WSJ in Invisible Hand 'Attrocity'

Wall Street Journal has this tantalising sentence in an article by Thomas F. Siems, called “Friedman's Legacy”.

“Friedman reminded us of the economic principles first outlined by Adam Smith. Take Smith's concept of the "invisible hand," by which individuals, ...”

Yes, that’s all I’ve got of it because the rest is subject to a ‘subscription’. Now as an author I am always conscious of copyright issues, etc., but I would like to read the rest of the sentence and its paragraph for obvious reasons, as my reader will know. So if anybody could supply me with the full paragraph with the sentence, I would be most grateful.

In the meantime, I am savvy enough to know from long experience of this misattribution to Smith of a metamorphosis of a metaphor into a ‘concept’, which he never meant it to be read that way, as my regular reader will know, that I could assume what follows, but scholastic training, and the many occasions when in discourse I have seen people caught for doing just that before falling on their faces, I shall refrain from the temptation, and await some kindly person to send me the paragraph..

That Milton Friedman, of Chicago University fame, was behind the metamorphosis does not surprise me. ‘Chicago’ Adam Smith was created in Milton’s department and replaced the authentic ‘Kirkcaldy’ Adam Smith who wrote the Wealth Of Nations.

One of the many atrocities committed by Chicago and its graduates who spread the word across US campuses, was the myth of the ‘invisible hand’, which some variants transmuted into ‘as if led by an invisible hand’, and most of examples of the myth in currency assert it was, first a ‘concept’, then a ‘theory’ and finally Smith’s most ‘important idea’.

Should my reader wish to have an electronic copy of my recent paper, “Adam Smith’s Invisible Hand: from metaphor to myth”, he or she should let me know by arranging the following words into an address: ‘gavin’, ‘negweb’ and ‘com’ in the usual manner.

In the meantime, you can read what Sam Fleischacker, a professor of philosophy at the nearby University of Illinois, Chicago, has to say on the subject of the ‘invisible hand’ in his book: “On Adam Smith’s Wealth of nations: a philosophical companion”, pp 138-42, Princeton University Press.

No Role for an Invisible Hand in the European Conquest of the Americas

I was checking over a pile of notes as I round off my manuscript on ‘Adam Smith: the moral philosopher and his thinking’ (comments on the proposed title would be welcome, too), and I came across this reference which I looked up to check that my scribble was correct:

‘A project of commerce in the East Indies therefore gave occasion to the discovery of the West. A project of conquest gave occasion to all the establishments of the Spaniards in those newly discovered countries. The motive which excited them to this conquest was a project of gold and silver mines; and a course of accidents, which no human wisdom could foresee, rendered this project much more successful than the undertakers had any reasonable grounds for expecting.’ (Wealth Of Nations IV.vii.b.21: p 564)

Comment
This is most interesting in view of my discourses on the myths of the invisible hand that have appeared of late and which still clutter public claims about Adam Smith. What would a believer in Adam Smith’s ‘theory of the invisible hand’ make of this paragraph?

Would you claim that this is an example of an invisible hand working? If so, it would stretch the invisible hand leading a group of Europeans to sail west for 3,000 miles in search of a route to India and China to break the Venetian monopoly of the eastern spice trade via Egypt; finding a large continent in the way, putting up settlements; behaving as soldiers everywhere at that time behaved, with wanton cruelty, rapine and looting; turning defenceless local inhabitants into slaves to work in the mines; and finally a century or so later, plundering gold and silver and shipping it Spain and then the rest of Europe. If it was a 'blessing in disguise', it was, as Winston Churchill once said, 'well disguised'. Does it sound plausible?

No, I don’t think so.

Is it therefore a ‘linked chain of intermediary events’ that have no end-purpose in sight, which happened as recorded, the consequences of which were not the result of anybody being ‘led’ in any direction. Greed for gold and silver, which are not part of the wealth of a society, a role reserved for the products of land and labour manifested in the ‘necessities, conveniences, and amusements of human life’, caused substantial and shameful human distress and disorder.

Fortunately, in the Northern part of the American continents, no gold or silver was found in the British, Dutch, French and Danish colonies (until the 19th century on the Pacific side of it) and they were built instead on farming, which produced real wealth.

There was also a fair amount over the three centuries following of ‘substantial and shameful human distress and disorder’. But again, there is no role for ‘an invisible hand’ leading humans to found a thriving economy. Smith didn’t claim that there was and he didn’t use the metaphor to describe the ‘intermediate chain of events’.

Was Adam Smith a Classic Liberal?

The myth of classical liberalism by John Dixon contains the following thoughts:

“So called classical liberals have themselves failed to understand what liberalism truly means by believing that economics and ideology are inseparable or at most one and the same. They see the glorious days of Ricardo, Malthus and Adam Smith as the days of true liberalism, when it meant what it said on the tin. Free trade was the conventional wisdom and the evils of government intervention were negligible. To them this is liberalism, a free market, a small government and the public sorting public problems out themselves. Many within our party (and even more so within the conservative party) would agree. How wrong they all are.”

Comment
I shall ignore Malthus and Ricardo's views on the size of government, and concentrate on Adam Smith’s views because his views were somewhat different from Ricardo’s, as was his method of analysis.

For Adam Smith’s days, ‘Free trade was [NOT] the conventional wisdom’. His analysis of mercantile political economy and the behaviours of ‘merchants and manufacturers’ as monopolists and protectionists (I read on a blog recently that we should refer to these people as ‘isolationists’, and I am inclined to agree), showed that Britain was far from a free trade economy in the mid-18th century.

And he was ambivalent about free trade being introduced too quickly because of the disruption that would cause, especially for the working poor, and he supported the Navigation Laws because of the need to defend Britain as an island, dependent on the sea.

In similar vein, ‘the evils of government intervention were [NOT] negligible’. The point about his critique of mercantile political economy was that the government that drove it pursued ‘absurd’ and ‘false’ policies, which intervened in the ‘natural’ process of economic activities (Book IV, Wealth Of Nations].

His agenda for the proper role of government was quite extensive, way beyond images of the minimalist ‘night watchman state’ (Book V). Defence rose from about £5 million to £40 million a year during the 18th century (defence was more important than opulence – without the former you could end up without the latter).

Education, as he envisaged it as a compulsory government–led, but not totally publicly funded service, with a ‘little school in every village, would be an extremely costly addition toe the public budget. Health spending was needed to combat ‘loathsome diseases’ like leprosy, and was itself the beginning of a large increase in the budget.

Public works and public institutions, facilitating commercial activities was probably another object of public spending with enormous potential for substantial budgets as there was hardly a road anywhere in Britain that was not in need of major repair, and when built they would need large annual sums for maintenance, plus bridges, harbours and canals. Cities like London and other large towns needed pavements and street lighting, regular refuse collection, paid for out of local taxation.

Smith recommended that the post office and the bullion mint be run as public services, and also that government administer quality stamping of cloths and assay services. He also saw a role for the government in regulating the banks (though he favoured banks issuing paper currency notes).

The idea that Smith believed that there should be a minimal state-run sector is mythical, though he may not have been comfortable with the proportionate state sectors common today in capitalist economies.

That’s just a few thoughts on John Dixon’s version of Smith’s political economy. If anything Smith was a pre-classical liberal, Malthus, Ricardo and Mill were classical liberals and the profession today is dominated by neoclassical thinking.

The big difference between Smith and those that followed is that he studied the detail of the pre-classical economy and economics slowly drifted to studying abstractions from real economies, until in the neoclassical version they study a completely abstract mathematical version that has no human influence in it whatsoever. That does not make it wrong, but it does make it different.

Posts Resumed

Apologies for no posts yesterday, but my internet connection went down at 7 am while posting a response to a comment on an earlier post and my technical-support team (i.e., my duaghter) was unavailable (she believes in week-ends off). Any way she popped round this morning, so I should be able to post later. Aparently, all it needed was for me to switch the modem off! Simple when you know how...

Its Called Scare Marketing and Adam Smith Knew Why

Paul Midler in Forbes.com writes (26 July):
“Dealing With China's 'Quality Fade'

“If Adam Smith were around today, he would have had to write a separate chapter on global outsourcing. Because it takes importers a long time to find suppliers and to get them up to speed, importers keep their suppliers a secret. The last thing that an importer wants to do is let his competitors know the source of any supply chain advantage he may have. Even when it is in their collective interest to share information, importers keep to themselves.

As a result, factories pay little, if any, reputational cost for production shenanigans. The invisible hand doesn't work well when the manufacturers themselves are unseen.”

[Paul is the founder and president of China Advantage, a services firm that provides outsourcing and supply chain management to U.S. and European companies. He has been involved with China for more than 15 years, and in the course of his manufacturing career, has had dealings with thousands of Chinese factories.]

Comment
As expected an article in Forbes is authoritative and worth reading. And this one is no exception. It is about the perils for US businesses which source off-shore in China. Problems of quality are among the topics and the usual effect of growing trade on improving quality does not work quite like it should. Because US firms keep their import sources secret, a poor-to-bad quality Chinese supplier is not penalised by publicity; it just changes its customers and carries on producing shoddy goods.

US businesses in these conditions need reliable information about the quality standards of Chinese manufacturers, and the author of the article is in that business, running 'China Advantage’. Fine; that’s a useful service and deserves its market niche.

My problem is with the obligatory paragraphs on Adam Smith. That aims to hit the readers'‘recognition’ buttons, fair enough, but happens to be unwarranted. Would Adam Smith need “to write a separate chapter on global outsourcing. Because it takes importers a long time to find suppliers and to get them up to speed…”?

If you think about it, Wealth Of Nations would have to contain a lot of new chapters because the world has moved on through European imperialism, the industrial revolution, the communist failed experiments, and such like. But even in outsourcing, why would it need a new chapter?

Trade over large distances – and trade within Britain in mid-18th century was truly 'distant' – it took three weeks to travel by ‘road’ from Edinburgh to London, which is as long as a factory-to-factory cargo from China to the mid-west or California.

Smith wrote about these and related problems and the perils of distant, including foreign, trade in Wealth Of Nations. If the author had read all of the chapter from which he borrows the metaphor of the ‘invisible hand’ (WN IV.ii. ‘Of Restraints upon the Importation from foreign Countries of such Goods as can be produced at Home’, pp 452-72), he would have found plenty of comments about the risks, perils and costs of what is called today ‘outsourcing’, a word invented and promoted by those who oppose foreign trade (also known as competition) among businesses, trade unions, tv demagogues and those who fear they are about to fail to be elected.

Hence, when the authorwrites: “The invisible hand doesn't work well when the manufacturers themselves are unseen…”, he misses the reason why domestic merchants prefer the home to foreign trade which was discussed by Adam Smith:

“In the home trade his capital is never so long out of his sight as it frequently is in the foreign trade of consumption [importing]. He can know better the character and situation of the persons whom he trusts, and if happens to be deceived, he knows better the laws of the country from which he must seek redress.” (WN IV.ii.6: p 454)

To which part of that sentence would the author add something different? Of course, he could expand it (as I could) but Wealth Of Nations does not need expanding!

A US manufacturer buying in Chinese manufactured parts (computer chips) and being sold duff products, will soon know if her computers don’t work, because her customers will tell her, the trade press will report her quality problems and her customers’ suppliers will cancel orders.

Secrecy about her Chinese supplier becomes irrelevant at the most important level; the US business woman’s loss of business, perhaps terminally. If her testing procedures were operating properly (‘what do you mean she hasn’t got any?) that batch of chips, or whatever else it consists of, would have been rejected.

Similarly if Chinese manufactured chairs collapse, or items do not survive their first wash, or customers suffer from toxic poisoning, or for that matter, US based suppliers act similarly selling down the road or across the states, the US manufacturer suffers legal redress from its customers, plus loss of business.

I think I shall put this author's article down to ‘scare marketing’ of his excellent services. US firms looking at foreign supply chains would do well to call on his services if they are embarking on outsourcing in China, or his equivalents in Indian or European outsourcings. They would be wise also to check carefully a local outsource supply across town. Its called ‘due diligence’ and you don’t need to read Wealth Of Nations to know this in business, though if you do, you’ll find references to it.

PS: There are no invisible hands in markets (see archives for plenty of explanation of Smith’s use of the metaphor).

Thoughts For Today About Tomorrow

A quotation form Wealth Of Nations of thoughtful interest, written by Adam Smith about the exploration of the Americas and the subsequent treatment of the indigenous inhabitants (formerly migrants from North Asia, c.9,000 year earlier) whose mode of subsistence was primarily low technology hunter-gathering, by the higher technology European migrants from the 15th century onwards:

‘At the particular time when these discoveries were made, the superiority of force happened to be so great on the side of the European, 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 necessarily, carries along with it.’ (WN IV.vii.c.80: p 626-27)

Comment
Smith drew attention of possible long term consequences of those negative aspects of superior force when applied against people who cannot resist.

Hunter-gatherer tribes were no match for Agricultural/commercial societies with their technological superiority and habits of using such force against each other, when they clashed with the pathetic resistance of local inhabitants in colonies thousands of miles from their homelands.

The ‘natives of those countries [have] grow[n] stronger’ and ‘those of Europe [have] grow[n] weaker’, and ‘the inhabitants of all the different quarters of the world [are arriving] 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.’

The working out of this new balance of force in the world is going to be the problem for this 21st century. It looks messy for now.

Let’s hope it doesn’t get much messier, especially with nuclear weapons spreading to more countries.

'Emperor' Mugabe's War on Price Inflation and Adam Smith's Theory of Prices

Economics tutors looking for first year in-class assignments (I’ve never been fond of out- of-class assignments because I’m never sure who wrote them) they could visit here and ask the class to discuss the ‘economics’ of Zimbabwe hyper-inflation as represented by a young Zimbabwe ‘journalist and a graduate development studies student writing from Canada”, Kuthula Matshazi, here.

He/she writes “Greed delivers command economy”, of which the gist is that the inflation problems (over 1,000 per cent) are the fault of greedy Zimbabwe businessmen basing their prices on "future inflation forecasts" and, menacingly, ‘untoward speculative behaviour influenced by greed and in some instances economic sabotage’. This leads him/her to advise: ‘It is therefore incumbent upon the government, as a people's representative, to take corrective action against the failure.’

Well, there is plenty more like that as a supporter of the Zimbabwe government, presumably embarrassed by the news coming out of Zimbabwe to the safe environs of Canada, lashes out in apparent total ignorance of the causes of rampant hyper-inflation, way back to Roman times. (Perhaps, he or she is on a government-funded grant paid for his/her ‘good behaviour’.)

Governments cause hyper-inflation by printing the damn money unrelated to any requirements in the economy. If Zimbabwe’s government wants to stop price rises on the scale the country experiences, it should switch off the printing presses.
Anyway, the article contains this:

“Correcting a market failure, we must ensure that, firstly, businesses charge natural (equilibrium price) prices. That natural price should also take into consideration what Adam Smith calls the just price - price that everyone would freely agree to if they knew the consequences of the entire price structure. We have to consider the moral price, in this case the just price and indeed the natural price which is determined by the demand and supply equation, labour costs, rent and profit among other factors.”

Comment
Smith’s price theory has nothing to do with the medieval idea of the ‘just price’. Smith’s (and others’) idea of the ‘Natural’ price was based on the price that happened to reward the factors land, labour and capital, or ‘neither more nor less’ what it costs to bring the product to market (Wealth Of Nations, pp 72-4).

