Beware Doctrinal Purity as Adam Smith Did

P J O’Rourke’s version of Adam Smith’s Wealth Of Nations generally has had a good reception in main stream media. I haven’t got round to reading mine yet. I’m saving it for April when I am hope to be nearing the end of writing my version, which may not concur entirely with “P.J.’s”, but it has had some good reviews and if it gets people interested in finding out more, all well and good.

Over at ‘Division of Labour’, a Blog by serious economists worth reading regularly, two of them, Michael Munger and Lawrence H. White, have offered brief criticisms.

Michael Munger writes:

“Just finished reading PJ O'Rourke's new book, on Adam Smith's Wealth of Nations.
A disappointment. To be fair, I am a really, really big fan of both O'Rourke and of Smith, so my hopes were perhaps unrealistically high.

But Smith is subtle, and it is hard to understand his main thesis on division of labor. PJ apparently doesn't, or at least skips over it any real discussion. He wastes chapters paraphrasing Smith's language, instead of summarizing his ideas.

And Lawrence H. White adds:

“Like Mike Munger, I recently finished reading P. J. O’Rourke’s On the Wealth of Nations. And like Mike, I was disappointed. I’m teaching undergrad History of Economic Thought this semester and I was hoping the book might be worth assigning. But it’s not really suitable. The book’s strong suit is its humor, but many of the jokes will be over the head of undergrad readers, most of whom (one must assume) aren’t already familiar with the subject.

Even more fatally, there are too many economic and doctrine-historical errors in the book. Fixing these would not have made the book any less funny. I wish P. J. or his editor had had the good sense to hire a few economists to vet the manuscript. If they had, we wouldn’t have to wince at amateurish misstatements.”

Comment
I would have liked Michael Munger to explain a bit about O’Rourke’s misunderstanding of the significance of Smith’s ‘main thesis of the division of labour’ – it certainly is a central idea of Smith’s political economy and it is an error to which many in the profession also committed over the 19th and 20th centuries (including such as Murray Rothbard, whom I have criticized on Lost Legacy in detail).

The short examples given by Lawrence H. White of errors about monetary theory and banking were most useful, though I might have reservations about White’s unelaborated upon views that:

“In fact Smith endorsed (to my view, mistakenly) two existing limitations on competitive private banking’s notes: the outlawing of notes below a minimum denomination, and the outlawing of clauses giving the issuer an option to delay redemption.”

That would depend upon just how much disruption you are prepared to tolerate while an economy adjusted to new changes that in longer term made sense, but which in the short term caused considerable personal misery to families caught up in them. In 18th-century Scotland, there were no margins for errors, no safety nets and no relief from utter destitution when things went wrong. And when they went wrong, people died, especially children.

Smith in this, and in regard to many other doctrinally sound economic practices (even tariff reform) considered that ‘humanity required’ a more cautious approach, which, where possible, mitigated the spillovers from doctrinal purity.

[Read the contributions at: Division of Labour Blog http://divisionoflabour.com/archives/003569.php]

Explanation, Yes; Prediction, No

There is nothing wrong with being ‘self-taught’ if the output is as good or better than being tutor-taught. Then everything depends on the tutor, which may be marginally better or worse than being self-taught; but everything then depends on by which instruments of learning you are self-taught?

Ranjit S. Mathoda on his Blog: Mathoda.com (‘the art and observations of…)’, says he ‘taught himself quite a bit of economics’ (26 February), and he plunges in with:

“Adam Smith is widely credited as the father of economics, but he would not have considered himself to be an economist. He was considered in his time to be a moral philosopher. He was interested in human behavior generally, and used certain techniques to help him understand and predict behavior. Modern economists like Gary Becker and Stephen Leavitt have applied the tools of economics to areas as varied as family dynamics, or the naming of babies.”

Comment
Ranjit’s pretty good on Adam Smith as a moral philosopher and his not considering himself an economist – there was no discipline called economics in his day – but is in an error with: “He was interested in human behaviour generally, and used certain techniques to help him understand and predict behaviour.”

I do not think Smith attempted to ‘predict’ behaviour. He was in the explanation, not the prediction, business, a far more modest goal, though difficult enough. Smith looked backwards into events and history and also looked outside his window; he used his model of political economy to analyse what factors enhanced the employment of productive labour as a proportion of total employment (the rest being unproductive labour) and derived from this how far short the past and current employment of labour was from what it would have been under Perfect Liberty.

This is the extent of his aspirations in Wealth of Nations, a case study of the history of the false mercantile doctrines prevalent for many decades before 1776. We should always remember that Smith did not propose that the necessary and valuable interventions by governments should be ended (he was not a libertarian). He opposed prodigal interventions of government (wars, colonies, reckless spending and attempts to do what markets would do better), and also opposed to those mercantile and monopoly policies of misguided merchants and manufacturers, which he heavily criticised.

From his analysis of the past he suggested that because productive labour added to annual net revenue, it produced higher annual growth of the ‘necessaries, conveniences, and amusements’ of life and spread opulence, especially to the labouring poor. History showed that prodigality harmed this long term process; frugality speeded it up and kept it doing its productive work.

That modern economist took on the mantle of being in the prediction business, and rich people believed that their econometric tools could predict the future (a silly hubris upon which they wasted their money, for which some economists were truly grateful while myths about their voodoo tools lasted), is a testament to the credulity of those desperately seeking an edge in a world of uncertainty.

Explain, understand, and be thankful. That was a perfectly good enough goal for Adam Smith – it’s also better than most modern economists can aspire to, with all of their tools – and it’s good enough for me, too.

[Read Ranjit Mathoda’s post at: http://www.mathoda.com/archives/117]

Interlude While We Sort Out a Comments Hitch

Comments Problem

I am having trouble posting a response to the Lost Legacy 'Comments' facility. What the problem is about I do not yet know, but we are working on it.

On the post below, Twilight of Rationality?', a reader, 'Don', posted an interesting comment. This is what I tried unsuccessfully to post since Don's correction appeared:

"Thanks Don for clearing up my error about the differences between neo-classical rationality and Mises ‘purposeful action’ to change a subjective state."

I tried originaly to post a longer response, but cut it down to see if that helped. It didn't.

Meanwhile, read Don's comment on the item before this, while we hunt the gremlins.

Gavin

Twighlight for Rationality?

Neoclassical economics operates on the axiom that people make rational choices (as does the Mise-ian paradigm). In the neoclassical case, rational behaviour is essential for the mathematics to produce determinate solutions. In both cases, rational behaviour has an ‘If only…’ quality. It produced some stunning analyses in the 20th century, giving its exponents grounds for the croc of gold sought by all disciplines, that of being ‘hard’, rather than ‘soft’, science.

The tension between mainstream neoclassical economics (a sub-branch of maths) and the Mise-ian minority, as firmly convinced of their scientific rectitude as the most rabid of mainstream-ers, papers over what they share: belief in rationality as the operating principle of human action.

This belief is different from Adam Smith’s, who saw human action as a vastly more complex phenomenon than people acting uni-rationally. Moral behaviour, in Smith’s world, as a moral philosopher, was driven by mixed motives within ranges of human behaviour that allowed for people acting without intentional objectives related to the outcome for society, often from degrees of fear (risk aversion) through degrees of naivety (ignorance), which nevertheless could produce unintentional outcomes of benign and malign content (the two-sided nature of this process is often forgotten by exponents of the so-called ‘invisible’, as I have mentioned several times on Lost Legacy). The ruler whose greed led him to avarice that undermined his power; the merchant whose fear led him and others like him to grow richer at the expense of society’s possibilities; the inventor whose laziness led her to higher productivity at the cost of past investments in processes she helped overthrow; and so on, are examples of the far richer behaviour range available for economists to study.

Others are noticing that something is missing in conventional economics as taught with great seriousness in the world’s universities. From a not unexpected source – from among the people whose business is to make money out of the money business - Gregory M. Drahuschak (first vice president of Janney Montgomery Scott Inc., Pittsburgh) writes “Behavioral economics may be worth looking into” in Pittsburgh Tribune-Review, (25 February):


“Although Scottish philosopher and political economist Adam Smith probably is best known for his book, "The Wealth of Nations," Smith might be remembered better for introducing the concept of behavioral economics in his 1759 book, "The Theory of Moral Sentiments." Two hundred forty-eight years later and after numerous harshly taught market lessons, Smith's work largely is ignored by a disturbingly large segment of the investing public.

Smith and others after him proposed the notion that a large portion of business and personal economic judgments are made based on the mental state of the people making the decisions. The notion largely was discredited by the middle of the last century, but recently it has resurfaced as a valid economic discipline. For some investors, however, the main lessons to be learned from the study of behavioral economics are mostly ignored.

A wide range of investors' behavior can be explained by subsets of behavioral economics. For example, why when faced with incontrovertible evidence, why do investors hang onto an investment that clearly should be liquidated? Behavioral psychologists would argue that one of the reasons is the fear of facing up to a bad decision.”

In an overly simplistic sense, the concepts of greed and fear as primary motivators are relevant. More often than not, however, it is greed, not fear, that generates the greatest problems.”

[To appreciate the scope of Gregory M. Drahuschak’s thinking read the rest of his article at:
http://www.pittsburghlive.com/x/pittsburghtrib/business/columnists/drahuschak/s_494763.html]

Cut Taxes and Business Rates Unilaterally Without Involving Civil Servants to Administer 'Approved' Schemes

Eamonn Butler, Director of the Adam Smith Institute, makes a poignant remark about a concern expressed by a BBC business presenter that struck an immediate resonance with my recent experience, and perhaps explains this is the way we are now:

“The lunch, by the way, featured BBC business presenter Declan Curry, who was complaining about how hard it is to get businesspeople to go on TV and defend their own business and business in general. I was not surprised. Too many businesspeople actually want to defend subsidies and regulation, rather than free markets. Frankly, I would prefer to keep them off the airwaves. Such is life.” (Eamonn Butler, ASI at: http://www.adamsmith.org/blog/)

I attended a meeting of the David Hume Institute in Edinburgh recently (I declare an interest: I am a Trustee of the DHI) where the participants were discussing how to get Scottish businesses to increase their relationships with its 14 universities and invest more in R&D (however defined).

Data were presented showing relatively poor performance by said universities and local businesses, especially SMEs, and while specific proposals were not outlined, except as goals, it struck me that some suggestions fitted the centre of gravity of current thinking among business people. They didn’t want to spend time searching among the university to find somebody who could help them (the procedures they had to go through were off-putting; it took too long and they risked ending up with somebody who didn’t understand business).

In my view, the problem for SMEs, and other enterprises, including universities which are not very enterprising, and investing in innovation is one of incentives. If you wanted to understand why SMEs do not do more than they do ion this area (most innovation is small-scale, unsung and not exceptional), you should look into their profitability, which operates under regimes of corporation tax and local business rates, imposed by legislatures, national and local, under the impression that they can extract from private sector profits without consequences to the behaviours of people in the organisations they tax.

If you add the uncertainties associated with anticipations about the future (not a problem in neoclassical economics), you would conclude that if you want this situation to change you must offer the right incentives.

Now, of course, the advisors to the legislatures, and business people too, may recognise the truth of the need for incentives, but such is the mindset of the modern adviser, that their version of ‘offer the right incentives’ is a bureaucratic one with all this implies in managed ‘tax breaks’, ‘grants’ and ‘aid’ packages.’ One such successful business leader proposed to the meeting that any package must be practical and structured within the terms of what is acceptable to the ‘politics’ of the current system, if it was to have any chance of being passed into law.

Economists, as per Adam Smith, are mindful of the practicalities involved in persuasion, when set against the standard of natural liberty. The two go together, as Smith shows repeatedly in Wealth of Nations, sometimes without drawing the point out, which causes fast modern readers to miss it. First, show how natural liberty produces an outcome; then show small practical changes that are steps towards that outcome, but do not contradict it. In other words, state how the system of natural liberty applied to the economy works and then make proposals that move the situation from where it is now to where it might move over time in the future.

His proposal was to ‘allow SMEs to retain more of their profits’. Great. It sounded quite radical: his method was to offer them tax credits, as a percentage of their tax deductions, on condition that they spent the money on employing local universities to help with R&D. This would lead to a bureaucratic mess of form filling, compliance reporting and inspecting, plus the usual proportion of ‘fraud’ as some firms tried to get round the rules, with civil servants deciding whether their expenditures (remember, out of their profits!) qualified under the tax-break rules, as if civil servants were competent to do so, or likely to do a better job than the business people who had earned the profits in the first place.

I thought about how Adam Smith might have proposed a remedy for the alleged problem that Scottish SMEs were not innovating to the same degree as in other countries (England included). First, he would have set out his ‘model’ of how an economy in a commercial society produced the ‘necessities, conveniences, and amusements of life’ each year and how it grew by net investment one year with another. He would have located the source of growth in the annual produce of the country as being generated by the productive labour in employment, defining productive as labour that added value to produce for sale in markets, the revenue from which was added to the equivalent in money terms of the annual production of the ‘necessaries, conveniences, and amusements’ of life (GDP).

Productive labour created the produce that its revenue in exchange (its money equivalent) repaid the costs of land (rents), labour (wages), and capital stock (profits). Unproductive labour does not produce this exchange because its services did not produce revenue for those who purchased them. Smith’s definitions of productive and unproductive labour were crucial to his ‘model’, though is use of them was sometimes inconsistent; it is the fact that most instances of unproductive labour did not exchange in markets that is the crucial difference with productive labour, not whether they were services per se, because some services, though their ‘products’ perished instantly, were sold in markets (such as public restaurants, coffee shops, ale houses and houses of ‘entertainment’).

Activities that exchanged products in markets did so when the factors involved in their products earned their reward, as rents, wages or profits. Entrepreneurs who made profits from their business would remain in that line of activity when they received net profits over and above the costs of the factors, including their own capital stock and their own subsistence. All charges on their net profits that reduced their incentives to continue re-investing in economic activities would undermine their willingness to sacrifice consumption and to take risks.

Taxes on profits reduce net profits; increases in business rates reduce net profits; profligate spending, including investments that fail to reproduce their costs, reduce incentives, and thereby reduce the amount available for investment and re-investment, which reduces the rate of growth of the capability for future wealth creation. Frugality, successful investments and re-investment in profitable ventures increases their incentives, and thereby increases the proportion of revenue available for investment and re-investment, which increases the rate of growth of the capability for future wealth creation.

To increase the rate of growth of future wealth creation, proposals that reduce the tax burden on the factors causing wealth creation (land, labour, and capital-stock), would be beneficial. The direct approach of legislatures, national and local, unilaterally cutting such burdens is more likely to achieve the goals of policies to increase the investment of SMEs in such activities as R&D and innovation (should such activities be related to increased future capabilities in competitive markets), than use of indirect approaches to the problem of first taxing the enterprises and then returning a proportion of taxed money in schemes that require unproductive administrative costs to decide on the suitability of individual schemes to have the taxed money returned. Entrepreneurs do not need the central direction of civil servants to take advantage of profit incentives, nor do they need administrative regimes of formal applications for eligibility, the inevitable inspection rules of compliance inspections.

