Lost Legacy Monthly Prize for April 2006

Here is some good sense on panics about so-called ‘gouging’ (an American term for ‘profiteering’) in the oil and gas industry that counters the almost mindless ignorance of some senators and congressmen about how the market economy works, which if they had their way (and they might still) would undermine the very system that has produced their country’s prosperity.

Thomas Bray, a columnist, writes brilliantly about how the ‘Government remains biggest oil profiteer’, in Detroit News/Detroit Free Press, 30 April:

“Republicans from George Bush on down caved last week to the latest round of hysteria by agreeing, among other ideas, to yet another investigation of gasoline prices. Never mind that every time the matter has been reviewed, the verdict has been the same: Market forces account for virtually all of the supposed "gouging."

Not that one needs to have warm fuzzy feelings toward the oil companies and their extremely well-paid executives. As the founder of economics, Adam Smith, observed in 1776, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public."

Smith went on to point out that the best antidote to such tendencies is competition, not regulation -- which, he noted, usually winds up making government part of the conspiracy. And evidence is strong that competition is not lacking, at least in that part of the oil business that hasn't been nationalized by foreign governments.”

Comment
Thomas Bray also uses a quotation from Wealth of Nations correctly. I think his article deserves to win the April Lost Legacy Monthly Prize for Smithian economics.

[Read it at: http://www.detnews.com/apps/pbcs.dll/article?AID=/20060430/OPINION03/604300323/1267]

James Hutton, Adam Smith and James Buchan

From The Scotsman 29 March:

'Adam Smith and the Pursuit of Perfect Liberty' by James Buchan, Profile Books, a review by George Kerevan:

"IF YOU WERE A REGULAR walker on the Salisbury Crags high above Edinburgh on crisp mornings during the early 1780s, you would be familiar with two earnest gentlemen whose passion was examining the geology of that ancient rocky formation. One of them was Dr James Hutton, whose excursions on the Crags would lead to a revolutionary conclusion: that the Earth was millions of years old and had not, after all, been created by God in the year 4004 BC, as was the prevailing view.

For this was the Edinburgh of the Enlightenment, when gentlemen amateurs abandoned traditional ways of thinking and created the modern world as we know it. Hutton's friend, who seldom uttered a word on these outings but trailed after his companion muttering quietly to himself, was also an Enlightenment revolutionary. His name was Adam Smith, founder of the equally subversive science of economics and, like Gordon Brown, a son of Kirkcaldy in Fife.

The novelist and noted historian of Enlightenment Edinburgh, James Buchan, has turned his attention to a new biography of Smith. At 145 pages, this is more a polemical essay than a dense life history, but it is an interesting and charming read for all that. If you want the serious historical background about the Enlightenment, try Buchan's own Capital of the Mind."

Comment
A review that concurs with my own assessment of the importance of James Buchan's new book (see previous comments in this book). Read it in full at: http://living.scotsman.com/books.cfm?id=639382006

What I like about Kerevan's introduction is his tagging the opening onto the name of James Hutton, a close friend of Smith and one of his literary excutors. James Hutton may be less well known but he was an important Enlightenment figure. As a geologist and farmer he brought to the early study of geology a knowledge of the land and by methodically studying Scotland's rocks he unravelled the mystery of the earth's origins, for which he has achieved posthumous fame.

I recently bought volume one of his three-volume book of Philosophy (1793) with the intention of comparing it with Smith's to see how much of it was influenced, if at all, by Smith. In a most interesting paper by Donald MacIntyre, a geologist from Edinburgh who taught at California until he retired, he explains a link between the two men in Hutton's coded stance against the orthodox religious explanation for the origins of the Earth, as expressed in Genesis. This is another thread I am following.

To find out more about James Hutton see the National Museums of Scotland publication: James Hutton: the foudner of mdoern geology by Donald McIntyre and Alan McKirdy, 1997

Hume and Rousseau versus Hume and Smith

“Enlightened enemies” is an account of their recent book on the David Hume’s out-of-character quarrels with the somewhat paranoid J. J. Rousseau in 1766, by David Edmonds and John Eidinow, co-authors of ‘Rousseau's Dog: Two Great Thinkers At War In The Age of Enlightenment’ (Faber & Faber, 2006).

Edmonds and Eidinow write about another partnership of David Hume with Adam Smith:
‘David Hume comes down to us as among the greatest of philosophers. He also exemplifies the man of pristine character, saluted in his own age for his uncommon virtue. Hume was immensely proud of his upright reputation; one might say he gloried in his goodness. In 1776, close to death from bowel cancer, he summarised his life in a short, unrevealing essay. He was, he wrote, "a man of mild disposition, of command of temper, of an open, social, and cheerful humour, capable of attachment, but little susceptible of enmity, and of great moderation in all my passions".

His friend, the economist and moral philosopher Adam Smith, agreed, eulogising Hume after his death as the exemplar of as "perfectly wise and virtuous man as perhaps the nature of human frailty will permit". Historians and biographers have gone along with this image - ignoring Smith's caveat ... "as the nature of human frailty will permit".

Smith wrote handsomely about the merits of his late friend in 1776, I think largely under the influence of a guilty conscience for his less than frank refusal to Hume in his last few months to publish Hume’s little essay, ‘Dialogues Concerning Natural Religion’, as revealed in correspondence between them.

Hume eventually persuaded his nephew to undertake the work of seeing his controversial (for the 18th century) Dialogues posthumously, which obligation Smith had wriggled out of and which Hume eventually realized was his intention. Hume was not best pleased with his old friend, asserting that Smith’s ‘Scruples’ were ‘groundless’ and ‘have a specious Appearance’ (Letter to Smith, 3 May 1776) and referred to the ‘sacred Regard to the Will of a dead Friend’ (Correspondence of Adam Smith, Liberty Fund, 1987).

His next letter (3 May) to Smith carried from Hume the noticeably unusual salutation of ‘My dear Sir’ instead of his usual ‘my dear Friend’ or ‘My dearest Friend’, suggesting for a short while in 1776 his friendly attitude towards Smith had cooled.

In August, Smith relented slightly and wrote: ‘I shall be very happy to receive a copy of your dialogues; and, if I should happen to die before they are published, I shall take care that my copy shall be carefully reserved as if I was to live a hundred years’. What he did not promise to do was published Hume’s dialogues.

In these exchanges while Hume was dying we see a flash of him reacting to what was a hurtful rebuff from a man he had every reason to admire and expect reciprocation from in his final months. A hint of disappointment was as far as it went, unlike when Rousseau accused Hume of plotting to do him harm, Hume reacted with uncharacteristic venom once he was convinced of the damage Rousseau intended for him.

Read David Edmunds and John Eidenhow’s account [http://books.guardian.co.uk/review/story/0,,1762868,00.html] of the deterioration into a poisoned relationship between Rousseau and Hume, as Rousseau went quite mad, in projecting onto the one man who could only do him good, his fantasies and paranoia that had no basis whatsoever.

Rousseau ruffled Hume’s dignity in ways that nobody else managed, not even the most virulent of the zealots who castigated Hume almost without mercy and towards whom he turned the other cheek without fail. He thanked critics and name callers for taking the trouble to publish their critiques and refrained from replying to their nonsense with a barrage of philosophical blasts of which he was more than capable intellectually, but not capable of emtionally.

Three Articles Referencing Adam Smith

I extract from three fairly typical pieces that make their points from different perspectives, two from the ‘conservative’ and one from the ‘progressive’ wings of US electoral politics out of a profusion of such on-line magazines circulating daily in the USA, with many others originating across the world.

Tomorrow a selection could be entirely different, with a different mix to cover ‘anarcho-communists’ from Canada through to ‘liberal’ in the UK and to ‘socio-marxists from Africa or India (see our Lost Legacies’ Archives collection in the right-hand column for such pieces selected since March 2005).

All are treated the same here – no matter what their professed political ideologies or affiliations; my interest is in assessing how they use Adam Smith’s name and alleged ideas in support of their pronouncements about the world, or as illustrations of the right/wrong ideas they claim to support.

Lost Legacy’s stance is to explain, elucidate and to educate readers from the standpoint of knowing what Adam Smith actually wrote, not what is claimed he said and believed, and, in doing so, to make a small contribution to encouraging those readers, who recognise that his legacy has been purloined for ends he did not consider or were not relevant in the 18th century, to read his books and papers, all of which are available in inexpensive editions (browse and order online from Amazon or direct from Liberty Fund, Indianapolis, Indiana, USA: http://www.libertyfund.org/).

1 From The Post Chronicle: ‘Socialism Corrupts Human Nature’by Thomas E. Brewton, 27 April.

“In the Western world, two views of human nature are dominant:
One is the classical economic understanding described by Adam Smith in his 1776 "Wealth of Nations," in which people as a whole -- at least those with any common sense -- look for ways to improve their own and their families' economic well-being. Smith's keen observations of economic activity in his time, and historically, led him to the view that such activity is spontaneous and part of the natural order, to the extent not impeded by government intervention.

From this understanding comes the idea of the law of supply and demand: when goods desired by people are in short supply, prices rise, and producers are led to increase production of the desired articles, thereby pushing market prices down toward their former level. This insight led him to his celebrated "invisible hand" idea that, while each individual is motivated by his personal interests, those motivations lead people to become more productive and thrifty, thereby increasing the aggregate well-being of society. While at any given time some people are suffering hardship from economic conditions, a free market offers most of them the opportunity to improve their status in the future by dint of hard work and frugality. And human nature leads most of them to take advantage of that opportunity.

None of this is to say that individuals and religious groups ought not aid the poor, elderly, and disabled. Smith was first and foremost a moral philosopher who elevated individuals' sympathy and empathy for their fellows to the pinnacle of morality.

This conception of human nature made England, then the United States, the greatest economic powers in world history while producing unprecedented improvements in standards of living for people at all income levels.

The second conception of human nature, in contrast to Adam Smith's pragmatic analysis of actually observed conditions, is the abstract, theoretical, French, socialistic conception espoused by American liberals (our sect of the socialist religion).”

Comment
I criticized Thomas Brewton in April 2005 for asserting that commercial society was more successful where the Judea-Christian religion took root. In the above piece he is more accurate in his portrayal of Adam Smith, except, of course, where he returns to the following:

“This insight led him to his celebrated "invisible hand" idea that, while each individual is motivated by his personal interests, those motivations lead people to become more productive and thrifty, thereby increasing the aggregate well-being of society.”

I have criticised this false notion of what Smith meant by the invisible hand metaphor many times over this past year. Obviously Thomas Brewton is not a regular reader yet! However, to be positive he brings Smith’s ‘Moral Sentiments’ neatly into his case.

[Read his article in full at: http://www.humaneventsonline.com/article.php?id=14365]

2 Human Events online, ‘Oily Politicians: Part II’ by Thomas Sowell (a senior fellow at the Hoover Institution ) 28 April.

“Politicians have long been known for seizing upon immediate symptoms and ignoring underlying causes and consequences. Back in the 18th century Adam Smith wrote of "that crafty animal" the politician, who is preoccupied with "the momentary fluctuation of affairs."

Comment
Yes, Smith was not too fond of ‘politics’ as practiced in the 18th century and of the politicians who ruled the country. He distinguished, however, between politicians – men of ‘faction’ and ‘system’ – and ‘legislators’, a kind of mythical or ideal man of government who legislated wisely in the interests of minimal interference and good, selfless civic government, justice and security.

Smith certainly met and knew many leading figures in government and was consulted by them on occasion on various matters of policy, notably the war in the American colonies and matters of trade. They listened with respect but did not take too much notice, or couldn’t do much in the circumstances to implement what he suggested, for ‘short-term’ reasons of not having the votes in parliament to carry the day.

[Read Thomas Sowell’s article at: http://www.humaneventsonline.com/article.php?id=14365]

3 Working for Change, ‘Enlightened self-interest: supporting the estate tax isn’t about class envy’ by Sean Gonsalves, Cape Cod Times, 28 April

“The idea that the estate tax is a needed check against concentrated wealth and centralized power, which the intellectual father of free markets, Adam Smith, argued would undermine capitalism itself, apparently causes some kind of allergic reaction among those afflicted with class envy.”

Comment
The US ‘Estate Tax’ is the ‘Inheritance tax’ (‘death duties’) in the UK and Sean Gonsalves asserts Smith opposed it because it ‘would undermine capitalism’. That can’t be true because Smith did not write about capitalism, a phenomenon unknown until the 19th century – the word capitalism was not invented until 1854 in the UK, the words ‘capital’ was in English usage from the 17th century and ‘capitalistes’ were used in French from the 1760s.

Smith preferred taxation to fall on usage of public infra-structure, to help to pay for improving public projects, and on revenue (spending) and not to fall on savings because he did not trust governments to spend wisely. He considered politicians of the baser kind to be prodigals and not toe exhibit the growth inducing frugality he considered necessary to encourage the growth of opulence.

[Read Sean Gonsalve’s article at: http://www.workingforchange.com/article.cfm?ItemID=20723]

Opulence, like Poverty, has a Price

The strangest contexts bring out false assertions about Adam Smith, often of the least relevance to both what he wrote and the needs of the story. Here is one of many examples from Barry Lille’s article, “Weekend work puts a strain on non-custodial parents” in Waterloo Record, Waterloo, Ontario, Canada. On 27 April:

“Proponents would suggest that this decision is an economic necessity or the inevitable requirement of consumerism and capitalism working as Adam Smith intended. Mandatory Sunday or weekend work for full-time staff is the outcome of this new marketplace and if it recklessly plays havoc with family life in our community, that is simply an unfortunate result.”

Adam Smith did not ‘intend’ anything about the future. He was an observer not a missionary. The notion of ‘consumerism and capitalism’ meant nothing; he wasn’t looking forward like that, he was not a ‘man of system’ and he laid down no ‘requirements’. He remained scepitcal that society would change just because he suggested it might grow faster and pull, more people out of dreadful poverty then all too common in Scotland. Moreover, even where the consequences of changes, such as free trade, were identifiable he always resorted to considering, from the viewpoint of ‘common humanity’, how any negative effects might be negated by longish transition periods to allow people time to adjust their circumstances. He cared about the effects of monopoly on consumers and one-sided laws against workers ‘combining’ to better their wages and resist arbitrary wage cuts.

