Smith Looked Backwards, Not Forwards

Following up on my blog on Saturday about Thomas Sullivan (Asheville Citizen Times, NC, USA) and his patriotism, which he believed was shared by Adam Smith in respect of domestic versus foreign markets, I had occasion this last few days to be writing about Smith’s ‘market model’ of society (a theme discussed by Jim Otteson in his excellent book, Adam Smith’s Market Place of Life).

As I developed the theme, it occurred to me that what Thomas Sullivan was contributing to the genre that repeatedly either berates Smith for not anticipating this or that development in economic theory; for example, the assertions of Murray Rothbard, the distinguished Austrian economist, whom I critiqued here during January and February under the title "Murray Rothbard’s Myths", which are also collected together and posted under "Articles" in the left column on the Home Page – or they misappropriate Smith’s ideas to claim that they can be applied to situations two centuries after he died and for which they may no longer be relevant (and often misunderstanding them in the process, too).

Smith wrote his lasting contributions to the history of moral sciences from a distinctive view point. He looked backwards throughout history, not forwards to the future. From the study of history, often beginning with the origins of what he studied, he analysed vast sweeps of human endeavour to seek appropriate generalisations about how the world had worked to arrive at situations prevalent in his day (18th-century Scotland primarily, but also Britain, Europe and the colonies).

He made very few predictions about the future. These can be grouped into those that asserted that unless things changed, his generalisations would continue to work as he outlined, which applied particularly to the behaviours of monopoly, the rulers of mankind and such like, and those few (I can only think of one such at this moment) that asserted a specific outcome for a specific situation.

He did not expect his ideas to be taken as predictions in the common meaning of the word. The one exception I can think of is the one he made about the relative economic strength of the American colonies in one hundred years time (i.e., the 1870s), which he asserted would be ‘perhaps’ (out of habit, his ‘prediction’ was qualified) stronger economically than Britain (Wealth of Nations, IV.vii.c.9: pp 625-6).

If this direction of focus is neglected it leads to errors. Sam Fleischaker puts it well in his new book, On Adam Smith’s Wealth of Nations: a philosophical companion (2004):

‘Those who make it their business to show how Smith’s principles can explain every
economic phenomenon today may thus not be using Smith’s work as Smith himself
hoped future readers would. They may be betraying their master’s methodological
legacy, rather than preserving it” (p 33).

Remedies Worse than the Problem

I read small pieces almost everyday on Adam Smith’s alleged views in relation to modern issues, most of which I would find problematical in their assertions. Many of these pieces appear in local newspapers or relatively minor national publications from around the world.

An example of the type of articles in this genre from the last few days:

Daytona-Beach news-journalonline.com (‘the independent voice of Volusia and Flagler counties’) has a piece by Glen Hameroff, a retired high school history teacher, living in Palm Coast, Florida, USA, in which he makes a case, as a life-long free-trade supporter of Adam Smith and David Ricardo, for modifying his stance in view of the current account deficit between the USA and China into something worse than protectionism; it could engulf the world in a bitter, hopefully not hot, war.

His concerns include: “[Chinese] Government interference includes intellectual piracy, currency manipulation, use of prison labor and a complete disregard for environmental safety.” His remedy?

“However, if we are going to compete with the Chinese, let us level the playing field. Demand that China cease the use of prison labor. Do not allow China to manipulate the relative value of its currency to create a trade advantage. Insist that China pay royalties for all patent and copyright protected materials. Plead with China to consider the health of its people and start considering the environmental impact of its actions. Finally, provide the American worker with the tools necessary to compete with inexpensive Chinese labor.”

Without being too difficult about it, none of his ‘remedies’ are likely to be attempted. That would require that the USA could tell China what to do in the non-trivial areas of penal management, exchange rates, law reform, social and welfare policy. A pretty tough agenda, involving outside interference on scale that no US government would contemplate if it was ordered by another country’s government to do similarly in the USA.

Neither is it clear what he means by (who?) provides the ‘tools necessary to compete’ with China’s (or anybody else’s) labour. Now that is an interesting proposition, especially from the USA, supposedly a land of free enterprise, which would also be out of kilter with any other country, even in Europe, though perhaps not North Korea. If US enterprises need re-investment in modern (relatively) expensive labour-saving machinery, they should get on with it, without government telling them to do so, or, worse, funding it.

Economies do not change at infinite velocity. They change slowly and by small amounts. Glen Hameroff, like so many contributing to the genre, draw panic-stricken conclusions, adopt unrealistic remedies, most of them worse than the problem in their unintended consequences, and seems to be cocooned from the reality that even the USA, or Europe, or China for that matter, do not control the world, never have, and never will.

Read the article: http://www.news-journalonline.com/NewsJournalOnline/ Opinion/Editorials/opnOPN81022506.htm

Nostalgia is Not a Guide to Policy

Page 456 of “Wealth of Nations” probably constitutes one of the most misunderstood pages in Smith’s entire published writings. It spawned an almost religious, certainly mystical, belief in 'invisible hands' (sometimes even called a 'theory') guiding everybody who pursued their self interest to always benign outcomes. The facts is that contrary self-interested actions can also act against, and sometimes savagely, the public good too – think of pollution, fraud, shoddy and dangerous products, and buildings that fall down or deteriorate quickly).

It also is taken up as ‘gospel’ when discussing domestic versus foreign investments. Take this extract from an article today in the Asheville Citizen Times, North Carolina, USA:

“We do not begrudge other nations new opportunities. Still, philosopher Adam Smith believed the quaint notion that entrepreneurs prefer investing in “the support of domestic to that of foreign industry.” But that view has become outdated. Country and community mean less now than next quarter’s profits. American working families might welcome some of Smith’s quaint, outdated patriotism about now.”

It was written by Thomas Sullivan, a professional engineer who consults for industries ranging from chemicals to biotech. Its title says much about its theme: “Behind every delusional ‘self-made’ man are the sacrifices and foresight of much wiser people”.

Overall it is a spirited piece on some simple ideas about patriotism, mixed with a bit of nostalgia for the known certainties of yesterday, which every age feels about the past – they know now what happened and they survived, but when it comes to the uncertain future they are anxious because they don’t know what will happen and it always looks as if the present age is unready and unable to cope the way 'we' were in the past age of our youth.

Fortunately, our grandchildren, looking back generations down line will know what happened and so the cycle of anxiety continues.

Adam Smith did not ‘believe’ in ‘quaint notions’. He was a philosopher of the past and present, not a seer of the future. He observed what was happened and what had happened and tried to analyse the ‘connections’ among things and events, and the people in active in them. Page 456 is about individual human motivations and how these have consequences, unintended and unplanned or co-ordinated by the people involved. There were no ‘quaint notions’ shared by entrepreneurs in “Wealth of Nations”.

The consequence of humans preferring to stay close to their families in their homes and close to their investments of their scarce capital stock had nothing to do with ‘preferring the support of domestic to that of foreign industry’. That is not how Smith articulated his assessment. It was the natural human anxiety about their livelihoods being out of their sight. Remember, these were times when capital stock was extremely scarce – a workman’s tools and materials; a horse and cart; farming implements; home based looms; a few pounds in money which they could lend out at interest to someone local whom they knew, or use to purchase sufficient materials from someone else they knew to add value to a line of output under the early division of labour. The amounts were small and being small if they chose wrongly the outcome was not just a loss, but labouring employment if they could get it, or abject destitution if they couldn’t. Risk aversion was high.

In these circumstances, keeping their scarce capital stock within reach and in sight of the others who used it was so fundamental to the cautious entrepreneur (mostly a skilled or semi-skilled tradesman) that it expressed their prudence (“Moral Sentiments”) not their sense of the balance of preferences driven by patriotism.

Only the richest of merchants or manufacturers could risk ventures based on distant sale, especially abroad. Again this was not because of their patriotism – though comfort could be gained if the British Union flag flew over the ship carrying their goods and over the warehouse where they stored their materials in transit – it was about opportunities to make a profit from the transactions.

I suspect that in reality Thomas Sullivan is importing into his argument about Smith’s alleged ‘beliefs’, a modern agenda that includes current concerns about the so-called export of ‘jobs’. How he considers the American colonists would have established their, at times, fragile occupation of the Americas without the export of capital stock (and jobs) from Britain is not stated. I suppose he would answer, but ‘that was then, and this is now’.

Today, there are vast flows of capital among countries. The minimum scale of capital owned by modern day corporations is a long way from the 18th-century early owners of minute amounts of capital stock. Much of US and European investment abroad is owned by US and European firms and the output of these enterprises is shipped back to the countries of origin, appearing in the economic scales as increases in the real wages of their citizens (what you can buy in dollar, pounds or euros). That has got to be a good deal for all participants, because the employed foreigners in their countries earn incomes that enable them to buy US and European products.

Read Mr Sullivan’s article at: (http://www.citizen-times.com/apps/pbcs.dll/ article?AID=/20060225/OPINION04/60224038/1006)

Universal peace Requires Universal Acceptance of the Staus Quo

Harold James writes a perceptive essay on peace, commercial society and the ‘Roman Dilemma’ (‘Looking Beyond Conquest’, 23 February). It’s worth reading closely:

“As the Bush presidency gets bogged down in the quagmire of Iraq, there is still a widespread assumption that there might be a quick and easy fix. Critics of the administration think that the world’s view of America would be transformed if only the U.S. president sounded kinder. Many officials in Washington believe that if the world understood all they really wanted was peace, prosperity and democracy, the criticism would subside. Such optimistic beliefs are mistaken but are characteristic of an ever-recurring dilemma of an interconnected world. Consider some historical parallels: in 1776, the year of the Declaration of Independence, Adam Smith and Edward Gibbon published the first volumes of two works that both used history to illuminate Britain’s own problems with the globalization of that age: The Wealth of Nations and The Decline and Fall of the Roman Empire. In these monumental and parallel works, Smith and Gibbon explored what could be called the “Roman dilemma.” In essence, how peaceful commerce is frequently seen as a way of building a stable, prosperous and integrated international society. At the same time, however, the peaceful liberal economic order leads to domestic clashes and also to international rivalry and even wars. The conflicts disturb and eventually destroy the commercial system and the bases of prosperity and integration. These interactions seem to be a vicious spiral or a trap from which it seems almost impossible to escape. The liberal commercial world order subverts and destroys itself, and Smith’s gloomy–but surprisingly little known–concluding chapters are a long way from the apparently optimistic beginning, with its focus on the immense productivity gains possible as a result of the division of labor.”

Comment
The problem with running a tight connection between ‘peace, prosperity and democracy’ is that all of the social interactions between the participants in the closed system that is the world are not included in the snappy slogans posing as objectives, not processes.

There have always been the problem that bands, tribes, nations may seek power over their neighbours, for protection or conquest, independent of the Smithian stage they are at. In Smith’s time, the political-economy of nation state was dominated by power seeking, not prosperity for all. Smith criticised the mercantile system for these errors that led to long wars and cold peace, plus trade bans, tariffs and preparation for the next war. He suggested a different political economy in which the growing division of labour would lead to opulence and peace. He was familiar with Gibbons ‘Decline and Fall’ and was familiar with the primary sources of the history of the fall of Rome and the millennium of the ‘dark ages’ that followed.

In this century the same issues are present. Mercantile politics and economics still dominate the world in contest with the alternative of free trade. The US and the rest of the West are protectionist (Mercantile politics and economics), as well as claiming to be advocates of free trade. New powers are rising (India and China) and America hesitates to accept them as full trading partners because powerful political constituencies are stirring and shedding their skin-deep free-trade stances (China’s attempt to buy a minor oil company; Dubai’s attempt to buy six US ports).

Also, the desire for peace is compromised by the fact that at root peace is the acceptance of the status quo. Hardly any part of the Earth can be said to be wiling to accept the status quo; indeed, war is about changing the status quo for half the world or preserving it b y the rest. And there are many versions of what the status quo ante should be, with precious few willing to endorse the existing status quo. Indeed, question closely all those in favour of ‘peace’ and you will soon find long agendas that favour changes in the status quo – then they will accept peace, which means wars will continue.

Harold James’ ‘Roman dilemma’ is a neat way of putting it; it could not be resolved (that’s the nature of a dilemma) therefore unresolved it led to the post-Fall millennia of Europe’s dark ages. ‘Smith’s gloomy–but surprisingly little known–concluding chapters’ is a strange way of putting it. Book V is about the duties of government, the first being the protection by means of a military force of the people from the depredations of barbarous neighbours. I didn’t realise they were ‘little known’ and I shall have to ponder over this.

Commercial society, based on voluntary trade, in which the outcomes are non-zero sum, is not strong enough to sweep all before it into a peaceful, prosperous society, based on low flat taxes, justice and security. Smith did not expect free trade to be restored in Britain this side of utopia. This looks strange in Wealth of Nations, but when you think about it, perhaps Smith was more realistic than he has been credited so far.

Harold James is professor of history and international affairs at the Woodrow Wilson School, Princeton University, and the author of The Roman Predicament to be published in May by Princeton University Press.

Read his article in Tom Paine common sense: ‘the best progressive insight and action.’ At:

http://www.tompaine.com/articles/2006/02/23/looking_beyond_conquest.php

Smith Cautioned: 'Don't Panic!

Talk about getting something wrong; here’s George Will getting it wrong. He writes a lively piece on the differences between liberals and conservatives (on the US political scale) and supports the idea that conservatives are happier than liberals, who are ‘grim and scolding’. I quote:

“Begin with a paradox: Conservatives are happier than liberals because they are more pessimistic. Conservatives think the Book of Job got it right ("Man is born unto trouble as the sparks fly upward"), as did Adam Smith ("There is a great deal of ruin in a nation"). Conservatives understand that society in its complexity resembles a giant Calder mobile -- touch it here and things jiggle there, and there, and way over there. Hence conservatives acknowledge the Law of Unintended Consequences, which is: The unintended consequences of bold government undertakings are apt to be larger than, and contrary to, the intended ones.”

I have nothing to contribute to the question of which political group is the happiest (frankly the question is not worth spending any time upon). But to buttress his case – or fill column space – George Will drags Adam Smith into the argument. Now, while Smith was definitely not a Tory (an 18th-century conservative) and he may have tended slightly towards being a Whig (an 18th-century liberal-minded MP), at least on the issue of Kings having no divine right to rule, which contemporary Tories of his day asserted noisily and Smith denied firmly. Smith, therefore, has no useful role as an advocate for against the proposition: which 21st century Conservatives or Liberals are the laugh most?