To the extent that added unproductive administrative costs of compliance, which do not reproduce their costs as revenue earned in markets, reduces net profits (they have to be paid for as a charge on the employment of productive factors), they reduce the gains from returning taxed money to entrepreneurs, and undermine the demonstration effect of experimenting with the policy. I would prefer, on impeccable Smithian grounds, that more direct measures are undertaken to solve the problem.

A Small Correction of Fact

‘Would you Adam and Eve it?’ by John Thorpe, MBE, appeared in the ‘Yorkshire Evening Post’ (Leeds) yesterday. It’s about the new £20 note issued by the Bank of England, of which there is much being said in the press just now, and like the Cockney riming-slang headline (it means ‘would you believe it’), it is full of little ‘jokes’ (‘come on on, it’s a living’). It also includes a common enough error about Smith’s history:

“His abilities apparently caught the eye of the Duke of Buccleuch who engaged him as tutor to his son on his Grand Tour of Europe where Smith met other eminent thinkers such as Voltaire, Rousseau, and Franklin.”

Comment
No, John Thorpe. Smith’s abilities caught the eye of Charles Townshend, Chancellor of the Exchequer, who had married the Duke’s widow, and whose young step-son (not his son), the Duke of Buccleuch’, was at Eton. Charles Townshend wanted Smith to tutor the young Duke, and eventually acquired Smith's services as a tutor for a life pension of £300 a year in 1764.

Charles Townshend MP was a leading figure in the government at the time and is credited with single-handedly causing the American rebellion with the imposition of the tea tax, which provoked a fancy dress tea party at Boston.

Would you Adam and Eve it? A modest tax on tea imposed by his Chancellor, whom David Hume described as ‘passes for the cleverest fellow in England’, losing the King the British Empire (version 1.0). Wasn’t too clever just then, was he?

[Read John Thorpe’s piece at:

http://www.leedstoday.net/viewarticle.aspx?articleid=2068173§ionid=1775]

The Moment When Brad Delong Understood What Adam Smith Was About

Every student (a status we should never lose, even unto retirement) knows the feeling; suddenly the light switches on, and you see further and deeper into a subject than you did the moment before. You are never the same again; and it happens again and again if you keep reading and researching in and around your subject.

One such ‘moment’, where the light struck (and is remembered with justified pride) occurred in the life of Brad Delong, twenty-five years ago, when still an undergraduate, and he wrote about it on his Blog yesterday.

I came across it too late last night to post, and I left it to read a chapter of Craig Smith’s new book on Adam Smith and spontaneous order. I thought about it, though, first thing this morning and wish to share it with you.

I only quote a small section of it – you MUST read it all for yourself. It concerns the time Brad Delong was searching for an original theme for his Bachelor degree final paper and was referred to a book by Keith Tribe, heavily influenced by Foucault. He titles his post with: "Two Months Before the Mast of Post-Modernism" Recycled” (those with an interest in sea stories will understand the first part of the title; those interested in literary criticism will understand the second, for the rest, those with a sense of irony will get by):

“I began to read Keith Tribe. He said very strange things. He said that the Wealth of Nations that economists read was not the Wealth of Nations that Adam Smith wrote. The Wealth of Nations that economists read was made up of two books: Book I on markets and Book II on capital. The Wealth of Nations that Adam Smith wrote was made up of five books: Book I on the "system of natural liberty," Book II on accumulation and the profits of stock, Book III on the economic history of Europe and why the empirical history of its economic development had diverged from its natural history, Book IV on the mercantile and physiocratic systems of political economy, and Book V on the proper management of the affairs of the public household by the statesman.

The Wealth of Nations, Tribe said, could not be a book of economics because a book of economics had to be about the economy. And there was no such thing as the economy in 1776 for a book of economics to be about. What was there? There was the undifferentiated stuff of the mixed social-cultural-political-trading system that governed production and distribution: material life. There was the study of the management of public finances. This was conceived in a manner analogous to the domestic-economic management of household finances. Just as--to Robert Filmer and others--the King was the father of the people, so the King's household--which became the state--had to be properly and prudently managed.

In the words of [Sir] James Steuart, who wrote his Principles of Political Oeconomy nine years before the Wealth of Nations, in 1767: "Oeconomy, in general, is the art of providing for all the wants of a family, with prudence and frugality. What oeconomy is in a family, political oeconomy is in a state." It is managing affairs to make the people prosperous and the tax collections ample by governing "in such a manner as naturally to create the reciprocal relations and dependencies between [inhabitants], so as to make their several interests lead them to supply one another with their reciprocal wants."

There wasn't, Tribe argued, an economy that an economist could write a book of economics about until the 1820s or so. …

And I became convinced that Tribe and Foucault were right. It was, indeed, only with Ricardo that the operation of what we now say is the economy--the production, exchange, and distribution of goods and services all mediated through market exchange--was seen as something that was important enough, or separate enough, or coherent enough to be something that it made sense to write books about, and, indeed, something that it made sense to be an expert in. David Ricardo was a political economist. Adam Smith was a moral philosopher. To try--as somebody like Joseph Schumpeter was--to grade Adam Smith as if he were engaged in the same intellectual project as Schumpeter was somewhat absurd.

Tribe applied this methodology to Adam Smith, his predecessors, contemporaries, and successors. What they were doing, before Ricardo, was Political Oeconomy--writing manuals of tactics and policy as advice to statesmen, although manuals restricted to what Adam Smith would have called (did call) a subclass of police: how to keep public order and create public prosperity. Hence for Adam Smith Book V of Wealth of Nations is the payoff: it tells British statesmen what they ought to do in order to make the nation prosperous, their tax coffers full, and thus the state well-funded. Book IV is a necessary prequel to Book V: it tells the statesmen in the audience why the advice that they are being given by others in other books of Political Oeconomy--by Mercantilists and Physiocrats. Book III is another necessary prequel: it teaches statesmen about the economic history of Europe and how political oeconomy of various kinds has been practiced in the past.

But Tribe's (and Foucault's) methodology collapses when we work back to Books II and I of the Wealth of Nations. For Adam Smith is not the prisoner of the discursive formation of Political Oeconomy. He is not the simple bearer of currents of thought and ideas that he recombines as other authors do in more-or-less standard and repeated ways. Adam Smith is a genius. He is the prophet and the master of a new discipline. He is the founder of economics.

Adam Smith is the founder of economics because he has a great and extraordinary insight: that the competitive market system is a remarkably powerful social calculating and organizing mechanism, and that the sophisticated division of labor to which a competitive market system backed up by secure and honest enforcement of property rights give rise is the key to the wealth of nations. Some others before had had this insight in part: Richard Cantillon writing of how once you have specified demands the market does by itself all the heavy lifting that a central planner would need to do; Bernard de Mandeville that dextrous management by a statesman can use the power of private greed to produce the benefit of public utility. But it is Smith who sees what the power of the "system of natural liberty" that is the market could be--and who follows the argument through to the conclusion that it forever upsets and overturns the previous intellectual moves made in and conclusions reached by the discursive formation of Political Oeconomy.

And once I had worked my way through to this conclusion, I could start to write my own thesis. I had broken the thralldom. Foucault's ideas of "discourse" and "archaeology" were not my masters, but my tools. And as I wrote it became very clear to me that between David Ricardo and even the later John Stuart Mill the discursive formation that was Classical Economics did not produce anybody like Adam Smith. There was nobody who made the intellectual leap--produced the epistemological break--that Smith had done that shattered Political Oeconomy and enabled the birth of Classical Economics. I could write my thesis about how the British Classical Economists never understood the Industrial Revolution that they were living through.
--J. Bradford DeLong, B.A. in Social Studies summa cum laude, June 1982.

Comment
These past four or more years when I have been reading many books, papers, journals and Blogs on Adam Smith, this is the first one that I can recollect that understands what Adam Smith was about in the Wealth of Nations, and that expresses it so well. It is hard to realize this is from an undergraduate’s essay on Smith, not a doctoral or post-doctoral thesis, or a magnum opus.

Here I was, anticipating with not a little pleasure, that my book on Adam Smith for the Great Thinkers in Economics series (Palgrave-Macmillan) would set the record straight – Smith did not write a book on economics; he wrote a book that made economics possible – and Brad had concluded the same and shared it with his examiners, quietly in 1982. It was an awe struck moment for me late last night; there is no doubt in my mind that Brad Delong on Adam Smith’s role in the history of economics is absolutely right, because I in my modest way know why too.

Read Brad Delong at: http://delong.typepad.com/sdj/2005/07/two_months_befo.html

18th Century Chartered Joint Stock Companies are Not the Same as Modern Corporations

Smith is good for quotes, and too good for accuracy, though. He wrote so much about the world, from distant pre-history of the past right up to the mid-to – late 18th century that out of its context, readers search apply what they find as if they are relevant to the 20th - 21st centuries.

Does it matter? Not really, but in looking at his quotes in context we learn something about what he was about, and how much or little things have changed in the intervening 217 years since he last edited Wealth of Nations and Moral Sentiments.

Steve Borsch, a serious blog author, writes a post: “Changing Nature of Work and Your Value Online” (which proffers free advice on an important subject that is entirely interesting and perhaps relevant to some of you). He posts on his Blog, “Connecting the Dots (guidance, insight & ideas in a time of accelerating change)”, and carries carries a quotation from Wikipedia:

“Think about the modern corporate organization and its just over 100 years of existence. From this Wikipedia article on the corporation comes this quote from Adam Smith's the "Wealth of Nations" which criticized the corporate form because of the separation of ownership and management.

The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

The modern corporate entity is, as Smith points out, an abstract one by its very nature. Remarkably complex and with numerous layers of specialized functionality, making it work as a whole is an ongoing challenge. With little true ownership by those that work within the corporate structure and loyalty (by both sides) fleeting, its no wonder that people are searching for meaning and aligned jobs while corporations are seeking human resources that provide a competitive advantage. Now throw in the explosion in instant and cheap communications, idea generation, knowledge transfer and social connections that the Internet has enabled and the corporation itself is undergoing massive shifts.
Now throw in the disruption of outsourcing, specializations that perish and retraining that takes years -- coupled with the masses that are working in jobs that pay the rent but are misaligned with what each view their mission, values and purpose to be, and you have a climate ripe for disruption and change.”

Comment
It is common to find this passage, and other from the chapters round it, frequently quoted as if Smith was referring to the modern (post-19th century) joint-stock company, even identical to the modern corporation operating within ‘globalisation’. Criticism of these modern institutions should be directed at them on their own merits or demerits, without bringing Smith into it, at least not on the criteria he used.

The common form of private firm in Smith’s day was the ‘co-partnery’, which was subject to much like the ‘partnership’ law of today: each member was liable for the co-partnery’s debts up to the limit of his fortune, into bankruptcy and beyond. But the joint-stock company in law limited a member’s debt liabilities to the amount of his share value only. This allowed it to recruit subscriptions from a far-wider audience than a co-partnery; allowing it to raise vaster capital sums, because the risk, should its venture fail, to the rest of their capital and possessions was much diminished.

After that, similarities with joint-stock, modern corporations evaporated. I commented on a professor’s use of ‘international trading companies’ as if these were the same as Smith’s in a post I wrote last September from the Adam Smith conference I attended at Columbia University, New York (see archive). The same applies here, in my view.

Smith’s context was the Royal Charter trading companies, a status awarded by the King, which gave them a legal monopoly of trade with designated regions of the world to the exclusion of all others, British and foreign. The most infamous of these was the East India Company, a by-name for systematic plunder.

Chartered joint-stock companies had Courts of Governors, operating through local managers. The shareholder holders subscribed their money and received dividends; the managers managed, nominally under the supervision of the Governors, but certainly not under their day-to-day control. This problem was exacerbated by the geography of the 18th century – India was many months sailing time from London, there and back, and could take a year or more in Smith’s time. During this time, local managers made every effort to get rich quick, at the local population’s expense, and the interests of the shareholders, and collectively they used the vast sums flowing their way to bribe and corrupt wherever they found it necessary to escape close supervision (including the Directors Court, politicians, and Prime Ministers).

In these circumstances, Smith did not consider their governance to be honest. Much of his criticism against the chartered companies was directed at these aspects of their activities, unique as they were in these respects. They were not regulated as international corporations are today with legal interventions, government inquiries, a free press and media, and stronger governments around the world. Information flows in seconds from a territory that used to takes months; they are not protected by monopoly rights, they don’t have Royal Charters (an institution that still functions in the UK, in that every university is founded by a Royal Charter, but without the endemic corruption that Smith wrote of, and without the spirit of mercantile political economy, the real object of his hostility to the 18th Century joint-stock companies.

Steve Borsch is not comparing like with like. When the advantages of a join-stock company were understood in the mid-19th century, legislation was enacted that governed their behaviour, which were worlds away from Smith’s barbed statements on the ones he wrote about.

[Read Steve Borsch at:
http://www.iconnectdots.com/ctd/2007/02/changing_nature.html]

A man acts (Mises), so I acted (Kennedy), and Human Action followed

Today’s my birthday (thank you) and my wife wrote the following on the gift card:

‘When you first said you loved me

I truly believed it was no myth.

I thought your love would last forever,

But along came Adam Smith.’

So, spotting an entrepreneurial opportunity (the glass, at 67, is half full), I immediately suggested we went to the local ‘Canny Man’ for a ‘romantic’ lunch. The sun is shining, the sky is blue, it’s freezing cold, and I’ll manage if my Blog waits, patiently …

Tonight it’s dinner with the family at Il Castello, an Italian restorante, which we have been known to frequent on these occasions and many others.

I shall blog afterwards, good sense willing (the glass after 11 pm is empty).

In the Left Corner We Have a Rusty Idol from Calgary

Canada provides some great personalities who are worth reading as bloggers. It’s as if the people over there exaggerate the extremes of opinion to get recognised as individuals amidst the noise from their excessively noisy neighbours to the south, but no matter how much they try, they still come across (to me) as moody teenagers at a party, out to shock the uncool.

Take one such, Cliff Almas Hesby, from Calgary, Alberta, the author of the ‘Rusty Idols’ Blog, with his ‘look-at-me’ Tee-shirt slogan: ‘I am a trade barrier’ (“tee-hee, that will shock them - now how I can work in the F-word, to really upset their grandparents”), who writes a piece on Adam Smith, which shows he has not quite understood what Smith was about.

Cliff writes (and he writes well):

“Free Market ideologues love Adam Smith and his magnum opus Wealth of Nations - except for the bits that they don't.

Under capitalism the more money you have, the easier it is to make money, and the less money you have, the harder.

Wherever there is great property there is great inequality. The affluence of the rich supposes the indigence of the many.”

[Get Cliff’s idea? Society is zero-sum; capitalism has turned the planet into the mills and factories of the mid-19th century, just as Marx and Engels told us; go to Calgary and see the dank slums, the smoke stacked hellholes where the Canadian lumpen proletariat shuffle to work in their cars, their clothes made from rags, their breakfasts made from the offal thrown out by the rich, bloated capitalists living, er, next door, their deformed 6-foot tall, skinny emaciated bodies – no fear of obesity here, crippled with disease and no medical services, the nearest hospital, a dirty shed, six floors high, with ignorant, uneducated nurses and people laughingly called ‘doctors’, killing everybody the germs don’t get to first, (Editor: that’s enough make-believe): no mark]

“Smith's metaphor of the Invisible Hand is often used to justify policies of Laissez-faire absolutism, of course this is taking a very specific quote out of a very specific context of Smith's belief that national level disruptions caused by globalized trade would be restricted by specifically nationalist sympathies. Essentially, exactly the kind of thinking dismissed by globalization's current high priests as narrow and parochial.”