In this case, noted by Barry Lille, fathers of children who have separated from their wives are disadvantaged when it comes to compulsory week-end working when they have succeeded in getting week-end access rights to their children. The common sense argument should be to make their access rights more flexible since week-end working today is widespread in retail, leisure and entertainment.

But this has nothing to do with the details in Adam Smith’s books, written in the mid-18th century, when weekends were arranged differently and Sundays were regarded as Holy days. Times change and work-leisure arrangements change with them. That a political point is made that is all ‘an economic necessity or the inevitable requirement of consumerism and capitalism’ does not hide the fact that it is a very narrow point. For ‘consumerism’ read Smithian ‘opulence’ – our living standards – and contemplate whether we are better or worse-off than our grandparents and the people in the 18th century. How many would vote for a political movement that promised to return Waterloo, Ontario to the living standards of 18th century Canada?

I suspect that Barry Lille does not want to return to the living standards of the 18th century but he does want to legislate(?) against compulsory week-end working. Fine. That is a valid proposal and is subject to the consent of others (liberty is not divisible). He can also call on Adam Smith in defence of his right to freely propose such ideas and to argue for them in public fora. But he should not implicate Smith as an accessory to whatever ‘consumerism’ or ‘capitalism’ is implicated in causing; they certainly are not doing it because of anything Smith said two hundred years ago in books addressed to his contemporaries.

[Read Barry Lille’s article at: http://www.therecord.com/NASApp/cs/ContentServer?pagename=record/Layout/Article_Type1&c=Article&cid=1146088217842&call_pageid
=1024322168441&col=1024322596091]

Pleasing Snippet in an Unexpected Place

I found a most interesting and surprising snippet about Adam Smith in, of all sources, What PC? – the ‘essential buyer’s guide’.

Andrew Sawers, pens a neat summary of Adam Smith’s ‘History of Astonomy’. He begins, infortunately, with the usual nonsense about Adam Smith and the so-called invisible hand:

“Adam Smith may be famous for his book The Wealth of Nations and his theory that an “invisible hand” moves markets and prices. But he was a philosopher who also wrote an essay on the history of astronomy. His intention was to explain how the mind tries to make sense of the world around us by looking for coherent explanations, so as not to “embarrass and confound the imagination”.

Readers will know that Smith did not have a “theory that an 'invisible hand' moves markets and prices.” His singular reference in ‘Wealth of Nations’ to an ‘invisible hand’ had nothing to do with how markets and prices move (see WN IV.ii.9: pp455-6). That it is a theory of markets and prices is a result of an interpolation from the late 19th century, and its widespread repitition in the 20th century, introduced by others long after he died in 1790. There is nothing mysterious or miraculous about Smith's theory of markets and prices, which, of course, does not make either of them properly understood, even today and even by some economists, especially when it comes to prices.

However, Andrew Sawers' brief summary of the Smith’s ‘juvenile’ essay on the 'Philosophical Method illustrated by the History of Astronomy' is worth reading if you only have time for a few minutes reading of a few hundred words.

It is not common that I find people have read or heard of Smith's early work on the 'History of Astronomy' - many have not read his two great books on 'Moral Sentiments' or 'Wealth of Nations' (even many so-called experts have not read his 'Lectures on Jurisprudence') - so to read Andrew Sawers' competent assessment was a surprise and a great pleasure.

In fact, I went through all of Smith's sentiments of 'surprise', 'wonder' and 'admiration'. If you are unaware of the significance of these three states then you must read Smith's Essay. You can start now by reading Andrew Sawers article.

Read it at: http://www.whatpc.co.uk/financial-director/comment/2154795/ifrs-heavens-above

Important to Correct Errors Once You Become Aware of Them

I commented on the views of Professor Colin Camerer on 24 April and return to them because, having contacted him, he offers a not altogether satisfactory explanation, making allowances for an extremely busy scholar taking any time to deal with correspondence from unknown persons on what probably appears to be a trivial issue besides the main thrust of his work on behavioural economics. However, it is Professor Camerer who brings Adam Smith into his argument, though his argument does not need Smith’s presence, particularly as Smith said exactly the opposite to what he attributes to him. And as such he could turn Smith onto the critics of behavioural economics.

What is true, is that modern economists hold to a view of ‘economic man’ as characterised by Professor Camerer and that this perspective is convenient for mathematical manipulation and mostly is ‘wishful thinking’. People are not wooden-chess pieces who move about under the direction of equations. Smith asserted that humans adhere to motions of their own and not of those who assume they direct them. Smith was a behaviourist, and on that much we agree without reservation. 'Moral Sentiments' and 'Wealth of Nations' are closely argued studies of how people behave in practice. They have the same perspective and do not contradict each other.

According to Carolyn Meinel, who interviewed Professor Colin F. Camerer for her article in Science & Theology: 24 April: “Smith’s book The Theory of Moral Sentiments, published in 1759, was “bursting with insights about human psychology, many of which presage current developments in behavioral economics.” Again I agree with Camerer’s statement. So what is the problem?

It is the next sentence in which he says: “However, economists ended up taking their cues from Smith’s later views.”

And that is the problem. Smith’s so-called ‘later views’ were no different than his ‘earlier views’. The so-called ‘later views’ of Smith were the uninformed views of others in the 19th century who started down the road that led to the cul-de-sac of modelling human nature into a sub-branch of applied maths, where no human being exist. Smith, an accomplished mathematics student, never went down that road and never had any notions of ‘economic man’.

Now this is not just the maverick view of myself. It is shared by others who have taken the trouble to read his books, something I am not sure that many members of the economics profession have managed to do. It is not clear that Professor Colin Camerer has read ‘Wealth of Nations’ closely enough to be so definite in the views attributed to him by Carolyn Meinel.

One of the recent contributors to this discussion is Professor Samuel Fleischacker, University of Illinois, Chicago in his ‘On Adam Smith’s Wealthy of nations: a philosophical companion’, 2004. He discusses the explicit issues raised by Colin Camerer and the paragraph is worth including here as a contribution to the refutation of Camerer’s error (or that of his co-authors , Ashraf and Loewenstein) which they repeat, unnecessarily, in pursuit of their correct case for behavioural economics:

“So we have several arguments even in Hutcheson, who has never been accused of favouring self-love over benevolence, for grating self-love a central role in the economic realm. This should begin to undermine any presumption that Smith gave self-interest a new or controversial prominence in WN. That presumption should be further weakened when we note that Smith’s readers did not attend to the role of self-interest in WN until long after it was published. As far as I can determine, none of WN’s first readers, whether in England and Scotland or in Germany, France, of the United States, mentioned this feature of the book, either to praise or condemn it, nor did they see any sharp break between TMS and WN. TMS was well known, throughout Europe and in the United States, and it was Smith’s reputation for the earlier book that garnered initial attention for WN. One would have expected a gap between the two books, if gap there is, to appear particularly sharply to Smith’s readership at this point in his reception. Yet is was only much later, in the nineteenth century, when most readers knew WN well but were at best dimly aware of TMS, that people began to suggest that the two books have different pictures of human nature. This is good circumstantial reason to suspect that the supposed gap between TMS and WN lies solely in the eyes of those who misinterpret one or both of the books. Turning to the text of WN confirms that suspicion.’

It seems to me that if Colin Camerer, Ashraf and Loewenstein were to read why Smith was not responsible for ‘economic man’ and what has been done with it, namely that modern economists do not have the venerable authority for Adam Smith for what they claim, then the support for research into behavioural economics based on human nature would be much stronger.'

[Read: S. Fleischacker, 2004. ‘On Adam Smith’s Wealthy of Nations: a philosophical companion’, Princeton University Press, NJ, pp 86-7].

Also: Carolyn Meinel’s reports in Science & Theology at: http://www.stnews.org/altruism-2792.htm and http://www.stnews.org/Altruism-2794.htm]

A Recipe for Poverty

“A larger income creates an aspirational staircase forever spiralling upwards, where all that counts is being on a higher rung than other people, and from where the fall, when it comes, will be desperately painful. As Adam Smith remarked, a long time previously, we suffer more when we fall from a better to a worse situation than we ever enjoy when we rise from a worse to a better. As Adam Smith remarked, a long time previously, we suffer more when we fall from a better to a worse situation than we ever enjoy when we rise from a worse to a better.” Melanie Reid, ‘A rich doctor who knows when enough is enough’, The Herald (25 April).

Comment
Melanie Reed’s article is promoted by the news this week of a General practitioner (GP) in a remote island community off the west-coast of Scotland having the highest earnings (£500,000) for medical doctors in the UK, up from his earlier pay of £50,000.

Her reference to Adam Smith’s various views on individual wealth and the efforts to attain it should be placed in context. Scotland in Smith’s day was a largely poverty stricken place with vast disparities in income and the bulk of the population living in destitution. Smith’s personal conduct like David Hume’s was to live frugally and to advise of the benefits of being so. It suited him and it had unintentional consequences too, of which he approved.

Frugality, not prodigality, drove the economy towards affluence because it provided the savings that were put to productive work by those who produced the food and manufactures that fed and clothed, etc., the lowest income earners. Smith also was not careless about looking after his means of acquiring the wherewithal to be frugal!

He received an income of over £40 a year (1740-46) while a student at the University of Oxford, which he continued to claim for three years until he resigned his Snell Exhibition in 1749 and studied at home (the original distance learner?). He earned £100 a year delivering a series of public lectures on moral philosophy, rhetoric and jurisprudence in Edinburgh (1749-52). His income at the University of Glasgow (1752-63) as a professor was about £300 a year, partly by salary and partly by students’ fees, plus a rent free house. On his return from his tour of France (1764-66) with the young Duke of Buccleugh he was awarded a life pension of £300 a year by the Duke’s stepfather, Charles Townshend (Chancellor of the Exchequer). In 1778 he became a Commissioner of Customs for Scotland, worth about £600 a year until he demitted office in 1790 a few months before he died.

These were affluent wages for the 18th century. Bear in mind there were no pensions, except savings, once you stopped work, which for poor labourers meant they were in absolute poverty. However, Smith is also an example of what any well-off person who believe they earn too much income can do about it, besides exhibiting the angst of Melanie Reid: they can give their surplus income above what they feel is enough for them away to whomsoever they consider more worthy.

Smith did just that: when he was appointed a Scottish Commissioner of Customs, he sent his life pension bond worth £300 a year back to the Duke of Bucceugh’s factor and asked that it be cancelled. The Duke returned it, somewhat angrily, as the termination of a life promise would reflect badly on him. So Smith did as he always hinted was appropriate: he gave to needy relatives and anonymous other beneficiaries throughout his life almost all his income, leaving a paltry £400 in cash in his estate on death, and all his books and other fixtures and equipage to his heir who had lived in his household in Edinburgh for over twenty years. If being rich is burden, the rich can unburden themselves by living frugally and either give to charity or invest in activities that benefit others. Both are commendable duties in Smith’s moral continuum.

In Book I of Wealth of Nations’, Smith brings out this last point clearly:

“But when by the improvement and cultivation of land the labour of one family can provide food for two, the labour of half the society becomes sufficient to provide food for the whole. The other half, therefore, or at least the greater part of them, can be employed in providing other things, or in satisfying the other want and fancies of mankind. Cloathing and lodging, the household furniture, and what is called Equipage, are the principal objects of the greater part of those wants and fancies. The rich man consumes no more food than his poor neighbour. It quality it may be very different, and to select and prepare it may require more labour and art; but in quantity it is very nearly the same. But compare the spacious palace and great wardrobe of the one, with the hovel and a few rags of the other, and you will be sensible that the difference between their cloathing, lodging and household furniture, is almost as great in quantity as it is in quality. The desire for food is limited in every man by the narrow capacity for the human stomach; but the desire of the conveniences and ornaments of building, dress, equipage, and household furniture, seems to have no limit or certain boundary. Those, therefore, who have the command of more food than they themselves can consume are always willing to exchange the surplus, or what is the same thing, the price of it, for gratifications of this other kind. What is over and above satisfying the limited desire, is given for the amusement of those desires which cannot be satisfied, but to be altogether endless.” [WN Ixi.c.7: pp 180-1]

For Melanie Reid, and the others she quotes, should contemplate that it is the increase in agricultural production, suited to satisfy the needs of each peasant household in the egalitarian vision, that the production of non-agricultural items, using surplus unemployed labour, destitute of land and the wherewithal to feed their families, a common enough experience in the unemployed in poverty stricken parts of the world, and all too graphically portrayed when drought, war and famine reach our tv screens, that is the key to a modicum of wealth creation. When unemployed people can obtain work in manufacturers of clothes, household goods and equipage, and later, in the supply of ‘amusement ‘and other ‘gratifications’, that a society moves from hopeless poverty towards opulence.

This is necessarily accompanied by great inequalities in incomes, which if it bothers the consciences of those with the wherewithal, they ease these concerns by either giving some of theirs to those without directly or by investing it with charities that create wealth creating activities or by placing their savings in investments that create the jobs for those without to improve themselves. Artificially restricting incomes to some figure (£8,000!) is a sure route to driving living standards and absolute poverty levels back to what we can see in poorer countries today.

[Read Melanie Reid: http://www.theherald.co.uk/features/60712.html]

Behavioral Economics 'Yes'; Fables About Adam Smith, 'No'

Carolyn Meinel interviews Professor Colin F. Camerer in Science & Theology: “The myth of the selfish gene” and “More than Money”, 24 April:

These pieces are well worth reading and while I have not yet read Professor Camerer’s professional articles, and cannot comment on them until I have, I want to comment on what he is reported to have said to Carolyn Meinel.

First his reported statement:

“In one sense, this isn’t a new idea. Camerer recently has argued that 18th-century economist Adam Smith, considered to be the father of freemarket capitalism, articulated many of the principles of behavioral economics in his book The Theory of Moral Sentiments. The difference is that Smith never linked his psychological insights into human nature with the moral pessimism set forth in his more famous book The Wealth of Nations.”

Next a couple of directed quotations from Professor Camerer:

“A: Economists uniquely have a very cynical attitude toward human nature — that people are basically selfish, which makes mathematical modeling easy. My goal has been to restore common sense over the wishful thinking that this simple model is adequate. The model of human nature used by classical economists is a shortcut. Their default thinking is that people care only about themselves.”