Worse, if George Wills is arguing that Smith’s comments about the ‘ruin of a nation’ helps him make the case that Conservatives believe that ‘Man is born unto trouble as the sparks fly’ he bags the wrong quotation from Smith.

Smith replied to a correspondent,John Sinclair of Ulbster, who reacted entirely negatively to a then recent reverse for the British in the war with the American colonists, after the surrender at Saratoga, and wrote to Smith saying: ‘If we go on at this rate, the nation must be ruined.’ Like many of that frame of mind, he saw disaster at every step, much as young environmentalists see catastrophe and pending doom for the world.

Smith replied: ‘Be assured, my young friend, that there is a great deal of ruin in a nation’.
(See Adam Smith’s Correspondence, Liberty Fund edition, page 262, footnote 3, or Ian Ross, The Life of Adam Smith, Oxford University Press, page 327).

Was Smith endorsing the pessimism of his young friend? Was he exhibiting Conservative or Liberal attitudes to events? I do not think so in regard to either question.

He calmed the young man’s fears, even his panic, at reverses, and pointed to the fact, still true today, that catastrophes are never as awful as they seem at the time, and over reaction to them is seldom the best policy. Which suggests that Smith was more of an optimist than a pessimist, and his optimism, I suggest was founded on his vast historical vista of history, his knowledge of classical times of ancient Rome and Greece and the millennium that followed, and his acute observations of how people behaved in the long past, and probably will behave in the future.

Read the article at: Washingtonpost.com: George F. Will: ‘Smile if (and only if) You’re a Conservative’ 23 February

Right-Thinking is not Right- or Leftwing

Quoted by Alex Singleton of The Globalisation Institute (http://www.globalisationinstitute.org/blog/) from an article by Andrew Mitchell, MP in Platform at ConservativeHome.co.uk (http://conservativehome.blogs.com/platform/2006/02/andrew_mitchell.htm):

“Think of the poorest person you have ever seen, Gandhi would say, and ask if your next act will be of any use to him. Will stopping poor people from trading with each other help them? No. Will stopping them voluntarily exchange goods and services with people in rich countries help them? Of course not.

Poor people should be free to trade with each other, and they should be free to buy and sell from us in the West. As long as the exchange is voluntary, no trade will take place unless both parties benefit from it. That is the beauty of trade: it is not a zero-sum game, in which one party must win at the expense of the other. Would anyone seriously suggest imposing tariffs or quotas between, say Surrey and Sussex? Or Manchester and Liverpool?”
What eminent good sense this is!

Yet, The Globalisation Institute is described by Hugo Rifkind (The Times) as “a right-on, right-leaning think-tank on world poverty” (February 21, 2006) http://www.timesonline.co.uk/article/0,,2-2049850,00.html

I don’t know about ‘right-leaning’, but I would have called it a ‘right-thinking think-tank’ for the very high standard of what it reports and implicitly advocates. I should hope that ‘left-thinking’ sympathisers of the poor trapped by both domestic (insane) protectionism of their rulers against other poor neighbours and the pathetic protectionism of rich farmers and manufacturers against them in the West, would endorse most of what Alex Singleton’s team support.

The issue is not that all forms of protectionism should be abolished immediately – Adam Smith advised that free trade be established gradually to avoid the burden being felt in one go by those who benefit from it continuing – but what steps are to be taken over what time period to bring it, and its benefits, is a matter for the use of good sense, not ideology.

Where the people affected directly are a small minority and the proportion of annual output they account for is also small, the rest of the community can assist them to adjust to a relatively short timetable. This would be cheaper, make more sense and do more good, that sending tens of millions in so-called aid to political regimes who are a contributory cause of the very poverty their fellow-citizens, not them, endure unnecessarily.

Before Repeating Flippant Remarks about Economics, Check your Sources (try Google!)

In ChristianityToday.com (http://www.christianitytoday.com/bc/2006/001/18.34.html)
Kenneth G. Elzinga reviews Benjamin F. Friedman's The Moral Consequences of Economic Growth.

“The first thread in Friedman's analysis is the conventional wisdom in economics. This idea goes back to Adam Smith: the wealth of a nation consists of its goods and services, not its gold. Today, an economics teacher might simply state what seems obvious (at least to economists): expanding a consumer's choice set necessarily makes the consumer better off (or at least no worse off, since the consumer can always choose the original choice set).

Today the conventional wisdom is often criticized. At one time, those opposed to what Adam Smith called the "obvious and simple system of natural liberty" faulted the market system for producing too little. That was the old-fashioned case against capitalism. Today, anti-growth environmentalists and small-is-beautiful advocates fault the market system for producing too many goods and services. Once scarcity was bad. Now abundance is. Once the market system provided too few choices; now it produces too many.

More than a century earlier, Carlyle wrote with distaste about the "cash nexus" that connected people in a market economy.

As I read Friedman's book, I wondered how many of my colleagues in the dismal science could differentiate between premillenialism and postmillenialism.”

Comment
In a review written by a self-proclaimed Christian in a Christian newspaper, should I be surprised that casual reference is made to Thomas Carlyle and his now famous, but obscure in its origins, quip about economists and the ‘dismal science’?

Most people since who repeat Carlyle’s quip, believing that he called political economy dismal because of the alleged dismal pessimism of Robert Malthus, and sometimes because of the alleged cold lack of compassion of Adam Smith.

For a recent corrective exposition of the non-pessimistic views of Malthus, see Sandra Peart’s Blog, Adam Smith Lives! (listed among the Blogs we recommend in the left column). For the alleged cold lack of compassion of Adam Smith, read abundant evidence to the contrary in Adam Smith’s Theory of Moral Sentiments (1759).

For an accurate account of why Thomas Carlyle was describing economics as the dismal science see:

http://www.econlib.org/LIBRARY/Columns/LevyPeartdismal.html and also: http://www.economics.unimelb.edu.au/TLdevelopment/econochat/Dixonecon00.html

Carlyle was not writing about ‘dismal’ political economy. He wrote a pamphlet entitled: Carlyle, T. (1849), Occasional Discourse on the Negro Question, Fraser's Magazine, 40 (December): 670-9. Reprinted in Collected Works of Thomas Carlyle, Volume 11, 171-210.

Caryle's disgraceful outburst also appeared as pamphlet in 1853 in London with the ‘the Negro Question’ changed maliciously to ‘the Nigger Question’. In it Carlyle refers to Caribbean black slaves as ‘two-legged cattle’ and defends slavery by the white plantation owners. He considered political economy ‘dismal’ because John Stuart Mill considered slavery was wrong and that blacks and white were of the same race, the human race, and that they should be freed. So much for a much-lauded English Man of Letters.

Of course, Benjamin Friedman was not a party to any of Carlyle's racist nonsense and his book, The Moral Consequences of Economic Growth, is well worth reading.

Perhaps Kenneth G. Elzinga might wish to reflect on his flippancy about the dismal science of political economy?

Morality and Enterprise: a View from Forbes

“A Different Kind of Invisible Hand: profits alone don’t determine success”

The headline grabbed my attention, so I followed the source to find a report on
Forbes publisher, Rich Karlgaard (20 Feb), speaking on “AlwaysOn: the insiders network” which puts a case for a moral basis to capitalism. By moral he seems to be talking about Christian morality and it seems to be semi-religious meeting, judging by the evangelical bio-confessions of other speakers:

http://www.alwayson-network.com/comments.php?id=14003_0_41_0_C

Rich Karlgaard says:

“Capitalism is a wonderful system. But it’s a system that is very much—as Churchill said about democracy—it’s the worst system that anybody could come up with except for all others.

The angriest mail that I get in response to columns that I write at Forbes, other than recommending tech stocks at the top of the bubble, are not from people who are anti-capitalists and left of center. I mean Forbes is a pro-capitalist, right-of-center magazine. They are not from people who are anti-capitalist and left of center. They are actually from a kind of Ayn Rand libertarian type whenever I write a column talking about the importance of morality in capitalism and how the two work together. A free enterprise will perish in two generations if it doesn’t have the underlying foundation of morality. That isn’t true [they say], capitalism is morally sufficient on to itself. And they never make the argument. They say because Ayn Rand said so.

It is just sort of an amazing little cult out there. But there are a lot of kind of what I would call soft libertarians out there who kind of believe the same. And I think the mainstream media is guilty of portraying capitalism as this kind of individual pursuit of greed and somehow it all works together. That is a complete misinterpretation of what Adam Smith said.

Adam Smith wrote lengthily about the necessity for capitalism existing on a moral basis.”

Well, it’s not quite a rebuttal of the usual reference to the invisible hand, but it makes a valid point about Adam Smith and his moral foundations to behaviour, including in markets and clearly rejects those notions, fed by Hollywood about ‘greed being good’, which are totally at variance to Smith’s approach, though often attributed to him.

Of course, Adam Smith never “wrote lengthily about the necessity for capitalism existing” on any basis, let alone on a ‘moral basis’. He knew nothing of the phenomenon of 19th-century capitalism; he wrote about 18th-century commercial markets. People who assert he did write about capitalism, including scholarly academics, are back-projecting phenomena of which Smith knew nothing.

Of interest, however, in Rich Karlgaard’s article is the following extract, further down the page:

“Very interesting to see what Rick Warren is doing now in Africa; now that he’s achieved about everything that he can with saddleback and his purpose-driven mission in the United States, he has turned his attention to Africa, where there is this intractable poverty. His test case is Rwanda, and his plan is to bring together government, business, and faith-based organizations to bear on these deep, deep problems of poverty. And it won’t work without all three because all three must come together on this. I was talking to Rick recently and I love what he said about this notion of free enterprise and capitalism: 'That we were created in God’s image; we were created by a creator; ergo we were born to create.'

And that is what the free enterprise system allows us to do. He talks about not just giving men fish and not just teaching them to fish. Because in today’s modern economy we need to teach them how to process fish; distribute fish; get fish into the supply chain; sell fish. He says people in Rwanda, even after all of the carnage of the 90s are actually very self sufficient. The problem is they are all doing the same thing. You drive down a road and everybody is selling the same agricultural produce. So you’ve gotten to the level where you have a sustaining economy at some kind of a level, of subsistence economy—there’s the word—but not anything that can grow and improve people’s lives.”

Millions sent in aid or grants to African governments by rich country governments are usually wasted (and are re-routed to private accounts in rich country banks). Infra-structure investments by NGOs and charities (not the funds diverted into political campaigns in western countries, which do not build a single useful thing in poorer countries) are partially useful but not entirely, given the corruption, state interference and lack of markets in Africa.

Africa needs domestic markets based on the division of labour from ever deepening as markets for basic items grow. These require peace and institutional changes at the grass roots, the eradication of barriers to their trade, including ridiculous regulations, red tape and licensing, let alone criminality and a corrupt justice system. The point about Rwanda is well put and taken.

It might take a while longer to work on Rich Karlgaard’s partially correct views on Adam Smith.

Busy Shops or Voting Most Conducive to Peace?

Is it democracy or wealth that promotes peace? Middle East Forum – ‘promoting American interests’ (Winter 2006) – publishes a series of articles addressing the conundrum between democracy and wealth.

Among them is an article by Martin Sherman (Tel Aviv University, and author of ‘Despots, Democrats and the Determinants of International Conflict’, St Martin’s Press, 1998), entitled: ‘What Brings Peace, Wealth of democracy?’ (from Middle East Quarterly, 1998).

It is an excellently argued article. Included is an exposition of the economic argument:

“Economic. Adam Smith warned of the perils of penury, cautioning that "No society can surely be flourishing and happy, of which the greater part of the members are poor and miserable."5 In line with this sentiment, the advocates of the economic paradigm see the creation of greater wealth as the preeminent factor for the achievement of political stability. In the words of Shimon Peres, the "higher the standard of living rises, the lower the level of violence will fall."6 This outlook derives from a view of man as homo economicus, a being whose conduct is dictated by a desire to maximize his utility as a consumer of goods and services. Satisfaction of material needs will generate contentment, thereby reducing the incentives for violence. Conversely, frustration of this desire generates a sense of deprivation that is liable to lead to interstate conflict as governments try to deflect the blame for the nation's plight away from themselves and channel public anger against some external enemy—whether real or contrived.
Proponents of this view hold that violence harms prosperous states more than it does impoverished ones. For example John Mueller, professor of political science at Rochester University, suggests that "As countries raise their standard of living . . . they will find the prospect of war decreasingly attractive because they will have more to lose."7 Since greater economic development implies more elaborate and interlocking commercial links, the structure of the world economy implies that economic and financial disruptions resulting from war are liable to be far more severe for wealthy countries than for poor ones. Accordingly, greater wealth will purportedly lead to greater stability.”

Comments:
Discussing this important question (and not just one for the Middle East) is beset with problems. Each situation, in each time period where it is relevant, is subject to changing dynamics, not fixed states in which universal maxims and choices can by applied. Examples of various combinations of wealthy and poor nations, and democratic and totalitarian regimes, can be adduced which support or contradict simple explanatory hypotheses that sum to a single word like ‘democracy’ or ‘wealth’.

Richer countries attack poorer countries (Germany v Poland/Russia) and poorer countries attack richer countries (Japan v USA). All countries engage in defence expenditures (because defence, while expensive, is cheaper than war) and ‘defence, however, is of much importance than opulence’ said Smith (Wealth of Nations, IV.ii.30: 464-5). Given the government’s first duty, ‘that of protecting the society from the violence and invasion of other independent societies, can be performed only by means of military force’ (WN V.i.a.1: 689), it follows that richer countries can allocate larger absolute amounts of annual resources in preventing (defence), preparing and conducting wars that poorer countries.

That their economic interests conflict with their political interests is part of the rich tapestry of the choices facing governments of all hues and states of wealth. As African poverty deepens, a small body of armed men, suitably led, can seize power and help themselves to the fruits of statehood, even if (perhaps especially if) the general economy is dominated by abject poverty.