But the sellers do not determine the price of anything unilaterally; buyers also have an input; they do not have to buy by paying any price that the seller asks or demands in competitive markets. That is why Smith focused on ‘Market’ prices, which are determined by demand and supply.

The idea that buyers would agree to the ‘just price’ if ‘they knew the consequences of the entire price structure’ is absurd. Ask your students: ‘how that would work in a practical sense?’

As for the ‘moral price’, the ‘just price’ and the ‘natural price’, I think there is a lot of confusion here. This is revealed in the statement of Kuthula Matshazi who says that the ‘Natural price’ “which is determined by the demand and supply equation, labour costs, rent and profit among other factors”. Natural prices are not determined by demand and supply equations – except the theoretical coincidence of a particular set of them (to which actual market prices gravitate around but never quite reach). The ‘other factors’ – ‘labour costs, rent and profit’ - are all subject to other prices.

As for Zimbabwe’s government, and its current laws against price increases, which will empty the shops faster, perhaps they (and Kuthula Matshazi) should read up on the Roman Emperor Diocletian, who in 301, tried to cure rampant inflation with an Edict on Maximum Prices, which fixed prices for goods and wages, and imposed the death penalty to merchants who overcharged.

It didn’t work, of course. Neither will 'Emperor' Mugabe’s.

A Short Note on Productive and Unproductive Labour

Earlier today I was working on Smithian growth theory and thought a short piece on an aspect of it might be of interest. For simplicity sake, I have not developed the full Smithian growth process (fixed and circulating capital, etc.).

Adam Smith’s separation of productive and unproductive labour has caused much discussion in the distant past, but it is now ignored altogether in neoclassical economics. I think the problem is that people come at it from different perspectives. The most common description of the difference is that of between producing goods or producing services; the former produce tangible products that can be sold later to recover their costs plus a profit; the latter do not produce anything tangible and perish at the moment of their delivery.

This was not quite what Smith meant when providing a singular characteristic of service. True, a product is tangible and a service is not. Labour in both cases receives an income; if the labourer spends all his wages on consumption goods (subsistence wages), his wages become revenue for the producers, who receive their revenue (costs plus profit) from the producers’ productive labour. The suppliers save out of their revenue, which adds to net capital, adding to growth. He also replaces the wage and materials costs of the previous round, plus consumes (frugally or with prodigality?) the rest of his revenue as consumption.

Take a closer look at our author: Smith’s lectures in Edinburgh in 1748-51 paid him £100 a year, a handsome sum compared to his annual stipend of £40 as a Snell scholar at Oxford. (Corr. Letter No 25, 8 June 1758, p 24; Ross. I. S. 1995. The Life of Adam Smith, p 86) Presumably this amount covered his costs, leaving without doubt a sufficient sum to hire the lecture rooms for the next season, and a profit for the sponsors (Lord Kames and Gilbert Elliot).

The output of his Edinburgh lectures 'perished' at the instant he delivered them, but their delivery in the market for education paid him revenue, available for ‘immediate consumption’ and some of it for capital accumulation. Today, we would consider this activity to be productive, and so must Smith if his definition of productive labour is regarded as more important than his example of unproductive labour. For the ‘respectable auditory’ who listened to his lectures, they invested some proportion of the price of admission in their human capital, the benefits of which lasted beyond the lectures (Smith recognised human capital as part of the enhanced skills of labour) and the rest perished in an instant.

Prodigality denied the prodigal an opportunity to conserve and add to his net capital and earn future profits, for which ‘sin’ he was ‘perfectly crazy’. The receivers of his wild spending made their profits on top of their costs of supplying him with whatever he fancied. To the extent that they saved from these revenues they were productive. And so it was true for all suppliers who supply for acts of consumption.

Consider another unproductive set, famously referred to by Smith:

“The sovereign, for example, with all the officers both of justice and war who serve under him, the whole army and navy, are unproductive labourers. They are the servants of the publick, and are maintained by a part of the annual produce of the industry of other people. Their service, how useful, or how necessary soever, produces nothing for which an equal quantity of service can afterwards be procured. The protection, security, and defence of the commonwealth, the effect of their labour this year, will not purchase its protection, security, and defence, for the year to come.” (WN II.iii.2: pp 330-1)

Again we should differentiate between government expenditure for preparedness for war, primarily on defence readiness, which provides costs plus profits for defence suppliers and therefore productive work for their employees, and which reproduces itself in each round in the economy, and government expenditure on the maintenance of soldiers and seamen, which is final consumption that does not reproduce itself. Government spending was paid for out of taxation, which reduced the revenues of the taxpayers, both for consumption and saving. To high the taxation levels and it means productive investment is limited, even reduced.

Smith’s concern with productive and unproductive labour was about the small proportion of the total capital available each year for net growth, because it was from this proportion that additional products of land and labour (the ‘necessities, conveniences, and amusements of life’) became available to society at all levels (unequally, of course), but it was the only way in which the lower orders, the labourers and their families, would raise their incomes above subsistence and bring more labourers into work.

His problem was that he had identified that while it was net revenue that drove growth, his definitions were primitive and not easy to identify in practice, and therefore difficult objectives for policy to affect. Exhortations for spendthrifts to be prudent, for people to be frugal, and for landlords and undertakers to save and invest, would have the usual moderate influence on behaviours. The 'urge to better themselves' may be dampened if rewards to risk and enterprise for profit seekers, and intenser working hours for labourers, were too low.

Another Busy Day on The Book

Another quiet day on the blog front, mostly because I am working through my ms of The Book. I took ten minutes out to post a comment on Chris Dillow’s Stumbling and Mumbling Blog on what seemed to me to be a not very well argued case based on a version of social evolution in a hunter-gatherer society (of the mind, that is, not of a real society).

It’s amazing how many references need checked to meet the bibliographical standards of publishing. The slightest discrepancy is a repeated reference that does not quite correspond to the entry in bibliography, and a copy editor sends a ‘query’; the remedy: check and re-check and clear up anything not perfect (a dropped capital letter can result in a query; a different edition from one end of the book to an entry at the end (many months later in writing time); a changed date of publication, and worse, the reference you had a year ago that you cannot find the details today).

I am also reading for sense (and non sense!). A clean page worries me more than a page with red ink – did I miss something? Two or three pages without red ink provoke me into reading them over again.

This is slow work and takes patience and non-interruption. It excludes taking time to read notes from the daily mail and hourly email. That is why the blog is under pressure.

I’ll try to do better tomorrow.

Why Smith Became a Commissioner of Customs

All quiet on the Adam Smith front today for Blogging. A couple of uninteresting asides using Smith’s name were not worth commenting upon. So I haven’t.

Maybe because I have been working steadily through my manuscript and these items seem to be rather unimportant. Certainly, they didn’t require me to think through what Smith actually said and meant, instead of the nonsense spouted about him, which would hardly help us understand he legacy.

Instead, I was writing a short note to a chapter detailing the issues involved in Adam Smith choosing to apply for the vacant post as a Scottish Commissioner of Customs and the Salt Duties in 1777, a year after he had guided his first edition of Wealth Of Nations through the press. I have never been happy with the apparent silence among his biographers about this episode and decided to develop some ideas I included in my earlier book, Adam Smith’s Lost Legacy (Palgrave Macmillan 2005) about this strange decision of Smith’s.

I decided to go through the entire episode in detail from the source materials, the biographical accounts (Stewart, 1793; Rae, 1895; Scott, 1937; and Ross, 1995) and what authors of articles had written about it (not much in the latter case).

It seems clear to me that Smith’s actions were deliberate, calculated and well executed. He also called upon a very strong alliance of powerful interest (in the 18th century meaning of this word; basically people well placed to use their influence on the decision-makers, in this case, including the Prime Minister, Lord North).

Basically, the coincidence of the colonial rebellion (1776-83) with publication of Wealth Of Nations posed serious problems to Adam Smith. He was actively seeking to influence decision-makers and influential members of the British political establishment to dismantle the mercantile economy of Britain through Wealth Of Nations, which included a sharp polemic against the American colonial trade under mercantile monopoly laws, which, added to his critique of the Chartered Trading Companies, and the high cost of unproductive European Wars, and his taking sides on the American rebellion, they began to have a cost on his influence. Friends, including David Hume, warned him to desist.

Reflecting on this, he realised the dangers of being identified too publicly with those that most of parliament regarded as ‘traitors’, no matter how right he believed his stance to be, was likely to undo the work he had put into his inquiry into the British economy. Hence, he chose to make himself ‘too busy’ by applying for the Commissioner’s post and absenting himself from new scholarly work.

Thus, despite promises, first published in Moral Sentiments in 1759, and repeated as late as 1759, he did not progress his manuscript on Jurisprudence for 31 years, and in a final act, he ordered all papers to be burned just before he died in Edinburgh in 1790. That’s the gist of my work today, writing up my final version of this episode for my new book.

A small issue, I know, but in the details we learn a lot more about Smith than some of the bland, anecdotal, and lazy acceptance of conventional accounts of his life. At least that’s my considered opinion.

Remembering Adam Smith

Art Diamond writes a Blog: Artdiamongblog.com, and he reports on his pilgrimage to Kirkcaldy:

“Many years ago, we took the train from Edinburgh to spend a few hours in Kirkcaldy, the birthplace of Adam Smith. I was surprised at how little there was to honor Smith in the town where he was born and raised. There was a small cafe/theatre named after Smith. A small crystal shop sold some shot glasses with Smith's image engraved on them. And there was a small plaque, above a no-parking sign, on the main street, at the spot where Smith's family home had been.

I remember asking a very polite young father with two or three small children in tow, why there was so little of Smith in Kirckaldy [Kirkcaldy]? With a twinge of something like regret, he said that everyone in that part of Scotland supported Labor, and they saw Smith as supporting capitalism, and so did not like him much.”

Comment
There’s a lot more going on now, with more to follow. The local college in Kirkcaldy and Glenrothes (an adjacent new town) has been amalgamated and re-named ‘Adam Smith College’. Under its far-sighted and energetic Principal, Adam Smith College is seldom out of the news for long.

In near-by Edinburgh, a project led by the Adam Smith Institute, to erect a 20 foot statue of Adam Smith, in a prime position opposite the building where he worked a Commissioner of Customs from 1778 to 1790, facing down the High Street to where he lived at Panmure House and further down to where he is buried, is slowly coming to fruition.

This will be completed for an opening ceremony in mid-May 2008, attended by the British Head of State. It is also likely that there will be an international conference on Adam Smith at the time of the event, Lost Legacy will keep you posted on any and all developments, and you can keep up to date by visiting the Adam Smith Institute web site.

In this respect I should mention that the Adam Smith statue project, as you would expect, has been made possible by private donations only and without any tax payers’ money. With the recent slide in the US $, there is a need (and a request!) for more donations from anywhere in the world to cover contingencies. If anybody can help please with small or large donations, email: eamonn@adamsmith.org
The next project should be to restore Adam Smith’s grave site the nearby Church yard or the fabric of Panmure House where he lived with his Mother, Margaret Smith (nee Douglas) and his cousin, Janet.

I think the anti-Smith feeling in Kirkcaldy, when Art Diamond visited the town years ago has diminished considerably. When the College was given its new name, there was a the usual noise from a small group of leftwing students, but it sputtered out to nothing as the majority rallied round Adam Smith’s name.
With Gordon Brown, the local Kirkcaldy MP, and now Prime Minister, and a known advocate of his version of Adam Smith, it is can now be accurately stated that it is no longer the case that ‘everyone in that part of Scotland supported Labor’ and ‘so did not like him much’.

Smith Did Not Advance a Labour Theory of Exchangeable Value for Commercial Society

Liberty For All Blog (19 July ) carries an article, ‘Value is Subjective’, by Denis D. Hayes, who is described as: ‘a healthy, independent thinker, author, and medical professional. Never one to pass up the opportunity to play at being a wordsmith, especially when it comes to politics and music, he has been actively writing for more than two decades. He has been with Liberty for All since its inaugural issue and devotes the bulk of his time to his family, his work, and the pursuit of happiness’.

This, I suppose, makes Denis interesting; however, he writes with evidence that he has the haziness notion of when Adam Smith lived (1723) and when Karl Marx lived (1818 – 1883):

“It is at this juncture that I feel we should briefly examine the error that gave rise to such things as unions in the first place. It happened around 1776, and is traceable to the great work of Adam Smith, “Wealth of Nations.” At about the same time a guy named Karl Marx is looking this work over, looking for anything he can exploit in his bid to discredit capitalism. Marx found it in Smith’s so called Labor Theory of Value.

Now it is well known that Smith was very sympathetic to the working class, but unfortunately it was probably this soft spot that contributed to his major mistake. Essentially Smith said, “All things owe their value to the labor that goes into their production.” This has been shown to be false innumerable times by many people and examples, but in the most enlightening way by A. J. Galambos, who was a physicist and author, and was the developer of the Theory of Volition. Galambos correctly points out that Karl Marx lifted the statement from Smith and then reworked it to support his own exploitation of the masses concept. Marx’s version states, “All the value is created by the laborer.”

Comment
Denis writes this in the midst of a fairly strong critique of the role and existence of trade unions, of which I shall say nothing. Should you be interested, follow the link above to the ‘Liberty for All’ web site.

The error of dates is only part of the problem, in that 1776 is a long way before 1818, when Marx was born and the 1850s, when Marx was writing on his labour theory of value, and was not remotely ‘about the same time’.

Denis is not clear on what Smith wrote about labour being the source of exchangeable value. He referred here to labour in the ‘rude’ society of hunters when labour was the sole factor production. There were no landlords charging rent for using their land and no undertakers paying wages to workers, or tax inspectors taking a share of their income. Smith argue that two hunters would exchange items (beavers for deer) in the ratio by which it would cost each labourer in labour time to hunt the other animal they wanted to exchange for what they had caught earlier. If it took twice as long to catch a beaver than it did to catch a deer, he suggested that the beaver would exchange for two deer.

As society advanced from sole hunters to shepherds, then farmers, and finally commerce, the number of factors required for production would increase from one to many, and each owner of the constituent factors would require a share in the revenue received from selling the joint product. From this time on, labour was no longer the sole source of production and the labour time theory of exchange value would no longer be relevant. This much is clear from reading Wealth Of Nations closely, as I explain in my forthcoming book on Adam Smith for Palgrave’s Great Thinkers in Economics series (2008).

Marx drew on the exchange value of labour time in ‘rude’ society, denied the existence of property, without which society would have remain at the hunting mode of subsistence age, not developed knowledge of shepherding, farming or commerce, and not experienced a growth in population at all. However, that may be disputed by Marxists but they cannot challenge the historical fact that hunting survived, which survived to the 18th century, had small populations in vast territories, nor can they challenge that hunting societies surviving to day (Kalahari, Papua New Guinea, Amazon, Australia, etc.,) are all low population, low technology and now, smaller land territories. At one time, not long ago, the whole world was limited to hunting as its mode of subsistence (as John Locke put it: ‘all the world was America’, alluding to the hunting tribes of North America, then being reported in detail by travellers and explorers).

Marx was wrong about ‘surplus value’ and he created a whole new vocabulary of abstractions trying to make it credible. Smith’s expressed a truism that factors had to be paid their costs, plus in the undertakers had to receive a profit, to induce them to continue supply their services. This did not mean that buyers had to pay sellers their costs. Market prices were determined by supply and effectual demand. Where a gap existed – as Smith thought there would be – markets would need to adjust the amount they supply or the amount that is demanded.

