Adam Smith Should be Quoted in Context

When affluent and educated people in the richest country of the world start looking at income distribution in America and compare it with their own income status, they are often led (by angst, envy, or concern for the really poor?) to find their place in the scale of things unsettling, and while not quite saying they want to dismantle the economic system that has created the wealth they enjoy, though as always they could do better, they give encouragement to those who will make that case.

The China, a more equal country under Mao compared to America (though. don't forget the communist 'elite' did very well, thank you very much), has dropped its state-imposed equality for all economics in favour of their version of commercial markets, says a lot about which system will raise the poverty of China's people on an upward track most surely.

Gary Olson wrote on Znet (1 May) in piece entitled: “ ’The very rich are different from you and me’ F. Scott Fitzgerald”:

“What should we make of these iniquitous numbers? I can't quarrel with Adam Smith, the oft misquoted and misunderstood moral philosopher and economist, who wrote in his monumental book The Wealth of Nations,

"Whenever there is great property, there is great inequality. For one very rich man, there must be at least five hundred of the poor, and the affluence of the few supposes the indigence of the many...”

And Peter McCormick on 30 May posts this (with credit to Gary Olson): “The Life styles of the Great and Fortunate”, repeats Olson’s words verbatim, adding: “There’s an Adam Smith doozy you don’t hear too often.”

Comment
The quotation is from Wealth Of Nations, Book V, though the context goes some way to explain what Smith was talking about. It is the chapter ‘Of the Expence of Justice’, the second duty of the sovereign.

As both Gary Olson and Peter McCormick inform us correctly, Adam Smith is ‘oft misquoted and misunderstood moral philosopher and economist’, I think it incumbent to quote his words more extensively to see his meaning:

‘Among nations of hunters, as there is scarce any property, or at least none that exceeds the value of two or three days labour; so there is seldom any established magistrate or any regular administration of justice. Men who have no property can injure one another only in their persons or reputations. But when one man kill, wounds, beats, or defames another, though he to whom the injury is done suffers, he who doe sit receives no benefit. It is otherwise with the injuries to property. The benefit of the person who does the injury is equal to the loss of him who suffers it. Envy, malice, or resentment, are the only passions which can prompt one man to injure another in his person or reputation. But the greater part of men are not frequently under the influence of those passions; and the very worst men are so only occasionally. As their gratification too, how agreeable so ever it may be to certain characters, is not attended with any real or permanent advantage, it is in the greater part of men commonly restrained by prudential considerations. Men may live together in society with some degree of security, though there is no civil magistrate to protect them from the injustice of those passions. But avarice and ambition in the rich, in the poor the hatred of labour and the love of present ease and enjoyment, are th passions which prompt and invade property, passions much more steady in their operation, and much more universal in their influence. Wherever there is great property, there is great inequality. For one very rich man, there must be five hundred poor, and the influence of the few supposes the indigence of the many. The affluence of the rich excites the indignation of the poor, who are often driven by want, and prompted by envy, to invade his possessions. It is only under the shelter of the civil magistrate that the owner of valuable property, which is acquired by the labour of many years, or perhaps of many generations, can sleep a single night in security. He is all the time surrounded by unknown enemies, whom, though he never provoked, he can never appease, and from the whose injustice he can be protected only by the powerful arm of the civil magistrate continually held up to chastise it. The acquisition of valuable and extensive property, therefore, necessarily requires the establishment of civil government.’ (WN V.i.b.2, pp 709-10)

Wrenching the words quoted, as done by Gary and Peter, is more than a trifle disingenuous. Smith is writing about the foundation of justice in a society, without which Smith declaims in another place, society ‘would crumble to atoms’.

Such a state would not be a pretty way to live. In the rudest of ‘savage’ society, before property existed beyond the Natural Rights of property in one’s own body, violations of ‘person and reputation’ were all that could be done to an individual (though, be clear that is not a minor transgression for the person killed or defiled).

At that time, and for most of the time that humans have existed (about 200,000 years) humans lived in small bands dispersed in the wilderness of the entire earth. At the time of the dispersal from East Africa (from 100,000 years ago) the human population was tiny, say, from 1,500 to perhaps 50,000. The bands in the dispersal seldom made contact and they lived off the land at were at the mercies of regular global warming and ice ages. Everyone was more or less equal, except compared to the alpha male or female, in what Gary and Peter would regard as abject poverty, if tney were forced to live like that, in possessions, medicines and knowledge, and life spans were short.

Once humans moved from ‘rude’ society to shepherding and agriculture, the innovation of property began to change all that. The bands grew larger and contact was more frequent, with all that that implies about the human condition. ‘Envy, malice, or resentment, are the only passions which can prompt one man to injure another in his person or reputation’, but there is a leap from how one individual treats another within band and how one band treats another band. There, the passions have free reign until the innovation of exchange, reciprocity and trade, and even then the choice of plunder versus trade was not always benign.

Gary and Peter look at the few lines they quote and think they justify how they feel reading the statistics their pieces go on to quote. But suppose they stop for a second and consider that for the millennia from about 11,000 or 8,000 years ago, when agriculture as a mode of subsistence spread across Europe and the near East to about the 15th century, although there were very great inequalities in living standards for the majority of the people, compared to the elites that run those societies, the living standards of the people were truly basic, at subsistence levels only.

There was an almost invariant regime of universal poverty, beyond the imagination of the casual quotations of today’s media people, living, incidentally, in the richest country the world has ever known, that has lasted as long as history was ever written and much further into pre-history. The ‘rich’ princes who ran those societies were very ‘rich’ compared to the people, but their ‘wealth’ amounted to very little compared to the poor today.

The difference after the 15th century was that living standards, and longevity, and knowledge, began to move, slowly but gradually, on an upward track. This was the result of the commercial age, which led to capitalism in the 19th century. Across the world the gap between rich and poor is uneven and the situation is not static; it is continually changing with average welfare improving perceptibly as the division of labour, traded exchange, growing knowledge, and the protection of justice spread and deepen.

Gary and Peter should read the whole quotation again, preferably in Smith’s context, and judge where they are in the among those where the ‘affluence of the rich excites the indignation of the poor (neither of whom are by any standards poor) and to what extent those ‘who are often driven by want, and prompted by envy’ would be better off from invading the ‘possessions’ of the ultra rich.

Of Fingers, Earthquakes and Moral Sentiments

Reason Hit and Run, a Blog about ‘free minds and free markets’ (hear, hear!) carries an article (29 May) by Ronald Bailey called “Neuroscience Confirms Adam Smith's Theory of Moral Sentiments”. This is a well-reported piece and I do not have anything to say about its main theme.

However, it uses as evidence the scenarios of the European man and the Chinese earthquake and his preference, apparently, for his own little finger. Ronald Bailey comments:

“What accounts for this difference in moral response? The Washington Post recently ran an interesting article which reported some neuroscience research that might help explain the difference in how we respond to our neighbors and to people living far away.”

Comment
Sorry to spoil Ronald Bailey’s argument in reference to the man, his finger and millions dying in an earthquake in China, and his apparent indifference.

Smith did not say that the man would in the end prefer his finger to millions of hypothetical Chinese dead. If you continue reading the paragraph, and a couple more, you will find that Smith turns the scenario at the beginning round completely and makes clear that the man will sacrifice his finger to save the victims.

I do not have my Liberty Fund edition of Moral Sentiments with me in France at this moment (where the quote is on page 136 from memory). I do have an old 1872 edition here and you will find the full reference in Part II, Chapter III: 'Of the Influence and Authority of Conscience' in all editions.

Smith writes of the triumph of conscience over perverted self-love and humanity. Many readers make this 'mistake'. I made too, until inimitable Sandra Peart explained it to me in her usual patient manner.

Watching the Watchers Muddle Adam Smith's Economics, Part two

Watching the Watchers: “The Wealth of Nations Revisited; It All Descends from Adam”
By Lee RussPart Two
(see earlier post below).

“It was intended to apply under certain conditions and certain conditions only”

Comment
In the case of Adam Smith this statement is not true. David Ricardo was the analytical economist, not Smith. Any acquaintance with these authors shows a deep difference in their theorising. Smith was not an analytical economist; he was primarily a moral philosopher, who included political economy in his philosophy courses while he taught at Glasgow University. His approach was an historical, looking backwards, long view of how anything he was studying originated, be it philosophy, astronomy, languages, moral sentiments, jurisprudence, ‘police’ (i.e., the provision of subsistence to a society), also known as political economy.

He is best known for the latter book, the Wealth Of Nations, which many casual readers treat as a normal economics textbook. It wasn’t a textbook nor was it meant to be. Its full title, ‘An Inquiry into the Nature and Causes of the Wealth of Nations’, says it all.

It was his report of his 12-year inquiry into how the British economy worked and how it got to where it was from where it came. It looks back to the situation in Western Europe following the fall of Rome in 476 and how it entered a thousand-year long interregnum under the rule of war-lords and feudal monarchs, when Europe regressed to an agricultural society and per capita incomes stood still at the pre-Roman level.

Smith treated the re-born commercial society as it was, which he described as 'mercantile commence’, but he did not discuss pre-conditions ‘under certain conditions and certain conditions only’ etc. His model, such as he had one, was set against an ideal that did not exist, known as ‘Perfect Liberty’, and which he states very clearly it would be ‘utopian’ to ever think it would exist. To confuse these two concepts, economic society as it was in mid-18th century Britain and how the monopoly, protectionist policies of mercantile commerce, is unfortunate.

The four conditions Lee Russ stated in his piece do not relate at all to Adam Smith. The quotation that follows with the famous invisible hand metaphor, is from a discussion Smith is undertaking about the natural risk-aversion of merchants to sending their capital out of their sight to distant places including foreign countries. Hence, their insecurity causes them to invest locally. By doing so, their capital grows locally and thereby the national capital grows faster than it would have if they sent part of their capital abroad. This is otherwise known as the ‘whole is the sum of the parts’. Nothing more, nothing less and nothing invisible in it. The invisible hand was a metaphor for those who couldn't see how the whole was the sum of its parts.

The three statements allegedly ‘not realised’ by anybody are defective.

· “Smith was deeply religious, and believed that God Himself had endowed human beings with such character that they would produce good simply by following their self interest?
· Smith described a world in which most business, especially domestic business, was not corporate, but sole proprietors, with no distance between ownership and management, and no means of limiting the personal liability of the owner?
· Smith described a world in which it was quite difficult for capital to travel from one nation to another, and barriers of physical distance virtually precluded the import of goods and services which were already available locally?”

Comment
Smith was not ‘deeply religious’. Far from it. He went to Oxford University to study for his MA and to prepare for ordination into the Church of England as a Minister in the Episcopalian Church of Scotland. He left before he took the ordination course and dropped the plans of his religious mother for a church career. Like all other men in Scotland at the time he worked under the tutelage of the zealots, a sort of ‘Taliban’ wing of the Church of Scotland, then the dominant religion in Scotland.

He was always careful to conform to the necessary public obligations, but it went no further. After his very religious mother died in 1784, who lived with him, he dropped several overly religious sentences in Moral Sentiments. He did other things too, but space precludes elaboration.

‘Copartnery’ and ‘joint stock companies’ appeared as capital requirements grew. He criticised chartered joint stock companies because of their monopoly status, granted by the King or Act of Parliament, but he also saw a role for joint stock companies without monopoly charters (Bank of England, Bank of Scotland, Royal Bank of Scotland).

Normal commerce did not need vast capitals to fucntion at that time, but canals and water supplies did, and he acknowledged they could be a role in large capital projects or high risk insurance business for joint stock companies (without monopoly charters). Neither he, nor anybody else, knew about capitalism.

The reference to ‘it was quite difficult for capital to travel from one nation to another’ is not quite the case (more a concern for Ricardo’s theories than Smith’s). Smith acknowledged that merchants owed by their conduct allegiance to no country and could and did move their capital at will – ships bringing gold bullion to and from Britain and other countries weekly did so, and paper bills of trade travelled great distances in an early form of international credit.

In sum, the economics attributed by Lee to Smith are tenuous. The case made by Lee Russ is not sound.

When 'Heterodox' is 'Orthodox' And Both Are Wrong

Mark Thoma writes the Economist’s View Blog, and today (28 May) he heads a long extract from ‘Hip Heterodoxy’, by Christopher Hayes, The Nation as: “The Hip Heterodoxy Meets Herd Mentality and the Neoclassical Mafia”. He is, of course, absolved from any implied association with what follows.