In the context of terrorism, even smaller groups of determined men and women can exert disproportionate influence on choices and have disproportionate influence on general poverty. Long-lasting low-intensity warfare is cumulatively as disastrous for a county’s infra-structure as a short technologically biased war. Unrepaired roads after a year or so become as bad as roads with bridges blown up by missiles from fast-jet aircraft. Lightly armed ‘soldiers’, who extract ‘local taxes’, soon deter all but the most hardy of commercial traffic.
The poorest countries may go to, or threaten to go to, war over the most frivolous of reasons (set against their real problems) – taken deadly serious by the contenders – such as India-China in 1962 and Eritrea-Ethiopia 2006. Contrasting these unhappy outcomes with two wealthy countries (Germany and Britain, 1939-45), we realise that wealth is a moving characteristic. European countries in the 1930s were poor compared to 2006, but wealthy by contemporary standards at the time.

We should also be careful with linking Smith’s name with today’s neo-classical assumptions:

“This outlook derives from a view of man as homo economicus, a being whose conduct is dictated by a desire to maximize his utility as a consumer of goods and services.”

This was not Smith’s assumption. He did not formulate his assessment of human motivations in that manner, not even when he examined motivations in “Wealth of Nations”.

That all persons sought to ‘better’ themselves he did not doubt; that it was the sole or major motivation is not established merely by assumption and ascription. Homo economicus is a post-Smithian assumption that leads to false ideas that human exchange behaviour is motivated by selfishness, a wholly misleading notion when attributed to Smith.

Wholly Wrong or Holy Wrong is still Wrong

ZENIT, an International News Agency (‘The World Seen From Rome’) with the mission: “to provide objective coverage of events, documents and issues emanating from or concerning the Catholic Church”) published on 18 February an article, ‘Capitalism in the Dock: Debate Continues Over Effects of the Market’. In the article ZENIT discusses four books in a fluent, fair and focused review of problems, as seen by the Roman Church, associated with markets, or more correctly, capitalism.

The four books discussed are:

1 "The Battle for the Soul of Capitalism" (Yale University Press), John Bogle. Zenit reports that John Bogle:

“analyzes what he considers to be crucial failings in the financial markets. Bogle, former chief executive of the Vanguard mutual fund group, wants the system to be run in the interests of the shareholders and owners, rather than the managers;”
2 "Capitalism's Achilles Heel" (John Wiley & Sons) by Raymond Baker, ex-businessman and current guest scholar at the Washington, D.C.-based Brookings Institution’. Baker, Zenit reports:

“draws attention to problems such as bribery, money laundering, tax evasion and income inequality;”

3 "The Ethics of the Market" (Palgrave) by John Meadowcroft, deputy director of the London-based Institute of Economic Affairs.

Zenit says Meadowcraft argues that:

“the market is an important school for virtue, and that participation in a market economy strengthens rather than weakens institutions such as the family. The market does not impose a specific set of values. The market mechanisms as such, Meadowcroft observes, can be used just as easily by selfless altruists as by selfish hedonists;”

4 “The Compendium of the Social Doctrine of the Church” recognizes:

“the positive role played by markets, which allow economic potential to be developed efficiently. Yet, the Compendium urges that people also need to remember aspects such as ensuring justice and solidarity. They must avoid the error of seeing the accumulation of material goods as the only end of their activity.”

Read the article at: http://www.zenit.org/english/visualizza.phtml?sid=84684

Of interest to Lost Legacy readers, the article contains these two paragraphs:

“By requiring people to continually review their ends in the light of information about others, communicated through price signals, the market coordinates a myriad of competing ends and values into coordinated economic activity.

In this sense, it is not correct to think of the market operating, as Adam Smith described it, through self-love. It is not selfishness that drives the market. Rather, individuals are motivated to respond to the price signals generated. Economic coordination depends on people being alert to these signals, whether the ends they seek are selfish or altruistic.”

Adam Smith never asserted that ‘selfishness drives the market’. This is an error read into Smith’s ‘Wealth of Nations’ by confusing his use of ‘self-love’ (self-interest) with ‘selfishness’, and by taking selfishness as a motive for behaviour to an extreme. Smith taught moral philosophy at Glasgow University and within his classes he also taught jurisprudence and political economy, as was the norm in Scottish Universities in the 18th century. He taught the four subjects in tandem to the same class of students and did not consider them wholly separate.

Man as a social animal was not moral in one field and amoral in the other. Such a contradiction would have stood out for Smith (and his students), should he have been prone to teach it. He carefully stated his disagreements with Bernard Mandeville’s theme that selfishness was a public virtue because of its consequences (Fable of the Bees, 1705, 1714, 1724) in “Moral Sentiments” (1759) and he disagreed with his mentor, Professor Hutcheson, who argued that only unsullied benevolence was a virtue, anything less was vicious. Smith saw a virtuous role in self-interest – he instances a father who acts in his self-interest to earn money to feed his family.

Now, if ZENIT wishes to argue against selfishness in market dealings it may do so, but without dragging Adam Smith’s name into its case as if Smith was party to any notion that selfishness had a legitimate role in markets. On this count, ZENIT may call on Smith’s name to support the view that selfishness if not appropriate in markets; indeed, that ZENIT may quote Smith’s contrary assertion that mediated self-interest through bargaining (“Wealth of Nations”, Book 1) is appropriate in markets and therefore is a legitimate source for arguments against selfishness.

I suggest the worthy people at ZENIT read Adam Smith before making these wholly wrong assertions about his stance on the morality of markets.

No Monopoly on Sentiments

Adam Smith’s “The Theory of Model Sentiments” (1759; 6th edition 1790) is kept in print partly by the reputation of the author, partly from the curiosity of modern philosophers, but mostly by the availability of a perfect facsimile of Oxford University Press’s authoritative 1976 Glasgow Edition from the Liberty Fund, Indiana, at a fraction of the OUP price (check it out at Amazon – better still, order a copy today).

The first paragraph on the first page is its most famous quotation might (cynicism might suggest many people only read that far):

“How selfish so ever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. Of this kind is pity or compassion, the emotion which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous and humane, though they perhaps may feel it with exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.” (TMS I.i.1.3: p 9)

Another step in Smith’s argument is often missed (it’s on the next page!):

“Pity and compassion are words appropriated to signify our fellow-feeling with the sorrow of others. Sympathy, though its meaning, was, perhaps, originally the same, may now, however, without much impropriety, be made use of to denote our fellow-feeling with any passion whatever.” (TMS I.i.1.5, page 2)

This is byway of my introducing an interesting piece from Chris Armstrong: ‘For Sentimental Reasons: how the emotional stories of Christian preachers and writers shaped a movement’ in Christianity Today, 13 February.

Chris Armstrong writes:

“In fact, these two impressions derive from a single "sentimentalist" agenda at work in the novels of Dickens, and in hundreds of other 18th- and 19th-century novels, as well as period biographies and histories. This agenda was the brainchild of the group of 18th-century philosophers and writers who in fact invented the novel as a genre.

These sentimentalists included philosophers such as Adam Smith, novelists such as Samuel Richardson, and, at one point in his career, the philosopher/ historian David Hume. To these thinkers, the term "sentimentalism" did not carry the meaning that it does now—of over-wrought, insincere emotional expression. Rather, it named a coherent set of philosophical ideas about emotions and morality.

The first of these is that all people share certain basic experiences and emotions. Although … post modern "strong constructionists" have sowed suspicion in our minds about this, modern social-scientific emotions researchers are beginning to reaffirm it.
The second sentimentalist affirmation, dependent on the first, is that we can become better people by hearing the stories of other people and having our own emotions (hearts) shaped by those stories.

This agenda of moral and spiritual formation shines from the full title of Samuel Richardson's 1740 prototypical sentimental novel Pamela: "Pamela, or Virtue Rewarded—Now first published in order to cultivate the Principles of Virtue and Religion in the Minds of the Youth of Both Sexes, A Narrative which has the Foundation in Truth and Nature; and at the same time that it agreeably entertains."

Sentimental novels? Surely not!The literary sentimentalists were not hack writers; they were philosophers who expressed their deepest philosophical convictions in their writings. Under the influence of John Locke's empiricism, Smith, Richardson, Hume, and Newton all assumed that our experiences (and by extension, our emotions, and by another extension, other people's experiences and emotions) are a strong, helpful source of knowledge.

In turn, these sentimental authors and many others exerted a pervasive influence on readers and reading habits in the 18th and 19th centuries. The three most popular genres in those centuries were novels, biographies, and histories. Why? Because, thanks to Locke and the sentimentalists, everyone assumed that what you learned in reading those books was valuable, experiential knowledge that could transform you in ways mere rational argumentation could not achieve.”

[Read it at: http://www.christianitytoday.com/ct/2006/107/52.0.html]

Smith regarded the sentiments between people as the binding that kept societies together. He felt they were strongest within the family, then in diminishing strength as people considered their friends, acquaintances and finally strangers, remembering that those who are strangers to us are friends and acquaintances of others.

For Smith his was not a world of hostile, selfish and suspicious persons, fighting it out daily for their sustenance and seeking always to do other people down in their endless quest for self-betterment at the expense of everybody else. Some laissez faire fanatics have not read Smith’s “Wealth of Nations” as closely as they affirm themselves to have done, to say nothing of his (ignorant) critics who have not read him, especially in his “Moral Sentiments”, at all.

That Christian authors write their novels along the lines suggested by Chris Armstrong is an interesting approach. It is an approach not confined to Christian novelists. Those with political axes to grind do so too. Charles Dickens did so in his antipathy to early industrialisation and what he considered were the unacceptable moral – and aesthetic – consequences of commerce. He shared these sentiments with Ruskin and Carlyle, the latter of whom descended into racism in his horror at John S. Mill’s sentiments towards ‘Negro’ slaves being the equal of white Europeans. Carlyle sneeringly called them ‘Niggers’ and issued his famous dismissal of Mill and his ‘dismal science’.

Presently, I am reading Anthony Trollope’s satire, ‘The Way We Live Now’, oozing with his “agenda of moral and spiritual” antipathy to the moral corruption of members of the middling and upper classes in Britain’s late 19th-century commercial society. That it is more about the mores and manners of marginalised people coaxing, lying and prostituting themselves in their quest for place and position than it is about entrepreneurs creating wealth (which meant jobs for the common poor) is not the point. It is a literary treasure, much like Thomas Love Peacock's “Crotchet Castle”, which I discussed in an earlier Blog, in its theme, though it is much better written and plotted.

Readers of Smith’s “Moral Sentiments” are treated to snatches of his views on literary themes and plots, and his acidic, but so true, characterisation of how we all have behaved and witnessd others behaving from time to time. Christians do not have a monopoly on the appreciation, or, indeed, the practice, of human sentiments. Smith's 'other work' is a magnificent essay on the unchanging human condition

Smith's Analysis of Bargaining Redundant?

An interesting suggestion from IT specialist, Dana Gardner, that aims to revolutionise buying and selling (he claims for everything, from 25c packets of pins to, say, a transport system). Its focus is on the buyer acquiring knowledge through IT facilities that reveal everything the buyer needs to know (and not just what the seller decides to inform the buyer).

Hence, references to the future ‘redundancy’ of Adam Smith, the Chicago School and eBay:

“The vision is that anyone, anytime, just about anywhere can get all the relevant information they need when they are seeking just about anything.

A secondary aspect to the vision is that once a prospective seeker has the full knowledge and visibility into what it is they want to purchase, that they can immediately act on it — to make the bid or outright purchase, same as anyone else, no strings attached, to gain from the investment fairly and productively as soon as possible at any scale.
With due respect to Adam Smith, the Chicago School, and eBay, a lot of this vision is already in place and has been an ongoing process of market forces refinement for hundreds of years. However, it is still not comprehensive, easy, nor complete. Feedback loops only exist within closed systems. The playing field is still not level. In order to work, the realization of the vision needs to breed outside of any closed command-and-control structure. Yet it needs to be organic globally.

Again, this notion of eliminating friction in the process of market activity is ages old. But the means of attaining friction-less and enlightened commerce at low or no cost to the masses remains revolutionary. The pillars to support this vision of a monumental smear of grease on economic skids are in place, they are just not coordinated. The rub remains how
to coordinate and be organic, too, so that no one games the game.”

Comment:

Students of negotiation should recognize the mathematical equivalent of Gardner’s vision in the John Nash “Bargaining Problem” (Eonometrica, 1955). If each party has perfect information of each other’s preferences, bargaining skills are assumed equal (eliminated), and their numerical utilities are known to each of them, then the optimal bargaining outcome would be the exchange that maximizes the product of their net gains in utility.

No bargaining process is described because it is assumed away; only the shape of the outcome is specified.

As with Nash, it does not take account of the bargainer’s uncertainty a priori of which point in the range of the acceptable solutions (exchanges) is consistent with which point in the range of the acceptable solutions of the other party. Bargainers think in ranges not price points, except for items of trivial cost. When decisions are made by teams of people(as they are in large corporations) their preferences vary in complex possible combinations.

As Gardner puts it: “The rub remains how to coordinate and be organic, too, so that no one games the game.” Precisely: Back to Smith, Chicago School and eBay!

It remains a fact that no matter how low a price buyers purchase something, they still prefer a lower price; no matter how much seller sells something, they still prefer a higher price. Perfect competition copes in theory and on the blackboard. It has not yet eliminated Smithian negotiation (‘give some of what I want and I will you some of what you want’) ("Wealth of Nations" WN I.I.2)

Automating auctions by repetitive plays does not resolve the negotiating dilemma. But not to be negative, Dana Gardner has suggested something worth looking at. A good class case?
Meanwhile ‘gaming the game’ is likely to continue.

Read Dana Gardner’s article, “E-commerce, meet your successor: knowledge commerce”: http://blogs.zdnet.com/Gardner/index.php?p=2256

Growing Numbers of Visitors to Lost Legacy and they are Reading more Pages when here

Recently, the number of visitor to Lost Legacy has increased considerably. This past week, for example, 9 - 16 February, there were 1,397 unique visitors (2,346 total visitors, including re-visits) who viewed 6,429 pages.

That represents close to and over 250 unique visitors a day, up from an average of between 100-150 visitors a day at the turn of the year.

Whoever you are you are most welcome!

In two weeks, 3 March, Lost Legacy reaches its first 12 months, and it will be interesting to see the annual figures from the slow start in March 2005.

Having now completed a DBA text book and web site on Strategic Negotiation for my former day-job (I retired last March) on 13 February, I can return full-time from part-time to writing my volume on Adam Smith for the 26 volume 'Great Thinkers in Economics' series for Palgrave Macmillan, due out in early 2007.