Light Blogging today, Friday.

I’m off to London at short notice in connection with a book I published 18-years ago on another, this time a biography of a minor, but overly famous, 18th-century figure, Lieutenant William Bligh (‘Captain Bligh, the man and his mutinies’, 1989. Duckworth, London).

This was a spill-over from my then academic interest in defence economics, upon which I regularly taught economics to serving officers in HM Forces, with occasional forays to Washington, DC.

Every now and again, tv and film companies make programmes on Bligh and the Bounty mutiny, and their researchers find my scholarly treatment and conduct telephone interviews, sometimes asking me to do a longer interview (mostly I decline). I believe one such programme is still put out on the History Channel. This time it’s a British tv channel and I agreed to do a short interview in London because they appear to be serious producers, not trying for the usual tabloid treatments. (The films about the Bounty mutiny are so devoid of historical accuracy as to be laughable, but great entertainment and best treated as such.)

I do not expect to return to Edinburgh until around 9.30 pm. It also conveniently nearly coincides with me completing the manuscript of ‘Adam Smith’ (to eb published mid-2008) yesterday evening. I am re-reading the hard copy before making final corrections and writing a short ‘afterword’ (and checking references). Taking the train, I have a few hours each way for careful reading.

I shall resume Lost Legacy on Saturday, the fates willing.

Adam Smith On the Analogy of the Circulation of Blood with Trade Flows

The World’s Fair: 'all manner of human creativity on display carries an article (here):

A Commentary on Flow: Muscles, Trains, and the Internet Converge (19 Jul) Benjamin Cohen, an Asst. Professor of Science, Tech., and Society at the University of Virginia, writes today:

“One could delve considerably more deeply into any of these, but my own recent reading has me thrumming on the circulatory analogy. Specifically, Richard Sennett's 1994 monograph Flesh and Stone: The Body and the City in Western Civilization, and in particular its chapter on William Harvey's revolution. Though Sennett is by no means the first to draw a conceptual line from William Harvey's 1628 De motus cordis (with its bracing new delineation of the role of a pumping heart in powering the circulation of blood throughout the body) through, for example, Adam Smith's Wealth of Nations (1776), with its own revolutionary conception of the circulation of wealth, resources, workers, etc., in the modern economy, his comments seem especially pertinent in the current context.

Thus, for example:
The new understandings of the body coincided with the birth of modern capitalism, and helped bring into being the great social transformation we call individualism. The modern individual is, above all else, a mobile human being. Adam Smith's Wealth of Nations first reckoned what Harvey's discoveries would lead to in this regard, for Adam Smith imagined the free market of labor and goods operating much like freely circulating blood within the body and with similar life-giving consequences. Smith, in observing the frantic business behavior of his contemporaries, recognized a design. Circulation of goods and money proved more profitable than fixed and stable possession. Ownership served as the prelude for exchange, at least for those who improved their lot in life. Yet for people to benefit from the virtues of a circulating economy, Smith knew, they would be obliged to cut themselves free of old allegiances. This mobile economic actor would moreover have to learn specialized, individual tasks, in order to have something distinctive to offer. Cut loose, specialized Homo econimus could move around in society, exploit possessions and skills as the market offered, but all at a price.”

Comment
Adam Smith knew Quesnay, leader of the French Physiocrats and medical doctor, well from his meetings with him in France. He knew of Quesnay’s Tableau Economique and could recognize its affinity with the circulation of blood.

In Wealth Of Nations he used a particular gruesome image of blocked blood circulation to emphasise the risks to the British economy, as a result of the implementation of mercantile political economy policies, in respect of the British colonies in North America, and real problem of the ‘recent disturbances’ that were to lead to the successful rebellion of the colonists.

Mercantile colonial trade led to distortions in the allocation of capital across manufacturing industries because the monopolising spirit of the Navigation Acts, which reduced competition and thereby raised prices of colonial imports into Britain, leading to higher profits, drew off capital that would normally have gone in domestic activity, and into trade with the rest of Europe. If that trade was ‘blocked’ for any reason, the disruption it could cause would be serious, though not insurmountable.

It would be better if Britain did not have colonies (they costs too much to defend) and instead of imposing an exclusive monopoly, it traded freely with neighbours. Any way, Benjamin Cohen, might like to note this extract from Wealth Of Nations if he is looking for references in this area:

‘In her present condition, Great Britain resembles one those unwholesome bodies in which some of the vital parts are overgrown, and which upon that account, are liable to many dangerous disorders scarce incident to those in which all the parts are more properly proportioned. A small stop in that great blood-vessel, which has been artificially swelled beyond its natural dimensions, and through which an unnatural proportion of the industry and commerce of the country has been forced to circulate, is very likely to bring on the most dangerous disorder upon the whole body politick. The expectation of a rupture with the colonies, accordingly has struck the people of Great Britain with more terror that they ever felt for a Spanish armada, or a French invasion.’

‘The blood, of which the circulation is stopt in some of the smaller vessels, easily disgorges itself into the greater, without occasioning any dangerous disorder; but, when it is stopt in any of the greater vessels, convulsions, apoplexy, or death, are the immediate and unavoidable consequences.’
(WN IV.vii.c.43. pp 604-5)

Thursday’s Naïve Nonsense About Adam Smith

Quoted from today’s Chicago Tribune:

“The dealmakers forgot to consult their undoubtedly dog-eared copies of Adam Smith, the man they cite for the proposition that they are being led as if by an invisible hand to do the public good. ... It is not unreasonable to guess that Smith would not have approved of a taxation system that allowed a British billionaire to pay taxes at a lower rate than the woman who cleans his office, or an American multibillionaire to enjoy a tax rate far below that inflicted on his butler".

Irwin M. Seltzer, The Weekly Standard”

Comment
Really? Chicago dealmakers have read Adam Smith’s Wealth Of Nations? Their copies are so often used that they are ‘undoubtedly dog eared’? He means ‘beyond reasonable doubt’? And they found the phrase, which they have forgotten: ‘they are being led as if by an invisible hand to do the public good?

Wow! Well we know for sure that Irwin Seltzer does not read Wealth Of Nations regularly enough for his copy to be dog eared, because if he had read it, even once, he would know that Adam Smith did not say ‘led as if by an invisible hand’. There’s no ‘as if’ about it.

Check it out at: WN IV.ii.9. p 456.

And these guys make millions …

Adam Smith on 'Stagnation'

Chris Dillow writes in Stumbling and Mumbling:

‘The tendency for the rate of profit to fall comes straight from Ricardo - it's just the law of diminishing returns. Ricardo - and indeed Smith before him - thought this would lead to a "stationary state" in which economic growth ceased.’

Comment
Just to set the record straight on Smith’s ‘stationary state’, he reported where the dynamics of his theory of growth would lead, unless something else intervened. Smith foresaw ‘increasing returns to labour in the division of labour’, not Ricardo’s ‘diminishing returns’ which led to a dead end. Smith’s argument for endogenous growth was different from Ricardo's and much neoclassical thinking. That neoclassical economists are changing track on this is encouraging.

The value of his ‘prediction’ was related to the situation when a country had
‘acquired that full complement of riches which the nature of its soil and climate, and its situation with respect to other societies allowed it to acquire; which could, therefore advance not further and which was not going backwards, both the wages of labour and the profits of stock would probably be very low.’ (WN I.ix.14: p 111) This was the ‘logic’ of his model, not a time-bound prediction.

He adds in the next paragraph: ‘But perhaps no country has ever yet arrived at this degree of opulence’ (WN I.ix.14: p 11). And this, plus experience since Smith’s day, shows why Smith did not predict so much as derive the conclusions of his growth model. The technological impact of the 19th-20-21st centuries show that in practice in the real world, there is no danger of a country ‘acquiring that full complement of riches which the nature of its soil and climate, and its situation with respect to other societies allowed it to acquire.’

Smith also noted that a country could deliberately reach such a state of no growth, as China had done to become stationary: ‘China seems to have been long stationary, and had possibly long ago acquired that full complement of riches which is consistent with the nature of its laws and institutions’, which was ‘inferior to what, with other laws and institution, the nature of its soil and climate, and situation might admit of.’ (WN I.ix.15: p 111-2)

Note that the key restrains in Smith’s model were ‘its soil and climate, and its situation’, reflecting the predominantly agricultural base of 18th century economies, and also the choices that it makes, ‘consistent with the nature of its laws and institutions.’

If it chooses to ‘opt out’, as China did deliberately by whim of the then Emperor in the 15th century (just as the commercial revival began in Western Europe) what happened is history. Chinese advanced technology withered; Western technology and science slowly and gradually flourished; China became backward; Western Europe advanced beyond the constraints of ‘soil, climate, and its laws and institutions’. China is now catching up, having stagnated under the Marxists, until they switched from Marxism towards capitalism.

Chris cites this idea from an otherwise interesting paper ‘Classical Growth Theory: from Smith to Marx’ by Gonçalo L. Fonseca

I can see also the influence of Robert Heilbroner’s popular exposition, The Worldly Philosophers: the lives, times and ideas of the great economic thinkers, Simon & Shuster, and his essay on the subject, ‘The Paradox of Progress: decline and decay in The Wealth of Nations’, in Andrew Skinner’s and Tom Wilson’s, eds, Essays On Adam Smith, 1975, Oxford University Press, both of which I criticise in Adam Smith’s Lost Legacy, 2005, Palgrave Macmillan.

The Thoughts of Marcus Ting-A-Kee

From start to end (‘A quest to understand things big and small... or how to survive as a Business Analyst and beyond’):

Marcus Ting-A-Kee writes:

“In a few of my blog posts I've written about how important it is to adjust your presentation and communication to your audience. In effect, you were telling them, What's In It For Them. It's all about creating a relevant experience to sell an idea, product or concept.

Now let's step back and examine this WIIFM concept applied to another situation. Have you ever worked on a project where you have an idea on how more success can be achieved if the project team were to work more collaboratively with other project teams and personnel? In my experience the typical project manager response is, "It's not my problem," or, "It's outside of my scope," or, "It's someone else's problem." Then you step back and watch the car crash in slow motion; the problem manifests itself and severely impact the project and company as a whole.

I liken this to Adam Smith's (the Father of Economics) "invisible hand."

"As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual value of society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By [p]referring the support of domestic 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 the society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it." (Adam Smith, The Wealth Of Nations)

Basically, this means each individual acting in his (or her) own self-interest will lead to a better outcome for the society as a whole; or WIIFM but on a project-scale. The problem with this is simple. No one ever builds roads and the infrastructure to connect things because it's in no specific person's best self-interest; but that's not my problem. Is it?

I'm not saying expand a project's scope, merely understand how a project fits in with the big picture.

Comment
Ingenious, especially as he follows the text with a lovely photo of heavy road roller flattening a recently hot-tar laid road surface. From there he implies that the project manager who sees the big picture can enlist co-operative action from those suppliers needed to deliver it by inducing in them ‘what’s in it for me’ (WIIFM) thoughts.

However, what does this have to do with the truncated quotation from Wealth Of Nations? (WN IV.ii.9: p 456) Very little, except it allows the author to invoke the ever-popular ‘invisible hand’, of which I am often called upon to write about here.

For the record, you may care to note that the WIIFM question would provoke answers, and presumably bilateral discussions, about the prices that the project manager might offer to the WIIFM audience for their co-operation. Nothing ‘invisible’ about that is there? We call it negotiation in price determination, otherwise known as markets. As argued many times, Smith’s sole reference to the invisible hand in Wealth Of Nations was not about markets.

But, let’s be fair. Mr Marcus Ting-A-Kee has presented an original way of getting the attention of his suppliers, without too much of an atrocity against Smith’s use of the famous metaphor.

Fancy a Rare Copy of Wealth Of Nations?

For those interested in obtaining a good copy of Adam Smith’s Wealth Of Nations, I received notice from a bookseller I deal with of an 1812 edition by Cadell & Davis, publishers.

The bookseller’s notes accompanying news of the 3-volume edition state:

‘Smith's book was like a one-man Royal commission, a tour de force, drawing on evidence over the millennia since the fall of Rome and from contemporary evidence he analysed in painstaking detail (The Scotsman)’.

Regular readers of Lost Legacy will recognize these words as a summary of mine. Obviously somebody in The Scotsman (Edinburgh) reads Lost Legacy or articles of mine, showing an excellent taste in reading.

I have no commercial interest in the volumes on sale by Stella & Rose nor any connection, except as an occasional customer (I have found them efficient, helpful and honest; that’s all I know of them).

I am posting this notice as a service to Lost Legacy readers. Let me know how you get on.

“AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS
Smith, Adam. No illustrator listed. Stock no. 581353
Cadell & Davies. 1812. Almost very good condition with no wrapper. Three volumes. Three-quarter brown leather with marbled boards. A New Edition to Which is Prefixed an Account of the Life of the Author and a View of his Doctrine Compared with That of the French Economists. Listed as one of the 100 books that shaped world history, along with for example the Gutenberg Bible. Smith's book was like a one-man Royal commission, a tour de force, drawing on evidence over the millennia since the fall of Rome and from contemporary evidence he analysed in painstaking detail (The Scotsman). Vol I: xli + 499 pages; Vol II: viii + 523 pages; Vol III: vii + 515 pages. Spines rubbed, corners worn. 3" split to top of spine of Vol I together with a small tape repair. Foxing to prelims and a very few scattered foxspots throughout. Bookplate oF G.C. Greenwell to front pastedowns. It's possible that this is the famous geologist noted for his interests and books on mining for example Notes On The Coalfields of East Somerset. Price £520.00”

Enquiries to:
Stella and Rose’s Books (rare and out of print books)

http://www.stellabooks.com/shop/results.php?pageNum_BooksRS=0&totalRows_BooksRS=115&Category=,ECONOMICS,
Tel: +44 (0)1291 689755 Fax: +44 (0)1291 689998
Email: enquiry@stellabooks.com

A Strange Claim About Adam Smith

Apropos of nothing, but I came across a Blog today calling itself: “Adam Smith Was A Socialist”. Its author says of himself (here):

‘Rants & musings of an innuendo-loving, cider-quaffing, number-crunching, faux intellectual, internationalist Scottish nationalist’ and expands on this in his profile:

‘The title refers to my absolute distaste for the libertarian right and its appropriation of one of the finest political thinkers Scotland (or the world) has ever produced. Personally, on a left-right scale I'm happily on the centre-left, thank you very much.’

It has on its side bar: ‘People of the same trade seldom meet together, ... but the conversation ends in a conspiracy against the public.’

Obviously the author of the Blog does not realise this was a criticism of the remnants of the city guilds that were staffed by skilled labourers, not capitalists (they didn’t exist in Smith’s day), who were given to imposing restrictive practices to prevent anybody who had not served an apprenticeship in the town they wanted to ply their trade in to undertaken any work there.

The quotation (find it at Wealth Of Nations, I.x.c.27: p 145) is often used to attack modern capitalists, forgetting or more likely not knowing, that Smith refers to ‘trades’ as in skilled workers, who ran a monopoly to keep out competition and thereby keep up prices. Today this role is often undertaken by trade unions.

A well-known example of being refused permission to ply his trade as an instrument maker, who had served his apprenticeship in London, was the Greenock (a town a few miles west of Glasgow on the River Clyde) born, James Watt, of steam power fame.