[At this moment he is partly quoting what others say about Adam Smith, so no point complaining: for ‘invisible hand as a metaphor’(1 mark); for ‘laissez faire absolutism’ (not a word that Smith ever used: no mark); ‘specific quote out of context’ (1 mark); ‘globalised trade’ (not a word Smith used and not appropriate in mid-18th century - international trade even with the American colonies was unimportant; Hawaii was unknown, Australia was unsettled: half mark); ‘specifically nationalist sympathies’ (no; it was simple human risk aversion to trade outside a locality and overseas – piracy, wind and waves, fraud, shipwrecks: no mark); ‘globalisation’s current high priests’ (colourful language to shock the adults: no mark)]

“Another example of the way Smith's modern followers display their very selective reading of Smith is on the subject of inheritance. Smith very strongly supported restricting inheritance, believing that beyond insuring the basic needs of widows and children it was something that distorted the equality of opportunity he believed in, creating an aristocracy of wealth. Amusingly the Adam Smith Institute now argues against the teachings of their name-sake on this and many other issues.”

[Smith’s concerns about inheritance were not directed at the overwhelming majority of Britain’s population – the labourers, artisans and their families – but at the landowners whose inheritances consisted of primogeniture rights and entails – land blocked by legal means from being broken-up and sold piecemeal; it had to be intact, as a whole, and passed to the nearest male relative, thus locking land distribution into a small coterie of rich families.

It is disingenuous to extend that to the situation today where the vast majority of Britain’s population live in families that have modest amounts of inheritance entitlements – the family home, mainly, of which the Inland Revenue takes 40 per cent, forcing the house to be sold; Smith did not believe in ‘equality’ in the sense Cliff suggests, - more like the right to a proper share in the opulence created by living in a regime of Perfect Liberty, which allowed for differences in lifetime earnings from labour; the Adam Smith Institute can look after themselves, so I offer no comments; overall score: nil.]

“Smith would probably been just as appalled by the bloated pay of CEOs and other executives and the growing canyon between the rich and poor. He would probably have supported efforts to narrow such gaps and would have sympathized with the argument that such gaps lead a dangerous class resentment and social instability. Even Bush has taken notice the dangers of such drastic transfers of wealth from the many to the few, which was the central point of his presidency of course.”

[I take the point, but it is not possible to say what Smith would have thought of these events. He did not anticipate the future, nor write about it; he did not know the word ‘capitalist’ – it was invented in 1854 and Smith died in 1790; he knew nothing of capitalism, a mid-19th century phenomenon. He certainly was concerned that if the bulk of the people – the labourers and their families – were unhappy and poor, it was ‘dangerous’ for stability, hence he approved of high wages, employment, education and freedom. The workers today are well educated, are not starving and living in hovels (I’ve been to Calgary on business and it does not look much different from Edinburgh in opulence, except everything is bigger in Calgary, but its older in Edinburgh) and they own the most amazing range of gadgetry beyond what Smith could have imagined: half mark]

“We tried it the Laissez-faire fetishists way for the last several years. The result has been an unstable mess of privilege and imbalance that threatens to upend the whole system. Time to accept that Smith's ideas always included a context of regulation and adjustment. Smith, the real Smith isn't inconsistent with regulation and adjustment - or even socialism, believers in transparent appendages to the contrary.”

[Laissez-faire is an abstract idea, never been tried nor tested, and certainly not in the ‘last several years’, and would not be a solution – Smith didn’t believe it would be either; he didn’t trust ‘merchants and manufacturers’ that much: no mark; if Cliff thinks Canada, or Calgary is on the eve of ‘revolution’, he cannot be serious, apologies to McEnroe: no mark; ‘Smith’s ideas included a context of regulation and adjustment’ – yes, but he didn’t trust politicians much either and preferred the rule of law, separation of powers and independent justice: half mark; ‘isn’t inconsistent with regulation and adjustment’ – yes: 1 mark; ‘even socialism’ – NO! Nonsense and wishful thinking, a step or more too far in Cliff’s argument, aimed at provoking adults, .. er, so I’ll calm down, with my ‘transparent appendages, whatever they are: no mark]

‘And if they are right, they are in effect arguing that fairness is impossible without radical revolutionary change.’

Well as maybe, but they ain’t right. And if ‘radical revolutionary change; is what Cliff wants, that is his free choice. In Calgary, they have democracy. If Cliff can get elected – his profile says he was a candidate for office for ‘NDP’ (of which I know nothing). All countries that have tried ‘radical revolutionary change’ have not been, even notionally, successful, except in swapping one elite for another, and making a whole lot of people, especially the average labourer and his or her family, a whole lot worse off, while they did so, and afterwards until the people returned to freedom and the rule of law.

Markets don’t promise you a rose garden, but they do quite nicely in not making you live in a man-made desert. Compare market driven Hong Kong and Mao suit, state-driven Canton before China’s steps towards liberalisation.

Overall, Cliff’s essay did not do well for content. For writing style it did much better. On Adam Smith’s thinking, he is moving away from Chicago’s version of Adam Smith, but he has some way to go to get to the heart of the Adam Smith who lived in Kirkcaldy.

[Read Cliff’s article at: http://rustyidols.blogspot.com/2007/02/inheritance-adam-smith-and-anna-nicole.html]

The Division of Labour Has a Long Lineage, as have Markets

A Blog, ‘Associated Content: the people’s media company’, publishes today a book review by Brian McElroy, “Adam Smith in Karl Polanyi's The Great Transformation”. I contains nothing controversial with the approach of ‘Lost legacy’, though Karl Polanyi might have choked over it while eating his morning cornflakes.

Brian McElvoy opens with a paragraph that sums up the differences between Polanyi and Smith:

“In Karl Polanyi's The Great Transformation, a treatise on the economic and social consequences of the Industrial Revolution, he often invokes Adam Smith as the founder of an intellectual movement that inappropriately relegated primitive economics to prehistory by assuming that man has a natural propensity to barter, truck and exchange one thing for another. Polanyi clearly differentiates himself from this movement, largely based on one of the basic premises of the market economy; he states that "the division of labor, a phenomenon as old as society, springs from differences inherent in the facts of sex, geography, and individual endowment; and the alleged propensity of man to barter, truck and exchange is almost entirely apocryphal" (Polanyi 45).”

Comment
From this page on (we are only at page 45), Polanyi and readers familiar with the works of Adam Smith go their separate ways. It’s some years since I last read Polanyi’s books and I remember spotting his errors in his ‘marxian’ version of the world and history, and the tendency he had to assume that Smith wrote about market relations in pre-history (and, indeed, in the ages of shepherding, farming and commerce) as if ‘truck, barter, and exchange’ on its separate, diffuse and social-evolutionary appearance within existing modes of production, meant that they dominated these ‘old’ orders and replaced them.

I have a couple of papers by Morris Silver (New York University) on these subjects, one of which is a studied and through rebuttal of Karl Polanyi’s narrow views of exchange relations in the Ancient world, using screeds of data from Greek times and earlier to show the extent and depth of what Polanyi calls peripheral, that I have not seen answered (it is among my papers in France, so I cannot give you references).

Brian McElroy does not address the substance of Polanyi’s critique, except in so far as it refers to what Smith wrote, and for this I was receptive. Polanyi came at Smith with the prejudices of a person who had taken on board the market economy, as described by Chicago, aligned it with a few quotations from Smith, and then proceeded to attack his perceptions of Smith’s political economy, as if Chicago Smith was Adam Smith inside guise of the neoclassical paradigm. Given that the neoclassical paradigm does not even describe existing economic relationships, I remain confident that Smith emerged unscathed from Polanyi's polemics against Chicago.


“As illustrated, Polanyi and Smith hold plainly different ideas on the causal factor behind the division of labor. Polanyi finds that Smith's ideas which gave rise to the notion of 'homo economicus' were more prophetic than descriptive; he states that "while up to Adam Smith's time [the propensity to barter, truck and exchange] had hardly shown up on a considerable scale in the life of any observed community, and had remained, at best, a subordinate feature of economic life, a hundred years later an industrial system was in full swing over the major part of the planet" (46).”

Comment
Polanyi’s version of the division of labour is almost laughable.

Consider the simple everyday facts of life in ancient times: city states had ports; ports have ships; ships have crews; crews eat food; other people produce the food; ships carry cargo; other people produce the cargo; other people eat food; families shelter in houses; people build house; people use tools; other people make tools; tools and cargo are transported; other people transport goods, using carriages (built by others) and animals tended by others; who visit temples, built by others and managed by priests; others guard the cities; they eat food; other produce the food; and ….

There is also the extensive monetisation present in all the economies of the ancient world, and that, is the crowning evidence for the existence of the widespread division of labour: for what conceivable purpose would money exist if there was no division of labour? And before money there was barter and the same applies: 'truck, barter, and exchange' causes barter and, eventually, money, and both, eventually cause the commercial age that Smith identified, and the commercial age, in its second manfestation after the recovery of Europe from the Fall of Rome, led to the capitalist phenomenon from the mid-19th century.

How far must I go on to demonstrate the ubiquitous nature of the division of labour from ancient times, long before Plato wrote about it, never mind Petty and his watchmaker, or Diderot in his Encyclopedia, and, of course, Smith visiting the pin factory in Wealth of Nations, all of which was before the ‘industrial system’ a ‘hundred years later’.

The absence of a division of labour (which may have been preceded by the divisions associated with the sexes) describes a primitive pre-human existence (the ‘brutes’ in 18th century lore), combining absolute equality (a totem of orgasmic Marxism), with absolute poverty (another totem consequence of the socialist states of the 20th century, plus North Korea in the 21st).

Google Professor Morris Silver and follow up with his impressive scholarship on these matters.

Thanks to Brian McElvoy for reminding me of Karl Polanyi’s unsound analysis of history, and his mistakes about Adam Smith.

Read Brian McElory’s post at:

http://www.associatedcontent.com/article/147422/adam_smith_in_karl_polanyis_the_great.html

End Note References Available

NOTICE re: references

Apologies, but the end note references for the previous post on Smith not having a Labour Theory of Value for Commercial Societies (capitalism was unknown to Smith and was a 19th century phenomenon) were dropped by the technical system on trasfer to the web page.

If anybody would like the 24 references to the posting, drop me a line by email to gavin at negweb doT com, and I shall send a copy back.

Smith Did Not Have a Labour Theory of Value for Commercial Society

I admit that reading this particular Blog (Cannonfire), I am no wiser as to its role or what it is about. Buried in an article about Abraham Lincoln and his alleged statements about corporations, I found a repetition of the usual claim that Adam Smith ‘believed’ in the labour theory of value, which has the singular virtue that it is widely believed, but no other. It is not true, especially when it is linked, as in this case, to Karl Marx.

Joseph Cannon at: ‘Cannonfire’

“Adam Smith himself voiced some wariness of "joint stock corporations," and was not (contrary to what you've been taught) always opposed to government regulation. Smith also believed in the Labor Theory of Value, usually attributed to Marx. (Yes, I've actually read The Wealth of Nations -- unlike a lot of the people who treat it as a holy book.) (Gad, I hope someone doesn't demand that I cite chapter and verse -- my complete copy is missing, and my abridged edition is buried in a huge pile of other books.)”
[Read the Cannonfire post (note, it is a fairly rabid anti-Republican rant) at:
http://cannonfire.blogspot.com/2007/02/lincoln-again.html]

Comment
I have extracted from my new book ms on Adam Smith an edited version of a sub-chapter on Smith’s alleged labour theory of value, which I found not to be the case on a close reading of Wealth of Nations. It’s rather long but you may find in thought provoking.

Smith’s flirtations with traditional labour theories of value
© Gavin Kennedy 2007

Smith put forward what is claimed to be a version of the labour theory of exchangeable value, along with, it should also be noted, strong evidence of his awareness that whatever merits such a theory may have had in the distant past, consistent with conventional knowledge and his historical perspective, it was insufficient to explain the observed behaviours of prices in markets, as the history of theories of value shows . And this created one of those conundrums: to what extent was Adam Smith committed to a labour theory of value? The answer is: very weakly, if at all.

There is no doubt that Smith’s presentation of labour as ‘the real measure of the exchangeable value of all commodities’ is less than clear, partly because he muddled his presentation and straddled two quite different circumstances. In time, successor authorities resolved the problem with the new theories of marginal utility, and Marxists holding labour as a measure of value by then had marched it into a cul de sac.

Smith shows that the early history of primitive hunting societies, ‘which preceded both the accumulation of stock and the appropriation of land’, were the arena where labour was ‘the source of value’ in primitive ‘exchange’. However, with the division of labour and, crucially, the co-operation of separate property owners in commercial society, Smith clearly acknowledged that labour no longer had a unique role in determining value or price. Therefore, the errors of a labour theory of value in commercial society put forward by others does not apply to Smith’s contributions.

Smith opens with:

‘In that early and rude state of society which preceded both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another’ (emphasis added).

He clearly delimits the situation he addresses, by asserting that labour is the ‘real measure of the exchangeable value of all commodities’ in a ‘rude society’ before the ‘accumulation of stock and the appropriation of land’. After the ‘accumulation’ and ‘appropriation’ occurred, labour ceased this role.

The Age of the Hunter was unrepresentative of the Ages that followed because in all of them labour was no longer the only factor of production; farming and commerce, for instance, had multi-factor production functions, and were significantly different from the ‘rude’ state of society. In consequence, Smith (and others) explored the impact of markets on the basis of pricing variations, and he used ‘natural’ and ‘market’ price formulations explain the distribution of earnings among several factors.

In his ‘parable’ of the beaver and the deer hunters he postulated that if in a ‘nation of hunters … it usually costs twice as much labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer.’

The parable applies to a ‘rude’ society only, where hunters unambiguously owned the product of their labour, leaving aside the dubious implication that in exchange they traded ‘equivalent values’, a proposition derived from medieval notions of the ‘Just’ or ‘fair’ Price’, still heard occasionally today.

Separately, Smith drew attention to the problems of determining the quantities of labour exerted by beaver and deer hunters. Despite labour being ‘the real measure of the exchangeable value of all commodities’, Smith asserts that it would be ‘difficult to ascertain’ the determinants of the quantity of labour that constituted labour’s real value because, in addition to time, other qualities enter the quantity equation, such as the degrees of hardship and the ingenuity of labour, degrees by which one hour of arduous work exceeds one hour of easy work, and one hour of a trade that cost years to become proficient in compared with a month’s unskilled industry.

In a sure recipe for argument, two hunters, tired, dirty and bloodied from their labours, understated the problems of comparability: ‘it is not easy’, he says, ‘to find any accurate measure of either hardship or ingenuity.’ While ‘some allowance is commonly made for both’, the exchange ratio would be found ‘by the higgling and bargaining of the market’, which he suggests ‘is sufficient for carrying on the business of common life’. But once ‘higgling and bargaining’ are allowed, there is no compelling reason to believe that the ‘higgling’ confined itself solely to the alleged labour (or any other) costs that the parties claimed for their products.

