Apologies to Stevie Joe, But He's Still Wrong About Adam Smith

A correspondent has taken me to task for what appears to be an apparent snub, or at least an act of discourtesy (unintentional I can assure all), in that I made a criticism of his views attributed to Adam Smith (2 July, Lost Legacy), to which he added a couple of comments and to which in return I did not respond. The correspondent in question was a Mr Stevie Joe, a self-proclaimed ‘genius’ who writes a Blog, Stevie Joe Parker’s guide to life (‘blazing a path to enlightenment, world peace, dependable government, and what not’) (here)

For some inexplicable reason, I did not respondat the time, for which I offer my unreserved apology, as I usually respond to all correspondents, without fear nor favour. As a lifetime-long educator, I suffer fools and geniuses in equal measure.

This came to my attention this very morning when checking emails and the trusty Google alert showed a piece referring to Adam Smith, and down came this one from Stevie Joe, which I did not recognise from before and which in equal measure perplexed me as I hadn’t clue the ‘good professor’ referred to me.

I copied it intact for study later and on seeing my house guests to the local rail station, en route to a day in Bordeaux, I returned from a long French lunch and read it again, this time noticing something familiar in one of its quotes and also that the ‘good professor’ was from Edinburgh. The author was referring to me! Temporarily in my French home (I return to Edinburgh next weekend), I quickly looked up the archives, found Stevie Joe’s earlier piece and the two unanswered comments. Quelle horreur!

That most modern economists have not actually read Adam Smith is sad, but a fact. That many of them attribute to Adam Smith that which he never said or wrote is a double sadness; it exposes them to criticism and exposes their ignorance to general disapprobation among those who have read Adam Smith.

Stevie Joe attempts to argue that this is analogous to the sayings of Jesus Christ, which came down from an oral not a written tradition, but, in general, probably bear some resemblance to what he actually preached. Maybe, maybe not. Brought up in the Scottish Presbyterian tradition and not the High Church of England or Rome, I reserve my opinions on the frugal simplicity of the Scotch churches compared to high and heavy rituals of the more prodigal of other churches among Christians.

However, the situation with Adam Smith is completely different. His works, Moral Sentiments, Wealth Of Nations, Lectures on Jurisprudence and various smaller essays and correspondence are available as they were written and edited by him. They are available at frugal prices intact and documented from Liberty Fund, Indianan, USA. While argument might be generated among biblical scholars about Christian sources, there can be none in the case of Adam Smith.

Anybody reading the archives of Lost Legacy would soon be aware that misattributions, made-up sources, and outright fiction is written about Adam Smith almost everyday somewhere in the world. So much so that several scholars, not just myself, demonstrate this sad fact by their detailed rebuttals of much of what modern economists claim about him and his Work. This has led some to differentiate a fictional figure, the Adam Smith created in Chicago, from the Adam Smith born in Kirkcaldy, Scotland, in 1723.

Of Alan Greenspan’s many qualities I have nothing to say, but his familiarity with the Adam Smith from Kirkcaldy is not among those qualities. The Adam Smith he talks about originated in Chicago in the 20th century. There are so many entries on Lost Legacy describing the errors in Chicago Smith that Stevie Joe can sample them. If Stevie Joe believes in Chicago Smith after reading them, there is little I can do to help him, though I am always willing to answer serious questions, should he have any.

Impressive Interview with Gregory Clark: a comment

Gregory Clark gives an interview (here) to the Intrepid Liberal Journal, 29 September, and explains the themes of his thesis from ‘A Farewell to Alms’ (Princeton University Press, 2007) in clear language for all. It is an impressive performance. I give a selected paragraph relating to Adam Smith below.

“The Industrial Revolution Unplugged: An Interview With Author Gregory Clark” by Intrepid Liberal Journal (originally posted in the Intrepid Liberal Journal as well as the Independent Bloggers Alliance, The Peace Tree and Worldwide Sawdust).

“ILJ: One element of your book I found ironic is your challenge to Adam Smith, considered the founding father of capitalism, who in 1776 published The Real Wealth of Nations. Smith postulated that the rule of tyrants and their institutions undermined incentive for productivity because the ruling class ultimately confiscated any wealth that was produced. You contend that pre-industrial England had plenty of incentive for producers, such as limited government and low taxes, yet prosperity still wasn't generated. Hence, Smith who is identified with the ethos of limited government actually postulated that the ruling class can positively or negatively influence economic policy with activist government. Why do you believe Adam Smith was wrong about that?