Adam Smith and his fellow professors arranged for him to be appointed the University’s instrument maker, allocated him some rooms for his workshop and employed him usefully around the University fixing machines and such like. The University was then sited just outside the Glasgow town boundaries and therefore the writ of the Glasgow ‘trades’ did not cover the University’s grounds. Smith did not like restrictive practices or monopolists whatever rank they came from in society.

By accident, the University’s model Newcomen steam engine was broken and James Watt was asked to fix it. He did and out of interest, he continued to experiment until he had improved it, discovering in the process an innovation that was to lead to the discovery of directed steam power, a major element in what became the industrial revolution. If the Glasgow skilled tradesmen had had their way, Watt would not have ‘fixed’ the model engine, would not have improved it and the industrial revolution might have been delayed.

What does this teach us about ‘socialism’, or about Adam Smith being remotely interested in it?

Ignorance Leads Leaders into Error

Douglass Carmichael posts in the ILF (International Leadership Forum) an article: ‘Smith and Locke –some surprises, part 1’ (here):

“Part of the reason that capitalism is so powerful as a control mechanism is because of its ability to use corporations. I wanted to see what, for example, Adam Smith in the Wealth Of Nations might have to say about capitalism. I ran a search on the text version and found 12 references. To my surprise every one of them was critical of the corporate idea. Here are some examples’...

There follows the usual misattributed references of ‘capitalism’ to the 16th to 18th century Chartered Trading Companies set up by either Royal Charter from the King or by Act of Parliament, which awarded exclusive legal territorial monopolies. They had nothing to do with 19th to 21st century corporations.

Moreover, Adam Smith died in 1790 and the word ‘capitalism’ was first used in 1854 William Makepeace Thackeray (1811-1863: today’s his birthday, incidentally!) in his novel The Newcomes. Second incidentally: his father was an official in the East India Company, the villain of the peace, which Smith bitterly criticizes, with good reason in Wealth Of Nations.

Douglass Carmichael then works up to his final, surpirsing and amazing conclusion in his penultimate sentence:

“It is amazing to me that while it’s obvious why those people dependent upon this economy don’t look for this kind of criticism from Smith as their ideological father, those who are critical have not made more of what Smith actually says. The point for us it is that the corporations actually undermine markets. Corporations were created by the state through a chartering system that gave privilege in exchange for responsibility for a limited time period of, say 20 years. The undermining of this social contract, the abandoning of the corporate charter reciprocity, will turn out to be seen, I think, as one of the great mistakes of the 19th and 20th centuries. It is like a cancer in the DNA of the Constitution. In my ne[x]t post I’ll turn to John Locke and the strange origins of the idea of private property.

Comment
This has to be the most ridiculous statement I have seen in respect of this subject:

“The undermining of this social contract, the abandoning of the corporate charter reciprocity, will turn out to be seen, I think, as one of the great mistakes of the 19th and 20th centuries.”

As Mr McEnroe would put it: 'you can't be serious!'

Douglass Carmichael turns history on its head. Having quoted Adam Smith he has not done him the courtesy of reading the chapter from which he has quoted. Did he not have Smith’s Wealth Of Nations to hand? Was he merely cribbing from a book of quotations?

It was allowing these corporations to continue under Royal protection that was the cause of the misery they created, not the ending of them.

The source of Douglass Carmichael's error lies in the immediately preceding sentence:

“Corporations were created by the state through a chartering system that gave privilege in exchange for responsibility for a limited time period of, say 20 years.”

Does Douglass Carmichael not realise, which Adam Smith points out, that it was the state-backed (and enforced) exclusive monopoly status that was the cause of the evils committed by the East India Company and the sorry distress and cruelty suffered by the Indian population? Smith favoured competition, not monopolies, whether private or state-backed.

The Chartered Companies operated at long distances from the UK – it could take about a year or so for messages from London to reach the local Company officials and for their replies to be returned - and effective supervision was impossible from 10,000 miles distance. The exclusive monopoly powers, no competition, even from individual traders, large fortunes swishing about to bribe ‘inspectors’ and ensure safety from too close a parliamentary scrutiny, and a management structure unsuited to probity and good behaviour that were the causes of the problem.

The only Chartered Trading Company that Smith felt was (relatively) ‘clean’ was the Hudson Bay Company, but this was due to the frozen environment it operated in and the very narrow weather window in which the Company ship could reach the company depots in North Canada, thus deterring interlopers and keeping the Company's haul in produce down to what a ship could bring home annually.

It is usual in articles dropping in on this 18th-century debate to associate the joint-stock company structure of the Chartered Companies to modern shareholder, joint-stock, corporations. These were created in the 1870s in Britain (and copied elsewhere) in which their legal structures were policed, such that today they are fully subject to the laws of contract, to legal responsibility and to the full weight of legal redress should their officers misbehave. Recent court cases should be a comfort to all of us.

Smith approved of joint-stock companies where the capital requirements were too high for an individual or small group of individuals, where no monopoly privileges were granted, where the work process was routine (i.e., definable, not universal) and where the fate of the company was closely dependent on the probity of its officers. That is why he approved of joint-stock corporations such as the Bank of England, the Bank of Scotland, the Royal Bank of Scotland, the insurance companies and such like.

19th century US Farmers Vote for Smithian Policies

Bruce Miller writes a Blog called: ‘The Blue Voice’ and has contributed a fairly long, thoughtful retrospective review article on William Appleman Williams' book (1969), The Roots of the Modern American Empire: A Study of the Growth and Shaping of Social Consciousness in a Marketplace Society, Vintage Books, or ‘Roots’ (here)

I have extracted below references to Adam Smith:

‘Farmers, the railroads and Adam Smith’

”Williams makes another important point in connection with the "Smithian" outlook of the farm businessmen. Their famous battles for better regulation and the railroads, and even for publicly-owned railroads, was based on a particular understanding of how a capitalist economy should work:

[Adam] Smith likewise provided a solid critique of monopolies, and of the misuse of the government by special coteries of metropolitan interests. The farm businessmen were also aware that Smith offered careful and even sophisticated justification for government actions, such as those concerned with improving transportation or checking monopolies, that were designed to strengthen the structure and guarantee the freedom of the marketplace itself. And their own experience, particularly after the 1840s, steadily reinforced their understanding and acceptance of Smith's great stress on the necessity of the sustained expansion of the market as the dynamic engine of continued progress and freedom. (Miller’s emphasis)”

“This concern for regulating railroads' rates and practices was also heavily related to farmers' concern for access to the export market. "The farmer's concern with transportation costs, which arose directly out of his routine involvement with the foreign market, was the primary cause of his increasingly vigorous attack on the railroads" (my emphasis). So, the railroad fight themselves played an important role in shaping the agricultural majority's concern for public policies on the export markets.”


“…But Williams also explains that the "agricultural businessmen" were operating with an understanding of the world based on Adam Smith's classical economic theories. Smith stressed the importance of foreign trade. And he emphasized the need for free trade without the kind of restrictions that the British mercantilist system of his time imposed. Smith's American admirers also held the conviction that the spread of free trade would convince those who benefitted from it of the virtues of a capitalist free market economy. And that along with spread of capitalism would come democratic and liberal institutions. Their notion was "a fair field with no favor" in the global marketplace, as Williams puts it. And they believed democracy would follow.”

Comment
Unusually, this retrospective review published on the Blog on 15 July 2007 of a book published in 1969, was so interesting and well written, I did not jump to the references to Adam Smith first.

The subject was interesting and covered ground I knew nothing of. I have been busy on my Adam Smith books all day, having lost writing ground this week-end with the birth of a grandchild (a most wonderful diversion from the usual daily grind and one I much enjoyed).

I expect the issues in the book by Williams were controversial and I can see the connection the farmer’s lobby made with Adam Smith. He envisaged that the British American colonies, because of their empty territory to their west and the abundance of land per head of the population of immigrants, would continue to enrich them as productivity based on agriculture would continue to rise. The colonies are a high-wage economy because labour was scarce and new labourers arriving from Europe would work for high wages at first and then take the plunge and become farmers in their own right, thus denuding the labour force again and adding to the bidding up of wages.

Smith believed that in a hundred years (circa 1880) the former colonies would be the richest country on earth. As he knew nothing of the impending industrialisation that was a few decades ahead, Smith based his prediction entirely on the growth of agriculture with a smaller manufacturing base serving the community. By the 1880s the USA was already a thriving industrialised economy, with a rich agricultural sector. It was the policy tension between these two powerful sectors that drove US politics from the dispersed constituencies in the cities and the rural hinterlands.

That the agricultural lobby took up Smith’s references in Book V of Wealth Of Nations on the government’s role in promoting ‘public works and institutions facilitating the commerce of society’ is not surprising. Given Smith’s prestige it must have been a powerful narrative for aspiring politicians from the sector. That public ownership for rail roads was considered must have driven some electors to the ‘left’ (is this where the ‘Farmers and Labour’ ticket came from?) and others who hostile to city business would have been re-assured if Smith was supposed to be in favour too.

I like the notion that America was ‘full up’ and must expand elsewhere, though I am unimpressed that this involved capturing some small island groups (Philippines, Samoa, Cuba), hardly places that could relieve either US population pressure(?) or prove a vent for US agricultural exports.

There is so much more in the article that it must be of interest to US readers and I heartily recommend it to all.

Overcoming the Malign Effects of Self-Interest

Gurcharan Das writes in The Times of India (15 July) about ‘Capitalist morals’ and his experiences on joining the board of a private company and discovering that the new MD had been compelled to pay a bribe to get a government department to pay an outstanding invoice (here):

“Seventy percent of the company's sales came from this government customer, who had always received 2% of the invoice under the table for expediting payments. The bribe was shared by many state employees. Our new MD, who had joined a year ago, refused to pay the bribe.

Are people honest only because of the fear of punishment? Without checks would people behave like Duryodhana in the Mahabharata? Modern social scientists assume that people are only motivated by 'self-interest'. But is that true? If a child is in danger, don't we have a natural desire to rush and save it? Adam Smith called this sentiment 'sympathy' in his Theory of Moral Sentiments. Rousseau called it 'pity' in his classic, Discourse on the Origin of Inequality.

We are not purely selfish, but our public institutions have to hold individuals accountable. In our case, accountability is eroded because our idealistic labour laws relied on the worker's 'good' nature and his superior's 'bad' nature. Hence, there isn't quick punishment for corruption in the government (while you are sacked in the hour in private companies.)

Institutions have to depend both on the 'good' and 'bad' in human beings. If one is cautious and re-designs government only on selfish motives, you might erode whatever public spirit that exists. But ours was the opposite mistake — we relied on too much public spirit. To restore accountability now you don't need new solutions. Just adopt the accountability systems of high performing governments like Canada and Australia. Even better, follow the recommendations of our own administrative reforms commissions.”

Comment
Corruption is reputed to be endemic in Indian government. That was the impression I got when I studied defence economics in the 70s and 80s. It was certainly not surprising when the massive regulatory regimes of government and large state sector activity were considered, plus tariffs on imports and on exports (I kid you not; ‘if it moves tax it; if its hidden confiscate it’).

Gurcharan Das makes an interesting observation on India’s perspective: too naïve an official attitude that people are good basically and are only bad if treated as if they are, is a theme running through much of the social work community (until, that is they have been about six months in the job).

Pufendorf, a philosopher who influenced Adam Smith’s thinking) commented in 1722 on this sort of idealistic belief by observing ‘it being much more easie to fansie perfect Men than to find them’ (Pufendorf, Law of Nature and Nations, 7.1.6).

In the old Soviet Union, corruption was also widespread. It goes with state controls because with controls those who administer and police them have discretion on what’s allowed and what’s not, and who’s allowed to do something and who’s not, i.e., a potential market in corruption.

I knew a trader operating in the old Soviet bloc, who bought million-gallon quantities of a chemical substance for his western company. He split a fine commission on the per gallon price with the Soviet official who paid it into two Swiss accounts. How do you monitor such activities? Appoint inspectors to find them? That makes for a three-way split into three bank accounts... and so on ad finitum.

“Modern social scientists assume that people are only motivated by 'self-interest'.”

Self interest is much maligned and much misinterpreted. Smith included in a persons’ self interest, a concern for family and so on, through to strangers in diminishing intensity.

He also noted that the European who was supposedly indifferent to 100 million Chinese people losing everything in an earthquake, would (it’s in the next often unread sentences) recoil because ‘when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration’… ‘It is not the love of our neighbour, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own characters.’ (TMS III.3.4: p 137)

If a society can engender such a ‘superiority of character’ to come to the fore – corruption corrupts those who stand-by and let it pass – then it does not need the fear of punishment to do what is right, but meanwhile that is all we have. Those whose standards drop and who are caught and who go to jail are not indicators of the end of game of a society; they are indicators that its end game is postponed once again.

That Gurcharan Das is discussing the ‘incident’ openly in The Times of India is a huge step forward. Congratulations.

Silly Sunday Stories on Adam Smith, no. 2

Mark Thoma of (Economist’s View) discusses an article: “In Europe, God Is (Not) Dead, by Andrew Higgins, Wall Street Journal", here

“Church Attendance and Supply-Side Economics”

“The notion that Adam Smith's invisible hand reaches into the spiritual realm has many detractors. Steve Bruce, a professor of sociology at Aberdeen University in Scotland, says market theory "works for cars and soap powder but it does not work for religion." ... The Church of Sweden is also skeptical of the supply-side view. "We don't sell a product," says archbishop Anders Wejryd.”

Comment
Does not the old army credo go: ‘If it moves, salute it; if doesn’t move, paint it’? Well it seems among economists today if you’ve got writer's block, bung down “Smith’s invisible hand” and work-up a story from there.

‘Reaches into the spiritual realm’? Andrew Higgins takes an isolated metaphor used only three times by Adam Smith and many times before him by many other wordsmiths (no pun intended) a dimension too far.

The rest of the article is sullied with a stupid misuse of a metaphor used by Smith for something else entirely. This is not Mark Thoma's reponsibility.

Religions have always had an economic dimension. But the only thing invisible in them is the gods they believe in. That includes the Roman god, Jupiter, whose invisible hand protected the Emperor from his enemies with thunder bolts.

Silly Saturday Stories on Adam Smith

Paula Hawkins reviewsP. J. O’Rourke’s recent book on The Wealth Of Nations in today’s Times Online (14 July) under the headline:

The American satirist reassesses Adam Smith's revolutionary economics'

She writes:

“The original edition runs to more than 900 pages, and even abridged versions are more than 300 pages, so it is rarely read – except, perhaps, by those who are required to do so for economics courses.

And even if you were prepared to plough through it, O’Rourke argues that Wealth cannot be property understood without first reading Smith’s Theory of Moral Sentiments, his philosophical tome published in 1759 – which is even longer.”

Comment
Is this sloppy fact-checking by Paula Hawkins or by P J O’Rourke? It is not clear from the context.

If was Paula, then both her and her sub-editors at the Times (London) are in breach of the second rule of journalism check all claimed factual statements. The first rule is: Keep your imagination to your expenses claims, not for your copy'. In this case she could have ‘Googled’ or ‘Yahooded’ (no bias here) both books in the comparison, or checked the books. Thought so; she hasn’t read either book.

