Reclaiming Adam Smith – Part Two from Fletch

Here are some extracts from Part Two of Fletch's posts on Adam Smith. They are particularly interesting because their command of what Smith wrote and meant is rare in Blog land (and rarer still in academe where it is influenced by Chicago's version of Adam Smith and not by the man from Kirkcaldy).

"Unlike in the case of child labor, Adam Smith spoke extensively about the issue of governmental involvement in the economy. It was, in fact, his primary concern. Modern liberals, however, have attempted to distort what he actually had to say about the issue in order to claim that he would share their advocacy of worker protection laws, anti-trust laws, interference with the free trade of free individuals in the international marketplace, etc., as if Adam Smith were a kindred spirit. Again, nothing could be farther from the truth. The passage from The Wealth of Nations most frequently cited as endorsement of the modern liberal position is this one:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” [WN I.x.c.27: p 145]

It seems a simple enough declarative statement condemning the actions of businessmen who will typically conspire against workers and the general public unless something is done to prevent it, right? Wrong.

Smith was describing the behavior of tradesmen under the guild system that existed in late eighteenth century England and Scotland - a system he vehemently opposed. It was a state-enforced, self-perpetuating trade oligopoly that fostered such behavior. And while the system had characteristics that were in some ways similar to both modern corporate structures and organized labor, it was materially different from either. It was specifically this state-facilitated collusion that Smith was attacking, not the actions of free individuals in an open marketplace.

One need look no further than the remainder of the same paragraph in which those fateful words can be found in order to understand the context in which they were actually written and to see the gross distortion that is necessary in order to co-opt Smith’s message. If the man from Kirkcaldy were advocating a governmental solution, rather than the removal of governmental involvement, then would he follow with, “It is impossible indeed to prevent such meetings[,] by any law which either could be executed, or would be consistent with liberty and justice (emphasis added)”? [Punctuation corrected from WN] Obviously, not. It would be completely inconsistent with his entire body of work in defense of individual liberty to suddenly advocate state intervention to prevent free individuals from coming together.

It is in the next sentence that Smith identifies the real culprit in this scenario, as embodied by the guild system: “But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies[;] much less render them necessary (emphasis added).” [Punctuation corrected from WN]

The guild system as it existed in Smith’s time involved the incorporation of business interests (Note: the terms “incorporation” and “corporations” as described in The Wealth of Nations refer not to corporations in the modern sense, to which, as alluded to previously, they bear little resemblance, but, rather, to the guild system as legitimized by state sanction.) into protected trade organizations that could stifle competition, control wages and prices and act as an oligopoly. This, the ham-handed intervention by the state that undermines the free market process, was the target of the moral philosopher’s ire.

Smith even goes on to say: “A regulation which obliges all those of the same trade in a particular town to enter their names and places of abode in a public register, facilitates such assemblies…. [WN I.x.c.28: p 145] A regulation which enables those of the same trade to tax themselves in order to provide for their poor, their sick, their widows and orphans, by giving them a common interest to manage, renders such assemblies necessary…. [WN I.x.c.29: p 149] An incorporation [see the caveat mentioned above] not only renders them necessary, but makes the act of the majority binding upon the whole. In a free trade an effectual combination cannot be established but by the unanimous consent of every single trader, and it cannot last longer than every single trader continues of the same mind. The majority of a [guild] can enact a bye-law with proper penalties, which will limit the competition more effectually and more durably than any voluntary combination whatever (emphasis added).” [WN I.x.c.30: p 145]

“The pretence that corporations are necessary for the better government of the trade, is without any foundation. The real and effectual discipline which is exercised over a workman, is not that of his corporation, but that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence.” [WN I.x.c.31: p 146]

Smith explicitly argues that the absence of government involvement – as exhibited by, in this case, the creation of the guild - is sufficient protection for the workman and the public. This, alas, is not the only passage from Smith’s magnum opus that is grossly distorted to make it appear that he favored protections for workers against the depredations of unscrupulous businessmen. There is, of course, this passage:

“It is not, however, difficult to foresee which of the two parties [masters or laborers] must . . . have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorises, or at least does not prohibit their combinations, while it prohibits those of the workmen.” [WN I.viii.12: pp 83-84]

And this one:

“The masters upon these occasions are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen (emphasis added).” [WN I.viii.13: p 85]

In each case, the thrust of Smith’s argument is not that workers require protection from “masters”, but rather that the involvement of the state (“those laws”) is the problem to be addressed, in the absence of which workers would not need further protection.”

Comment
I have corrected punctuation in square brackets [ ] and presented references, though the emphases are due to Fletch. This is a rare occasion when somebody has not only read Wealth Of Nations but also he has interpreted the text quoted accurately, aligning is interpretation to be consistent with Adam Smith’s theme of Perfect Liberty (even rarer).

Contrary views and themes from the Left (or at least New Labour) can be read in Ian McLean’s ‘Adam Smith, Radical and Egalitarian: an interpretation for the 21st century', 2006, Edinburgh University Press, foreword by Gordon Brown (UK Chancellor of the Exchequer). It doesn’t deal (from memory) with either of the issues raised by Fletch, which is a pity because partial interpretations do not do Adam Smith justice, and may compromise claims to accuracy of implications that Smith was a kindred spirit of New Labour (or of conservatives in the US).

This does not meant Smith was absolutely right about the balance of power, but I think it is incumbent of scholars to present the whole Adam Smith, warts and all, and not just selected pieces with which they agree with in 21st century Britain and the US. On these issues raised by Fletch he is closer to Adam Smith from Chicago.

[I commend you to read Fletch’s Blog at:

http://fletch4freedom.townhall.com/g/7d5502d3-af10-49d6-bfc4-1d888c09ca70]

Reclaiming Adam Smith - a conservative contribution

A person called ‘Fletch’ of Loganville, Pennsylvania, USA writes a Blog, “Fletch for Freedom” (a Blog within Town Hall.com., of which I know no more) has written two most interesting interpretations of Adam Smith, with which I more or less concur, though I am not so sure whether I would support Fletch’s politics, which appear to be ‘conservative’ within the US Republican tradition, and about which I follow Lost Legacy’s position of not being affiliated to any political party, tendency or band of sympathisers, except for selected such alliances within the country I vote in, namely Scotland.

However, that said, the posts by Fletch are extremely good in that they address issues in Smith’s Wealth Of Nations with which Lost Legacy has commented in the past, in particular the much quoted (or rather misquoted) criticism of tradesmen in town guilds or ‘corporations’, who conspire against consumers to raise prices, which many persons of the left, or in US terms of ‘liberal’, persuasion misread and reword to imply that Smith was talking about modern day ‘corporations, when he wasn’t.

Here is his first post on Child labour (28 March):

“Reclaiming Adam Smith – Part One: Adam Smith and Child Labor”

“Frequently, those who would misconstrue Smith’s writings will concentrate, to the exclusion of all else, on the fact that he was a “moral philosopher”. This is a common tactic of the Left – perhaps the most common – wherein the position taken is deemed to be “on the side of the angels” and all others are deemed to be morally inferior and, therefore, unworthy of further consideration. In reality, this is a false debating tactic designed to obscure the fact that, typically, both sides of the debate agree that the societal issue to be addressed (poverty, tyranny, slavery, etc.) should be reduced and the real debate involves the suggested methodologies to bring this about. Thus, those cloaking themselves in the blanket of moral superiority conclude that because Smith was a “moral philosopher” that he must have objected to child labor. Nothing could be farther from the truth.

I have no doubt that Smith would have been delighted that child labor has largely come to an end in the Western world, but that is not the same thing. It must be remembered that the abolition of child labor is a conceit of modern prosperity in an industrialized world. In Smith’s time, child labor was the norm, considered by all concerned to be completely ordinary because the economies of the world in the late eighteenth century were overwhelmingly agricultural. Suggesting to a farmer then (and in many parts of the world today) that the family farm should not be worked by all members of the family would be met with simple incredulity.

As the very things that Smith observed began to take hold over time – primarily the greater reliance upon the division of labor and industrialization – the related increase in overall prosperity ultimately made it possible to consider freeing the society’s children to engage in other pursuits. It did not, however, happen overnight. As much as twelve years after Smith penned The Wealth of Nations, the new water-powered textile factories in England and his native Scotland were overwhelmingly staffed with children. It wasn’t until Lord Shaftesbury campaigned to bring an end to child labor in England that the trend was even reversed - and he wasn’t even born until more than a decade after Smith was in his grave.

In this country and elsewhere, the move to bring child labor to an end was less the result of concern for the little kiddies than an attempt by the newly growing organized labor movement (in the early nineteenth century) to restrict employment opportunities for others so that their own wages and employment levels would be increased. It was the trade unions that began agitating for restrictions upon child labor in the early 1830s and it wasn’t until the 1830s and 1840s that child labor laws were passed for the first time both here in the United States and in England. In fact, it would be another century (1938) before minimum ages of employment were established by federal law in this country.”

Comment
How refreshing to read somebody placing an issue in its proper context. Child labour in 18th century Scotland was in no way analogous to child labour in 21st century developed countries, which have abolished it in the main, requiring children to be attending universal education institutions. In the developing world, and the non-developing, world child labour remains a harsh fact of life, and the pennies earned may make a difference of life or death for their families. Well-meaning affluent observers who campaign against child labour in plants supplying foreign-owned markets sometimes condemn the exploited children to worse than they seek to protect them from – child prostitution, male and female, literal starvation, lives of crime, and so on.

Twelve-hour days in factories are an alternative to 18-hour days in the fields. Child labour from the 17th century in Britain was worth pennies a day that added to a few shillings a week, supplementing a family’s income to at or above the survival diet. Children attending the Parish schools in Scotland (long before universal education in England) often left at around eight because of family destitution – that Adam Smith was able to continue attending school until 14, when he went to Glasgow University, was not a universal practice – occasional talented children (boys exclusively) who showed eligibility for university, sometimes made it through with charitable support, but desperately poor parents normally pulled them out of school and put them to work.

Until society produced the capital to hire labourers for above subsistence wages, and the raw materials to work upon, there was no alternative, and there still isn’t in many developing, and all non-developing, countries today. The corruption, vileness, and mendacity of many of the rulers of these countries, with their mercantile policies (mirroring the same policies of mercantile governments in the richer developed countries), locks poverty away from the only lasting remedy: the creation of wealth – the annual flow of ‘the necessities, conveniences and amusements’ of life, and these comes from establishing wealth creating enterprises and not, unfortunately from palliatives of rock concerts, charities and ‘aid’ to governments (aka ‘filling the pockets of the corrupt’, and also ‘massaging the consciences of the mega-rich’).

I shall cover the interesting second article by ‘Fletch’ later.

[In the meantime, read the whole article at:

http://fletch4freedom.townhall.com/g/09bca01d-2df6-4825-
8a33-cd1926148e65?comments=true#commenta645b2ea-946e-48be
-b9d5-38dc85249e72]

Misquoting Adam Smith

Adam Smith is often called upon as 'hook' upon which to hang arguments about current political affairs that are only loosely connected and, as often as not, wrongly associated with the subject selected for 'das Adam Smith' treatment.

In this example, the subject is about the 'duty of government' in a minor incident in the 21st century and has nothing much to do with Adam Smith in the 18th century, especially when the source is misquoted.

Mark Peters writes in his Blog, Taxing Times (‘a blog dedicated to the discussion of matters historical and current inssues of military and political natures), 29 March: “Adam Smith and the Duty of Government”

“Adam Smith, in the Wealth of Nations Book IV, maintained that government had three duties, namely:

1) Protection of it's [sic] citizens from external aggressors.
2) Protection of it's [sic] citizens from internal aggressors.
3) The provision of welfare, within society, to those in need and whom could not be supported by the free market.”

Comment
Yes, memory can play tricks on one’s habit of accuracy, and it is not always that important. But readers may not notice the unintended errors and might repeat them in contexts where it is important.

So, at the risk of boring those who noted the errors in the passage above I shall correct them (keener readers may wish to do it quickly themselves – for practice):

● Adam Smith’s Wealth of Nations consists of five book, numbered I through V, and Book IV, ‘Of Systems of Political Œ’, contains Smith’s critique of the ‘mercantile system’.

● Smith’s statements of the duties of government are in Book V, ‘Of the Revenue of the Sovereign or Commonwealth’.

● These ‘expences’ pay for the duties of ‘defence’, ‘justice’, and ‘public works and public institutions’ (which include ‘institutions for the education of youth’ and ‘people of all ages’ and, en passant’ relief from the ‘loathsome diseases’) and the ‘dignity of the sovereign’.

● They do not include what we mean by ‘welfare’.

● Neither should we reduce the entire range of justice to ‘protection of its citizens from internal aggressors’, as if it mirrors defence.

As for the context of the Blog post – the hostage taking of British sailors by Iran – I have nothing to say, it having little, if anything, to do with Smith’s legacy.

[Read the post by Mark Peters at:
http://mpeterstaxingtimes.blogspot.com/
2007/03/adam-smith-and-duty-of-government.html]

Silly Notions and Real Markets

The byeline is “Hard Hat Investor" writing a piece called: ’“Ethanol Hangover? The USDA's Planting Report Should Confirm” in the Blog: Seeking Alpha: Energy Stocks, 29 March, presumably to investors choosing to buy, hold, sell their stocks in Ethanol.

“By the time you read this article, the whole ethanol/corn/soybeans landscape may have changed dramatically. But heading into the USDA’s March 30 prospective planting report, the whole ethanol thing is just too close to call. It all comes down to Adam Smith's invisible hand.

The truth with corn – and this is what makes agriculture commodities different from others – is that we are a long, long way from running out of arable land. If Smith was right, we should expect farmers to bring new supply into the market in droves, hoping to cash in on the almost two dollar-a-bushel price increase we’ve seen on corn over the past two years.

This is why investing in softs can be such risky business. Unlike, say, gold, new supply in agriculture can be brought online in a comparative blink of an eye. All it takes is a handful of farmers plowing new land, or switching from soybeans to golden maize. How quickly that supply comes on line, and whether it overshoots the mark, are the questions.”

Comment
It has nothing to do with Smith’s invisible hand. It’s how markets work, as he shows clearly in Books I and II of Wealth of Nations.

Some farmers plough some extra land, others plough the same as last time, and the rest cut back on what they did last time. Necessarily the effects on output are lagged by the growing season. Before that experts calculate as best they can how much has been planted, how much is expected to be harvested, weather details, and anticipated prices on the basis of this information. Final prices shift upwards or downwards depending on actual quantities produced.

Which invisible body parts have a role in this? What do they do? How do they know in advance to switch farmers from plowing to non-plowing? The metaphorical body parts don’t, nor do the real brains of humans (they're guessing according to hoped for returns).

Aligning all this with Adam Smith, who referred to ‘an invisible hand’ once and in reference to something else in Book IV is one of the lesser atrocities committed by Chicago economists in the last century on his legacy. It also is a pretty silly notion too.

[Read Hard Hat at: http://energy.seekingalpha.com/article/31047]

Some People Quote Smith Appropriately

It’s great when an author quotes from Wealth Of Nations and puts in its proper context, especially when it is one of his most oft repeated quotations – the one about people of ‘the same trade’, etc., ….

Jake Mortenson of the University of South Dakota contributes a column to ‘USD Volante’ at Vermillion, South Dakota, and writes about Smith’s quotation and the strange inconsistency in state sponsored interventions in different markets:

“As a general rule, beware of any laws concerning economic transactions with "fair" in the title. They are usually no more than means for well-organized producer groups to gain an "unfair" advantage over consumers by limiting competition. As Adam Smith once wrote: "People of the same trade seldom meet together ... but the conversation ends in ... some contrivance to raise prices ... [Government] ought to do nothing to facilitate such assemblies, much less render them necessary."

In other markets, most notably gasoline, Mr. Smith's words are heeded. Price collusion is strictly prohibited. In alcohol sales, it is apparently against the law to NOT collude at a certain price level. With all of the vague, biased language stripped away, what SDCL 37-10A-1 boils down to is a legalized form of price collusion. In a state which supposedly favors limited intervention in markets, it is disappointing that the 1989 South Dakota legislature had not read Mr. Smith or chose not to heed his warning. It is the hope of this columnist that future lawmakers will not so easily succumb to well-organized producer groups.”

Comment
Perfect. See the original quotation in context at: WN I.x.c.27: p 143.

Note the contradiction: encouraging competition, with a great deal of suspicion that it is not operating effectively, in the oil industry and on garage forecourts, and blocking competition in alcohol sales and being pleased with the non-competitive results.

I am aware of the 'moral hazard' arguments for alcohol and tobacco sales, though even here there is a contradiction in respect of the outright prohibition of drug sales, a policy that has been an absolute failure in neither preventing consumption or supply, and have filled out jails with thousands, plus the many thousands of others who remain uncaught from committing crimes to acquire the money to purchase the drugs and, as a byeproduct, enrich the criminal suppliers. But that's another story.

[Read Jake Mortenson at:
http://media.www.volanteonline.com/
media/storage/paper468/news/2007/03/28/
Opinion/Column.unfair.Alcohol.Sales.a.k.a.
Collusion.Bad.For.Consumers-2808622.shtml]

China's Social Experiments and The Velocity of Change

Peter A. Browne writes that ‘Capitalism causes sects in China’, on timesunion.com, 27 March:

“But 21st-century China is neither fish nor fowl; it is the world's fastest-growing economy, where capitalism seemingly has replaced socialism as the financial model with a zeal that would make Adam Smith proud. This has greatly raised Chinese living standards. But, in the process, it has created a tiered society; a growing middle class that has benefited enormously from the shift toward capitalism, and the largely rural poor who have been left behind.”

