Smith's True Legacy

India has a lively print medium that promotes considerable discussion of economics as an historical subject (mentions of Adam Smith, David Ricardo and John S. Mill abound) and as an analytical subject (the neo-classical abstraction). There is far more public as opposed to professional discussion of economics than commonly found in UK media. The quality of the discussion is not always authoritative, but it is more often than not, at least in the level of discourse, evidence of a widely read authorship and, presumably, of the readership too.

C T Kurien, writing on development provides an example of what I mean in Frontline (‘India’s National Magazine’: vol 23, issue 18, 22 September). Here is an extract:

“There are two broad approaches to economics. One of them puts the emphasis on its formal and logical aspects and its general applicability as a science. The other is more concerned with its substantive subject matter. Those who adhere to the former position trace its ancestry to Adam Smith's classic work The Wealth of Nations (1776). Although in it Smith had dealt with a wide range of issues, what have subsequently been elaborated are his observations of exchange as an innate human activity and the market as the automatic functioning (the much celebrated `invisible hand') mechanism facilitating it. The `universal laws of economics' have been premised on these observations. By the middle of the 20th century, those who followed this tradition claimed to have built up economics as the universal science of choice under conditions of scarcity.

But this has been essentially an Anglo-American tradition passed on to the former British colonies, including India. (Those who are interested in a detailed exposition of this tradition and a critique of it may consult my Rethinking Economics, Sage Publications, 1996.) That Smith was not the founder of economics can be seen from the fact that half a century before the publication of The Wealth of Nations, professorships in economics were established in Germany in 1727 (see page 57 in the second volume). It is a contested issue whether even in the U.K. Smith's work was the first major writing on economics, or political economy, as it was then known. A strong case has been made (by Colin Clark, Arthur Lewis and Amartya Sen among recent writers on economics and developmental economics) that in the U.K. the first major writings on economic issues were by William Petty (1623-1687) whose A Treatise of Taxes and Contributions (1662), Political Arithmetic (1671-72) and other contributions dealt with a number of important economic issues.”

Comment
I am not so sure that Adam Smith can be pigeon-holed in this manner. First of all Wealth of Nations is not a textbook on economics as a science. It was a report of his inquiry into a major social question, namely, what was the nature and cause of the wealth of nations (you get exactly what it says in its title).

Yes, he did assert that exchange (‘truck, barter, and exchange’) was a human ‘propensity’ (OK, ‘innate’ if you must, but only loosely), arising he said from the faculties of ‘reasoning’ and ‘speech’. I am not so sure, however, that we can say with confidence that modern economics owes anything to ‘elaborating’ on that assertion; quite the reverse – economists tended to ignore Smith’s assertion and thereby neglect exchange relationships in favour of ‘automatic’ price determination over bargaining, the former well defined mathematically and the latter still a hopeless mess because neoclassical theory is still stuck where Francis Ysidro Edgeworth left as the "indeterminacy of contract" (bargaining) in 1881.

The situation is no clearer when we consider what C T Kurien describes as “the market as the automatic functioning (the much celebrated `invisible hand') mechanism facilitating it.” For a start, in Smith’s view the relationship was the reverse: it was not the market that facilitated exchange, but the propensity to exchange that facilitated the division of labour and the market.

As for the ‘much celebrated “invisible hand” being the ‘automatic functioning mechanism’, I have expressed my doubts (indeed, my conviction) that Smith’s use the metaphor, apparently forever to be associated with his name, was not a ‘law’, and most certainly not a ‘theory’, but, as any metaphor is ever used, merely to give ‘colour’ to his prose, a purely rhetorical device in fact, that has been promoted without any real basis into something ‘wonderful’ or (even) ‘miraculous’, as if there is something as ‘universally’ mysterious as there is ‘universally’ applicable about how markets work when there isn’t anything we do not know about markets.

If, as C T Kurien, asserts that by ‘the middle of the 20th century, those who followed this tradition claimed to have built up economics as the universal science of choice under conditions of scarcity’, we should note that those who ‘followed this tradition’ were not following anything remotely relatable to Adam Smith’s ideas in his report. After the marginalists (Walras, Edgeworth, Marshall), neo-classical economics completely broke with Adam Smith, though they stayed in touch (only just) with Ricardo.

If Smith was not related to what C T Kurien calls ‘the Anglo-American tradition’ how does he stand alongside the approach which is ‘more concerned with its substantive subject matter’? I can only refer readers to Wealth of Nations. If that book is not concerned with ‘substantive matters’, specifically with how wealth (the annual production of goods that supply the ‘necessaries and conveniences of life’) is created and how it applied to 18th century Europe, I cannot think of another word that would accurately describe what he was about.

To suggest he wrote a ‘principles of political economy’ falls at the first fence. He did not write a comprehensive treatise (compare Sir John Steuart, 1767; David Ricardo, 1817; J. S. Mill, 1848; A. Marshall, who all wrote what we call textbooks). Smith’s reputation for including many detailed ‘diversions’ within Wealth of Nations arose from people who expected a treatise and found a specific report, highly focussed on adressing his title only; his so-called diversions were actually the data and evidence suppoting his report about his title, not about political economy generally.

Whether Smith was the ‘first’ economist or not is less important than what his posterity has accorded him. To make him the ‘first’ economist it has been necessary for his actual work to be transmuted into what it was not – a metaphor, for instance has been promoted to a theory and his theory of exchange has been ignored. This 'deception' has been successful because few people read Wealth of Nations - their copies grace their shelves only - and those who do tend not believe what their tutors told them.

Nobody before him, I suggest, produced the devastating critique of general government policy, served up to gullible legislators by special interest groups, in the manner achieved by Adam Smith.

That is his true legacy.