If it was ‘P.J’, well what can I say? The master satirist should check with his expensive fact-checking agency and claim a re-fund, or perhaps, being in the USA, he should initiate a legal claim for, say, several million dollars for the trauma such sloppiness will cause him, loss of prestige and the cost of pulping and re-printing his book.

Fact: Wealth Of Nations at approximately ‘900 pages’ is an acceptable statement (see below for technical details).

Fact: FACT: Smith’s Moral Sentiments (OUP/Liberty Fund edition) is 412 pages plus a 52 page introduction.

So, what can we make of Paula’s sentence (perhaps misled by P. J. O’Rourke) that ‘Smith’s Theory of Moral Sentiments, his philosophical tome published in 1759 – which is even longer’?

Somebody has not checked their facts.

You could protest that I am being pedantic. I would not agree. Paula’s error is not just of fact: she makes the comparison by way of stating that Wealth Of Nations is such a long book that readers of the Times On-line are unlikely to read it, especially as she insists, they would have to read the even longer' Moral Sentiments first.

But a simple check shows that it isn’t.

It is not the length alone that puts readers off. I doubt that any students are ‘required to read’ Wealth Of Nations in economics courses today (the best will, of course, en route for tenure track). The discipline has moved on and away from reading 18th-century authors, even one’s as famous as Adam Smith.

Potential readers have not been introduced to what Smith was about when he wrote hisr eport of his inquiry into the nature and cayses of the wealth of nations'. Without this understanding, Smith’s detailed argument, backed by his evidence, soon loses them, hence, the market opportunity for P. J. O’Rourke to write a popular version in his inimitable style. I reviewed it on Lost Legacy and it has my qualified recommendation – if it gets readers to turn to the original text, so much the better.

I have eleven editions of Wealth Of Nations (more, if I add my editions in my library in France) and I have only one which is under 500 pages, and that after widespread vandal-like cutting by its editor. Paula says there are editions with over 300 pages, which is either in 5-point type or is after a large-scale brutal abridgement.

Technical details:
Wealth Of Nations, two-volume ‘Glasgow Edition’, with footnotes, references, bibliography and, index, is 1080 pages + the 60-page editors’ General Introduction.

Moral Sentiments, the Glasgow edition (Oxford University Press/Liberty Fund), inclusive of a technical appendix and the index, is 412 pages. Even adding in the 52-page editors’ introduction, its pagination only rises to 464 pages, which is well short of the claim that it is ‘even longer’ than Wealth Of Nations.

Bargains in Adam Smith's Wealth Of Nations

From The Herald, Glasgow (Not Paisley!) a snippet of interest to those nursing their first editions of Adam Smith’s Wealth Of Nations:

“Adam Smith book fetches £66,000

“A RARE first-edition copy of The Wealth of Nations by Scottish economist Adam Smith was sold for £66,000 at Sotheby’s in London yesterday. The book, in two volumes, had been expected to sell for between £40,000 and £60,000.”

Comment
When first published on 9 March, 1776, in two volumes, it sold for the princely sum of £1.16s.0p and it kept the same price for the second edition published on 28 February 1778.

A ‘Supplement’ edition was published on 20 November 1784 with an extra 24,000 words, selling at 16 shillings to purchasers of the first edition. This Supplement was published along with the 3rd edition (20 November 1784), incorporating the material in the Supplement. This is regarded as the definitive edition in that it incorporated Smith’s detailed corrections to errors that had crept into his text.

The fourth edition was published in 1786, but was not altered in other than trivial typos and therefore is really a reprint of the 3rd edition text. The fifth edition was published in 1789 ans the last published in Smith’s lifetime, again with no substantial changes (unlike Moral Sentiments, which Smith amended in its last edition in 1790, the year of his death).

These details from pp 61-64 of the General Introduction to the 2-volume Glasgow edition of Wealth Of Nations, published by Oxford University Press, and reproduced in exactly the same pagination by Liberty Fund (Indiana) at the bargain price of £10.95 (about US$20). This is the scholars’ edition par excellence, complete with the editors’ footnotes and comments.

So, for the price of a couple of cups of coffee and, perhaps, a bagel or doughnut, or slice of pecan pie or two, you get the text of a book that somebody just paid £66,000 (US$130,000) for in July 2007 and which cost somebody else £1.16s in 1776.

Is that a deal or is that a deal?

Why Blame the Enlightenment for Modern Criminality?

I have problems with references to Adam Smith and the Scottish Enlightenment and Lee Harris linking them to the recent terrorist incidents in London and Paisely [NOT Glasgow].

I am not trying to be smarty pedantic, but Lee Harris makes a case about a serious criminal action in the 21st century and links it to some alleged disappointments about the Enlightenment in the 18th century. This surely is a highly tenuous string of weak links and stretched speculation?

Here is what Lee Harris writes in his article in City Journal (New York – or should I write Newark?), 11 July:

‘Mad Scientists’: The disturbing lessons of the Doctors’ Plot’

”Such, at least, has been the faith of the intellectual movement called the Enlightenment—a movement that owes much to the city in Scotland that was one of the sites of the failed terror attacks.

“It was at the University of Glasgow that the great Adam Smith taught. Like the other members of the Scottish Enlightenment, Smith believed in the power of education to free men and to improve human prospects. In his masterpiece, The Wealth of Nations, Smith argued that the state should educate the working classes not simply because it was the right thing to do, but also because it was prudent. For Smith’s close friend, the philosopher David Hume, an ignorant multitude was a dangerous multitude, because ignorance bred both superstition and fanaticism. A practical, universal education, grounded in the scientific or experimental point of view, was the best means of assuring the peace and stability essential to a nation’s prosperity and security. Those educated in science could learn to live in harmony with one another.

This Enlightenment model, which has worked quite effectively in Europe and the United States, as well as in other parts of the world, has always relied on an advanced elite that brings learning to the masses through universal secular education. Many have hoped that Muslim nations would adopt the same model, with the same results.”

Comment
‘Glasgow’ airport is near the town of Paisley (2 miles) and 8 miles from Glasgow. The original ‘Glasgow’ airport was at Abbotsinch and was re-sited to its present location in the 1960s and kept its name, Glasgow Airport (a highly controversial affair at the time).

Its connection to the City of Glasgow by name does not mean that alleged ** terrorists are linked somehow, spiritually or otherwise to the Glasgow of the Enlightenment. The alleged perpetrators worked in Paisley at the hospital there and not in Glasgow.

At the time that Smith lived and worked in Glasgow in the 18th century it was a small town with a population of about 23,000; Paisley was a village, one of many in the surrounding country. Edinburgh was larger at over 50,000.

To the tenuous geographical detail, Lee adds speculation about the hopes of Enlightenment through education. I am not convinced that this is a fruitful line of thinking. Lee writes:

‘The Wealth of Nations, Smith argued that the state should educate the working classes not simply because it was the right thing to do, but also because it was prudent.’

Which is correct at one level and not at another. Adam Smith argues in Book V of Wealth Of Nations that the division of labour in the new work processes could make labourers ‘as stupid and ignorant as it is possible for a human creature to become’ (WN V.i.f.52: p 782). He did not make these points when extolling the virtues of the division of labour in Book I (chapters i-iii); he raised this issue in his chapter on the need for government to participate in a national education programme to provide a school in every village.

His rhetorical flourishes in this later chapter are directed at the influential readers in and around government who were already anxious about the violent events in the American colonies and were concerned about such unrest spreading to the motherland, especially among the ‘ignorant’ lower orders (whom privately were seen as of similar status to those the ‘colonials’ had rallied to rebellion against the King; people always see the worst in their enemies).

Knowing these people well, Smith directed his case along lines that would find sympathy among them. In modern terms, we would call it ‘spin’. Scotland already had ‘village schools’ in every parish, unlike England (it also had four universities to England’s two). But if legislators were not convinced by good arguments for education, then a tad amount of argument by ‘fear’ might be called for.

I think the less said about education being a harmonizing force the better. Leaders, legislators and political agitators (‘men of system’, Smith called them) in government from Smith’s time to this, most of them educated too, have a lot to answer for in their conduct, much of it falling well short of the standards expected by the Enlightenment. I can think immediately of the French-educated leaders of the Kymer Rouge in Cambodia, Dr Goebbels in Nazi Germany, on the left and right extremes; scores more in the democratic politics of the US, Britain, France, and South Africa, whose capacity for false doctrines, often contrary to good sense, is a norm not an exception.

That some medical students from the Middle-East, some of whom appear not to be well qualified, may have been associated with criminal events in for them a foreign country, has absolutely nothing to do with the Scottish Enlightenment, David Hume (whom we know visited Glasgow and its hinterlands in 1752), or Adam Smith, who taught there between 1751-64) and was a regular visitor afterwards.

It is also a bit impertinent to think that ‘Muslim Nations’ are lacking a secular education to make them – what? – ‘normal’. When more than half of educated US citizens believe in ‘creationism’ and versions of the earth being only 6,000 years old, reject evolution in terms of utter repulsion, and want to impose their creeds on schools (!) and government, I am not sure that Lee Harris has much of a case to argue for or much firm ground to preach to the ‘Muslim Nations’ about education as an antidote for ignorance.

** British law is rightly fussy about making judgments about criminal trials and people in them before the process has begun and been settled by verdicts. I live in Scotland and I am held to account for such action.

Blogging at Its Best from Brad Delong

If you would like a quick, intelligent and sound account of 8,000 years of the political economy of the world, read Brad Delong’s short essay: “China and Economic Growth: Hoisted from the Archives (What I Am Thinking About Right Now Department)”, found here.

It is written in what I would call the Smithian tradition – the looking backwards to from when we came to understand why were are where we are now as a species, and what this means for our prospects in economics.

Here are the first two paragraphs (enjoy the rest of it):

“Up until 8000 or so years ago, it was crystal-clear why humans should pursue greater wealth--understood as better spearheads, more knowledge of the local environment, and occupation and control of regions where game was abundant and nourishing plants plentiful. Back when our ancestors were hunter gatherers life was short--high infant mortality plus all the attendant risks of the hunting-and-gathering ecological niche--and quite brutish: low technological levels and being always on the move meant that levels of comfort were low, and the absence of literacy meant that the cultural depth and historical memory of the band could not grow very deep. Life before agriculture was not especially nasty: our hunter-gatherer ancestors were for the most part healthy, well-nourished, alert, and engaged for their short lives. But greater wealth for the band and the individual had very clear benefits: fewer of your babies died, you had a greater chance of living through the next winter, and you had a greater share of what comfort was attainable.

For all of the past 8000 years since the invention of agriculture, the benefits of pursuing greater wealth have been much, much greater than back in the hunter-gatherer days. For the vast majority of the human race, agriculture has been a poisoned cup. Malthusian population pressures have--until the last century or so--kept our numbers high enough relative to our technological expertise that the overwhelmingly large majority of humans have been close to the edge of starvation and well over the edge of malnutrition. If the typical adult male hunter-gatherer human grew to be 5'8", the typical adult male peasant-farmer human over the past several millennia has only grown to be 5'2"--or less. Here too the benefits of increasing wealth for the individual and the group are obvious: richer people have more food and a better diet; their children aren't as protein-deprived and so grow taller, stronger, and smarter; their ability to engage in conspicuous consumption via something as simple as having meat on the table gives them status and social power; plus they have access to the amazing depth of riches of human culture. The rich have enough food that they aren't hungry (and good-enough quality food that their brains and bodies can grow, and their immune systems remain strong), enough clothing that they aren't cold even in the winter, enough shelter that they are not wet, and enough literacy and access to culture that they are not bored.”

Good stuff, eh? The rest is soound thinking too, and it gets to China as well.

Anybody Have Information on a Snippet I Came Across This Evening?

I came across this snippet this evening and don’t know how to classify it. I have never heard of the Blog or the Podcasts that it advertises (which carry some prestigious brand names).

It’s called: “Invisible Handwriting: a podcaster’s blog” and can be found here.

The bits that interested me are as follows:

“I am planning on putting the Adam Smith show back on the feed for the rest of the summer.

Looking back, it was so gracious of him to spend time with me, particularly early on when nobody knew me from Adam. I still remember my family being puzzled why I was reading Adam Smith during Christmas 2005, and one of my favorite party moments was when I told a philosophy professor here in Portland that I had done two shows with Bob Solomon. His jaw dropped, because, trust me, in the world of philosophy,Bob Solomon was a big deal. This professor asked me how on earth I got him to do not one, but two shows. My response? "I asked."

Comment
If anybody has any idea what this Blog is about, would they mind sharing their knowledge or, at least, pointing me in the right direction?

Thank you.

James Buchan's New Book on Adam Smith is Excellent Value

Profile Books, London, has published the paperback edition of James Buchan’s, Adam Smith and the pursuit of perfect liberty, first published in hardback in 2006. I said then (April 2006) and I say again that James Buchan’s book is:

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

My second reading has not found anything major too.

At 198 pages (including the Index) and in its compact size in paperback it is easily transportable for convenient reading throughout the day and moving about. It stands a second or third reading (most books on Adam Smith don’t) because it is packed with the author’s eye for telling detail in revealing contexts.

Smith had a complex character which the scant knowledge we have about him can easily be lost in the heavier, and more controversial, books published about him over many years (I know because my research has required me to read them).

When Smith’s claims to fame, usually in isolated quotations from the book the writers never read, are transferred into articles, including sometimes in the professional journals, though mainly in the world’s media, the picture that emerges is mainly a false one. Authors ascribe ideas (laissez-faire; invisible hands’; and small government) to Smith that often are the reverse of what he actually wrote or thought about. For a selection of the grosser errors, look through the earlier posts in the archives of Lost Legacy.

He is both claimed by the Right and the Left and denounced in equal measure by them both. Anarcho-libertarians don’t care too much for him either. Those that claim him as their unlikely icon, smear others for their association with his recommendations in Wealth Of Nations (few of these critics have read his Moral Sentiments or his essays, let alone Wealth Of Nations).

Buchan’s readable and lively prose (I wish I could write half as well) is a great corrective for the mass of misinformation about him. Not a single page is absent something revealing about Adam Smith, the man or his ideas.

I opened his book randomly, just now, at page 117, and found Buchan crowding in delicate sentences, in his fast moving style, mentions of [Hugh] Blair; ‘the pugnacious Ferguson’; the ‘Hellenist Lord Monboddo’; Alexander Caryle [in my view an irritating social voyeur]; the captious and pedantic Governor Pownall’; [Isaac] Newton; Edmund Burke; Sir James Steuart; Karl Marx; Lord Kames; and [William] Robertson. I defy anybody to write a 27-line piece mentioning this galaxy of ‘names’ (all worthy of long articles and books about them in their own right) and keeping it interesting, relevant and entertaining about Adam Smith.

To write sensibly about Adam Smith you have to be familiar with all the above people – and many, many more too. Few besides James Buchan have managed it, and it usually requires major biographical space to do so. Buchan manages to do it all in under 200 fairly small pages. Amazing.

The East India Company Was Never a Model of the Modern Joint-Stock Company

Larry Elliot writes on "PLc: prerogative to an unaccountable few,” Guardian Unlimited 9 July:

“Smith, indeed, predicted what might happen in the Wealth of Nations, when he supported the idea of private companies (or copartneries) against joint stock companies, the equivalent of today's limited liability firm.”

Comment
The joint-stock chartered trading companies (e.g., the East India Company) that Smith wrote about in Wealth Of Nations were definitely not “the equivalent of today's limited liability firm”, any more that the Titanic was the ‘equivalent of a submarine’.