Comment
At precisely the time when Western Europe was awakening in the 15th century from a millennium of stagnation, following the fall of Rome, China was a fairly vibrant economy, well advanced in science and technology and on the eve of continuing through into innovation and application, when the Chinese political regime embarked on a self-destruct policy of cutting itself off from the rest of the world, abandoning expeditions to explore the continents overseas and curtailing economic development and trade.

The rest, as they say, became history. The maritime powers of Europe embarked on world explorations, improved primitive science and technology, began the shift from superstition within fractured religious orthodoxy, and slowly and gradually raised gross domestic products as revitalized trade spread across its lands.

By the time that the powerful trading nations and their colonies confronted mainland China in the 19th century, the gap between them was manifest, not just in naval power, but also in commerce, technology, basis science and active markets. China was stagnant, technically backward and not developing (noted by Smith in Wealth of Nations). In the mid-20th century, China added to its woes by embarking on a massive social experiment, under the influence of a minor European ideology for the proletariat, a version of Marxism, adopted to fit a peasant society by Mao and his communist party. It was as disastrous a 50-year social experiment as China's 500-year experiment adopted in the early 15th century.

The rapidity with which China has abandoned the Marxist faith almost hides the haste with which it has embraced market solutions, albeit within the bounds set by the Communist Party. The skylines of Shanghai, Guangdong, Beijing and dozens more testify to the surface transformations of a stagnant, state-run socialist economy into the most vibrant market economy on Earth, unprecedented in history.

But the speed, breathtaking as it is, raises serious concerns. The ‘largely rural poor who have been left behind’ are inevitable, for while no country needs to take as long as it took the original market powers in Europe to move from stagnant agriculture to markets, and then to industrial capitalism, there is limited scope for even China to do other than ‘leave behind’ vast segments of its population. Smith always used the phrase ‘slowly and gradually’ for all cross-societal changes because that is what happens, whatever the inclinations of commentators, analysts and forecasters to have everything change at once. Social change does not move at infinite velocity, neither do markets, despite what is expected from half-understood diagrams in price theory.

Peter Browne mentions that in 2006 there were ‘23,000 "mass incidents," which is bureaucratese for riots’ in rural China. My immediate reaction is ‘only that few’? People’s expectations of change may be low, but their anger at exclusion is easily provoked into impatience.

But I do not think that Smith would have been ‘proud’ at the ‘zeal’ of the Chinese communist party functionaries. He was always suspicious of changes promoted by legislators and princes, especially when guided by ‘men of system’ (the Chinese Communists leaders combine all three roles in one). Markets tend to devolve decision-making downwards, and while they are not dependent on secular democratic forms of government, they tend to be compatible with them, and, most important, people living in market economies are more comfortable with democracy than with authoritarian dictatorships (hence, authoritarian leaders – e.g., Malaysia and Singapore – dress their political support in ‘democratic’ clothes).

[Read the article at: http://www.timesunion.com/AspStories/
story.asp?storyID=575553&category=OPINION&newsdate
=3/27/2007&TextPage=2]

Two Funerals and Das Problem

Chaim Steinmetz – Happiness Warrior (a Blog billed as ‘Articles by a Fortyish Orthodox Rabbi in Montreal’) writes (elegantly):

“Yes, I have a problem with capitalism. And so did Adam Smith.

Adam Smith, the 18th century Scottish philosopher, is considered to be the founding father of capitalism. In his book The Wealth of Nations, he notes that society is most productive when structured around the self interest of every individual. Smith says that:

"It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest."

So free enterprise is the best way to structure society. Let the market decide what’s good or bad, and whether Yankee logos belong on coffins.

But at the same time, Smith wrote another book, The Theory of Moral Sentiments. In it, he sees society as based on mutual love and sympathy:

It is thus that man, who can subsist only in society, was fitted by nature to that situation for which he was made. All the members of human society stand in need of each others assistance, and are likewise exposed to mutual injuries. Where the necessary assistance is reciprocally afforded from love, from gratitude, from friendship, and esteem, the society flourishes and is happy.

So in one book, Smith says society is best structured around self interest. In another he says it is best structured around love and gratitude. So which is it?

This question, known as the “Adam Smith Problem”, is one that has baffled scholars. Clearly, Smith may have embraced laissez faire capitalism, but also realized a society structured around pure self interest would lose its soul. Or, to apply it (rather crudely) to my case, capitalism might produce a New York Yankee coffin, but capitalism should not have the final word. Our spiritual values should make the ultimate decisions.”

Comment
I wouldn’t presume to comment on the Talmud or Torah (though I remember some interesting questions in them that I often used to illustrate early ideas in statistical probability for students) without finding out a great deal more about them than Chaim Steinmetz has found out about Adam Smith before pronouncing on what he is alleged to have written.

That he considers that Adam Smith had a problem with ‘capitalism’ is acutely wrong – he never knew anything about capitalism, a phenomenon from the mid-19th century, back projected onto him by 20th century neoclassical economists and graduates who passed through Economics 101 as taught by graduates from Chicago. Smith wrote about commercial markets, not about capitalism, an economic form driven by finance capital, either accumulated or financed by banks, and not the result of savings out of personal income.

Taking Smith’s model of society, through the ‘four ages of man’ from hunting, through shepherding, farming and (‘at last’) commerce, accommodates the notion that “society is most productive when structured around the self interest of every individual” throughout each age, and not just that of commerce.

He asserted (Lectures in Jurisprudence, 1763-4 and Wealth of Nations, 1776) that the behavioural traits of ‘seeking to better oneself’ (‘from cradle to the grave’), of the ‘propensity to truck, barter, and exchange’ (from the beginnings of humans), and the ‘division of labour’ (requiring the first formations of capital stock – subsistence) were always present in societies of humans. As were (Theory of Moral Sentiments, 1759) the moral sentiments (sympathy, concerns for the judgements of others, via the impartial spectator) which society held up to all as through a mirror.

Hence, he didn’t say that ‘let the market decide what’s good or bad’ nor his Chaim’s allusion correct in: “Clearly, Smith may have embraced laissez faire capitalism, but also realized a society structured around pure self interest would lose its soul.” For a start he did not ‘embrace laissez-faire capitalism’; he never used the words ‘laissez-faire’ (nor ‘capitalism’). For the culprits, please refer to the gentlemen and ladies from Chicago.

In both Moral Sentiments and Wealth of Nations he stated the need for justice, curbs on the self-interested proclivity for monopolists for protectionism, for conspiracies against consumers, and called for the stiff application of the laws of justice against self-interested criminals, fraudsters, assaulters against the person, thieves, and such like. He wasn’t too fond of self-interested princes fighting wars for trivial vain-glory ends, nor for chartered trading companies, and mercantile colonies.

Chaim Steinmetz is not in possession of the full facts (i.e., a politer way of saying he is wrong) when he concludes that “the “Adam Smith Problem”, is one that has baffled scholars”. It hasn’t. It baffled some readers who didn’t know of the existence of the student notes of Smith’s Lectures, found respectively in 1895 and 1958, or who haven’t read them since they were widely published in 1982, and it may baffle those who have picked up ‘the problem’ second-hand. It was never a problem to Smith and it isn’t to those familiar with his books.

On the issue of whether persons should leave instructions to have their coffins carry the logo of a sports team, in this case ‘the Yankees’, if it is not illegal, causes no offence to his immediate family, and reflects their passions during life, I am prejudiced in favour of Liberty.

Recently, I have attended several funerals with ‘unorthodox’ ceremonies. I would never presume to tell others how they should make that journey, or who should be present, or not, as the case may be. Smith criticised David Hume’s choice of grave stone, considering it too ornate for his own taste and his sense of frugality in matters of using funds for unproductive labour.

[Read Rabbi Chaim Steinmetz at:
http://chaimsteinmetz.blogspot.com/2007/03/
yes-i-have-problem-with-capitalism-but.html]

No Profits in Colonies

Not often you find an entire and plausible hypothesis summarised in a single paragraph, covering a history period from the mid-18th century through to the mid-20th century. It is also an instructive counter to those who think that society is a one-dimensional exhibit of the workings of Homo economicus.

Rafe Champion achieves the one-paragraph test in his post on ‘The betrayal of liberalism’ in the “Catallaxy” Blog:

“Keith Windschuttle has contributed a really excellent historical study of the waxing and waning fortunes of British liberalism, especially in relation to imperialism and the Empire. Adam Smith and David Hume saw no future for overseas dominions other than as friendly trading partners and similar views were held by the 19th century Manchester radicals such as Cobden and Bright. However one evil led to another because the threat of Napoleon prompted Britain to establish a worldwide system of naval bases to protect their sea trade and later these became the entry points for colonization of the pink ‘coloured empire that extended’ around the globe.”

Comment
Smith commented that it was an error to think that society required ‘Perfect Liberty’ before it progressed from barbarism to opulence. Desirable as general Perfect Liberty would be for such development, it was neither a necessary nor a sufficient condition for opulence over a long enough period. On this basis he did not indulge in predictions about the future. He concentrated on elaborating on the deficiencies of mercantile political economy and their impact on contemporary 18th-century Britain (Book IV, Wealth of Nations).

His thoughts on the role of colonies were fairly negative and this showed in his assessments of the rebellion in the British colonies in North America. I imagine that he would have been critical of the British colonial empire in India (he was a trenchant critic of the East India Company’s role in India during the 16th-18th centuries) and more so of the 19th century’s British colonies in Africa.

Those who saw imperialism as the ‘highest stage of capitalism’ (early 20th century) linked it to economics, missing the point that the strongest economic ties and destination of capital exports were to North America and Australasia and not the ‘colonies’, which cost more to garrison and defend than they provided repatriated profits for London. These colonies were the follies of governments, not the projects of capitalists. Any profits made by individuals were small compared with the costs of the military establishments believed necessary to keep the ‘Frenchies’ and ‘Huns’ at bay.

The colonies, as the bastard children of national rivalries, also contributed a mixture of good and bad for the inhabitants; the good being the institutions of the rule of law, education and medicine they brought along; the bad being the racial treatment, plunder and bad examples meted out by vile individuals.

[Read more of Rafe Champion’s article – it’s a good read at: http://catallaxyfiles.com/?p=2686]

Who Wants the State to Run Mobile Phone Services?

Pharoz (‘a weblog about Australian politics, science and religion’), 25 March, carries an article about privatisation in Australia (in 'coms', a technology far removed from industries like Coal):

“Economic fundamentalism doesn’t always work for more sophisticated systems. Adam Smith may have complained about Corn Laws in his time, and the advantages of markets, but transferring that approach straight into today’s more complex systems is akin to trying to stick a sim card into a cob of corn and expecting to be able to make calls from it.”

[Read the rest of the Pharoz article at: http://www.7gs.com/
pharoz/?p=845]

Comment
Rhetoric is not a compelling argument on this occasion. The social consequences of the Corn Laws was every bit as complex as telecoms (it took long enough to achieve repeal). The issue is not complexity: it is whether a market will produce better results for society than state-run organisations. The best way to answer such questions is to experiment and compare the outcomes.

State-run organizations usually are subsidized and protected as national monopolies, and are managed by politically-appointed ‘experts’, using the capital raised by compulsory taxation and allocated by the ‘good ideas’ of politicians (aka: party policies) and by public servants. If they get it wrong they are moved from their posts with difficulty, sometimes years after they have failed and the politicians have retired, dropped out, promoted, or have been ‘honoured’ in the usual manner.

Private-run organizations attract private capital if they are, or are likely to be, successful in the separate minds of thousands of dispersed persons risking their ownership, or stewardship, of capital. Private capital is raised by judges of performance who act swiftly to correct the errors of those managers who get it wrong (they lose their jobs, and often much else besides) and to reward those who get it right (they attract more capital should they need it – on the same impersonal terms).

There is nothing invisible about the rewards and retributions of markets.

Politicians in Britain are notorious failures at ‘picking winners’ (the computer disks of the 80’s) and are predictably awful at subsidizing ‘losers’ (textiles, shipbuilding, steel, coal, utilities, motor vehicles, air travel, railways, road transport, R&D, - the list goes on and on in Britain). Smith called private investment that fails ‘misconduct’ and state investment in activities that fail is no different, except usually measured in tens of millions (WN II.iii.26: p 340-41).

The waste from both sources in terms of capital that could have been available for innovating and modernizing the British economy – a source of unproductive activity noted by Smith in Wealth of Nations (Books I to V) – slows down, sometimes eliminates, the creation of wealth from economic growth. The worst of the private practitioners of prodigality aggregated together is but a small proportion of the state sponsored prodigality to which Britain has been subjected since the 18th century, and was a world leader after the Second World War

Smith put it trenchantly:

‘It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the œconomy of private people…. They are themselves always, and without exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust people to look after theirs. If their own extravagance does not ruin the state, that of their subjects never will’ (WN II.iii.36: p 346).

Songs of Praise for Invisible Body parts

Tim Webb writes in The Independent (25 March) about Gerry Spindler, boss of UK Coal:

“Gerry Spindler: Glimmers of hope at the bottom of the pit. It's tough being a former state-run monopoly in a privatised world, but the Chief Executive of UK Coal remains philosophical”

“Ordinarily, you might not expect the chief executive of what used to be British Coal to quote Mark Twain and wax lyrical about the economists Milton Friedman and Adam Smith. But Gerry Spindler, the American head of UK Coal, fancies himself as a bit of a philosopher.

"I am a disciple of Milton Friedman," he says in his slow, measured tone. "I believe in Adam Smith's 'invisible hand'. I have seen the free market economy work and I am a believer."

Just for good measure, he also warns sagely: "You can't trust capitalists," without explaining whether he includes himself in this category.”

Comment
Yes, markets work but whether they need or there is ‘an invisible hand’ running the show is not in doubt: there isn’t, and Adam Smith never said there was. His explanation of markets (Books I and II of Wealth of Nations) did not invoke any invisible body parts at work.

The neoclassical economists from Chicago who linked the metaphor (from Book IV) to markets (Books I and II) have sowed confusion –even helped to start a new religion for ‘believers’, of which Gerry Spindler appears to be one (of many). He sings praises to an invisible body part like the ancient pagans who sang praises to invisible gods who lurked in every tree, stream, cloud, storm, earthquake, eclipse, rainbow and season.

[Read more of Tim Webb on Gerry Spindler at: http://news.independent.co.uk/business/analysis_and_features/article2390835.ece]

Trade and Full Employment

OP-Ed News.com, 23 March, carries an article by Richard Backus, ‘The Globalization Hoax’, which heads of into the stratosphere with this:

“Globalization, in theory at least, was an economic philosophy which espoused a more efficient production of the world's manufactures for the benefit of the world at large. It is based upon an economic theory proposed, I believe, by Adam Smith that if each manufacture was produced by the most efficient worker in the world, production would be maximized with the best use of the world's resources (manpower, materials, etc.). In theory this concept is sound except for the fact that it was based upon the presumption of full employment. Full employment these days does not exist and in the U.S. hasn't for some time.”

Comment
I hadn’t realized that Smith had said anything about full employment being a necessary condition for countries to benefit from trade. Come to think of it, I do not recollect Smith saying anything about employment being ‘full’, ‘partial’ or non-existent. Trade is about consumers, not producers, who may very well be producing domestic goods for local exchange and not goods for foreign trade.

The necessary condition is ‘effectual demand’ for markets to function. If the entire workforce, or most of it, is unemployed and without the means of subsistence, they won’t be buying much and this will reflect in their comparative states of, or lack of, opulence.

No economic system so far devised has it workforce fully employed all the time with nobody in-between jobs. There is always some unemployment at less than full employment (however measured), with millions changing jobs, others searching and some proportion unemployed for long periods (with incomes to match, usually low). Smith did discuss the theoretical possibility of an economy stagnating, even in absolute decline. But not about an economy no longer exchanging products in markets.

Anyway, read the whole article if you are willing to read crass nonsense, at:

http://www.opednews.com/articles/opedne_richard__070320_the_globalization_ho.htm

Gordon Brown's Taxes are not 'Easy'

Julia Langdon, of the Daily Telegraph, writes under the heading: “2p won't buy Brown a ticket to No 10” (a reference to Gordon Brown’s budget speech this week announcing a cut of 2p in the standard rate of income tax).

“The clues were all there. Gordon Brown has laid them himself over the past few years, during which acute observers will recall that he has consistently sought to reclaim the considerable reputation of the philosopher Adam Smith - Margaret Thatcher's favourite economist - as a bulwark for his "New Labour" economics.
It is, of course, a wonderfully appropriate claim for him to make, not only because of their shared enthusiasm for prudence and a strong sense of the importance of what Smith called "moral sentiments", but only because of the pleasing symmetry provided by their shared home town of Kirkcaldy in Fife. Mr Brown is a skilful politician, as we all know, and, despite his clumsiness in anything to do with public relations, he still has an ability to spot a gifthorse when it comes cantering towards him at breakneck speed.

Thus he embarked some while ago on rescuing his distinguished former fellow citizen from the clutches of the political opposition. At one point, when being a member of "New Labour" was something that people still boasted about, he claimed that Adam Smith was a spiritual early member of "New Labour". In a lecture at the University of Edinburgh five years ago, he specifically refuted the idea that Smith's belief in the free market made him an exclusive Conservative hero. He has associated his own name with that of the annual Adam Smith lecture. Last year, the Governor of the Bank of England found himself making the long trek north for the same reason. And this month he put the man's face on the £20 note.

What other clues did we need, for heaven's sake, that in preparation for his life after the Treasury, Gordon Brown may have been reading a bit of Adam Smith and contemplating his philosophy and might even be considering a cut in income tax?
"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things," wrote Smith in his Essays on Philosophical Subjects.

So there you have it. Easy taxes is what everyone wants. While Mr Brown's main objective in what surely must have been his last Budget - under what circumstances would he remain as Chancellor if he does not, after all, become Prime Minister later this year? - was to keep a careful control on the Exchequer, he also wanted to please as many people as possible and simultaneously confound his enemies.”