By generalising these conclusions to both ‘rude’ and ‘advanced’ societies, it causes confusions. Smith drew attention to the problem of ‘price’ determination by asserting how it worked:

‘In the advanced state of society, allowances of this kind, for superior hardship and superior skill, are commonly made in the wages of labour; and something of the same kind must probably have taken place in its earliest and rudest period.’

If we remember that exchangeable value, first for a ‘rude’ society, assuming an acceptable measure of quantity exists, with labour as the only factor owned by whoever exerted it, is different from exchange value when societies moved on to the ‘advanced’ state, when labour was no longer the only factor, and that others owned the other factors, everything is clear. But he switched between different modes of production, causing careless readers to miss the significance of the differences. They also missed that Smith took for granted, they knew he was talking about two separate phenomena of ‘value’ in ‘rude’ and ‘value’ in subsequent states of society, after property was invented.

Separate the muddle
He opens Chapter V with:
‘Everyman is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life.’

He speaks here of the commercial age and not the ‘rude’ hunting age, because this definition applies after the division of labour ‘has thoroughly taken place’, and he makes the logical assertion that in this state each person supplies from his own labour only a small part of his needs and, necessarily, he must obtain what else he needs from others. In these circumstances their richness or poorness depends on the labour of others each can command by what they can ‘purchase’ from what their own labour can purchase from the products they own and which they can supply to others in exchange for the products owned by them. It is the command of other people’s products through the exchange of products that people already own (irrespective of what they cost in labour), or what they can get for what they can trade, irrespective of the supposed labour ‘embodied’, so to speak, within them, that constitutes Smith’s theory of exchangeable value. It is no longer a labour theory of value.

When labour is no longer the only factor, it ceases to be the case that what everything ‘really costs to the man who wants to acquire’ something is purely ‘the toil and trouble of acquiring it’. In commercial society, through the division of labour, he acquires what he needs by trading his surplus contribution with the owners for their surplus products. By acquiring money from contributing to the production of exchangeable surpluses he saves himself the toil and trouble of making other products he wants; he imposes the ‘toil and trouble’ of making them upon those who made them. This, after all, is the benefit of an exchange economy, with its ever-finer division of labour – we have an unimaginable increase of product variability available for exchange.

Smith’s text moves between both ‘rude’ (with an extremely limited division of labour) and commercial societies (in which the division of labour ‘has thoroughly taken place’). In the ‘rude’, single-factor society, the identity of labour with value may be sound; in commercial multi-factor, multi-owner societies, the labour of an individual lost its ‘monopoly’ of creating the ‘value’ that a person consumed, because individuals now consumed products created by multiple others in addition to the one or few they created themselves.

Smith writes of exchange relations in commercial societies, after the division of labour ‘has thoroughly taken place’, and shakes off unique measures of an individual’s labour as the sole source of value; he introduced the notion of the greater toil of making everything oneself with the lesser toil and trouble of somebody else making it for an exchange with others.

‘What is bought with money or goods is purchased by labour as much as what we acquire by the toil of our own body.’

This assertion elides one relevant point: the division of labour through exchange creates a larger range of products than individuals could make for themselves in a ‘rude’ society, before the division of labour ‘has thoroughly taken place.’ The individual in commercial societies purchases from among a vastly superior range of products. ‘Toil’ is more productive with a division of labour than without it.

‘Labour’, writes Smith, referring to ‘rude’ societies, ‘was the first price, the original purchase price that was paid for all things.’ Indeed, it was by labour that ‘all the wealth of the world was originally purchased’ and, ‘its value to those who possess it and who want to exchange it for some new productions’ is ‘precisely equal to the quantity of labour which it can enable them to purchase or command.’ Smith’s shows he had moved on from labour values:

‘But though labour be the real [i.e., historical] measure of the exchangeable value of all commodities, it is no longer how value is commonly estimated.’

Because of the difficulties involved in ascertaining the commensurability of two quantities of labour, we are back at ‘higgling and bargaining’ and, outside ‘rude’ societies, the quantity of labour is an ‘abstract notion’. In commercial societies, where the division of labour is in full effect and ‘barter ceases’ in favour of monetary exchange, people rely on the ‘palpable objects’ of the quantities of commodities.

Hence, ‘it comes to pass,’ writes Smith ‘that the exchangeable value of every commodity is more frequently estimated by the quantity of money, than by the quantity of labour or any other commodity which can be had in exchange for it.’ In short, there was no useable labour theory of exchangeable value outside the early stages of ‘rude’ society, once the division of labour became general.

Smith considered that what he enunciated was clear enough if readers properly understood the central role of ‘truck, barter, and exchange’ in a commercial economy. The problem is that despite his repeated emphasis, too few readers in practice realise his intentions.

‘Had this state continued’
I shall follow his speculative diversion where he returns to a rude society.
‘In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him.’

Smith uses the same phrase, ‘the whole produce of labour belongs to the labourer’, no less than three times but always in connection with the original, first Age of Hunting, i.e., before the Ages of Shepherding, Farming or Commerce. It is the simple fact that the product of his labour constituted the hunter’s property. An individual had a natural or perfect right in one’s own body and when ‘trafficking with those who are willing to deal with him’ (‘liberi commercii’) all persons had a natural right of ownership in their ‘industry, labour or amusements’, when not ‘hurtful to other persons or goods’.

His parable of an exchange of arrows for a share of a hunter’s kill affected his statements that the ‘whole produce of labour belongs to the labourer’. In the exchange transaction, the arrow maker no longer ‘owns’ the ones he gives in trade, and the hunter, using the arrows he did not make, no longer is the sole source of the labour involved in whatever he kills using the arrows. The link between labour and ownership necessarily breaks the link between an individual’s labour and the supposed exchange value of a product.

If the labourer was no longer the sole owner, who owned the product using arrows made by somebody else to make a kill? The hunter was not the sole owner of the ‘whole product’ of his labour. The traded arrows and the kill belonged to the hunter, net of the share of his kill that he had ‘higgled and bargained’ for with the arrow maker; the arrows belonged to the arrow maker, minus those given in exchange for a share of the kill received for the arrows that he had higgled and bargained for: the traded arrows and the share of the kill given in exchange, no longer belong to their original producers.

Exchanging created a clear break in the ownership of the factors that produced the kill. In rude societies, ownership was inextricably linked because hunters made their own arrows and arrow makers did their own hunting, but with trade the ‘title’ of ownership changed from the bargain made between the new owners. When owners of other factors joined in producing output this was significantly different from the former situation when there was only one factor, the hunter’s labour, unambiguously owned outright by the hunter.

Truck, barter and exchange introduced multiple claims to ownership of the product. Smith’s statements that ‘the whole produce of labour belongs to the labourer’ apply only to the first age of the hunters up to the exchange of arrows (or whatever) for the product.

With the evolution of property in land the share of an individual labourer in the final product is reduced, and the contribution from materials and technology, also owned by others, further reduced the share further, because he had to pay a third or half of the product as some kind of rent. Differences between rude and commercial societies in the ownership of the ‘product of labour’ became the basis of Marx’s theory of ‘exploitation’ through the ‘surplus value’ (the amount paid to the owners of capital and materials – Smith) which Marx claimed was created by ‘workers’ and ‘belonged’ to ‘them’, collectively.

The meat that hunters gave in exchange for arrows was the ‘price’ they paid to own, or to ‘borrow’, tools that had belonged to somebody else. Land before the evolution of property was ‘free’. Because they could not both consume the entire product and ‘pay’ the producer of the other factor (they couldn’t ‘eat their cake and have it’), they consumed less of the product of their labour in order to ‘pay’ for the arrows they formerly used with their own labour to produce their entire output of kills. The items they traded from the division of labour increased the hunter’s output because more and better arrows ensured more kills (partially wounded prey escaped). With the aid of the tools they purchased, they released time formerly used to make their own arrows, which increased the discretionary time available for hunting, leisure, or whatever. In exchange for the arrows, they gave up any claim to that share of the kills that went to the arrow maker, because the arrow maker’s share of a kill unambiguously belonged to him for his arrows. Inevitable disputes over shares and ‘non-payment’ required the development of adjudication and ‘rules’ or ‘laws’ and their enforcement. Thus the history of jurisprudence commenced through numerous experimental variants.
Because primitive exchanges made those participating in them ‘better off’ (a major incentive of the division of labour and the main unintentional consequence of the propensity to ‘truck, barter and exchange’), they had a self-reinforcing effect of encouraging pair-wise exchange behaviour throughout a society. Therefore, Smith’s unique assessment of the role of ‘truck, barter and exchange’ was that it opened the social-evolutionary road that eventually leaves behind assertions that the product solely belonged to the labourer.

Smith did not spell out these consequences clearly enough and he is lumbered with a reputation for a theory that he knew no longer applied, once the division of labour from exchange was underway in the later millennia of the first Age of Hunting and thereafter, with increasing effect in the Ages of Shepherding, Agriculture, and the Age of Commerce, and since in the 19th-21st centuries. Exchanging property in the age of commerce means exchanging claims on output with the participants in production.

Components of Exchangeable Value in Advanced societies
Smith makes clear that there is a crucial difference between rude and commercial society, i.e., societies more advanced than rude societies, But he is unclear that he has leapt from barter to a monetised economy:

‘As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials.’

The product of ‘complete manufacture’ is exchanged for money at a price ‘over and above the price of materials, and the wages of the workmen’ and contributes something for the ‘undertaker’, who ‘hazards’ his stock in the ‘adventure’. Workmen add value to the materials provided by the undertaker and their added value pays their wages and the cost of the materials, and the profit on both wages and materials advanced by the undertaker.

The undertaker only ‘hazards’ his stock in the ‘adventure’ if he expects to make a profit. It is the profit motive that promotes the employment of labourers; without it there is no employment. If a venture did not yield a profit, the undertaker withdraws from it at the earliest opportunity and this imperative induces the undertakers’ interest in the costs of production the world over. If the venture did not pay labourers at least their minimum subsistence they do not work for it for long; they look elsewhere for work opportunities. Buyers are not interested in the seller’s costs.

Bringing the elements together, Smith finds in the prices of all commodities that all three contributing ‘owners’ share the revenue among themselves as ‘wages of their labour, the profits of their stock or the rent of their land’, making wages, profits and rent the ‘three original sources of all revenue as well as of all exchangeable value.’ Labour is no longer the sole source of value in a commercial exchange economy. Without trumpeting it, Smith dropped ‘his’ labour theory of value because this is where his analysis led him.

Money lent to someone who employs it derives revenue, its ‘rent’ being the interest paid by the borrower. The profit from the borrower’s use of it is divided between the profit for his risks in the venture and his conduct of the enterprise, and the profit of the lender who affords the borrower the opportunity to make a profit.

Smith abandoned the pristine labour theory of value that dominated his historical account of rude society and he unambiguously asserts that ‘as in a civilised country there are but few commodities of which the exchangeable value arises from labour only, rent and profit contributing to that of the far greater part of them, so the annual produce of its labour will always be sufficient to purchase or command a much greater quantity of labour than what was employed in raising, preparing, and bringing that produce to market.’

Labourers’ families live off their (subsistence) wage incomes, leaving little or nothing for savings; the undertakers’ families live of their profits and the landlord’s families live off their rents, having a greater capacity than labourers to save. Among the latter two orders there were ‘idle’ persons of all ages, who consume from their family’s their income streams from rents or profits. The proportion between the consumption and savings of productive and unproductive, including idle, labour determines whether net annual output increases or diminishes or remains the same.

© Gavin Kennedy 2007

In Praise of Markets

Yet another new blog comes to my attention (my trusty searchers for references to Adam Smith worked through the night and found this one). It’s about markets and looks just great. These are often misunderstood, especially by aficionados of the neoclassical paradigm, and it is always good news to note someone who has taken a look at the phenomenon in practice.

I refer to: Reinventing the Bazaar: a natural history of markets, by John McMillan, W. W. Norton, 2006, which was spotted by Jed Chistiansen, whose blog, Mercury’s Blog: Mercury Research and Consulting blog (read it at: http://blog.mercury-rac.com/2007/02/17/a-must-read/).

Jed Christiansen writes:

“The book opens not on the New York Stock Exchange, but in the Dutch city of Aalsmeer. It is here where a huge flower marketplace is operated, and where millions of dollars worth of flowers are purchased every day in an extremely efficient manner. That the book doesn’t focus solely on standard financial markets such as the NYSE is to its credit. It talks about real-life markets throughout the world-wide economy, such as a Middle East bazaar (hence the name), fishing grounds, the deregulated California energy markets, the famed auction of additional slices of the US frequency spectrum, and many more. More importantly it examines what makes those markets work, and what is required to make those markets work.

I’m also very impressed that there is no ideology here. Some authors writing a book on this topic could tend to write either a “markets can save the world, they just need to be freed from regulation” type book, or a “markets are the cause of all the worlds’ problems” type book. It is neither, and instead discusses how markets are indeed a powerful construct, but can be both well-built and resilient or poorly-built and unfair.”

And he offers some quotes from John McMillan’s ‘Reinventing the Bazaar: a natural history of markets’, of which I quote two:

“For a market to function well, you must be able to trust most of the people most of the time; you must be secure from having your property expropriated; information about what is available where at what quality must flow smoothly; any side effects on third parties must be curtailed; and competition must be at work. A multitude of mechanisms sustain these five key requisites of effective markets. Your trust in your trading partner rests on both the formal device of the law and the informal device of reputation. Your property rights are protected by the law and, in the case of your investments, by regulation. For you to be able to take your business elsewhere, there are channels for the flow of information, so you can locate others to deal with, and there are few impediments to starting up and running firms.

A market’s design, supporting these features, may evolve from below or be imposed from above; usually there is a bit of both. A workable structure provides rewards for good behavior and checks and balances to deter bad behavior, so people act honorably while following their self-interest. When markets are well designed - but only then - we can rely on Adam Smith’s invisible hand to work, harnessing dispersed information, coordinating the economy, and creating gains from trade.”

Comment:
Jed Christiansen writes that ‘Reinventing the Market’: “it lays a fantastic foundation for why prediction markets are such incredible mechanisms for forecasting and revealing information.” I am not sure what a ‘prediction market’ is, so I cannot comment, but I am skeptical about anybody in the ‘prediction’ business. If anybody could predict how a market was going to operate, she would end up with all the money in the world, or a large slice of it. Those that do make anything remotely like that sort of money, on occasion, or regularly, are gamblers, albeit well informed, and in a zero-sum business. If everybody wins, the game's over; if you win and nobody else does, somebody either ‘loses’ or ‘pays’ for your winnings.

Bargaining is different. Both parties win something that is important to them, from trading something that is of lower value. The proposition behind predicting markets is (remember, I am surmising from two words and without yet having read Reinventing Markets – I shall order it today from Amazon) the implied proposition that the outcome of prediction is more gainful than being unable to predict outcomes in markets. But I shall (and should) wait until I know more. Prices are signals about possibilities, not predictions of certainties. Markets invite responders to signals to act, to follow the signal. The outcome remains uncertain. A rising price for oil may signal that investment in oil exploration or production or stockpiling, may be profitable; it may signal 'get out of the oil business' and into substitutes. The appropiate outcome depends on what is done or not done; it is not 'predicted'.

I choose to ignore John McMillan’s sentence that includes: ‘we can rely on Adam Smith’s invisible hand to work’, on grounds that my arguments against such allusions are well known to readers of Lost legacy and I shall abstain from repeating them on this occasion (see archives).