“In the former, Smith said, each partner was "bound for the debts contracted by the company to the whole extent of his fortune", a potential liability that tended to concentrate the mind. In joint stock companies, Smith said, shareholders tended to know little about the running of the company, raked off a half-yearly dividend and, if things went wrong, stood only to lose the value of their shares.”

Comment
The Chartered Trading Companies were set up by Royal Charter or Act of Parliament, with heavy political backing and received an absolute monopoly of territorial trade (‘East of the Cape of God Hope’; “the Baltic”; “Hudson’s bay”, etc.,).

Given the distances they operated under (a six to ten month’s round trip to India), communications were tenuous and under loose supervision to say the least. The case of the East India Company is so bad, so corrupt, so cruel and so awful, that Smith’s criticism of it was well justified.

Be absolutely clear: it was the monopoly status, sanctioned by law that gave the ‘parcel of rogues’ who represented The Company in India and elsewhere in the region a virtual free hand to act as despots, and to plunder on a scale that made even lowly clerks into millionaires, who ‘traded on their own account’, and committed crimes to match.

The limited liability company, legislated for in mid-19th century, and since on many occasions, does not resemble the Chartered monopoly companies in the slightest. To talk as if losing an investment is a mere nothing to the shareholders is somewhat less than convincing. To ignore the legislation and regulation that covers limited liability companies and charges them with a host of responsibilities, with heavy fines for ignoring them, including trading ‘recklessly’, as if the model of the East India Company’s directors applies today is unconvincing.

Big pension funds buy shares in companies and usually spend a great deal of time and money ensuring that the governance of a company performs responsibly before they invest and continue to invest. If all their funds were liable to their full value that would bankrupt the pension funds, which would be reckless in the extreme, including for Mr Elliot's pension. Hence, pension funds take care of where they invest, or withdraw from. In what would Penion Funds invest their members funds if PLCs and Ltd's were banned - corner gorcery shops, lawyers, accountants partnerships, and government bonds?

Immunity from civil damages for destroying a business and the livelihoods of employees used to belong to trade unions when engaged in strikes, but such legal immunities were never conferred on companies. That would not make it advisable to ban trade unions; if a deficiency is noticed, it can be rectified if parliament legislates. And in the case of companies the law has intervened and continues to do so. Corporate misbehavior is punished through courts of law (the East India Company made its own laws for centuries), and the overwhelming majority of companies comply with such laws.

It is a travesty of journalistic, let alone scholarly, exactitude to imply otherwise about Plc’s and Ltd’s. That is why Smith had a different and positive view of joint-stock companies that were denied monopoly status, such as the Bank of Scotland (1694) and the Royal Bank of Scotland (1727). Read the entire book, not selective quotes, please.

Important Text From Francis Hutcheson Republished

Peter Klein at Organisations and Markets
an excellent economics Blog (8 July), reminds us that Liberty Fund * (www.libertyfund.org) publishes this month Francis Hutcheson’s Philosophiae Moralis Institutio Compendiaria, with A Short Introduction to Moral Philosophy, at the ludicrously low price of GBP8.95 9 - about USD16!).

The ‘never to be forgotten’ Professor Hutcheson, was Adam Smith’s teacher at the University of Glasgow.

General Editor, Knud Haakonssen (an authority on the 18th century Enlightenment writes:

“Hutcheson’s Institutio was written as a textbook for university students and it therefore covers a curriculum which has an institutional background in his own university, Glasgow. This was a curriculum crucially influenced by Hutcheson’s predecessor Gershom Carmichael, and at its center was modern natural jurisprudence as systematized by Grotius, Pufendorf, and others. . . . The Institutio is the first major [published] attempt by Hutcheson to deal with natural law on his own terms. . . . It therefore encapsulates the axis of natural law and Scottish Enlightenment ideas, which so many other thinkers, including Adam Smith, worked with in their different ways”

First published in 1742, this is the 1745 edition, in both Latin and English, edited by Luigi Turco, Professor of Philosophy at the University of Bolonga, Italy.

* A couple of years ago I met a Professor of Philosophy at the University of Edinburgh, who on hearing that I recommended the Liberty Fund edition of the Glasgow Edition of the Works and Correspondence of Adam Smith, told me stiffly that he would never buy anything from Liberty Fund because of its ‘rightwing political leanings’.

Being familiar with the Works of Adam Smith, John Millar, Francis Hutchinson, Lord Kames and the Federalist Papers, I confess I have never noticed anything particularly ‘right wing’ (the good professor did not define what he meant by this appellation) in any of these books. As the professor had a North American accent, I assume he was talking about something related to politics in North America. It’s a funny old world…

How To Misread the Famous Pin Factory

Stumbling and Mumbling is a lively economics Blog, run by Chris Dillow, a Marxist of 25 year’s standing (according to his post last week, 5 July), who bills his Blog as ‘A Fanatic not and Extremist’. I read it almost everyday because he has interesting and well written things to say about economics (can’t say the same for some of political posts, but, who’s perfect?).

This weekend Chris Dillow turns to the new Harriman House edition of Adam Smith’s Wealth Of Nations, which I reviewed last week, 4 July, and, following correspondence since with Professor Jonathan Wight, who wrote the Introduction to the edition, and who kindly sent me his paper on the invisible hand, I shall be posting about in the coming week.

Chris Dillow writes: “Smith on growth and companies”, in which he criticises George Osborne, MP, in the leadership team of the UK Conservative Party. He criticises George Osborne, inter alia, “who shows no sign of ever having read Smith, or indeed of ever having spoken to someone who has.” I could not possibly comment on the validity of this allegation, knowing nothing about George Osborne or the extent his knowledge of Adam Smith (I haven’t read Osborne’s Foreword), but I can comment on Chris Dillow’s interpretation of Adam Smith’s writing on the division of labour and the behaviour of ‘corporations’:

“The problem is, Smith's account of [the division of labour] process gives no place for Osborne's paymasters, companies.”

In response, Chris seems to restrict the benefits of the division of labour to independent hunters in ‘tribes of hunters or shepherds’ or to artisans, but not, for some strange reason, to companies (presumably even those run by Marxists)

Chris writes:

”The first sentence of the Wealth of Nations is:
The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour.”
In turn, the division of labour is the result of a natural human impulse. It is "the necessary, though very slow and gradual, consequence of a certain propensity in human nature...; the propensity to truck, barter, and exchange one thing for another."

For example: “In a tribe of hunters or shepherds [?] a particular person makes bows and arrows, for example, with more readiness and dexterity than any other. He frequently exchanges them for cattle or for venison with his companions; and he finds at last that he can in this manner get more cattle and venison, than if he himself went to the field to catch them. From a regard to his own interest, therefore, the making of bows and arrows grows to be his chief business, and he becomes a sort of armourer. Here we have an account of how men, given freedom, will develop the division of labour, markets and hence prosperity.

But there's a problem. In the real world the division of labour is mediated not merely by market exchange but by hierarchically-ordered companies. In Smith's famous pin factory the drawer of the wire does not sell his product to the straightener of wire, but is ordered to hand it over.”

He continues, developing a theme that “the division of labour might not promote prosperity” when companies are formed (capitalism).

Comment
This is a highly problematical assertion, especially when Chris bolsters his case by selectively quoting from Smith’s criticism of joint-stock companies, as if the problems Smith’s alludes to about the ‘Chartered Trading Companies’ in the 18th century were analogous to shareholder companies in the 19th thru 21st centuries.

Chris quotes Smith:
“The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail.” Book V ch 1.107 - which is the online edition) [You will find the quotation in the Glasgow Edition at WN V.i.e.18: p 741; in the new Harriman edition: p 483; or in Edwin Canaan’s (classic) 1937 edition, pp 699-700)]

The contexts in which these and similar quotations should be understood cannot be separated from the institutional forms of the joint-stock trading companies, such as the East India Company to which Smith refers, and should not be attributed to the joint-stock shareholder companies of 19th century capitalism and beyond. These, unlike their 18th-century counterparts, are highly regulated by the Company Acts (as anybody running a limited company, let alone a Plc. can testify).

Smith’s critique of the corrupt colonial trading companies, granted monopoly status by Royal Charter or Acts of Parliament, and mostly operating up to a year’s return sailing time in, say, India (and therefore basically unsupervised, which is, universally, a sure recipe for malfeasance, perfidy and cruelty. Smith’s critique cannot be transferred with integrity by assumption to all joint-stock operations.

Indeed, Smith speaks highly of both the Bank of Scotland (1695) and the Royal Bank of Scotland (1727), which were joint stock companies but neither had monopoly privileges. And for Smith that was the crucial difference; competition is one protection against directors acting against the public interest, and this applies to artisan tradesmen, partnerships, modern companies and multi-nationals (and to entities in Soviet-run economies).

Chris argues further than companies (presumably as he defines them by his misinterpretation of Adam Smith) operate a ‘variant of the division of labour [that] might not promote prosperity’. This is a weak case from reading Smith on the division of labour. In his day, most workshops were fairly small affairs; owners of forges, pin factories, nail-makers, tanning works, spinning or weaving sheds, shipbuilders, coal mines, carriage makers, wheel makers, wholesale traders, and such like, employed a few to 20 or so employees.

Chris says: ‘In companies, we lose one of the benefits of the division of labour - that in focusing men's knowledge upon a single object, they are more likely to "find out easier and readier methods of performing their own particular work."
It's easy to see how self-employed artisans have an incentive to improve productivity. But workers employed by others need not have such an incentive, or indeed the freedom to find such methods.’

Now given that Smith (WN Book I, chapters 1,2, 3) makes the point that the natural outcome of the division of labour was, initially at least, a rise in labour productivity. This increase employment for labourers, and because to do so requires a division tasks among more than one person(!), it is inevitable that an artisan, noting how to gain the benefits from a division of labour (incentives!) would have to increase the numbers employed in his shop. Therefore, to leave the benefits of the division of labour to a self-employed artisan alone would only take the division of labour so far on Chris’s argument. This was an improvement on single-labourer operations, but is no way to ensure increasing returns. Indeed, the productivity gained from the division of labour, while significant even under the conditions of employing 10-20 labourers, would soon maximise.

Smith's 'third' advantage of the division of labour (after ‘dexterity’ and ‘time saving’) is ‘the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many’ (WN I.i.5: p17). Smith’s examples were examples of what he saw in the small workshops of his time; this process was not limited to that situation.

In a later paragraph (which in view of Chris Dillow’s strictures against George Osborne’s alleged 'restricted' reading of Wealth Of Nations), he implies that he has read it), Smith writes:

‘All the improvements in machinery, however, have been the inventions of those who had occasion to use the machines. Many improvements have been made by the ingenuity of the makers of the machines, when to make them because the business of a peculiar trade [e.g., ‘philosophers’] (WN I.i.9: p 21).

The 19th century experience of pin-making, with power-driven machinery, saw output per worker, operaitng machines that did most of the operations previous done by 18 men in the 18th-century pin factory, were done by a handful of men who produced millions of pins, in 20 pin factories compared to the hundreds of such plants in Smith's day.

Moreover, the whole history of the inventions of machinery (James Watt) and new labour processes (Wedgwood, etc.,), show that companies, employing scores, hundreds and thousands, have every incentive to search for new divisions of labour, new sources for their supply chains, and new products, and looking at what has been achieved in productivity, this clearly happened under capitalism.

Whatever Chris Dillow’s points are, they are not supported either by Smith’s text nor in history and nor by experience today.

Good Review from Stuart Kelly of O'Rourke's Book on Adam Smith

Stuart Kelly writes a review of P. J. O’Rourke’s recent book on Adam Smith’s Wealth Of Nations (reviewed on Lost Legacy, Atlantic Books, £14.99) in Scotland On Sunday (Edinburgh) (8 July), “Helping with inquiries”.

It is a lively review, well written and measured. I agree with much of it because Stuart Kelly correctly describes Adam Smith in words I could use myself. However, his opening paragraph could be confusing as Stuart correctly uses the Scottish phrase ‘son of the manse’ (a person who’s father was a Church Minister and lived in the Church’s house – the manse) in reference to Gordon Brown, Britain’s new Prime Minister, who’s father was the Kirkcaldy Church of Scotland Minister.

But Adam Smith was not from the Manse, but the son of a solicitor/lawyer and ‘Writer to the Signet’ (a Scottish legal status), and, latterly, from 1714, a Comptroller of Customs at Kirkcaldy (details are from the excellent and definitive, The Life of Adam Smith, 1995, Oxford University Press, by Ian Ross).

Stuart writes:

“A son of the manse from Kirkcaldy, with a reputation for prudence and a rigorously philosophical approach, who believed that trade could eradicate slavery and reconcile nations... no, it's not our new Prime Minister, Gordon Brown, but Adam Smith, a true scion of the Scottish Enlightenment and the founder of modern economics.”

O'Rourke summarises the central aspects of Smith's thinking neatly. As Smith said, "consumption is the sole end and purpose of all production". … Smith never uses the word "capitalism" (it came about 64 years after his death), or "libertarian" (130 years later). He never saw the Industrial Revolution, or the Service Sector or the Knowledge Economy.

Well, he makes a fine fist of it. First and foremost, O'Rourke grasps one fundamental thing about Smith's magnum opus: the importance of its title. Usually abbreviated, its full title is An Inquiry Into The Nature And Causes Of The Wealth of Nations. The key word is inquiry. It wasn't a Theory of, or a Last Word on, or a Dogmatic Manifesto about. Like any good Enlightenment thinker, Smith circled his topic.

O'Rourke is blessed by Smith's failure to be prophetic. Since he didn't have the word "capitalist", he used "a system of perfect liberty" as not a synonym, but an aspiration. Who'd quibble with flawless freedom? Smith. "To expect... that the freedom of trade should ever be entirely restored in Great Britain is to expect an Oceana or Utopia should ever be established in it."

Overall, however, this is a judicious, finely written book. O'Rourke writes especially well about the connections between Wealth Of Nations and Smith's prior work, The Theory Of Moral Sentiments. His precis is precise: in Moral Sentiments Smith urged us to love our neighbour as ourselves; in Wealth Of Nations he urged us to love ourselves. Or, as in his most famous quote: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."

Comment
In this last paragraph O’Rourke (not Stuart Kelly – the messenger) spoils what was until then a pretty good summary of Smith’s work. O’Rourke’s presentation of Smith’s ideas on the last topic is glib, silly and absolutely wrong. But, what’s a paragraph too bad and too far, in an article that Lost Legacy would publish if I that business.

Silly Sunday Stories on Adam Smith

This is from New York Public Radio:

“The Invisible Hand

In 1776, writer Adam Smith came up with a theory: when lots of buyers and lots of sellers get together, the resulting "market price" that emerges through all that buying and selling is in fact the work of an "invisible hand." He meant god. We think he really meant "emergence."

Comment
Too daft for a comment…

Silly Saturday Stories

Ian Cowie, Personal Finance editor in the Daily Telegraph (UK) (Telegraph.co.uk) writes in ‘Personal account’ that “Alert savers should benefit from the cut-throat battle between banks” and includes this rather tabloid (for the Telegraph) paragraph:

“On a symbolic level, there was hardly a squeak of protest last March when Sir Edward Elgar was displaced from the back of £20 notes by Adam Smith. Other nations' banknotes commemorate famous soldiers, artists and politicians; we swapped a wonderful English musician for a Scottish tax collector. Yes, I know that Smith's fame is firmly based on his insights as an economist but the fact remains he worked as a commissioner of Scottish customs and excise.”