Comment
I have a few quarrels with Julia Langdon in her interpretation of Adam Smith’s 1755 paper defending himself against charges of plagiarism. I think the notion of a standard tax rate of 20 pence in the pound could hardly be described as ‘easy taxes’, especially as the top rate is 40 pence with an 11 pence in the pound National Insurance ‘tax’ added to the charge, plus all the other taxes, such a Value Added Tax, Stamp Duty, television licenses, car duties, petrol taxes, inheritance taxes and many ‘stealth taxes’ that Gordon has imposed in his ten years as Chancellor of the Exchequer.

And set against the reduction of the standard rate from 22 pence to 20 pence, we have to take account of the abolition of the old 10 pence starting band, which moves millions of low paid employees straight into the 20 pence band. What Gordon giveth, Gordon takes back (and as a good Church of Scotland member, Gordon knoweth his Bible).

Smith would have taken the whole picture into account and not just the headline spin. He would also have been somewhat surprised to see public expenditure above 40 per cent of GDP, a sharp rise from nearer 10 per cent in his day. Smith’s concern was what we call growth – he called progress to opulence – and one of the causes of wealth was summed in his growth model as the allocation of net profits to productive activity – products of land and labour that generate a revenue that covers the cost of the factors, plus a net profit for the next round of ‘the great wheel of circulation’.

State expenditure is largely on the products of unproductive labour (as a factor), no matter how useful or necessary its output maybe (defence, justice, education, health, and those public projects that facilitate commerce). These do not replace the stock of capital used in their production, unless they charge a market fee. All capital directed away from productive activity alters the balance between natural growth inducing activity and consumption.

Neither New Labour nor Conservative governments are Smithian. Smith did not support any political party in his day, and it is most unlikely that he would qualify, or wish to do so, as a ‘spiritual early member of "New Labour".’ This is as meaningful as those neoclassical economists who claim him as a “spiritual early member of Chicago’s faculty’ (George Stigler said Adam Smith was ‘alive and well and living in Chicago’).

[Read Julia Langdon is the Daily Telegraph at:

http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2007/03/24/do2406.xml]

Through a Glass Darkly

A grad student calling herself Jane Dark recommends a short reading list which includes the following:

“In small doses, of course, with poetry in between, to keep the economics from running together -- the reading list should include:

Adam Smith, The Wealth of Nations, Book One, chapters 1-2 (about 10 pages, and including the illustration of the pins, the desire to save labour, and the desire to make a bargain which is advantageous to oneself, and not necessarily advantageous to the other party)

--and possibly a couple of the selected famous quotes, re: the invisible hand, etc.”

Comment
No, relax. I am not going to make a heavy response to such an innocent recommendation because I hope her readers follow her advice – without taking too much notice of her comments interpreting what Smith didn’t write!

Jane Dark might care to note that there is only one quotation using the metaphor of an invisible hand in Wealth of Nations, but scores illustrating exceptions where the unintentional actions of self-interested people do not cause benign consequences for society.

Visit Jane Dark's Blog at:

http://romecoloredglasses.blogspot.com/2007/03/malthus-and-smith-and-swedenborg-oh-my.html

The Real '300' - Not in Wars that Kill but a War of Words that Educates

Scotland's Herald (23 March) continues with one of the best informed discussions of the brilliant article by Ian Bell on the authemtic message form Adam Smith (discussed on Lost Legacy this week) that any press anywhere in the world has published this year (I see most of them; many are less than worthy of the label 'discussion').

The Herald's editorial team should be congratulated for their commissioning of Ian Bell for the original article and for publishing the daily letters from interesting correspondents, particularly as it has brought the considered judgement of Dr Eamonn Butler, of the Adam Smith Institute, the premier source of advocacy for the application of Adam Smith's political economy to address 21st century problems and opportunities.

I commented on a minor quibble with Dr Butler's presentation of Adam Smith's in The Guardian newspaer yesterday. Today I am taking the unusual step of publishing Dr Butler's 342-word letter below (apologies to The Herald for any breach of its copyright but this is a non-commercial site and we have been mentioning The Herald all week and the world wide publicity for the Herald should be a worthy recompence for not asking for prior permission):

NEIL Davidson (Letters, March 22) is quite right that we cannot press-gang an eighteenth-century thinker such as Adam Smith into being a 21st-century politician. He wrote before the Industrial Revolution changed everything, before trade unions, before state health or pensions, and when the idea of a government spending more than 40% of the nation's wealth would have seemed the greatest tyranny.

Davidson is right also that Smith did not promote some caricature of capitalism, red in tooth and claw. Rather, he supported markets - free and competitive markets - as the best way to create and spread wealth, particularly to the poor.

Free markets do not cause poverty, inequality and environmental problems, as Davidson suggests: it is the lack of them which does that. Indeed, Smith knew that free markets must be husbanded. Traders, who love monopoly, were quite willing to use the political system to extinguish free markets and limit their competition. So he did not advocate laissez-faire, but saw a vital role for the law in keeping markets open, honest and free. And markets, a form of mutual co-operation through voluntary exchange, are actually central to Adam Smith's view of humanity. We trade for our own benefit, of course; but then we act morally in order to spare ourselves the resentment of others. There is no "problem" of conflict between Smith's "economics" and his "ethics" - Adam Smith is, in fact, a social psychologist, and his social psychology is entirely consistent.

Davidson tries to downplay Smith's belief in markets by citing his "consistent" support of state education. It was anything but. Smith suggested some state spending on buildings, but felt that if teachers were to have any incentive to perform well, they should be paid by their pupils rather than by the government. "Public services," he wrote, "are never better performed than where their reward comes only in consequence of their being performed, and is proportioned to the diligence employed in performing them." He had a point."

Eamonn Butler, Adam Smith Institute, 23 Great Smith Street, London

Comment
This letter is a great winner of the Lost Legacy Monthly prize for demonstrating outstanding understanding of what Adam Smith was about.

You should read the whole week's correspondence to see what Dr Butler was up against in the misunderstandings of some other correspondents. Plus read the original article by Ian bell (details on my postings through the week).

The Herald is published in Glasgow not far from where the University of Glasgow was originally sited and where Adam Smith lectured (see his Lectures in Jurisprudence, Liberty Fund, 1982), where he wrote The Theory of Moral Sentiments (1759) and from where he wrote the Early Draft of the Wealth of Nations (1763).

[Read the letter by Eamonn Butler at:

http://www.theherald.co.uk/features/letters/display.var.1280641.0.0.php]

A Quibble or Two About What Smith Meant

Just in case anybody gets the impression that Lost Legacy only criticises the Left, I offer a couple of letters from farther along the spectrum nearer the ‘middle’. One is from Dr Eamonn Butler, Director of the Adam Smith Institute, a tolerably known think-tank with an enormous readership and close contacts with many MPs disposed favourably to freer markets.

The Guardian (21 March 21) carries correspondence from readers about Tristram Hunt’s piece I commented on earlier this week. Dr Butler comments:

“I am delighted that Gordon Brown wants to claim Adam Smith as his own (Why Brown reveres the man on the new £20 note, March 19). But any attempt to kidnap an 18th-century figure as a 21st-century political mascot is forlorn. Smith wrote before the industrial revolution transformed things, before capitalism (he never mentions the word) or organised trade unions, before state health or pensions, when favoured trades enjoyed state monopolies, and when the idea of a government spending over 40% of the nation's wealth would have seemed the greatest tyranny.

Tristram Hunt writes that Smith was no "laissez-faire free-marketeer". Half right. Smith did not support laissez-faire and, again, never mentions the term. Yet he was a free-marketeer. He believed that voluntary exchange in free markets benefited both buyers and sellers. But he knew that merchants were skilled at using political power to distort free markets and limit their competition; so he saw a role for the law in keeping markets open, honest and free.

Smith maintained that this free-market system spread prosperity throughout society, particularly to the poor. True, his few mentions of the "invisible hand" are oblique, but the idea pervades every line of his writings - that the free interaction of human beings, though done solely out of self-regard, nevertheless produces a general benefit. A far surer route to peace and prosperity, he thought, than the assertions of enthusiasts or the commands of governments.”

Comment
All but the sentence is OK: “True, his few mentions of the "invisible hand" are oblique, but the idea pervades every line of his writings - that the free interaction of human beings, though done solely out of self-regard, nevertheless produces a general benefit.”

A small but important quibble. I would prefer to see a qualification inserted between ‘nevertheless produces’. Something like, ‘could produce’ or ‘often produces’, rather than leaving it as if it ‘always’ produces. The self-interests of individuals may have many different motives, many benign, which have the result stated – society is better off, but they may also be malign (monopolistic, protectionist, a ‘conspiracy to raise prices’, even support for wars and colonialism), and many of them specifically stated by Smith and not left for the reader to conclude separately. In many cases, we could add externalities like pollution, careless and unsafe working practices, work place ‘tyrannies’ and other abuses.

Markets are run by people and people are ‘weak and imperfect’. They may also be consumed with greed, avarice, a lack of ‘common humanity’ (a phrase of Smith’s) and whatever comes under the rubric of the ‘vile rulers of mankind’. OK, I am sure Dr Butler realizes this and the need to keep the word count down imposes limitations of including qualifications.

Another correspondent writes to The Guardian:

“Tristram Hunt neatly illustrates how Adam Smith expresses the lofty ideals of the European Enlightenment in the homely terms applicable to the butcher, the brewer and the baker, such as those of Kirkcaldy. However, this encapsulates not only the relevance but also the limitations of Smith's message for today. For in retrospect, the outstanding legacy of his epoch did not concern such domestic issues at all, being rather the opening out of the great divergence in fortunes between the rich and poor countries and peoples of the world, not least the extension of European domination over those peoples of other continents to whom Smith referred to as "naked savage".

Dr Hugh Goodacre (University College London)

Comment
The thesis implied in Dr Goodacre’s last line is dubious. Living standards in the 18th century across the world had not changed much for the majority in two thousand years, probably as many as ten thousand years, when agriculture appeared in parts of Europe, Asia and north Africa, which contributed (caused?) a rise in per capita consumption enabling populations to grow.

From the 16th-18th centuries, domestic consumption in certain countries began to rise, ‘slowly and gradually’, an event of historic interest, because unlike previous changes, this time it continued. Combined with technological and knowledge enhancements that led to further changes. The re-appearance of commercial society began to reverse the steady decline experienced since the fall of Rome in the 5th century.

Into this context, Smith’s use of the ‘butcher, brewer, and baker’ example was connected to the operation of exchange by voluntary negotiation, which was the driving force for the gradual pacification of inter-communal violence and became a viable alternative to plunder. Exchange is very much central to markets and inter-human relationships today. Smith’s ‘homely’ example is still not appreciated by readers of Wealth of Nations (for example the daily reminders we get that readers still see it as a manifestation of ‘greed’ – because they read it too fast).

That ‘rich’ countries diverged from ‘poor’ had nothing to do with implied racialism in the use of terminology, such as in ‘naked savages’ for the inhabitants of Hunting societies. This referred to the differences in the modes of production in countries with developed divisions of labour (the manufacture of the labourer’s common woolen jacket compared to a ‘naked savage’ who was poorly clothed in socieies without that division of labour). It was reflected in the short life spans of the North American ‘Indian’ and African ‘prince’, absolute rulers of ‘ten thousand’ of their brethren (Wealth of Nations, Chapter 1).

Every author of the time used this expression. If Dr Hugh Goodacre had been alive at the time and working at any of Oxford, Cambridge, Edinburgh, Glasgow, St Andrews or Aberdeen universities, he too would have used the phrase. If he had taught in Scotland, he would also have known that the Scottish courts declared slavery illegal in 1778, long before Wilberforce began his campaign against it.

The racialist overtones to the ‘Noble savage’ were a 19th century development from the USA (Ellingson, T. 2001. The Myth of the Noble Savage, University of California), for which Smith was blameless, though not Thomas Carlyle (1848).

The ‘great divergence’ came about because some countries got onto the development path and the rest didn’t. But the former was not a consequence of the latter. The politics of all countries are part of theie growth, no growth paths. Colonialism was not recommended by Adam Smith – he didn’t think it was worth the cost in wars (and how right he was in that). Colonialism is an inevitable extension of mercantile commerce, which Smith railed against in Book IV of Wealth of Nations. Governments cause colonialism to be affected, not Smithian markets.

The Far Left Should Look Outside their Windows and Confront Reality

The Herald, from which I have commented already on Ian Bell’s admirable article, has provoked a lively correspondence from ‘left’ critics of Smith – it is, after all, published in Glasgow, a city with a tolerable reputation for socialist ideas and practices.

Among them, this from Neil Davidson, Department of Geography and Sociology, University of Strathclyde (my alma mater), where he criticizes an earlier letter from James Young, a historian farther to the left than Neil, with a tolerable reputation in the media for robust polemic (the impartial spectator is not managing to reduce his language to something we can all ‘go along with’):

“When Smith attacks unproductive labour, he is not making some timeless critique of state employees, but thinking quite specifically about Highland feudal retainers. When he attacks monopolies, he was not issuing a crystal-ball warning against the emergence of nationalised industry in the twentieth century, but criticising those companies of his own time which relied for their market position on the possession of exclusive royal charters.

It is not simply his deep distrust of businessmen (an aspect of The Wealth of Nations which Young, of course, completely ignores); he intuited, long before industrialisation really took off, that it would lead to a massive degradation in the condition of labourers and their reduction to mere "hands". It is this nightmarish (and deadly accurate) anticipation, which he shared with Adam Ferguson and John Millar, that later informed Hegel's conception of alienation, and through him, that of Marx.

Understood in the context of the Scottish Enlightenment conception of human potential, the description of pin manufacture at the beginning of The Wealth of Nations is not only a primer in the joys of the division of labour: it is a vision of Hell.

We know now that the market has not resulted in the realisation of human freedom, but in poverty, gross inequalities and the possibility of environmental collapse, but Smith was not to know this.”

Comment
Clearly, Neil Davidson understands something about Adam Smith that James Young has not. However, he is not quite there yet. Smith’s view of ‘unproductive labour’ had little to do with ‘highland retainers’, as opposed to retainers generally. Any labour, no matter how valid socially and useful it may be (or how useless, too) that did not reproduce its cost from its revenue that was sufficient to meet those costs and produce a profit was unproductive.

Mainly because the product of such labour was not sold in markets; retainers, and so on, received a wage only. Those who served at a rich person’s domestic dinner table worked for a wage; what they did was not ‘sold’ to the rich man’s guests; soldiers serving in the army did not have their services sold – they ‘did and died’ for the King’s shilling. This left productive labour, the products of which were sold in markets to earn revenue (the price of their products) which met their wage costs, the rent of landlords, and the profits of the Master artisan.

Smith did not predict that commercial society would lead necessarily to ‘massive degradation’, etc. It was what could happen if society did not act. He advised that society could avert such extrapolation by investing ‘small sums’ in public education, and partly paid for by parents (the richest paying more). The warnings about the former were in support of the adoption of the latter measures by the government, using the existing Scottish model as an example for educational reform in England. His advocacy took until 1879 to come into effect with the government passing the first Education Act.

I think calling what happened from the division of labour a “deadly accurate” anticipation is somewhat exaggerated. Real living standards rose throughout the industrialisation period (despite dreadful conditions in its early years), but the alternative prospects for the working classes were even more dreadful (as they are now in many cases in the developing world – and even worse in the non-developing world with famines, wars and neglect).

Likewise for the so-called ‘vision of Hell’ and the alleged claim that “the market has not resulted in the realisation of human freedom, but in poverty, gross inequalities and the possibility of environmental collapse”. Like a lot of neoclassical economists, apparently, geographers and sociologists do not look outside their windows. If markets have not been associated with greater freedom, I wonder what the non-market economies would be described as, by geographers ands sociologists on any freedom index they care to devise.

The problem with poverty is the absence of markets, not their working. From the wealth created by market operations, the solution to ‘environmental collapse’ will be found and paid for, should the ‘possibility’ become the actuality. There is no other source for the resources needed. Manna and the money equivalent of the goods, technology and knowledge are not going to arrive from ‘heaven’ – they never have in the past, and none of Kim in North Korea, Castro in Cuba, Chavez in Venezuela, nor Migabe in Zimbabwe, are going to do it either.

And this is the real agenda of those on the left, who in 19th century claimed that markets would lead to the immiseration of the labouring poor and the affluence of only the rich– it didn’t – are now claiming in the 21st century that markets will lead to environmental collapse because the vast majority of the people living in the developed world are affluent, not poor. I do not expect either James Young or Neil Davidson to see a contradiction in their stances.

The other day I was looking at my grandfather’s 1880 birth certificate from Ayr, whose father, Alexander Kennedy, is listed as ‘coal miner’. My grandfather also became a coal miner in the early 1900s. He was called Gavin and I was called after him. By all accounts, my grandfather’s working life was tough – coal mines were no place for the ‘weak’ – and he sometimes quoted lines about his experiences for some years he spent in Canada, before returning to the pits in Scotland: ‘This is the law of the Yukon, where the strong shall thrive, and the weak shall perish, and only the fit survive.’

Now, my son, called ‘Gavin Alexander’, works with computers in a bank. The pits have long gone. His office is air conditioned and well-lit, he lives in flat he owns not far from where my grandparents lived in Edinburgh (they paid rent for years and never owned anything but the clothes they wore and the bits of furniture they bought second-hand). To compare inter-generational living standards is ‘no contest’ in terms of the supposed immiseration among the ‘alienated’ zombies, beloved of Marxist intellectuals (hardly the poor souls themselves that they imagine to be the reality the great-grandchildren of Smith’s pin-makers).

I suggest James and Neil look out of their windows, consider the inter-generational wealth shifts in their own families and modify their perceptions of the effect of markets.