My other concern is this sentence from the book: “A market’s design, supporting these features, may evolve from below or be imposed from above; usually there is a bit of both.” I am not sure about ‘designing’ markets – a design implies intention –and markets are not the product of a design (even a human design, let alone a deity's); they evolved by trial and error, workability and redundancy, more like water finding its own level than the putting together of cardinal elements. They are still evolving; every system of interference, usually from ‘above’ but common from ‘below' too from the participants (of which Smith wrote extensively in Wealth of Nations – the nefarious ‘merchants and manufacturers’, to which we can add also, the occasional consumer engaged in some fraud or other).

Markets are not something created long ago, which remain intact like a mechanical contrivance, an object or such like. There is a history of markets, but no archeology of them. They are what happens when people behave in a certain way – you can get markets forming in anything, anywhere, including cyber space – that exist and dissolve and re-appear, and the participants disperse and re-assemble, and move on. They work better when they are free, and the five conditions identified by Jed Christiansen operate; but even with one or more elements not present or deformed in some way, markets can still be operating at lower levels of efficiency, and still be better than central direction and control for all the reasons Jed has noticed and John McMillan, the author of Reinventing Markets, has written about in detail.

Even in totalitarian Soviet Russia, in the midst of the draconian controlled economy, ‘markets’ re-appeared like shoots on a rubble site, with illegal bartering among its local agents, supplying and demanding spare resources from each other just to keep the planning system functioning, despite the draconian penalties for doing so.

Markets are a human creation, irrepressible, resolute and pervasive. They will always exist, either open and free, or underground and repressed, as long as humans exist. As Smith put it, if it was necessary for Perfect Liberty to exist before human progress from barbarism to opulence could occur, there never would have been any progress.

The reason why is that markets as a human creation (not a ‘design’), even less than perfect (an impossible goal), and are better than whatever a ‘planner’ on an average day can do. Planners don’t have many ‘good days’ because they need tyrannical means to get their lumbering designed structures underway, and humans sooner or later dispel the notion that they can be moved around like wooden chess pieces (Moral Sentiments).

From Moonshine Whiskey to Green Tourism

I never doubted that the US can (nay, will) create a market for anything, and, most important, will link a piece about it to Adam Smith. Well, as long as the link is appropriate, that’s OK with me. So following the post on moonshine whiskey, I find this on “Wheat and Weeds”, about a NYT piece on "green weddings” and was amused:

“Gather more than 150 friends and relatives at an organic farm for a pre-wedding day of hikes and environmental tours. Calculate the mileage guests will travel and offset their carbon dioxide emissions by donating to programs that plant trees or preserve rain forests.

These stories are delightful both because of the extent to which the Lefty lifestyle can parody itself, and because they're the perfect example of the market working efficiently, creatively, and unexpectedly to respond to even the most outlandish predilections of the very people who doubt the market's ability to do any such thing.

The story looks at "green" honeymoon, reports Mary Katherine Ham:

“You used to have to go camping,” said Ted Ning, the executive director of the Lohas Journal, a resource guide for businesses that serve the environmentally conscious market. “Now you have these amazing luxurious spas in Africa or Fiji. You can look at different animals while getting a massage in a tree.”

I don't mind this kind of development in these countries, by which the folks who live there can benefit and earn a living by catering to the self-absorbed honeymoon plans of Western environmentalists. That's good stuff, economically speaking, but aren't environmentalists generally opposed to it? Until they need somewhere to go on their honeymoons that'll produce the requisite number of Peace Corps-style photo ops to please their friends back home, I guess.

It is delicious, all these folks who fancy they're dropping "off the grid" with organic, free-range, sustainable-farming products --they've created a market!”

Comment
Now that’s what I call a good story to brighten my day.

Though, I am slightly perplexed by the mandatory compensation for the carbon emissions by donations to plant trees. If the plane flies at all, full or empty, it emits carbon (or whatever the chemistry). How do they calculate the per head compensatory fee? Each passenger pays their share, or each pays for the whole share to allow for the inevitable free-riders?

Scheduled flights fly full or empty and anything in-between. If the ‘green minded’ fly, they pay their share, which is something towards the full carbon ‘cost’ – if they decide not to fly, and nobody who does fly on that plane pays anything, then the net cost in uncompensated carbon is larger. The imperative is to make excuses for flying as long as you, irrespective of what others do, pay compensation.

Other than the comfort of feeling good about it, or by being on a plane full of ‘green’ activists flying to a world conference on ‘green’ issues, I am not sure this will last, and the next step will be compulsion (the organiser of the trips collects from the paying travellers, or, ultimo extremis, the government imposes a green tax).

Which ideologues will blame on ‘market failure’… and (cynical me) ‘green’ organisers will decide to donate the voluntary compensatory ‘tax’ they collect to ‘green’ campaigning all over the world instead of trees, and governments will absorb into their spending.

Now last year I planted six fruit trees in the field in which my French house sits, so how many miles can I fly for that? How many must I plant this year? ... I must check through Wealth of Nations and Moral Sentiments to see if Adam Smith said anything remotely connectable to this issue.

[Read it at “Wheat and Weeds”: (http://wheatandweeds.blogspot.com/2007/02/valentine-to-adam-smith.htmlreligion, politics and the glories of home-grown tomatoes]

A Taste of the Hard Stuff

There some great Blogs out there (and much mortifying rubbish too) and occasionally my search for posts on Adam Smith (a 24/7 task, yes, Sir), I come across the very best in Blog journalism. Today I readan absolute gem about the unlikely subject of moonshine whiskey (US version), and, Adam Smith gets a mention too.

My knowledge of moonshine is restricted to a glass I drank many years ago on Benbecula, in the Western Islands off the mainland of Scotland (go west after that and you hit North America, or an iceberg). We were visiting the mother-in-law’s relatives and the obligatory glass was offered; after two I was very much not in control, never normally drinking whisky (nor anything else much).

This Blog is called: “Hillbilly savants”, which describes itself as:

“This blog is about our Appalachia - the real one, not the Hollywood-stereotype nor the third-world nation-esque stereotype being sold by do-gooders, or even the neo-Romantic sylvan stereotype that Rousseau would probably buy into.”

Now, that grabbed my attention and then my eyes were drawn to the following:

“Another key subject in this chapter is that it explains clearly and elegantly why Appalachian farmers, both Scotch-Irish and their neighbors who adopted this part of the Scotch-Irish tradition, often turned to moonshine. Ultimately, moonshining in the Appalachians (at least from the colonization period up through the tide or Prohibition) was a product of three converging structural elements: (1) inadequately developed transportation infrastructure, (2) the high resale value of processed corn (as liquor) versus unprocessed corn, and (3) the predominance of small, yeoman farmers (as in New England) rather than large-scale plantation-style agriculture (like that which dominated the rest of the South) thereby redoubling the relative costs of trying to rely on unprocessed goods for their monetary incomes. In other words, to paraphrase one of my favorite Scotsman (fellow by the name of Adam Smith), the moonshiners rationally interpreted their relative economic advantages and disadvantages and acted accordingly.”

Comment
It hardly needs a comment. Anything said would spoil the moment. The extracts given on the Blog cover so much that is interesting, and you will, like me, be tempted to look for the book on Amazon, and, hopefully, it should arrive next week.

Perhaps, one brief comment is in order. The sentence, “the moonshiners rationally interpreted their relative economic advantages and disadvantages and acted accordingly”.

Well, that is how markets appear to start (and probably the early ones too in pre-history). Individuals see an opportunity and act in pursuit of it. They neither realize, nor care, if what they are doing that is of great historical importance; they pursue their interests as they see them that will make them better off. That motive also encourages others to be willing to exchange something to acquire a mouthful or two of the liquid they may have tasted as a gift earlier. Nobody plans these incidents, nobody orders them. They occur naturally. Markets are like that. They emerge, if you let them.

Smith knew that, and said so. Whether he tasted the golden nectar, is not recorded, though we know he frequented the ‘Oyster Club’ in Edinburgh, where lassies of a willing disposition served food, beer and claret, and occasionally danced, and such like, and he watched the dancing and with his friends, then retired to a side-room for conversation, merriment and diversion, and put the world to rights, as philosophers do.

Smith on Education and Some Radical Suggestions

Following on praise for Xi Zhang’s correct use of Adam Smith’s legacy, I come across yet another example this morning. Geoffrey Manne post in the Blog: ‘Truth on the Market’, quotes from ‘Wealth of Nations’ (the famous Book V) in a debate about university funding, related to the University of Phoenix (USA):

The New York Times–shocker!–hates the University of Phoenix”

“I don’t know for certain whether UOP students maximize their utility by choosing UOP over Princteton (aka clown college, coincidentally), but there is, at a minimum, some theoretical merit to the form of organization.

Here’s what I (and Adam Smith) said on the topic once before:

Here’s Adam Smith on universities:

The endowments of schools and colleges have necessarily diminished more or less the necessity of application in the teachers. Their subsistence, so far as it arises from their salaries, is evidently derived from a fund altogether independent of their success and reputation in their particular professions.

In some universities the salary makes but a part, and frequently but a small part of the emoluments of the teacher, of which the greater part arises from the honoraries or fees of his pupils. The necessity of application, though always more or less diminished, is not in this case entirely taken away . . . and he still has some dependency upon the affection, gratitude, and favourable report of those who have attended upon his instructions . . . .

In other universities the teacher is prohibited from receiving any honorary or fee from his pupils, and his salary constitutes the whole of the revenue which he derives from his office. His interest is, in this case, set as directly in opposition to his duty as it is possible to set it.

Faculties in today’s universities are substantially insulated from both the reputational and remunerative consequences of offering poor (or exceptional) education. As direct payment by students — and, eventually, the conferring of degrees on “independent” courses of study — becomes more commonplace, this insulation will be seriously weakened, much to the likely benefit of the students.
I have no doubt that UOP isn’t perfect. But it certainly mitigates some of the problems of traditional, nonprofit higher education. Perhaps a comparative institutional analysis would have been in order. The implication that UOP’s shortcomings derive necessarily from its for-profit status is both unsupported and unsupportable.”

Comment
University funding (and school funding, before it) is a topical issue still. Having passed beyond the stage of funding my bequests, endownments, private scholarships, and such like, in the UK the public funded route was selected. The old universities continued with elements of the past charitable funding sources, but also took up the government's gold too, and became dependent on taxpayer's money. The newer universities are too new to have accumulated sources of private funding, and had little incentive to search for other sources of funding, until recently.

With public funding comes what is called, euphemistically, ‘accountability’, otherwise known as political inference to meet the consensus of what ‘educational experts’ consider the ‘safe’ thing to do. What they do not do, or reward, is encourage institutions to experiment. There are about 107 universities in the UK, only one is private (the University of Buckingham), the rest are dependent on government funding (i.e., overall management).

Universities are trying to raise student fees, reluctantly accepted by government politicians, but capped severely to quieten resistance in their own ranks; but they have the resources, and the staff, to experiment with fully funded (no-government money) degree courses, where student demand is high.

Universities are already legal charities, they are legally permitted to form sub-charities within them, and these can be placed outside the public funding sector, given the task of raising their own finance, paying their staff whatever they consider appropriate, charging their own student fees, re-organising their course schedules, move from the regulatory 5-day week, 30 week years, and change over to 50 week years, 7 day weeks, 8 am to 10 pm days.

Not convinced? Of course not. Change everything at once? Of course not. That is the beauty of being able to experiment within the existing system on an individual scale in any of the 107 universities. Trial run the experiment, monitor the progress, allow radical changes under the control of those charged to manage the sub-charity that event show to be necessary.

That approach would be completely within Adam Smith’s legacy.

Oh, and a final point: defend excellence by measuring outputs not inputs. The opposite of who universities in the main practice - they make it difficult to get into their courses, but easier to pass through, with soft, even no, examination regimes. Instead, make it easier to get into the course; difficult to pass through. Examinations, independently invigilated, no choice of questions, and no other non-examination contributions to a pass.

It’s amazing what freedom to innovate, adapt, apply and try does to the people in markets (including surrogate versions).

[Read Geoffrey Manne's article at:
http://www.truthonthemarket.com/2007/02/12/the-new-york-times-shocker-hates-the-university-of-phoenix/]

Xi Zhang Gets it Right - Why can't others?

Not all users of Adam Smith’s writings do so inappropriately and when I come across them I like to include them on ‘Lost Legacy’. Here’s one that crossed my desk this morning (enjoy, as restaurant staff say):

“Lousy cheating rat” by Xi Zhang, in Indiana Daily Student (13 February 07):

“But why is trust such a big deal in the business world? The answer was long ago revealed by Adam Smith, a revolutionary economist of the 18th century: "A dealer is afraid of losing his character, and is scrupulous in observing every engagement. When a person makes perhaps twenty contracts in a day, he cannot gain so much by endeavoring to impose on his neighbors, as the very appearance of a cheat would make him lose.

The success of a business always depends upon the favor and goodwill of its customers, and it cannot continue in the event of cheating or misdirection.”

Read Xi Zhang’s article at:

http://www.idsnews.com/news/story.php?id=40908&adid=business

Biographical Nonsense About Adam Smith

Apart from the ignominy of having his intellectual legacy misappropriated into a caricature of his writing, Adam Smith also suffers from much nonsense written about his personal history, the kind of man he was, anecdotal gossip of his supposed ‘other worldliness’ and his lack of social acceptance. He showed very clearly another side, in his administrative work, his studies and his ability to organise effective political campaigns, which many people failed to notice.

I came across an example of this genre today in what may be an undergraduate essay (I am judging its quality and standard of factual content, not the academic standing of its author).

In an article on the awe inspiring title of: “The Wealth of Nations, the betterment of a people: a look into the contrasting writings and the corresponding goals of Adam Smith, and of Karl Marx and Friedrich Engels”, Sarah Harrison writes:

“Adam Smith’s lens was that of a Scottish social climber who, when writing The Wealth of Nations in the late 1760s and early 1770s, saw revolutionary change occurring around him. Indeed much of the world was preparing for major political and thus economic changes. Having just exited the Seven Years’ War, and on the eve of the American and then French Revolutions, the world was changing, and with that so were class structures and the traditional views on economics [Nolan 183]. With the population boom and the transition from a feudal to a mercantile and to a capitalist or free market system, came an increased freedom to choose whatever occupation you wished to persue. Previously birth and rank had predetermined one’s social standing for life, but as the capitalist Benjamin Franklin later put it, “The ‘‘commodity’’ of ‘‘high birth’’ was worth next to nothing… what mattered about a man was ‘‘What can he DO?’ ’” [Waldstreicher 268-278] With this freedom to choose what you do, and the opportunity to benefit from your skills, came the chance for social mobility, something that had never before been so readily available to the common man.

As a common man himself, a professor of moral philosophy from average means [Wikipedia]”

Comment
Adam Smith, ‘a Scottish social climber’;

‘With this freedom to choose what you do, and the opportunity to benefit from your skills, came the chance for social mobility, something that had never before been so readily available to the common man’;

‘As a common man himself, a professor of moral philosophy from average means…’ (so says Sarah Harrison; the author of these lines).

What a lot of, er, tosh!

From what to what did Smith ‘climb’, socially or otherwise? Does Sarah have any idea of what she is talking about? Obviously not.