“In his early years, however, Camerer was the odd man out amid a widespread belief in “economic man,” a concept first expressed by Adam Smith in his 1776 work An Inquiry into the Nature and Causes of the Wealth of Nations. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard to their self-love,” Smith wrote. Economists enlarged upon this hypothesis with the concept of economic man — a totally rational and purely selfish being — and assumed that everyone fits this model.
Perhaps the most bemusing thing about the power of Smith’s “economic man” was the fact that earlier, Smith himself had been on the other side of the debate. According to Camerer, Smith’s book The Theory of Moral Sentiments, published in 1759, was “bursting with insights about human psychology, many of which presage current developments in behavioral economics.” However, economists ended up taking their cues from Smith’s later views. “

Comment
I do not recognise Professor Camerer’s representation of Adam Smith’s views in these reported statements, though I do recognise them as assertions about Smith’s views as commonly circulated in US academe and through into each generation of graduates in economics. They also happen, in my view to be wrong.

For example, the assertion that Adam Smith is ‘considered [by who?] to be the father of freemarket capitalism’, is historically incorrect. Smith wrote about a much more modest commercial society and had no knowledge of ‘capitalism’, a 19th-century development and one not present in the mid-18th century, unless the definition of capitalism is broadened beyond the usual toleration common among economists fluent in maths.

Of greater import is Professor Camerer’s misinterpretation of Adam Smith’s alleged discrepancy between his ideas as represented by his ‘Theory of Moral Sentiments’ (1759) and his ‘Inquiry into the Nature and Causes of the Wealth of Nations’ (1776). Allegedly, Professor Camerer finds this alleged discrepancy ‘bemusing’.

I see no reason for Professor Camerer to be bemused. It happens to be wrong because neglects the fact that while Professor Smith was teaching moral sentiments at Glasgow University between 1752 and 1763 (the substance of which from his ethics class became his book ‘Moral Sentiments’, (1759) he was teaching in his lectures in Jurisprudence much of which became his ‘Wealth of Nations’ (1776). The difference in dates was not caused by later changes of mind – there were none – but only the labour of writing them. For Smith these two subjects were interwined and almost simultaneously conceived and developed by him.

The fact that some German economists in the 19th century, who did not have access to his lecture notes, as transcribed by students in enough detail to find whole passages almost word-for-word the same as those sections in ‘Wealth of Nations’ that appeared in 1776, was unfortunate for their argument (still known today as ‘Das Adam Smith Problem’ because it keeps being resurrected; I am sorry to see a distinguished scholar repeating the fable as if the contrary evidence did not exist).

Nevertheless, these ill informed economists created the ‘Das Problem’ fable , namely that the ‘early’ Smith was different from the ‘later’ Smith, in clear breach of the evidence that became available when one set of student’s notes was discovered in 1895 and became the property of Professor Edwin Cannan (Lectures on Justice, Police, Revenue and Arms, delivered in the University of Glasgow by Adam Smith, Oxford University Press, 1896) and another set was discovered by Professor John M. Lothian in 1958. Both set of notes were published as Lectures in Jurisprudence in the Glasgow Edition of Adam Smith’s Works and Correspondence, edited by R. L. Meek, D. D. Raphael and P. G. Stern, by Oxford University Press in 1978 (also available in a low price edition from Liberty Fund, Indianapolis, Indiana, 1982).

But what of the substance of Professor Camerer’s latest resurrection of Das Problem? He is reported to assert: ‘“economic man,” a concept first expressed by Adam Smith’. I was surprised to read this because homo economicus is associated with modern economists and is quite alien to Adam Smith’s perceptions of human motivation.

Professor Camerer’s evidence for his resurrection is the famous quotation from ‘Wealth of Nations’:

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, [not to their humanity] but from their regard [to their own interest. We address ourselves, not to their humanity but] to their self-love,” Smith wrote’.

[WN I.ii.2: pp 26-27; minor punctuation and omitted words restored.]

There must be more than this to his evidence? But until I read the academic articles listed in Professor Camerer’s home page I shall confine my remarks to the quotation he offers. For a more extensive examination of this paragraph I refer you also to my ‘Adam Smith’s Lost Legacy’ (Palgrave Macmillan, 2005, chapters 22-25 pp 101-114).

Smith’s rendering of this paragraph in his Lectures in 1763 is as follows:

‘Man continually standing in need of the assistance of others, must fall upon some means to procure their help. This he does merely by coaxing and courting; he does not expect it unless he can turn it to your advantage or make it appear to be so. Mere self-love is not sufficient for it, till he applies in some way to your self-love. A bargain does this in the easiest manner. When you apply to a brewer or butcher for beer or beef you do not explain to him how much you stand in need of these, but how much it would be in [his] interest to allow you to have them for a certain price.’ [LJ(A) vi.45, 1763]

To fully understand the richness of this passage it requires familiarity with his ‘Moral Sentiments’ (1759), the class for which he was teaching with his class in Jurisprudence (i.e., much the same audience around the same times). In fact, I would assert that neither book can be properly understood on its own.

Self-love was insufficient and nothing about it would get anybody what they wanted by relying on that alone. The language of a Smithian bargain is quite clear on the subtlety of his blending into ‘Wealth of Nations’ the concepts of ‘Moral Sentiments’ (the next sentence comes right after the words from his Lectures, as reproduced in ‘Wealth of nations’):

‘Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of’.

[WN I.ii.2: p 26; the ‘butcher, brewer and baker’ quotation follows immediately on].

Self-love and self-interest in Smith are not synonymous with ‘selfish’ as apparently used as a category in psychology (perhaps they should re-look at their polar categories of ‘selfishness versus altruism’). Professor Camerer rightly accuses mathematical economists, who see ‘self’ as the driving motivation of ‘economic man’ (after all it is their creation and not Smith’s!) doing so (only?), because it ‘made mathematical modelling easy’, which I would add has little relevance for Smithian political economy. I am sure the construct of ‘economic man’ did maker it easier, but Smith never used mathematics in his subject (though, for an 18th-century professor of Moral Philosophy, he was an accomplished mathematician), and he did not have such a creature as economic man’ anywhere within his works. (See Professor Fleischacker’s erudite explanation of why Smith did not hold to such a model: ‘On Adam Smith’s Wealth of Nations: a philosophical companion’, Princeton University Press, 2004).

In bargaining – the main interaction of all trading activities – the self-interests of one party must be mediated by consideration of the self-interests of the other party (and vice versa). Two selfish, self-loving, psychopaths would never conclude a bargain and nor would two ‘economic men’ who sought only their own self-interest without considering the other’s self interest too (Professor Stigler got this wrong too, as did from a different perspective did John Nash). And the process by which they mediate their self interests is embedded in both ‘Wealth of Nations’ and ‘Moral Sentiments’ too. See TMS I.i.3.2: p 17; I.i.4.5: p 21 and crucially I.i.4.9-10: p 23. The last I shall quote from here:

‘We expect still less sympathy from an assembly of strangers, and we assume, therefore, still more tranquillity before them, and always endeavour to bring down our passion to that pitch, which the particular company we are in may be expected to go along with.’

As I argue in ‘Lost Legacy’ (pp 109-10), that sentence of Smith’s, and its preceding argument, describes closely the process that occurs in negotiation by which parties who start with two different solutions to a bargaining problem find their routes to a single, joint solution by mediating their differences and taking account of what they have to say and do to modify their first solutions before reaching their last joint solution. If they don’t so modify in this manner they will not get their dinner and the ‘butcher, the brewer and baker may not get their dinners either. For my account of modern bargaining based on Smith's conditional proposition ('If you- Then I') see my 'New Negotiating Edge: a behavioural approach to results and rleationships', Nicholas Brealey, 1997 (available from www.negotiate.co.uk).

I think if mathematically-minded economists were to study the arguments of real bargainers a little more than the arguments of their functions they would see what Smith was getting at. And, if I may opine, with the greatest of respect to psychologists, if they were to read Smith more closely, and be less concerned with proving their credentials as a ‘harder’ science, an attribution wrongly credited to mathematical economics, they would not fall for the old fallacies of the ‘Das Adam Smith Problem’.

Having said all this, let me end by stating that apart from these observations, I think Professor Camerer is on the right track with behavioural economics and it is one that I am more than willing to travel along with him, except I do not intend to carry the same baggage he carries in regard to Adam Smith. Meanwhile I will start reading what I can find of Professor Camerer’s work.

[Read Carolyn Meinel’s reports in Science & Theology at:
http://www.stnews.org/altruism-2792.htm and http://www.stnews.org/Altruism-2794.htm]

Counsel for the Defence

Alexander McCall Smith, the justly celebrated Scottish Law Professor and author of the wonderful series about the 'Ladies No 1 Detective Agency' series set in Botswana, is turning his talented eye for solving mysteries to a bemusing episode in Scotland’s 18th century history, namely the James Macpherson literary fraud of the so-called ‘Ossian’ poems, allegedly composed by a third century Highland epic poet.

I would not dream of interpreting the details of the fraud before seeing McCall Smith’s BBC 4 programme, soon to be released. News of this event – it is sure to be an event of pleasing proportion – is reported by Karin Goodwin in today’s Sunday Times (Scotland edition, 23 April).

Typically McCall Smith appears to be taking a side of Macpherson in the role of a plea in mitigation by defence counsel. McCall Smith is unimaginable in the role of a prosecutor, except perhaps in the prosecution of a really horrible person., and even then he’d more comfortable leading the mitigation plea.

Macpherson caused quite a stir at the time he revealed his translation of Ossian. Adam Smith discussed him, so did other writers in the Scottish Enlightenment. The irrepressible James Boswell, biographer of Johnston, comments on him in his Edinburgh Journals.

There seems to be a spate of books and tv programmes about Scotland in the 18th century en route to Scotland’s media. We await to see Andrew Marr and his forthcoming programme in the same tv series (no doubt to appear as a DVD).

[I should declare an interest in that I knew Alexander ('Sandy') McCall Smith briefly during my early days as a university lecturer in the 1970s, being friendly with one of his friends, Peter Cheine.]

Pessimism About China, Russia and Iran Breaking the West

‘The West must bend great will of China’, by Fraser Nelson, Scotland on Sunday, 23 April :

“Since Adam Smith first explained the principles of economic freedom three centuries ago, no country has managed to combine dictatorship with economic strength to the extent that China is now achieving. It is breaking new ground.

It has done this by managing globalisation. It restricts information commodities - the media, internet, political groups and associations - while creating economic freedom in selling billions of goods to the West.

China's partial embrace of Smith's free market principles has allowed it to tackle poverty - and enrich itself - at a rate unknown in human history. But it is filtering out the aspects of a free society it does not like.”

This extract is from a highly doom-ridden and pessimistic vision of the new roles emerging for China, Iran and Russia in subverting the West through their key places in the world economy. It is traditionally relatively easier for totalitarian regimes to rule in periods of economic poverty. But this changes in situations where the economy begins to thrive.

The French Revolution, for example, was not provoked by the people’s long standing poverty; it was provoked by the return to that poverty from a temporary respite in a period of relative affluence in France just before the country was thrown into unrest, from rising bread prices (and prices of other commodities consumed by the poor and the middle-class) when the newly experienced affluence came to an end. When the domestic economy is made better and then falls back into it being worse, regimes experiencing change are at their most vulnerable.

China is already experiencing early signs of something like this, which if exacerbated by events, may prove destabilising. Dictatorships have no mechanisms, except internal violence, for regime change; democracies manage peaceful regime change within their constitutional norms and practice. In highly regulated states, as in China, Russia and Iran, with their heavily-controlled media, news leaks out (especially from China) that all is not well at the local level. Of course, the instruments of repression are solid for now (they are not that fragile) but the habits of years of totalitarian repressions in China have worn thin in several incidents with people in local riots and disorders.

Rapid growth in opulence causes two sources of discontent; from those who feel excluded from what they see and hear about the wealth of the cities and from those whose newly acquired access to the growing affluence is interrupted. People displaced by economic developments, with no avenue for restitution, taking to the streets shocks those in power (who typically overreact) and those watching the unthinkable – the Party under siege from people who dare to challenge it – encouraging more public dissent.

The long march to the fall of Soviet communism began with riots and disturbances in East Germany, Poland, Hungary and Czechoslovakia, before it spread into Russia. That China sells billions of dollars worth to the West is also provoking unprecedented demands for higher wages, as predictable from economics, to which the Chinese communists are not invulnerable.

Fraser Nelson may be too impatient because he sees nothing changing within these countries. Great shifts into non-acceptance of old certainties, backed by totalitarian repression, which seems invincible, arise from deep shifts taking place cumulatively and mostly out of sight. If the new Chinese middle-class, the main beneficiaries of China’s hurried march to affluence, and the formerly poverty stricken labourers and peasant families come to worry about threats to their new positions, their consequential responses could expose the apparent stability of the communist regime to severe testing.

Smith also wrote about the life-long quest of people of all classes – from the ‘cradle’ to the ‘grave’ - to ‘better themselves’. Having tasted that process, and realised that it is not just a dream, they will not give it up easily. That changes the equation. Trade within a country raises its wealth. In that process the ruling regime is always under threat. Elements within and near the regimes know this and, like politicians everywhere, dispute how best to deal with threats to their tenures in office (from the lowest functionaries to the highest posts in the land). China is not akin to the tiny island state of Singapore.

Only in transitional democracies – always the least worse of all options of government – is resolution of these fissures manageable. That does not mean that democracies are immune from instability; only that their records of successful outcomes to these events are more numerous.

As Chou En Lai put it about the outcome of the French Revolution, which applies with equal force to the outcome of the current tensions between the West and totalitarian rivals, “it’s too early to say” which of the two will prove the more resilient.

[Read the article at: http://news.scotsman.com/opinion.cfm?id=609552006]

Taxpayers' Funding Political parties?

“It is no surprise that all three parties should favour state funding. No doubt a convention of farriers, if they thought they could get away with it, would demand the state funding of farriers. As Adam Smith observed, "people of the same trade seldom meet together… but it ends in a conspiracy against the public". Why, though, should the rest of us humour them?”