In Christopher Haye’s post I find this:

“Classical economics refers to the theories laid out by Adam Smith and David Ricardo in the eighteenth and nineteenth centuries, which emphasized the power of the "invisible hand" of the market...

A hundred years after Smith, a group of "neoclassical" economists came along and added ... that humans are rational, utility-maximizing agents with fixed preferences, that they make decisions "at the margins" and that the mechanisms of supply and demand ... will lead to a general equilibrium whereby resources are allocated efficiently.”

Comment
Economics is a divided discipline with the largest number by far in the neoclassical camp and a smaller group, representing a wide range of stances, in what is described as the ‘heterodox’ camp (actually a camp with many fire sites, with varying numbers from 1 to more than 1, but less than vastly large, huddled trying to keep their ideas warm and spirits up).

The more snobbish of the neoclassical economists look down on the heterodox few, shaking their heads with disdain, and mutter something about them ‘not understanding’ neoclassical theorems, with hints that they are 'not intelligent enough' to do so. I barely exaggerate.

If Christopher Hayes is representative, as I believe he is, he has one thing in common with the neoclassical high caste in one thing. Like them to a last person, he does not understand Adam Smith (I’ll leave Ricardo out of this), if he believes that Adam Smith ‘emphasised [note the gross exaggeration] the power of the "invisible hand" of the market...’. I have not met yet a neoclassical economist who would disagree with that statement.

That an instance of a single event – his use of the metaphor of an invisible hand in Wealth Of Nations, Book IV, ii.9: page 456 – can become by osmosis an example of him ‘emphasising’ the invisible hand, and in ‘markets’ to boot, I find extraordinary.

At least for anyone who both knows for what use Adam Smith put the metaphor to work only three times (once each in Wealth Of Nations, Moral Sentiments and History Of Astronomy) in all his works, articles, essays and correspondence (approximately a million words), but never about markets, and also what the word ‘emphasised’ actually means.

Who then ‘emphasized the power of the "invisible hand" of the market’? It wasn’t Smith, that’s for sure.

It’s probably been mentioned a million times (perhaps many times more) in the works articles, essays, papers, and correspondence of the mainstream neoclassical economists, which is 997,000 times more frequent than it was used by Adam Smith.

And the same neoclassical economists, who look down on their ‘heterodox’ cousins, always use the metaphor in connection with markets! Now that’s interesting. I wonder if an empirical test for association would show us something about being neoclassical and not understanding Adam Smith, even if it did not show a causal connection in either direction?

It seems 'you can't have one without the other', as the song puts it.

And the neoclassical misattribution of the metaphor of an invisible hand is clear example of the habits of an organised mafia, so on one count, among others, Thoma is correct in his headline.

Greed is Not Good, Nor is Selfishness Said Adam Smith

Lee Russ writes interesting posts on the ‘Watching the Watchers’ Blog. This one on 26 May, ‘The Wealth of Nations Revisited; It All Descends from Adam’, caught my eye. Please regard this as Part One of a response:

“Adam Smith's famous ‘invisible hand’ purportedly leads all individuals to follow their own self interest in a way that produces the greatest good for all. Just reading that idea leaves me amazed that such a counterintuitive idea has come to be so thoroughly accepted by really smart people, many of whom have really good educations.

On the micro level, the idea doesn't hold up at all. Just imagine living in a relationship with other human beings in one family household. If the husband always acts only for his own self interest, how exactly will that serve the interests of the family? How does the family benefit if dad spends the entire month's food budget on a trip to Las Vegas? The same analysis holds for the wife, and the same holds for each child.”

Comment
Well, it’s an easy enough mistake to make when put like that. Fortunately for Lee’s peace of mind, Smith did not write anything like that first paragraph remotely as crude about self-interest (or self love). Whoever teaches or claims that he did, has not read or understood what he did write in his ‘Theory Of Moral Sentiments’, and perhaps didn’t read his ‘Wealth Of Nations’ either.

In Moral Sentiments (apologies for not quoting the exact reference, but I did not bring my copy to France, wrongly believing I had another copy here) Smith writes critical comments on selfishness, but also notes that some degree of apparently selfish conduct is actually praise worthy.

Specifically, a man (it was 18th-century Scotland, not PC Boston) would be regarded with disdain who did not make provision for his family – here his ‘selfishness’ would be excused by the ‘impartial spectator’ and would not be regarded as guilty of improper conduct. Indeed, should a man not act in his self-interest to provide for his health and well-being, and act for the same for his family, he would be regarded as deficient morally.

Moreover, regard for the welfare for one’s family, next for relatives, next for friends and acquaintances, was regarded by Smith as appropriate behaviour for people who actions are consistent with praiseworthy moral sentiments.

Therefore, Smith’s actual writings correspond to Lee’s third paragraph:

“The one way in which Smith's theory might apply to a family is if each member of the family recognizes that part of his/her self interest is the health and survival of the family unit. If Dad recognizes that going to Las Vegas will cause the family hardship, and is sufficiently committed to the family that he views family hardship as contrary to his self interest, he won't take the trip.”

Where Lee goes wrong is to passively extend the actions of the moral man to all of society, a rather daunting task given the numbers involved. Most people only know, in addition to their family, a few friends (count your current number of active friends), add your numerous acquaintances, even add in your past friends with whom you have lost contact), and I predict with some confidence that even if you double or quadruple the total you came to, that the number of strangers in society (in your state or county, your country, and then the world), will dwarf your personal total by a large multiple.

It is not a question of your personal intentions – you may intend to ‘love all the people of the world’ – but your time and resources are never, repeat never, going to affect the billions in the world, the millions in your country, the thousands in your community. This does not condemn your attitudes, nor your genuine feelings. It only places them in perspective.

Smith’s contribution as a moral philosopher was to work out, given the moral sentiments of people and given their relative isolation from all but a few others, how it is that societies tends to be stable and harmonious, and how and in what circumstances they collapse into disorder and destruction.

He argued that whatever else we can say about people, in the main they are concerned about others as well as themselves. They are interested in the welfare of others. These moral sentiments are learned from within the family first and then in the ‘great school of self command’ (the school yard) their selfish expectations are curbed by the effect such self-indulgent behaviour has on other children, and how they react to such behaviour in others.

Their parents consider them ‘special’; others do not. This process, which today we call ‘socialisation’ continues through to adulthood. They learn to temper their self-indulgence to the level that their colleagues (immediate family, relatives, friends and acquaintances) will tolerate. They are aided in this by what he called their ‘impartial spectator’ of their behaviour (closely akin to their conscience). Behaviours that are rejected by their fellows, and which they reject in others, are curbed, as they learn to ‘get on’ with others, and they mutually avoid causing strife and offence.

This is what Smith call’s society’s ‘mirror’ and in dealing with strangers we ‘lower’ our passions to the level that strangers will tolerate, as they lower theirs. Hence, vast multitudes learn to behave in ways that even strangers, and not just over indulgent parents, will tolerate. It has nothing to do with being ‘greedy’; Greko's ‘greed is good’ was not in Smith’s litany at all.

I shall come back to the rest of Lee Russ’s article later in Part Two. I have to get back now to the work of finishing my manuscript for my new book on Adam Smith, but I shall return to Lee’s almost correct view of the context in which he wrote his Wealth Of Nations. I shall also challenge the idea that Smith was ‘deeply religious’.

The Daily Drip Feed of Biased Mainstream Media

Bias and BBC are often regarded as synonyms and as a sub-set of a wider bias present in the mainstream media. The evidence for an anti-American bias in the BBC is overwhelming, both from Blogs that track instances of that bias and from personal anecdotal evidence. I can also allude to the anti-American predilections of the majority of media folk that I know personally, and their vastly large capacity to find endless instances of discreditable interpretations of world events involving the US government, the activities of American owned multi-national corporations, the CIA and US justice agencies.

I don’t know if there will be an inquiry into anti-American biases in the BBC (if there has been one I must have missed it) but a recent concern about pro-business biases at the BBC prompted an inquiry which reported this week.

The independent inquiry into the BBC’s coverage of business stories says it found ‘no evidence of systematic bias against business and concluded that most of the BBC’s business output meets the required standards of impartiality’.

That’s clear enough, but I was somewhat surprised that the rest of the report by Adam Sherwin, Media Correspondent in the Times today revealed those instances when no bias failed at great length, despite the headline summary of there being ‘no evidence’ of bias. I suppose it fills column inches to demonstrate no bias by providing evidence to the contrary from within the report.

But what really caught my attention were statements from the report as follows:

‘the Corporation’s business coverage placed too much focus on the consumer angle’

‘In some cases, the preoccupation with the consumer angle led to items of no real consequence’

‘We do not believe the BBC has a systematic bias against business, though at times the BBC can be unconsciously partial and unbalanced in its business coverage. This arises mainly from a lack of awareness of the commercial world – many BBC journalists have never worked in business – and from a preoccupation with taking the consumer perspective’

‘The Trust shares the panel’s concern about the BBC’s predominant focus on the consumer perspective in business reporting if it results in the audience not receiving the full story”

Comment
Adam Smith was of the decided view that in the balance between the interests of consumers and producers there was no doubt as to which side attention should be concentrated.

‘Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer’(WN IV.viii.49: p 660).

He found it was seldom the case that the interests of consumers had plyed any role in the mercantile system:

‘It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers whose interest has been so carefully attended to; and among this latter class our merchants and manufacturers have been by far the principal architects’ ( WN IV.viii.54: p 661).

It is ever thus it seems right through to the 21st century. But this not a simplistic case of the media ignoring or exposing the neglect of consumer interest in an impartial manner. The prejudice of sections of the media goes beyond righting a few wrongs. The question of impartiality itself is a mess.

There are consumer-oriented programmes that expose shortcomings in some businesses, as they should. There are producer news programmes that interview leaders of business that expose the ethical shortcomings of some CEO’s, as they should. There are few consumer-oriented programmes informing consumers of products that are exhibits for excellence; there are few producer-oriented programmes lauding the achievements of business leaders. Instead, we have a constant diet in the performing arts programmes (‘soaps’, serials, franchises, one-offs) that portray illicit practices of consumers who ‘go wrong’ because they are excessively covetous of the ‘good life’ of conspicuous consumption, and portray the ‘illicit’ practices of those who act ‘merely for profit’, as if profit is a dirty word for a dirty personal habit.

These daily drip feeds are a far more serious bias in the media, including the BBC, than the incidence of this or that presenter mentioning a product (a chocolate brand) with which she is a keen consumer, or, quelle horreur, her co-presenter who expressed a preference for Sky Sports programming over his own employer’s, the BBC’s (I do too). It is only recently that the BBC acknowledged the existence of radio and tv channels produced by rival private companies.

But nobody looks at the daily anti-capitalist rants and clichéd images of crooked business people in their ‘pursuit of greedy profits’ and ‘environmental destruction’, and the ‘evil’ consumers who encourage them.

I have a media friend (I haven’t seen him for years; he’s now a tv producer) who defended his yourhful ‘leftist’ daily critiques on the programmes he presented on national tv on the grounds that when Labour returned to power he would be critical of them too, as if this evened up his daily biases presented as ‘news’. I pointed out to him that he criticised Mrs Thatcher’s right wing government from his leftist perspective but would continue to criticise a leftwing Labour government from the left, not the right. Hence, the leftist bias would continue. He denied this because it was his ‘duty’ to do so until a truly leftwing government was elected by the viewers. With such attitudes prevalent among the media there is little hope that producer bias will be curtailed.

In the meantime, consumer interests are neglected, over two hundred years after Smith noted the pervasive influence of producer interests, including the influence exerted by tv producers.

Who Says That Judges Do Not Have a Sense of Humour About the Legal System?

Peter Lattman posts a piece in the Wall Street Journal online (23 May) that made me laugh, and I am sure it would have amused Adam Smith, LLD too:

It’s titled ‘Supreme Repartee, Starring Adam Smith’

“The editorial pointed us toward a playful exchange in the opinion between Justice Souter, who wrote for the majority (”believe it or not,” says the WSJ edit board); and Justice Stevens, who penned the dissent. Justice Stevens quoted Adam Smith’s famous line about pinmakers in the “Wealth of Nations,” (though he added “I am not so cynical as to accept that sentiment at face value”):

Many years ago a truly great economist perceptively observed that “[p]eople 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.”