This will mean more time to reflect on serious Adam Smith studies and, of course, on the wild howlers about him and his ideas that provide daily material for Lost Legacy. I shall also be updating the Smith Bibliography with the scores of new references picked up in the past six months.

If readers have any views on how to make Lost Legacy better (including critical views) send them in to me at gk AT ebs.hw.ac.uk, or post them here.

In the meantime, thank you to all readers, regular and occasional.

Revising Adam Smith and Laissez Faire

Earlier this month I noted an article by James Pyland and I reported it under the heading: “Trenchant Rebuttal of Laissez Faire Activists” (scroll down the Blog to read it).

I was struck by Pyland’s article and its main theme, namely that corporate activists attribute to Adam Smith views on laissez faire which he never held, and, because they link it to their misreading of Smithian ‘self-interest’, which they transmute into selfishness, they claim Smith’s authority for modern corporations to be absolutely free of any government interference, as their predecessors claimed for mine, mill and factory owners in the 19th century. Much government interference today is malign and plain wrong, but it would be wrong to erect a principle to make all interference illegal.

I also made clear that I had various quibbles with James Pyland’s presentation and the content of his arguments, but I avowed a disinclination to make these explicit in case they gave comfort to the laissez-faire activists he calls to account.

Today, in one of my regular visits to the Division of Labour Blog, there is a less than fair criticism of James Pyland’s article by Professor Robert Lawson, a regular contributor, with whom I often agree. I find it a disappointing put-down of Pyland’s article from a distinguished economist because it uses arguments unrelated to the general soundness of the author’s criticisms of laissez faire doctrines and their forced association of them with Adam Smith.

Pyland quotes extensively from Smith’s “Wealth of Nations”, attacks him for being a ‘Marxist’, which is something I had not noticed because I took the article at face value and, while I am a long way from being a Marxist, I do not think it relevant in the matter of questioning the misleading use of Smith’s legacy.

Here is Robert Lawson’s rebuttal of Pyland in full (read it http://www.divisionoflabour.com/):

"Revising Dr. Smith
--Robert Lawson
Here's yet another attempt by a Marxist to co-opt Adam Smith.

To refute the laissez-faire capitalism often ascribed to Adam Smith, it is only necessary to quote . . . Adam Smith

This should have read "To refute the laissez-faire capitalism often ascribed to Adam Smith, it is only necessary to selectively quote . . . Adam Smith"

It would be nearly impossible to quantify the number of times that pro-corporate, laissez-faire activists have used the phrase “invisible hand” to justify all manner of unjust and brutal economic policies and their outcomes.

Ok let's get this straight once and for all: laissez-faire activitists are PRO-FREEDOM not pro-corporate. (Apologies for the scream.) Corporations (which in Smith's day, unlike today, were all government granted monopolies) are very often against laissez-faire. I defy you to find me a bona fide laissez-faire activitst defending ADM's ethanol subsidy or the car quotas on Japanese cars or local tax abatements....

I was going to go on dissecting the article, but just can't put myself (or you dear reader) through the misery."

The unusual step of my quoting from another Blog in full is that is the only way that busy readers can judge its merits without visiting Division of Labour (a Blog I recommend because Division of Labour is an excellent source for commentary by economists).

Laissez-faire activists may be ‘pro-freedom’, but where that involves freedom for people Smith called ‘merchants and manufacturers’ to do what ever they will under cover of ‘freedom’, no matter what monopolistic, duopolistic, anti-competitive contrivances and anti-social short-termist behaviours they get up to (and remember Adam Smith considered that sort of behaviour to be a norm, not an exception) then such laissez-faire activists become apologists for corporate misdemeanours.

The 18th century chartered corporations were indeed operating under the legal sanction of Royal monopolies, but Professor Lawson is slipping a fast-one in suggesting that the history of modern corporations has been one of unsullied good behaviours just because they are private corporations. Smith had plenty to say about the inclinations and behaviours of private ‘merchants and manufacturers’, and recent headline accounts of some recent corporate dishonesty in the US suggest these inclinations and behaviours, regrettably, are still with us.

The challenge to “find me a bona fide laissez-faire activist defending ADM's ethanol subsidy or the car quotas on Japanese cars or local tax abatements....” is disingenuous in the extreme. Of course, laissez-faire activists, such as Professor Lawson, are completely consistent and honest in their inclinations and dealings, but it is not Professor Lawson who is under scrutiny here.

The charges are against the myths of the laissez-faire activists who traduce Adam Smith’s legacy - and his life-long disinclination to advocate laissez faire (he never used the words). I am grateful for Professor Lawson for his consideration and his kind desire not to put his readers “through the misery” of his dissection of Pyland’s article, but this reader for one (always willing to learn) would be pleased to read such a dissection, complete with an entirely different set of quotations or references from any or all Smith’s works he finds that exposes my ignorance in these matters.

‘Grand statues will not overcome destructive statutes.’

Ivor Tiefenbrun writes in The Scotsman (16 February), in its regular ‘Column that Puts Business First’, under the heading, ‘Prophet of capitalism deserves to be honoured in his native land’. I am sure Adam Smith would have preferred he wrote his piece for a ‘Column That Puts Consumers First’!

Ivor Tiefenbrun writes a trenchant piece blasting governments for their regulatory red-tape interference in business and their marked obsessions with imposing on businesses collectivist solutions to social problems. Ivor Tiefenbrun, the founder and owner of Linn Products Ltd, is a successful and celebrated entrepreneur in Scotland’s manufacturing sector, specialising in electronic entertainment systems. He knows what he talks about on business.

Tiefenbrun is also enthusiastically supportive of the project, sponsored by the Adam Smith Institute, to have a 20ft statue of Adam Smith erected in Edinburgh’s High Street, opposite where Smith worked as a Commissioner of Customs and a few hundred yards up the High Street from where Smith lived until he died in 1790. The Statue is to be erected by public subscription and I trust that Mr Tiefenbrun puts his money where his mouth is and has sent his donation to ASI to help to make the project successful (I shall look for his name on the plinth when it is erected – as he may look for mine).

However welcome are Tiefenbrun’s sentiments for Smith, I have a caveat. I shall excuse the heading of Smith being a ‘Prophet of Capitalism’ on the likely grounds that it was written by a worldly-wise and weary sub-editor, who has seen it all and forgotten nothing. Prophets and cartoons are in the news at present and generally they are people believed by the gullible to be divinely inspired to foretell the future.

Smith did not qualify as being a Divine (he abandoned an ecclesiastical career in 1746 to become a teacher, not a preacher) and he most certainly did not predict the future. He wrote about 18th-century Britain, did not foresee ‘capitalism’, which manifested itself in the 19th century and for which the word itself was first put into use as late as 1854, and he did not write from the point of view of producers:

“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it. But in the mercantile, trhe interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production and not consumption, as the ultimate end of object of all industry and commerce.” (WN IV.viii.49: page 660).

He was not hostile to business, provided it behaved itself by trying to monopolise markets and increase prices to consumers. He believed that well-managed competitive enterprises ran by free owners (within the law) benefited consumers. He had no doubts that free commerce provided a better deal for consumers.

I emphatically agree with Ivor Tiefenbrun when he writes:

“The views of Adam Smith, in particular the idea that wealth can be both created and destroyed, is till not widely understood or accepted. Weslth can only be created by the imagination and labour of free men and women. It is destroyed by excessive government taxation on regulation and, in particular, by wealth redistribution and constraints on legitimate personal or business freedom.”

I liked the particularly apposite ending in Ivor Tiefenbrun’s article:

‘Grand statues will not overcome destructive statutes.’

[PS to all: ASI is still looking for donations for Smith’s statue in minimum units of GBP5,000, at http://www.adamsmith.org]

Invisible Hand, no 31

What do they teach at the University of Virginia that an obviously bright and articulate student, like Zack Fields, writes with such passionate certainty and anger that he trounces the views of Jack Bogle, a visiting former CEO who warns of the ‘impending crisis of capitalism’ and exclaims that "values should be embedded in business"?

Mr Bogle, Zack Fields reports, “then cited Adam Smith's belief in the importance of ‘propriety,’ ‘generosity’ and ‘love of that which is noble’ with respect to business behaviour”.

But far from Zack Fields finding common ground with Mr Bogle, a critic of ‘capitalism’ predicting a ‘pending crisis’, he launches into a tirade against anything with which ‘capitalism’ is, or has been, associated.

“These are all laudatory sentiments, but they also contradict the ideology of the invisible hand, which says that selfish action will ultimately maximize societal welfare. Bogle is absolutely right -- it would be wonderful to trust our corporations. It would also be idiotic.”

I am bound to ask politely: what is this ‘ideology of the invisible hand’? Maybe somebody’s presentation at the University of Virginia of the ‘ideology of the invisible hand’ includes the silly (even ‘idiotic’) notion “that selfish action will ultimately maximize societal welfare”, but such nonsense never had anything to do with Adam Smith or anything he wrote, and if it is taught in Virginia (surely not?) the tutors have got it (irresponsibly) all wrong.

The tone of Zack’s rendering of his repetition of ‘selfish action will ultimately maximize societal welfare’ owes more to his tutors’ debt to Bernard Mandeville’s ‘Fable of the Bees: or Private Vices, Public Benefits’ (1705, 1714, 1729) than it does to Adam Smith. Indeed, as early as 1759, Smith, in his ‘Theory of Moral Sentiments’, severely criticises Mandeville for purveying such views on selfishness in his ‘Theory of Moral Sentiments’ and he demolishes any concession to Mandeville’s (or anybody else’s) view that selfishness does any good for society, or even could do so.

There is no succour for any tutor to argue that in “Wealth of Nations” altered these views of Smith. He taught moral sentiments and political economy together to the same students at Glasgow and such a glaring contradiction would have been commented upon by them (for they were every bit as bright and articulate as Zack, but alas much poorer: see Smith's Lectures oo Jurisprudence, 1763-4).

Zack continues with this theme, however:

“More fundamentally, because each person lives in the short term, each capitalist participant will engage in what Bogle called "counterproductive" short term behaviour. If we do not live forever and we are maximizing our own utility in line with invisible hand ideology, there is no reason to maintain trust through the end. At some point it is profitable to cheat one's neighbour”

which leads Zack to his piece de resistance:

“A self-proclaimed believer in "free enterprise," Bogle does not realize that the mechanics of market competition cause the income inequality, exorbitant CEO pay, and corruption of accounting agencies that he views as a mutation of the virtuous marketplace. Moreover, the ideology of the "free" market serves as a convenient rationalization of our inhuman treatment of one another in daily market exchanges.”

Markets do not create income inequality – these existed for long before markets appeared and before the revival of commerce a thousand years after the fall of the Roman Empire. ‘Exorbitant’ distribution of incomes to the rich and powerful were not noticeably absent in feudal society and what preceded it. These societies suffered the ever present fragility of what passed for justice and the associated tyrannies that were experienced by the majority of humans, many considered worse than expendable, for generations.

Criminality is vulnerable to the laws of justice. The fact that Zack knows so much about ‘corruption of accounting agencies’ and ‘our inhuman treatment of one another’ is because freedom, liberty and justice make these things known to all. In many parts of the world, the ‘vile rulers of mankind’ control the media and hide their crimes.

And be sure, ‘daily market exchanges’ do not cause ‘inhuman treatment’. They enable millions to access most of the things they need, including the poor, every day of their lives in countries like the USA, Europe, and the West’. Of course, everybody could be ‘better off’ and many should be, but without the ‘daily market exchanges’, denigrated by Zack Field, the lot of the very poorest really would be dire, with no hope of reprieve.

The very poorest in the West are a long way from the dreadful poverty of Africa, parts of Asia (including Russia and parts of the Middle East) and Central and South America, as are the articulate students of the University of Virginia.

Humans do not create poverty; it is the absence of wealth creation that is the bed-rock of poverty. Defective as all human societies are and have been, no alternative system of wealth creation has achieved as much as even the most defective of market economies, while the best of the market economies (based on liberty, security and justice) do even more, right across the income distribution. Where would you rather be poor: in Charlottesville, Virginia, USA, or any town or village in Africa?

[Read the article in The Cavalier Daily, “Rationalising the Market” by Zack Field, University of Virginia, Charlottesville, USA:
http://www.cavalierdaily.com/CVArticle.asp?ID=25908&pid=1398]

Adam Smith and Gordon Brown: quintessential bourgeois or quintessential Scots?

Gordon Brown MP stands near the touchline warming up his muscles and tendons, anxiously ready to go onto the field of politics in place of player-manager Prime Minister Blair, who has signalled to the front bench that he is ready, reluctantly, to come off – soon, or later if possible.

The fans of both teams watch and scrutinize everything Brown does for signals about when he will be allowed to run onto the field, whether he will play as an attacking forward in pursuit of a radical agenda, a mid-fielder who manages the play of the game, or as a defender to keep out the reinvigorated other side’s team led by its new younger captain, who threatens to make serious dents in Labour narrow lead, somewhat compromised of late by a few spectacular ‘own goals’.

Hence, today’s (15 February) Daily Telegraph’s Opinion Column (known as the ‘Torygraph’ in Private Eye), advises David Cameron, the new Tory leader, to see “Brown for the Scottish bourgeois he is”.

“The mistake we could all easily make is to imagine that Mr Brown's morality is socialism; that a Brown government will be an Old Labour one. This is to misread both the circumstances and the man.

Quite simply, the facts will prohibit socialism: the national finances will not admit more taxes and more spending. The Government's fiscal plans show spending increases falling to less than two per cent from 2008, down from 5.5 per cent in 2004: after the fat years when spending growth exceeded income growth, the ratio is about to be reversed, and lean years are ahead.

That aside, the idea of Mr Brown as a socialist misunderstands his whole career. The driving project of his youth was his biography of James Maxton, published after nearly 20 years' work in 1986. Maxton was the Red Clydesider who led the breakaway Independent Labour Party out of Ramsay MacDonald's Labour Party, in disgust at their "collaboration" with the 1931 National Government.

The lesson Mr Brown draws from Maxton is: don't do it. Rather than a revolutionary socialist, Mr Brown is, like Adam Smith, his fellow son of Kirkcaldy, a quintessential bourgeois. And like Smith, he knows that economics are less important than culture.

Most of all, and quite unlike Mr Blair, he has a healthy respect for Victorian values. He recognises them for what they were: the agents of classlessness, aids to self-improvement and levelling-up.”