‘Paying for the Party’, Sunday Telegraph, Opinion 23 April.

The editorial makes a tenuous connection between Adam Smith on the monopolistic tendencies of ‘merchants and manufacturers in ‘corporation’ towns (i.e., those ran by local guilds of artisans and tradesmen for the benefit of the protected trades organised within them) and proposals floating around in the UK currently from cash strapped political parties.

The Labour Party was revealed to have accepted ‘loans’ from rich businessmen to run its election campaign, some of whom were subsequently made into ‘Lords’ and ‘Knights’. Subsequently, the Tories were also revealed to have accepted similar ‘loans’ (thus escaping the need to publicly declare them if they had been ‘donations’, though many loans are later declared as gifts when the dust settles). The Liberal democrats huffed and puffed quietly, but have had a major donor, an ex-pat UK businessmen, arrested for various alleged misdemeanours.

So, having been caught with dodging the legal rules about donations (which wise lawyer showed them how?), their latest proposal is to propose state funding for political parties. Hence, the conservative Daily Telegraph’s comments.

I suggest one major difference between what Adam Smith critiqued and the conduct of political parties in the ‘loans’ for ‘Honour’s’ fudge. The restrictive practices of the corporations and guilds in the 16th and 18th century in Britain were all perfectly legal. Their monopolistic powers were backed by law and were not hidden from public knowledge – that is why Smith critiqued them as part of his attack on mercantile political economy. He suggested the law was changed and monopolists exposed to competition.

In the cash for parties at the taxpayers’ expense proposal, having been caught out, all three parties want to replace private donations in the million pound range to be replaced with millions from the public. Whatever the sums start at and whatever the restrictions, the rules are bound to change (even be ‘bent’?) and the sums will get larger for the bigger parties.

How do I know? Well, eventually the monopolist guilds were broken in the UK, but the behaviour of ‘merchants and manufacturers’ and their successor business companies in the 19th and 20th centuries continued to meet secretly for ‘merriment and diversion’ and conspire against their customers to rig their markets, charge higher than competitive prices and act against the public interest in this area. This is why Smith did not approve of laissez faire.

[Read the article at: http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2006/04/23/dl2302.xml&sSheet=/opinion/2006/04/23/ixopinion.html]

Just a Thought

A Canadian Econoview: ‘What Would Adam Smith Say?”

BSF quotes from “Wealth of Nations” (book V) in the course of an excellent article:

“The teacher, instead of explaining to his pupils himself, the science in which he proposes to instruct them, may read some book upon it; and if this book is written in a foreign and dead language, by interpreting it to them into their own; or, what would give him still less trouble, by making them interpret it to him, and by now and then making an occasional remark upon it, he may flatter himself that he is giving a lecture. The slightest degree of knowledge and application will enable him to do this without exposing himself to contempt or derision, or saying anything that is really foolish, absurd, or ridiculous.” (WN V.i.f.14)

BSF concludes (tongue in cheek I presume):

“Smith thought that the system at Glasgow, where professors were paid directly from the fees paid by students who took their courses, created a much stronger incentive to diligence in teaching than the system at Oxford, where professors were essentially tenured and on salary. He would have preferred all universities be organized along the lines of Glasgow.It's not often I say this about Adam Smith, but on this point I thank God that nobody listened to him.”

Comment
I comment on only one aspect of Econoview’s contribution.

First, Smith was contrasting the appalling state of England’s two universities which, at the time he wrote in the 18th century, were Oxford and Cambridge, in comparison to the practices of Scotland’s four universities.

He also drew attention to other defects in the provision of education for boys; girls were not formally taught but were put to work for pennies, or to learn from their female seniors about modesty, chastity and household management.

The sons of the very rich left school after six or more years schooling and went on a tutor-guided tour of the Continent, which Smith considered turned the worst of them into wastrels. A few of them went to university and a few of these attended Glasgow College, and Smith attended diligently to the education of several aristocratic sons destined for careers in government.

For all his criticism of Continental tutor-led tours, Smith, of course, resigned his professorship in 1764 to take the 15 year-old Duke of Buccleugh to France on his tour (1764-66) and we must assume that none of his structures about the effect of these tours applied to the young duke.

However, I think there is another important consequence of the quoted paragraph. I have long suspected the educational credibility of the British habit of including the writing of dissertations in management degrees, undergraduate and in many MBAs, comes within Smith’s strictures about reading from books instead of lecturing. These ‘projects’ give lecturers ‘still less trouble’ than the above practices at Oxford in the 18th century.

By requiring students to conceive of a ‘project’ and to research (also known as plagiarise, or at least ‘to Google it’) and write it up, saves lecturers from yet more lecture hours, while charging them tuition fees for it too! Their students do not see them assessing it, so they cannot judge if they approach the task with a modicum of diligence.

Moreover, given the obsession of ranking systems with the criterion of the proportion of ‘completions’ in expensive MBA degrees programmes, these ‘projects’ are a useful safety-valve to maximise examination passes. Top-graded students do not need to do well in the ‘project’ to pass; failing students can be eased through to a 'pass' by upping the grade awarded for their ‘projects’ whether they deserve it or not (who's to know?).

Different centuries, but the motivation is the same; poor teaching accommodates to the easier life (and so-called tenure does not make it easier to cut-out the dull-wood) of faculty, who, as Smith explained, choose to neglect their students’ interests, where they conflict with what is 'vulgarly' their own.

An Erudite Speech Marred by a Problematical Assertion

Ambassador J. Thomas Schieffer Addresses The Research Institute of Japan, Tokyo, 19 April 2006:

“Finally, I think Adam Smith was right. There is an invisible hand that moves markets, and that hand generally moves, as Smith said, out of self-interest. As Smith wrote so many years ago, "It is not from the benevolence of the butcher, the brewer, or the baker, that we [can] expect our dinner, but from their regard to their own interest."

[GK: delete 'can' in square brackets.]

Comment
Ambassador Scheiffer’s speech and the Q and A session that followed it presents a coherent account of economics, economic policy, USA-Japanese relations, some interesting comments on comparisons between Texas and Australia's economic prospects, and, in the round, gives a credible exhibition of an intelligent spokesman for his country.

However, his comments on Adam Smith were disappointing and problematical. Regular readers will already know which aspects of the paragraph quoted are contrary to Smith’s ideas in “Wealth of Nations”, though they conform to the commonly expressed views of much of academe.

For new readers, the transposition of the isolated metaphor of the invisible hand, which was about human motivation and its unintended consequences and not about how markets work (there being nothing invisible 'moving' Smithian markets) and the singular one-way interpretation of the motives of the ‘butcher, brewer and baker’ that draws them into a market exchange with their customers in which both parties to transaction mediate their self interest by serving the other party’s self interest.

Ambassador Scheifer is clearly an accomplished diplomat, educated and erudite as the best diplomats of any nation aspire to be. He should read a little wider, perhaps by reading ‘Wealth of Nations’ for himself, and think carefully about what Smith was getting at in his famous quotation. In exchange, we serve our own self interests best by serving the self interests of others.

[Read Ambassador Scheifer's speech and the Q&A session answers at:
http://tokyo.usembassy.gov/e/p/tp-20060419-71.html]

In the Right Direction but Straying

"The Twilight of Capitalism" by Natylie Baldwin in Peace Journalism (New Jersey, USA) April 2006:

“The market was not originally intended to be organized as the money-worshipping corporate nightmare it has become. Adam Smith, widely credited as the godfather of market economics, also wrote and lectured extensively on human ethics. His Theory of Moral Sentiments opens with the recognition that humans have an inclination toward concern for their neighbors as well as self-interest.

Contrary to popular mythology, “the invisible hand” is only mentioned once in the 900-page Wealth of Nations. The term “capitalism” does not appear at all. Furthermore, Smith made it clear that his ideas about market economics and their consequent benefit to society could only be realized if certain prerequisites were met.

These prerequisites include favorability of small human-scale enterprises over large monopolies, a responsibility of each economic player to avoid harming others, and restraint of those who disregard such principles.”

Comment
Natylie Baldwin’s references are all secondary sources; she would benefit from reading the originals, though she is almost correct in her account of Smith on ‘sympathy’ for others (Moral Sentiments) and the much touted, so called, invisible hand.

However, she misses and important thing about markets – they were not and are not ‘intended’ to do something, beneficial or otherwise. Markets emerged long before Adam Smith in the 18th century. He did not ‘invent’ them or produce a ‘plan’ for them. He was not a ‘godfather’ or ’high priest’ of markets or capitalism.

Factually, many others wrote about markets before Adam Smith. He certainly provided an analysis of how markets work, but was not the first to do so, though he provided some useful insights. Markets evolved gradually and continued to develop in human societies because they worked, much like languages developed and were adopted by individuals not by a sort of 'tribal' vote in pre-history (any more than teenage slang is today) because they were found to work for individuals (see Smith on 'Languages').

He didn’t favour large monopolies because they worked against the interests of consumers, who do better if there is competition among producers (who also do better if there is competition among consumers). He pointed to the benefits of competition in a system of Natural Liberty, but did not require from this a programme to change the way the world (i.e., society) was evolving. Indeed, he remained pessimistic about prospects for free trade and shied away from becoming a ‘man of system’, fanatically insisting that everything changed immediately, if not sooner.

Natylie Baldwin falls into the trap of the ‘change-now-propagandist’; she sees disaster on the horizon awaiting to swallow up the world unless it changes her way soon. Capitalism, of which Smith knew nothing in the mid-18th century, is not in a ‘twilight’ zone, terminal decline or a state of impending catastrophic collapse.

Smith never saw upwards-only progress ahead; he was too much of an historian to ignore history. The first human experiments in markets in the age of commerce (Smith's ‘Fourth Age of Man’) were followed by the collapse of Rome and the thousand-year interregnum, known as the ‘Dark Ages’, in which Europe relapsed into barbarism. All his writings are imbued with the shadow of that millennium and the ghosts of the classical scholars of ancient Greece and Rome (they provide the largest source of quotations and references in ‘Moral Sentiments’ and ‘Wealth of Nations’).

Just as the revival of markets in Western Europe from the 16th century, restored the lapsed Commercial Age from the 18th century in Britain, a ‘collapse’ of the unique era of capitalism that began in the 19th century, should it occur, would be followed some centuries ahead by a revival of markets and of capitalism out of the barbarism that would takes it place. Adam Smith would have taken a stoical view of such a prospect. We should too. The task for philosophers is not to change the world, but to understand it.

Big Producers in Alliance with Regulators Squeeze Small Producers

“Toxic Regulation” by David Schoenbrod in City Journal, Spring 2006

"The FDA [Food and Drug Agency, established 1906] had gotten involved with cider …. when an infant in California had died because of E. Coli contamination in bottled fruit juice. The juice had come from Odwalla, at that time a large West Coast company, but the FDA began to consider regulating all producers of fruit juices, down to small cider makers.

E. Coli can get into cider because deer and mice, which are among its carriers, have a taste for apples. One response is to pasteurize the juice, which also brings the commercial benefit of longer shelf life. Odwalla, however, had taken pride in not pasteurizing; it advertised its products as tasting better because they were only minimally processed. After the E. Coli outbreak, it installed equipment that pasteurizes by heating and cooling the juice in such a flash that the taste is not much affected.

The Apple Processors Association, dominated by large companies, urged the FDA to require that all juice be pasteurized. That would have been ruinous for small cider producers. At that time, equipment that pasteurizes in a flash cost upward of $70,000. Even budget pasteurizers cost $25,000, but they are prone to cook the taste out of cider and require extra employees to operate. Cider that tasted like canned apple juice, plus higher operating costs, spelled bankruptcy. Not so for the members of the Apple Processors Association.

They already pasteurized, and stood to pick up the sales of the small producers driven out of business.

In any event, the FDA proposed to decree that juice be put through a sanitizing process that would cut bacteria levels at least 100,000-fold. Culling the apples and then washing them would probably have accomplished that, but the rule required that the cut take place in one step. The only way to do that was pasteurization. While still pondering this proposal, the FDA promulgated another rule that the Apple Processors Association wanted. Any unpasteurized juice must carry a label with this chilling warning: this product has not been pasteurized and, therefore, may contain harmful bacteria which can cause serious illness in children, the elderly, and persons with weakened immune systems.”

[Read the whole article by David Schoenbrod about how the FDA, in alliance with large scale producers of cider, affected one small cider producer, despite its owners and friends actually inventing another proven scientific method to achieve a reduction level of bacteria to at the least 100,000 level, but at costs small producers could afford and therefore survive:
http://www.city-journal.org/html/16_2_regulation.html]

Comment
The is a sorry example of how big producers gang-up, in this case in a dubious alliance with the regulating body (whose proud claim to fame appears to be how many regulations they can legally impose in businesses), on smaller companies to reduce competition and re-carve markets in their favour.

Adam Smith said a lot about the proclivity of 18th-century ‘merchants and manufacturers’ to descend into the ‘spirit of monopoly’ in ‘Wealth of Nations’. It remains a wonder that many upholders of competition have not grasped the fact that many so-called competitive players in markets have a predilection in favour of reducing competition, even in eliminating it. All conspiracies against competitors end in actions against the interests of consumers.

In this case the Apple Processors Association (an ‘Agri/Washington Managed Association’, i.e., Washington based lobbyists) followed the tragic death of a child with a policy, adopted by the FDA, that dealt a mortal blow to small traditional apple juice producers, which had the beneficial (for its members) consequence that the small producers’ share of the cider market became available for redistribution, and, as important, the barriers to entry of new players in this market were raised.

The alternative technology used ‘ultra-violet’ light to sanitise the juice to the required standard and cost $12,000 in place of pasteurisation equipment at $75,000. But by adopting only one method (pasteurisation) for approval, on the recommendation of the hired Washington lobbyists, the FDA declined to even test the alternative ultra-violet equipment for months. This conforms to the prejudices of input only methodologies common to bureaucrats, when the true scientific methodology, and the one that boosts innovation, should always be to test outputs in preference to inputs.