It Takes More than Labour Alone to Create Wealth

Following the excellent article by Ian Bell on Adam Smith in The Herald, correcting some ideas about him that are patently wrong (though a bit off in some respects), which I praised on Lost Legacy, The Herald’s letter page carries a contribution by Alan McCombes, the ‘policy coordinator’ of the ‘Scottish Socialist Party. In it he writes:

“Adding to Ian Bell's superb essay on Adam Smith, your correspondent RF Morrison rightly differentiates between money and wealth (March 19). His definition of wealth, "the production of socially useful goods and services", is spot-on.
Unfortunately, almost all our mainstream parties' politicians fail to understand that distinction. They endlessly extol the virtues of Scotland's "wealth creators" and promise them an array of incentives designed to encourage further wealth creation. In fact, many of these so-called wealth creators do nothing of the sort. Their main contribution to society is to shuffle money around, enriching themselves in the process.

It is not necessary to have a PhD in economics to work out that wealth is created, not by merchant bankers, venture capitalists, property speculators, currency dealers, stockbrokers or shareholders, but by those who work in our factories, offices, call centres, hospitals, schools, buses, trains, farms, fishing boats, mines, oil rigs, newspapers and countless other workplaces.”

Comment
The premise of in Alan Mcombe’s letter is slightly wrong (the way it reads):

‘His definition of wealth, "the production of socially useful goods and services"’. If ‘his’ refers to Ian Bell and excludes Adam Smith, McCombe is wrong in so far as Adam Smith is concerned.

Book IV of Wealth of Nations (and elsewhere, of course) makes the point several times in Smith criticism of ‘mercantile commerce’ that ‘wealth’ is not the amount of gold and silver bullion a country collects. Wealth, writes Smith from Book I onwards, is the ‘annual produce of land and labour’ in a country; it is the annual output of the ‘necessaries, conveniences and amusements of life’. Money is merely a means of exchange to facilitate exchange in markets; it is not wealth, except in the popular imagination.

It is not clear what ‘socially useful’ means, though it sounds vaguely Marxist.

The idea that only one factor of production creates wealth (in Smith’s sense) is false, and patently so. Many countries have vast resources of labour available, but live in abject poverty. They do not have access to capital – labour will not work without wages to buy the ‘necessaries, conveniences, and amusements’ of life. If all you need was labour (willing or coercible) to work to produce real wealth then Mao’s China would have been growing rich without access to foreign capital investment and technology. India and Africa would be virtual Eden Gardens, and so would all points of the compass outwards.

If Mr McCombe believes that getting rid of the people who bring capital to the opportunities to produce real wealth (the annual produce of ‘land and labour’ in Smith’s 18th century terms) – an analogous view to the Russian communists who decided that the ‘Kulaks’ (richer farmers) were an obstacle to the creation of wealth, and Mao tried with the ‘communes’ – his recipe for wealth creation is as likely to be as successful as that of Mugabe’s Zimbabwe, the tragedy of which can be seen before our eyes today.

Adam Smith understood about the creation of wealth. Mr McCombe, and the 'wealth is money' people too, apparently do not.

A Literate Banker Writes

What a nice change to read a literary piece from a banker who knows something about Adam Smith and Music that is worth reading.

Stephen King, managing director of economics at HSBC (“the world’s local bank”) writes “In praise of Adam Smith, Mozart of money” in today’s Independent (19 March). The occasion is the replacement of the image of Elgar, British musician, by Adam Smith on the UK’s £20 note today (announced by Mervyn King in Kirkcaldy last year and reported on Lost Legacy – I was in the audience).

“Elgar should never have been on British banknotes. His appearance represents a peculiar celebration of mediocrity.

[T]hink of Elgar's position in the pantheon of great composers. What if Mozart, Beethoven or Verdi had been British? Would Elgar then have found his way on to a banknote of any description? Might he have displaced a British Bach, or challenged a Scottish Schubert? I somehow doubt it. Elgar should never have been on British banknotes in the first place. His appearance represents a peculiar celebration of mediocrity, the equivalent of choosing Noel Coward rather than Shakespeare to highlight Britain's cultural heritage.

Mediocrity is not a word you would ever associate with Adam Smith. He is genuinely the father of economics. He's one of the economic greats, the Bach, Mozart or Beethoven of his discipline. Edward Elgar, thankfully, he is not. His ideas may have been hijacked by Margaret Thatcher and the Tory right in the 1980s, but few politicians these days would argue that Smith was wrong, or representative of a particular political view. He just happened to be one of the very best economists the world has ever produced. He was British to boot.”

“Smith is often, unfairly, portrayed as a man who argued in favour of selfish behaviour. His supporters may occasionally have given this impression (Mrs Thatcher once famously claimed "there is no such thing as society") and his words are sometimes misquoted to support this view ("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."). Yet, throughout his works, he offers a sophisticated view of what, precisely, makes economies tick.

He is, of course, most famous for the invisible hand and the division of labour. Smith recognised the importance of the price mechanism. The invisible hand proved much better at resource allocation than any number of state planners, an observation sadly lost on those Soviet leaders who led Russia and its satellites into economic stagnation. As for the division of labour, his famous description of the pin factory stands the test of time.”

"These arguments all appeared in his The Wealth of Nations, the first major book on economics and, mercifully, a book bereft of mathematical formulae. It was first published in 1776. He also, though, wrote The Theory of Moral Sentiments (1759). There, he established some of the ground rules for modern societies. He distinguished between self-interest and selfishness. For most of us, it's in our self-interest to have a system of justice in which each of us can expect to be treated fairly. From time to time, we might choose to cheat the system, thereby acting selfishly, but, were we all to act in this manner, the system would eventually crumble."

"A system of justice, in turn, can underpin property rights. Smith's insights in this area were remarkable. He understood the need for legal "rules of the game", recognising that, otherwise, markets would fall apart. How could there be division of labour, for example, if workers didn't know, from one week to the next, whether they'd receive any wages for their pin-making efforts? The invisible hand might seem like a remote and rather cold concept, but Smith knew that, at the end of the day, the invisible hand would only work in a society where self-interest included showing sympathy for the interests of others, expressed through a binding set of legal rules.”

Comment
I wouldn’t equate the invisible hand with the division of labour, or with his ideas about growth, but Stephen King’s understanding of how Wealth of Nations fits into his Moral Sentiments (and Lectures on Jurisprudence) is entirely refreshing, especially from a working and literate economist.

[Read it for yourself at:

http://news.independent.co.uk/business/comment/article2371658.ece]

Now There’s a Thought for Smithian Growth

In the 19th March edition from the Foundation for Economic Education (FEE) under the heading, “Migrants Send More Money to Latin America than Foreign-Aid Donors Do”, we find this gem:

"The amount of money sent home by Latin American migrant workers to their families has reached more than $62bn. This figure now exceeds the combined total of all direct foreign investment and foreign aid to Latin America." (BBC News, Monday)

And it's not going to a government.”

Comment
For Smithian growth models that is interesting. Smith said that the initial source of capital accumulation necessary for sustained growth (and with it development) was from the savings of productive workers applied to investment.

The transfer of $62 billion from migrant workers in the US to Latin America, and the smaller amount from Polish migrants in Scotland to Poland, any percentage of which seeps into productive investment (putting labour to work in the recipient economies) will have growth inducing effects.

Growth is a slow and gradual process (recent rates in India and China are historically high), which over time, under compound interest multiplication, can double the GDP in 25 years when as low as about 2.5 per cent. Bypassing government sticky hands, via private persons is a unique opportunity for the recipient countries.

If it relieves local poverty as well, or instead, that too is all to the good on grounds of what Smith called 'common humanity'.

Brown's Reverence for Adam Smith Not Based on Understanding

In the Guardian Unlimited (19 March 2007), under the heading: “Why Brown reveres the man on the new £20 note”, we find Tristram Hunt addressing the admiration of Gordon Brown, British Chancellor of the Exchequer, for Adam Smith:

“Yet the Smith who Brown reveres is not the laissez-faire free-marketeer of neoliberal lore - the Smith whom Sir Keith Joseph put on his infamous 1979 reading list for civil servants and who saw the magic of economic growth delivered by the invisible hand of the market. "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-love, and never talk to them of our own necessities but of their advantages," as he famously put it in The Wealth of Nations. This was the "greed is good" Smith of the Gordon Gekko school of raw capitalism.”

"But over the last 20 years a rather different Smith has emerged. One of the traditional difficulties of interpreting his philosophy used to be the problem of uniting his Theory of Moral Sentiments (1759) with The Wealth of Nations (1776). The former stressed the role of virtue, sympathy and benevolence for the proper functioning of the public realm, while the latter highlighted the public good accrued from the private greed of the butcher, brewer and baker."

“[Emma] Rothschild has even suggested that Smith's evocation of the "invisible hand" rather than being a hymn to the benign wonders of the free market is, in fact, "best interpreted as a mildly ironic joke". His use of the phrase in The Wealth of Nations was specifically concerned with reducing import duties, while it also alluded to Macbeth's calling forth of darkness "with thy bloody and invisible hand" to cover up his crimes.”

Comment
I hope Gordon does not read the famous ‘butcher, brewer, and baker’ paragraph so casually as to confuse it with Gekko’s ‘greed is good’ speech from Hollywood. It has nothing to do, and neither did Smith, with greed. Quite the reverse, in fact. Read it more carefully. It is about the dangerous futility of looking for what you want, in this case your dinner, from the benevolence of others – despite any inclinations they might have for your plight, nobody but a beggar would rely on others for their needs (there just ain’t enough to go round for everybody to live off others).

In civilized societies we are all dependent on others. It would be the height of greed to expect others to do other than to exchange their surplus output for your surplus output. We work to produce the annual output of society and from our revenues we buy our shares of what everybody has produced. That’s what markets do, and do better, Smith noted, than all other modes of production that have been tried so far.

We address others who have what we want (our dinners and much else besides) and are willing to exchange what they have for what they want, mediated by the invention of money, which we obtain by working to produce what others want. If Tristram Hunt or Gordon brown know of a better system for resolving our total dependence on each other we await the details. Abusing markets as ‘raw capitalism’, is no substitute for offering a workable alternative that does not include the ‘raw tyranny of socialism’.

Emma Rothschild’s writings on the metaphor of the invisible hand are extremely good (Rothschield, 2001, ‘Economic Sentiments: Adam Smith, Condorcet and the Enlightenment’, pp 116-56, Harvard,).

Tristram attributes it to being ‘specifically concerned with reducing import duties’ rather than being ‘a hymn to the benign wonders of the free market’. I do not think so; it is in a chapter in Book IV of Wealth of Nations (p 456) on restraints on imports, but the metaphor is applied to the consequences of the human motivation of risk aversion and had nothing to do with markets (that is covered in Book I).

Mixing the two up is a cause of much misunderstanding that had nothing to with Adam Smith.

[Read Tristram's article at: http://www.guardian.co.uk/comment/story/0,,2037055,00.html]

Smith's Natural and Market Prices had Nothing to Do with Invisible Body Parts

Indian newspapers are written by educated journalists and contributors. They often refer to Western intellectuals with a familiarity that shows their university syllabi include swathes of work from philosophers, economists and other figures at home to students in North America and Europe. Unfortunately, this includes the Chicago version of Adam Smith and derivatives therefrom.

In today’s Times of India editorial (19 March) I come across these paragraphs in an article about bears running rampant in the stock market:

“When the market is overheated, as many analysts believe about the Indian stock market, it is natural that bears will come in to the picture and pull it down.

That is exactly what Adam Smith meant by the invisible hand — the free market would always adjust to a stable equilibrium. Or to use the laws of physics: What goes up must come down.”

Comment
See what I mean?: ‘the free market would always adjust to a stable equilibrium’. And, apparently, this is ‘exactly what Adam Smith meant by the invisible hand’!

Exactly where did he write that he ‘meant’ anything remotely like this assertion? Certainly not in either Moral Sentiments or Wealth Of Nations. He explained in Book I of Wealth of Nations how market prices would oscillate around the notional ‘natural price’ – the price at which the contributors to its costs of production received their full value – and how market price deviations from natural price signalled whether to supply more or less of their contributions (land, labour and capital). But he said nothing about ‘adjusting to a stable equilibrium’. Market prices were actual prices, natural prices were coincident with factor costs, not real, and nothing he said in Book I was to do with financial instruments or share prices.

Moreover, he wrote of ‘an invisible hand’ in Book IV in the context of the consequences of human motivation – risk aversion – and not in relation to market prices. That was added by the neoclassical economists of Chicago and their epigones who spread across the world’s campuses armed with notions about Adam Smith bearing no relation to the Adam Smith from Kirkcaldy.

Sometimes a little knowledge is dangerous to truth and accuracy, both valued among credible journalists.

News of Important Conference on Adam Smith Scholarship in 2009

Interesting pre-announcement news of what looks like a cracking conference in 2009 to commemorate the 250th anniversary of ‘The Theory of Moral Sentiments’ (1759). The International Adam Smith Society and its annual publication, ‘The Adam Smith Review’ are the sponsors and it is to beheld at Balliol College, Oxford University, where Adam Smith spent six harrowing years from 1740-46.

Smith’s unhappy experiences at Oxford was not from its difficult academic work, quite the reverse; he found Balliol a complete contrast to his three years as an undergraduate at Glasgow (1737-40), where there were lectures every day, from 7.30 am, followed by tutorials during which students were expected to answer questions and read their essays (some as long as 70 pages) on subjects set by faculty. At Oxford, in contrast, students attended prayers twice a day and hear ‘lectures’ twice a week, given by indifferent faculty, many of whom didn’t bother too much, having students translate passages from set books which, as Scots say, ‘didn’t set the heather on fire’ for their academic rigour. I should say that nothing as slack and third rate as this is experienced at Balliol today. Oxford is one of the world’s premier universities.

The low demands on Smith left him plenty of time for his own studies, which he undertook with some enthusiasm, particularly in his studies of the classical Greek and Latin, English, French and Italian literature, and into the wider theme of moral philosophy, from which gradually he lost his religious convictions. We have a remarkable remnant of these studies in his essay on the philosophical method, published posthumously in 1795, commonly known as his ‘History of Astronomy’, though it is more a critique of religious belief, disguised as pagan superstition.

The opportunity provided by the 2009 conference is seen by the listed speakers and the invitation for Smithian scholars from any discipline to participate. I append the official details below and hope many readers will consider attending:

“A conference to commemorate the 250th anniversary of The Theory of Moral Sentiments (January 6-8, 2009 Balliol College, Oxford / Organised by the International Adam Smith Society and The Adam Smith Review)

Although Adam Smith is better known now for his economics, in his own time it was his first book, The Theory of Moral Sentiments (1759), that established his reputation. Just as scholarly work on Smith has challenged the free market appropriation of Smith’s Wealth of Nations, so it has also come to appreciate the importance of Smith’s moral philosophy for his overall intellectual project. This conference, to be held at the college Smith himself attended from 1740-46, and at the beginning of the year marking the 250th anniversary of the publication of The Theory of Moral Sentiments, will provide an opportunity to re-evaluate the significance of Smith’s moral philosophy and moral psychology, the relationship between them and his other writings on economics, politics, jurisprudence, history, and rhetoric and belles lettres, and the relevance of his thought to current research in these areas. Papers on any of these topics, and from any discipline, are welcome.

Plenary speakers will include:

Steven Darwall (Professor of Philosophy, University of Michigan)
Charles Griswold (Professor of Philosophy, Boston University)
Knud Haakonssen (Professor of Intellectual History, University of Sussex)
David Raphael (Professor Emeritus of Philosophy, Imperial College)
Emma Rothschild (Fellow, King’s College Cambridge; Visiting Professor of History, Harvard)
Geoffrey Sayre-McCord (Professor of Philosophy, University of North Carolina)

Please send detailed abstracts (500-800 words) prepared for blind review by September 15, 2007 to:
Samuel Fleischacker
Philosophy Department (M/C 267)
601 South Morgan Street
University of Illinois at Chicago
Chicago, IL 60607-7114
USA

Or email them (as attachments, prepared for blind review) to: sfleisch@uic.edu

Participants will be notified that their proposals have been accepted for the conference by December 1, 2007.

Publication

A selection of conference papers will be published in a special commemorative volume of The Adam Smith Review (Routledge) [www.adamsmithreview.org], entitled The Philosophy of Adam Smith, edited by Vivienne Brown and Sam Fleischacker (planned publication date 2009). To meet the publication schedule of the volume, participants who would like their papers to be considered for it should submit complete drafts to the editors by September 15, 2008. Only new, previously unpublished work will be included in the volume.

[Thanks to Phileconomicus ('A Blog on Philosophy and Economics') at
http://philecon.wordpress.com/2007/03/17/call-for-papers-the-philosophy-of-adam-smith/]

Department of A Breath of Fresh Air: read this lively piece on Adam Smith

If you read nothing else this week-end I recommend you to read a newspaper article on Adam Smith, warts and all, in Saturday’s ‘Herald’ (Glasgow), entitled “Adam Smith is worth £20 of anyone’s money”.

No, its not a eulogy, and no, I wouldn’t have written it in the style adopted by its author, Ian Bell (and no, I don’t know anything about him), but it is written in a splendid voice so different from the average newspaper article written by space-fillers that pass for serious journalists nowadays.

Here’s a sample (sorry it’s almost all I may risk because the proprietors of The Herald have stuck a serious copyright notice on the piece (‘© All rights reserved. Reproduction in whole or in part without permission is prohibited’), suggesting the early attentions of Messrs. McSue & Partners, should they catch any transgressors:

“Adam Smith had big teeth and bad French. He never used the words laissez faire and he never made a bundle playing stocks. When he talked of the "invisible hand" of the ineffable global market he was being ironic, even "witty". He thought he was a philosopher, not a share-picker, and he would have blanched at our private equity pirates.