To that, Justice Souter offered this footnote in response:

“If Adam Smith is peering down today, he may be surprised to learn that his tongue-in-cheek remark would be authority to force his famous pinmaker to devote financial and human capital to hire lawyers, prepare for depositions, and otherwise fend off allegations of conspiracy; all this just because he belonged to the same trade guild as one of his competitors when their pins carried the same price tag.”

Comment
More please! I like the erudition displayed by these judges and their understanding of what Smith alleged in Wealth Of Nations about contrivances to raise prices, of which lawyers know more than most.

They make money defending someone who is caught doing it and prosecuting someone when others believe that is what they are doing, and also advising legislators how to set the law to prevent anybody misbehaving in such a manner, and for giving opinions about what the law means and how it can be tightened or loosened to suit.

A legal career is a licence to print money. But justice is the cap stone of society. It's the price of liberty.

Call For Comments on Smith's 'Invisible Hand'

It has long been my view that ‘invisible hand’ explanations are redundant in Wealth Of Nations and Moral Sentiments because the instances they refer to are fully explained by Smith as a natural outcome from human behaviours.

That invisible hand explanations have become in the second half of the 20th century elevated into ‘principles’ or ‘theories’ of markets has more to do with an apparent need of Chicago-influenced neoclassical economists to sanctify their partial and general equilibrium models and is unfortunate, but they do not correspond to anything implied in Smith (he did not develop theories of perfect competition as we know of them today), nor did he write about capitalism (a word invented in 1854).

I have prepared a paper for the History of Economics Society 34th annual meeting, this year taking place at GMU, Fairfax, Virginia from 8 to 11 June. My paper is called: ‘Adam Smith’s Invisible Hand: from metaphor to myth’. It is in draft form at present.

I was reading a my chapter from my manscript for a new book on Adam Smith today (aiming to have a final manuscript for the published by the end of June) and I noted a few paragraphs indirectly related to the invisible hand debate, which sum up a theme running through my HES paper and I thought readers may be interested in reading them (hopefully, also commenting if so minded).

I quote the famous paragraph mentioning the metaphor first, followed by some full quotations from later chapters in Wealth Of Nations that provide a perfectly clear explanation of behaviours related to the famous paragraph that do not mention anything about ‘an invisible hand’. The omission is so glaring that my assertion that the ‘invisible hand’ explanation of behaviours are redundant is a sounder explanation of the metaphor than attributions to it by some economists nearly two hundred years later.

Here is the famous paragraph (Smith’s only reference to ‘an invisible hand’ in Wealth Of Nations:

‘By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.’ (WN IV.ii.9: p 456)

Compare this mystical explanation with ‘an invisible hand’ to how Smith explains what is going on in mercantile commerce five chapters later in Wealth Of Nations, which fully explains the process by which unintentional actions have unintended outcomes beneficial for society without mentioning, or implying, that ‘an invisible hand’ was at work:

‘The mercantile stock of every country, it has been shewn in the second book, naturally seeks, if one may say so, the employment most advantageous to that country. If it is employed in the carrying trade, the country to which it belongs becomes the emporium of the goods of all countries whose trade that stock carries on. But the owner of that stock necessarily wishes to dispose of as great a part of those goods as he can at home. He thereby saves himself the trouble, risk, and expence, of exportation, and he will upon that account be glad to sell them at home, not only for a much smaller price, but with somewhat a smaller profit than he might expect to make by sending them abroad. He naturally, therefore, endeavours as much as he can to turn his carrying trade into a foreign trade of consumption. If his stock again is employed in a foreign trade of consumption, he will, for the same reason, be glad to dispose of at home as great a part as he can of the home goods, which he collects in order to export to some foreign market, and he will thus endeavour, as much as he can, to turn his foreign trade of consumption into a home trade. The mercantile stock of every country naturally courts in this manner the near, and shuns the distant employment; naturally courts the employment in which the returns are frequent, and shuns that in which they are distant and slow; naturally courts the employment in which it can maintain the greatest quantity of productive labour in the country to which it belongs, or in which its owner resides, and shuns that in which it can maintain there the smallest quantity. It naturally courts the employment which in ordinary cases is most advantageous, and shuns that which in ordinary cases is least advantageous to that country.’ (WN IV.vii.c.86: p 628-9)

Smith continues in this vein because distant trade is ‘as necessary for the welfare of the society as a near one’. How then does it occur naturally that ‘some stock should be withdrawn from advantageous employment locally to distant locations where it is less advantageous? The answer is fully explained in the model from Book II (and not by the metaphor of ‘an invisible hand’), namely the higher profits obtainable in distance trade (scarcer capital is employed in distant than local trade, raising the market rate of profit above its natural rate), motivate individuals to overcome their risk aversions.

‘It is thus that the private interests and passions of individuals naturally dispose them to turn their stock towards employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead them to divide and distribute the stock of every society, among all the different employments carried on it, as nearly as possible in the proportion which is most agreeable to the interests of the whole society.’ (WN IV.vii.c.88: p 630)

Again, he makes no mention of the metaphor of ‘an invisible hand’. There is no need for anything remotely mystical or literary about market incentives. The natural workings of markets are fully sufficient to explain what happens.

[If you have comments pro or contra, please send them to: gavin{AT] adamsmithslostlegacy DOT [com} and I shall forward in due course a copy of my paper. Thanks.]

Let Debate Continue (it's better than fighting a trade war)

I wrote this post in reply to Aldon Hynes on his Blog Orient Lodge, but the process of posting a comment got lost in multiple attempts, so I am posting it here. To read Aldon's response and to follow on to his Blog, read his comments on my original piece about provoking World Wars III and IV.

My response to Aldon Hynes:

Nice to meet you Aldon Hynes in Blog Land.

I did not mean to polemicise a difference of opinion with you. Lost Legacy is about commenting on the widespread misuse and misattribution of ideas to Adam Smith when these ideas have nothing to do with his Works (primarily his Theory of Moral Sentiments and his Inquiry into the Nature and Causes of the Wealth of Nations, but also student notes of his 1762-4 Lectures in Jurisprudence, all published in low priced scholarly editions by Liberty Press, Indianna). People familiar with his Works read Lost Legacy and others are prompted to read what he actually wrote. I hope you are encouraged to do so too.

You wrote:

“NAFTA's explicit inclusion of environmental issues in dispute settlement jurisdiction didn’t start a World War. Why would they in other trade agreements? It appears as if Kennedy is just being a polemicist, not seriously interested in thinking seriously about how trade policies affect our world.”

NAFTA was intensely amended by Congress, and the Canadians and Mexicans, to reach agreement on opening their borders to fairly extensive measures of freer trade. It was not about closing borders to trade until the partners reached the ‘level playing field’ of environmental concerns. If NAFTA included the Kyoto Agreement it would not have passed the US Congress. If the Kyoto countries closed their borders to trade with non-Kyoto or similar protocols countries, it would have produced a seriously de-stabilising situation in world affairs. If the US closed its borders to non-Kyoto countries (India, China, UK), assuming such a provision would pass Congress and a President’s veto, it would do likewise.

It has always been easier to destroy trade agreements or to argue over their imperfections. ‘Jealousy of trade’ and naïve hostility to trading countries has a long history. Both David Hume and Adam Smith (and many others) wrote about the phenomenon. Wars were fought over such jealousies, the entire colonial and later, imperialist, episode was caused by them. What you propose (seems directed at China today; was Japan in the 1960-80s, perhaps Russia in 2015) would destabilise the world, and risk World War III (and IV between the ‘victors’).

I do think ‘seriously about how trade policies affect our world’, but this has nothing to do with how Adam Smith thought in the 18th century.

David Korten (When Corporations Rule the World) says ‘these same conditions are fundamental to Adam Smith's famous assertion in The Wealth of Nations that the invisible hand of the market translates the pursuit of self-interest into a public benefit.” Smith said no such thing in Wealth of Nations or in Moral Sentiments or in Lectures on Jurisprudence, nor in his Correspondence, or any other of his writings, such as the History of Astronomy.

He never related the metaphor of the invisible hand to markets or market behaviour. He used the metaphor only three times in his million published words, and never in the context claimed for it by Korten, or any of a hundred other authors whi make the same allegation. It is a myth of attribution, introduced to sanctify neoclassical partial and general equilibrium economics. Read through the archives at adamsmithslostlegacy.com to see why this is so, and what he meant. I am reading a paper on this subject at George Mason’s University at the 34th Annual Conference of the History of Economics Society on 10th June, next month: ‘Adam Smith’s invisible hand: from metaphor to myth’.

Eldon adds:

“I have no idea where Kennedy gets such an absurd idea [World War II and IV]. It is either more extreme polemics, like his comments about starting world wars, or it reflects a profound lack of understanding about how international trade policies work.”

I may be accused fairly of ‘extreme polemics’ and that I have a ‘a profound lack of understanding about how international trade policies work’ (though as an economist I do not think so) but I do have ‘a profound understanding’ of what Adam Smith said and what he didn’t. Hence in reading how Helen Joyce describes the invisible hand, I find her totally unconvincing in what she claims about Adam Smith:

“Smith was profoundly religious, and saw the "invisible hand" as the mechanism by which a benevolent God administered a universe in which human happiness was maximised.”

There is much doubt among scholars that ‘Smith was profoundly religious’. He was brought up in early 18th-century Scotland, which at that time and for much longer, though at a diminishing degree, was ‘profoundly religious’. His widowed mother was very religious in the Protestant tradition. Smith went to Oxford University, aged 17 (1740) to study for ordination into the Church of England and to become a Minister in Scotland in the Episcopalian Church (in communion with the C of E). But he changed his mind while at Oxford from reading moral philosophy, the classics and Newtonian natural science. He suffered a depression in 1743-4 and left Oxford in 1746, before completing his course, and returned home, determined not to continue his mother’s and his guardians’ plans for a Church career.

The Church of Scotland (often in bitter doctrinal disputes with the Episcopalians) ruled Scottish social life, especially the four universities. Society was also troubled by the activities of the ‘zealots’ (a kind of Taliban wing of the Church) who hunted for signs of dissent, apostasy, deism and atheism. Smith, with no wish to upset his mother, and in common with most other intellectuals, kept his views private, though he consorted openly with David Hume, whose public and private utterances barred him from an academic career, and after his mother died in 1784, he removed key religious passages from Moral Sentiments in its last edition (1789). He died soon afterwards, showing his non-religious beliefs (it not being a good move to reveal his scepticism about God's existence a few weeks before he died and was supposed to ‘meet his maker’).

However, Helen Joyce is wrong to assert that Smith saw ‘the "invisible hand" as the mechanism by which a benevolent God administered a universe in which human happiness was maximised.’ Nowhere does he assert such a statement.

An exegetical reading of Moral Sentiments shows his careful camouflage of his true non-religious beliefs. Much the same behaviour was noticed in the later stages of Soviet influence over intellectuals – they mouthed the expected platitudes to mislead the ignorant ‘commissars’ who watched them closely.

Eldon expresses disappointment because I did not ‘stop over here to talk more seriously about how we can understand Adam Smith in today’s world’. I think I have shown that the best way to understand Adam Smith is to read what he wrote as he wrote it, and not to rely in third-hand accounts about what he is supposed to have said, or a few quotations taken out of context from his Works, and from the context of the society in which he lived.

Libertarians: Please Note Adam Smith's Qualifications on Perfect Liberty

Frank James in The Chicago Tribune (The Swamp CT’s Washington Bureau) comments on Philippe Legrain on the US immigration Bill before the Senate:

“While it's a system that's being used by other nation's, as Legrain points out, it does seem odd that conservatives of all people would be advocating such an approach since it seems to get in the way of Adam Smith's invisible hand.”

Legrain gets specific:

“But bureaucrats cannot possibly second-guess the requirements of millions of United States businesses, let alone how the fast-changing economy’s employment needs will evolve over time. In effect, the points system amounts to government officials picking winners—a notion that conservatives rightly criticize in industrial policy and elsewhere. Hayek must be turning in his grave.”

Comment
How true, but what’s it got to do with Adam Smith’s metaphor? Smith believed in perfect liberty under justice, namely that each individual should be able to use his capital (which included human capital) in what he regarded as his best interest, without interference, restrictions and prohibitions imposed by the State (a breach of natural justice) or other individuals (merchants, manufacturers and monopolists), provided his self-interested actions did not harm others, were not unfair, and would be approved by the impartial spectator. [Libertarians: Please note the Smith’s qualifications.]