Comment
Ian Cowie obviously is a better editor than he is a fact checker.

The Bank of England is the central bank of the United Kingdom of Great Britain and Northern Ireland. Its write across the UK is unchallengeable. It is not a bank only of ‘England'.

Its currency is the sole legal tender for the whole of the UK and not just England.

Notes issued by private banks in Scotland may only circulate under the auspices of the Act of Union, 1707, and do so today only if the exact same numbers of notes issued by the Bank of England are deposited physically in the Scottish Bank’s reserves. They are accepted as currency by custom.

Adam Smith was not ‘a commissioner of Scottish customs and excise’.

He was a 'Commissioner of HM Customs and Excise' serving in Scotland, appointed by the UK Government in London. To be precise (the difference being important), he was
one of five ‘Commissioners for Managing and Causing to be Levied and Collected His Majesty’s Customs, and Subsidies and other Duties in that part of Great Britain called Scotland and also the Duties of the Excise upon all Salt and Rock Salt imported … into Scotland in that part of Great Britain called Scotland.’

As an institution of the British government, appointed by the British Government, HM Customs was a British institution and not a devolved nor separate Scottish institution.

Incidentally, ‘the fact remains’ that the Bank of England was founded by a Scotsman, William Paterson.

Adam Smith Was Not a Philistine, Mr Hutton

"Creativity is not just about artistic expression - it can also generate wealth", writes Will Hutton, in The Guardian (6 July):

"There's no unbridgeable gap between culture and business"

“The more creativity and culture we have, the better - but it is also a source of wealth generation. Adam Smith thought that culture was a non-productive activity, and from a different perspective [Mark] Lawson is making the same argument: there is "arts" and "industry" and never the twain shall meet. In fact, companies who attempt to meet deep-seated human desires for culture need the same business disciplines as any other sector.”

Comment
I class this comment as ‘mischievous’, on the grounds that Will Hutton, a prominent spokesperson for the left literary class in the UK is bound to know that Adam Smith’s productive/unproductive labour distinction had nothing to do with the importance, social usefulness or civilising influence of culture.

Mr Hutton is given to acerbic distaste for anything to do with centre politics in the UK (he didn’t like Mrs Thatcher too much, if at all, and his opinions of Mr Blair are not much warmer).

Adam Smith was in fact a stalwart enthusiast for the Arts.

His first ever publication was to write a Preface and introduction to a book of poems by the Jacobite exile, William Hamilton, in 1749.

His second publication was to write a review of Samuel Johnsons’s Dictionary in the Edinburgh Review, (1755) in which he criticised Johnson’s treatment of the worda ‘But’ and ‘Humour’, with detailed references to Shakespeare, Milton, Sidney, Addison, Dryden, Pope, South and Bacon.

His third publication was his Moral Sentiments (1759) which demonstrated an intimate knowledge (apart from moral philosophy) of classical Greek and Roman literature and Rhetoric.

We know now from manuscripts published posthumously by his literary executors in 1795, which include four essays or part essays on:

Of the External Senses;
Of the Nature of that Imitation which takes place in what are called the Imitative Arts;
Of the Affinity between Music, Dancing, and Poetry;
Of the Affinity between certain English and Italian Verses.

Throughout his life Adam Smith was a patron of the theatre (an emerging art in Edinburgh under pressure from the ever vigilant zealots of the Church of Scotland), he read poetry in his social hours, and he wrote and delivered a series of thirty (30) ‘Lectures on Rhetoric and Belles Lettres’ each winter in Edinburgh from 1748 to 1751, and he continued these lectures at Glasgow University as part of his moral philosophy degree course from 1751-63.

So, far from being portrayed a philistine, only interested in the creation of wealth, Adam Smith has strong qualifications to be considered a man of letters and a patron of arts, at least to a similar standard as William Hutton (I am being generous here to Mr Hutton).

In terms of Smith’s distinction between productive and unproductive labour it had nothing to do with the merits of works of art, or ‘culture’. It related solely to how labour contributed to the accumulation of capital in a commercial society.

Smith’s growth model identified net investment, from savings out of revenues, that arose when capital, plus productive labour and land, produced output that could be sold for a price that covered its costs and added some ‘neat’ (net) amount which constituted profit, some of which could be re-invested in each round of the ‘great wheel of circulation’, to add to the annual production of the ‘necessaries, conveniences and amusements of life’.

Productive labour enhanced productive investment rather than consumption. Unproductive labour didn’t (though Adam Smith’s distinction was too tightly drawn even for the last quarter of the 18th century (brothels, plays and hotels met Smith's productive labour definition), and too tight certainly for the 21st century, with much of artistic activity captured electronically and in live performances, which also produce a net profit available to allocate in some positive proportion for savings and investment.

I suspect nobody would be more pleased with accessibility to art or culture than Adam Smith. Comments on him should at least recognise Smith’s undoubted support for the arts when it was sometimes difficult to get many ventures started and free from censorship.

1,000th Post Today - a small step in Blogland but a giant step for Lost Legacy

Today, Lost Legacy reaches its 1,000th post, since it started in February 2005!

Over that period from the first month’s total of unique visitors of 165, who looked at 665 pages (there were virtually no archives to look at), Lost Legacy has gone on to June’s 2007 monthly total of 21,533 unique visitors, who looked at 64,395 pages, nearly a tenfold increase.

For the time since March 2005 to June 2007, Lost Legacy has received 211,563 unique visitors, who have looked at 839,180 pages. I hope that trend continues upwards.

During virtually all of the time since my first posting, I have been working on my new book, Adam Smith, for Palgrave’s Great Thinkers in Economics series, to be published in 2008. I am now on the home stretch with the book and hope to hand the manuscript over to Palgrave Macmillan within a few weeks.

There comes a time in every book where the author must let go of ‘tidying up’, checking references, incorporating new text and taking into account new materials from the busy ranks of Smithian scholars. I am rapidly approaching that point, but I have one more task to do before I sign it off: I have to write my conclusions about Adam Smith. If I get to there in two weeks I will be pushing it. I would like to get there before I return to France in late August.

My thanks go to all who have ‘dropped in’ to read Lost Legacy, many who have stayed to read regularly. To few comments are posted on pieces but apart from a few more doing so recently, I receive emails from many more.

I’d like to think that I have not wasted your time and I hope you have all benefited from knowing more about the real Adam Smith, born in Kirkcaldy near to 5 June 1723 and died on 17 July 1776.

Lost Legacy shall carry on after my book is published for as long as I am able, and you, dear readers, keep ‘clicking’ on.

Call For Help to Locate an Alleged Statement by Adam Smith

'Life, Liberty, and the Pursuit of Personal Gratification' (posted in OpEdNews.com) by Jason Miller, who writes:

“While Jefferson penned the words, “life, liberty, and pursuit of happiness” in our Declaration of Independence, the notion actually evolved from Locke’s “life, liberty, and the pursuit of estate” and Adam Smith’s “life, liberty, and the pursuit of property.” Smith’s version even found its way into The Declaration of Colonial Rights, crafted by the First Continental Congress in 1774.”

Comment
The piece suggests that its author, Jason Miller, does not seem to be happy about America, the people who run it politically, or the people who run its businesses. Far be it for me to comment on another country, largely populated at its founding and through the 19th century with British connections.

Recently in the Best Western Hotel, Fairfax, Virginia, I read the names of the top 12 Union Generals and the top 12 Confederate Generals during the civil war, or the ‘war between the states’, and all but one of them on both sides had names suggesting they were ex-British stock, and of them the clear majority had names of Scottish origin….

Anyway, I would ask your indulgence to help locate the alleged quotation from Adam Smith (‘and Adam Smith’s “life, liberty, and the pursuit of property”).

I do not recognise it, but memory ain’t what it used to be (along with much else), so if anybody knows anything about it, please post a comment or drop me a note to gavin At negweb dOT com

Incidentally, I have invited anybody who would like a copy of my paper ‘Adam Smith’s Invisible Hand: from metaphor to myth’ (presented at the History of Economics Society annual meeting in June at GMU) and several have already done so.

Let me make it clear there is no charge for me sending to you an electronic copy, nor is there any danger of your email address, or anything else about you, being used for any purpose other than to send to you the paper (somebody last night asked what it would ‘cost’?), as Lost Legacy works strictly within the UK’s Data Protection Act.

A Small Caveat About the Fine Harriman House Edition of Wealth Of Nations

Recently, I advised readers about a new 656 page edition of Adam Smith’s Wealth Of Nations from Harriman House, UK, at the fine price of GBP19.99. My copy arrived today and in production terms it is excellent. It would make a fine one-volume present to initiate anyone about to start an economics course in October (northern hemisphere) or in March (Southern hemisphere), or for private reference.

It is based on the famous Edwin Canaan New York edition of 1937 [1930], though it has dropped his interesting and well researched footnotes, more’s the pity. Canaan’s notes explain references, occasionally correct slight errors in Smith’s text, and generally add a good deal of insightful editorial comment. Nevertheless the book is well worth the low price.

Should you be used to reading the Glasgow edition from Oxford University Press (and the Liberty Fund edition), as most scholars are, you can find your way through the Harriman House version of Canaan’s edition by using the ‘Table of Corresponding Passages’ at pages 980-1055 in volume II of the Glasgow Edition.

However, I must make a critical comment of the Introduction by Jonathan B. Wight (University of Richmond), where he is Professor of Economics and International Economics and author of a forthcoming article: ‘The Treatment of Adam Smith’s Invisible Hand’ in the Journal of Economic Education.

In a section headed ‘The Invisible Hand’ he writes:

‘One of Smith’s main contributions to economic theory is the concept of the invisible hand. He borrowed the phrase from Shakespeare, Daniel Defoe and others, but used the term sparingly – once in Moral Sentiments, once in Wealth Of nations, and once in an earlier essay. However, the idea behind the invisible hand appears throughout his works, namely, that there are hidden forces at work in human society (just as gravity and electricity work invisibly in the material world).’

Comment
There is much more in a similar vein, such as his equating the invisible hand to ‘human instincts’, analogously to the ‘instincts of birds when building a nest’, and require asserts the hands need supportive institutional settings, even in some people’s views, of a ‘benevolent deity’.

Professor Wight integrates his open acceptance that not all instincts of the kind he is interested in are sometimes other than ‘destructive’ in the ‘wrong institutional setting’. Now that’s interesting. If everything boils down to the ‘institutional setting’ what does the invisible hand amount to?

I could go on, but Lost Legacy has had plenty to say about the metaphor of the ‘invisible hand’ (check the archives) and will continue to say more too. I find Professor Jonathan B. Wight unconvincing on this subject.

He spoils, in my modest view, a good edition of Wealth Of Nations with this small part of his introduction. I shall look forward to his forthcoming article in the Journal of Economic Education, if I can access a copy.

In the meantime, if your are interested in reading my recent paper : ‘Adam Smith’s Invisible Hand: from metaphor to myth’, email me at negwebDoTcom,with with ‘gavin’ as the preface in the usual form of address, and I’ll send an electronic file of the paper I presented at the 34th annual conference of the History of Economics Society in June in Fairfax, Virginia at GMU.

Don't Read Wealth Of Nations too Quickly

Mark Thoma opens an interesting discussion on "Morality and Economics" on his brilliant and always readable Blog, Economist’s View.

There is too much to comment on (read his article and comments from readers here).

The following comment, I think it is from Mark Thoma, though it is between two statements from Kenneth Arrow, and may be Kenneth Arrrow’s:

‘I think that when Adam Smith was telling the story of getting his dinner from the butcher, the brewer, and the baker he was really thinking of a gentleman who has money to spend. He was not thinking of the struggles of those tradesmen to make a living. The price system can generate this kind of error.’

Comment
It is at the famous ‘butcher, brewer, and baker’ paragraph that much of what is misunderstood about self-interest in Smith’s Works starts to go wrong.

Here is the famous quote:

‘It is not from the benevolence of the butcher, the brewer, and the baker, that we expect our dinner, but from their regard to their own interests. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.” ((WN I.ii.2: pp 26-7)

It is not clear to me in what manner the ‘price system’ makes an ‘error’ in these circumstances, nor why ‘the struggles of those tradesmen to make a living’ is relevant to the transaction, any more than the ‘struggles’ of customers in search of the items for their dinner within their budgets are relevant to the ‘butcher, the brewer, or the baker’.

As we are enjoined to address the interests of the ‘butcher, the brewer, or the baker’, so they are enjoined to consider their customer’s interests. It was never the case, either in Wealth Of Nations, nor in Smith’s earlier Lectures at Glasgow University (1751-64), or in the ‘Early Draft’ (1763), which discuss the same transaction in almost the same terms, that Smith enunciated a doctrine that people should act from their own self-interest only, as if that is the end of it.

Markets involve transactions between two or more independent parties, who also happen to be dependent on each other, to serve their own interests, but they can only do this by addressing the other party’s interests, not their own.

Economists, especially in recent generations, do not seem to have grasped this point, including Nobel Prize Winners like George Stigler, Kenneth Arrow and Paul Samuelson. I know this is a risky charge to make from a lowly retired economist who will never be on anybody’s very, very long list for such acclaim as we rightly give to the giants of our profession, but retirement does allow one to ‘live dangerously’.

In markets, the two parties arrive at their transaction from entirely different perspectives. The seller is conscious of the costs involved in coming to market with something to sell, and the buyer is conscious of wanting something to buy within a limited budget.

If the agreed price does not meet the seller’s costs, he may conclude the bargain on that occasion, but will probably adjust his behaviour next time round, including lowering unit costs or withdrawing from the market, or, of course, entering in some collusion or scheme to narrow the competition in the market (a point often made by Adam Smith).

If the agreed price does not meet the buyer’s aspirations, she may conclude the bargain on that occasion (the family have to eat their dinner), but will probably adjust her behaviour next time round by raising the funds allocated to dinners (cutting something elsewhere in her budget), or withdrawing from buying items ‘too expensive’ for her budget and subsituting cheaper items, or seek another outlet where the competition among sellers impels them to lower their prices (a point often made by Smith when discussing the distorting effects of monopoly and protectionist behaviours and how they lead to ‘wrong’ allocations of capital).

But overall bargains are transacted by starting from different solutions to the same price problem (buyers wanting lower prices than sellers offer; sellers wanting higher prices than buyers demand); they may arrive at a solution that has a single price acceptable for both at that time and place.

The most efficacious way to arrive at that single solution is by conditional bargaining: ‘give me that that I want and you shall have this that you want’ (WN I.ii.2: p 26, which is only two lines before the ‘butcher, the brewer, or the baker’, enters the discussion.

The process of bargaining (completely ignored by John Nash’s 1950 paper, another Nobel Prize winner, assumes away the process by which prices are formed, and identifies the ‘ideal’ outcome only), involves each party mediating their self-interests by addressing not their own self interests, but by addressing each other’s.

Understanding this, as Smith wrote it and meant it, resolves Kenneth Arrow’s angst about the ‘errors’ of the price system. To the extent that individuals behave as if their self-interests are paramount in bargained transactions they make the process of negotiation a stressful and more difficult exchange that it needs to be.

