooming in the recent past. I suggest that this behaviour among chimps today was practised among the antecedent species of Hominids (if the common ancestor of chimps behaved a reciprocal exchangers, it is more than likely that the hominids did too) and by the time that the a evolutionary social process was underway these behaviours were firmly in the human repertoire of inter-personal skills (social change is a more rapid evolutionary process than biological natural selection). Once underway this process continued through the speciations that followed until Homo sapiens emerged as anatomically and mentally identical to modern Humans about 150,000 to 200,000 years ago.

Whereas reciprocal exchange was initially implicit, with speech added to implicit exchange (favours) it added explicit exchange (negotiation) eventually, and both forms of exchange co-exist today in all human groups. Negotiation and reciprocation are data in modern human relationships and are among the universals common to the human species. I have not space, and you may not have the patience, for me to develop this argument in detail here.

But that is not all. Your argument is that self interest dominates the exchange transactions. As a first-cut working assumption I cannot quarrel with it (it was made explicitly by Adam Smith in both of his main works), but I qualify the assumption of pure self-interest with the observation that pure self-interest (i.e., selfishness) does not dominate explicit voluntary negotiation and implicit reciprocal favour exchanges. Self interest, as defined and in the sense that you use it, i.e., it dominates the exchange process, would and does lead to violence, plunder and coercion and not trade, as understood by Adam Smith and others, or as practised by human beings and the hominids since their speciation in their implicit, and latterly their explicit, exchange processes.

What evolved was not self-interest dominating human transactions – primitive Brutes and Chimps already knew about and practised selfishness – but the mediation of pure self interest in trillions of transactions, first within the band (humans did and do not live by bread alone and neither did or do they live alone) and then, following post-contact with other bands, among the bands. This evolved process of mediation of pure selfish self-interested behaviours produced, eventually, the conditional proposition, ‘If you give me some of what I want, then I shall give you some of what you want’. At this point, forever, humans behaviourally separated from animal ‘exchanges’. Violence (red in tooth and stone) did not end – probably never will – but the alternative, peaceful, voluntary exchange became practicable. With commerce (Smith’s fourth age) exchange through mediated self-interest became the dominant behaviour; through competition self-interest is mediated severely.


Smith hinted in “Wealth of Nations”, in the “Lectures on Jurisprudence” and in the “Early Drafts” that it was not pure self-interest, but self-interest modified by the learned behaviour that to serve ones own interests, one had to serve the interests of others. The issue of altruism in this context is not relevant, or even interesting.

The Ultimatum game and its derivatives or alternates stumble over naked self-interest only in the initial round. Self-interest is modified in repeated rounds of the Ultimatum game towards each party serving its own self-interest by serving the self-interest of the other party. Each party moves its offers and concepts of what is acceptable. (Try several rounds of Ultimatum empirically with players who are new to the game.) I side-step the issue of ‘fairness’ as this implies objective measures of distribution separate from the subjective judgements of the parties in the transaction.

In negotiation we call the means to achieving that acceptability criterion, ‘movement’ from an original demand or offer towards an outcome acceptable to both parties. In implicit exchange, the refusal to reciprocate provokes a non-repetition of the original favour unless the non-reciprocator, Person B not Person A, unilaterally offers a favour to Person A, which may initiate another attempt at implicit exchanges. Offering a favour to someone, whom you rejected to reciprocate with originally, is a way of saying ‘sorry’; not doing so creates an ‘enemy’ non-player for life.

People learn about exchanges processes, as they do about moral conduct and sentiments, as outlined by Adam Smith in “Moral Sentiments”.

You write: “By definition, exchange transactions are not unselfish giveaways, and therefore they are not instances of altruism. Therefore I do not agree that, to any significant extent, humans are motivated by a mixture of self-interest and altruism; rather, self-interested motivation dominates.”

My original intervention on your interpretation of Fehr’s assertions was not as well expressed as it should have been. I am no believer in pure altruism, nor am I a believer in pure self-interest (selfishness) in exchange transactions. Pure altruists are minor and uninteresting cases. Pure self interested players are also minor and uninteresting cases. Both are reproductively dead ends, even when they meet each other. Humans are motivated by a mixture of self-interest and exchange, mediated in the division of labour, the urge to ‘better themselves’, family and, in diminishing strength, friends and acquaintances, and weakest of all strangers, except when, as they are, strangers are the means to the betterment of self, family and friends in markets for goods and morals.

Where it gets really interesting is in the social processes for mediating self-interest, to which I urge Fehr and yourself to follow the transactions through, and do not stop at ‘self interest’ (what a range of human behaviours that encompasses), but complete the process right to its conclusion. Humans are motivated by a mix of motives – and ‘to [a] significant extent’. The evolution of the conditional proposition is far richer than mere ‘self interest. As Smith says, ‘self love is insufficient’. (Lectures in Jurisprudence, vi. 45, page 347). It is in the insufficiency of self-love that the lessons of the Ultimatum Game have interest. As a ‘proof’ against ‘altruism’ they have no interest (in the ‘so what?’ sense) at all.