The fatherless son of Fife wanted government off people's backs. That's true. In the eighteenth century he threw the word "liberty" around with the best of them. The idea that the state could ensure anyone's prosperity by fixing the trade rules, or fiddling with the tax tables, made him angry. Businessmen - transnationals, please note - who used their muscle to ensure that government performed precisely this counterproductive trick made him angrier still. Smith said they were wasting everyone's time.”

Comment
The style is a bit like O’Rourke’s recent book on Adam Smith, but Ian Bell gets closer to the real Adam Smith from Kirkcaldy than does the cardboard imitation imagined in Chicago and taught across the world to unsuspecting students who go on to teach the same version to upcoming generations.

I would prefer readers new to Adam Smith to start with Ian Bell’s short article than what is usually on offer from some serious scholars who leave a lot to be desired in the department of historical accuracy.

[Read Ian Bell's piece at: http://www.theherald.co.uk/features/features/display.var.1267107.0.0.php]

Smith's Nuanced View of Self-Interest Benefiting Society

It is not just a pedantic point to make when people are only half right about what Adam Smith wrote, nor is it intended to be critical when they may not see the point that is made. The real problem with being half right (apart from it meaning they are half wrong too) is that they miss the far richer legacy of what Adam Smith was actually leaving behind for his posterity.

Consider this somewhat innocuous summary of Smith’s views from a library that is notifying faculty and students about an accession into their stock of an excellent set of essays by distinguished scholars on Adam Smith:

“Many believe that Adam Smith (1723-1790) was the founder of modern economics. In his book, The Wealth of Nations (1776), Smith established the theory of laissez faire—the principle that society's interests are best served by the pursuit of individual self-interest. If each person pursues his own interest, the general welfare of all will be promoted.”

From: Mildred F. Sawyer Library Blog (‘a communication tool from the Mildred F. Sawyer Library at Suffolk University in Boston, Massachusetts’) that passed my desk this morning advising its customers about the Cambridge Companion to Adam Smith, edited by Knud Haakonssen, Cambridge University Press.

Comment
If what ‘many believe’ about Smith was true, Smith would have been a relatively uninteresting contributor to our knowledge. He didn’t establish ‘a theory of laissez faire’, nor did he state the principle that ‘if each person pursues his own interest, the general welfare was promoted’.

It wasn’t as crude as that. That everybody pursues his own interest may well be arguable, but the pursuit of their own interests does not of itself promote society’s best interests. Some actions and their consequences of some people pursuing their self interests as they see them does promote, unintentionally, society’s best interests in the circumstances, which is not the same as believing that everybody’s perception and promotion of their self interest has that outcome. But on many occasions, people pursuing their self-interest has the opposite effect on society’s best interests. The qualification is important.

People's self-interest can act in ways that undermine society’s best interests. Monopolists pursue their self-interests and narrow the application of capital to fewer opportunities than would occur in the absence of monopoly distortions. Smith makes this point over and over again. Protectionists pursue their self-interests and distort consumer spending by narrowing the range of competing products available to them. This distorts price signals with consequences in terms of real incomes of consumers, altering their behaviour from what it would be in the absence of protectionism. These actions by some people pursuing their self interests do not promote the ‘general welfare’ (and then we have an endless history of what Smith called the 'vile rulers of manking').

Language was not invented by dictat from above. It developed in the uncoordinated actions of individuals creating word sounds to communicate with each other through an emergent order of social evolution over many generations. Markets work in similar ways. In Perfect Liberty they may work smoothly, but, as Smith pointed, human societies did not have to be at Perfect Liberty to progress from savagery to commerce. If that had been a condition for progress we would never arrive at where we are at any particular time. Society’s general welfare emerges from the competing outcomes of myriad self-interested actions, some of which help its best interests to advance and others, many others, which hold it back.

The self-interested corruption of many individuals in developing and non-developing economies conspires to worsen the welfare of their people. When self-interested corruption and criminality reaches endemic proportions, statements that I have quoted above seem somewhat lacking in precision. That is why Smith did not say something to give comfort to those who assert that he did.

The half-right statement from the Library misses the important theme that Smith addressed: political economy is about understanding how specific policies that detract from society’s welfare should be understood first and where practicable, with all due allowance from our common humanity for the time needed for adjustments; legislators should be persuaded of the social benefits of doing so, to allow the benign self-interests of individuals to operate without the distortions from the proclivity for malign self-interests to dominate.

Adam Smith’s Ideas as They Were Intended by Adam Smith

Visitors to university student associations come in all formats and their variety is part of student life. Some are passing politicians, some are ‘heavy hitters’ from Parliament, many are just, well, politicians, a few are 'nutters'.

The Birmingham University Conservative Forum had a remarkable visitor this week in the person of Dr Madsen Pirie, President of the Adam Smith Institute, who gave a talk on Adam Smith (who else?) that in my view, judging from the reports of the talk, ‘told it like it is’, and presented the authentic voice of the man in terms that were both arresting (the kind that makes you sit up and take notice) and authoritative. His audience may not realise it, but their speaker gave an exceptionally gifted summary of what Adam Smith stood for.

Consider this account from the BUCF Blog:

“The President of the Adam Smith Institute, Dr Madsen Pirie, visited both CF and Adam Smith Society members yesterday to tell us how the father of modern economics, Adam Smith, conquered the world. Unlike Alexander and Julius Caesar, who’s empires fell, Adam Smith’s empire was not advanced by the use of armed force but by ideas. Smith’s legions were not composed of men and armour, but of the self interest, competition, the division of labour and of wealth creation. These have produced something quite rare in human history; simply, wealth. Poverty is the norm, wealth is the exception, and Smith in his Wealth of Nations observes how it’s done. And his ideas are just a real now as they were 231 years ago. Madsen went on to bust a few fallacies, including the argument that countries like Britain have a disproportionate share of the world’s wealth, and that rich countries make other countries poor. He also contested how much good Fair Trade does accept for making certain individuals feel more virtuous.”

[Read it for yourself at: http://bucf.wordpress.com/2007/03/15/madsen-pirie-visit-2/]

To which Dr Masen Pirie added a couple of paragraphs on the ASI’s Blog:

“Among Smith's crucial ideas is that the market is not preconceived and directed, but the spontaneous product of human actions. It is self adjusting and self-correcting. Famously, Smith understood that a rational and legitimate self-interest can lead us to provide goods and services of value to others. We might not make this our first motive, but it is what happens.

I was careful to give prominence to Smith's notion in his Theory of Moral Sentiments that the most striking human characteristic is our capacity to empathize with each other. Far from being selfish, our trade with each other is an exercise in co-operation to mutual advantage. Finally I made the point that Smith's empire has been benign, and lifted much of humanity clear of the old adversaries of hunger and disease. Smith's own life might have been uneventful, and the man himself modest; but he conquered the world.”

[Read Dr Pirie at: http://www.adamsmith.org/blog/index.php/blog/alexander_caesar_adam_smith/

Comment
I think you may agree that this uses a striking contrast to emphasise the originality and uniqueness of Adam Smith. Compared to Julius Caesar, himself a major influence in European politics towards the end of the Roman republic, Smith brought a simple message of the power of Perfect Liberty (in Natural Rights, not in laissez-faire). Caesar left a million or more dead after his invasion of Gaul, and sent a million more into slavery; Smith’s ideas penetrated the world’s economies, and helped to free millions from destitution, and he stood against slavery and Wilberforce quoted Wealth of Nations(though Smith was pessimistic privately of its abolition ever being voluntarily achieved, which is often quoted by opponents of abolition, thus conceding the moral ground to Smith).

[I should declare that I have never spoken or met with Dr Pirie and only know of him from reading his Blog; hence the above is not a 'friendly' plug.]

Standards Slip in the Financial Times

For the department of imagination and false ascription. An author writing for the prestigious Financial Times (13 March) ascribes an idea to Adam Smith, using the notorious metaphor of ‘the invisible hand’ to assert that Smith ‘said the invisible hand of competition would reduce excess profits in business to normal levels’. That he nowhere said anything like this at all, yet Philip Augar, the author of the article for which he presumably was paid money, is a minor point in the big world of media nonsense, and may not matter. But journalists used to concern themselves with the accuracy of their reports and, as a minor point of protocol – ‘don’t put words into the mouths of witnesses’, it ought to be considered important by editors.

Here is the report from the Financial Times, under ‘Comment and Analysis’:

“Adam Smith’s hidden hand is vanishing"
By Philip Augar

"It is ironic that, at the time when Adam Smith’s head is featuring on the Bank of England’s £20 notes, the financial services industry appears exempt from the market forces he described. Smith was the 18th century economist who said the invisible hand of competition would reduce excess profits in business to normal levels. Yet financial institutions seem to be defying conventional theory. Commercial banks are reporting record results, the $50m bonus has arrived for top investment bankers and hedge and buy-out fund managers are being paid off the scale.

It is tempting to write this off as just another cyclical peak. But there is a powerful underlying trend. Smoothing results through mini-cycles reveals rising levels of profitability for a quarter of a century. Profits and compensation levels have parted company with those in other industries. In contrast to what we might expect from Smith’s teaching, financial services industry returns have been remarkably resilient to pressure from customers and competitors.”

Comment
Smith did say that excess profits would be competed away. But he said nothing about ‘an invisible hand’ in this context. He called it competition. He did not need to embellish it at all with a metaphor (which he used in another context in Book IV of Wealth of Nations, p 456, IV.ii.9). It didn’t need one. Competition is competition. It isn’t invisible. It isn’t linked to a body part.

To assert it is – the author’s prerogative – is one thing; to ascribe it to another author when he didn’t say such a thing is wrong, called, I think, false reporting, sloppy journalism and plain wrong.

I think we deserve better from the Financial Times.

Once More on Butchers, Brewers, and Bakers

Once a false notion is loose in the world it spreads like a yawn among all who hear it and pass it on. And nothing is more subject to fallacious treatment that that most famous passage from Wealth Of Nations (WN I.ii.2: pp 26-7) about the ‘butcher, brewer, and baker’. I’ve certainly dealt with it many times on Lost Legacy (yesterday too, I believe).

Here’s the latest sample:

“The first of these self-interested Republicans was probably Adam Smith who published his capitalist bible "The Wealth of Nations" in 1776 just in time to see it incorporated into the new American Constitution which then proved to be the foundation of freedom and prosperity on earth. But, in perhaps one of the most unfortunate public relations omissions in human intellectual history Smith wrote "It is not from the benevolence of butchers, 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." So there it is, regardless of the results of Adam Smith's capitalism, whether seen in the comparison between North and South Korea, USA and USSR/Communist China, East and West Germany, East and West Berlin, Cuba and Florida, or Nogales, AZ and Nogales, Mexico, capitalism was created for the "self-love" or the "interest" of the capitalist and so it is no damn good despite the supernatural results.”

The source this time is something calling itself “The American Daily (analysis with political commentary)”, 12 March, from Phoenix, AZ., a fairly trenchant political sheet from the wilder fringes of politics that pulls no punches in the knockabout world of partisan posturing. Its opening reference is to ‘the half insane, buffoon dictator from Venezuela, Hugo Chavez’, who most certainly is on his way to becoming a dictator, but while correctly described as such I don’t think he is ‘half insane’ or a ‘buffoon’. Dangerous yes; but he is so because he is sane and serious.

The author, Ted Baiamonte, titles his piece, ‘ “Socialism is Love” – Hugo Chavez’ and asserts, implausibly, that US Democrats “would love to do the same things here if only they could get rid of the mean, loveless, self-interested Republicans”, as hyperbolic a treatment of hyperbole as you’ll ever find. On these grounds, some readers wonder why I bother responding to the likely nonsense one can expect from such sources about Adam Smith. Surely, I am assured by correspondents on occasion, we should concentrate on expressions of view from worthy sources among scholars and should leave the tittle tattle of ignorance to fester in the darker corners it inhabits.

Yet, exactly that same passage from Smith is quoted by scholars of the most serious kind with similar conclusions about what he meant displayed in their most serious texts. Why should we discriminate against ignorance from whatever source it emanates? Moreover, the likes of the ignorant quoted above, get their misplaced ideas from somewhere (a half-remembered lecture in Economics 101 or something a Nobel scholar wrote in an Op-Ed?).

How scholars treat the ideas of Adam Smith (or any other contributor to economics) has consequences in the ‘trickle-down’ effect (to quote a phrase) they have when they hit bottom.

Smith is dealing with that most important human activity he called ‘bargaining’ and was dealing with the apparent enigma that two parties, the buyer and the seller, were self-interested sentient beings. The nature of the bargain was that the negotiators are saying in effect: ‘Give me that which I want, and you shall have this which you want’. But, and this was noted by Smith, how do they move to a bargain if they are both self-interested, and each insists on having his self-interests met in full? Most readers of this paragraph in Wealth Of Nations don’t pause long enough to answer the question. They plough on, disregarding their experiences of conducting similar transactions in their everyday lives, and think in terms of somebody winning and somebody losing. Fine, for considering options is a proper approach, but just leaping to the next sentence, reading it too quickly, and we get the usual misreading.

"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 advantage."](I have corrected the punctuation and completed the sentence as Smith wrote it).

Please pause here, and read that sentence carefully. Smith is talking about a person who is dependent on others (as is the characterisation of all of us in civilised society – the richer we become the more dependent we are on others, which is the great paradox of opulence), and in our dependence (i.e., the ‘constant occasion for the help of his brethren’) he discusses the how we get that help if benevolence is not sufficient to attaint the constant help we need.

At this point mystics peel off and begin lambasting Smith for decrying the role of benevolence, a monstrous calumny as a reading of Moral Sentiments would show; yet no mystic ever explains how everybody could rely on everybody else’s benevolence to benevolently provide us all with everything we need – where do all these benevolent goods come from? Benevolence is a virtue but our means are miserly and we can only be miserly with our benevolent gifts, which is why ‘nobody but a beggar chuses to depend entirely upon benevolence’ – they just ain’t enough to go round.

So, if benevolence is not an option, except as individual low level gifts (which I believe we should do from common humanity), and rampant self-interest (which is usually elided into ‘selfishness’, or worse, greed) is an obstacle, how do we conclude bargains (of which trillions are concluded every day, if not every hour among six billion of us)?

The solution was given in both Moral Sentiments and Wealth Of Nations (the gist of each were taught at the same time to the same students in his lectures at Glasgow University between 1751-64). In Moral Sentiments our behaviour is mediated by the presence of the impartial spectator, whose response to our arrogance is to ‘humble’, until we reduce our heated self-concern to the level at which the spectator can accept (see Moral Sentiments, II.ii.2.1: p 83 – passim); in markets our self-interested behaviour is mediated by the need to address the self-interests of the other party, NOT our own! In effect, we are showing the other party how what we want to transact (buy our dinner) serves the butcher’s, brewer’s, and baker’s interests (it’s how they get the wherewithal to buy from others what they want), and we ‘NEVER’ talk about how getting ingredients for our dinner ‘advantages’ our self.

Thus, exchange is about addressing the interests of others in order to serve our own interests (eating dinner). Markets are not based on greed; that is absolutely incorrect; if they were people would avoid them. In market societies we have a choice: we may veto any proposed transaction and seek an alternative. That is why markets and liberty go together. That is why markets become such powerful engines for wealth creation – the annual output of ‘the products of land and labour’.

Now having taken the opportunity to state all this, I hope those doubters can see the point of bothering to reply to the likes of Ted Baiamonte; he may not be a scholar, but he is writing what many scholars agree with, and he has one thing in common with such people; the are wrong for the same reasons as he is, as shown above. And now that you have read why they are wrong, you should not make the same mistake as those who read Adam Smith too quickly.

[Read Ted's article at: http://www.americandaily.com/article/17955]

Waste of a Good Teacher?

I was looking at YouTube videos on economics and came across “Principles of Economics: Origins of the Discipline”, Video Edition, by ‘Dark Wraith’, also known as Professor Wraith, who specializes in economics, computers and English.

The professor’s teaching style is enthusiastic and clear, which on studies undertaken by colleagues at Heriot-Watt University of what makes for a good teacher scored highly with students. I used to try to emulate this when I taught regularly, so I appreciated Professor Wraith’s style.

However (or ‘But’, if you like), Professor Wraith’s subject of the three lectures on YouTube included his take on Adam Smith, which, well, how shall I put it? – was less than excellent, even less than passable.

No; why should I hold back? It was absolutely bloody awful.

I’ll give you an instance – it won’t take long.

Professor Wraith explained Adam Smith on the grounds that he advocated/described the motivations of a baker considering opening a rival bakery as being driven by ‘greed’. I know, tiresome isn’t it?

Did Professor Wraith learn his economics from repeat watching ‘Wall Street’ and Geko’s speech? He certainly did not learn them from Smith’s Wealth Of Nations. He mentioned Smith’s ‘Moral Sentiments’ (though he said it was published in ‘1758’ when it was 1759; he also called it a ‘Treatise’, which was news to me at least), but must have missed the sections denouncing the idea that ‘greed’ was a motivator in the manner Professor Wraith felt obliged to link to the same Adam Smith.

The notion of the role of greed in like manner came from Bernard Mandeville in ‘The Fable of the Bees’ (1724), not Smith, which Smith criticised several times in Moral Sentiments. In Wealth Of Nations, Smith provides an entirely different explanation of what motivates people like the baker (including the butchers and brewers), which is also consistent with what he wrote in Moral Sentiments.

He advised consumers to address the self interests of the sellers of goods that they want to buy and not their own self-interests. Have a look at the passage in Book I, chapter ii, pp 26-7 (Wealth of Nations), and just in case you are misled by the fallacious Das Adam Smith Problem, I also refer you to his Lectures in Jurisprudence, delivered in 1762-63, where you will find the same words used in the same context.

I do not know where Professor Wraith teaches. He did mention something about the ‘State University of Illinois’ and that of course brings him close to Chicago University and the home of the ‘Chicago Adam Smith’, a wholly made-up image who had little to do with the Adam Smith from Kirkcaldy.