None of this has anything to do with the famous metaphor of an invisible hand. Indeed, the specified qualifications, especially the impartial spectator, preclude, make redundant, and exclude ant role whatsoever for ‘an invisible hand’. So why use it?

How to Start World War III & IV

I get to read several Blogs a week which I would not come across normally. This one caught my eye for reasons that will be obvious to regular readers of Lost Legacy:

“Unshackling Adam Smith’s invisible hand – Carbon Credits” by Aldon Hynes (he’s here):

“The conversation drifted to Adam Smith, and how the political spectrum is not a line, but a circle. The further to the left or right you go, the closer to those on the other side you end up. I think an interesting illustration of this is what I’ll call The Progressive Capitalist.

I must admit, I’ve only read very brief passages of Adam Smith’s Wealth of Nations, so I may be off based on some of my observations. Smith’s had big concerns about fairness and normative cultural values. Jock argued that Smith believed in a local marketplace, with local ownership and was opposed to absentee ownership and remote accumulation of capital. In a world of large multinational corporations, the market is no longer local. The playing field is not fair. A local community can no longer exert its cultural values on the businesses in its locality.

Indeed, if we are going to allow Adam Smith’s invisible hand to have an effect, we need to avoid entering trade agreements that give other countries unfair competitive advantage. For example, a country that puts disproportionate amounts of carbon dioxide into the air, a country that is essentially robbing its neighbors of a clean air and a healthy climate has an unfair advantage that would be unacceptable to Adam Smith. Instead, trade agreements should include fairness. If we want to unshackle Adam Smith’s invisible hand, we should tie our trade agreements to fairness. If we want to see a real market force, let’s require all imports to be carbon neutral. Instead of tariffs, companies would need to buy carbon offsets. Let’s tie Kyoto to all our trade agreements.

This is just a start. We should spend time thinking about how to make sure that in an increasingly flat world, Adam Smith’s invisible hand can help maximize human happiness.”

Comment
A very honest opening about having ‘only read very brief passages of Adam Smith’s Wealth of Nations, so I may be off based on some of my observations”. That’s not so unusual – to have only read the occasional passage – but to admit it is what I suppose could be described among trendy week-end book readers, as a ‘Black Swan’.

Smith didn’t ‘believe in a local marketplace’ as a preference (‘you should watch ‘Jock’; he’s stretching the facts). Such markets dominated the scene in Scotland, as contemporary prints of the period show clearly, but Smith makes it clear in several places in Wealth Of Nations that production for ‘distant sale’ was an important step in the development of markets and, a crucial step in raising the ‘enjoyment’ of the progress towards opulence.

Hence, the thesis that Aldon Hynes develops is based on a false basis, at least as far as Adam Smith’s name is invoked in support of it. Smith’s ‘invisible hand’ did not mean ‘we need to avoid entering trade agreements that give other countries unfair competitive advantage’. That no doubt is the expected wail from the merchants facing competition from other merchants sending products some distance.
Smith welcomed competition, especially in lower priced products because he was concerned with the interests of consumers, not producers. Lower prices raised real wages for the labouring poor. If competition was only allowed if everybody charged the same price is would hardly be competitive.

“For example, a country that puts disproportionate amounts of carbon dioxide into the air, a country that is essentially robbing its neighbors of a clean air and a healthy climate has an unfair advantage that would be unacceptable to Adam Smith. Instead, trade agreements should include fairness.”

Sorry, but that is Aldon Hynes’ view – to which he is perfectly entitled – not Adam Smith’s. The proposition amounts to a statement that all trade must be suspended until every country has exactly the same policies in place, which is really a call for undoing society to the lowest common denominator, itself a proposition that would require a totalitarian imposition to enforce. As trade shrank among the nations, countries dependent on trade would have to reduce their living standards in short order to avoid collapse. Countries in debt to others would face the problems faced by the Weimer Republic in post-War Germany after 1918 (which led to Hitler in 1933) in its hopeless effort to pay reparations.

Dismantling the international trade system in any time period likely to make a difference in a lifetime would threaten a catastrophic collapse of civil order. However, that’s not my point on Lost Legacy. No such scenario had any validity as a claimed endorsement from the views of Adam Smith.

Consider Aldon’s concluding sentence in which he describes everything he lists as “just a start. We should spend time thinking about how to make sure that in an increasingly flat world, Adam Smith’s invisible hand can help maximize human happiness.” I shudder to think what he means by maximising ‘human happiness’ after what he proposes is so glibly imposed on six billion people.

There Ain't No Such Thing As A Quick Fix

As always, or almost always, Brad Delong, the premier Blog for economics (with a large dash of US Presidential politics included: Professor Delong is often calling for the President’s impeachment, a rather extreme measure, I should have thought, best used sparingly to avoid discrediting the office altogether), he has an interesting quote about the ‘bash China’ debate, or harangue, according to your taste.

This is a debate between Thomas P.M. Barnett and James Mann, who ‘specialises in overwrought arguments”. Mann has written a book, “The China Challenge: a shining model of wealth without liberty”.

“China”, says Thomas Barnett, “is no "new" model or threat. It follows the model of Singapore, and before that South Korea, and before that Japan: a single-party state that bases almost all of its legitimacy on rising income and development through export-driven growth. It is a self-liquidating model: eventually the society wants more political freedom to go with that wealth. China's just so fricking huge and so poor that this process isn't going fast enough for Mann--hence the inevitable "threat."

“Mann recognizes neither those past examples nor the significant economic and personal freedoms unleashed inside China over the past quarter century. His Z not having been reached fast enough, he discounts all movement from A since the bizarre depths of Mao's cultural revolution, which is no more distant politically than our Vietnam.... As for our take on it, we should logically welcome any so-called model that promotes external economic connectivity, because we know where that goes historically (i.e., where Japan and South Korea finally ended up: creating political freedoms that match their system's potential--something that took us a while to achieve as well)”

Comment
I am inclined to agree with Barnett from a Smithian point of view. People in a hurry for historical processes to be completed quickly are worrying. They end up thoroughly impatient and liable to extreme stances. If in charge of foreign policies, they are dangerous.

It took Britain two centuries to move from a minority parliament of the 18th century to universal franchise of popular voting, and Britain only got to the restricted franchise of a constitutional monarchy in the 18th century after several centuries from feudal rule. Even the USA, with its magnificent Constitution, was well short of its ideals as late as the 1960s.

Democracy does not arrive quickly. People who believe the world must change quickly in this or that way, are certain to be disappointed in their lifetimes, and pointlessly angry because this or that blemish persists. This gets so bad that you never hear the end of the pointless cliche: ‘too little, too late’, no matter what the change or how big it is, that is announced. People in this frame of mind, want it all, they want it now, and you can never satisfy them whatever you do, which produces the counter-reaction of conceding change even slower than their opponents felt they had to move at.

Smith took the long view. He was calmer as a result. He noted the trends and had the satisfaction of noting their direction, if not its pace. He didn’t expect there to be big changes away from the false doctrine of mercantile political economy in the immediate future. History showed that everything moves slower in practice.

Expecting commercial life to change China’s political structure as quickly as it changes the economic relationships is pure utopianism. But the changes that it is causing in the daily lives of tens of millions are remarkable by any scale of judgement, and they run much deeper than the mere arithmetic of pushing people out of abject poverty. Everything changes with it. Leaving abject poverty for absolute poverty and then towards relative poverty changes values taken as inevitable for generations.

Time becomes available for reflection and a minority realises this. I like this last paragraph quoted in Brad Delong’s extract from Thomas Barnett:

China's "model"... is about transforming a hugely rural, impoverished, disconnected society (one-sixth of humanity) into an urban, consumeristic, connected one. Once achieved, and China is nowhere near that at this time, with well over half its population still living in very Gap-like conditions, then its model self-liquidates that all before it. China's future leaders know this, so do our smart observers. Mann ain't one of them...”

Brilliant! Pure Smithian! Pity about James Mann, though...

Both Candidates and Their Critics Can Be Wrong

Quite a number of Blogs are commenting on the forthcoming US Presidential Election, so it is likely that we shall be drawn into it, even if tangentially, though I shall not be commenting on the attractiveness or otherwise of any of the potential candidates. I shall be commenting on references by anybody to Adam Smith where I think it is appropriate to do so.

Take this piece from James D. Miller in his blog (‘Adventures In Economics’):

“From the Politico:

“May 20 Obama is wrong. Making money is noble.”

"In his commencement speech at Southern New Hampshire University this morning, Obama ...warned against the charms of doing what most college graduates set out to do: Make money. 'In a few minutes, you can take your diploma, walk off this stage and go chasing after the big house and the large salary and the nice suits and all the other things that our money culture says you should buy. But I hope you don’t. Focusing your life solely on making a buck shows a poverty of ambition. It asks too little of yourself. And it will leave you unfulfilled'"

If he does get elected president, someone should teach Obama about Adam Smith's invisible hand. In a well functioning market economy, you only profit by helping other people. And the more money you make, the more you have helped others. A graduating student who wanted to maximize the amount of good she did for society should probably try to maximize her own paycheck. (Although she should avoid going into certain professions such as law and crime.)

Comment
In the second paragraph, James Miller refers to ‘Adam Smith’s invisible hand’, which when clicked takes the read through to an entry in Wikipedia that is tendentious in the way in which readers of Lost Legacy would expect me to say.

The argument used in the rest of paragraph is plain wrong, or if that is too strong, I shall call it ‘problematical’. Markets may work as indicate but in the real world, the one inhabited by Adam Smith and by James Millar, people can make money from ‘helping others’ and from monopoly practices and other externalities (pollution), which does not help others in the same sense – it helps the monopolists.

Of course, Adam Smith’s metaphor of ‘an invisible hand’ had nothing to do with markets, which he explained very well without using the metaphor at all. Whether your actions have ‘helped others’ depends on many other factors and might be independent of your intentions. The Wikipedia entry is quite wrong here, though it does make several nods in the right direction. Read it here for practice.

Service Back to Normal from Tomorrow

I am returning from Bilbao, Basque, Spain this morning and will resume posting later today. I have attended the 8th International Practitioners' Workshop, an annual event at different venues in Europe, in which practitioners discuss negotiation issues.

This was my former day job at the Edinburgh Business School (readers will recognise my affinities with Adam Smith's early contribution to negotiation theory in Wealth Of Nations on negotiation in Chgapter 2, Book I).

From tomorrow until 25 June, when I return to Edinburgh, hopefuly with my Adam Smith book complete, I shall be working on the manuscript, with occasional forays into Blog land.

Thanks for your patience.

Exchange as the Alternative Practised Millennia Ago

Greg Mankiw writes one of the Big Blogs, in content and number of readers. Read it here. I followed one of his interesting pieces earlier, but saved it and then ‘lost’ it (a not uncommon experience at Lost Legacy), but found it again while setting up the system in France (with the talented assistance of my daughter – another not uncommon experience).

This piece was headed: ‘Charles Darwin versus Adam Smith’ and it comes from a piece by Professor Paul Rubin, Samuel Candler Dobbs Professor of Economics and Law at Emory University and the author of Darwinian Politics: The Evolutionary Origin of Freedom (Rutgers University Press, 2002). He has been writing a series on evolution and economic behavior for the Cato Institute's journal Regulation.

Rubin’s article is “Evolution, Immigration and Trade” published in Washingtonpost.com Think Tank Town (7 May )

I selected only two paragraphs for my comments:

“Our primitive ancestors lived in a world that was essentially static; there was little societal or technological change from one generation to the next. This meant that our ancestors lived in a world that was zero sum -- if a particular gain happened to one group of humans, it came at the expense of another.
This is the world our minds evolved to understand.

Conflict was common in the environment in which humans evolved. As primates, which are a very social order, our ancestors lived in relatively small groups in which everyone knew everyone else. Our minds are adapted to deal with populations of that size. Our ancestors made strong distinctions between members of the in-group and outsiders, and we still make such distinctions today -- social psychologists can create in-group and out-group feelings based on virtually any arbitrary difference between populations.”

Comment
Consider an alternative explanation of the same scenario presented by Paul Rubin. First what is missing?