His father was a Scottish solicitor (a Writer to the Signet, as well), serving the Scottish Secretary of State, in the crucial legal work to join the Scottish and English parliaments in the Act of Union, 1707, still a most controversial event in Scottish history in this 300th anniversary year. He also served John, second Duke of Argyle, commander of the Army in Scotland during the courts martial related to the 1715 Jacobite rebellion.

He died a few months before Smith was born in June 1723, and his mother, Margaret Douglas, was a daughter of one of Fife’s farming and landowning families, many of her brothers and uncles were also farmers and ex-army officers (not labourers). His mother owned and lived in one of the larger houses in Kirkcaldy from her husband’s legacy, which included other properties in Aberdeen.

I thing Sarah has a starry-eyed notion about the living standards and incomes of the ‘station in lif’ of the common man in 18th century Scotland. Wives of labourers had large families of children, most dying in their infancy; out of ten or more, only two normally survived to adulthood.

Smith was not of such limited vision as to aspire after the social life of the upper order of British society. It took until the end of the next century before common labourers could aspire to anything more than relief from their poverty, let alone to ‘social climbing’. This was Scotland, not America.

Smith mercilessly rubbished such social aspirations in both of his major works, and he had friends, like the social snob, The Reverend Alexander Carlyle, who were sufficiently off-putting as social climbers to keep Smith’s feet on the ground. Smith was a comfortable member of the middle orders, well educated above the norm (most children of common labourers left school between 8-10 years, and put out to work for pence a day).

He mixed with people of all classes, and had a healthy respect for the common man, born of his compassion and not memories of having suffered anything remotely like the poverty of the vast majority of his fellow citizens; a poverty he witnessed by taking the trouble to spend much time consorting with people from all walks of life, rich and poor, around him. He gave away most of his self-earned fortune in charitable acts, including to his extended family of cousins, nephews and aunts.

He was not ‘upwardly mobile’ in any modern sense. His family paid his way through Glasgow and Oxford universities, he became a university professor and ‘retired’ to write Wealth of Nations, consort with friends in the Scottish Enlightenment, and proffer private advice to MPs, Ministers of the Crown and Prime Ministers, much as his father had on a smaller scale in the early 1700s.

Sarah should read any of the major biographies of Adam Smith (Dugald Stewart’s, 1793; John Rae’s, 1895; or Ian Ross’s, 1995) instead of relying on unreliable contributors to “Wikepedia” (assuming what she quoted is representative).

[Read the rest of Sarah’s article – it's almost as inaccurate in its content as the biographical howlers quoted above at:

http://www.terry.ubc.ca/index.php/2007/02/07/the-wealth-of-nations-the-betterment-of-a-people-a-look-into-the-constrasting-writings-and-the-corresponding-goals-of-adam-smith-and-of-karl-marx-and-friedrich-engels/]

In Praise of a Bit of Sophistry on Peak Oil Which Understands Adam Smith

By ‘accident’ I came across a Blog (Sophistpundit: ‘self-consciously pretentious since 16 November, 2004’) written by someone I do not know, and found myself scrolling through its contents with deepening wonder at its style, approach and robust arguments.

One such posting was a professional demolition of ‘Peak Oil’ theory by applying fairly simple economics to the explicit predictions of oil running out and the world economy, and everything else with it, collapsing, as if economics were suspendable and markets did not exist. I recommend that you read it too (I wonder what it would make of the world economy collapsing and everything else with it, from a few more years of ‘global warming’?).

Here is an extract from a post, which shows a good grasp of what Smith was about, and what its author, Adam Gurri of GMU, is also about:

“It's time for us all to grow up. Calling Imperialism an extension of free market economics is like calling quantum physics just another stage of newtonian physics. It makes no sense. The Wealth of Nations is ripe with blatant criticism of everything that its brand of economics is often blamed for creating. So please, please, please, try to take the time to learn something about economics before making irrelevant accusations about it. Or at the very least, learn something about its history.”

[Read his Blog – it is quite fascinating and worthwhile reading at: http://sophistpundit.blogspot.com/]

Be ready to have your mind stretched a little.

Brad Delong is Absolutely Right; Duncan Foley is Absolutely Wrong

In Radical Notes, Dipankar Basu, writes on “DeLong on "Adam's Fallacy":

“So what is Adam's Fallacy? It is the claim, according to Foley, that the pursuit of self-interest, which is morally problematic in most human interactions, is unambiguously socially beneficial in the context of competitive market interactions. This claim, which consolidated itself in the writings of Adam Smith, has been passed down from generation to generation in various forms and various guises, and has been accepted and used, according to Foley, by economists of virtually all political persuasions.

But why is this claim a fallacy? It is a fallacy in three senses. First, it is a logical fallacy because neither Adam Smith nor any of his followers who use this claim - often implicitly - have ever managed to prove it rigorously and robustly; at best it remains an unproved assertion. Second, it is a moral fallacy because it "urges us to accept direct and concrete evil in order that indirect and abstract good may come of it". Third, it is a psychological fallacy because it leads us to deny the iniquitous manner in which costs and benefits are distributed in society under capitalism.”

Comment
Foley’s fallacy commences from the assertion that Adam Smith wrote that: “the pursuit of self-interest, which is morally problematic in most human interactions, is unambiguously socially beneficial in the context of competitive market interactions.”

Smith was well aware and wrote a great deal about the problem that ‘merchants and manufacturers’ were liable to pursue their self-interests by reducing competition in markets and that Perfect Liberty would not be a strong enough condition to resist these tendencies. The neoclassical theory of perfect competition excludes the real world by its assumptions, which Duncan Foley knows well.

In the real world, and throughout the c. 8,000 years of history (and almost certainly all throughout pre-history – covering a few million years), the ‘vile rulers’ of mankind imposed their self-interests on the rest of the human population. And Adam Smith fully understood this and said so.

To criticise Smith for the above misattributed fallacy and that it was ‘consolidated … in the writings of Adam Smith’ is a fallacy of breathtaking impertinence, bordering on crass ignorance (a charge which Duncan Foley only escapes by virtue of his distinguished academic pedigree).

If there is one thing that emerges from reading Smith’s well-known works it is that he had no illusions that the recommendations he made for changes in the arrangements prevalent in the commercial societies of Europe up to the last quarter of the 18th century, were a prelude to Utopia or Oceania, or were likely ‘ever’ to be adopted (WN IV ii.43: p 471). Far from it, as Duncan Foley would realise if he read and thought about what Smith actually said, instead of deconstructing his corpus from his familiarity with Chicago neoclassical theory.

You will not find anything in neo-classical, or post-neoclassical endogenous growth theory, but highly sanitised, even sterilised, versions of Smithian ideas on self-interest, divorced from his writings on the context in which political economy operates in society. That requires that you read all the (large bits) of Wealth of Nations and Moral Sentiments that modern economists avoid and treat as untouchable.

You get a hint of Smith’s actual thinking about the practical and lasting problem of overstating as a necessary condition the beneficial effects of self-interest:

“Mr. Quesnai … seems to have imagined that [society] would thrive and prosper only under a certain precise regimen, the exact regimen of perfect liberty and perfect justice. He seems not to have considered that in the political body, the natural effort which every man is continually making to better his own condition is a principle of preservation capable of preventing and in correcting, in many respects, the bad effects of a political œconomy, in some degree, both partial and oppressive. Such a political œconomy, though it no doubt retards more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of the bad effects of the folly and injustice of man; in the same manner as it has done in the natural body, for remedying those of his sloth and intemperance’ (WN IV.ix.28: p 674).

Perfection is not a necessary condition for society to benefit, and history shows that perfection does not obtain in human societies, and probably never will, because of the ‘follies’ of man. No science dependent on such a necessary condition would have practical relevance for political economy or the affairs of mankind. Perfect competition and models derived from it are not compatible with Adam Smith, were not ‘consolidated … in the writings of Adam Smith’, nor did he assert that self-interest was ‘unambiguously beneficial in the context of competitive market interactions’ (which is a folly of perfect competition and general equilibrium theories created over a century and more after Smith died), and if they have ‘been passed down from generation to generation in various forms and various guises’, that is the responsibility of the proponents of the neoclassical paradigm, resident at Chicago, Harvard, MIT and Yale, etc., but not the responsibility of the man who resided in Kirkcaldy.

Some actions originating in self-interest (and for self-betterment) are beneficial for society, but many, many are not, and Smith waxes long on the explicit details of the corruptibility of self-interest, which definitely is not beneficial for society.

Smith did not need “to prove it rigorously and robustly”, because he never asserted it in the first place; he did not urge anybody “to accept direct and concrete evil in order that indirect and abstract good may come of it" – quite the reverse in fact; and nor did he ask anybody “to deny the iniquitous manner in which costs and benefits are distributed in society under capitalism” – again, quite the reverse; he railed against the misdistribution of the revenues of 18th century commercial society, and of previous regimes too (‘capitalism’ had not yet having been invented by 1790).

In short, Foley’s fallacies are directed at the wrong person, as I continue to point out. Brad Delong is on the right track in critiquing Foley’s charges (I don’t agree with every one of his points, but I am pleased to see a notable economist is unconvinced by Foley’s diatribe against Smith), and am happy to say that Brad Delong is much more right than wrong, while Foley is overwhelmingly wrong and not a smidgen right on Adam Smith.

[Read the whole comment on Brad Delongs’s review of Duncan Foley’s ‘Adam’s Fallacy’ commented about on this Blog several times earlier (see archives) and to read Dipankar Basu, visit: http://radicalnotes.com/content/view/31/30/

Adam Smith on Paying Teachers

“Measuring a Teacher’s Worth” by Bryan Prior (9 February), a Dutko Fellow serving as an intern at the American Enterprise Institute (from American.com - a magazine of ideas – online):

Brian Pryor writes a case for revaluing teachers as a prelude to raising their pay:

“In an age of statistical manipulation and easy punditry, Adam Smith remains a trustworthy guide.

Despite his laissez-faire theories and his faith in the invisible hand, Adam Smith understood that a certain amount of education, provided by the government, was necessary to prevent the decay of the basic virtues upon which the perpetuation of democratic civilization depends.

It’s worth remembering that well before The Wealth of Nations, Adam Smith wrote The Theory of Moral Sentiments, a work that reveals his deep respect for education, wisdom, and virtue. But even at his most laissez-faire, Smith recognized the importance of education to a sound society, writing in The Wealth of Nations of the common laborer:

"His dexterity at his own particular trade seems … to be acquired at the expense of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall unless government takes some pains to prevent it." [Wealth of Nations, Book V]

The column’s authors are right to criticize the way teachers are paid—based on seniority, not merit or performance. But prescribing a halt to modest raises in teachers’ already meager salaries is not the remedy. Ideally, the entire system of teacher compensation would be revamped to make pay more competitive. Given the clout of teacher unions, there’s no telling how long such sweeping reform would take. But until Smith’s economic theory hits America’s public schools, we ought to pay the utmost homage to the value Smith placed on education and respect teachers’ degrees, certifications, and noble pursuits—and thus their pay.”

Comment
“his laissez-faire theories”

He did not believe in laissez-faire (he never mentioned the words, and taking his work as a whole he regularly advocated measures severely in breach with laissez-faire, as understood by some French advocates, and, later by James Stuart Mill, in 1849.

“and his faith in the invisible hand”: “even at his most laissez-faire”

He cannot be said to have had ‘faith’ in ‘the invisible hand’; it was a metaphor he only used once in Wealth of Nations for a process which he had just explained clearly without any mystique that needed ‘faith’ to understand. He also gave many more numerous examples of the consequences of actions by people that did not lead to beneficial outcomes, compared to a few that did.

“the importance of education”

Nothing that Smith wrote on education did anything other than emphasise its importance to society and the need for people to invest in human capital.

“Given the clout of teacher unions”

These constitute the major constrain on raising both education standards and the pay of teachers. Teachers guaranteed their income no matter what they do up to, or more correctly down to, poor standards are part of the problem; paying them solely on the basis of being on the pay-roll for a length of time is not conducive to good practice. Smith was specific on this point. With job guarantees, seniority and parents disenfranchised from acting a check on quality, without adequate choices, teachers have no proper incentives to perform well, and every incentive to be indifferent, as many, Smith found, were (and not all that much has changed).

"respect teachers’ degrees, certifications, and noble pursuits—and thus their pay"

'Degrees, certifications, etc.,' are measures of inputs into teaching and are not adequate measures of outputs, especially when all teachers have them, the absolutely poor teachers, the laziest and the incompetent, as well as the best by all output measures, including their effect on raising their pupils' performances from wherever they start from with them. For pay, measure outputs, not inputs, otherwise just getting a job and staying there long enough qualfiies someone for higher pay.

Smith favoured a revenue system that included both government (i.e., tax payers) funding and some contribution from parents, including the poorest who would be charged pennies. He also favoured choice. The Unions hate ‘vouchers’ because this would break teacher-oriented choice, which amounts to ‘no choice’, but vouchers are consistent with Smith’s views. With teacher run unions in charge, with almost a veto on change, it is not a question of how long it will take for reforms to take effect. They won’t take effect at all.

There are enough schools of all kinds in the West for experiments to take place in all neighbourhoods; let schools funded the way the teachers unions prefer compete with schools funded the way some parents prefer (in all their forms), and let the best emerge to demonstrate their credentials against the worst.

That is the way we should test all proposals for reform.

[Read Bryan Prior’s article at:

http://www.american.com/archive/2007/february-0207/measuring-a-teacher2019s-worth]

Origins of the Word Capitalism: Thackeray not Marx?

Robert Lawson writes:

Recently I was explaining to a friend why I generally refrain from using the word "Capitalism":

"My reasoning is mostly tactical. The word was first coined by Marx and continues to be used as a pejorative by the left. 'Capitalism' as a term implies to me that capital is special and that the owners of capital, the capitalists, are therefore the special beneficiaries of the system. This of course was Marx's view. Even today, to many people capitalist = fat cat. But the fact is that 'capital' as a factor of production plays no more of a special role in a market economy than any other factor. You and I would argue that the real beneficiaries of the system are consumers and laborers. It would in my book be more accurate to say "laborism" than "capitalism".

Comment
I am not sure that Karl Marx invented the word ‘capitalism’; he certainly began using early, particularly in volume 1 of ‘Capital’, or at least his editors of the Moscow edition sprinkle his text liberally with it (from memory).

The Oxford English Dictionary, considered an authority on the English language, credits William Makepeace Thackeray for the first published use of the word ‘capitalism’ in his novel, The Newcomes (1853-55), though it is clear from its context that this refers to finance capital, rather than as a ‘system’. Financiers in 19th century novels tend to get a bad press; see Trollope’s ‘The Way We Live Now’.

The origin of the word ‘capitalist’ is of much earlier vintage: in French, A. R. J. Turgot (1727-1781) used ‘capitaliste’ in his essay, ‘Reflection on the Formation and Distribution of Wealth’ (1769-1770), and WilliamGodwin used its English version, ‘capitalist’, in his Political Justice (1794).

I take Robert Lawson’s point about the word capitalist over emphasizing its importance as the main factor of production, though I am not so sure that ‘laborism’ is a better alternative because it is another factor. I would have thought that ‘consumer’ is better than ‘capitalist’ and ‘labourer’ (two factors) bearing in mind that Adam Smith considered the consumer was the sole purpose of production (perhaps ‘consumerism’?).