Clark: Well, since I've published the book I've come under criticism from intellectual historians. So, I think what I should be careful to identify it's the modern image we have of what Smith was about, rather than Smith himself. I'm not a historian of economic thought, so what I mainly want to emphasize is the message we've taken from Smith, the Smith we've constructed.

Smith is regarded as arguing that growth results from getting the correct economic incentives, which results from getting the right set of economic institutions. That's really an incredibly strong founding principal of modern economics, the idea that people really are at base the same everywhere. If you can only get the incentives correct, then economic growth will result. So, the book strongly takes issue with that.

I'm saying that economists have had to construct a false history of the world. They've had to imagine a pre-industrial past that is, you know, a cross of Brave Heart and Monty Python's Holy Grail and all the bad movies about medieval England. An image of rape, and pillage, disorder and violence, and serfs groaning under the weight of the lords emerged about medieval England.

My knowledge of medieval history, and this is one of the areas I've studied in detail, shows that picture is just unsustainable. If the World Bank was to now score medieval England against modern economies in any objective way, in terms of what are the incentives for production and for innovation, medieval England would score much more highly than somewhere like modern Sweden - which is a very rich and successful society. One way that shows up is, for example, in the average government tax rate for medieval England? It's one percent. In low tax America we're closer to forty percent, and in places like Sweden they're even close to sixty percent in terms of how they're taking from any extra earnings of the average wage earner.

Medieval England had absolute price stability. It had almost no government debt. It had very strong security of property. People who invested in land in local villages, who needed a ten percent return in order to make that investment, had absolute property security. We can see through the course of 500 years that lots of these land plots were transferred properly from one legal owner to another. They had a free market. And they had huge incentives. If you produced you ate, if you didn't produce you starved. For example we can see from the records that in 1316-17, in the last great famine that England experienced, poor people died and the rich lived (laughs).

ILJ: (Laughs)

Clark: You had every incentive to acquire assets in this world. Assets could be the difference between life and death. And yet this was still a world with very, very slow economic growth. Almost none. So one of the things the book is saying is look, modern economics in some sense is a cult. It's like pre-modern medicine, where you keep repeating these same ineffective treatments. They keep failing. In the book I provide lots of other instances where good economic institutions are not associated with economic growth. That's why I'm saying there has to be some other thing required, and what the book is arguing is that there really are important cultural processes that take place before you get modern economic growth. If we neglect that we're never going to understand the true nature of economic growth. And so we really need to move away from incentive explanations, and what the book is saying is that history is illuminating about this and we really need to know more about that history.”

And Clark concludes later (you must read it all to grasp his interesting thesis):

“And if we are going to solve the problem of poverty in sub-Saharan Africa, the solution is going to come in a very different form then the followers of Adam Smith are going to accept.”

Comment
The first thing to note is that Gregory Clark acknowledges that there is a separation between what Adam Smith of Kirkcaldy wrote and what ‘his followers’ claim for him today. See his contributions to the debate on A Farewell to Alms, posted on various dates since August on Bryan Caplan and Arnold Kling’s economic blog: EconLibrary Blog (here).

Having made this acknowledgement, I am not convinced that it is sufficient to do so in an Internet discussion whilst leaving the original assertion to the contrary as if the acknowledgement had not been made. Clark should undertake to make a correction in new editions of A Farewell to Alms and in discussions in other fora. The problem with modern ‘followers of Adam Smith’, all located in the neoclassical majority and all influential in economics policy programmes for developing countries, is that their presentation of Adam Smith’s ideas about growth is mainly wrong, and their growth theories are problematical (Solow, for instance).

Compressing a millennium into the odd century (14th?) when English agriculture was relatively peaceful is not representative of Western Europe after the fall of Rome in the 5th century. In fact there was peasants’ revolt, from memory, in 1381.

Let me state Adam Smith’s theory of growth in commercial society (the 4th Age of Mankind), if only to separate it from the modern ‘followers of Adam Smith’, rightly derided by Gregory Clark. I should have though that if Gregory Clark agrees that Adam Smith did not write what modern economists say he did, that he would be curious at least as to what he did write!

Gregory Clark queries why, with various institutional conditions all in positive mode in early Medieval England, there was no industrial revolution, or at least a breakout from the Malthusian trap? Gregory Clark points to the extent of trade relations (exports of wool, corn, etc.,) to continental Europe. But an industrial revolution (assuming such a term is valid) needs more than a market in a few specific commodities.