This is not the first reference to the fact that Gordon Brown comes from Kirkcaldy, birth place of Adam Smith sometime before 5 June 1723. Nor that Brown’s reputation for ‘prudence’ and ‘frugality’ is allegedly shared by both men. Alan Greenspan also drew attention to ‘something in the air’ about Kirkcaldy as it produced both Smith and Brown to stride the world’s stage (though for Smith it was more evident after he died in 1790 than during his life, and often, as we point out regularly on Lost legacy’, for reasons not associated with anything he wrote or advocated).

As for Brown being a ‘quintessential bourgeois’, I am unsure what the Telegraph means by this label. He has never struck me as being that way inclined or in his behaviour, at least from memories of him as a (brilliant) student who graduated PhD from the University of Edinburgh, and from observations of him in the media over the years since then. I would also have trouble fitting Smith into that label from what I know about him from his writings – a prudent and frugal professional academic is about the most I can say about him, more interested in ideas than in fripperies.

Yes, on reflection they do share certain characteristics, though I think it is more the careful sense of balanced steadiness that we would expect from two talented, well educated Scots, brought up in the ‘quintessential’ Scottish Protestant tradition, and neither of them given to extremes of fanaticism in their remedies for society’s many problems.

And yes, Brown, like Smith with his use of the language of religion, knows how to speak in the socialist language at the roots of his party without quite letting on how little of it he expects to see flower.

Invisible Hand no 30

When I read the two sentences of Steve Lydenberg’s piece in GNet my heart beat a little faster, momentarily. It seemed OK, and then it turned to dust:

“One of the great challenges of our times is how to encourage corporations to act in the public interest. A powerful obstacle is the myth of Adam Smith's "invisible hand" which suggests that if everyone -- corporations along with investors and consumers -- act solely in their own short-term self-interest, a greater good will inevitably be served.”

Steve was not announcing a break with the myths about Adam Smith and the invisible hand, of which I have spoken many times on this Blog. Oh, no! He was arguing against the myth of the invisible hand as if Adam Smith was its source. He was not!

It is a lie perpetrated by modern, mainly neo-classical economists (some innocent, many not) and some of their 19th century forebears, and is now a parody of the original isolated metaphor (from Shakespeare: Macbeth 3:2), and is now firmly ensconced, drinking double brandies and smoking Havana cigars in campus academe, polluting the minds of students from Economic 101 onwards. I think I now understand how generations of religious believers can believe the most absurd propositions, even to the point of killing those less credulous who ask questions.

First of all Smith never asserted that “that if everyone -- corporations along with investors and consumers -- act solely in their own short-term self-interest, a greater good will inevitably be served.” He suggested something much milder: people acting in self-interest to better their condition (an urge that I with us from the cradle to the grave) they could, given certain other factors, produce a ‘greater good’ for society, but (and it is a big but) they could also work against the public interest. Greedy monopolists, scheming merchants and manufacturers, private interests and ‘vile rulers’, could work against the public interest by their nefarious practices.

It was never automatic. If it was, then Smith would have no complaint about mercantile policies imposed by governments, urged on by the winners with influence at the expense of the losers without influence, because benign self interest would triumph over malign self interest. But that was never the message of “Wealth of Nations”, which is why he never gave the invisible hand metaphor free reign in his book, and nor did he advocate a policy of laissez faire (he never mentioned the words).

The way it is taught, one would believe without checking the source for oneself (and most do not – even professors of economics teaching invisible hands and laissez faire in Smith’s name have never read Smith’s “Wealth of Nations”, except isolated quotations), that his works were replete with examples of the invisible hand and praise for laissez faire. If they read what they preach they would soon discover a scarcity, where they have taught abundance, of references to these alleged ideas of Smith. Strange, to say the least.

The ignorant peasantry of Europe in the dark ages after the fall of Rome had an excuse for accepting all they were told by articulate priests, who preached from the Bible in Latin, a dead language they did not comprehend, until it was translated into their own tongues. With comprehension came dissidence. But “Wealth of Nations” and “Moral Sentiments” are in English and are translated into all main languages. What excuse do campus tutors have for perpetrating the nonsense they espouse?

But to get back to Steve Lydenberg’s piece. He is right. The problem, I agree, is the “powerful obstacle [of] the myth of Adam Smith's "invisible hand". But not quite as he believes it to be. It is not Adam Smith’s myth of the invisible hand that is the problem, but myths about Adam Smith and the invisible hand that is the problem. When Wall Street bankers and CEO’s of commercial enterprises, assorted academics who should know better, understand this truth they can adopt policies more in keeping of how markets work.

Steven D. Lydenberg is Chief Investment Officer of Domini Social Investments. As the founder of KLD Research & Analytics, he was instrumental in the creation of the Domini Social Index, the first SRI index, launched in 1990. He has written widely on issues of corporate social responsibility, including his most recent book, Corporations and the Public Interest (Berrett-Koehler, 2005).

His article is at: http://www.gnet.org/news/Print.cfm?NewsID=30281

What Steve Lydenberg should do now is read “Wealth of Nations” by Adam Smith to straighten him out on some fundamentals of Smithian economics.

Smith on Family Life and Family Discord

In National Review (14 February) David F. Forte offers an essay: “The Founders @ Home: the framers’ ideas of marriage and family”, where he refers to Adam Smith and his statement in the first sentence of “Moral Sentiments”:

“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it” (TMS I..i.I.1, page 10).

David Forte missed a great opportunity in confining his quotation to a general statement about mutual sympathy, because Smith wrote about the mutual affections within families in his book that circulated widely in the American colonies and was read sympathetically by some of the framers. David Forte could have quoted from “Moral Sentiments” the following:

“With what pleasure do we look upon a family, through whole of which reign mutual love and esteem, where the parents and children are companions for one another, without any other difference that what is made by respectful affection on the one side, and kind indulgence on the other; where freedom and fondness, mutual raillery and mutual kindness, show that no opposition of interest divides the brothers, nor any rivalship of favour sets the sisters at variance, and where every thing presents us with the idea of peace cheerfulness, harmony, and contentment? On the contrary, how uneasy are we made when we go into a house in which the jarring contention sets one half of those who dwell in it against the other; where amidst affected smoothness and complaisance, suspicious looks and sudden starts of passion betray the mutual jealousies which burn within, and which are every moment ready to burst out through the restraints which the presence of the company imposes? (TMS I.ii.4.2, pages 39-40).

Or from Smith’s more extensive essay on the family (TMS VI.ii.1.1, pages 219-24) where he averts that disaffection between close family relatives is the ‘highest impropriety, and sometimes even a sort of impiety’.

Smith's own family circumstances show a sickly child born, not long after his father died, in 1723, brought up by his widowed mother, who never re-married but devoted her life to her son's well-being, seeing him well educated and settled. She was a model doting-mother and a practising Christian of the Protestant sect. Smith reciprocated with his deep love and consideration (even at variance to his philosophical principles in the matter of religion, from which alleged 'athiesm' he kept her ignorant, evem minding carefully his public writings) and she shared his household until she died in 1783.

So did his mother's neice, Janet Douglas, his cousin, who was his housekeepr from 1754 to 1788, of whom he always displayed the warmest of family affections. Extant letters show him teasing his cousin in company at tea. When he wrote about family discord his reaction was in the contrast with his own family and its 'mutual love and esteem.'

Free speech is good for economic progress

The current furore over cartoons depicting the founder of the Muslim religion is an apposite reminder of the time when Scotland and England were dominated by several fairly rabid versions of the Christian religion, which treated detractors with no less intense hostility and physical reprisals. It is also a useful background to my, I hope, friendly and civilised discussions with Professor James K. Galbraith on the influence of the Scottish version of Christianity on the writing style of Adam Smith’s discourses.

Gary Duncan writes an excellent piece in today’s Times (London) on the theme that ‘Free speech ensures economic progress’. His ‘hook’ into his readable article is via an incident in Edinburgh’s history in 1696 in the ‘affair of one Thomas Aikenhead, an 18-year old theology student.’

“On a freezing Edinburgh night in the autumn of that year, Aikenhead and three acquaintances found themselves hurrying up the Scottish capital’s Royal Mile as they sought refuge from the biting cold. As they passed the city’s austere Tron Church, an embodiment of the country’s repressive Presbyterian church, the young man turned to his fellows and joked: “I wish right now I were in the place Ezra called hell, to warm myself there.”
The casual remark would turn out to be no laughing matter. The next day, Aikenhead’s comments were reported to the authorities of the Scottish church, the Kirk. They didn’t see the funny side.

A swift inquisition of other students revealed a litany of ridicule of the faith by Aikenhead. He had claimed that the Bible was a work of invention by the prophet Ezra; that Christ’s miracles were cheap magic tricks; and that the Apostles were “silly, witless fishermen”.
The incensed ministers of the Kirk quickly made the affair a cause célèbre. Scotland’s chief prosecutor, the Lord Advocate, began a prosecution under a law that those who “railed and cursed against God” or the Trinity were to be punished by death.

A repentant and shattered Aikenhead was convicted and condemned. Desperate appeals by distinguished supporters to the Scottish Privy Council, and to King William in London, failed as the Kirk demanded that an example be made. On January 8 of the following year, Aikenhead was put to death.”

[You should read the entire article in the Times (London) at:
http://business.timesonline.co.uk/article/0,,8210-2037784,00.html]

This is a cause célèbre among Scottish sceptics of the social benefits of religion (any religion) on economic change. It is certainly to the fore in the minds of those interested in the politico-religious climate of the Scotland during the 18th-century Enlightenment and its effects on leading contributors to it, such as David Hume, Francis Hutcheson, James Hutton and Adam Smith.

Of these men, David Hume lived most dangerously, developing a measured but teasing disdain for the apparatus of Christianity (miracles, the existence of God, belief in the after-life, etc.,), but also exhibiting careful prudence in not driving the most rabid of the ‘divines’ (of which Scotland had more than its fair share) into the violent conduct of the stony-faced men without a sense of human decency who dominated the Church in 1696. Their successors proved strong enough to keep David Hume out of professorships in both Edinburgh and Glasgow, but not strong enough to arrange to hang him like they contrived to hang poor Aikenhead.

Francis Hutcheson shrugged off silly charges of apostasy to the embarrassment of his accusers. Both Hutton and Smith escaped the attention of the vigilantes by disguising their scepticism in their books in carefully composed camouflage of ‘well-known phrases’ that appeared to show their soundness as Christians. Unless the ‘witch-hunters’ looked very closely to the disposition of their word orders they would not realise the game being played on them.

Nevertheless, the vigilantes were powerful enough still to make life difficult for targets of their enmity. Gradually, over the 18th century, the urge for freedom of expression – the very heart of enlightenment – grew bolder. Smith made several public gestures towards freedom of expression, notably after his religious mother, whom he worshipped, had died in 1783, but he still did not feel completely free of the ever-present threat. When David Hume was dying in 1776, Smith tried desperately to avoid a commitment to publish David Hume’s Dialogues. The correspondence between them shows Smith twisting and turning to commit Hume to agree to not publish his short book, because of the embarrassment this might cause Smith on the eve of “Wealth of Nations” – it not being a good time to attract public condemnation from ignorant and superstitious ranters.

Hume almost broke with his closest friend over this issue, addressing him as ‘my dear Sir’ in place of ‘my dearest friend’ (Correspondence of Adam Smith, Liberty Press, 1985). Hume being Hume, he reverted to his forgiving and friendly salutations in his last letters to Smith. It was his characteristic of deep gentility and manifest kindness to all (including his critics) that made Hume popular even with orthodox members of the Church and which protected him to the extent that largely he was left alone by his would-be tormentors in his latter days. When the Dialogues were published by Hume's nephew they caused less of a stir than Smith's one- page eulogy to Hume.

In acknowledging the personal struggles of leading Enlightenment figures to make public their radical ideas about fundamental aspects of the society of which they were part and part wanted to change, we can reflect on the hidden, because silent, wise prudence of the many Muslims who do not share the certainties of the fanatical fundamentalists. This might suggest caution in blanket condemnations of all Muslims because of the actions of a (large) minority of those in the streets outside embassies.

Given our own record of religious intolerance, albeit from two hundred years ago, we should reflect sympathetically on the difficulties faced by those Muslims who are inclined to favour Enlightenment in the 21st century, as we are reverential of those Enlightenment figures who risked social place in the 18th century.

Smith was not a Deist 2

In response to a comment from James K. Galbraith to my article today (below) on his views on Smith as a Deist:

I have expressed already my policy is not to make unwarranted criticism of anybody’s assessments of Adam Smith’s writings. Lost Legacy usually criticizes ideas and tries to avoid criticizing individuals, especially where their records show them to be of some standing in the profession. That I returned to James K. Galbraith (November, December, February) is not because things are ‘quiet’ on Adam Smith (they are in fact fairly busy each week, as this Blog’s contents show) but because James publishes in Mother Jones and shows little sign of responding to my points, except to repeat the views which I consider to be in error. These are not major failing or reasons to fall out on a personal level.

That a ‘great many authorities think’ Smith was a Deist does not justify mere repetition that he was Deist. When scholars are shown contrary evidence they should consider it, and if it seems reliable, when checking the sources, they should at least qualify their assertions. How much Thornstein Veblen knew about the conditions in Scotland during the Enlightenment is not clear, except his ignoring the religious climate suggests if he did know anything he ignored it.

I make no claims for my forthcoming book (I would be surprised indeed, if anybody was to call it ‘great’) and this was not the purpose of my mentioning it here. I recognize that I have not marshalled and presented here all of the evidence for Smith not being a Deist, except a few tell-tale pointers that suggest he was not, and which readers may follow up for themselves.

I added material about Smith's friend James Hutton, just to indicate I was not making my claims up – they have been made by others, including ‘authorities’. The point about my book, due in 2007, was more to excuse my not going into detail to back-up my case (in the usual scholarly manner) because this is contained in something I am writing for another purpose. No suggestion is implied that I expect James, or anybody else, to have read a book not yet published, nor to read it afterwards; my concern is that he may not have read widely enough on what is already in the public domain – Smith’s works, journal articles about them – but relies entirely on those authorities, admittedly the majority, who assert ‘Smith was Deist’, to add his own substantial credibility among economists to what is, in my humble view, an error.