Still, Smith called his fourth age of man, ‘commerce’ (after Hunting, Shepherding and Farming), and I have long preferred to name it as he did, despite the differences between the elements that he considered were important in the commercial economy and the mass consumer societies that have followed. Just a thought.

[Read the ‘Division of Labour’ Blog, to which Robert Lawson is a regular contributor, at: http://www.divisionoflabour.com/]

Peak Oil-ers Do Not Understand Markets

The ‘Peak Oil’ debate is one of the regular use of alarm-and-despondency, added to popular ignorance, to frighten the chattering classes into desperate measures to combat whatever the pressure group considers the world’s number one priority.

So far, on an environmental front allied to global warming, the ‘alarm and despondency’ tendency has caught the eyes of governments, lobby groups, politicians in and out of office, the media (which loves nothing so much as a headline-grabbing story for its news cycles), and the impressionable minds of children and some parents, that ‘something must be done’.

Well, that’s not for me to get involved in. After aids, Mad Cow Disease, lead-in-petrol panics, terrorist bombings, radiation poisoning, ID cards and Big Brother in the guise of the Nanny State ('everything we eat is poisoning us'), I am quite relaxed about the latest end-of-the-world-is-nigh hysteria, especially when exponents parade their ignorance of basic economics; a far easier challenge than understanding the natural sciences. I am not sure the global warmers are sound in their claims to scientific certitude, but I am absolutely sure that Peal Oil-ers do not understand the economics of markets.

A Mr de Sousa, apparently a Peak Oil-er, writes:

“A regular economist will tell you a fable like this:
If a shortage of potatoes occurs either by lack of supply or by growth on demand the market price will rise. This new higher price will signal to the farmers a need to produce more. Supply will rise, meeting demand, lowering the price and bringing the market back into balance.”

And Tim Haab on of the impressive “Environmental Economics” Blog takes him up on the fabulous nonsense of the above quotation. I shall not try to improve on Tim Haab’s demolition of Mr de Sousa’s presentation of how a market adjusts to an excess demand at the going price.

Tim Haab writes:

“If there is a lack of supply--presumably due to some unexpected conditions like a drought--or growth in demand, the market price will rise. I agree. But, the reason the price will rise is to remove the shortage. A shortage occurs when the quantity demanded exceeds the quantity supplied at a given price. This creates upward pressure on the price causing consumption to fall and quantity supplied to rise. This is what Adam Smith referred to as the invisible hand and TODEE refers to as the magic hand. When the price rises high enough, quantity supplied will equal quantity demanded and the shortage is gone. So far I agree with the potato fable--although I might have worded it a little different.”

Comment
Whether the physical quantity supplied rises depends on many factors and the time-lags involved (supplies do not adjust at infinite velocity); but what is certain (barring government intervention) to happen is that price will rise and this reduces effective demand, often quite quickly at the margin, and increasingly so, as customers are disappointed when sellers refuse to sell at the previous going prices.

Mr de Sousa’s potato example itself should have told him about the growing season (a lack of knowledge of botany and biology?) and it will take time to increase the physical supply, should that be a response from suppliers on this occasion. The increase the physical supply of oil depends on geology and the costs of extraction, and the availability of the products of substitute technologies, and suitable politics.

Where I do have a reservation about Tim Haab’s rebuttal of the luckless Mr de Sousa’s efforts is in his statement that: “This is what Adam Smith referred to as the invisible hand and TODEE refers to as the magic hand.”

Regular readers know that Adam Smith said no such thing about price adjustments in markets linked in any way to ‘an invisible hand’. New readers may scroll down the archives and see many examples of what he used the metaphor of ‘an invisible hand’ for and they do not include price theory.

I have no idea what ‘TODEE’ stands for, or what they mean by the ‘magic hand’. It has nothing whatsoever to do with Adam Smith’s political economy, or with economics. ‘Magic’ belongs to nonsense like astrology, contacting the dead in séances, Tarot cards and superstition.

There is nothing ‘magic’ in markets; their processes are well known and commonly understood by Economics 101 (though apparently not by Peak Oil-ers). Like rainbows, markets may be admired but not wondered at, and understood but not worshipped.

[Read Tim Haab’s measured demolition of the latest economics from the Peak Oil-ers at: http://www.env-econ.net/2007/02/an_attack_on_ec.html]

Adam Smith was Not, and Never Claimed to be, the Discoverer of the Division of Labour

A interesting and thoughtful piece about the education of children includes the following paragraphs, which may have merit in what is proposed, but there is not enough detail to make that judgement.

“I think the greatest development of the last few centuries was the concept of division of labour. For every productive part of human society, one needs to specialize as much as possible and have people focus on specifics aspects of the operation.

This may sound a bit philosophical, but something as simple as creating a pin is still a very complicated task. And creating a plane is a much more complicated task. I think educating a child is an equally challenging task. But in the case of the pins and the airplane, management has ruthlessly applied the concept of division of labour. This has not been true in education. But the same principle of division of labour applies. Adam Smith on the pin factory: [the famous quote from Wealth of Nations follows.”

Comment
I would need details of what exactly is proposed in ‘ruthlessly’ applying ‘the concept of the division of labour’ to the education of a child before judging the merits of what is being suggested by the author, Nitin Julka, an MBA student at Columbia, ‘who is very interested in education policy, politics, and current events’.

However, I feel obliged to observe, in the interests of consistency, that while Adam Smith placed an enormous emphasis rightly on the role of the division of labour, and not just in pin factories and the making of a labourer’s woollen coat, but also in the history of the social-evolution of society from ‘rude’ society in pre-history, he was by no means the first to draw attention to the concepts. Plato, Petty, Mandeville, Harris, the authors of Diderot's Encyclopeadia, and Turgot, also wrote about the division of labour too.

At Lost Legacy, Smith’s genius and creativity as a thinker is often remarked upon, but as he made clear himself, the division of labour in the trade of the pin-maker ‘has been very often taken notice of’, and we do not enhance Smith’s reputation by ascribing to him ‘priority’ when it is undeserved because it belongs to others before him and to one contemporary.

This Month's Lost Legacy Prize Awarded to Dr Eamonn Butler

The Adam Smith Institute is well known in Europe and in the Blogsphere (it is the most popular economics Blog in Europe – hated by the far left and Guardian columnists still getting over the Thatcher years, itself its highest recommendation to thinking people). I like reading it for its spirited independence of thinking and its lively approach to current issues.

Occasionally, ASI dips into the more heady waters of intellectual theory and one of its star contributors, Dr Eamonn Butler, reports on a talk he gave about Adam Smith to the Hayek Society at Oxford (they are, if anything, well connected). I noted this from his talk:

“There are in fact many parallels in the work of Smith and the Nobel economist F A Hayek, particularly Smith's 'invisible hand' idea, which Hayek transforms into his 'spontaneous order' concept. Quite simply, it is possible to have an orderly society without some central authority (a dictator, or the state) telling us how to run our lives. In The Theory of Moral Sentiments, Smith attributes is to divine providence, but by the time he published The Wealth of Nations seventeen years later, he seems to regard it more as just an automatic, natural system that runs itself. Hayek traced the idea from Smith and other contemporary writers, right through to his own day, and gives it an evolutionary explanation: the free-exchange system just simply works, spectacularly well, fuelling economic and population growth. If it did not work, we would not be here to talk about it.”

Comment
I think this is 99% correct, and I hope Eamonn does not mind my ‘nit picking’ a trifle.

Smith wrote Moral Sentiments in 1759 while at the University of Glasgow (at that time a far more serious academic institution than Oxford) and his freedom to write without genuflecting regularly to religious orthodoxy was limited (East bloc scientists suffered the same inhibitions under the Soviet era). This was his first major published work and was meant to establish his reputation, a not unimportant consideration for him. Prudent he was to a fault.

Smith was far more serious about his career than the anecdotes suggest; he had already shown brilliant tactical sense and skilful political maneuvering as a Hanoverian ally to achieve his election to his professorship in 1750-1, under the patronage of the most power interest alliance in Scotland, led by the Duke of Argyll. He had the example of what happened to David Hume – a genius and Britain’s greatest philosopher – who lost two elections for chairs in Edinburgh and Glasgow because he was careless with his public scepticism of religious beliefs. Even pious, Professor Francis Hutcheson, Smith’s mentor, was prosecuted by local religious zealots, of which there were many.

Smith never allowed such menacing forces (an 18th century Taliban) to get near him. However, subsequent editions of Moral Sentiments had the more religious passages toned down (his mother read his books)and, after his mother died, he struck out several passages too.

Wealth of Nations was published in 1776, but large parts of it appear verbatim in student notes of his lectures that he gave in 1762-3 (Lectures in Jurisprudence, Liberty Fund, 1982) and show that he had delivered the basic ideas of Wealth of Nations in parallel with his lectures on Moral Sentiments (to the same students) and the bulk of this book was the same as the lectures he gave on ethics.

In the mid-18th century it would be difficult, if not impossible, to give lectures on moral philosophy without regular nods to ‘divine providence’ and stay in post. When he wrote Wealth of Nations (he left Glasgow in 1764) he had no such inhibitions, and political economy was relatively new as a taught subject anyway and had not been written about by divines in the manner by which they dominated in the teaching of moral philosophy. However, read between the lines, and note the subtle qualifications and they are not so religious as they seem.

However, on the linkage between Smith’s social-evolutionary thinking (he called it ‘conjectural history’) and Hayek’s ‘spontaneous order’, I completely concur with Eamonn Butler, and I welcome this idea reaching a wider audience of the thousands of readers of the ASI web site.

Yes, I totally agree Eamonn: what works, lasts!

Now, if only we can keep the acquisitive politicians at bay, who always – no exceptions – seek to interfere and ‘improve’ the world in their own image and end up making it worse, we would break the cycle of ‘what politicians make, doesn’t work’. The cycle only wastes scarce resources and is never put right by throwing money at it. On that we have perfect agreement.

[Read Eamonn Butler at:

http://www.adamsmith.org/index.php/blog/adam_smith_at_the_hayek_society/]

Duncan Foley Indicts the Wrong Person for his Fallacy

The investigation is honing in on the prosecution charges, led by Duncan Foley, against Adam Smith and as each witness is examined, the case against Smith shows signs of a forthcoming collapse, on grounds that they have indicted the wrong person, creating as blatant a case of mistaken identify as has ever been put before a jury.

Smith is in position to present a ‘cast-iron alibi’ defence: he wasn’t near and has never been to the places where the ‘crime’ of fallacy was committed; it didn’t come from anything he wrote or said; he said nothing to encourage other people to commit the crime of fallacy; he said the exact opposite of the crime of fallacy throughout his life; the defence will corroborate these assertions from the testimony, and sworn affidavits before Notary Publics, of hundreds of prime witnesses; and the so-called ‘exhibits’ that the prosecution relies upon for their flimsy charges will be exposed as crude forgeries from persons known personally to Duncan Foley as he associated with many of them during his long time residence at known haunts of the forgers.

In a thoughtful extract from David Warsh’s review of Mark Foley’s recent book. “Adam’s Fallacy”, discussed here several times, Mark Thoma, of “Economist’s View” heads his piece: “Conscientious Objections to Invisible Hands and Other Moral Sentiments”. It is well worth reading and the URL is below.

Mark Thoma: “David Warsh has a very nice discussion of Adam's Fallacy: A Guide to Economic Theology, the book by Duncan Foley, and the relationship of Adam Smith's The Theory of Moral Sentiments to his work in The Wealth of Nations”:

David Warsh:

“So what exactly is Adam's fallacy? According to Foley, it's "the idea that it is possible to separate an economic sphere of life, in which the pursuit of self-interest is guided by objective laws to a socially beneficent outcome, from the rest of social life, in which the pursuit of self interest is morally problematic and has to be weighed against other ends."

This abstraction of an economic sphere from the messy complexity of real life is indeed the kernel of present-day economics, just as Foley says it is:

[U]nderstanding the logic of capital accumulation does not require us to surrender our moral judgment to the market... The exploitation of any profit opportunity involves a range of consequences, some good and some harmful. There is no escaping the moral relevance of weighing the good and the harm in each case. The fallacy lies in thinking there are universal principles that short-circuit this process.
But Smith isn't responsible for what has happened in the 200+ years since he died, in 1790. He saw the world whole. And, in the first instance, what he saw was that self-interest was an inevitably complicated matter.”

Comment
That seems to me to be the problem behind “Foley’s Fallacy”. Adam Smith was not involved in the development of the one-dimensional Home economicus developed and taught in the neoclassical paradigm from 100 years after his death.

If Foley has a beef with Homo economicus he directs his critique at the wrong source of what he calls, perhaps with some justice, its ‘fallacy.’ But it was never Smith’s fallacy to fall into the habit of conceiving of human behaviours as one-dimensional.

In both Wealth of Nations (1776) and Moral Sentiments (1759), and in his lecture series at the University of Glasgow (1751-64) from which they both originated, he recognised and wrote about the multi-faceted exhibition of human behaviour in all of his work, which taken together, cannot possibly be interpreted as separating economic behaviour from moral behaviour.

That is the essence of Foley’s fallacy. He impugns the wrong person. Adam Smith is innocent as charged.

You can get an idea of just how ‘complicated’ ‘self-interest’ was when Smith wrote about it from: Pierre Force, 2003. ‘Self-Interest Before Adam Smith: a genealogy of economics science’, Cambridge University Press.

You could say that self-interest as a subject was a ‘hot topic’ in the 18th century, and Smith was deep inside that debate.

[Read Mark Thoma’s extract from David Warsh’s review at:
http://economistsview.blogspot.com/2007/02/conscientious-objections-to-invisible.html]

Smith Taught Mediated Self-Interests in Both Moral Sentiments and Wealth of Nations

Forbes carries an article by Rich Kargaard on the subject I discussed yesterday, the famous advice when negotiating with the ‘Butcher, Brewer and Baker’ traders for your dinner. Here’s what Rich Kargaard says:

“The great Scotsman seemed to say two contradictory things. In The Wealth of Nations (1776) he wrote these famous words about self-interest: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages." This sounds like selfishness: Greed is good.

But Smith never believed that. In his earlier book, The Theory of Moral Sentiments (1759), Smith defined self-interest not as selfishness or greed but as a psychological need to win favor within one's society. Smith revised The Theory of Moral Sentiments after he wrote The Wealth of Nations. He did not change his belief that moral sentiments and self-interest are the same thing.
Let's not forget our Adam Smith. When we do, capitalism loses its moral authority, and the redistributionists win.”

Comment
I much enjoyed his piece on Forbes.com, ‘How moral is capitalism’ and I noted his reference to Adam Smith’s two books at the end of the piece, and thought he conceded too much to his critic (read the whole piece to see what I mean at: http://www.forbes.com/home/free_forbes/2007/0212/027.html) in his distinction between Wealth of Nations and Moral Sentiments.

The problem arises from interpreting Smith’s famous passage about trading for your dinner with the Butcher, Brewer, and Baker.

Smith said bargainers address each other in something like the following manner: ‘Give that which I want and you shall have this which you want’ and ‘it is 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) Now he doesn’t say how they should formulate their solution at this point, but he hints very strongly how this should be done (in fact he is quite prescriptive on the point).