Well it was headed by Greg Mankiw as ‘Charles Darwin versus Adam Smith’, though neither appeared in the article as posted, and Smith in Wealth Of Nations (Book I, chapter 2) did postulate that the ‘propensity to truck, barter, and exchange’ has a long history, going back to the ‘consequence of the faculties of reason and speech’, which places it sometime in the past 200,000 years, perhaps earlier depending on whether the hominids, such as the Neanderthals, had an ability to speak (we can accept that they could reason to an extent).

From the above propensity,humans developed the division of labour, which after many millennia was the cause of social evolution towards, eventually, commerce, via scavenger/hunter-gathering, shepherding and farming. (Smith’s four ‘ages’).

Now, we can accept that in the long duration from a small world population of humans in Africa to the occupation of the entire Earth, there were few opportunities for isolated bands of hunter-gatherers to make contact, except on an intermittent, possible multi-generational sequence. In these circumstances, Professor Rubin’s scenario has credibility.

However, as humans proliferated in relatively small but separate geographical regions (Europe, India, Australia, parts of China, North Western routes from Asia to America, North Africa), contact incidents increased. The processes that added a new experience to the human condition.

The choice on contact was two-fold: violent hostility (Rubin’s zero-sum) or exchange (Smith’s non-zero sum). That these co-existed seems to match the archaeological evidence; they still persist together, for which no counter-evidence is credible.

Exchange was not invented in the 18th century; its prehistory is understood fairly well (I have an as yet unpublished manuscript, ‘The Prehistory of the Deal’, awaiting my attention, which after my ‘Adam Smith’ volume is with the publisher, I shall return to it).

In short, exchange behaviour, which includes gift, reciprocation of favours, peace agreements, safe passage, hostage swaps, and much else, had been practised for many millennia, possibly as long as the human species has formed.

This assertion is perfectly comfortable with the zero-sum nightmare alluded to by Professor Rubins. If life on the open savannah was characterised by the zero-sum behaviours he mentions, it was also characterised by a different non-zero-sum set of behaviours, as deeply ingrained as the former.

Connected via Wanadoo - at last

Connection is made (for now!) after much frustration, and normal blogging will commence at Lost Legacy (hopefully) later this evening (French time: BST + 1 hour).

I Snuck This in While the Family Awaits Without Their Legendary Patience...

‘Molly’ PhD in economics, aged 43, writes on the Gaian Economics Blog, what is billed as ‘The Assumptions of Perfect Competition: Lesson 5:’

“Of all the assumptions of perfect competition the assumption about knowledge of opportunities to buy and sell this one relating to information has failed the test of time perhaps worst of all. In Adam Smith’s 18th-century market it was a reasonable suggestion that you might be able to have ‘perfect information’ about all the goods between which you were making your choice. There were, let’s say, three shoemakers and you could stroll from one stall to the next, and on to the third. In markets and fairs of this time, producers of similar goods helpfully located themselves alongside one another, which is why we are left with street names such as Butcher’s Row or Shoe Lane.”

Comment
Molly conflates the modern neo-classical economic general equilibrium theory of perfect competition with the classical economics of Adam Smith. He did not assume, state, or describe Natural Liberty in terms of ‘perfect information’. Landlords, labourers and undertakers did not need anything other than prices to motivate them to change their current behaviours. Market prices were determined by supply and effectual demand at the place where they were making their decisions.

Where prices, or price, which in Smith’s world were always local not general, and could vary from locality to locality, were whatever they were, they acted accordingly, either to maintain their current behaviour or to change it.

This could include circumstances when prices elsewhere were different, but of no operational relevance because of distance, or because of ignorance within the periphery of their knowledge. Owners of factors immediately close to price signals that suggested expanding their supply would draw on successively near, through to distant changes in demands. Perfect liberty allowed factors to move towards markets where prices covered the natural prices of the factors they owned, and away from markets where they didn’t.

Neoclassical price theory is an entirely different set of concepts. People do not appear in them; perfection rules; knowledge about all possible prices and costs is assumed to be general, mathematics determines actions.

‘Molly’s’ target does not include anything Adam Smith envisaged.

Gaia is misinformed and has a right to be ‘angry’ with ‘Molly’.

I do not have much confidence in Lessons 1-4 (nor time to read them just now)...

Interruption to Lost Legacy Blogging - quelle domage

Brief Announcement

I am en route for France at present and it has already affected my Blogging. It will contune to do so until at least Wednesday, when I shall arrive (hopefully) at my French home for the usual summer soujourn, interrupted by a short trip to GMU for the 34th History of Economics Society annual conference and, later, a longer return to Edinburgh in July and August on family business, before returning to France for late August to early October.

I shall complete my manuscript for the 'Adam Smith' volume for Palgrave's new series, Great Thinkers in Economics, circa end June.

In the meantime time, apologies all round. Lost Legacy returns as soon as I re-connect to the Internet in France (unfortunately via telephone dial up, as my Wanadoo connection is tempermental).

Smith May Not Have Applied a Labour Theory of Value to Multi-factor products, including Whisky

Division of Labour is one of the popular (with discerning folks) Blogs on the go, but it suffers from one small defect, in my opinion; it does not have a comments facility, nor is it clear how to communicate with the eleven economists who are listed as its Bloggers. If it did accept comments, I would have posted on today’s Blog from Lawrence H. White (F. A. Hayek Professor of Economic History • Department of Economics, University of Missouri - St. Louis) a comment on his post ‘Scotch versus the Labour Theory of Value’.

The gist is that Lawrence White posed a question in his History of Economic Thought class glad to note that the University of Missouri has such a class, one of the few in the world): “How is the labor theory of value inconsistent with rate-of-return arbitrage?”

A student wrote a brief answer: “It doesn’t factor in value added by time, such as aging Scotch”, which impressed him so much he intends to work it into his course next year. To which Lawrence White adds:

‘The price differences between young and old Scotch are so systematic and so obvious, it’s a wonder that the Scotsman Adam Smith did not notice and repudiate the labor theory of value.’

A good line, I admit. But it begs the question of whether Smith had to repudiate the labour theory of value in the sense that Lawrence seems to mean, specifically that he had such a theory for society after the ‘early and rude state of society’. I find the evidence ambiguous and I do not have space on Lost Legacy to develop the argument based on Wealth Of Nations, though I do in my manuscript for my new book on Adam Smith, to be published in 2008.

To clarify Smith’s association with a labour theory of value it is necessary to read Chapters IV, V and VI of Book I of Wealth Of Nations as a whole and cut through the bits of a tangle Smith gets into, while he integrates his analysis with his four ages of mankind from his Lectures In Jurisprudence. He did not apply a labour theory of value to society after the invention of property and the need for prices to cover the owners of the factors of land, labour and capital within market prices.

I should also note that Scotch whisky in mid-18th-century Scotland was not a brand run business as it is today with anything nearly as precise as a ‘750ml bottle of Glenlivet single malt 12 years old selling for $30 while the same size and proof of Glenlivet single malt 15 years old sells for $45, and Glenlivet 18 years old sells for $62’.

A shot at the history of whisky (spelt in the US as Whiskey) can be found in that excellent 1975 volume, Mountain Spirits, by Joseph Earl Dabney, Bright Mountain Books, North Carolina, Chapter 3.

In Scotland in Smith’s time whisky was sold in various containers, was not regulated to great effect by the excise and had an air of a slightly ‘informal’, risque product. Smith apparently drank local beer and French claret.

Did Adam Smith Uncharacteristically Predict the Course of Globalisation?

Adam Smith rarely made predictions about political economy or anything related to conjectures about the future. In his entire approach to all the subjects he studied and reported he had, what Samuel Fleischacker, the philosophy professor, described as his looking ‘backwards’, not forward's vision, or as I saw somewhere the other day, he took a ‘rear mirror’ view of his subjects.

Hence, it is remarkable when Smith indulged in a rare bits of speculation. In this case, his motives I think were from his moral conscience driving him to break the habits of a lifetime. He was no indifferent academic to the misfortunes of others, be they labourers and their families in Scotland or ‘natives’ in the discovered foreign lands visited by European adventurers.

Smith had an excellent rhetorical ability (in the 18th-century sense, not the 21st-century somewhat disparaging sense in which we use the word today); he was an accomplished master of classical studies of oratory and literary expression, and we have students’ notes of his lectures on rhetoric to demonstrate his grasp of style and composition (Smith, A. [1763] 1985, Lectures on Rhetoric and Belles Lettres, J. C. Bryce, ed. Liberty Fund, Indianapolis, Indiana).

In one such passage in his books there is the following gem, illustrating an aspect of his humanity (I shall offer others on Lost Legacy in the course of the next month of so, as I approach the end of writing my new book on Adam Smith, and as I check references for the publisher’s editor, which may be of interest to readers):

“The discovery of America, and that of a passage to the East Indies by the Cape of Good Hope, are the two greatest and most important events recorded in the history of mankind. Their consequences have already been very great: but, in the short period of between two and three centuries which has elapsed since these discoveries were made, it is impossible that the whole extent of their consequences can have been seen. What benefits or what misfortunes to mankind may hereafter result from those great events, no human wisdom can foresee. By uniting, in some measure, the most distant parts of the world, by enabling them to relieve one another's wants, to increase one another's enjoyments, and to encourage one another's industry, their general tendency would seem to be beneficial. To the natives however, both of the East and West Indies, all the commercial benefits which can have resulted from those events have been sunk and lost in the dreadful misfortunes which they have occasioned. These misfortunes, however, seem to have arisen rather from accident than from any thing in the nature of those events themselves. At the particular time when these discoveries were made, the superiority of force happened to be so great on the side of the Europeans, that they were enabled to commit with impunity every sort of injustice in those remote countries. Hereafter, perhaps, the natives of those countries may grow stronger, or those of Europe may grow weaker, and the inhabitants of all the different quarters of the world may arrive at that equality of courage and force which, by inspiring mutual fear, can alone overawe the injustice of independent nations into some sort of respect for the rights of one another. But nothing seems more likely to establish this equality of force than that mutual communication of knowledge and of all sorts of improvements which an extensive commerce from all countries to all countries naturally, or rather necessarily, carries along with it.' [WN IV.vii.c.80: p 626]

Comment
Looking backwards today, long after the era of imperialist empires and colonies, gun-boat diplomacy, and world affairs centred on the interests of Europe and North America, we can see the gradual emergence, still underway, but probably accelerating, of the erosion of the ‘superiority of force’ formerly monopolised by the Europeans until the early years of the 20th century, joined by the United States from mid-century.

The growth of China and India, from their fairly decisive moves away from statist economies, reversing their economic dogmas, based on failed models of European economics associated with Karl Marx, and socialism, to adopt that ‘mutual communication of knowledge and of all sorts of improvements’, i.e., the successful European models of economics, to gain shares in ‘the extensive commerce from all countries to all countries’.

Globalism, derided by the former followers of Marx and varied brands of socialist ‘true believers’, is producing what Smith anticipated might happen when the conquered nations adopted the workable market economies of the West, rather than the unworkable romantic fantasies of scribblers, in what for his generation were perceived to be ‘the most distant parts of the world’. The foci of the world economy, wherever we argue about where it was or is, it is certainly shifting slowly, eastwards and westwards (depending in which direction you look).

Smith noted that ‘the discovery of America, and that of a passage to the East Indies by the Cape of Good Hope’, were ‘the two greatest and most important events recorded in the history of mankind’, to which we might add ‘so far’, and that the next greatest event ‘in the history of mankind’, perhaps to be witnessed closely by the next few generations, will be the arrival of ‘that equality of courage and force which, by inspiring mutual fear, can alone overawe the injustice of independent nations into some sort of respect for the rights of one another’.

What's The Problem With Outsourcing?

Atanu Dey writes on his Blog ‘On India’s Development’ about Alan Blinder’s breach of his free trade preferences (Washington Post):

“It’s a strange article considering that he does know his economics. Surely he knows that trade is good. International trade is also good, subject to some very well-understood conditions. He understands Adam Smith and David Ricardo well enough to write econ textbooks and is a professor at Princeton.”

Comment
I am not sure why ‘off-shoring’ should ‘rattle’ Professor Blinder in the manner his Washington Post article suggests or why he is in a panic about his prediction that ‘India may pose major problems for tens of millions of American workers over the coming decades’.