Notes:
“Agri/Washington has been in business in Washington, D.C. since 1982. During the past twenty years, the firm has provided management to nearly a dozen associations, and completed hundreds of programs and projects, including food and nutritional conferences, crisis management and personnel consulting. Agri/W a s h i n g t o n is as much at home in the field with producers, as it is in the halls of government with elected officials and policymakers.”
(see its web site: http://www.agriwashington.org/index.php?pr=Clients)

Apple Processors Association “was founded on July 20, 1987, and is a national association of companies that manufacture quality apple products from whole apples. Members are either apple grower/processor cooperatives, or proprietary firms. They each grow a portion of the apples processed in their plants. APA members produce a majority of the nation's applesauce, apple juice, and specialty products.

All members of APA stress quality and safety in their food processing operations. They pasteurize their juice products, and hotfill their food containers, reinforcing their commitment to quality and safety during their food processing operations.”
(see its web site: http://www.appleprocessors.org/)

Mr Prime Minister: Sack Your Researchers!

Prime Minister John Howard addresses the Menzies Research Centre at Parliament House last night (presumably his speech writers have access to the best of Australia’s researchers) - from The Australian, Canberra, Australia, 19 April):

“Cut & paste: Lean but not mean government for Australian families”

“Earlier this year, I described government in Australia as lean but not mean. Our people seem to like it that way. A limited and prudent state, yes. A nanny state, definitely not. But Australians have always believed in something more than Adam Smith's nightwatchman state. And in an age when civilised nations are engaged in a global struggle against terrorism, when comprehensive health and school systems are every citizen's birthright and when that citizen is living more than twice as long as one born when The Wealth of Nations was published, I dare say Smith would not be surprised.”

Comment
Given that Adam Smith didn’t believe in a ‘night-watchman state’ either, I am not surprised that John Howard’s believes in ‘something more’ than this view he ascribes wrongly to Adam Smith.

Smith believed in a an expanded role for the 18th-century British state and one that was much bigger than the grossly over-interfering state he lived under. Some careless readers in the 19th century attributed to him the ‘night watchman’ image of the state, presumably from secondary quotations from his severe critique of the mercantile policies of British (and before 1707, English) governments in which he expressed views uncompromisingly advocating in Book IV of ‘Wealth of Nations’ that the state stopped legislating for policies that intervened in labour, capital-stock markets and the activities of merchants and manufacturers in commercial society.

But that is only one half of his views on the appropriate role of the state in the economy. In book V of ‘Wealth of Nations’ he went on to support the traditional role of the state in the defence of the people from the violent oppressions of neighbouring states, which cost 5 per cent of national income in Marlborough’s time and 15 per cent by the end of the 18th century.

To defence he added what would have been an enormous increase in government expenditure in his suggestion for the construction, staffing and maintenance of a school in every UK parish educate a literate and numerate population, even with a contribution levied on parents according to their income (from a penny per poor child upwards). He also saw the need to fund a justice system to allow for trial by jury, habeas corpus, and an independent judiciary, with appropriate jails (including penal colonies like New South Wales) for those in breach of the law, as legislated by a parliament under the separation of powers.

Perhaps his biggest item for public expenditure (with, where appropriate, private management) was the building of a transport infra-structure in the form of passable roads, canals, bridges and harbours, partly funded by tolls on users. He took almost for granted that local councils would manage street pavements, lighting and refuse collections and disposal (these last items were known quaintly in Smith’s time as ‘police’).

Now these items may not cause much comment in the 21st century but the 18th century was a whole lot different. There was no way that such a public investment and maintenance agenda could be funded without a substantial investment and, thereby, a substantial increase in public expenditure and, consequently, in taxation revenue. None of this squares with the notion of Smith supporting the false image of it being a ‘night-watchman’ state.

Mr Howard, or his many researchers, should have known these facts about Adam Smith before he delivered his speech.

[Read Prime Minister Howard’s speech at: http://www.theaustralian.news.com.au/story/0,20867,18854164-7583,00.html]

Top Ten/One Hundred Lists are a Waste of Time

There is a letter in today’s Herald (Glasgow) berating Melvin Bragg’s selection of his 10 top people in British history. The sub-editor adds a headline: ‘Instead of the usual English suspects’ (The Herald, 18 April 2006).

Its author, Ian Anderson, from Dingwall, writes:

“Let me demonstrate my own prejudices: Adam Smith's An Enquiry into the Nature and Causes of the Wealth of Nations; a friend and contemporary of Smith's, James Hutton and his The Theory of the Earth which showed that Earth had evolved over millennia, challenged the Church's view that it was 4000 years old, and which strongly influenced Charles Darwin in his unoriginal Origin of the Species; and last but not least, A Treatise on Electricity and Magnetism by James Clerk Maxwell.”

Comment
Lists of anything to do with almost anything are controversial, which is why I seldom take them seriously. A list of the top ten Scottish books would provoke controversy, just as the recent public voting on the most illustrious Scots men and women.

This produced votes for William Wallace over Robert Bruce, who actually won Scotland its independence from the English, but his film role in Brave Heart was not too favourable (each film must have only one hero). Even Donald Dewar, the first of Scotland’s First Ministers, did well, and a very personable man he was too and a giant compared with the present First Minister and the one before him, he was not by any standards (and I suspect, including his own from what I knew of him – a paragon of modesty with no reason at all to be modest) in a serious top ten list .

David Hume and Adam Smith did not do well comparatively.

However, Melvin Bragg’s list was designed and selected I suspect more for his television series and the associated book on those included. Hence, should we take it seriously? I do not think so, especially when the medium determines the message.

I did like the letter writer, Ian Anderson’s, inclusion of James Hutton, the geologist and friend of Adam Smith (he was one of his literary executors). It is always nice to see forgotten giants re-discovered from their obscurity.

Read Ian Anderson’s letter at: http://www.theherald.co.uk/features/60281.html

Would Adam Smith Vote Labour?

Gordon Brown, the British Chancellor, has written a forward to a new book on Adam Smith that is to be published in June. Its author is Professor Iain McLean, from Oxford University. Chancellor Brown is of the opinion that Adam Smith would have felt more ‘at home’ as a supported of ‘New Labour’, the successor to the old Labour Party.

Meanwhile, the Conservatives opine that this shows that Margaret Thatcher has ‘won’ the argument about economics with the ‘old left’. Ian Johnston of The Scotsman writes (18 April) about this latest development in Gordon Brown’s flirtation with Adam Smith, perhaps born as much from his sense of mischief in embarrassing the Tories as much as his (formidable) intellectual convictions.

I have penned a short letter about this to The Scotsman newspaper:

“The Editor

Adam Smith’s reputation (Scotsman, 18 April) with Left and Right is an unreliable guide to his legacy. Smith disdained 18th-century politicians and their proclivity for ‘faction’, ‘system’ and ‘wooden chess piece’ tyrannies.

He was ‘Hanoverian’ in his politics (a beneficiary of the patronage of the Duke of Argyle), and a supporter of Natural Liberty - the rule of law; the separation of civil powers, and of church and state; of powers of impeachment; trial by juries; impartial judges; habeas corpus, and regular elections.

Smith never supported ‘laissez faire’ economics, nor did he consider markets operated by people as being ‘basically selfish’; he advocated an increase public spending in education; he praised benevolence (and was aware of its limitations); he mocked the public’s attention to the petty affairs of the very rich, and he questioned adventures in ‘Empire’.

He tried to persuade people of the benefits of free international trade (he would never have subscribed to the Common Agriculture Policy), of the need to deregulate markets and end all subsidies to commercial activities, and of the imperative to dismantle private monopolies, he would have replaced all nationalised monopolies (the Mint and the Post office excepted) with competition, but not with privatised monopolies, and he would not have been sympathetic to giant trade unions.

In that mix there is room for New Conservatives and New Labour. Hopefully, Gordon Brown’s interest will induce people to make their own minds up by reading Smith’s works. Meanwhile, I look forward to reading Iain McLean’s, Adam Smith, Radical and Egalitarian.”


Read Ian Johnston’s article in The Scotsman at:

http://news.scotsman.com/uk.cfm?id=583502006

Peanuts and the Markets

This article by Jim Blasingame is an excellent (and overdue) example of the correct use of Adam Smith’s legacy and worth reading in full from commercialappeal.com http://www.commercialappeal.com/mca/business/article/0,1426,MCA_440_4626139,00.html)

Connecting the division of labour (which, incidentally, was not invented or first high-lighted by Adam Smith and he never claimed it was) to a basic example of its effects on economic development through the gradual extention of markets. The woman in question, Biutou Doumbia, humble station in life and illiterate, going about her small-scale business, does more to illustrate how markets grow in power to change the lives for the better of those touched by them.

The makers of the diesel powered grinder do their bit too (as do the maintenance workers and repairers). Scores of others besides Biutou Doumbia will add the services of the grinder to their processes, saving enormously on using their energies, physical strength, and above all time, which has opportunity costs on family life and obligations. So will the suppliers of the diesel fuels, the tranporters of the fuel, and back through its own supply chain and processes.

A small example, as the one that Smith borrowed from Diderot’s Enclyclopedia (1755), the pin factory he made famous in ‘Wealth of Nations’ (1766), carries significance if it educates general readers and students to understand an aspect of commercial societies than is important in Mail, Africa, and in developed capitalist societies in North America and Europe.

Congratulations to Jim Blasingame - potential April winner of the "Lost legacy Monthly Prize" for excellence in promoting the real Adam Smith - for providing this example of good writing - and for commericalappeal.com for publishing it.

“Outsourcing savings may be peanuts by Jim Blasingame (in commercialappeal.com in Memphis, Tennessee, USA (©. All Rights Reserved) [http://www.commercialappeal.com/mca/business/article/0,1426,MCA_440_4626139,00.html]

"Biutou Doumbia lives in a tiny village in the West African country of Mali. Biutou (sounds like Bee-oo-too) and her family live in poverty, very close to the line between survival and, well, you know.

Oh, one more thing: Biutou is a small business owner. She makes and sells peanut butter.
In Mali, as Roger Thurow reports in a Wall Street Journal article, peanut butter is made the same way African women have made other staples for millennia: by grinding the seeds on a rock with a large wooden pestle.

You might say that Biutou's operation is vertically integrated: She grows the peanuts, and then manufactures, sells and distributes her product.

Over two centuries ago, in "The Wealth Of Nations," Adam Smith explained how markets are made by the division of labor. And free markets created capitalism, which Ayn Rand called, "the only system geared to the life of a rational being."

Biutou doesn't know Smith or Rand from a warthog -- she's illiterate.

But she is one of Rand's rational beings. And as such, she recognized the efficiencies offered by the division of labor when a diesel-powered grinder/ blender became available. Now for 25 cent and a 10-minute wait, the sack of peanuts Biutou carries to the central grinding location turns into better peanut butter than she could make pounding all day with a pestle.

So Biutou now practices intermediation -- a fancy modern-day word for division of labor -- which is the process of employing contractors to create efficiencies. It's a valid business strategy, as is its opposite -- you guessed it -- disintermediation, the process of removing vendor layers, usually to get closer to our customers.”

(Jim Blasingame is the award-winning host of "The Small Business Advocate Show," and author of "Three Minutes to Success." Find Jim at jbsba.com.)

Good Reception to Buchan's Book on Smith

James Buchan’s new book, Adam Smith And The Pursuit Of Perfect Liberty, (Profile Books, London) was published on 13 April and it has received a number of good reviews in the Sunday papers today. One such is by Paul Stokes in Scotland on Sunday (15 April): “Invisible hand just out of reach”. Its opening paragraphs caught my eye for obvious reasons:

“Adam Smith is a philosopher more written about than read these days. In the past few years, a veritable industry has grown up, revealing what the works of this great Scottish thinker actually say. Of course, this is something of which the man himself could only approve. As a firm believer in the individual's right to pursue his own interest he could hardly do other than applaud the emergence of a thriving trade in ideas about his ideas.

Smith would be flattered that, more than 200 years after his death, people still care enough about his writing to dispute its meaning so often in print, although, he might also feel perplexed that his prose apparently allows so much room for disagreement.
Last year saw the publication of Adam Smith's Lost Legacy, a brief, accessible work by the Edinburgh economist Gavin Kennedy, which argued that Smith's ideas had been hijacked and misused by modern-day capitalists and adherents of the doctrine of laissez-faire. Now novelist and historian James Buchan offers a short, sharp, polemical biography of Smith which covers many of the same arguments, but in a style that is less scholarly, and with language that is considerably more robust.”

Paul Stokes exhibits familiarity with the work of Adam Smith in his review and is worth reading on those grounds alone. Of course, it is worth reading James Buchan’s book too, as he has some fresh ideas about Smith. Stokes picks up on one of them, for instance:

“Buchan's big idea is that Smith's search for a guiding force in human relations, his famous invisible hand, was inspired by the death of his father before his birth. Here we enter the realms of psycho-history, and one person's view is as good as any other's. It is equally plausible that this significant event caused Smith to understand that life progresses best without direction from authority figures, which is what he actually said.”

I agree with Stokes that this assertion has the status of an ‘opinion’ – a conjecture, as Dugald Stewart, Smith’s first biographer (1793) would have put it – but it is from informed opinions such as Buchan’s that we make progress when sifting through the sparse details of Smith’s life.

On this occasion I would raise the issue that while Smith was brought up alone by his mother, she had a massive influence on his life because of her religious convictions. He was totally devoted for her throughout his adult years until she died in her 90th year. Such was his commitment to never upsetting her by his views on religion – he grew more and more dissatisfied with institutional Christianity as he grew older and witnessed the whinning behaviour of pompous Christian believers – he held back until she died from overtly attacking religion, except in coded language. I suggest if he was absent on authority figure, his father’s, he was very much aware of his mother’s authority towards whom he was devoted and which he regarded as a blessing.

This returns us to the single use in ‘Wealth of Nations’ of the metaphor of the invisible hand, which I have suggested in ‘Lost Legacy’ and this Blog many times, has been blown out of all proportion by commentators, scholars, journalists and politicians. Nevertheless, we should keep Buchan’s suggestion in mind.

Read the review at: http://scotlandonsunday.scotsman.com/review.cfm?id=575722006.