Thirty years of observing, training and consulting with thousands of negotiators in the real world (not students playing games) has confirmed to me that Smith understood the price process much better than most economists understand it over 200 years later. Perhaps they read Wealth Of Nations too quickly? More likely, they cnanot model the bargaining process, so leave the dark alley for the lamplit pavement.

Important Meeting 24 July, London: Adam Smith and Edmund Burke

On Tuesday 24 July, Dr. Eamonn Butler, the Director of the Adam Smith Institute, will speak on the relationship between Adam Smith and Edmund Burke at a Burke Society Dinner, in London’s Garrick Club.

Eamonn Butler will talk about the relationship between these two 18th-century leading figures, their influence in their times, and their relevance for today, when considering such current issues as education, ‘fat cats’, the future of the Welfare State and the British Constitution, and world problems such as Iraq, the European Union, Darfur, trade with Africa and so-called human-caused climate change.

It will be an evening for profound, far reaching and significant thinking, and one not to be missed. Reserve your place(s) by emailing: aharris@manufacturingforum.com

The evening, (including dinner, wine and pre-dinner drinks), costs GBP£52.00 per place. Book now.

Articulate Nonsense About Smith is Still Nonsense

The manner in which Adam Smith is turned on his head by misquotes, made-up quotes, and outright, barefaced, fiction about him is a wonder to behold and to be treated contemptuously. I found the following by an author who purports to offer ‘a guide to Life’.

Ghad! Sir, what sort of life is he guiding his readers to I wonder? His name is Steve Joe Parker, and his ‘Guide to Life’ is here:

I select the following pieces of fiction, masquerading as good sense for my comments, trying not to be impolite:

“Adam Smith and his "invisible hand" of the free market created the concept that acting in our own self-interest was the most efficient way to promote the public good. Instead of donating $20,000 to charity to assist struggling families, I can buy a $20,000 car and provide jobs at the factory, health insurance, and other social benefits. Plus, I get to keep the car. Adam Smith made it okay to be selfish.”

Comment
Errors: Adam Smith never had ‘his invisible hand’ of the free-market’. That is a fallacy created by 20th century neoclassical economists attempting to dress mathematical theories of general equilibrium with the accolade of Smith’s name. His single use of the metaphor in Wealth Of Nations had nothing to do with ‘free-markets’. Go on, check it out: WN IV.ii.9: p 456 …

In the case where individual merchants were risk averse to sending their capital abroad, they could invest it at home. If enough of them chose to do so, domestic GDP would higher than if their individually dispersed capital was sent abroad. The whole is the sum of its parts. Other cases of such consequences exist.

But, many more cases of self-interest working against the public good also exist – Wealth Of Nations is full of them. Monopolists and protectionists narrow the market, engage in uncompetitive practices, reduce workers wages, support policies that benefit their interests in the name of ‘the public good’ and lobby against policies that would benefit society.

Steve Joe Parker:

”So, what's wrong with this view of the world? Maybe a few things. First, it promotes a consumerism that is not necessarily environmentally sustainable, and it places a higher value on things than anything else. Unfortunately, we often learn through experience that happiness does not come from our things.”

Comment
Consumers promote ‘consumerism’. If Steve Joe Parker does not want to be a ‘consumerist’, he does not have to participate. He can quit; cut down on his income and give what he has to charity.

Adam Smith practiced what he preached. He lived frugally, gave most of his income to private charity, had an ‘open house’ for students, indiginous scholars, visitors to Edinburgh, and such like. He shared his frugal dinners with anybody who had conversation to offer. Steve Joe Parker, if he lives like that, is living as Smith did; if Steve Joe Parker is a well-heeled ‘consumerist’, holding on to his money, he ain’t living as Smith did.

Secondly, Smith wrote extensively on human motivation and happiness too. He was clear that urging that the ambitious “poor man’s son” would spend a lifetime chasing a chimera, a false dream; so much so, that he said that ‘heaven in its anger’ are misled him to follow a life that he would regret when he was aged, even if successful in his quest.

People admire the rich and wish to emulate them, he said. Admirers, said Smith, do not really imagine that the rich are ‘happier’; the imagine, falsely, that the rich ‘posses more means of happiness’.

Steve Joe Parker should read Moral Sentiments, Book IV.I.8: p 182; better still he should read the entire chapter, and see why Smith that this illusion was what kept society driving forward. It’s what formed the USA across its continent, and it is what makes ‘poor men’s sons’ risk everything to cross the border in search of a piece of it.

If Steve Joe Parker wishes to opt out, I expect he will be posting from Mexico soon, or from even less consumerist societies – why not Darfur, or North Korea? – neither of which is remotely consumerist. Or he could go to corners of his own country and doss down with those who have nothing…

Steve Joe Parker:

“Second, Smith's view suggests that selfishness is not only okay but it is desirable. While this might be good economically in the short-term, it doesn't do much to help the people of the world co-exist peacefully.”

Comment
Sorry, Steve, those are not Smith’s views at all. You are confusing him with Bernard Mandeville (1724), whose ideas Smith said were ‘licentious’ and wrong.

Steve Joe Parker:

”Third, sometimes Adam Smith is just plain wrong. If Jonas Salk acted in his own interest, he would have patented his vaccine instead of giving it away. He could have raised the price and become a very rich man. However, the result would have been the suffering of thousands who could not afford his vaccine.”

Comment
What has this to do with Adam Smith?

From his writings Smith would have applauded Jonas Salk. Indeed, Steve should turn a couple of pages from the page I have already referred to, page 185, and read paragraph 11 (it carries on over the page to page 186-7), and read Smith praising the sense of public duty exhibited by some people.

Surprising to some, what you find in Adam Smith’s actual works and not the second-hand, made-up nonsense about him that Steve repeats, mindlessly and, I assume, in all innocence.

If Steve got these silly ideas about Smith from a book or newspaper by somebody, he should demand his money back. After all, that's what people do in consumerist societies with lots of lawyers in them.

What Wealth Of Nations is Really About

‘Emmanuel’ asks: "What Would Adam Smith Do?" in the Blog, International Political Economy Zone (2 July):

“What would Adam Smith do for a living nowadays? It seems an odd question to ask about the person some refer to as the father of economics. However, two researchers at the University of Texas, Daniel Sutter and Rex Pjesky, argue that Smith would not have been able to find work in modern economics as his approach was mainly non-quantitative; his method relied on prose and not maths. Indeed, some Nobel Prize winners in Economics have won the award with little or no quantitative analysis such as Gunnar Myrdal, Friedrich Hayek, Ronald Coase, Thomas Schelling, and James Buchanan. However, in their survey of recent publications in economics journals, the UT authors find that few papers are free from quantitative analysis.”

Comment
Emmanuel’s question can be answered on two levels; first Adam Smith’s mathematical ability; and second, the purpose behind Wealth Of Nations.

The absence of mathematics (and ‘political arithmetic’ or statistics) is not evidence of the absence of mathematical ability (an elementary error of assessing evidence).

From his biographical accounts he showed mathematical ability as a student in 1737-40 at Glasgow University according to his friend Matthew Stewart, later Professor of mathematics at Edinburgh University, and father of Dugald Stewart, Smith’s first biographer. Professor Robert Simson, teaching mathematics at Glasgow and a leading authority of Euclidean geometry, ran an informal mathematics seminar outside the University syllabus for interested and able students and colleagues, to which Smith attended and participated. He was reportedly still discussing ‘difficult’ problems in maths throughout his life. Smith interests in all subjects was eclectic.

Of course, mathematics has moved on a great deal since and so has economics; if anything the two seemed to have merged in the last sixty years since Samuelson’s 1948 ‘Foundations’. I doubt whether Smith would have been comfortable with neoclassical economics, expressed verbally or mathematically; probably he woudl find it too divorced from the real world to answer any meaningful questions about it.

That leads to the purpose of Wealth Of Nations. It should be obvious to readers who know anything about the context in which wrote his book that it never was intended as a textbook of economics, nor as a book of principles of economics.

In so far as it included economics these were supportive of his main theme and were directed at the audience for which he intended it to be read. ‘Police’, or the assurance of the regular supplies of the products of land and labour, were included in the moral philosophy syllabus of Scottish universities in the 18th century. Smith followed that tradition in his lectures at Glasgow University during his tenure, 1751-64 and remained essentially a moral philosopher.

The problem (or, opportunity) that he addressed was his observation that Western Europe showed signs of recovering since the 15th century from the thousand year stagnation following the fall of Rome in the 5th century. This was evident in the crude evidence in literature, architecture, technology (most of it to assist and augment the powers of labour, as seen in Diderot’s multi-volume Encyclopaedia) and in the slowly rising population (only possible if a 'surplus' was being produced).

Smith saw the philosophers role as ‘to do nothing, but observe everything’, which he did from his wide reading of classical sources, modern travellers’ tales on America, Africa, the Pacific, Asia, and from reading contemporary accounts of Europe.

From these sources (there were few others), he observed the long-run changes that were occurring in the basic elements of ‘police’: people of all levels were slowly becoming better off (absolutely, not relatively). Compared to the wretched lives of ‘savages’ in the America’s (which were made worse off by violent and cruel European colonists), the lives of the poorest common labourers and their families in Scotland were much better served by ‘police’ than that of the ‘savages’. Rousseau’s admiration for non-commercial man was an illusion; the gap between them and their ‘chiefs’ or ‘princes’, was greater than that between European princes and their subjects.

That led to asking of what did ‘wealth’ consist (money, or their access to the ‘necessaries, conveniences and amusements of life’)? Observing that it was the latter (gold was a means, not an end), the next question was ‘what caused the production of the people of Europe to have access to the ‘necessaries, conveniences and amusements of life’, denied to the people of the ‘savage’ world?

It is in answering those two questions that Smith wrote Wealth Of Nations, using the library of sources, those which he had to hand or access to. He did not have a ready made set of principles on a nearby shelf; short pamphlets that he had access to provided some narrow answers, but mostly he had to evaluate limited current knowledge, synthesise many sources and present his conclusions to his intended audience, the men who legislated, who determined policies, and those who influenced the former. In short, the British political class.

He concluded that the drift of national states in Europe into jealousy of trade, mercantile protectionism, internal regulation of commerce and ventures such as colonies and wars over trivial ends, reduced the ability of the full fruits of commerce and improved agriculture to be realised. He was not against government roles in 'police'; he opposed then current government roles for following false doctrines from mercantile minded colonists and protectionists.

In this context, the absence of mathematical interpretations of reality, partial and general equilibrium theorems, statistical tests and others not yet invented in 1764-76, nor before he died, is a false, if not trivial issue. It is clear to me that most economists do not understand what Smith was about, if they have ever read more than a few isolated quotations from his book(s).

It is as worthwhile asking modern economists to write a book on how current economies work, what are its singular features, and how will they persuade today’s legislatures to act to take advantage of the potential in economics growth and the growth in knowledge.

Don't hold your breath.

So Near, Yet Just a Little Short of Being Perfect

‘Private equity will have to play fair on tax: American Account' by Irwin Stelzer in today’s Sunday Times Online (1 July):

“So far, so good. But the dealmakers forgot to consult their undoubtedly dog-eared copies of Adam Smith, the man they cite for the proposition that they are being led as if by an invisible hand to do the public good. First, as James Buchan points out in his Adam Smith and the Pursuit of Perfect Liberty, that phrase occurs only three times in the million-word output of Smith, “and on not one of those occasions does it have anything to do with free-market capitalism . . .” More importantly, Smith argued that: “The subjects of every state ought to contribute towards the support of the government, as nearly as , in proportion to their respective abilities.”

Comment
Irwin Stelzer is almost right in quoting the excellent author, James Buchan, and his excellent book, Adam Smith and The Pursuit of Perfect Liberty [Profile Books, London; new paperback edition is out, £7.99; which is the subject of my review next week].

But James Buchan does not hold to visions of ‘an invisible hand’ in the manner attributed by implication from the manner in which Irwin Stelzer places his name in the same paragraph ‘as if’ (if I may be so bold) James Buchan had made a similar comment. He didn’t, and as we would expect, Buchan makes it very clear in his interpretation of the invisible hand that he was not fooled by claims about Smith’s use of it, which happens to be the same as mine in Lost Legacy (with one small caveat, which I cover in my review of the new edition of Buchan’s admirable volume, to be published here next week).

However, Adam Smith did not use the phrase ‘as if led’ instead of ‘are led’ before ‘by an invisible hand’. That is an interpolation introduced by habits from whence I know not where nor by whom I know not of. It changes Smith’s use of the metaphor of ‘an invisible hand’; it softens its more ridiculous claims to be taken seriously as other than a metaphor for what Smith has described in previously to the oft quoted paragraph.*

Check it out for yourself in your copy, ‘dog-eared’ or otherwise (Wealth Of Nations, Book IV, 9. p 456: ‘and he is in this, and in many other cases, led by an invisible hand to promote an end which was no part of his intentions’).

Why is this important? Well, Irwin Stelzer is commenting on the behaviour of certain equity-partners, and assuming that they read Adam Smith so often and have done for so long that their copies of ‘Wealth Of Nations’ are ‘dog-eared’ (excluding the unlikely possibility that they only own second-hand copies), they will find, if they consult their copies, a different phraseology to that which Irwin attributes to Smith, which might lower the attention they pay to his advice.

The real problem for me is that to the incorrect attribution of certain qualities to Smith’s use of a well-known, to him at least, literary metaphor (only three times in all of his works), Irwin changes the meaning that Smith gave it by his use of the metaphor as quoted above.

‘As if led by and invisible hand’ is different from ‘led by an invisible hand’. This opens another debate between those who see Smith as some sort of ‘Deist’ (believer in an original God, but not a personal God) and those who see him as essentially atheistic (such as I do).

I would add, in parenthesis, that when Adam Smith speaks of the inner motivation of people he talks unambiguously of their constant striving to better themselves and this does not need, nor does he give it, the metaphor of ‘an invisible hand’:

‘… the principle which prompts to save, is the desire of bettering our condition, a desire which, though generally calm and dispassionate, comes with us from the womb, and never leaves us till we go into the grave. In the whole interval which separates those two moments, there is scarce perhaps a single instant in which any man is so perfectly and completely satisfied with his situation, as to be without any wish of alteration or improvement, of any kind. An augmentation of fortune is the means by which the greater part of men propose and wish to better their condition. It is the means the most vulgar and the most obvious; and the most likely way of augmenting their fortune, is to save and accumulate some part of what they acquire, either regularly and annually, or upon some extraordinary occasions. Though the principle of expence, therefore, prevails in almost all men upon some occasions, and in some men upon almost all occasions, yet in the greater part of men, taking the whole course of their life at an average, the principle of frugality seems not only to predominate, but to predominate very greatly.’ [WN II.iii.28: 341]

If only readers of, and writers about, Wealth Of Nations would stick to the actual propensities of humans to act in ways that raised the prospects of society - all of it, not just a few – enjoying the products of land and labour, i.e., the annual production of the ‘necessaries, convenience and amusements of life’, they would be closer to the really important messages contained in Wealth Of Nations.

* I cover the details in my paper: ‘Adam Smith’s Invisible Hand: from metaphor to myth’,(presented to the 34th Annual Conference of the History of Economics Scoiety, Fairfax, Virginia, 10 June) which interested readers may obtain by sending to me an email: GavinK9 [a]t] gmail{d]o][t]com from which they will receive an electronic copy.