Debate on Ernst Fehr's Ultimatum Game is Joined

Jason Biggeman of Productivity Shock responds to our exchange thsi week with a most interesting and thoughtful defence of his position on self-interest as shown in the 'Ultimatum Game' as reported by Ernst Fehr. It is well worth reading and thinking about. Aslo look up the original exchange on both Productivity Shock and further down this weeks Blogs here. I shall reply tomorrow and I hope we can move towards a clarification of our differences in our interpretations of the same game. Jason writes, starting with three paragrpahs from my posting:

"From Gavin Kennedy's remarks on my earlier post about Ernst Fehr:

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.
...
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.

The distinction between self-interest and altruism is not a question of who benefits from a behavior -- it is a question of motivation. Altruism is "unselfish concern for the welfare of others; selflessness". By definition, exchange transactions are not unselfish giveaways, and therefore they are not instances of altruism. Therefore I do not agree that, to any significant extent, humans are motivated by a mixture of self-interest and altruism; rather, self-interested motivation dominates.

I think Fehr's work does show that humans have evolved some tendencies that, due to changes in the social environment, may not be consistently well-aligned with achieving preferred outcomes. However, in his presentation, he goes beyond that to suggest that motivation itself has evolved -- and it's this that I take issue with. It's one thing to say we've evolved an initial, emotional reaction that now occasionally works against us; it's another to say we have underlying altruistic motivations.

In the ultimatum game, the argument is that (because of the social environment in which most of our evolution transpired) we don't immediately trust or believe or understand fully that we will never encounter the opponent again, and therefore the immediately chosen action does not result in a preferred outcome. I buy this argument. However, if Player B were to reflect dispassionately on the situation, and he was truly convinced he would never see Player A again (and Player B didn't have religiously influenced motivation, i.e., earthly faux-altruistic behavior motivated by the self-interested desire to gain Heaven), I can't imagine that Player B decides to teach this stranger a lesson at substantial cost to himself.

My empirical evidence for this claim is as follows: Certainly, not everyone will bother to engage in such dispassionate reflection, nor will everyone place enough trust in the designers of economic experiments to feel certain that Player A will never be seen again. But as Fehr's work shows: there are at least some people -- namely, academic economists -- who are willing to engage in that reflection and do trust the experiment designers. I think this phenomenon is common: not everyone has time or desire to reflect fully on everything they are doing, but if they did, they would act differently, because what fundamentally motivates them -- self-interest -- is unchanged by reflection.

Wage shocker!

Tim Harford (psdblog.worldbank.org/) picks up a story from a South African Blog about the minimum wage and what it should be set at: (http://www.fodder.co.za/2005/11/domestic_wage_s.html) , which I quote below:

“Domestic wage shocker

The labour department has announced the new minimum wages for domestic workers effective from Thursday. The increase is 6.7% and in urban areas domestic workers doing more then 27 hours per week must now earn R997.04 and those working less then 27 hours a week must earn R706.63 – in rural areas it is even less.
Disgusting! Who is the government kidding when it says that a person can live on less then R1,000.00 a month?
When these minimum wages were initially proposed the government seriously messed up by setting these wages way below any half decent poverty level. The same problem exists within the taxi industry where the government introduced the new basic employment conditions for taxi operators with wages between R945 and R1,350.
It is a blight on our new democracy that our government says a person can live on such a minute amount of money every month, if one wants to go the minimum wage route then at least ensure the minimum is a livable amount of money."
Posted by zaBlogger on 29 November 29.

The only person who can decide whether a wage on offer is 'too low' is the person to whom it is offered. Third party opinions (especially as they are not paying) usually have other agendas and they cannot take account of the circumstances for each and every transaction.

If the offered wage is too low, then the person can look elsewhere. Maybe a few hours a day suits him or her and the household income is well over R1000; maybe the job is convenient for some reason (location, nearby a school, a safe neighbourhood, not overly strenuous, more a companion than a heavy duty worker, flexibly paid sans taxation, or does not registration with the authorities, or whatever). Who knows but the person involved?

The blogger's conceit leads him or her to assert access to that knowledge:

“Disgusting! Who is the government kidding when it says that a person can live on less then R1,000.00 a month?”

Who is the Blogger ‘kidding’ when depriving anybody of a job at R706, and leaving them with zero rand a month, that they “can live on” no rand “a month”? The next logical step is to compel anybody above the national average wage to employ somebody as a domestic, or whatever, at a wage fixed by third parties, who have no idea of the multi-varied circumstances of every single person who might be willing to work for R706.

Interesting that the compulsory billeting of British soldiers in people’s homes was one of the causes of the US War of Independence; compulsory hiring of domestic help at R1,000 (why not 10,000, and really “abolish poverty”!) while not quite as oppressive, it is certainly silly economics.

If poverty could be abolished by raising the pay of those below the average wage, governments would have done it years ago. Those that follow such fantasies eventually impoverish everybody (except themselves). Only the creation of wealth – the annual goods and services produced by an economy, as Adam Smith expressed it – reduces poverty. Governments have never created wealth – only markets can create wealth.