I recently quoted the admirable work of Jerry Evensky, who makes a firm scholarly case for Smith being a deist (Evensky, J. 2005. Adam Smith’s Moral Philosophy, Cambridge University Press). I don’t agree with Evensky on Smith’s Deism but admire his work; I don’t agree with James Galbraith on Deism but acknowledge and admire his work. Ideas are not to be taken personally in the republic of letters.

Smith’s mention of a preference for security (or any other reason or emotion) of one’s own capital stock, which is perfectly understandable and was practised in 18th century Britaion, especially among the small to middling merchants and manufacturers, and, of course, smaller farmers, having the unintended consequence such that it benefited society was certainly based on the fact that overseas opportunities existed, and were mainly exercised by richer merchants, the Royal Charter Trading companies (e.g., the East India Company) and not often among local merchants and journeymen. Of the great joint-stock chartered monopolies, Smith was most critical, not just of their corruption and vileness as ‘governments’, but also of their negative effects on local and national growth in Britain. They also cost expensive wars to maintain them.

Wealth of Nations is precisely about the conditions that ‘cause’ local/national wealth to grow faster and others that cause it to grow slower. Among the other causes that inhibit local/national wealth creation, he included monopolies, apprenticeship and settlement acts, tariffs and bounties of all kinds, and events like wars over frivolous issues. He accepted for reasons of state that some negatively-helpful growth deterrents, like the Navigation Acts, were necessary, even at some cost in growth terms, though he did not favour a policy of Empire merely to provide a market for monopolised distant sale (more worthy of ‘a government influenced by shopkeepers’ was how he expressed it).

I thank James for drawing my attention to a misattribution of a quotation to him instead of Veblen, for which I unreservedly withdraw it and, of course, apologise. It is, however, still incorrect, whoever said it.

Smith did not believe in the inevitability of progress; retrogression was possible within his evolutionary model. Nothing was pre-ordained to happen. It was also central to his assessment of human society, shown in his treatment of European society as barbaric for 1,000 years after the fall of Roman civilisation, until the commercial age began to revive gradually from the 16th and 17th centuries.

Trenchant Rebuttal of Laissez Faire Activists by James Pyland

“It would be nearly impossible to quantify the number of times that pro-corporate, laissez-faire activists have used the phrase “invisible hand” to justify all manner of unjust and brutal economic policies and their outcomes. This concept has provided to the pro-corporate right an enormous intellectual legitimacy and advantage over their liberal and leftist opponents who seek to limit the excesses of private corporate power. Faced with the unquestioned assumptions implied in the idea of the “invisible hand,” the arguments of liberal opponents often draw little more than scorn, derision, or silence.”

This is how James Pyland opens his remarkable 5,000 word article, ‘Free-market activists distort original message of Adam Smith’s “invisible hand”’, published in Online Journal (Silver Springs, Florida, USA, 11 February). For a comprehensive critique of much of what passes for informed opinion by economists claiming a special affinity with Adam Smith, while silently traducing his legacy, it would be difficult to do it better.

You should (must!) read his article now at:
http://onlinejournal.com/artman/publish/article_499.shtml

James Pyland considers seven of what he described as ‘Adam Smith’s arguments that contradict the modern message of conservative laissez-faire capitalism’:

Adam Smith was pro-labor
Adam Smith distrusted and denounced the capitalist class
Adam Smith argued against corporate privilege
Adam Smith argued for investment at the local or domestic level
Adam Smith advocated taxing the rich
Adam Smith observed that state power could be used to protect human rights
Adam Smith looked to government-supported education to mitigate the effects of the division of labor.

Now, I have some quibbles with Pyland’s commentary on some of his arguments, but they do not detract from his being absolutely right in his main theme, namely that the conservative consensus in its interpretation of Adam Smith and ‘Wealth of Nations’, is mostly wrong in the way it presents Adam Smith as an advocate of laissez faire (words Smith never used).

Numerous articles on this Blog show my affinity with James Pyland on his broad theme. His article is too long to quote in detail here (I hope to get permission from Online Journal to post Pyland’s entire article on the Articles pages of Lost Legacy) and I would not wish to give any comfort to those critics of his arguments by appearing to make a big issue out of my quibbles about them.

I abhor how professional economists misattribute their misreading of Adam Smith (or more likely, accept uncritically what they have been told about Smith by their tutors, who didn’t read him either) and how politicians loot “Wealth of Nations” for quotations torn out of context for their lazy sound bites. They do Smith a great disservice and expose themselves, at least to readers of Lost Legacy, for their shallowness, which is far more serious, in my view, than any quibbles I have with how James Pyland expresses himself.

Pyland’s account is honest, it is from the “Wealth of Nations”, and is unadorned with falsehoods. Congratulations James Pyland.

A certain candidate for February’s Monthly Lost Legacy Prize?

Smith was not Deist

James K. Galbraith has graced the pages of this Blog on several occasions (mainly critically). He has a distinguished cv as an economist and writes regularly on the ‘issues’ from a ‘progressive’ perspective. None of this prevents him being wrong on Adam Smith. A typical example is from one of his regular articles in Mother Jones (December-January):

“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."

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

Taking the above at face-value it contains ideas that I find problematical.

“Adam Smith was a deist”

Comment:
a careful reading of Adam Smith’s works in their context of 18th century Scotland, with its religious climate and the evident doctrinaire approach of Christian zealots who could, and did, make life miserable for those they considered apostates or atheists, or worse, if they merely suspected them of these ‘crimes’, suggests that the face-value of a charge of deism based on an intellectual’s writings two centuries later is not worth as much as it seems.

Smith’s close friend, James Hutton, (1726-1797) who became his co-executor with Joseph Black, was a major influence in the world of scientific geology in the 18th century. His writings are replete with religious terminology of the kind used by Smith in his writings.

They had similar ideas about the evolution of Nature and how human minds impose ‘order, regularity, purpose, and wisdom’ as a ‘heuristic aid’ to understand phenomenon. Hutton cautioned against limiting ‘nature with the uniformity of an equable progression’ and ‘intention may be found in nature, but this intention is not to be supposed, or vainly imagined, from what we may conceive to be’ (Hutton, J. “The Theory of the Earth; or an investigation of the laws observable in the composition, dissolution, and restoration of land upon the globe”, Royal Society of Edinburgh, Transactions, v. 1, 1788, pp. 209-304, quoted in Sengor, A. M. ‘Is the Present the key to the Past or the Past the Key to the Present?,’ Geological Society of America, Special paper 355, 2001, p. 20).

Reading Hutton or Smith and concluding they were deists or, as Galbraith states of Smith, ‘believers in Intelligent Design’, when in fact they both took great pains to hide their scepticism, if not their outright atheism, is in error. I discuss this theme in greater detail in my forthcoming study of Adam Smith for Palgrave’s Great Thinkers in Economics series (2007).

Hutton wrote at the time of the Scottish sedition trials of 1793-4 (Smith died in 1790) and both lived through an era when to ‘go against the Church was to go against the State and the penalties were severe’ (Sengor, above, p. 20). David Hume was denied employment in the Universities of Edinburgh and Glasgow and attempts were made to prosecute him for apostasy. The zealots even prosecuted Francis Hutcheson (Smith’s mentor at the University of Glasgow) on weak and silly charges, despite him being a most celebrated professor of moral philosophy and an ordained Minister in the Church.

Sengor quotes a colleague who ‘compared Hutton’s Edinburgh with the United States of the McCarthy era.’ Whilst making no excuses for McCarthy, I think modern Iran under the ex-Mayor of Tehran is a more relevant comparison of the religious climate in Smith’s Edinburgh. How would James K. Galbraith adjust his prose style if modern America suffered anything like the regime under which the Scottish Enlightenment flourished by avoiding overt attacks on religious notions? Much better to write with great circumspection and use the cliché phrases learned in the relatively harsh education system was religious divines, as did, to an extent, Charles Darwin who wrote cautiously sixty-nine years later.

Smith was not a deist; he wrote in code to avoid attracting the reactionary reprisals of some fairly awful and largely ignorant people who did not live up to the admonition in the New Testament to ‘turn the other cheek’ – there is no fury like the fury of a fanatic carrying a big stick and a hanging rope (or today, a belt of explosives).

The second of Galbraith’s errors is in the partial quotation from Smith’s “Wealth of Nations”, prefaced with the woeful nonsense of ‘its now mostly forgotten anti-globalization flavor”. Smith discusses the preference of individuals for applying their capital stock in the neighbourhood in which they can watch over it, rather than sending it away or abroad and out of sight. Only the very rich and powerful, and those with powerful superintendents, could risk that. Keeping in within sight had the consequence that a neighbourhood’s or a nation’s capital stock grew quicker than it would if it left the country (because, in value-added terms, the products of the labour of the neighbourhood remained local – sending it abroad meats only that the profits returned to the owners of capital stock, which were a smaller proportion of the value-added).

This had nothing to do with ‘globalisation’ in Smith’s time because Britain was going through that phase in the accumulation of commercial capital known sometimes as ‘primitive accumulation’ (about where Africa on the ground is now; ignore the thieves in government). Capital stock was scarce and usually existed in small, individual amounts commensurate with tradesmen, artisans, merchants and shopkeepers. The era of vast capitals was still over the horizon; therefore, it was not part of the “Wealth of Nations”. There were some capital outflows to the colonies and mercantile policies kept their added-value within the British Empire. No view was expressed by Smith of whether this was an appropriate policy for a different level of capital accumulation, as exhibited in the mid-19th and 20th centuries. He was not a visionary predicting the future.

That political economists like Frederick List (1841) were hostile to the export of capital out of what he envisioned would be the German Empire (Reich) within the expanded borders of the separate states of Germany is quite clear in his writings, and we know now where such anti-foreign ‘globalisation’ ravings ended up in the 20th century.

Thorstein Veblen’s assertion about the invisible hand – a lonely metaphor in “Wealth of Nations” (a metaphor that is not even in the index in editions edited by Smith) – has been blown-up out of all proportion by 20th century campus economists. Today’s exaggerated imagery is linked to Smith’s name as if he conceived of his (or rather Shakespeare’s) metaphor in the same manner as Veblen and others were to see it a century later. Galbraith writes "the guidance of…the invisible hand takes place…through a comprehensive scheme of contrivances established from the beginning."

So that when Galbraith asks the rhetorical question: “What is this if not Intelligent Design?” I am bound to answer that Galbraith should ask himself the question and then ask Veblen, but not ask Smith. Veblen and Galbraith’s assertions are incorrect, unhistorical and have no basis in anything Smith wrote. They are no part of Smith’s legacy, nor were his alleged beliefs about the deity or religious meanings attributed to the invisible hand.

Smith Wrote Nothing About Modern Corporations

A lively piece by Dave Taggart castigating currency speculation and speculators, such as George Soros (now in amoral remission, and giving the world the benefit of his somewhat changed views towards his past work as a speculator), in SCOOP: ‘An Occam’s razor’, 9 February. Unfortunately, Taggart, drags “Wealth of Nations” into the case for ‘Tobin’s Tax’.

“This form of trading [currency speculation] has absolutely nothing to do with human labour or productivity; it is not the ‘marketplace’ of Adam Smith’s day.”

Comments:
Even in Smith’s day paper bills were traded in active markets. The Admiralty in London always honoured bills drawn on a Royal Navy officer’s King’s Commission for goods purchased in overseas ports, not matter how long they took to make their way back to London for payment in cash at their face value – the amount of discounting and re-selling was signified by the number of signatures on their reverse side as they passed from merchant to merchant. There was also a lively trade in the purchase of such discounted bills by Royal Navy and merchant ships calling at ports en route for London – Lieutenant Bligh, for example, purchased (speculatively) a number of these bills when HMS Bounty called at the Cape of Good Hope in 1788.

“When Adam Smith wrote ‘The Wealth of Nations’ in 1776, markets dealt in material products, not currency speculation. Smith wrote (op. cit; Vol 1: 144), “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”. Doubtless, he would hold the Soroses of the world in similar contempt.”

Comment:
What is Dave Taggart’s point here? The behaviour of ‘people of the same trade’ that Smith refers to in “Wealth of Nations” (WN I.x.c. 27, page 145) was from people who were dealers in tangible goods, not currency trades. Alluding to currency speculators as being of the same ilk as traders in tangible goods suggests that the behaviour Dave Taggart considers to be a new phenomenon among currency speculators today, and beyond the pale, has been the common behaviour of both traders in tangible goods and currency. This suggests that Taggart’s apparent approval of traders in tangible goods is forced. Taggart’s assumption, or rather presumption – and a ‘doubtless’ one at that – about whom Smith would have held in ‘contempt’ is of doubtful provenance.

‘As Adam Smith stated (1776; Vol 2: 158)[?]; "Such exclusive companies, therefore, are nuisances in every respect: always more or less inconvenient in the countries in which they are established and destructive to those which have the misfortune to fall under their government." Smith’s “exclusive companies” are, of course, corporations. His visionary contempt of the then fledgling corporate phenomenon is never acknowledged by the neo-cons who cherry-pick his writing, but I am sure he would have endorsed the Tobin Tax.’

Comment:
Again a quotation stretched from its original context in “Wealth of Nations” into a completely different context in the 21st century. Smith’s “exclusive companies” were not modern ‘corporations’ at all. He was referring to the chartered monopolies, such as the East India Company, that did more than trade with India; it ruled the country for much of the over two hundred and fifty years (1600-1858) it operated as a monopoly. Hence, Smith’s reference to its “nuisances in every respect: always more or less inconvenient in the countries in which they are established and destructive to those which have the misfortune to fall under their government”, as India had the misfortune to suffer from.

Not all chartered monopolies, operating as ‘joint stock companies, in the 17th-19th centuries were as prone to bad governments of those areas over which they exercised their monopolies to the same extent as the East India Company upon which he heaped odium and disgust. Smith considered most of these monopolies ‘useless’ as trading entities.
His ‘contempt’ for them was not ‘visionary’. He wrote about these specific institutions in the here-and-now of his observations of them in the 18th century. He had no vision of how competitive joint stock companies would develop in the 19th century as the main vehicle of the, to him, unknown phenomenon of capitalism (a phenomenon of which he neither knew nor a word which he knew about – it was first used in 1854).

No conclusions should be drawn from the completely different joint stock companies in competitive markets compared to Smith’s views about trading monopolies operating under Royal Charters in the 17th-18th centuries.