That’s problem with economists who get into the prediction business (of which the ‘global warming’ doomsayers are another current example). Economists have enough trouble explaining the past, immediate and distant, without trying to predict the ‘coming decades’. Adam Smith refrained almost completely from predicting the future, but then he studied history which most neoclassical economists tend to avoid. He took a ‘rear-view’ mirror approach to the economy and tried to explain how his contemporary economy arrived at where it was and left the future to ‘whatever it would be’.

Why is ‘off-shoring’ a unique and special problem? Many global industries and almost all manufacturing industries since whenever – including Smith’s example of the inter-sector links that helped produce the day labourer’s coarse woollen coat in Wealth of Nations – had some elements of their products sourced from outside the home economy. The US economy has never been fundamentally different.

Trade creates job elsewhere than at home. Self-sufficiency is a job destroying phenomenon; that’s why international trade is better than self-sufficiency. Those of us who live in the European Union can see the ‘food security’ policies of the Common Agricultural Policy as a protectionist measure that raises food prices for Europeans and keeps poorer countries poorer than they need to be. Food subsidies do not go to the protection of poor European small farmers because with the subsidies available large farming businesses squeeze out smallholdings, a trend very noticeable in the region of France where I spend the summer months.

I am leaving for a couple of months in the Bordeaux wine region next Tuesday, and neighbours are selling off bits of their land because French wine consumption is giving way as its European markets are succumbing to ‘New World’ competition, including from California. Dinner tables are outsourcing their wine products. I take calls from outsourced (mainly Indian) call-centre services and some of my books on negotiation are typeset in India, China, Hong Kong, and Malaysia. The latter country provided the copy-editing services and proofs were exchanged via the Internet, using a Dell computer made all over the world, on Microsoft programmes (Seattle?). Should I be ‘rattled’ about this? I do not see why.

If ‘tens of millions of American workers over the coming decades’ are going to be ‘rattled’ by the transition and the US economy is going to decline into mass unemployment, there will not be much effective demand for the products of off-shoring, if that is what Blinder envisages. The structural composition of the US workforce changed dramatically over the last decades; it probably will change over the ‘coming decades’ with or without ‘off-shoring’.

If Blinder is thinking that the ‘pie’ is fixed, an old fallacy of mercantile political economy, then he has forgotten Wealth Of Nations. I suspect it all has more to do with the coming Presidential election than the prospects for ‘American workers over the coming decades’.

Humans Have Always Specialised and Have Always Been Generalists

Luke Johnson writes in FT.com an article on the division of labour, ‘Let’s turn our hands to the portfolio life’, which contains the following:

“Ever since Adam Smith published The Wealth of Nations in 1776, modern societies have focused on the division of labour. We have become ever more specialist in our work – no one wants to be known as a jack of all trades, master of none. Today it is all niches. After all, the sum of human knowledge has expanded exponentially since Leonardo da Vinci’s day, when the concept of a Renaissance man with learning across all fields was valid. Now someone like that would be dismissed as a dilettante.”

Comment
Superficially, Luke makes a plausible point, but I doubt whether his own life conforms to the image he portrays of ever diminishing areas of hyper-specialisation of labour. You should read the article in full for a flavour of its background (including a conversation at a dinner-party), but I shall confine my remarks to the narrow focus of Luke’s image of the division of labour since Adam Smith’s day and with the understanding of what happened since in the economy and in the work roles of labour.

Smith was a moral philosopher, a discipline that included in the 18th century subjects as diverse as Natural Religion, Ethics, Jurisprudence and Political Economy with, as background, a thorough classical education and an ability to deliver university lectures in fluent Latin (and, for students, to understand them).

These subjects are now separate disciplines, and within each subject there are many sub-divisions, and sub-sub-divisions. But Luke should note that to become proficient in any of the sub-divisions it is necessary for the individual to become proficient in the discipline as a whole. Nobody becomes a specialist by first becoming a specialist.

I suggest that the same condition applies to him, as well as the rest of us. Add to this the fact that many people, increasingly the majority, change their jobs and work functions more than once in their working lives. Moreover, they have ‘lives’ outside their work: interests, hobbies, crafts, activities, home, and families and friends. They have access to media sources (the Internet, TV,) that widen their scope of knowledge from their narrow jobs at any one moment.

Also, with technological change at the current rate, their jobs change even when their employer doesn’t. The tv business (Luke is something in UK Channel 4) has changed dramatically in the past working life of the average employee specialist in media business and will continue to do so. Many specialists change employers too in the same business, or come into it from different businesses. They have different age experiences and different life experiences, and move about different geographical locations. And the life environments around them change, including new governments, new products, new concerns and myriad new events, some of which affect them.

We are all ‘jacks-of-all-trades’. And the division of labour, which Smith wrote about in Chapter 1 of Wealth of Nations, has been a major cause of there being job opportunities (more jobs!) for more people, without which the human species would have remained at around the population levels of the few hundred thousand that populated the Earth before our hunter-gatherer forebears discovered the alternatives of herding animals and practising agriculture.

Incidentally, Luke, the division of labour began a long time before Adam Smith's Wealth of Nations. In pre-history in fact. It's always been part of the human condition and it is not a burden on modern society only. Specialisation was rampant in the most primitive of human societies, as was the 'propensity to truck, barter, and exchange'. We did not move from clones of each other to specialists only in the 18th century.

It All Started With 'Good Queen Bess' and 'The Honourable Company'

Contemporary debates on economics focus on ideas as if they are eternal verities, when in fact a moment's thought inform us of the obvious: ideas replace older ideas through successive mutations until the ideas of today of the same phenomena are absolutely of no resemblance to what they were a while ago.

Commerce is no exception; in fact it is a prime example. Way back, the idea of commerce itself was anethama in discourse. The long interregnum between the fall of Rome and the re-emergence of commerce a millennia later left social guideposts to appropriate behaviour adrift. A long, slow process of acceptance of what we call modern ideas took centuries to take root. Smith's Wealth of Nations was part of that process, but thousands of others also took part (Yale holds several thousand pamphlets from the post-1600-1800 period in its library).

Somebody called ‘Buce’ (‘you wait here in the lobby, I’ll bring the etchings down’), from or in Palookville, (American slang for a place where ‘imperfect’ humans come from; a failed concert venue in Santa Cruz, California, etc.: Wikipedia), in his Blog: Underbelly(a journal of soft information) has realised there was a different world set of ideas back four centuries and it appears to have incited him to think some more about it. Read it here:

“Riffing on Empire”

“I spent most of yesterday with John Keay’s The Honorable Company: A History of the East India Company (link). It’s chatty and entertaining, although I could have used a bit more depth and focus. Still, there are some takeaway point[s]. Herewith some thoughts on the nature of commerce and the development of sovereignty.”

Comment
Yes, John Keay’s account of the East India Company (‘The Honourable Company”) is a good read on a long-haul flight; I recommend it if you have no time for deeper study (though be aware, there is rather a lot to read beyond John Keay’s book).

‘Buce’ also hits, perceptively, a rich vein of intellectual interest in the second paragraph I quote:

“It’s really hard for one—me—to put his mind into a time back before Adam Smith, before Thomas Hobbes, when current notions of commerce and sovereignty were still struggling to be born. It’s not easy to imagine a world where it seems that most of the noisy people believed that in every trade, one gains and another loses, and that if the English were shipping out goods for sale, then it must be that someone was taking advantage of them.”

Comment
Yes, the 16th-17th centuries were most interesting if you want to grasp fully the magnitude of Adam Smith’s contribution to thinking about what causes the wealth of nations. The disparate literature, mainly in pamphlets, that wrestled with questions about commerce, its morality and ethics, and its future from the time, show a complete cleavage between the post-medieval ideas, mainly hostile, about avarice, ‘love of money’, and ‘godliness’, and the Hume-Smithian ideas about mediated self-interest, self-betterment, and liberty.

The most authoritative (and incidentally, eminently readable) account of these debates is Istvan Hont’s ‘Jealousy of Trade: international competition and the nation-state in historical perspective’ (Harvard University Press, Mass. 2005).

I have just revised my own chapter on the subject for my new book on Adam Smith (for Palgrave’s Great Thinkers in Economics series, 2008) and agree that there was an immense sea-change in the triumph of the Enlightenment ideas over the medieval ideas, though what accompanied the change-over in national wars, both bloody and economic, which Smith labeled ‘the false doctrines of mercantile political economy’, was a heavy price to pay for many millions of people.

Unfortunately, the resurgence of mercantile political economy (did it ever go away?) threatens to continue its damaging ‘beggar my neighbour’ paranoia, much of it from people who consider themselves to be ‘liberal’ minded.

But a great place to start understanding the present is to understand the past, and you cannot do better than start from 31 December 1600, the day that Elizabeth I awarded her Royal Charter to the ‘Company’.

Myths About Adam Smith's Famous Hands

John Reiniers, a columnist who lives in Spring Hill, Florida, writes, in Hernando Today (on-line edition), a trenchant piece (here) titled, “Insurance Expectations Out of Hand”, which includes this sorry nonsense about Adam Smith’s use of the metaphor of ‘an invisible hand’, and as bad, applies it to ‘open frictionless markets’, which he never did in Wealth Of Nations (nor anywhere else in anything he wrote publicly or in privately):

“Adam Smith, legendary Scotch economist from the 1700s, was onto something when he observed in his monumental "The Wealth of Nations" that if people could make personal economic decisions with less governmental regulation, it would, "as if by some invisible hand," benefit all of us by creating open frictionless markets.”

Comment
Worse, John alters Smith’s wording from ‘are led by an invisible hand’ to a completely fictitious ‘as if by some invisible hand’.

In point of fact, Smith was not talking about markets at all. His reference in Wealth Of Nations (IV.ii.9: p 456) was to the risk aversion of merchants to sending their capital abroad which causes them to prefer to invest locally where they could keep an eye on it. Having explained this clearly and comprehensively, he mentioned them being led by (NOT ‘as if by’) ‘an invisible hand’ in his tail off sentence.

The metaphor was redundant as an explanation because he had already explained what caused it. And because it was not striking enough to his readers at the time, nor to anyone else for well over a hundred years, nobody did mention it. That came later in the 20th century when Chicago-trained neoclassical economists began to introduce it into their presentations on neoclassical markets.

And that is the problem. Columnists like John Reiniers are not expected to know the differences between their image of the ‘legendary Scotch economist’ and the facts, but what of modern economists from the world’s top universities? A five-minute consultation with Wealth Of Nations would correct their error. How many will undertake that difficult task? Precious few.

The invisible hand has emerged in the lexicon of neoclassical market equilibrium theory in an attempt to give a mystical endorsement to the paradigm. It is applied everywhere, in all its versions. My desk each day is littered with pieces from the world’s print media (there must be many more in the electronic and voice media) extolling the mythical virtues of “Adam Smith’s invisible hand”, as if using his appropriate revered name endorses neoclassical theory, and the politics that often goes with its exponenents.

I do not despair for Smith’s legacy. Scholars can only plug away. I am encouraged occasionally by signs that some economists are waking up to the facts about Smith’s Legacy, including the myths about the invisible hand. I am doing my bit, too (this Blog for one thing, my book 'Adam Smith’s Lost Legacy’ from Palgrave, 2005) and now my latest effort.

Last night, I sent off to the conference organisers of the 34th History of Economics Society Conference, which is meeting in George Mason University, Fairfax, Virginia in June, my paper: ‘Adam Smith’s Invisible Hands: from metaphor to myth’, for delivery on 10 June (noon). This is based on Chapter 13 of my new book on Adam Smith to be published in 2008 by Palgrave in its Great Thinkers in Economics series.

Meanwhile, I shall continue to repudiate myths about Adam Smith and his legacy wherever I come across them.

Sarkozy Should Take a 'Second Look' at Adam Smith - He Was a Pragmatist Not an Ideologue

The French Presidential elections were concluded this week-end with victory for Sarkozy and while I live part of the year in south-west France, I do not vote there, hence my self-denying ordinance of not commenting on the internal politics of anywhere except the country (Scotland) in which I vote, remains in place.

If asked about the politics of the region in which I live for several months each year (I am going there on 15 May) I can report that the region as a whole is fairly ‘socialist’, but the village where I live is fairly Gaullist and I saw poster signs around last time of support for Le Pen, the rightist candidate. You should also know that in terms of economic policy there is widespread consensus among socialists and Gaullists in favour of high degrees of intervention in the economy by the state and adherence to something called ‘social capitalism’. That is the limit of my description of local French politics.