Anyway, watch the videos for yourself at:

http://dark-wraith.com/2007/02/principles-of-economics-origins-of.html

and form your own judgement. I only feel sorry for his students if they buy what they hear and don’t read the references for themselves. On the other hand, students who don't check their teachers' references are unlikely to become excellent teachers.

What Did You Do During University?

Why are journalists - even those who populate organs dealing with higher-education - so sloppy with their presentation of key concepts and have no idea about the minimum requirements to test assertions? OK, I'm kidding a bit, but if you don't have a sense of humour, you could not host Lost legacy.

So this snippet from News Blog (Higher-education news from around the Web), 9 March, caught my eye this morning:

“Economics Professor Bites Off More Than He Can Chew

“Two centuries ago, Adam Smith wrote in The Wealth of Nations of an “invisible hand” that, in a free market, tends to turn individually self-interested actions into public goods that benefit society as a whole.

On Wednesday, a visiting associate professor of economics at Michigan State University seemed to put that guiding philosophy to the test, in an incident at Sarasota-Bradenton International Airport, in Florida, that resulted in his arrest on two felony charges.”

Comment
Standards of journalism are not high on insight, mockingly funny though they may be when grabbing at one idea(actually wrong as well, as Lost Legacy readers should know), and linking it to an event not entirely relevant to test the alleged hypothesis.

Even by the standards set by using the wrong analysis, the New Blog journo demonstrates she confuses statements, a) ‘individual self-interested actions’ … tends to … benefit society as a whole’, with b) a single event that allegedly did not ‘benefit society as a whole’, and from this false connection concludes, ‘as one of his students might have put it, quite economically, reality bites’, ergo statement, a) is falsified.

But is it? Accepting for the sake of argument that the hypothesis is what Smith alleged (I know, he didn’t quite say that) was it ‘tested’ by a single event? Of course not! Anecdotes are not data.

Smith used the metaphor of ‘an invisible hand’ for what he asserted about the sum (not each and every singular event) of the individual motivations of risk aversion among merchants resulting in an aggregate outcome that raised domestic capital formation,and thereby increased the output of local land and labour greater than it would have been if some, or all, merchants exported their capitals to distant parts or abroad. That’s all. It doesn’t need a metaphor of invisible body parts to demonstrate this point, but Adam Smith was a rhetorician, and like all such stylists he sometimes got carried away with his compositions.

Some risk averse merchants could invest locally in failed enterprises, some could hide their capital under their beds, some could consume it in prodigality, some could die suddenly and their relatives spend it foolishly, or they could lose it in a court case, or the government could tax it away; and the sum of which individual actions would detract from the potential aggregate gain for society, plus, no single incident of an individual would undermine the integrity of Smith’s alleged hypothesis.

I could think of an argument – though I am long since departed from the late-night student discussions that I spent hours haunting in as a younger man – in which I would argue that the unfortunate Professor John Douglas McCallie helped to prove his actions benefited society, because by emptying the trash can onto the floor, he committed an act of littering a public place, which if not cleaned up would turn Sarasota-Bradenton International Airport, in Florida, into a typical airport found in some Third World countries (littered, dirty, messy, and an affront to good order and discipline).

The presence of a police man, who cared enough to ‘ask him to clean up’, as is his public duty, and who arrested him after he then “just flipped out” and for ‘shouting curses and swinging the can at the officer’, demonstrated that society’s standards of public conduct would be enforced and in thus acting he was trying to ensure the betterment of society on behalf of all those other people using the airport.

Consider the aggregate sum of individual actions following the good professor’s conduct versus the good policeman’s conduct. The former would lead to a breakdown of public standards of cleanliness; the latter to the upholding of justice. And without justice, Smith noted, society would crumble to atoms (Moral Sentiments).

However, such comments, while helpful in the training of young economists (what else was there to do at a late night party, while an undergraduate in the 1960s?), are not the point.

The journalist misunderstood Smith’s hypothesis, formed an incorrect test of it, came to wrong conclusion, ‘bit of more than she could chew’, and does not get a cigar. She should have spent more time late at night at university with some economists, or if she did, she should have listened more carefully...

[Read the story at: [http://chronicle.com/news/article/1771/economics-professor-bites-off-more-than-he-can-chew]

Adam Smith and Modern Research on the Benefits of Trade

The Economist carries an interesting article on the demise of the Neanderthals possibly caused by the Home sapien migration into Europe, circuitously from North and East Africa, beginning about 40,000 years ago. In evolutionary terms, a slight advantage between two groups is sufficient to cause a wide gap in their performance (living long enough to breed; off-spring living to breeding age) in a few millennia, with the advantaged group displacing even a slightly disadvantaged group.

The research that sparked the Economist’s article was by Richard D. Horan, Erwin Bulte and Jason F. Shogren: “How trade saved humanity from biological exclusion: an economic theory of Neanderthal extinction” (Journal of Economic Behavior & Organization, Volume 58, Issue 1 , September 2005, Pages 1-29).

The Economist paraphrases the thesis:

“One thing Homo sapiens does that Homo neanderthalensis shows no sign of having done is trade. The evidence suggests that such trade was going on even 40,000 years ago. Stone tools made of non-local materials, and sea-shell jewellery found far from the coast, are witnesses to long-distance exchanges. That Homo sapiens also practised division of labour and specialisation is suggested not only by the skilled nature of his craft work, but also by the fact that his dwellings had spaces apparently set aside for different uses.”

And adds what I can only describe as a ‘strange’ assertion, though whether the Economist’s author is giving her own views or is reporting the researchers’ (Messrs. Horan, Bulte and Shogren) is not clear.

“SINCE the days of Adam Smith and David Ricardo, advocates of free trade and the division of labour, including this newspaper, have lauded the advantages of those economic principles. Until now, though, no one has suggested that they might be responsible for the very existence of humanity.”

Really? The researchers’ abstract states:

“We show how the endogenous division of labor and subsequent trading among early modern humans could have helped them to overcome potential biological deficiencies. We discuss the relation between economics and natural selection, and show how trade may partially offset natural selection.”

I cannot speak for David Ricardo, but I can for Adam Smith, and he makes it clear from the start of Wealth Of Nations that he understood the significance of the division of labour and the propensity of humans to trade (a behaviour ‘to be found in no other race of animals’ [WN I.ii.2: p 25] and he saw clearly that it was the distinguishing feature of humanity, and, in that sense, it was “responsible for the very existence of humanity”.

Smith was way ahead of his time (natural selection had not yet been defined by anybody – Darwin’s “Origin of Species” was published in 1859, a hundred years after Smith’s “Moral Sentiments”) and I view with dismay the assertion of the great Joseph Schumpeter, in his magisterial History of Economic Analysis, 1954, and echoed by the much less great, Murray Rothbard, that ‘nobody, either before or after Adam Smith, ever thought of putting such a burden upon the division of labour’ (HEA, p 187). More fool them.

Smith wrote:

‘The division of labour, from which so many advantages are derived, is not originally the effect of human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

Whether this propensity be one of those original principles of human nature, of which no further account can be given; or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to enquire.’ [WN I.ii.2: p 25]

I consider this the key stone, the foundation of all that was to follow in Smith’s analysis of how economies originated and evolved, and it was much misunderstood by generations of readers, including the giants of our discipline. These two paragraphs deserve what today we would expect a Nobel Prize to be awarded.

From what I understand, I may disagree with what the researchers, Horan, Bulte and Shogren, report in their paper (I shall visit the University library on Monday and check it out), that the Neanderthals had no division of labour and no experience of trade. Two hundred years on from Smith we know a great deal more about ‘truck, barter, and exchange’ in prehistory (I have a near completed, but now neglected for three years, unpublished manuscript of mine: ‘The Prehistory of the Deal’ that details my deeper hypotheses in this subject). I suggest two necessary amendments to Smith, and to the three researchers.

First, exchange behaviour is much more widespread in nature and is not exclusively confined to humans, particularly in areas of what I call ‘quasi-bargaining’. Secondly, different hominid species (pre-cursors of the human lineage) practiced quasi-bargaining to varying degrees throughout their existences as separates species for millions of years. The researchers’ computer model appears to have taken a fairly blunt separation for this trait, which may have overstated its speed of change. It could have taken much longer and still had its effects, if Homo Sapiens had even a very slight advantage as practicisng exchangers.

Thirdly, Smith correctly asserts that the propensity to truck, barter, and exchange, preceded the division of labour (WN I.ii.3: p 27) and this places it firmly back into the Hominid lineages, prior to Homo sapiens, perhaps by millions of years. Smith showed insights in this area not appreciated by many of his critics.

These are part of his legacy too.

Another Undergraduate Economist Shows The Older Generation the Way Ahead

Alex M Thomas posts on a Blog called Undergraduate Economist (‘perspectives of an economics student) and gives us a sight for sore eyes: a proper appreciation of what us required if economists are to make real contributions to understanding how wealth (the annual output of society – the ‘necessaries, conveniences and amusements of life’) is created. Poverty is the absence of wealth and the discipline should be about how to the create wealth (it will not be abolished any other way).

I have taken the absolute liberty of reproducing Alex Thomas’s post in full (apologies to his Blog) because I consider it an excellent survey of what social science has to offer those who look for it. It will also help put Adam Smith’s Works into perspective.

“The Fellowship of Economics (8 March):

The essence of Economics or Political Economy as it was called earlier (According to Adam Smith) was to provide a good livelihood for the people and also to bring in money for the state. Nowadays, economics has got lot many divisions and specialities, that I feel the essence is getting compromised.

These are some of the subjects which are closely related with economics.
Anthropology is the science that deals with the origins, physical and cultural development, biological characteristics, and social customs and beliefs of humankind.
Economic anthropology analyses decisions and behaviour of economic agents who are embedded in the networks of social relationships and cultural influences. Economic Anthropology is directly concerned with the most central anthropological issues of human nature, choice, values, and morality. [Thomas 2006]

Geography is defined as the science dealing with the areal differentiation of the earth’s surface, as shown in the character, arrangement, and interrelations over the world of such elements as climate, elevation, soil, vegetation, population, land use, industries, or states, and of the unit areas formed by the complex of these individual elements. [Dictionary.com]

Geography forms an integral part of Environmental Economics, which studies the externalities, both positive and negative, arising out of human activities.
Moreover, natural endowments have a significant correlation to the natural progress of an economy. Studies have shown that nations with abundant natural resources have grown faster.

Geographical factors can lead to poverty also. Jeffrey Sachs, in his book “The End of Poverty” has given an account of this.

Demography, the study of Population draws extensively from the science of geography.
History is the branch of knowledge dealing with past occurrences. Tirthankar Roy, an Economic historian says that Economists engage with history from a desire to make the theory of economic growth more complete and intelligible. Without comprehending the history of Britain during the 1700’s one could never understand what Adam Smith tried to say. Students find Classical theories to be otiose, due to their lack of understanding of history.

Political science or politics seem to have attracted a lot of ire, but with out a proper political institution, there will be no freedom. It is a branch of social science dealing with political institutions and with the principles and conduct of government. It is therefore essential that economic policies can be framed keeping the objectives of the political institution prevailing. “The disjuncture between economics and politics in India’s democratic system has also been growing” says Bimal Jalan in his book ‘The Future of India’.

Psychology is the science that deals with mental processes and behaviour. Theories like consumer preferences, irrational exuberance and specializations like behavioural economics and game theory draws heavily from psychology. Behavioural Economics is the combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications. [Mullainathan and Thaler]

Sociology is the study of human social behaviour, especially the study of the origins, organization, institutions, and development of human society. Economic sociology has emerged as a separate branch in Economics; Robert Gibbons of MIT defines it as the sociology of economic actors and institutions.

Philosophy is the rational investigation of the truths and principles of being, knowledge, or conduct. J D Sethi, who specializes in Gandhian Economics, said that “Science of Economics is in crisis. Indeed, the main reason for the crisis is that modern economics has no philosophy whatsoever”. To understand an Economist’s theories, we ought to know the prevailing philosophy at that time. Moreover, debates were carried out to decide whether Economics was a normative science (based on values) or a positive science (based on empiric).

Thus, it becomes pertinent that the teaching of economics also touches subjects like history, psychology etc so that the student gets a more realistic picture of the event. These days, economics has become a strict discipline with various specializations and one who ventures into one specialization is unaware of the effects of variables which is outside his or her area of interest. I do not know if ‘division of labour’ is applicable in such cases as it tends to distort the real picture. Thus the need arises for a more comprehensive learning of the social sciences.”

Comment
What’s with these undergraduate students that they are so switched on? I am in awe that they understand something the usual university teacher of economics from the neoclassical paradigm apparently does not. If they represent the future of the discipline it is in better hands than I thought.

What Alex M Thomas is saying is that economists ought to start from where Adam Smith left off and progress from there in an inter-disciplinary collaboration to address the problems of today. A good place to start is with Smith’s outline of the creation of real wealth (growth in modern parlance).

[Read the post and follow the comments from his fellow students – the tone of some of them suggest there is much work still to do!) at:

http://alexmthomas.wordpress.com/2007/03/08/the-fellowship-of-economics/]

Jason Goldberg - Winner of the Lost Legacy Monthly Prize

Students usual preach what their tutors teach (who got what they teach from their tutors, and so on back to the fount from which the original teacher taught the first class of students). Unfortunately, in the neoclassical economics stream that emanated from the University of Chicago aeons ago, the students were too busy to read Wealth Of Nations for themselves, sitting, as they were, and as used to be said, ‘at the feet’ of brilliant professors (an allusion I believe to how the ancient Greeks were taught by their masters), and they absorbed the false messages they were given about Adam Smith.

What an unexpected delight it was therefore to read a student computer science major at the University of Texas at Austin, a Jason Goldberg, on the subject of Adam Smith. He didn’t make a single error in his exposition of Smith on the trade balance.

I shall not quote it because I think you should read it for yourself. It is a rarity in academe today. No non-sense about invisible hands, nothing about Smith advocating laissez-faire (Jason even criticises contemporary Republicans and Democrats for believing he did), nothing about Smith and labour as a measure of value, nothing in fact with which I or anybody else familiar with Wealth Of Nations would quibble.

More Jason Goldbergs please. It has fair made my day.

[Read Jason Goldberg’s essay at:
http://media.www.dailytexanonline.com/media/storage/paper410/news/2007/03/08/Opinion/Balancing.The.Trade.Imbalance-2764736.shtml]

In Place of a Comment on a Previous Post

Gus (re: your comment on yesterday's post):

Apologies for intruding on a class discussion out of ignorance as to what the medium was about. Your piece showed up on my Google Alerts and as I am currently working on that section of Adam Smith's thinking about public expenditure and taxation, I was drawn to follow the statements made there.

I agree, I didn't consider your views absolutely wrong (a not uncommon feaure of statements about Smith); I considered them incomplete.

Smith was writing in the third quarter of the 18th century and capital accumulation was fairly primitive, as was individual ownership of capital.

In these circumstances he considered that public works and institutions had to be funded by the State, as the controller of the largest amount of capital, at least for erection, if not maintenance, if the necessary works for facilitating commerce were to be undertaken. He did not make this an absolute principle (Mill?). The amount and purpose of Public Works was related in his view to the annual product of land and labour, which funded them.

Should society become richer in savings and investment, the profitability of some public works would enable private sources of capital eventually to enter the field. J S Mill's contribution led this aspect off into a tangent.

Coase's lighthouse example is well taken; major shipping owners had much to lose if their ships were wrecked and where it was considered still worthwhile to club together to erect lighthouses, despite free riders, they would do so, as well as press the government to take on this function. The tolling of new roads proved to be inefficient and corrupt, and private canals appeared in the 19th century with a patchy econoimic performance. These events did not detract from Smith's point that infra-structure public works facilitated commerce. He did not solve the problem of ensuring they were erected consistent with the availability of resources and the expense of their maintenance, while limiting the role of public funding. But Smith did not write about the future; his vision was limited to the past and the present.

I make it a matter of policy to notify authors of anything I discuss that I have posted something. Apologies for not being able to do so to you on this occasion.

Adam Smith was a Pragmatist Not an Ideologue

Larry Beinhart, writes in ‘The Huffington Post’ Blog a piece ‘Capitalism 104, Part II’ (I missed the rest of the series), which makes six points mildly critical of markets includes two paragraphs below:

“Second, although Adam Smith's idea that individuals working for their own economic self interest will produce positive results that they're not even thinking of is true, it does not mean that they will produce all the possible good results that we want and need. Or, in many case, even the best results we would like. A lot of them come because of other reasons.

So the next time a guy from the Heritage Foundation, or some other shill from the insurance companies and pharmaceutical industry, talks about free markets as the best way to provide health care, you can be confident when you say that's not true. It's not historically true, it's not currently.”

Comment
It’s common in political circles to take extreme stances on the social phenomenon we call markets. Some consider them the perfect answer to every problem of production and distribution; others consider them the embodiment of everything ‘immoral’, even ‘evil’. And with the extremer wings of the environmental ‘movement’ pouring scorn on the higher living standards of the common labourers of the market-driven world compared to the remaining vestiges of the ‘command economies’ and their truly ‘downtrodden masses’ (what a reversal of roles that brings to mind!), the case for markets is weakened into apologising for their successes.

Adam Smith took a more relaxed, pragmatic attitude to markets, neither declaring them the answer to every problem a society could have, nor dismissing all ‘public spirited’ people and quite large roles for government funding of activities that could assist markets to work and to make life better for those who had no chance of doing for themselves what they needed to have done. And that is a problem for those who try to fit him into one or other of the stereotypes devised to fit the pigeon holes they have designed for him.