Whatever ‘neo-cons’ (i.e., politicians in the 20-21st centuries) allegedly ‘cherry pick’ from Smith’s 18th-century writings, their interpretations are as likely to be biased as are Dave Taggart’s cherry-picking of “Wealth of Nations” to draw the extraordinary and ‘sure’ view that Smith “would have endorsed the Tobin Tax”. The basis for such a conclusion is undermined by the necessity for Dave Taggart to massage “Wealth of Nations” to arrive so confidently at, what must be, a wild assertion, irrespective of the merits of Professor Tobin’s usually excellent advice.

(Scoop: independent news (New Zealand): Dave Taggart’s article is found at: http://www.scoop.co.nz/stories/HL0602/S00090.htm)

Smith on Education Funding Misunderstood

Ralph Martire (4 February) writes a contentious piece in the Chicago-Sun Times on private v public schools and the comparable education they provide for their students. I have no comment to make on the US education system as I know little about it, but I do know something about Adam Smith, so when Ralph Martire brings Smith into his article to support public over private provision which is clearly misleading , I am drawn into replying on Smith's behalf about being called as an expert witness in a debate taking place in 2006, of which Smith can hardly be called ‘expert’.

Martire writes:

“Ironically, this [public schools better than private schools] was predicted by Adam Smith, the father of capitalism. In his seminal work, The Wealth of Nations, Smith called for the public sector to assume responsibility for educating the general public. In Smith's words, ''The education of common people requires, in a civilized and commercial society, the attention of the state.'' Smith supported public education for ''common'' folks because they couldn't afford private schools. He contrasted that with the position of individuals of ''rank and fortune,'' because their parents are ''willing enough to lay out the expense necessary'' to educate them.

The data show that Smith was right. When it comes to educating the public, nothing works better than public schools.”

Sounds convincing. However, Ralph Martire is disingenuous. By changing a single word, he changes Smith’s meaning and builds his case for his last sentence on a shallow prospectus.

Compare Martire’s version of ‘Smith’s words: “'The education of common people requires, in a civilized and commercial society, the attention of the state.'' Note the last word ‘state’ and note particularly the last part of that sentence which Martire leaves out, though it is relevant.

This is what Smith actually wrote:

“The education of the common people requires, perhaps, in a civilized and commercial society, the attention of the publick, more than that of people of some rank and fortune” (WN V.i.f. 15, page 784).

Where did, and why did, Martire substitute Smith’s word ‘publick’ (18th century spelling of the word ‘public’) with the word ‘state’. If Smith had intended to use the word state he would have used it – he was always most careful with his wording, reportedly writing and rewriting six or more times until he was satisfied.

The situation in the last quarter of the 18th century in Britain was not one where there was a choice between state or private education for the mass of the common people. There was practically no education at all for the common people (except to a limited extent in Scotland’s little schools in every village, largely established by the Church since the 16th century). Proper education, from 6 or 8 to 18-19 was only available for the sons of the rich(incidentally, no daughters were educated even in rich families to anything like the extent to which rich boys were educated) .

For the sons of middle class parents there were local grammar schools funded by endowments, local donations and fees paid by parents. Smith’s mother sent him to Kirkcaldy Grammar school from 9 to 13 (1732-37) and then to Glasgow College or University (1737-40). This was paid for by his guardian tutors as directed in his late father’s will and family funds.

Children were sent to work at 6 years was the norm for the common labourers (they got the wages of a pittance, but such was family poverty it did make a difference; and for many there was no schooling at all (particularly in England). This was the situation Smith addressed in this part of ‘Wealth of Nations’.

He did not advocate that teachers should be rewarded by the public revenue, for if they were they would become slovenly teachers, not caring if they taught properly or gave up the pretence altogether. (Read Smith: Of the Expence of the Institutions for the Education of Youth, WN V.f. pages 758-88) He suggested for ‘every parish or district a little school, where children may be taught for a reward so moderate, that even a common labourer may afford it; the master being paid partly, but not wholly paid by the publick; because if he was wholly, or principally paid by it, he would soon learn to neglect his business” (WN i.f.55: page 785).

It took nearly a century, 1860, before Britain adopted universal education. And the past 146 years of publicly funded education for all children from 5 – 15 (later 16) has produced vast amount of data on the efficacious mix to get the best results. In short, publicly funded schools under the management of the state have not produced an enviable record.

Nobody should pretend that state-funded provision has removed the need for a wider debate on whether public education has achieved those goals Smith and others considered to be attainable even in the moderate circumstances of the 18th and 19th centuries.

Humour between Politicians

Rep. Gerald Lange, D-Madison, has earned a reputation during his eight terms in the Legislature as a well and widely read person. He peppers his testimony with verbal footnotes, as in this observation when the House Taxation Committee considered a bill about renters and property taxes.

"I was reminded of Adam Smith and his classical 'The Wealth of Nations,' 1776," Lange said. "One third of his book is about taxation, and he comes down on the fact that it should be simple and certain, and this is so contorted and complicated that it doesn't qualify at all for this great book of Western civilization."

Rep. Joel Dykstra, R-Canton, serving his second term, listened, then said, "I always appreciate the lecture on Adam Smith from Representative Lange because although I've read Adam Smith, I didn't know him personally."

We should appreciate a bit of humour involving Adam Smith, especially when it comes from politicians, in this case Congressmen in the US. Though with characteristic political hyperbole, while the joke was great, the arithmetic was in error. Taxation takes up 128 pages in “Wealth of Nations”, about 13.5 per cent of the total 945 pages, not thirty-three per cent. However, when it comes to numbers in taxation, politicians always state it is less than anything it actually ends up costing and more than any number they claim they take from taxpayers’ incomes.

Story from Argus Leader.com: Sioux Falls leading web site, Sioux Falls, South Dakota, USA courtesy of TERRY WOSTER (twoster@midco.net)
(read it: http://www.argusleader.com/apps/pbcs.dll/article?AID=/20060206/NEWS04/602060326/1001/NEWS)

Good Sense on Trade and Development

“At the end of this week at the historic Hotel National, which stands in the very heart of Moscow, finance ministers of the Group of Eight nations gather to discuss international economic and financial policy issues. As the ministers meet, we hope they reflect on two of the greatest challenges confronting the world: persistent poverty and the sometimes difficult adjustments associated with globalization.

The connection between trade and economic development was made 170 years ago by Adam Smith in his classic work "The Wealth of Nations." By capitalizing on what different countries do best, Smith explained, trade lowers costs, frees up capital and other resources to be used more productively, promotes growth and development, creates jobs and raises standards of living.

Trade also promotes peace because commerce requires communication, which leads to mutual understanding, respect, friendships and lasting partnerships.
And the results have been nothing short of phenomenal. Between 1950 and 1998, global economic output rose by 530 percent, while the volume of merchandise exports rose 1,840 percent. Over that nearly 50-year period, the ratio of trade to global output tripled, from about 7 percent to more than 20 percent. In what has been the most dynamic era of economic development in human history, trade has become the basis for a prosperous world economy.”

Don Evans, a former U.S. commerce secretary, is chief executive officer of Financial Services Forum, writes on “Taking a Stand for World Trade” in today’s Moscow Times (7 February).

Apart from the minor arithmetical error of ‘170’ years ago (it was 230 from when Smith’s “Wealth of Nations” was published, and 216 years since when Smith’s last edition edited by him, was completed in 1790), this short article is a model case for the deepening and extension of the market as the soundest road to social and economic development, under the rule of law, security of property and justice.

Read the article: http://www.moscowtimes.ru/stories/2006/02/07/006.html

Smith was Not Naive about Corruption in Markets

Simon Longstaff, executive director of a St James Ethics Centre, writes in the Sydney Morning Herald, 5 January, a piece, “Free Trade Cheats Caught in a Loser’s Game”, on corruption in trade markets and whythis is not how the 'theory' according to Adam Smith supposed it would work. (Read it at: http://www.ethics.org.au)

“Adam Smith is often credited with providing the intellectual foundation for free trade. So what would he make of the evidence emerging from the Cole commission into alleged kickbacks from Australian companies to the regime of Saddam Hussein?

Smith was not an economist; rather, a professor of moral philosophy at the University of Glasgow. He had a robust and pragmatic view of the ethical underpinning needed for any free market to operate.

Smith knew that if a market is to be truly free, then its participants must never lie, cheat or use their power oppressively to secure advantage over their competitors. It is not simply that lying and cheating are "wrong" - of equal importance is the fact that such behaviour brings distortions to the market. The effect of these distortions is that people end up paying the wrong people the wrong price for the wrong products.

Smith would urge us to create a level playing field in which honest traders win or lose on the basis of the price and quality of the products they offer to sell. He would be appalled by any suggestion that Australians have profited from duplicity. That's the theory.”

Comment:
Several minor errors here. Smith’s contribution was not in economics (a subject not generally thought of as such in the 18th century). Longstaff is correct to describe him as a Professor of Moral Philosophy and not as an economist, but in 18th century Scotland, courses in moral philosophy incorporated not just ethics, but also ‘natural religion’, ‘jurisprudence’, ‘rhetoric’ and ‘political economy’, the latter known as ‘police’ (the government’s job to ensure the provision of food and products for the population).

The idea that Smith did not understand ‘economics’ because he was a moral philosopher instead, if that was the point that Longstaff is trying to make, is misleading; his knowledge of political economy was as good as any other political economist among his contemporaries. Smith studied political economy under Francis Hutcheson (1737-40) and also read widely.

That Smith is “often credited with providing the intellectual foundation for free trade” is true, but sadly he is credited with more than this assertion; he is credited, falsely, with being the founder of laissez faire, being the ‘high priest of capitalism’ and other similar nonsense, mainly by people who have not read his books, ‘The Theory of Moral Sentiments’ and ‘Wealth of Nations’, neither of which was a textbook on economics, at least not how we think of textbooks today.

Smith’s scepticism about free markets, in the guise of what people today think of as laissez faire (words Smith never used), was evident in his oft repeated caution about allowing ‘merchants and manufacturers’ to have an absolutely free reign in their markets – because they tend to conspire against the public interest by forming monopolies, restricting supplies (e.g., keeping put imports if they can; persuading gullible governments to impose tariffs if they can’t) and secretly agreeing to rig prices, and dump externality costs on communities.

Smith was not naïve about how individuals operate in market relationships. He did not use words like ‘must must never lie, cheat or use their power oppressively to secure advantage over their competitors.’ He expected them to do that regularly, if they were left to do what their selfish sides motivate them to do. If people lied and cheated, it was not something that would ‘appal’ him; it was an unintended amoral consequence of the choices made by individuals. Smith considered himself a ‘man of the world’ (he often berated younger men who were naive about the world they hoped to prosper in). He knew how his world worked and often advised others of these facts.

Smith’s concerns about such behaviours were related to their consequences, as much as his ethical disdain for their conduct. Anything that distorted markets from working effectively resulted in a slower growth and, therefore, a prolongation of outcomes that were less than what they could be in the absence of such behaviours. For the poorest labourers and their families, this prolonged the period in which they were deprived of modest affluence. His book was an inquiry into to nature and causes of the wealth of nations, and by wealth he meant not mere riches in gold, silver and trinkets, but real goods and services that were produced annually.

Funds diverted to feed the petty desires of those able to cheat, lie and monopolise their markets, took that productive capital away from other fields where it could set productive labour (including that of the poorest labourers) to productive work, and, by doing so, reduced the annual output of a society shareable among its citizens. That was more of a social crime than the petty gains of unscrupulous individuals. He had a strong moral sense of 'self command' and expressed it in his Works.

That, Mr Longstaff, is Smith’s ‘theory’. That there is corruption in trade (not ‘free trade’, because trade cannot be free if it is distorted) was the norm in Smith’s day, partly by the unethical behaviours of those inclined to behave that way and partly by the adoption of anti-growth policies by gullible governments.

A Niggling Conundrum

Is it possible that the message about barriers to development being far more complex than the economics consensus appears to believe is getting through to a wider audience than before? I am not sure but reading some recent contributions on the web I see a glimmer of hope that ideas are circulating that have tremendous significance, if – and it is a big if – these ideas are translated into policies and the policies are applied.

In the Blog, “New Economist, (new economic research, data, events, and analysis from a London-based economist)”, I was scrolling through some of its pages at: http://neweconomist.blogs.com/new_economist/, and found the following extracts from a Professor Rodrik (Harvard) on a World Bank document:

"Rodrik contrasts the World Bank's interpretation of the 1990s with the IMF's, which has increasingly emphasised the importance of institutions and the need for good governance and institutional reform:

What has become clearer to practitioners of the Washington Consensus over time is that the standard policy reforms did not produce lasting effects if the background institutional conditions were poor. Sound policies needed to be embedded in solid institutions.
Moreover, there were significant complementarities across different areas of reform. Trade liberalization would not work if fiscal institutions were not in place to make up for lost trade revenue, capital markets did not allocate finance to expanding sectors, customs officials were not competent and honest enough, labor-market institutions did not work properly to reduce transitional unemployment, and so on. The upshot is that the original Washington Consensus has been augmented by a long list of so-called “second-generation” reforms that are heavily institutional in nature.

The paper also discusses "yet another vision of reform strategy": the United Nations’ Millennium Project, led by Jeffrey Sachs.

The U.N. Millennium Project is based on the view that we basically know enough to mount a bold, ambitious, and costly effort to eradicate world poverty. We have successfully identified all the margins that matter, and we better move on all of them simultaneously. Learning from Reform, by contrast, is an ode to humility. What we have learned, it says implicitly, is the folly of assuming that we know too much. We need to downplay grandiose claims, move cautiously, and concentrate our efforts where the payoffs seem the greatest.

Rodrik outlines "a way of thinking about growth strategies that avoids some of the obvious pitfalls," based on growth diagnostics, targeted policy design, and institionalising reform. There is much good sense here. He concludes:

Learning from Reform is a genuinely interesting document: it represents a mea culpa as well as a way forward. It pushes us to think harder and deeper about the economics of reform than anything else out there. It warns us to be skeptical of top-down, comprehensive, universal solutions—no matter how well-intentioned they may be. And it reminds us that the requisite economic analysis—hard as it is, in the absence of specific blueprints—has to be done case by case. These should be music to any economist’s ears.
I suggest people read the whole book - it is available to download on the World Bank website.