From Nice People to Totalitarian Monsters

I was surprised to listen to a BBC radio discussion (‘Five Live’) on what was described as Britain’s ‘Ecological Footprint’ from the ‘New Economics Foundation’ (http://www.neweconomics.org/gen/uploads/f2abwpumbr1wp055y2l10s5514042006174517.pdf) in which Andrew Simms argued that Britain should stop importing what it could and with substantial economic investment produce for itself. The basis for this suggestion is research from the Global Footprint Network which appears from its flash website to be well funded (http://www.footprintnetwork.org/gfn_sub.php?content=whatwedo).

Alex Singleton (Globalisation Institute) commented (http://www.globalisationinstitute.org/blog/):

“Personally, I think we should celebrate our ability to buy from around the world, not just because it gives jobs and prosperity to other, less developed countries, but because it also gives us experience of a very wide range of varieties of fruit and vegetables, products and services.”

I assume most economists would agree with him. Tim Worstall also commented in two trenchant guest pieces on the Adam Smith Institute blog (http://www.adamsmith.org/blog/) by referring to the report as being from what he renames ‘Non Economics Foundation’ from its self-proclaimed title: ‘New Economics Foundation’.

He asks, seriously, if the reports are ‘spoofs’ because they cannot be serious. He claims that the source of the research is the unusually secretive (for scholarly) research work in that the methodology of their basic model is not publicly available, so that other scientists could analyse and run the programs and try to replicate the results. If they find the model is flawed or the results cannot be replicated, this normally ends by discrediting the model. The Global Footprint Network states:

“With over 4,000 data points and 10,000 calculations per country per year, national Footprint accounts document the natural resources (e.g., cropland, pasture, forests and fisheries) available within the country as well as the country’s demand on these resources.”

Its broad point is that if the rest of world consumed the same amounts of natural resources as Britain they would consumer 3 ½ World’s worth of resources (if the USA’s annual consumption of natural resources were consumed by the rest of the entire world it would use up over 5 World’s worth). I am not sure that this is a spoof; it is more likely that its authors and its fund suppliers believe it all to be true.

For broadly ‘leftwing’ sponsors such as Michael Meacher, MP (a former Labour Minister), Rhodri Morgan (Welsh labour leader) and various Green party activists and distinguished scholars, the implications are more than a trifle authoritarian, even scary, and certainly extremely, er, rightwing.

The world population as a whole must find the will and the means to enforce policies that could save the world from what they imply (predict?) will be a catastrophic calamity – read: mass starvation, ecological collapse, and terminal decline into barbarism – which would involve many highly controversial and draconian policies that must be introduced soon, if not sooner.

At root this means undoing the dependence of people on each other – that is overturn an important insight of Adam Smith that the basis of human harmony is the inter-dependence of each on all. In what the researchers see has the problem – the interdependence of disparate peoples on each other – Smith saw as the solution.

The division of labour lifted humanity out of the pre-stone age (absolute self-sufficiency) into inter-dependency (absolute self-insuficiency). The long march, by no means inevitable or secure – from the near absolute poverty of the first c.200,000 years of humanity (life spans of 25 years, local rates of birth near to below natural population replacement rates, fatal minor bodily injuries, species-threatening disease pandemics, and absolute ‘affluence’ at absolutely low living standards) to the agricultural and commercial societies from 11 - 13,000 years ago was often tenuous, nearly always violent and totalitarian, and thoroughly unpleasant for most people, particular women and children, but also for most subordinate men too.

To prevent you living on resources outside your own nation’s territory, and to end exporting and importing anything, is a formidable agenda. If the need is serious enough – and the doomsters never have doubts that it is – there would be an early resort to measures of enforcement if they could get into power or the power to influence those in power. If people will not voluntarily stop consuming goods from elsewhere, naval and land blockades would be needed to ensure that their edicts were carried out (‘Death to importers of lettuces and Belgian chocolate!).

What a picture the nice research scientists have of how the world actually works! People do not do what others decide is good for them. They do what they think is good for themselves - that’s why there is a (violent) trade in illegal drugs. On the scale they envisage for an end to international trade, do they realise that the simpler way than persuasion to stop large amounts of such trade would be to blockade, first, the ‘dispensable’ people around the world, i.e., those unable to resist being violently isolated by those powerful enough to isolate them, and later those peoples consuming anything that the powerful covet. It has ever been thus in human history.

The people who would thrive in such a world (dis)order would combine the evil ‘talents’ of men such as Stalin, Hitler, Mao, Pol Pot, and Mugabe. They would not include – for long – the nice researchers at the ‘Footprint’ project.

To reverse Smith’s insight into the growing dependence on others being the broad road to liberty, justice and opulence for the poorest orders in society, would never be easy or bloodless, and neither would it be ‘for our own good’. In Smith’s vision lies the solution to the world’s problems; ‘Footprint’ fantasies create much worse problems than the original problem.

New Book on the 'Infernal Couple'

“France never did take to Adam Smith's vision of a market economy. This idea, the authors write, conflicted with ``French absolutist traditions of economic control, Catholic paternalism, republican patriotism and later the Bonapartist emphasis on state-directed modernization.''

Britain's ability to adapt was evident in 1720, when the bubble that was the South Sea Company burst, sending investors in both London and Paris reeling. The Bank of England introduced changes to make investments safer. In France, paper money became distrusted. "The crash ruined the French credit market for at least a century,'' the Tombs conclude.”

From a review of Celestine Bohlen, Bloomberg.com, 13 April, reviewing "That Sweet Enemy: The French and the British From the Sun King to the Present'' (William Heinemann, London)

The main thesis of the book by Robert and Isabelle Tombs, a husband-wife team, which Ms Bohlen reviews, is credible.

Indeed, I was at a dinner party this week for two Chinese visitors (sign of the times?) in the splendid Prestonfield House, an 17th-century restored house adjacent to the grounds of the Queen’s Holyrood Park, Edinburgh (at which people like Adam Smith, James Boswell, David Hume, assorted the literati, Reverends, High-Court Judges and members of the Scottish aristocracy, visited socially in the 18th century).

This very subject came up in the conversation, to which Professor Lumsden offered exactly the same thesis as Tombs’ book to explain to our guests why Britain and France have different views on the appropriate form of capitalism: basically, let markets work versus use the state to make markets work in the manner that politicians think they should (but are incapable of managing).

Hence, the Tombs' book is on my ‘to read’ list. However, the assertions about the French rejection of Adam Smith’s views on the market economy require clarification. It would be wrong to leave that assertion alone because it continues the misplacing of the economics – and social benefits – of markets entirely to the credit of Adam Smith, especially in respect of France in the 18th century.

The semi-mysterious figure of Richard Cantillon, a French banker wrote his Essay in France in 1734 and it was published in French in 1755: Essai sur La Nature du Commerce; translated into English by Henry Higgs, in 1931, reprinted in English and French by Augustus M. Kelly, New York 1964 and in 2001 by Transaction Publishers, New Brunswick. This Essai contains a clear case against the dirigiste French economic tradition of the 17th-18th century (long before Napoleon’s efforts and their continuation into the 20th century).

Another major French figure was Anne Robert Jaques Turgot’s Formation et Distribution des Riches (Formation and Distribution of Wealth) written in 1766 and published in Ephemerides du Citoyen (Paris) in 1769; translated into English in 1793. In addition there were substantial contributions from Marquis de Mirabeau and Francis Quesnay (the Tableau Economique, 1766) and many others.

The French Physiocrats, whatever their errors on ‘sterile’ manufacturing, etc., had no illusions about the perfidious role of French state regulations on commerce. These French economists preceded or were contemporary with Adam Smith and he met many of them during his visit to Paris in 1765-6. There is a side-debate as to how much he was influenced by them and by how much he influenced them (I tend to the view that this was a case of separate, independent discovery from them all working in the same field, but I am working currently on comparing their writings).

But to suggest that there is a British economic tradition a la Adam Smith plus a totally separate French tradition (as if it began with Napoleon and not with the predecessors of Louis XIV) is problematical when one studies the historical sequence. If France ‘did not take to Adam Smith’s vision of the market economy’ it was as a result of rejecting the consensus among those very French economists, whose works had a wider circulation in France than Smith’s ‘Wealth of Nations’ during this period.

PS: The South Sea Bubble in 1720 is stretching the case for later French economic beliefs. There were cases of serious financial fraud in France (and the UK) in the 18th and 19th centuries, of which the South Sea Company was hardly a unique event. France's largely agricultural economy had a peasant population highly prejudiced against any money not in the form of gold and silver right up to the 20th century; they didn't trust each other, let alone Parisian bankers. Peasants the world over - and recent peasants - are suspicious of paper written money, as are citizens of totalitarian states where not having the right 'papers' is dangerous.
[Readthe Read the Bohlen review at: http://www.bloomberg.com/apps/news?pid=10000088&sid=a2ERAijFEntk&refer=culture]

Did I miss the 1980s?

“LAISSEZ FAIRE economics was at the forefront throughout the 1980s here in the UK, as the theories of Adam Smith, Milton Friedman and Hayek were enthusiastically embraced by all and sundry.
The spirit of deregulation, the unshackling of controls and the encouragement of enterprise, permeated all aspects of our business life.”

(“Is there a dastardly plot against estate agents?”, 12 April, by Owen Llywelyn, Western Mail, Wales, UK.)

Did I miss something? I do not remember ‘all and sundry”, of which I include myself, enthusiastically embracing ‘laissez faire economics’ (apart from it not being a theory of Adam Smith’s) and while the government of the day (Mrs Thatcher’s) made several stabs at ‘deregulation, and the encouragement of enterprise’, I also remember that the great privatization programmes of her government (for which three cheers) that dismantled parts of the state that had no business to be run by the government in the first place, was also obsessed, under the direction of the Treasury, with selling state monopolies to become private monopolies, instead of breaking them (for which, shame on you, and sighs of exasperation). This conflicted somewhat with the views expressed by ‘Milton Freidman and Hayek’.

[Read the article at: http://icwales.icnetwork.co.uk/0300business/0100news/tm_objectid=16933886&method=full&siteid=50082&headline=is-there-a-dastardly-plot-against-estate-agents--name_page.html]

Invisible Hand, no 34

“A central assumption of the general equilibrium model is that all individuals possess perfect information, which explains how free markets result in optimum outcomes. In “The Wealth of Nations,” Adam Smith uses the “invisible hand” metaphor to describe this model. Stiglitz believes that the assumption of perfect information and in-turn the conclusion that free markets create optimum outcomes are both invalid. Speaking on his reluctance to put absolute faith in the free market, Stiglitz remarks, “the reason that the hand may be invisible is that it is simply not there—or at least if it is there, it is palsied.”

(A Report by Kendal Burgemister, an economics major at Boise State and a Top Ten Scholar, in Arbiteronline.com (Boise State’s Independent Student Newspaper, 10 April)

Comment
I can understand why Kendall Burgemister, like many other bright and accomplished students of economics, repeats without question what he understood a Noble Prize Winner from the Bank of Sweden to have said. As students we sit at the feet of men and women of great learning and of justly established reputations in their fields, and not many come as high in the well earned and justified respect of colleagues and students towards scholars as does Joseph Stiglitz.

However, Joseph Stiglitz would be wrong if he attributed to Adam Smith a familiarity, let alone an affinity, with a model of general equilibrium, either in its primitive form (as it would have had to be in the mid-18th century) or in a modern form (of which he absolutely no knowledge); he did not describe, and certainly did not prescribe, anything like the assumptions of ‘perfect information’ and ‘free markets, or ‘optimum outcomes’ in “Wealth of Nations”.

Smiths remarks about markets showed he understood them as varying from their ‘natural prices’ through the oscillations of their ‘market prices’. There were as many markets as there were goods in different ‘neighbourhoods’. Smith never used the metaphor of the invisible hand to ‘describe’ such a model.

Indeed, his use of the metaphor was not related to markets at all – it was used (once only!) to comment on individual motivations expressing preferences to trade locally rather than abroad for the security of their ‘capital-stock’ having unintended consequential effects on local growth.

The assumptions about general equilibrium models, perfect information, and free markets remain just that: assumptions as a prelude to a demonstration of mathematical elegance, in the manner of John Nash’s theory of the ‘Bargaining Problem’ (Econometrica, 1950).

These assumptions are unlikely to apply in real world markets (despite which, sorry chaps, you still have to learn about General Equilibrium models and demonstrate your understanding in your examinations).

I agree with Joseph Stiglitz “the reason that the hand may be invisible is that it is simply not there—or at least if it is there, it is palsied.” Now, if only more academic tutors would ditch the nonsense that Smith had something real in mind in his use of the Invisible Hand metaphor (first used by Shakespeare in 1605 and Defoe in 1722) and the belief that it had anything to do with markets, then fewer students would pass on this myth to the next generation.

[Read the interesting report at: http://www.arbiteronline.com/vnews/display.v/ART/2006/04/10/4439cee990d59}

Economics 101: Essay Assignment

Opinion Piece: Times Online: 10 March:

Matthew Syed writes: “Please Tell us What We are Buying: without ‘traffic light’ labels, shoppers will be hoodwinked about ‘healthy’ products”

And asserts:

‘Either way, it is beyond dispute that if every company insists on using its own design drawn from its own criteria, it will be well nigh impossible for the consumer to make an informed choice. Going it alone on food labelling is tantamount to severing Adam Smith’s invisible hand at the wrist. And then serving it up as a healthy-range ready meal.’

Comment:

Economics 101 Essay Question: ‘Discuss the misuse of the metaphor “invisible hand” in Matthew Syed’s piece?’

Reading: Adam Smith: ‘The Principles which lead and direct Philosophical Enquiries; illustrated by the History of Astronomy’; ‘The Theory of Moral Sentiments’; ‘An Inquiry into the Nature and causes of the Wealth of Nations’ (all in the campus library), and posts on ‘Lost Legacy’, passim.

Matthew Syed’s article is at: http://www.timesonline.co.uk/article/0,,6-2126681,00.html

'A lot of ruin' in Unpunished and Unrestrained Free-riding

The Liberal Order, in a Blog from Marc Stecbeck ('Why We Cooperate'), and Benedict Carey of the New York Times (‘Study Links Punishment to an Ability to Profit’) , have picked up on a research paper on co-operation with and without sanctions for free-riding, ‘The Competitive Advantage of Sanctioning Institutions’, by Özgür Gürerk, Bernd Irlenbusch, Bettina Rockenbach.