Wealth Of Nations covers in Books I and II the derivation of markets from human kind’s natural propensities to ‘truck, barter, and exchange’ and the consequent ‘division of labour’ that created commercial activities within primitive economies, until they emerged eventually into commercial societies. Within these explanations, he developed his analysis of how markets worked, how commercial activities produced, painfully slowly and despite many set backs occasioned by the ‘vile rulers of mankind’ and the follies of humans driven to desperate measures to survive.

But Smith’s contribution to analysis using concepts of productive and unproductive labour related solely to whether they contributed to their costs, and the costs of materials that they worked upon, plus net profits, or whether they consumed without returning their costs in the ‘great wheel’ of capital circulation. From the net profits, that proportion that went to hire new labour and generate new resources, constituted what we call growth today. All the rest was revenue that went on consumption (and taxes). No matter how minute the rate of growth, even a minor positive proportion of a small percentage, had the effect, slowly and gradually, of adding to the annual output of the real wealth of society (the products of land and labour). Over time, initially measured in millennia, and later in centuries, the real incomes of the poorest majority improved, the middling orders improved more and the rich landowners and others gained yet more. But, and this is critical in a developing economy, absolute poverty declined.

Book III described the long interregnum that lasted in Western Europe for a thousand years from the Fall of Rome and the destruction of its commercial and agricultural economy. Towards the end of that millennia, China opted out of social, technical and trade development, and, despite its advanced science, innovation and discovery, it lapsed almost coterminous with the slow and gradual revival of the economies of Western Europe, some countries of which leapt ahead of others, and while China at the time potentially the world’s leading economy stagnated, India declined absolutely and was finished off by the depredations of ‘vile adventurers’ of the East India Company and the ineptitude of local Indian ‘vile leaders’.

Book IV is a polemic against mercantile political economy, a loose set of ideas based on false notions of what constituted wealth, what moral codes were appropriate in the new economies slowly emerging out of feudal agricultural (basically a form of slavery), and what institutional norms were appropriate to manage the emergence of markets, unfortunately centred on legislation to create monopolies, enforce trade restrictions, limit the movement of labour, and curb the benefits of markets, plus the usual wars over trivial ends.

This is partly the source for notions that Smith opposed government interference in markets, when in fact he opposed government intervention based on false premises about how gold and silver bullion surpluses benefited and deficits endangered the ‘nation’ (much as trade deficits are alleged to endanger nations today). He favoured property rights to reward those inclined to ‘better themselves’ in whatever labour or exchange roles they chose (Perfect Liberty); justice to protect people against criminality (Natural Rights); the harmonising influence of moral sentiments and free exchange (the Great School of Self-command) and took the long view on patient reforms of institutions to change things, slowly and gradually, without disrupting individual rights and social harmony (Distinction of ranks).

Book V sets out the appropriate role of government in a constitutional monarchy with the separation of powers, which roles are quite extensive, though limited in scope, and which bring together his thinking covered in the previous four books of Wealth Of Nations. Defence was more important than opulence, for without defence against invasions and depredations of neighbours (the awesome lesson from the fall of Rome), opulence was fragile; justice was most essential to avoid society ‘crumbling to atoms’; public works and institutions that facilitated commerce, including mass education of children and people of ‘all ages’, measures against ‘loathsome diseases’, and lastly, maintaining the ‘dignity of the sovereign’ (instruments and ceremonials of government). Expenditure on these necessary ends, taxation was to be raised to pay for it according to the benefits to citizens of living in society.

Having nothing to do with the Heritage Foundation, I have nothing for or against it, but I would not dismiss any views from any source out of hand until I read (slowly what they proposed. Markets have a role in health care, so does public provision. It is the balance surely that is debateable. Poor people and their families need health provision and treatment; so do the affluent. No matter what system is used, I can bet my pension that every system can, and should be improved.

Reforms are best undertaken, slowly and gradually (to use a common phrase of Adam Smith’s) and are never likely to be satisfactory when implemented by ideologues and ‘men of system’. That at least is Adam Smith’s legacy.

[Read Larry Beinhart at: http://www.huffingtonpost.com/larry-beinhart/capitalism-104-part-ii_b_42589.html]

Adam Smith's Long Agenda for Public Works and Public Institutions

Nice to see that Gus Hurwitz, writing on a Blog related in some way to Prof. Randall C. Picker, of the University of Chicago Law School, is a reader of Adam Smith.

He writes about ‘Adam Smith on Public Works’, and quotes from Book V, Wealth of Nations (WN V.i.d: pp 724 et ceq) on the ‘third and last duty of the sovereign or commonwealth’. He comments:

‘Smith doesn't offer many examples of Public Works, so Mill makes up one of his own: the lighthouse. And Mill's lighthouse becomes one of the bases for Coase's Lighthouse—a familiar beacon that we saw, at least briefly, earlier in this quarter.’

Comment
I would suggest that Adam Smith mentioned many examples of ‘public works and public institutions’, corresponding to a substantial expenditure of tax payer’s taxation, far greater than is normally supposed by fast readers.

He was interested in those ’public works and institutions’ (keeping in mind both together is important; dropping ‘public institutions’ is a common editorial action and quite misleading.

Of the public works that would facilitate commerce in general’ consider Smith’s list: ‘good road, bridges, navigable canals, harbours, &c’. The many thousands of bridges required, even in a country as small as Britain, thousands of miles of roads, navigable canals, and large acreage of harbours and their long sea walls, dredging capacity, and workforce to construct and maintain them, suggests a long construction agenda, probably lasting several generations (it actually took longer).

Turning to the public institutions, the agenda was even bigger. Part III in the section Gus quotes from includes a long critical discourse on private co-partneries and Royal Charter joint stock companies, institutions under which companies exercised their functions, regulated by laws.

It has a long section of the institutions for the education of youth, bringing into the frame the education of children through to university. To carry our Smith’s recommendations would involve schools in every parish, plus teaching staff, and reform of the universities on the Glasgow model (he slays into Oxford’s failings). He even advocates public health measures to ‘prevent leprosy or any other loathsome and offensive disease’ (page 788), an area, as we know that could only grow, however funded. To cap it all he gives a long discourse on religious reform as part of the ‘Instruction of People of all Ages’.

Lastly, he consider measures for ‘supporting the Dignity of the Sovereign’, or in modern terms, the expense of government, no mean loose change operation in any country. What was the prerogative of sovereigns became the ‘dignity of governments’ and, as a necessary public institution, its buildings and furnishings were appropriate charges on the public purse.

Gus should look a little closer at Book V to counter-act his impressions as they stand at present. But congratulations for actually reading the book, including what he calls ‘all of my favorite passages’. Lawyers, after all, are trained to read the small print.

[Read Gus Hurwitz at: http://picker.typepad.com/network_industries/2007/03/adam_smith.html]

Non-Sense About Invisible Hands and Competition

The Charleston Gazette (‘the state newspaper’), 6 March. Edward Peeks (former business editor of the Charleston Gazette), posts on “Wal-Mart making world history” (of which I have no disagreements) a couple of passages on Adam Smith that manages to link the usual non-sense about ‘his’ invisible hand with regulating ‘competition’:

“ADAM SMITH wrote “The Wealth of Nations,” the bible of capitalism, in the late 18th century. He left a lasting belief that the marketplace is regulated by the law of supply and demand, and by the “invisible hand” of competition.”

And:

“But nothing like that in the good ol’ USA, where the “invisible hand” is strongest in the marketplace — unless China were to shake down the stock market.”

Comment
If Smith ‘left a lasting belief that the marketplace is regulated by the law of supply and demand”, which arguably he did, along with several contemporaries, why would he need a metaphor to regulate it called the ‘invisible hand’, which I anything else would mystify how markets work?

I don’t expect Edward Peeks to know the answer, because Edward is only repeating what students are taught by those who should know the answer. Which underlines the points made on Lost legacy regularly, specifically that Adam Smith knew how markets worked (Books I and II of Wealth of Nations) and used the metaphor in Book IV to ‘explain’ the phenomenon of individual motivations in matters of risk aversion leading to higher rates of capital formation than would have occurred if the individuals had sent more of their scarce capital abroad. This had nothing to do either with how markets work or with competition.

I shall say nothing about Wealth Of Nations being, good grief, a 'bible of capitalism'.

[Read Edward Peeks at: http://wvgazette.com/section/Opinion/200703059]

Bargaining Is Not About Greed

In The Discomfort Zone [http://www.planetd.org/] 5 March, is posted helpful thoughts on Adam Smith: “Economics and Ethics: What they don’t say about Adam Smith” containing these paragraphs:

“While doing some research, I came across this interesting article (PDF) by Peter Ulrich, professor of business ethics at the University of St. Gallen (HSG) in Switzerland (the premier university for business and management studies in Switzerland). Written as a conversation with Adam Smith, the article brings out fabulously some of the problems with our current thinking of economics and free-market operations.

Adam Smith is, of course, known as the father of modern day economics, and regularly quoted for his words supporting the free-market and “the invisible hand”:
lt 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 selflove, and never talk to them of our own necessities but of their advantages.

However, that quote presents only a part of the whole picture. Adam Smith came to economics as a moral philosopher, with views on political economy. Therefore, large parts of his book - The Theory of Moral Sentiments - deals with ethics, morality, and the role of government. Of course, the neoliberals conveniently leave that out.
The result is an economic theory devoid of any conception of morality, ethics, equality, or justice, something never intended by Adam Smith. The weakness of that mutual exclusion of ethics and economics is discussed in detail by Amartya Sen in his book “Ethics and Economics”. He too, brings out in stark contrast, what Adam Smith originally intended. Yet, rather than address this gap in economics, teachers of economics are content to circumvent the weakness simply by saying economics deals only with the positive, not the normative.

There is a problem with holding this limited view of economics. I may not be greedy but if I believe others I transact with are, then I too must act greedy to ensure my survival. Conversely, if I do not act solely in my self-interest I risk loosing to those that do, and in the evolutionary chain of events will be relegated to irrelevance. In essence, this interpretation of economics - of being based on self-motivated individuals - is a self-fulfilling prophecy. Over time, it would turn a theory of how the world works, into the reality of how the world works.”

Comment
Its author is doing just fine until that last paragraph where he or she makes an error of drawing the problematic conclusion from something we observe everyday when people transact.

Human society did not go from violent plunder to spreading the contagion of greed. Bargaining in its several forms emerged as a means of transacting peacefully. The discovery or invention of the conditional proposition which is central to the bargaining process emerged over time to deal with ‘greedy’ bargainers.

The butcher, the brewer, and the baker, quoted in the article from Wealth Of Nations (Book I.ii.2: pp 26-7) is not about two greedy people transacting; it is about each seeking to satisfy their own interests by addressing the interests of each other. Each has to mediate their own wants to reach agreement with the other party who also has to mediate his or her own wants. Two utterly selfish people cannot conclude bargains because neither would move in pursuit of their selfish interests. But move they must to an acceptable price because each has a veto on agreeing.

Smith understood this and taught it in his classrooms at Glasgow from 1751-64 (see his Lectures in Jurisprudence), and wrote it into Wealth Of Nations in 1776.
It is the neoclassical paradigm that preaches self-interest as greed or selfishness.

Even George Stigler (and others) misunderstood Smith’s moral statement of what actually happened; they had to fit behaviour into a set of assumptions about the real world, which did not predict very well what happened in the real world.

And, moreover, individuals bargaining from pre-history onwards discovered (invented) the truth without the benefit of being taught by neoclassical economists how to do it.

It's called 'emergent order'.

Daniel Klein on Smith-Hayek

The place of Adam Smith in the lineage of economists is a controversial subject: his legacy has been claimed by various strands among the economists’ camps and political groups. The dominant one is that of the neoclassical paradigm (out of Chicago); less numerous are those economists in the Left tradition and its slightly larger Right tradition.

The Austrians, as far as I can see, especially if Murray Rothbard is still representative, are hostile to most of what Smith wrote, though it may be that it was just Rothbard who got it wrong about him (he certainly muddled up completely Adam Smith’s writings on the division of labour and his alleged labour theory of value).

But the Hayek tradition is quite different, apparently. My own work on Smith includes a look at the ‘invisible hand’ attributions and I have found some alignment of views with Hayek’s ‘spontaneous order’ (which I prefer to call ‘emergent order’, because it is a social-evolutionary process, not an ‘event’).

So, when my I visited (as do daily) Café Hayek and found Russell Roberts referring to an article by Daniel B. Klein (5 March), professor of economics at George Mason University and chief editor of Econ Journal Watch, in The Library of Economics and Liberty, I was most interested in his post on “The Smith-Hayek Economist: From Character to Identity”.

In it I found this paragraph:

“The Smith-Hayek Economist: From Character to Identity”

“• a tendency to make the distinction between voluntary and coercive action clear in formulating many basic economic categories, principles, and arguments;

• an appreciation that knowledge is not merely information, but also interpretation and judgment, and as such is highly particular to the individual and the moment; it is essential for humans to err, in the sense that they kick themselves for having interpreted or judged badly;

• a sense that economics must be relevant and serve social purposes, and that such service necessarily entails heavy engagement with non-economists, notably laypeople and policy-makers;

• a sensibility that economic reality is incredibly complex, inspiring the eschewal of efforts to paint a picture of the economy or how it "really" works;

• a sober, non-romantic view of government—since economic reality is scarcely knowable, we should be wary of those who pretend to manipulate it beneficially;

• a presumption in favor of liberty, not the status quo.
The Smith-Hayek characteristics are by no means typical of economists today. As one who shares those characteristics, I wonder if Smith-Hayek economists could do better. Maybe they would do better if they created an effective "we." ”

Comment
How much more credible is that approach to Smith and Hayek than the ‘normal’ economics science of Homo economicus, which bleeds white the people in the real world of any content and they appear devoid of human characteristics? My collection of books by Hayek is in France and you can be sure I will be re-reading and consulting them when I return in April-June.

[Read the whole article by Professor Daniel Klein at:

http://www.econlib.org/library/Columns/y2007/Kleinidentity.html]

It's More Important to Understand Than to Predict

Mark Thoma on his Blog, Economist’s View, 3 March discusses the dilemma that, allegedly, economics is not very good for forecasting (“Forecasting Recessions”) (at http://economistsview.typepad.com/economistsview/)
He comments on the article by Daniel Gross in the New York Times: “The Forecast for the Forecasters Is Dismal” that kicked the discussion off and comments in his reply:

“The second use of models is to understand how the world works and this is, I hope, an area where we have done a bit better (though I expect that statement will be challenged). Even if we can't predict the future of the economy very well, that doesn't mean we can't use our understanding of the economy to design policies and institutions to minimize economic fluctuations.”

You must read the article by Daniel Gross, Mark Thoma’s studied reply and then trawl through the 32 comments on Thoma’s post, to get a flavour of what they are arguing about.

Comment
This is an interesting discussion (and quite a robust one at times). I would like to add a slightly different perspective as to what economics can do and what it cannot, for this goes to the heart of what Adam Smith was about in mid-18th-century Britain, and what was different from his approach in how political economy developed in the 19th century and beyond. I should add that I agree in principle with Mark Thoma’s assessment in the piece I quoted above, but with the caveat that I think neoclassical economics has not done very well in explaining what its policies should be for what has happened.

Modern neoclassical economics makes claims for the gold standard of it being a ‘hard’ science, similar to the natural sciences, compared to the softer social sciences. Its claims rest largely on its axiomatic foundations, using rationality in pursuit of self-interest as it passport to mathematical precision (Home economicus).

Adam Smith went about his task differently (though he was adept at mathematics according to reputable contemporary sources – professors of mathematics who conversed with him). He took a backward looking perspective of how society had evolved from hunting through shepherding and farming to commerce, and sought to explain that evolution up to limits of the contemporary knowledge of his day. Wealth Of Nations can be seen as a report of his inquiry into what wealth (‘riches’ in French) was and what caused wealth to grow, and what inhibited it from growing. He did not write a textbook, or a set of tools; he wrote a detailed account of what his inquiries showed.

Looking backwards, he did not predict the future; his mission was to explain how Europe evolved to where its component parts were in the second-half of the 18th century. He was not in the prediction business; but was in the explanation business. And this produced many policy recommendations, related to his fairly crude model of economic growth derived from his examination of the past growth of the economies for which he found data. Even his data was often indirect, as Samuel Fleischacker reminds us (‘On Adam Smith’s Wealth of Nations: a philosophical companion, Princeton).

The majority of modern economists do not study history, not even the history of economic theories, and having nothing to say about the past, or how the economies they study arrived where they are, they almost inevitably end up studying the future, or at least proclaiming their ability to do so. That they fail miserably in what they claim to be able to do (and some of them get paid enormous sums from corporations and get tremendous prestige from governments for taking jobs as forecasting advisors) is remarkable, given the historic results of their forecasts. Few if any do better than anybody could do by tossing a coin; sometimes a few of them ‘guess’ right, and win a prize; mostly they ‘guess’ wrong.

Admittedly, it’s better to be approximately right than absolutely wrong, but mostly they manage to be both approximately and absolutely wrong. The odd correct forecast is not proof of the ability of the discipline to forecast; as we are often reminded by mathematical economists, anecdote is not data. But history is data; it happened, sometimes many times, over and over again. If only the bright minds among economists had continued Smith’s example and sought to explain ‘why’ and ‘how’ it happened they way it did, given the many other ways economies could have evolved (using ‘dead-ends’ and disasters as the human parameters that limit the workable options), and society did it unaided, undirected and uncontrolled to the positions it now occupies among the many others it could have become, and economic science (allied to the other sciences, hard and soft) might be further along the road to understanding what is going on.

Be clear, economics can do no more than understand what has been and is going on. It cannot predict future states; it can discuss possibilities, but cannot say when this or that state will materialise, or whether it will. The more certain that people are who claim they know the future (e.g., the causes of climate change phenomenon), the less their credibility.

That’s my considered judgement from my study of Adam Smith and his contemporaries, and most of those who followed.