I am going to read further in this area and will report later.

Meanwhile, I am minded of one of those niggling conundrums, which I have long determined I would think about when I have the time, that has always bothered me about something Adam Smith was alleged to have written in 1755, but which was not seen by others besides Dugald Stewart, who quoted from it in 1793, whilst giving the eulogy in memory of Smith to a meeting of the Royal Society of Edinburgh. His son, suffering from mental illness, is believed to have destroyed the paper subsequently.

Smith wrote: ‘little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point are unnatural, and 6to support themselves are obliged to be oppressive and tyrannical.”

This paper is often quoted as Smith’s hymn to free markets (even laissez faire) liberty and justice. However, that is not my niggling conundrum. What bothers me is the thought that humanity has come a long way from barbarism in a few millennia but it has experienced precious few governments of the kind alluded to by Smith and even fewer economic and justice regimes that could be described as he prescribed for the ‘little else’ needed. Indeed, most governments have been tyrannical and oppressive, as the American colonists knew to their pain in 1776.

Popular journalism, and not a few academics, point to the immense progress in alleviating poverty in recent years in state communist China (an oppressive regime by any definition), its sister regime in Vietnam and state dominated India, and before them of the state controlled, protectionist market regimes of Taiwan, South Korea and the slightly less state dominated regimes of Malaysia and Singapore. None of these regimes conform to the conditions set out in the 1755 paper.

I need to give it more thought, but the World Bank and Professor Rodrik may be coming at my conundrum from another direction. I shall continue reading.

Do free governments intervene too much?

Commentators in the US often present the USA as the land of free capitalist competition, even mistakenly attributing the wonders of US capitalism to Adam Smith, who never knew the word or the phenomenon – he died in 1790. This Blog spends its time correcting these errors of misattribution, but now comes a blow against the US image of being a free market in a disturbing piece, ‘The Leviathan (Ohio edition)’, on the Division of Labour Blog from Robert Lawson, one of its regular bloggers (read it at http://www.divisionoflabour.com).

It contains a list of the state boards and commissions for Ohio, known in Britain as Quango’s (Quasi-autonomous non-governmental organisations), to which Robert Lawson comments: ‘Boy I sure do sleep better at night knowing these fine people are out there “protecting” me.’

Accountancy Board of Ohio, Architects, State Board of Examiners of Athletic Commission Ohio, Auctioneers Program Barber Board, Ohio State Building Standards, Board of Chemical Dependency Professionals Board, Chiropractic Board, Ohio State Construction Industry Licensing Board, Ohio Cosmetology, Ohio State Board of Counselor, Social Worker, and Marriage and Family Therapist Board, Dental Board, Ohio State Dietetics, Ohio Board of Embalmers and Funeral Directors, Board of Emergency Medical Services, Board of Financial Institutions, Division of Hearing Aid Dealers and Fitters Licensing Board, Homeland Security, Division of Industrial Compliance, Division of Landscape Architect Examiners, State Board of Manufactured Homes Commission, Ohio Medical Board of Ohio, State Medical Transportation Board, Ohio Motor Vehicle Collision Repair Registration, Ohio Board of Motor Vehicle Dealer Licensing Board, Motor Vehicle Salvage Dealer Licensing Board, Nursing Home Administrators, Board of Examiners of Nursing, Ohio Board of Occupational Therapy, Physical Therapy, and Athletic Trainers Board, Optical Dispensers Board, Ohio Optometry, State Board of Orthotics, Prosthetics, and Pedorthics, State Board of Pharmacy, Ohio State Board of Professional Engineers and Surveyors, State Board of Registration for Psychology, State Board of Real Estate and Professional Licensing, Division of Respiratory Care Board, Ohio Sanitarian Registration, State Board of Securities, Division of Speech-Language Pathology and Audiology, State Board of Veterinary Medical Licensing Board, Ohio.

On reflection, is it really surprising that government inspired interventions are commonplace in so-called free markets? Modern government intervenes in all manner of places in every society – indeed, Adam Smith advocated in “Wealth of Nations” (Book V) a role for at least three quango’s: for the Hallmarking of gold and silver, the post-office, and the minting of coinage – but the scale of intervention today at every level of detail, apart from macro-interventions in the economy, still comes as something of a shock when they are listed as in the case of the Ohio.

Look in any phone book under Government, national or local; check the job adverts in newspapers, start working your way through all the regulatory bodies required just to build a modest extention on your home, or, in a preservation district or listed property, to make a modest changes in an internal or external feature.

We have come a long way from the simple free market and the perfect liberty to which Smith aspired. If the US is regarded as a free market, we can only conclude that there must be some pretty unfree markets around the world in comparison with it. I am sure there was a rationale for each and every state, commission and quango that was ever formed. But do we really need them?

Could the resources they consume be spent to better affect dealing with the real deprivation problems that require capital investment, which those enduring them can never afford? If we attend to these first, could we then reduce government expenditure and return the cash to the taxpayers, both direct and indirect?

Invisible hand, no 29:

Adam Smith is often credited with supporting events in the daily news by people who manage to get him wrong or to accuse him of nonsense he did not write, but which they believe he wrote because they picked up something somebody else told them long ago in a poorly taught Economics 101.

A classic example a few days ago (27 January – apologies for commenting on it late but I have been in rural France and my Internet connection was via a single telephone wire, not broadband) appeared in Citizen-Times.com, Asheville, (‘voice of the mountains), North Carolina, USA, under the Editorial heading, quoting the Wall Street Journal:

“Automakers forced to innovate and improve, as must rest of US industry”.

The piece below includes the following assertions, partly disguised by the word ‘probably’:

“Adam Smith would probably applaud Ford Motor Co.’s decision to cut 34,000 jobs from its North American work force and idle 14 North American factories.
For years, the Wall Street Journal says, Ford and GM relied on making a lot of money on a few products, mostly SUVs and trucks, to cover losses or bolster slim profits on small and midsize cars. They built vehicles, even when sales of those vehicles were slow, to keep factories running and avoid paying wages required by union contracts to idled workers.”

What possible evidence do the editors of the Citizen Times adduce for this story?:

“To Smith, whose “Wealth of Nations” published in 1776 is viewed by many as the seminal work in economics, paying workers to make something no one wants would constitute major market inefficiency.

“Wealth of Nations” was written as feudalism was giving way to the Industrial Revolution. It challenged and was largely responsible for discrediting mercantilism, a system of controls on industry that bore heavily on the rising merchant classes and that saw foreign trade as primarily a means of strengthening the state. The idea behind mercantilism was to bolster the state’s coffers.”

Comment:
‘Feudalism’ (a form of land ownership complete with tied labour) gave way to landlords and yeoman/tenant farming long before the ‘industrial revolution’ in the 19th century, itself a century subsequent to Adam Smith’s time on Earth (1723-90). I am not sure that ‘Mercantile’ political economy (‘mercantalism’ was not a word known to Smith nor anybody else in the 18th century) ‘that bore heavily on the rising merchant class’.

Mercantile policies certainly ‘bore heavily’ on the labouring poor and the unemployed tradesmen, who were denied the right to work in a trade unless they had served seven-year apprenticeships and which denied them the right to leave their parish and seek work in another one without meeting near impossible conditions (written permission from the local church minister read out at the end of Sunday church services plus a residence duration of 30 days without work).

“Smith saw labor, rather than commodities or land, as being the real source of a nation’s wealth.”

Comment:
Not quite. Smith saw the nations’ wealth as the annual output of products (we call it Gross Domestic Product nowadays) and not the amount of gold or silver bullion held in the nations’ strong boxes. I think the editors are confusing ‘wealth’ with some speculations Smith suggested about the source of ‘value’. This is not the place to elaborate on this latter misconception about Smith.

“The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations,” he wrote.

Comment:
Better.

“… This proportion must in every nation be regulated by two different circumstances; first by the skill, dexterity and judgment with which its labour is generally applied; and, secondly, by the proportion between the number of those who are employed in useful labour. ... Whatever be the soil, climate or extent of territory of any particular nation, the abundance or scantiness of its annual supply must, in that particular situation, depend upon those two circumstances.”

Comment:
Yes, but it is not clear if the editors understand what Smith was on about.

“In other words, wealth rests in the knowledge and productivity of the people of a nation, not in the commodities or the natural resources it possesses.”

Comment:
To be productive Smith argued that labourers had to be employed in occupations that produced goods that were sold in markets. Being employed “to keep factories running and avoid paying wages required by union contracts to idled workers” does not make labourers productive. It is a situation that cannot last indefinitely – the employer eventually runs out of money to pay wages. If this was not true, then we could print/borrow money to ‘employ’ people to do nothing and everybody would be ‘wealthy’. But Smith did not say anything about whether this or that policy was ‘good’ or ‘bad’, nor that he would ‘applaud’ a policy of sacking 34,000 employees (or employing them). In his days work forces of over 20 were extremely rare in Britain (excluding the church, the government and the armed forces – the Royal Nay employed over 200,000 at the height of wartime).

The editors’ killer assertion follows:

“He proposed that allowing people to pursue their own self-interest, pretty much unfettered, would benefit society as a whole and that the “invisible hand” of the market would self-correct over-pricing, oversupply, and other market inefficiencies.”

To which the editors add the nonsense:

“Thus, it would seem, Ford, GM and DaimlerCrysler have been touched by the market’s invisible hand.”

Comment:
Smith said nothing of the sort. He used Shakespeare’s metaphor (Macbeth 3:2) of the invisible hand only once in “Wealth of Nations” and it had nothing to do with market ‘efficiencies’, not even with markets, and there were no Smithian markets with an invisible hand in his writings on markets that “would self-correct over-pricing, oversupply and other market inefficiencies.”

His use of the invisible hand metaphor was about motivations that had unintended outcomes (the so-called ‘law of unintended consequences’) that on some occasions benefited society and on others worked against society’s interests. Monopolists were motivated to raise prices against consumers, restrict competition and over-charge consumers. If they were left alone to ‘pursue their own self-interest, pretty much unfettered’, they made society worse, not better, off.

“Ford, GM and DaimlerCrysler’ have not ‘been touched by the market’s invisible hand”. They have been driven by the effects of the brute course of events that are well understood by economists (who get past Economics 101). There is nothing invisible in markets, nothing mysterious and nothing miraculous.

Ford, GM and DaimlerChrysler can see and read the figures in their accounts, look outside their office windows at the visible lines of unsold vehicles, read the reports coming back from dealers, visit dealers’ showrooms and see the unsold vehicles for themselves, film the unsold stock to show to their colleagues on the Board and read the proposals for action from the CEO and the Financial Director (and read messages from their Banks, other creditors and letters from shareholders) and act accordingly.

In fact, you do not have to bring Adam Smith into the discussion at all, but if you must, please stop dragging in the usual nonsense about invisible hands, alleged images of Smith ‘applauding’ an event over 200 years after he died, and assertions about the history of political economy that you do not understand and consequently get wrong.

Ask a loaded question and you get your answer

Anatole Kaletsky answers his own question: “The President is a dolt – so how can America be such a success story?”, with the straightest of answers (always the most telling):

“The American approach has a powerful advantage rooted in human nature: private sector activity is powered by economic incentives, while the State must operate by rules and sanctions. Since incentives, as Adam Smith observed, are much more likely to stimulate creativity and effort than sanctions, private enterprise tends to achieve ambitious objectives, while government often fails.” Times (London) 2 February

Seems we European expect too much from our governments and suffer hurt when we are short changed (as we mostly are), but Americans? They have a low opinion of what any of their governments do for them, hence, are less disaappointed when they get what they expect from them, which is not much, and probably less than that.

Cynical Acceptance of Corruption?

When corruption reaches the highest levels of an African government and the donor governments know what is going on while they continue to pour millions in the name of ‘aid’ into the clutches of the same government ministers, something is really wrong with their good sense of right and wrong, and their priorities.

Alex Singleton of the Globalisation Institute writes consistent sense about the vast and extravagant waste of taxpayers’ money on so-called ‘aid’ (read it regularly at: www.globalisationinstitute.org/blog).

He quotes a piece from The Guardian (UK) that would be astonishing if it was only published in ‘Private Eye’, the satirical weekly, but it is beyond that when a daily newspaper features it (and, I might add a daily Newspaper with a less than approving attitude from those concerned about the views of some of its columnists on subjects like terrorism).

“In Kenya, it is increasingly clear that UK taxpayers are getting poor value for the development aid they are sending. As the Guardian reported yesterday, Kenya's anti-corruption tsar went AWOL, eventually found hiding in an Oxford college. "It didn't take a genius, after all, to guess that when the official responsible for policing an African government's finances flees, something is seriously amiss," says the Guardian. The paper continues:

The contents of a 36-page dossier compiled in exile are being drip-fed to a transfixed audience. His dossier accuses a clutch of key ministers, including the finance minister, of setting up bogus contracts designed to steal hundreds of millions of dollars in public funds. The scandal stretches to the top, for, despite being briefed by Githongo, President Mwai Kibaki took no action. All those named protest their innocence. But if the claims are true - and few whistleblowers come with more credibility than Githongo - Kenya's three-year-old government has not so much broken with the sleazy practices of Daniel arap Moi's administration as raised them to new levels of sophistication.”

Just what are the ‘reasons of state’ that justify accepting this behaviour as worthy of British taxpayers giving up part of their incomes to fund the bank accounts of already rich ministers? It reminds me of the evident truth of the remark that foreign aid ‘took money from the poor in the rich world to give to the rich in the poor world’.

Adam Smith witnessed much corruption in British governments in the 18th century. This behaviour continued into the early 19th century in so-called ‘subsidies’ to European monarchs to keep them on the British side in its wars. For all that Britain apparently does at the highest level in ensuring ‘blind eyes’ at turned by Ministers to the corruption of foreign governments who take sustenance out of the mouths of their people, their corrupt clients can hardly ever be accused of being partial to public support for the international policies of Britain in any for a the craven ministers attend. So their complicity in funding the corrupt does not even produce what they normally call ‘value for money’! Their corrupt clients usually over themselves in the rush to condemn Britain on the big issues of the day.

Those who deal in corruption by knowingly funding it, ignoring it when it is exposed or defending it for 'reasons of state', end up as corrupt as the people they force UK taxpayers to fund. Worse, their silence when it is exposed, as it is today in Alex Singleton’s blog and The Guardian newspaper, is as good as lying about it too.