However, I am free to talk about references to Adam Smith, and one such reference is reported by Jason Soon in his blog ‘Catalaxy’ here.

Jason quotes from a profile of Sarkozy in Time:

“I’m conservative, liberal-inclined and I believe in market economics,” Sarkozy says. “But when an issue lands on my desk, I don’t spend time wondering what [David] Ricardo, Adam Smith or [Friedrich] Hayek would have done. Ideologies have been replaced by principles of realism and pragmatism, and I don’t rule out the possibility to intervene when intervention is called for.”

Comment
It all depends on what Sarkozy was taught at the upper levels of the French university system, which would not be sympathetic to thinkers like Adam Smith and Friedrich Hayek, or David Ricardo, or to much of neoclassical Chicago economics.
Smith did not teach an ideology. His writings in Moral Sentiments and Wealth Of Nations abound in the ‘principles of realism and pragmatism’ to a degree that Sarkozy would revel in. He did not write a ‘principles of political economy’ and deliberately declined to call his book by such a title. It was his report into what caused the wealth of nations and what history showed worked and what manifestly didn’t.

In pulling no punches in his critique of mercantile political economy (he admitted privately in correspondence that he was ‘confuting’ directly Sir James Steuart’s ‘Principles of Political Economy’, 1767) Smith was careful at all times to remind readers that the Perfect Liberty he identified as the most efficacious way to bring about the progress to opulence that he recommended had to be tempered by realistic adjustments to what people would tolerate, especially where anything he recommended in general would have disruptive affects from particular changes on those effected by them, especially the labouring people who had no means of subsistence beyond what they earned each week.

He supported the Navigation Acts that were a state imposed monopoly in shipping reserved for British ships and crews trading with North America and in British ports. He opposed restrictions on imports, preferring free trade, including with the then French ‘enemy’ (and as had been conducted successfully against the previous Dutch ‘enemy’), but accepted that too swift a transition to free trade would be too foolhardy, because of domestic opposition, and dangerous to social stability.
He pointed out that expectations that ‘freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect Oceana or Utopia should ever be established in it’ (WN IV.ii.43: p 471).

Before we get carried away with pessimism he also reminded readers that if ‘Perfect Liberty’ was a requirement before a country to move towards opulence, then no country in the history of the world would have developed towards opulence at all.
In short, imperfections were a fact of life and the best that could be done was to nudge small steps towards liberality when the opportunities arose, but not to get carried away into despair when there were setbacks. For this reason, Sarkozy’s understanding of Smith as an ‘ideologue’ and his writing as ‘ideological’ is unfortunate.

That Sir Keith Joseph in government handed around reading lists that included Smith’s Wealth of Nations set a bad precedent. I have no reason to believe that Sir Keith really understood Smith’s philosophy.

I think the Adam Smith Institute (London), here, understands it in its useful work to initiate debate, seek out practical steps to move Britain towards freer markets, slowly and gradually, without trumpeting about ‘betrayals’, ‘too little too late’ and other extremist emotionalism, which over the years has had remarkable success in transforming, not without political controversy, Britain from decline towards steady growth, with modicums of freedom that otherwise would have been closed down.

In short: ‘that’s the way to do it’ and Adam Smith I am sure would have agreed.

President-elect Sarkozy may take note. Nobody who knows France expects anything to move any faster than glacier-like, but when they do move they move steadily and with imagination, supported by their gallic verve.

If You Must Quote Ricardo on Free Trade, Try to Get It Right!

People who lead with ‘economics 101’ should take care to get their economics correct when chastising other economists for their failings. A case in point is David Sirota in the Huffington Post (6 May) in his: ‘Econ 101: How Free Traders Distort "Comparative Advantage"’:

"Alan Blinder has a very interesting op-ed in the Sunday Washington Post about "free" trade and job outsourcing. He has been attacked lately for being an economist who is actually pointing out that "free" trade may not be the perfect thing its fundamentalist proponents have been saying it is. Yet, Blinder still falls prey to one of the most insidious distortions that rationalizes "free" trade orthodoxy: the distortion surrounding "comparative advantage." Blinder, invoking "comparative advantage," writes:

"The basic principles of free trade that Adam Smith and David Ricardo taught us two centuries ago remain valid today: Just like people, nations benefit by specializing in the tasks they do best and trading with other nations for the rest."

“But here's the problem - Ricardo's "comparative advantage," which when it works does bring on beneficial specialization, isn't what's going on most of the time with "free" trade today.” U.S. Sen. Byron Dorgan (D-ND) … explains what the theory of "comparative advantage" is:

"Time and time again, companies decide that they can move their jobs to Mexico, China, Indonesia, or other countries to save costs and boost profits...Economist say it is just something called 'comparative advantage' in action [and cite] the theory developed by David Ricardo in 1815 [who] used an example of trade between England and Portugal...The English-Portugese example described a natural comparative advantage each has with respect to the raising of sheep and the growing of grapes. It has to do with the climate and the soil, etc."

Comment
Oh dear. I am not sure that US Senator Dorgan is right in his apparently appealing scientific argument (did his speech writer pay attanetion in his Economics 101 class?).

I have no comment on his political case against free trade – US politics is dominated now by the run up to the Presidential election and we can expect hyperbole and spin by the bucket load. Anyway I do not comment on another country’s politics; I only comment on my own country’s in my own country.

The Senator and David Sirota confuse ‘absolute advantage’ with ‘comparative advantage’, which is not surprising because many Econ 101 students do so as well, and the Senator or Sirota were not paying close attention when they, presumably, attended their 101 classes, however, long ago.

Adam Smith analysed absolute advantage: countries trading goods in which they have an absolute advantage (he quoted wines which do not grow well in Scotland’s climate) will both benefit from the exchange. This was based on specialisation in the sense argued in the article.

David Ricardo, on the other hand – as we economists are fond of saying – extended the absolute advantage case to the comparative advantage case. In this situation, countries gain from trade by trading goods in which they have a comparative advantage.

Suppose two countries both produce aircraft and home entertainment systems. Further Amex is better than Chungwa in producing aircraft and also better that Chugwa in producing home entertainment systems, but not by so much as it is in aircraft. In short, it is better than Chungwa at producing both of these goods.

Should they still trade? Ricardo’s comparative advantage theory says ‘yes’. Amex should produce aircraft and exchange them with Chungwa for its home entertainment systems, because they would both be better off. How so?

Amex should specialise in goods for which it has the highest comparative advantage over Chungwa (aircraft) and not devote resources to producing home entertainment goods, which though it is better at doing so than Chungwa, it is better by a smaller margin. Resources in Amex devoted to home entertainment production, in which it has a small comparative advantage over Chungwa, are better devoted to aircraft production, in which it has a much greater comparative advantage over Chungwa.

The Senator and Sirota appear not to understand Ricardo’s theory, though they both call it into play with the confidence of those who may not know what they are talking about.

If the above economic example is a bit difficult for current Econ 101 students (and for those not paying attention when they were in their classes), try this example of comparative advantage.

David Sirota is a very busy journalist and broadcaster. Let us imagine he is extremely busy, so much so that he is hard at work most of the time. Further, he is busy because he is in great demand as a talented professional journalist and broadcaster, as is obvious from his profile.

However, suppose he is also greatly talented as a PC and Apple user, so good at these tasks in fact that he has never met a secretarial assistant as good as him at preparing his articles and books for press. Now, good as the best of the secretaries he hires are, while some comes close to his own secretarial skills, none have bettered them. And none of them come anywhere near him in his ability to conceive of articles, themes for books, and do the creative part of his journalistic and broadcasting work.

Now, because he is much better than his secretarial staff at both journalism and broadcasting, for which customers are keen to pay him small fortunes a year, should he do his own secretarial work because he is better at this work by a small margin than the very best of the secretaries he can hire?

Surely not! David should concentrate all of his time on journalism and broadcasting for the high incomes it brings him and his family, and he should hire a secretary for his secretarial work. Diverting any of his scarce time to secretarial work, even though he could do it better than his secretary, would reduce his income by the time he spent away from journalism and broadcasting doing secretarial work what somebody else, while not as good as him, nevertheless is good enough for that job.

Why? Because his comparative advantage is highest in the work he does better than his secretary could do in his place, and it is smallest as a comparative advantage he has over his secretary in the work his secretary does in place of him.

That is the real meaning of the gains from trade in comparative advantage according to Ricardo, and it is quite different from the presentation David (and the Senator) put together under the guise of sarcasm about Economics 101 and false claims about ‘insidious distortion’. Read David's column here.

Methinks I hear somebody whispering something about ‘kettles and pots’….

Read Darwin and Adam Smith (and Malthus)

Jonah Lerer, author of ‘Proust Was A Neuroscientist’, to be published by Houghton-Mifflin in 2007, posts (here) on his Blog: The Frontal Cortex, ‘Darwin as a Writer’, quoting from Jonathan Weiner, author of the magisterial 'Beak of the Finch' (though I could not find the paragraph quoted below on the reference he gave).

“Consilience. Has there even been a more consilient thinker? Darwin took the political economy of Malthus, merged it with the invisible hand of Adam Smith, and applied it to the history of life. Economics has never been more useful.”

Comment
That Darwin read Malthus and Smith is known from his papers, and they were inspired choices for his theory of natural selection.

If you look at Malthus population theory and apply it backwards to human society for much of its history to before the 15th century, there is a case for a Malthusian population theory being a useful analytical tool for explaining the dynamics of subsistence for the overwhelming majority of the population.

I have not inquired deeply into this connection, but reading Smith’s Lectures in Jurisprudence (1762-3) as background to both Moral Sentiments and Wealth of Nations, and applying his elementary growth model to ‘rude’, hunter-gatherer, society, and what followed in shepherding and agriculture, and early commercial society, all experienced before the 5th century, I can see a Malthusian core to what happened throughout the millennia as far as population curbs operated. Per capita consumption for the majority was close to subsistence and fairly constant, with blips occurring occasionally.

Surpluses, such as they were, did not set of chains of growth to sustain rising populations coincident with higher per capita consumption. Population growth there was but per capita consumption did not grow a great deal, if at all. The surplus output went into ‘magnificent’ but expensive construction (‘ancient monuments’ now), and defence, plus higher per capita consumption for rulers and their armed retainers. As civilisations came and went, the norm for the human populations was subsistence levels of consumption.

However, this began to change in the revival of growth through commercial markets from the 15th century, documented in Wealth of Nations. When science and technology became drivers of the commercial mode of subsistence, the growth in population (a normal Malthusian response) and in general, not just elitist, per capita consumption (an unprecedented self-sustaining Smithian growth response), a unique period in human history commenced and the world entered sustained long-term growth on a global scale.

The Malthusian drag was suppressed (though not eliminated), first for small centres of population in Western Europe, then North America, and in the last fifty years for wider sections of the human population around the world (with, of course, other places, such as India and China, still transforming to Smithian growth, and others, such as Africa, yet to be affected).

Darwin on natural selection is worth reading, for those who have not yet done so, and with the 150th anniversary of Origin of Species (1859) about to be celebrated with shoals of books about the man and his science, there will soon be little excuse for evading the task (I think his ‘Descent of Man’ is also worthy of your attention). Of course, Darwinian science has moved on a great deal since the 19th century, and no doubt there will be plenty of topical books bringing natural selection up to date – plus, as ever, the numerous controversies among the neo-Darwinian will be well represented by 2009 – but read these works within a background embedded in Smithian economics and Darwin (and Malthus) will make a lasting impression on your thinking about economics.

I won’t elaborate on this occasion, but when I undertook this exercise ten or so years ago, it struck me that we teach economics in our time as if the economics we teach is about an ideal system, secure in itself with a life of its own, yet in the long view of human economy, such as Smith understood it, it has been anything but ideal, nor can it be captured by the likes of an equation. Economists today spend too much time studying a world that does not exist and never has existed, and like never will exist (the last is a tentative assertion). A bit more time studying the world as it is might do their insights of what is really going on a dose of good.

[Note: I am passing on the refernce to Smith's 'invisible hand' .. too busy this morning.)

Are Blinder and Persaud in favour of Protection or Not?

Sometimes I read things that I am not quite sure what the author is actually saying. In this case is he in favour of free trade or not?

First we have this paragraph having a good go at Mr Lou Dobbs, a tv presenter in favour of ‘protection’ on the usual grounds. His intro was about Professor Blinder’s apparent conversion from free trade to some elements of protection (though even his position is a trifle vague, at least for me).