In that most famous quotation from Wealth of Nations, of the transaction (process) among the ‘butcher, brewer, and baker’, he observes: ‘it is not from their benevolence … but from their regard to their own interest.’ So, if the bargainers want something from the other party they have to take full account of the other party’s, not their own, self-interest.

Yes, they have to think of the other person’s self-interests first and by bargaining to arrive at a mediation of their different interests by converting them to the common interest of a voluntary settlement. We call that negotiation; ‘the process by which we obtain what we want from someone who wants something from us.’

But we have not yet done, because Smith said more. He advised prescriptively (so Smith did not consider it optional) that ‘we address ourselves, not to their humanity, but to their self-love’, which is clear enough in advising the bargainer not to appeal to charity or to address herself to her own self-love only. To make this clear, he also advised her ‘never to talk of them of our own necessities, but of their advantages’. Again, it is clear: don’t think of your needs, think of the other party’s advantages from completing the bargain with you, and to do this effectively you must look for what advantages trading with you has for him, not yourself.

This is not greed, nor begging for charity. If two greedy people try to bargain they will never come to an agreement because neither would ‘give in’ nor compromise. If we all beg, who would create the goods and services we need, including our dinners?

What he said in Wealth of Nations (1776) is no different from what he said in Moral Sentiments (1759): ‘Society may subsist among different men, as among different merchants… by a mercenary exchange of good offices according to an agreed valuation.’ (TMS II.ii.3.2: page 86).

Moreover the separation of the dates of publication of his two books is misleading. He did not write one thing in 1759 in Moral sentiments and another thing in 1776 in Wealth of Nations, 17 years later. We know this from student notes of his Lectures in Jurisprudence, found in two copies in 1895 and 1958, and both published in 1978 (Liberty Fund).

On Tuesday 29 March, 1763, (LJ(A) vi.45-6, p 348) Smith delivered a lecture on the butcher, the brewer, and the bakers’ transaction in identical wording to that which later appeared in Wealth of Nations. This was part of his University of Glasgow lectures series which he delivered each year from 1751-1764. In other words, he was regularly delivering both the contents of Moral Sentiments (which was his lectures on the Ethics part of his philosophy) to the same student audience as he delivered his political economy lectures (much of them reproduced word-for-word in Wealth of Nations). He did not change his mind about ethics and markets – they were the same ideas he always had and they took account of each subject’s compatibilities.

By the way, Smith never said approved of greed, nor did he ever say anything about greed other than the staunchest criticism of the idea of greed, which more to do with Bernard Mandeville (1714) than anything Smith said.

An Educator Explains

I think I should explain a little about how I see the function of the ‘Lost legacy’ Blog, both to review it in my mind and perhaps to elucidate my approach for readers.

I am an educator, primarily, and have sought to explain complex ideas to a wide audience both for and beyond the special interest groups within the discipline of economics.

Hence, I do not solely comment for professional colleagues, though, of course, I welcome their interest in Adam Smith’s writings. Mostly, this is because Smith’s works and ideas are also purveyed by varying degrees of inaccuracy by experts beyond specialist economists in the media, as well as the professional journals.

Smith’s ideas have been so transformed by two centuries of the epigones that we are not faced merely with presenting interesting ideas that may be unknown beyond the circle of specialists, like, for instance, if I was to research and write about other figures from the hinterland of the history of ideas in economics.

A Blog devoted to the economic thinking of Richard Cantillon, or Charles Davenant, or even a front-ranker in 'fame' such as David Hume, would be interesting to a small groups of academics and, perhaps, a select group of general readers, but they are not names associated with wild perversions of their ideas by, sadly, some of the brightest economists, modern policy makers and their advisors, in the manner that happened to Adam Smith. There is a 'Chicago Adam Smith' and a 'Kirkcaldy Adam Smith', but not similarly for Cantillon, Davenant and Hume. Their intellectual legacies have not been purloined (not too strong a word!) for ends alien to their writings, as they have been with Smith’s.

Thus, when an obviously 'partially educated' contribution is put out from any author and I come across it, I look at the ideas and their degree of variance from Smith’s Works, ignore the status of their authors, and put their ideas about Smith under scrutiny for those readers of ‘Lost Legacy’ who may be interested, and hope to educate them, if they need it (many don’t), in both the correct writings of Adam Smith and of the subject with which the wrong ideas have become associated his name.

I try to keep this non-technical, without being flippant; the aim is educational, not academic precision worthy of peer review. It is a daily Blog, not a draft article for one of our journals. I aim also to be scholarly enough to avoid dismissal of what I say about Smith’s writings, and I am confident that on most, if not all, occasions I can source my interpretations accurately from within the primary Smithian texts.

Bear also in mind that I am also engaged in writing a serious account of Smith’s thinking that in due course will be published and, thereby, under scrutiny from my colleagues, and that writing on aspects of his thinking, under fire from daily abuses from epigones, from media authors using second- and third-hand sources, dimly remembered sound bites, and en passant muddled interpretations of isolated quotations devoid of context at Economics 101 from long ago, has the virtue that I practise explaining what Smith did say as against what he is alleged to have said on this or that subject, sometimes repetitiously I know, but it is excellent preparation for writing understandable prose, and for correcting the turgid in what I have already written in my manuscript.

If some readers learn something they did not know, or have confirmed for them what they do know, then they may be satisfied, which shows in the increasing numbers of visitors to the site, many of whom become regular readers and willing apparently to spend their scarce time to this task. I am also doubly satisfied that I have benefited from my time spent writing and rewriting as above, and I hope it will show, eventually, in what I publish later this year.

If I appear somewhat ‘emotional’, impatient', and less than ‘calm’ on occasion, over issues that should be treated in a more detached manner, with the usual professorial gravitas, that probably reflects my teaching style at the universities I lectured in before retirement – I was never known, since the early days of my academic career, for teaching in monotone.

John Nash Was Not Right about Adam Smith Being Wrong

I found a most interesting piece of commentary that is one of those that goes almost far enough, but not quite in its thinking, and I would like to examine its good points and suggest how it might be made completely accurate. The extract states what the author considers a difference between Adam Smith and John Nash, or rather an Hollywood scriptwriter’s version of the differences. Fine. I am not snobbish and given only to contesting the ideas of tenured professors out of Chicago; I’II take on Hollywood scriptwriters too, yes Sir.

The author is someone from The Amrita School of Business blog (2 February), but I know no more about him or her. The author writes:

“As the great Adam smith stated, - the market benefits when everyone does what is good for him; we are unknowingly following his path, and take for granted that the whole market is benefited.

However, instead of following Adam smith, only if we follow the versions of Prof. Nash, we all would be in a better situation.

Prof. Nash suggested that the market benefits, when one does what is good for him and also for the group. Following this idea, if we try doing well for ourselves and at the same time, think for gain of the whole group; we all would be in better situation.

By following Adam Smiths principle (self interest), we are actually blocking each others way and giving rise to ambiguity and dissatisfaction .Instead if we think of others (Prof. Nash’s Theory) and follow what is stated below every one will be benefited.”

Comment
John Nash wrote a seminal paper for Economica in 1950, ‘On the Bargaining Problem’, which set out certain far reaching and basic assumptions that, in effect, eliminated from consideration the process known as bargaining, and substituted instead a consideration of the outcome after two parties bargained. In short it is a study of the solution of bargaining, it is not a study of how two (or more) bargainers arrive at a solution.

The optimal solution (Pareto efficient) shows that the division of an amount of the various items available for trade with varying numerical utilities for the bargainers is the one where the product of the net gains in utility of each bargained set is maximised. Any attempt to redistribute the sets would make one or both of them worse off.

Hence our author concludes that “if we try doing well for ourselves and at the same time, think for gain of the whole group; we all would be in better situation.” However, accepting as true the conclusion, it does not solve the bargaining problem. The problem is not one of achieving an optimal outcome, so much as one of how to achieve that optimal outcome. Nash eliminated the most interesting part of the problem by his assumptions (the boys in his example had perfect information about each other’s utilities for the items available for trade, their bargaining skills were eliminated, and they both knew what each would trade their items for in the bargaining.

Mathematic modelling is only determinate (has a solution) if these conditions operate. They don’t, so apart from being an instructive exercise into the nature of an optimal solution, it is also non-operational.

Smith wrote on the bargaining problem in Wealth of Nations (Book I), but he discussed the process not the solution. So Smith and Nash were addressing different parts of the problem, and like apples and pears, it is difficult to see how a valid comparison can be made between their different solutions. Following ‘the versions of Prof. Nash … instead of following Adam Smith’, will not get us very far because the Nash version is non-operational, it does not address how we conduct the process.

Smith said bargainers address each other in something like the following manner: ‘Give that which I want and you shall have this which you want’ and ‘it is 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) Now he doesn’t say how they should formulate their solution at this point, but he hints very strongly how this should be done (in fact he is quite prescriptive on the point).

In that most famous quotation from Wealth of Nations, of the transaction (process) among the ‘butcher, brewer, and baker’, he observes: ‘it is not from their benevolence … but from their regard to their own interest.’ So, if the bargainers want something from the other party they have to take full account of theirs, not their own, self-interest. Yes, they have to think of the other person’s self-interests first and bargaining allows for a mediation of their different interests into the common interest of a voluntary settlement. We call that negotiation; ‘the process by which we obtain what we want from someone who wants something from us.’

Yet, the author of the piece from Amrita Business School asserts: that following Adam Smith’s advice “we are actually blocking each others way and giving rise to ambiguity and dissatisfaction.” Having shown that is not what Smith said (anywhere in his writings), I think the author needs to rewrite his sentence.

But we have not yet done, because Smith said more. He advised prescriptively (so Smith did not consider it optional) that ‘we address ourselves, not to their humanity, but to their self-love’, which is clear enough in advising the bargainer not to address herself to her own self-love. To make this clear, he also advised her ‘never to talk of them of our own necessities, but of their advantages’. Again, it is clear: don’t think of your needs, think of their advantages from completing the bargain with you, and to do this effectively you must look for what advantages trading with you has for him, not yourself.

In what manner can this ever be described as ‘blocking’ or causing ‘dissatisfaction’, if the bargainers are doing exactly the same by addressing the other party’s interests and the other party’s ‘advantages’? Is this not exactly what Nash was supposedly suggesting? If it is different, enlighten me. Are we reading from the same page?

However, I think there is another problem, apart from the weakness of the Nash solution addressing the outcome of the optimal bargain but not able to offer any help with how to get to it, and the weakness of the author’s understanding of Adam Smith’s contribution, which dealt with the process, and that is the possibility that our author is mixing up the Prisoner’s Dilemma solution with the Nash Theorem. They were both published around the same time in 1950, and are often mixed up (especially in examinations from poorly prepared candidates).

Prisoner’s Dilemma shows that the choice is between doing best for oneself or doing best for both parties. People play ‘co-operate’ or ‘defect’, and those that defect do so for one of two reasons. In effect, the defector acts to protect himself from possible defection by the other (‘I defect, not because I want to, but because I must’), or the defector does so because he intends to exploit the other player (‘I defect not because I must, but because I want to’). Unfortunately, depending on the pay-offs in the game, defection is the majority choice by a long way in my experience of conducting thousands of games in my negotiation courses (about 92 per cent play the defection ‘red’ against the co-operators ‘blue’).

Interestingly, its creators wrote to Nash not long after the papers circulated, but Nash did not reply to their request for his comments. But that’s a long way from the Hollywood scriptwriter, who stuck into Russell Crowe’s/John Nash’s speech the side-attack on Adam Smith’s alleged views.

We don’t’ need to look far for where the script writer got these absolutely wrong views he attributed to Smith; they come from the Chicago version of Adam Smith and not the man from Kirkcaldy. Chicago never has understood Smith on bargaining (let alone the entire corpus of Smith’s works), and they have a lot to answer for in their miss education of generations of economists in what Adam Smith actually wrote about.

It’s not as if it is difficult to get a hold of a copy of Wealth of Nations…

Read the author’s piece at: http://asbians.blogspot.com/2007/02/consider-this.html

Give Me those Old Time Numbers - They're Good Enough for Me

In the absence of markets to assess effectiveness in Blog readership numbers, the next best measure is the number of unique visitors per day, week, month and year.

Among economics Blogs, Adam Smith's Lost Legacy is fairly small, but, as Smith often pointed out in Wealth of Nations it is not the size of an economy that indicates its vitality (and the happy countenance of the the labourers, as they march towards opulence), it is whether it is growing, stationary or stagnating.

Lost Legacy is 'slowly and gradually' (another favourite phrase of Smith's) growing in its number of regular unique visitors. Well, if that measure was good enough for our patron, then it's good enough for me (reminds me of an old hymn, somehow ...):

Checking the January unique visitor numbers I found:

Jan 2007 Unique Visitors: 12,550; page views: 53,585

Comparing that with:

Jan 2006 Unique Visitors 4,675; page views: 18,898

Looking at these numbers for the 12 months to 30 Jan 2007:

Unique visitors: 102,446; page views: 447,844

I am grateful to all visitors and readers of the Blog and the Home page materials, including the bibliography of Smith articles. When I finish my current book on Adam Smith for Palgrave’s ‘Great Thinkers in Economics’ series, I shall update this with several scores of new references.

Anyway, a great thank you to all readers (how about some of you posting comments, including polite criticism?).

Sometimes Some Politicians Talk Good Sense

Gordon Brown, UK CHancellor of the Exchequer (and Prime Minister in waiting) speaks at 'The Government Leaders Forum' at the Scottish Parliament, Edinburgh, today, 1 February:

“Two centuries and more ago, the very idea of globalisation - of a wholly global interconnected economy - was anticipated by Adam Smith, the great Scottish economist, who was born in my home town of Kirkcaldy.

Brought up by the waterfront, looking out from his window over the North Sea, witnessing a hundred and more ships coming in and out of Kirkcaldy to trade, he could see with his own eyes how trade was the engine of wealth creation, that an increasingly specialised division of labour would drive nations to seek their comparative advantage through innovation and trade, and his book 'The Wealth of Nations' explained the foundations of the world's first industrial revolution starting here in Britain.

And now today, driven by the same dynamic of technology and trade that Adam Smith observed, but this time with global and not just national or continental flows of capital and labour as well as of goods and services, we are at the birth of the creation of a new world order, as dramatically different for the 21st century as the growth of the industrial revolution was for the 19th century.•

It took just 40 years for the first 50 million people to own a radio;
• Just 16 years for the first 50 million people to own a PC;
• But just 5 years for the first 50 million to be on the Internet.

Today one hundred million people are using online communities such as MySpace or YouTube. On the Internet, one million new postings are made every day, and one new blog is created every second - a world so interdependent and connected that we talk now, not just as Adam Smith did, of the wealth of nations, but of the wealth of networks.”

Comment
Gordon Brown tends to refer to Adam Smith often in his speeches and this occasion is one of his more relevant and accurate contributions. Often criticised, Brown deserves credit when he speaks good sense.

His speech illustrates the appropriate linking of a current issue to Smith’s legacy, and for that reason I highly commend him for it.

Read the whole speech at: http://www.egovmonitor.com/node/9264

While the focus is on globalization from a Scottish/UK perspective, the essence of his theme is, er, global, so no matter where you are it has high significance for you and your part of the world too.