The research paper’s abstract says:

“Understanding the fundamental patterns and determinants of human cooperation and the maintenance of social order in human societies is a challenge across disciplines. The existing empirical evidence for the higher levels of cooperation when altruistic punishment is present versus when it is absent systematically ignores the institutional competition inherent in human societies. Whether punishment would be deliberately adopted and would similarly enhance cooperation when directly competing with non-punishment institutions is highly controversial in light of recent findings on the detrimental effects of punishment. We show experimentally that a sanctioning institution is the undisputed winner in a competition with a sanction-free institution. Despite initial aversion, the entire population migrates successively to the sanctioning institution and strongly cooperates, whereas the sanction-free society becomes fully depopulated. The findings demonstrate the competitive advantage of sanctioning institutions and exemplify the emergence and manifestation of social order driven by institutional selection.”


Bernard Carey opens with: ‘Sociologists have long known that communes and other cooperative groups usually collapse into bickering and disband if they do not have clear methods of punishing members who become selfish or exploitative.

Now an experiment by a team of German economists has found one reason punishment is so important: Groups that allow it can be more profitable than those that do not.’

It is best to read the design details of the ‘games’ used by the researchers to derive their results (see below for links). Their conclusions are most interesting:

“Other experts said the results were an important demonstration of how self-interest can trump people's aversion to punitive norms, at least in the laboratory. Out in the world, they said, it is not usually so clear who is free-riding, or even whether a given group is encouraging cooperative behavior in most people.

"The mystery, if there is one, is how these institutions evolve in the first place," Duncan J. Watts, a sociologist at Columbia, wrote in an e-mail message, "i.e., before it is apparent to anyone that they can resolve the problem of cooperation."
Marc Steckbeck’s comments are also interesting:

‘Market capitalism requires social cooperation. When we specialize, take on risks, and enter into mutually advantageous voluntary agreements, trust is essential. But it's also then lucrative for free riders to profit off the backs of honest and trustworthy people by cheating. As the number of non cooperators increases, trust begins to break down on a larger scale. In the end, without trust market capitalism falls apart.’

Comment
Fortunately, human kind did not have to await the advent of market capitalism to evolve the appropriate mechanisms for enabling sanctions to police their trust systems. If they had it is doubtful if evolution would have progressed much beyond that of the brutish hominids of 1 to 6 millions years ago. It is also true that in resolving the social means, though not necessarily the universal application of them, human kind, the surviving last biological species of the hominid-home lineage, became possible, if precariously, from about 200,000 years ago.

The instruments that ensured biological survival can be seen in the practice of reciprocity in chimpanzee bands, which in grooming sessions, shows the power of punishment in acts of non-reciprocity (see Robin Dunbar on Grooming and Gossip). Chimps voluntarily groom those who groom them and avoid doing so to those who don’t (except in status cases towards Alpha males where they have no choice).

This carried over into the evolution of the hominids and later proto-humans (Homo erectus, etc.,) in reaction to the ever growing demands of their ever growing brains (from c.330cc to c.14,000cc in about 5 million years) which demanded higher productivity in food gathering and scavenging/hunting, 'feeding off' (to coin a phrase) their growing intelligence.

Crudely, those who tried free-riding on food – and sex – were excluded, or killed. Bands that failed to punish free-riders, and bands that ‘over-punished’, became extinct. The separation of the last hominids from the earliest homo species eventually left only one species, Homo-sapiens, albeit in extremely small numbers. Their descendents (us) inherited the entire planet.
Co-operation is not the absolute norm and probably never will be. We see today many examples of ‘cheating’ and endemic corruption that goes unpunished as elites that manage State punishment regimes are themselves the beneficiaries, and organisors, of ‘cheating’. As Adam Smith pointed out once to a younger man who believed that loss of a battle with the American colonists would ‘ruin’ Britain: ‘there is a lot of ruin in a nation’ he told him.

Nations, economies, forms of government (even 'Empires) accepting the non-practice of punishing free-riders can degenerate quite a way before the ‘edifice’ of justice ‘crumbles to atoms’, and, with it, society. Highly prominent trials, serious examples of the abuse of power and evidence of popular cheating do not presage the near-imminent end of market capitalism. The near total absence of punishment for endemic and systemic free-riding and cheating in some countries around the world does presage the likely failure of them to develop, hinder and delay, self-managed economic punishment norms (and ethical restraint) that would raise them to opulence in a few generations. But that is an altogether different scale of problem to those other countries that have occasional, if spectacular, lapses.

[Liberal Order is at: htpp://liberalorder.typepad.com
The researchers are at: Bettina DOT rockenbach-At_unierfurt DOT de]. Their paper is in Science (subscription)

Nicholas Gruen on the Real Adam Smith

Nicholas Gruen on ‘Smith and Jane Austen on marriage’: now available on ‘Lost Legacy’ (under ‘Articles’)

Earlier this week I mentioned that I had received a copy of a short 5-page essay on Adam Smith from Nicholas Gruen (Australia) and how I had immediately admired it. This is now available under ‘Articles’ on this site. Please take the time to read it. It is among the very best articles on Smithian market theories I have read for a long, long while.

No, it is not an unrestrained paean of praise for free-markets, nor is it the usual diatribe against them; both often written by people who have not read Adam Smith for themselves, or, if they have, they did not understand him.

Gruen writes about the real Smithian moral philosophy and political economy as applied to ‘commercial society’, and as he thought and wrote about them in the mid-18th century (Nicholas Gruen has certainly read and understood Adam Smith). In many senses, Gruen reclaims Smith’s legacy and moves the debate back to his original focus.

I quote an extract in the form of Nicholas Gruen’s final paragraph:

“I began this essay suggesting that Adam Smith was to markets what Jane Austen is to marriage. But the converse is also true. For Smith the market, for Austen marriage, were honourable estates, ideal theatres for human engagement where prudence and good character would be rewarded (in the absence of unusually bad luck). They were likewise a state in which people made their own lives together, in which each might find and benefit from the best in others as they sought what was best for themselves. As such, though they were not the sum of human life, they were estates in which both virtue and happiness might thrive together, at least so far as possible in human affairs.”

Read it; read it now, and gain an insight into the mind of Adam Smith, perhaps as you have never understood him before.

[First published in Australian Financial Review, 31 March 2006. All rights reserved]

Sandra Peart Live at GMU

Sandra J. Peart’s Blog, Adam Smith Lives! is well worth waiting for because of the sheer quality of her short pieces that she occasionally posts (a busy US academic, she seems always to be up to her ears in assignments, here, there and everywhere).

Deidre McCloskey, a lively and controversial economist (I like her tilts at the obsession of professionals with mathematical analyses in economics), has titled her lecture ‘The Hobbes problem: From Machiavelli to Buchanan’ and I look forward to reading it (clearly America is where the action is at the moment).

Sandra Peart (who is highly privileged - she calls Professor Buchanan, ‘Jim’!) is introducing Deidre McCloskey at the lecture and she has posted extracts from her intended speech on the Blog she shares with David M. Levy, with whom she wrote: The "Vanity of the Philosopher": From Equality to Hierarchy in Post-Classical Economics’, (check Amazon).

“Adam Smith – whose great books figure prominently in the work of both McCloskey and Buchanan – said that all of us are capable of imaginatively changing places with one another, a sort of "sympathetic exchange". That act of imagination takes place whenever we exchange, trading physical or imaginative stuff – goods or approbation – and it comes to temper pure self interest with a reciprocity norm that has been so important to Professor Buchanan’s argument for eliminating the off-diagonals in prisoner’s dilemma games. Only recently, with the development of experimental economics and neuroeconomics, have economists come to fully appreciate the subtlety and power of Smith’s sympathy. For Smith, the process of sympathetic exchange makes us generous beings, sometimes compelled to act in ways that violate self interest narrowly construed, as when Smith’s European gives up his finger to save those he has never seen and never will see.”

Read it in full at: http://adamsmithlives.blogs.com/thoughts/2006/04/deirdre_mcclosk.html

Unfortunately it is only an extract from her introduction to the ‘Inaugural James Buchanan Lecture’ at George Mason University (of which quite a lot of excitement has been aroused recently in numerous economics Blogs by a sporting event!).

The interest, and newly published writing, on Adam Smith’s moral sentiments is excellent news for his legacy. I have received an article this week on exactly this theme from Australia and I have asked the author if I may post it in full on this site. These gems are most encouraging. More please.

A 'Peace Journalist' on Adam Smith is Right

If a ‘peace journalist’ can get it right about Adam Smith and markets – that individual motives can have, collectively, either benign or malign consequences – why can’t some high-powered economists, who keep repeating the avoidable error that Adam Smith asserted that the ‘so-called invisible hand’ ensured that the actions of profit-seeking individuals always lead to benign consequences?

That is not what he wrote, meant or expected anyone to misinterpret. By putting it this way, they suggest falsely that Adam Smith provided an alibi for just about anything corporate managers do, including pollution, fraud, monopoly and rigged ‘markets’.

What a great pleasure it was to read John G. Scherb (of whom I know nothing else) in a ‘peace’ publication (a source of which I would normally be sceptical) writing about Adam Smith and markets correctly.

John G. Scherb writes: ‘Trading Blocs, Global Interdependencies and Wars’ in Peace Journalism: independent emagazine, New Jersey, USA (issue 17 – April):

"In the last twenty years or so there have been many interesting trends and developments in the world. Perhaps none more so than the two mega-shifts concerning the huge growth in worldwide goods and services and the growing, some say virtually complete, interdependencies of the world's largest economies.

By and large, these two phenomena have resulted in much good for many people. The first of these, the explosive growth in international trade in goods and services is a well-documented phenomenon and is largely an outgrowth of post World War Two internationalism, now commonly referred to as "globalism". The theory is a simple one: In the search for profits following Adam Smith and successor's market theories, the greatest good for the greatest number will, over time, occur if market forces are honored."

Read the whole article (interesting in itself):

http://peacejournalism.com/ReadArticle.asp?ArticleID=8345

Smith on In-Country Migration

Jeremy Rose (a resident of Barcelona, Spain) writes: ‘Globalisation’s Unsung Martyrs’ in Scoop (a New Zealand web site) 3 April:

“The free market cheerleaders who forcefully proclaim the need for developing countries to open their markets and liberalise their economies are strangely, if predictably, silent on the human cost of the rich world’s closed labour markets.

Their intellectual hero Adam Smith was in no doubt that there is no such thing as a free market for goods without an equally free labour market.

In his classic 1776 work The Wealth of Nations he wrote:

‘Whatever obstructs the free circulation of labour from one employment to another, obstructs that of stock likewise; the quantity of stock which can be employed in any branch of business depending very much upon that of the labour which can be employed in it. Corporation laws, however, give less obstruction to the free circulation of stock from one place to another than to that of labor. It is every-where much easier for a wealthy merchant to obtain the privilege of trading in a town corporate, than for a poor artificer to obtain that of working in it.’
The more things change, the more things stay the same….”

Comment

The quotation above is from: WN I.x.c.44: p 152 [GK: Minor punctuation errors corrected.]

While agreeing with Jeremy Rose’s general point of international restrictions on labour mobility (though such restrictions are absent on citizens of the European Union with its 25 member countries – also an outcome of ‘globalisation’?), I feel we must in all honesty to Adam Smith’s legacy be aware of the context in which the above quotation was made.

The UK at the time (particularly in England) had some rigid laws (Settlement Act; Apprenticeship Acts) and it was to these that Smith referred when he advocated their repeal because these obstructed economic development through the division of labour. He was not referring to the mass movement of people across international borders.

National restrictions of labour movement are international in their application and scope. This, in all cases I know of, are at root racist in motivation, albeit dressed as preventing social disruption. They apply today in all developing countries and have been the source of racial pograms in many places, including in Africa (expulsion of the Asians in East Africa is one such example; Rawindi and Burindi are also examples; as are tribal hostilities in Somalia).

High African barriers to trade between neighbouring African countries are an area where Africa could do much to invigorate their economies, independent of anything they might wish to do in relation with their trade with the developed world. Whether this would be accompanied by the free movement of labour among them, sadly, is unlikely, for much the same reasons that it is restricted with Europe. African governments, and the mood and tempers of their national residents, oppose such reforms.

The phenomenon of hostility to inward movement of people has nothing much to do with globalization, nor can it be blamed justly on the growth of international trade. That people are moving between Africa and Europe (if not within Africa), despite the appalling risks, is welcome news to me personally, as is the movement of people among the EU member countries as a result of its expansion. But I am but one vote among tens of millions.

For Journalists Accuracy is a Virtue(?)

To the Editor of Fortune,

Ellen McGirt in “Fortune 500 a Banner year writes”:

“That and other significant mergers, such as the acquisition of Premco by Valero (Research) (No. 15), were encouraging signs of the "animal spirits" that Adam Smith considered the mark of an economy in fine fettle.”

Could you ask Ellen McGirt when and where Adam Smith said or wrote about ‘animal spirits’?
John Maynard Keynes certainly did make such a reference, but not to my knowledge Adam Smith.

Is it important, you may ask, but the image of Adam Smith as a sort of ‘red in tooth and claw’ believer in competition is at variance with his moral philosophy and political economy, and his two main books, Theory of Moral Sentiments and Wealth of Nations.

Kind regards

Dr Gavin Kennedy (Professor Emeritus)
Author: Adam Smith’s Lost Legacy (Palgrave Macmillan, 2005)

Moll Flanders (1722) and an 'invisible hand'!

Yesterday I recommended a new book by James Buchan, Adam Smith and the pursuit of perfect liberty, to be published by Profile Books, London on 13th April.

Let me quote two (of many refreshing) paragraphs of James Buchan to demonstrate why every serious Smithian scholar, and any person interested in Smith’s true legacy, should read it (pre-order from Amazon):

“One could hardly imagine,’ Greenspan said, ‘that today’s awesome array of international transactions would produce the relative economic stability that we experience daily if they were not led by some international version of Smith’s invisible hand.’
Couldn’t one?
The phrase ‘invisible hand’ occurs three times in the million-odd words of Adam Smith’s that have come down to us, and on not one of those occasions does it have anything to do with free-market capitalism or awesome international transactions. One could with better justice claim that Moll Flanders, a resourceful whore in the fiction of Daniel Defoe who also uses the phrase ‘invisible hand’ is another towering contributor to the stability of international markets.’ (Adam Smith and the Pursuit of Liberty, pp 2 and 146, Profile Books, 2006)

It does not come more clearly than that.