“Mr. Dobbs never stops to consider that perhaps the socks he wears, the watch, the microphone, the very cameras he peers into-would be triple their cost without China's low paid workers, earlier Japanese manufacturing process technology and today's highly skilled Indian software engineers. He does not stop to consider what the end of Wal-Mart would mean to U.S. consumer prices and standard of living. He, like the British imperialists before him, wants to have his cake while continuously gobbling it down.”

So says Wilberne Persaud, a financial columnist on the Jamaica Gleaner (established 1834), Kingston, Jamaica, writing “Free Trade and the Right of Protectionism” on 4 May.

Next, we get a piece about Adam Smith:

“Adam Smith was perfectly correct. Free trade benefits both parties to it. The benefits of specialisation can be grasped by babes in the woods. But the world has never had free trade, perhaps never shall. The British, when it suited them, when they could benefit most, forced the rest of the world to 'embrace' the model. The Americans have done the same from their founding, more so since the end of the second European war for world resources.”

Comment
Wilberne seems to make the case for Adam Smith’s views on trade and then loses me. True, Smith made modifications to a purist free trade position to accommodate certain problems of the transition during the dismantling of protection (note, not imposing new measures of protection to hinder the affects of competition).

But, I am not sure what is meant by the article. Read it for yourself, here, and let me know what you find.

You can read what Smith thought on these issues in Wealth Of Nations, Book IV, chapters ii and iii. At least he is absoutely clear what he meant.

Edmund Burke, Conservatism and Adam Smith

I regularly look at a number of ‘conservative’ Blogs that come across my search function, some are strictly ‘political’ about current events with various targets for their ire; some, the more interesting, are ‘philosophical’. If you are not articulate in their ‘speak’, you often are lost in their allusions to authors.

One new Blog of this ilk, I came across this morning: The Paleo Blog(NB: in English normally: ‘Palaeo’; Greek: palaios).

“Nisbetian Conservatism by Walter Block (2 May)”

“Burke thought that the state should just keep itself to things that are truly "public." Other than that, it should not get involved in peoples' affairs. Nisbet wrote that "there is not the slightest distinction between Burke and his friend Adam Smith." Both share decentralization and laissez-faire. Burke thought that welfare was not the job of the government. (One thing that made be say "yuck" ---- Adam Smith was OK with education from government.)”

Comment
Edmund Burke, a ‘friend’ of Adam Smith, repudiated his affinities with his ideas after Smith died in 1790 in a reaction to the French revolution, particularly after the French Terror of 1793. Mostly, this was an extension of Burke’s political thinking, bearing in mind his common stance with Smith on the American ‘revolution’, which was broadly supportive of the colonies; Burke was conservative in matters about governance and continuity.

Smith was not a conservative in the same sense. He was not a high Tory; he did not believe in the ‘divine right of kings’, he was not a ‘Jacobite’, after Jacobus, the Latin word for James, who was the last of the Stuart line of kings when deposed by the 1688 ‘Revolution’ that installed William of Orange as King of the United Kingdom (please: since 1604 there has been no such institution as the ‘King’ or ‘Queen of England’, as so many American citizens insist on calling the British monarch).

The sentence: ‘Both share decentralization and laissez-faire’, is problematic. Smith did not support laissez-faire and he never used the words. He was well aware of their meaning and he knew many of the French economists (the Physiocrats) who regularly advocated laissez-faire. The reason he wasn’t in favour of laissez-faire he detailed throughout Wealth Of Nations: merchants and manufacturers could not be trusted to allow competition to continue unhampered by monopolistic measures, legal and illegal. He gives many examples that show that such activities hamper ‘progress towards opulence’, the biggest gainers from which, are the labouring majority of the population.

“Adam Smith was OK with education from government”

Yes, he most certainly was, though his proposals were a hybrid of public provision and private contributions from each parent, except the very poor who could not afford a penny.

Walter Block may not be aware of the context in which Smith wrote. First, Scotland was a small and very poor country, much more so than England. But it set up, via the national Church, ‘Parish Schools’ in the 17th century and the cost was divided between buildings and remuneration for the school teachers. These were local schools and, mainly, taught boys to ‘read, write and account’.

When writing Wealth Of Nations he knew that schooling in the larger population of England was patchy and recommended that the Scottish ‘parish school’ system was spread into England. A century’s experience of the Scottish system showed that most labouring people were ‘literate’ to a degree and knew a little arithmetic. Any boy who showed academic promise, irrespective of his family circumstance, could go on to University (Scotland had four universities, England only two), supported by scholarships, bursaries and endowments.

Walter Block was educated, I surmise, in a different context. ‘Education from government’ in North America is many levels away from Smith’s day, though I am sure that in the most deprived parts of the richest country in the world there are analogous gaps in provision, public and private, made worse by rich teachers’ unions, well paid public administrators and political interference, giving ‘public’/government schooling a bad name. For this I favour vouchers.

With the scarcity of capital in mid-18th century Britain and the thinness of national organisations, it was most unlikely that the programme advocated by Smith would be funded privately. The school buildings required national efforts, though teachers’ salaries could be funded locally, as they were in Scotland, with small contributions from parents.

Of private education there was next to none. The rich sent their sons on grand tours of Europe with hired professors as their travelling tutors (Smith was one such tutor from 1764-6. with the young 3rd Duke of Buccleuch, stepson of Charles Townshend, British Chancellor of the Exchequer, who imposed the tax that provoked the Boston tea Party).

I don’t think it appropriate to say "yuck" to a person who grappled with a provision two centuries a go when Scotland was so poor (as no doubt the then ancestors of Walter Block were too).

I see his Blog is dedicated to “the late Murray Rothbard”, a scholar whose robust style was also given to inappropriate comments about Adam Smith, which Lost Legacy commented on in the past (see Archives, January-February 2006). Is this a trait among conservatives?

Rich Canadian Bloggers and Nigerian 'Tea-leafs'

May Day brings the usual flurry of Blog posts about labour. Even in the richest continent in the world, North America, which I was sorely tempted to comment upon in one particular case from a gentleman ‘libertarian communist’ in Canada writing from a country that enjoys the conditions of the alleged ‘downtrodden masses’ of Canadian workers, whose connection to extremes of poverty seen in Africa, Asia and parts of South America seems somewhat remote.

It’s amazing how a loss of perspective on what real poverty is like can lead educated people in the rich countries to imagine that a family with the appurtenances of among the best living standards in the world are somehow on the brink of starvation and cataclysmic alienation, not seen anywhere in their country except in the desperate lives of the victims of severe drug and alcohol abuse (both of which cost more to sustain for a month than the annual income of a landless peasant in Sudan, to mention only one of many places).

However, I resisted the temptation as you can see, but you can read Le Revue Gauche here.

Instead, I noticed an editorial, no less, in the Nigerian Tribune (Ibadan), close to the financial news and the usual indicators of modern consumption, and thought it was about the desperate poverty of the landless or unemployed, the victims of a corruptly managed economy. Here is a single paragraph from it:

“Nigerian Workers Still Searching for Succour”

“BUT as most social scientists like Adam Smith have postulated, the real wealth of any nation is not in the tangible resources like gold, silver or crude oil. The wealth of a nation is not in the quality or arability of its land. The real wealth can only be found in the quality of its human resources. A highly cultivated human resource, in terms of good and quality education, highly enhanced salary package and functional social amenities, will, without doubt, be highly motivated and resourceful and very productive. Conversely, a workforce that is poorly remunerated will only produce a very low yield. In both cases, the society is at the receiving end. In other words, the quality (and lack of it) of any workforce will translate into the prosperity (and otherwise) of that particular society.”

Comment
I picked this paragraph because the editorial drags Adam Smith into its serious rant against the rulers running Nigeria, if that is the word for it (I think the cockney slang for thief, as in ‘tea leaf’, is more closely associated with the nature of too many in the enterprise known as ‘government’ and officialdom in that country – if they are ‘running’ anything it’s more like ‘running off’ with the loot).

I accept that not everybody is a ‘tea-leaf’ in the government administration of Nigeria, but too many are ‘tea leafs’ and too many of their rivals for office want to graduate to becoming ‘tea-leafs’ as soon as possible.

But that is not my main point. Some of the ideas in the editorial that are linked to Adam Smith are not quite correct. For instance:

“the real wealth of any nation is not in the tangible resources like gold, silver or crude oil.”

Smith’s criticism of the ideas behind mercantile political economy were about the notion that ‘wealth’ consisted of money, which in those days was in the form of gold and silver coinage and bullion. He said ‘no'; money was not ‘wealth’. He defined wealth as the annual output of the ‘necessaries and conveniences (and amusements)' of life, i.e., the real goods produced by labour and capital each year. Their money equivalents facilitated exchange, that’s all. They were not wealth because wealth was a flow not a stock or money.

A country that aimed to fill strong-boxes of gold and silver (or today, treasury bonds) and considers that it has achieved real results was fooling itself, argued Smith, because the policies that accumulated money as wealth were quite different from the policies that created employment for productive labour, and from the division of labour, greater output. In fact, Smith showed that the pursuit of nominal money inhibited real growth and, crucially, the spread of opulence to the labouring majority.

In this context, of course, crude oil output is real wealth.

“The real wealth can only be found in the quality of its human resources.”

Again this misdirects the emphasis placed on labour by Smith. Labour, as human capital (he was one of the earliest to recognise the importance of investment in human capital), is important if as resources they are going to help a country ‘progress to opulence’, but they are not real wealth in themselves. They help produce real wealth, in association it must not be forgotten, with capital-stock. Without both together, wealth is not produced, as the stagnant economies of many countries amply, though sadly, demonstrate.

The editorial writers develop their points to argue for higher remuneration for labour and a higher standard of living because such recognition of the quality of labour ‘will translate into the prosperity (and otherwise) of that particular society’. But, I fear that the editorial writers have got the direction of causation the wrong way round – and Smith would have told them so too – ‘highly enhanced salary package and functional social amenities’ are funded by prosperous societies and are not (and certainly not ‘without doubt’) initiated by somehow ‘enhancing’ the salaries of labour.

If only it was that easy, then many countries might not be in the mess they are. But editorials on 1st May are not written with an eye for scholarly exactitude. They are written to rally/curry favour with/assuage consciences/have a go at others/sound concerned, and so on. Fine.

But if they must drag in Adam Smith, they should present his ideas as he intended.

This is Worth Following Up On: an 18th century Fin Who Influenced or Was Influenced by Adam Smith

Some months ago, Professor John Pratt (Oxford), was in correspondence with me and he introduced a Finnish author to me who wrote along similar lines to those that Smith developed in Book IV of Wealth Of Nations, in particular a small pamphlet called ‘The National Gain’ by Anders Chydenius.

I read the material and made a note of it in my manuscript because the arguments Chydenius used against mercantile political economy were similar to those developed by Adam Smith. Today I was revising my chapter on Smith’s critique of mercantile political economy (from Book IV) and it occurred to me that a wider audience for Chydenius’s ideas may be interested in reading him too.

Let me give two paragraphs as tasters (I want you to read the whole pamphlet):

“Now, if this is incontrovertible, I intend to found thereon the following proposition, i.e. that every individual spontaneously tries to find the place and the trade in which he can best increase National gain, if laws do not prevent him from doing so.

Every man seeks his own gain. This inclination is so natural and necessary that all Communities in the world are founded upon it. Otherwise Laws, punishments and rewards would not exist and mankind would soon perish altogether. The work that has the greatest value is always best paid, and what is best paid is most sought after.”

Comment
Note his use of ‘spontaneous’ in a context which Hayek would have approved.

Smith would have approved of it in its entirety.

I have not followed up to see if there was any contact between them, but I did notice that Bonar's Catalogue of the Library of Adam Smith, p 97, mentions an indirect contact via Peter Kalm, listed as a ‘Swedish traveller’, who talked to Glasgow merchants trading with the Baltic countries, and had Chydenius as a pupil. In the 1760s, Smith was in France and back home in Kirkcaldy working on Wealth of Nations.

Chydenius’s ‘National Gain’ is available in html from a Finnish source here.

Source details are:

Chydenius, A. [1765] 1931. The National Gain. Intro. Georg Schauman. Ernest Benn, London.

Anybody interested in ‘Smithian’ (or ‘Chydeniusian’?) thinking is recommended to read National Gain.