Law and Economics

Unsolicited praise is praise indeed and this one comes from Barry Barnett of Blawgletter (for hot-shot lawyers, but readable by less-hot citizens) at: http://blawgletter.typepad.com/bbarnett/

“Understanding Adam Smith"

Adam Smith wrote Wealth of Nations (1776).

“Blawgletter heartily endorses Gavin Kennedy's Adam Smith's Lost Legacy. Economics professor Kennedy will shortly complete a book on the famous Scottish economist. We await it with fond anticipation.
Barry Barnett”

Comment
Well thankee, sir.

I hope you and my other reader are not disappointed.

I am working on Smith and the role he saw for government at present, which includes justice, covered in his ‘Lectures On Jurisprudence’ (a must read for law students), ‘Moral Sentiments’ (a must read for students of moral philosophy, psychologists and sociologists) and ‘Wealth Of Nations’ (a must read for all students).

On the affinity between law and economics, I discovered last week that a student friend of mine, who has spent his entire career so far in the university of our youth (I moved on after 11 years) has, to my great surprise because I never thought he would leave the old alma mater, moved to Manchester University to head up a leading research and teaching department in law and economics, a subject he dabbled in throughout his early years and, obviously has more than dabbled since.

I should think the future of law and economics as a joint discipline on the analytical level is now in safer hands. I shall write and offer him my congratulations and I shall mention Smith’s lectures on jurisprudence, just in case he hasn't read it (unlikely).

'Rationality', Prices, Markets and Adam Smith

How markets work is not widely understood, despite a couple of centuries or so of their study by what became in the 19th centuries the discipline known as economics. I could go further and say that the more economists studied markets and fitted them into their neoclassical theories, the less they understood them in practice.

I do not say that lightly or flippantly. It is not that the neoclassical theory of markets is wrong – it is backed by the clearest of mathematical rigour imaginable – and cannot be faulted on its assumptions leading to the rigorous consequences of those assumptions, plus the laws of maths. No the problem is far more fundamental: the impeccable theory isn’t applicable to the phenomenon of real world markets.

Consider the following piece, post by Mitch Fincher posts on his Blog, 'The Distracted Programmer’:

“The closer Shell station is selling gas for $2.30 and the adjacent Chevron is at $2.31. Oddly, the Chevon had three cars filling up and the cheaper Shell station had only two. I've seen these two stations which share a parking lot vary by three cents. How can the price vary so much between two adjacent stations, when Adam Smith's invisible hand tells us that people would flock to the cheaper price? It's because the gas station owners know that the American car driving public are slothful creatures of habit. We will fill up at the same station regardless of the price - we are just too lazy to look out our windows, compare the prices and do a subtraction.”

Now, it’s no use carping that Mitch Fincher does not write for the Quarterly Journal of Economics or AER or any of the other mainline refereed journals (more joining each month) by which the economics profession is blessed. That’s not the point. Young Turks of the profession in a hurry to dismiss old fogy’s and our failings in matter of their high theory, might simply sigh and mutter the words ‘irrational behaviour’ with a shake of their heads, as if that told us anything other than their mantra of their theory of rational behaviour.

The point raised by Mitch Fincher is one possible observation of the mass ‘irrational’ behaviour that millions of consumers exhibit each hour across the entire planet; in fact, more people display what neoclassical economists learn from Econ 101 to call ‘irrational’ behaviour, than any number of the wooden chess-piece movers in Chicago, and all point of the compass to which they have spread their wares, can point to examples of their rational assumptions operating in the real world (and no cheating in your counter-examples, please).

Once economics was separated from political economy (and before that from moral philosophy) it entered the dry gulch canyon of abstraction from real life. Proponents stopped looking outside their windows.

Mitch Fincher is only asking why his understanding of economics, via a theory attributed to Adam Smith (itself the product of Chicago Adam Smith, who had little to do with the Adam Smith of Kirkcaldy) appears to be wrong in practice. A perfectly fair question, I should think. I shall answer it as fairly.

Note the following extracted from Mitch’s piece: “Adam Smith's invisible hand tells us that people would flock to the cheaper price”. Now, from where did he learn this notion and forget about lags (movement is not at infinite velocity)? This use of the invisible hand certainly wasn’t from anything Adam Smith wrote. But I’m sure we all recognise it from what is repeated in Economics 101 (and onwards; even in articles in the above mentioned esteemed journals).

And with just as big a ‘but’ we can be sure that Smith never had an invisible hand theory of price determination. No Sir! You can check it out by reading Books I and II of Wealth Of Nations, where price determination is introduced and discussed and its associated consequences, and you will not find a single reference by Smith (nor even by his numerous editors) to ‘invisible hands’ as having anything to do with prices, or markets. You have to go to Book IV of Wealth Of Nations to find Smith’s sole reference to ‘an invisible hand’ – and his reference had nothing to do with prices or markets.

It is not Adam Smith’s ‘invisible hand’ that is under siege by the commonly perceived behaviour of people in markets to act ‘irrationally’; it is the neoclassical cardinal assumption of rational behaviour that is challenged by the evidence.

Years ago, as junior lecturer, I did some research into the wage differentials in the engineering sector among small workshops (under 100 employees) in the east-end of Glasgow and I found in one area little engineering workshops, who employed machinists, fitters, tool-makers, etc., all employed on different hourly rates of pay for more or less the same skill sets. While all reported some turnover of skilled and semi-skilled workers, the numbers were small; the bulk of their workers remained where they were irrespective of their wage differentials compared to workers literally across the street, and certainly near by. Why?

The reason is similar to Mitch Fincher’s drivers when buying petrol from adjacent stations with a choice of cheaper or more expensive petrol within sight. Price is not the only factor of a price choice. Now, it is in the theory of price: all other factors are held still and the quantity demanded changes to changes in price. But all other influences on the quantity demanded and from where it is demanded don’t stand still in the real world. And some of these excluded factors are more influential on some consumers than on others. Ceteris is seldom paribus.

If I approach a petrol station and I see three cars waiting at one of them and only two cars at the other, I might consider 1p price difference not worth waiting for. Am I acting ‘irrationally’? If I’m in a hurry but the price difference is 5p a litre, I might join the longer queue; I might not if I am late to pick up my children at school.

I drive regularly on the motorway of France and the government (kindly?) posts lists of prices for different brands of petrol at intervals along stretches of the road when approaching a petrol station. The signs show the price ahead and the (often different) prices at stations beyond the next one. Drivers can decide whether to pullover at the first station or drive on to the next one or two ahead. In twenty years, I have never decided on where to stop for petrol based on price and distance. I have never heard of anybody else doing so.

To call this irrational is weird. Consumers enter markets with all kinds of motives, of which price may be one. We are not guided by ‘an invisible hand’ to do or not do something. Our actions have consequences; some of them result in benign and some malign outcomes for ourselves and for others, and by extension for society (for malign outcomes from individual actions see Smith’s Book IV – which includes the metaphor of ‘an invisible hand’on page 456). The overall outcome is in principle identifiable, and in terms of markets it is thoroughly understood and explained by Smith without reference to ‘rationality’. Smith says we all try to ‘better ourselves’, but leaves open how we see betterment affecting us.

It is in the uncoordinated, unordered, and uncontrolled actions of six billion people that produce the myriad of outcomes each day that constitute a day’s experience in the lives of the participants. Markets are part of those experiences for good or ill.

Smith’s main point was that where markets are free of interference by wrong-headed policies imposed by misled legislatures, by merchants and monopolists pursuing restrictive, coercive and price rigging conspiracies against consumers, by criminals breaking the law, exercising frauds and cheating, and the proportion of net revenue from economic activity that goes to savings/investment (including investment in the necessary cardinal purposes of government – defence, justice, public works, education, health and minimal administration) is greater than the proportion going to prodigality and wasteful consumption, including wars for trivial ends and taxation for activities which the markets can do better, then society moves towards greater opulence for the bulk of the working population, in peace and security, through the phenomenon of ‘growth’.

Hayek called this ‘spontaneous order’; I prefer to call it ‘emergent order’ – it’s a process not an event – but call it what you will, it had nothing to do with a metaphorical quip that was Smith’s ‘holding job’ until someone would come along and compete the work he had began.

That was Smith’s legacy.

[see Mitch Fincher at: HTTP://MITCHFINCHER.BLOGSPOT.COM/2007/03/WHY-DO-GAS-PUMP-PRICES-FALL-SO-SLOWLY.HTML]

China, Loss of a Finger, and What Smith Really Wrote (courtesy of Sandra Peart)

Dr. Michael Reksulak teaches economics and public finance in Georgia Southern University's College of Business Administration. He writes a piece today that he calls the ‘China Syndrome’ for the Savannah Morning News (Georgia).

"Adam Smith, in his lesser known book "The Theory of Moral Sentiments," used China as an example for the difficulty of truly experiencing empathy over large distances.
"Let us suppose" he wrote "that the great empire of China ... was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe ... would be affected upon receiving intelligence of this dreadful calamity."

Smith depicts in great detail how shaken this representative European would be by the news, but concludes that "...when all these humane sentiments had been once fairly expressed, he would pursue his business ... ."

Comment
Unfortunately Smith didn’t come to that conclusion, as Sandra Peart has reminded us. The quotation comes from TMS III.3.4: pp 136-7.

Smith goes on to say quite the reverse, coming to the opposite conclusion that that implied by Dr. Michael Reksulak (an easy mistake to make; I was convinced as he is that the western man would rather save his little finger than save the people of China, but then Sandra Peart drew my error to my attention, as I am doing now for Dr Resulak).

Dr Michael Reksulak should continue reading until the end of the paragraph from which he has quoted – the last 23 lines in fact – and he (and you) will realise that Smith is engaged in a rhetorical ‘trick’. He firsts describes the selfishness of the ‘man of humanity in Europe’, and portrays the man Dr Reksulak quotes. He then demonstrates how he will be affected by the impartial spectator to reverse his stance of indifference at the death of ‘hundred million of his brethren’ in China, to act and think entirely differently.

Go ahead. Read the reference, for yourself (if you are not familiar with the example). You’ll feel better, and also will appreciate a little more about Adam Smith’s humanity.

[Read the article by Dr Michael Reksulak at: http://www.savannahnow.com/node/236907]

[Also read Sandra Peart (scroll the archives) at: http://www.adamsmithlives.blogs.com/]

Problems of the Transition Made Worse by Populist Remedies

Andrew Roth (March 2) on ‘The Club for Growth’ Blog quotes the paragraph that Don Bourdreaux is quoted from on Red State (earlier today), headed “Adam Smith on the Trade Deficit”:

From the Wealth of Nations:

“Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses, and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false. A trade which is forced by means of bounties and monopolies, may be, and commonly is disadvantageous to the country in whose favor it is meant to be established...But that trade which, without force or constraint, is naturally and regularly carried on between any two places, is always advantageous, though not always equally so, to both.”
[WM IV.iii.c: pp 488-9]

Comment
I agree whole heartedly. What different laws have been discovered that refute these words. Of course there are none.

What appears to be a problem of the transition, which Smith drew close attention to, is escalated into a crisis of imbalance, for which the politicians remedies are worse than the problems of the transition.

http://www.clubforgrowth.org/2007/03/adam_smith_on_the_trade_defici.php

The Politics of Protection Are Too Serious for Politics

It is not my practice to comment on the political affairs of countries in which I do not have voting rights (though I often have plenty to say about affairs in Scotland where I do vote).

Hence, who is the next President of the United States is none of my business. However, I have taken a close interest over the years in US politics and last year, for example, I read the three-volume biography of Lyndon Johnston by Robert Caro with great interest. With the pending nominations season under way for the next Presidential election, I occasionally read about the would-be candidates, and have taken to reading what the candidate candidates say and what is said about them, particularly Senator Clinton (don’t ask why because I don’t know).

Yesterday, the namesake of Lost legacy, Congressman Adam Smith Oregon), came out in support of Mrs Clinton’s main Democratic Party rival, Barack Obama, and I was not happy about this as Smith had opposed a free trade area proposal a year or so back. Today, Red State Blog reports a speech by Hilary Clinton under the heading ‘The Newest protectionist: wanting to be president in the worst possible way’ (by Pejman Yousefzadeh) and comments. She said:

"When it comes to the fiscal recklessness and economic fatalism of the current administration, the writing might not be on the wall but yesterday the writing was on the Big Board. The economic policies of the last six years have contributed to an erosion of US economic sovereignty and have made us more dependent on the economic decisions of other nations," said Senator Clinton. "We need to take steps to restore fiscal responsibility and sound economic policies based on the facts not ideology," said Senator Clinton in remarks on the Senate floor.

Cutting through the language, it appears that she is sliding towards a protectionist stance, and Red State quotes in reply remarks by Don Boudreau, entirely apposite to the circumstances:

“As for the trade deficit . . . well . . . it has been written more times than I can count--this is surely not an exhaustive list of links--that the trade deficit is an utterly meaningless metric and should not be employed as a method for policy analysis. Don't believe me? Then believe Adam Smith:

‘Nothing, however, can be more absurd than this whole doctrine of the balance of trade….’

Again, read the whole thing. I certainly intend to later on this year, if only to refresh my recollections. But it's never too late to read it for the first time . . . especially if you are seen as a plausible candidate for President of the United States.”

Comment
Of course, the USA does not have a free trade policy; like the EU, of which Scxotland is a party, it is protectionist, especially in agriculture. There are those who would go all the way and build a 'fortress' of protection (and lower the growth prospects and living standards of their own people's and most others too) and those who are moderate free traders where it suits them. Few are free traders in a degree to really make a real differnece to the living standards of poorer countries, with only marginal discomforts in their own countries (election years are not good one for change).

So Senator Mrs Hilary Clinton is edging to one side of the so-called 'free trade' deadlock. That is worrying. But I am not voting in her election. However, in May we go to the polls in Scotland to elect a new parliament for Scotland (not England), and I am voting in that election, but, unfortunately trade policy is a 'reserved' issue, i.e., decided by the UK parliament in London, not the parliament in Edinburgh.

Unlike the British American colonies, we do have representation in the London parliament, which was something Adam Smith suggested at the time should be extended to the American colonies, but London rejected this in preference to changing nothing, and events developed that ensured that London lost everything.

I wonder what Adam Smith would suggest we do in May... Meanwhile, I know what he would respond to Mrs Clinton's speech.

[Read the report, plus podcast of senator Clinton’s speech at:

http://www.redstate.com/stories/featured_stories/the_newest_protectionist
And read Adam Smith Wealth of Nations at: WN IV.iii.c.2: p 488]

Milton Friedman May Have Misunderstood the Lesson of Hong Kong

The example of Hong Kong as a bastion of non-intervention by government in markets is well known. Milton Friedman made a particular point of the great example that Hong Kong was for free markets and for a low proportion of GDP to be used for government spending. These thoughts tended to morph into the idea that this arrangement was one of Adam Smith’s ideas about the minimalist role that should be accorded into government, a long running misperception in economics from the middle of the 19th century.

While British governments tended to keep out of economic interventions in markets in the so-called age of laissez-faire, they also tended to take a fairly large role in the ‘international balance of power’ – a sort of mercantile doctrine for state spending, as false as that for hoarding gold and silver bullion – which meant that defence spending, colonisation and fighting local wars, played an overly large role in economic affairs, albeit somewhat hidden.

Hong Kong was another example of the hidden hand of government. Asia Sentinel carries an article suggesting that Friedman’s explication of Hong Kong’s relatively small government role in the economy misses some significant areas where government spending played a less obvious, but still important role that was overlooked.

“At one time 60 percent of the people lived in subsidized housing, mostly rented cheaply from the government, and some in Home Ownership Scheme flats, provided with cheap land and sold to lower-middle-income households. Even now that public housing has low priority and the home ownership scheme has ended, some 50 percent of the people still benefit from this massive intervention in the marketplace.
The intervention also partly accounts for the low apparent ratio of spending to gross domestic product. If the cost of the subsidized housing land were accounted for at market prices in the government budget, the ratio would be significantly higher.

Hong Kong people have also enjoyed almost free medical treatment at government clinics and hospitals. Friedman was against “free” medicine elsewhere but failed to notice it in Hong Kong. Likewise, education, at least up to the secondary level has long been almost entirely funded by the government.”

Comment
Moreover, the government of Hong Kong did not contribute to the costs of its defence. That fell on the British government (and now on the Chinese government), These factors – defence, housing, and health – raise government spending in the economy considerably. But the specific proportion is not as important as the more general point: there is a necessary role for government in a free market economy, and, Adam Smith was well aware that some government spending (and taxation to pay for) is an essential component of a free society, as discusses in Book V of Wealth Of Nations.

Smith was not the ‘night-watchman state’ advocate that laissez-faire economists often claim. Interestingly, libertarians sometimes criticise Smith for not being laissez-faire enough (some have actually read Wealth Of Nations). I am writing that section of my book on Smith at the moment and it is clear, what many scholars of Smith recognise, Smith was far more nuanced in practice than his epigones give him credited for.

His prescriptions for the appropriate role of government spending included defence (in 18th-century Britain the largest, and growing, share of government expenditure, destined to get larger as the 19th century colonial empire grew); justice (an absolutely essential, even pre-requisite, for a successful commercial society); public works (his actual programme was massive, potentially); education (also massive if implemented, with its emphasis on the education of the ‘common people’); health (initially confined to ‘loathsome and offensive disease’); and necessary expenditures of the apparatus of government (‘maintaining the dignity of the sovereign’).

This did not make Adam Smith a ‘socialist’ (a nonsensical claim, except among ideologues). His assault on mercantile political economy was a critique of government intervention in pursuit of wrong policies and not a critique of all and any government expenditure.

But neither was it an endorsement of government expenditure with an ever widening remit to cover large sections of the economy in which markets could perform much better. Understanding the difference is what makes a Smithian scholar.

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