James Buchan is to be congratulated for finding the early reference to the invisible hand by Daniel Defoe. We already know of Shakespeare’s even earlier use (1605) in Macbeth, 2:3: ‘thy bloody and invisible hand’, courtesy of Emma Rothschild (2002: Economic sentiments: Adam Smith, Condercet, and the Enlightenment, Harvard University Press, Cambridge), and this new reference from James Buchan undermines the continued false portrayals of Smith’s legacy.

Defoe: ‘A sudden Blow from an almost invisible Hand, blasted all my Happiness’ (Moll Flanders).

References:

Alan Greenspan, Remarks by Chairman Greenspan: Adam Smith, at the Adam Smith Memorial Lecture, Kirkcaldy, Scotland, 6 February, 2005.’ (www.federalreserve.gov)

Daniel Defoe, 1722. Fortunes and Misfortunes of the Famous Moll Flanders Who was Born in Newgate and during a Life of continu’d Variety for Threescore Years, besides her childhood, was Twelve Year a Whore, five times a Wife (whereof once to her own Brother), Twelve year a Thief, Eight Year a transported Felon in Virginia, at last grew Rich, liv’d Honest, and died Penitent, London

What Are They Teaching at Harvard?

Greg Mankiw’s Blog: Random Observations for Students of Economics
29 March: ‘Kinsley on Billionaires and Adam Smith’.

“The first exchange of one caveman's dinosaur meat for another's rather attractive decorative rock started a process that, after millions of years, leads to DVD players at Wal-Mart that cost less than DVDs. Or something like that.”

“Even in its most primitive form, the invisible hand is a brilliant explanation of what motivates most of us, and how our efforts serve the common good.We work to produce things that can be traded for things we want. That trade makes us better off than we would be if we made everything we consume ourselves.”

From Michael Kinsley: ‘Why Be a Billionaire? Deconstructing Forbes’ annual list’ (see also my Blog for 24 March 2006: ‘No Alibi for Selfish Greed’).

Comment
This is an example of a complete confusion of the history of the human species. The dinosaurs and associated species died out 60 million years before the speciation of the Common Ancestor into what became ‘Hominids’ and Chimpanzees (4 to 6 million years ago). Humans evolved as a separate hominid species about 200,000 years ago. Stone-age hominids (Habilus, Erectus) made the first stone tools about 1 million years ago. Hominids used stone tools to cut through carcasses they scavenged while other members of their small bands fended off rival predators with clubs, stones and noise in the earliest division of labours. It was the evolution of the division of labour from that time to this that we arrived at DVDs, not 65 million years. An even better achievement than mythically chasing lomg-extinct dinosaurs for dinner as credited to them by misreading of the use by Smith of Shakespeare’s ‘bloody and invisible hand’ (MacBeth, 3:2) to describe the consequences of human motivations, which sometimes had benign, and other times, malign consequences for their societies.

As to the second paragraph, the so-called theory of ‘the invisible hand’, it was not a theory and had nothing to do with the benefits of the division of labour and trade. Conflating a metaphor with the grandeur of a theory is poor teaching.

Greg informs readers that Kinsley was an Economics Major at Harvard, which means that nonsense about the invisible hand is passed on to succeeding generations of Harvard students who receive advice from their tutors to read Kinsley on Dinosaurs. They should spend time reading Adam Smith, not reading what an alumnus says he wrote, and should ask why their tutors are promoting such poor history of economics.

Are Belief in Hell and Economic Growth Linked?

“Religion is good for business: economists like strong economy, firm beliefs”

“The fear of eternal damnation may be the key to a robust economy.
In fact, where a large percentage of a country's population believes in hell, some economists have found a link to less corruption and a higher standard of living, according to a recent report by the Federal Reserve Bank of St. Louis. The idea is nothing new. Adam Smith, the 18th century Scottish economist and philosopher, argued that a society infused with religious beliefs would be less inclined to devote its resources to determining an individual's or firm's business ethics — "what economists call the credit or default risk associated with lending to an unknown individual," according to Kevin Kliesen, author of the report and an economist at the St. Louis Fed.
The bottom line, Kliesen said, is that the greater the belief in hell, the less corrupt a country's public and private institutions tend to be perceived. "This perception, in turn, can affect economic growth."

From DeseretNews.com, Salt Lake City, Utah, USA 2 April by Dave Anderton

Comment
No reference is given for the alleged statement of Adam Smith that religious belief in ‘Hell’ is correlated with strong economic growth. He wrote quite a bit about religion in “Wealth of Nations” (WN V.i.g.1-42: pp 788 – 814), and much of it critical in terms of Established Churches and their ecclesiastical establishments (Church of England, Church of Scotland, Church of Rome) as well as the independents, such as the Quakers, Methodists and the many protestant sects – the Latter Day Saints did not exist in the 18th century.

Two points should be made here (there is no time today to elaborate on Smith’s most interesting analysis of the role played by religion in society or the economy). First, Smith divides ‘systems of morality’ into two kinds, the ‘liberal’ and the ‘austere’ and he explains while the austere is admired by the ‘common people’ and the liberal by the ‘people of fashion’ current at the same time.

The distinction between them is marked by the relative disapprobation that ‘mark the vices of levity, the vices which are apt to arise from great prosperity, and from an excess of gaiety and good humour.’ In the ‘liberal or loose system, luxury, wanton and even disorderly mirth, the pursuit of pleasure to some degree of intemperance, the breach of chastity, at least in one of the two sexes, &c., provided they are not accompanied with gross indecency, and do not lead to falsehood or injustice, are generally treated with a good deal of indulgence, and are either easily excused or pardoned altogether. In the austere system, on the contrary, those excesses are regarded with the utmost abhorrence and detestation’. (WN V.i.g.10: p 794).

Almost all religious sects have begun among the common people, writes Smith, and start with an austere moral system, sometimes carrying it to ‘some degree of folly and extravagance. But Established Churches are staffed largely from the middle and upwards ranks of people, whose living conditions, behaviours and morality strays from the austere to towards the liberal kind (he clearly has the Church of Rome before the Reformation in mind, and perhaps his own observations of his Oxford tutors – always remember he went to Oxford University to train for Holy Orders, but changed his mind about a career in the Church of England).

Second, the question arises, not should a belief in Hell lead to an austere morality, but does it do so in practice? Smith gives no evidence that it does. The moral poor were not in a financial position, in the main in 18th-century Scotland, to be tested for their proclivity to creating strong economies. And while there is some scholarship arguing for linking protestant sects to business (R. H. Tawney, Religion and the Rise of Capitalism; Max Weber, The Protestant Ethic and the Spirit of Capitalism), which may well have some merit (apologies for being vague here; it’s a long time since I studied in this area as an undergraduate), there is also a need to explain why, for example, belief in Hell among the priesthood and the congregation of the Roman Catholic Church is not so clearly linked, to capitalism, and why, today, other religions, such as Islam, with relatively fanatical beliefs about Heaven and Hell, do not seem to be immune in countries where they dominate ,and have a monopoly of religious beliefs, have produced degrees of corruption in business and social life that cannot be said to be the aberrations of a few individuals.

I think the thesis advanced in the report by the Federal Reserve Bank of St. Louis is problematic. More to the point here, is that I think the almost obligatory reference to Adam Smith is misleading. His views on religion in practice were far more complex than implied by Kevin Kliesen.

Dave Anderton, the report in Deseret News meets the requirements of a competent journalist. He ends his report with a reference to contrary views, and is to be congratulated for his objectivity:

“Steve Kroes, executive director of the Utah Foundation, a nonprofit public policy research group, said he would not dismiss research showing a correlation between religious beliefs and economic growth, but he puts more stock in other factors, like low land costs, low tax burdens and reasonably priced labor. "Nevada is the fastest-growing state in the nation, and it's right next door to Utah, and I don't think you could say that Nevada and Utah are morally equivalent," Kroes said. "I really don't think the morality issue is really what is driving the economies in the West."

[Read the report at: http://deseretnews.com/dn/view/0,1249,635195960,00.html]

Smith, Capitalism, and the Founding Fathers

“There is some economic history to it. After all, the United States with its richness of natural resources, was fertile ground for capitalism. Adam Smith’s classic book, "Wealth of Nations," first published in 1776, had a lasting influence upon our founding fathers. Capitalism’s idea of producing a commodity that could be sold for more than it actually cost to produce it, while creating jobs which lifted desperately poor people into an economic middle, class was pure genius.” (Punctuation as in original.)

From: Metro West Daily News (near Boston, Massachusetts, USA) 2 April, by Frank Mazzaglia (local columnist).

Nice idea, but completely at odds with the facts. Adam Smith did not write about capitalism (a phenomenon unknown in the 18th century); he wrote about Commercial Society and about markets – of the kind located on carts and wooden stalls, emporia, small shops and quay sides. His ‘Merchants and Manufacturers’ were 'Undertakers', tradesmen, artisans and salesmen and women (butchers, bakers, ale-house owners, saddlers, horse and cattle dealers, wheelwrights, blacksmiths and forgers, tinsmiths, carpenters, miners, etc.,) and ‘machines’ were hand-tools, mainly of wood not metal (see early editions of Chamber’s encyclopedia or Diderot’s illustrated version in French, 1755) and certainly not driven by ‘fire engines’
(Smith’s words for what became steam engines in the 19th century).

It was not ‘capitalism’s idea’ to produce goods ‘to be sold for more than [they] cost to produce’; this was practiced for centuries before 19th century capitalism and had it antecedents from long before Roman times.

Smith’s model sourced the practice in the division of labour and the gradual realization of the benefits of exchanging surplus output for products (eventually money) that were wanted instead of producing everything scarce time allowed if a person did it himself. As dependence on others grew and the division of labour deepened, living standards rose to undreamt of levels; again, long before the phenomenon known as capitalism (a word invented in 1854; the word ‘capitalist’ was first used in print in 1793 and ‘capital’ in the that sense went back to the 16th century). That the division of labour and growing markets for its products would gradually raise a poverty stricken population towards opulence was a function of commercial markets. That was what ‘Wealth of Nations’ was about.

So, much as Adam Smith contributed to understanding how markets worked and how societies moved from poverty to opulence, it was not his ‘pure genius’ that promoted it or somehow occasioned it. That some of the founding fathers had read his books (‘Moral Sentiments’ and ‘Wealth of Nations’) there is no doubt. But the degree of his influence on events in the American ex-colonies and beyond is an open question still. (Broadly, he was sympathetic to the American colonists, and he knew and corresponded with Benjamin Franklin).

Smith Got it Right

An appropriate use of a quotation from Smith's Wealth of Nations:

“Politicians do not stay embarrassed for long. The prime minister, having been caught out dodging his own rules on party funding through loans from rich benefactors, no doubt expects the police investigation into cash-for-honours to run into the sand. Mr Cameron believes that as a new leader he is absolved from his party’s past sins. So when they meet they are likely to agree in principle to push forward on state funding. The great Adam Smith had it right more than two centuries ago: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.” In this case the conspiracy would be comical were it not so serious. The party leaders will be saying, in effect, that because they cannot be trusted to raise funds in an open way free from corruption, you, dear long-suffering taxpayer, will pick up the bill.”

Sunday Times (London), 2 April, Editorial Comment.

Well said.

See Wealth of Nations (WN I.x.c.27: p 145) the sentence concludes with: ‘or some contrivance to raise prices.’. And in this will happen in this case too.

Whatever amount MPs agree to subsidise political parties initially, it will gradually get more expensive after each election, as MPs vote to spend taxpayers' money on getting themselves and friends elected, to among other things become eligible for substantial and generous pensions, all paid with taxpayers' money again, few of whom will ever have such pensions themselves.

Smith was writing about local merchants and manufacturers consipiring over beer, bread and games to gain extra pennies from their customers; he never envisaged that the amounts at stake would be measured in millions of pounds.

New Book on Adam Smith - read it!

James Buchan’s newest book, Adam Smith and the pursuit of perfect liberty, is strongly recommended by me. It is a literary, and therefore most readable, accurate short account of Adam Smith’s life and works to appear for many years.

It covers much that is interesting about Smith, both from its singular facts and from the new perspectives the author reveals in his tour through the known facts about Smith’s life

I concur with much of what Buchan writes about Smith’s contemporaries, such as the snobbish Alexander Carlyle; the dubious William Robertson; the rakish James Boswell; the embarrassing Lord Monbodo; and the pedantic Thomas Pownall (a former British Governor, first of Massachusetts, and later South Carolina, returning to Britain in 1760).

A potent feature of the book is it alerts reader to give more attention to Smith’s other, but largely neglected, essays that survived his instructions to burn everything else, published in Essays on Philosophical Subjects (those on the ‘Imitative Arts’, the ‘External Senses’, ‘Music, Dancing and Poetry’). These are published in a low-priced edition by Liberty Fund, along with his better known ‘History of Astronomy’(see Amazon).

If I have a quibble – more a question – it is James Buchan’s remark about Smith allegedly ‘abandoning Bernard Mandeville’s example in the division of labour in the Early Draft (the common labourer’s coat), which was not abandoned but is in the Wealth of Nations. The famous ‘pin factory’ appears to be straight-out of Diderot (1755) - along with an account of a small pin factory that Smith visited that had 10 men working in it, each doing one or more of the operations - and together with 'common labourer's coat provide a full description of the division of labour within a single workforce and between several workforces in separate places. See my article on this Blog, ‘The Myth of Murray Rothbard’ (who muddled his arithmetic) - under the ‘Articles’ button.

An excellent and authoritative read, it is an excellent route into Adam Smith, absent specialist jargon, and, as far as I can discern on a first reading, absent any of the grosser errors associated with Adam Smith and his legacy.

James Buchan’s Adam Smith and the pursuit of perfect liberty is to be published by Profile Books, London (ISBN: 978-1 86197 905-6) at £14.99 on 13 April.