For a start it requires numerous extensive markets in many things, particularly manufactured (i.e., hand made) items, which also requires knowledge, know-how, and practised dexterity. This is before machines move from aids to augment physical labour to power-driven machines to replace labour. Manufacturing techniques in Europe often spread from theft, imitation and invited migration of artisans from one country to another (assisted by short-sighted religious motivated expulsions of hundreds of families, often to England, who brought with them necessary knowledge of manufacturing processes).

Smith regarded the trade between country and town in England as a crucial element in the continuing growth (partly a revival from Roman days) of commerce. Instrumental in this process was the slow and gradual accumulation of ‘capital stock’ in the hands of ‘merchants and manufacturers’. Smith sourced ‘stock’ in the savings out of immediate consumption way back in the age of hunters (the first age of mankind), where it was practised in primitive trade, as in his Just So story of the arrow maker trading with the hunter. Stock in that world was akin to a ‘grub stake’ and as societies developed into shepherding (the second age of mankind) and into farming (the third age of mankind) the accumulation of stock became less casual and more significant.

Herds required secure pasture land (to stop animals wandering back to nature) and crops required secure arable land (to stop animals, and landless humans, wandering in to deplete the crops. Both required ‘hired’ hands to nurse the stock into breeding and re-planting seed corn and to protect the integrity of property (see Wealth Of Nations, Book V, chapter ii). On this basis civil government was invented (where it failed, so did development); where it never started – in much of the world – populations remained in the first age, there being nothing inevitable about development.

From the end of the allodial era of warlords and vast landed proprietors, much of it uncultivated, from the 11th century, and during the feudal era, commerce slowly revived (the history of pedlars, etc.,) and with improved seagoing ships, foreign trade became an important element, including to move troops across the channel, and towns slowly grew from huts to more secure buildings. Waterways, rivers, coastal waters, were significant trade routes in which manufactured products were exchanged among settlements and with the rich proprietors in the country.

Literacy revived, initially from preservation in isolated monasteries, and then via the printing press into a wider, educated public. Universities were established (four in Scotland, two in England) and knowledge culture, based on Greek and Latin, spread.

Now place Smith’s model of growth into this mix. His theory of capital accumulation was long-term, slow and gradual, in progression. Those few with access to capital-stock could allocate some of it to immediate consumption, which above a minimal amount became prodigality. They could also allocate some of it to building machines (hand operated) to raise yields from the land (ploughs, shears, harnesses, secure fences, etc.,) in the form of fixed capital. To work the machines required labour who worked for wages at varying subsistence levels, depending on supply and demand. The machines required materials, raw or semi-processed. Fixed capital produced nothing unless circulating capital was applied to it (the purchase of labour and materials). Whereas fixed capital remained with its owner, circulating capital passed to others.

From the application of labour to work machines and repair them, output was produced and sold in markets. From the revenue received (market prices), the owner recovered outlays on the maintenance of labour and the purchase of materials. Any surplus above these outlays was profit on capital, from which the owner allocated a part to his immediate consumption, which could include items consumed over longer time periods, such as clothes, buildings, furniture, artefacts, trinkets, etc., and the other part to augment his capital stock. That proportion that augmented his capital stock constituted economic growth.

Across society, wealth was defined as the annual production of the ‘necessaries, conveniences, and amusements of life’. For a growing minority this was not a subsistence level of consumption. Per capita income statistics eliminate this most crucial component of development; hence I assert that the per capita statistics detailed by Gregory Clark are misleading as a measure of development. In the extreme, I have suggested that economic history of the last 10,000 years (and for long enough before that) the history of the poor is not the decisive factor in economic development: it is the history of the rich (all those above subsistence), plus the history of the politically powerful who diverted some proportion (from taxation, levies, duties, and oppression) of the annual production of wealth into stone built cities, infra-structure, cathedrals, harbours, canals, routes for trade, shipping, and the instruments of war.

The growing commercial exchange economy below a society, gradually accumulating capital stock (Smithian growth), with all the associated knowledge, literature, natural and moral philosophy, science, invention, and technologies, prepared the ground for the eventual invention and application of power-driven machinery that constituted what some call the industrial revolution.

I have suggested to Gregory Clark that he take sometime to study what Adam Smith actually wrote and not what modern economists (who may never have read him at all) say he wrote. This is not just of intellectual interest; he might find some of the answers to the conundrums he wrestles within A Farewell to Alms.

Bryan Caplan on Invisible Hands and Selfish Businessmen

Bryan Caplan has a literate, pacy and thoughtful article on the Blog (October 2007): ReasonOnline (‘free minds and free markets’), which all readers should visit here:
It’s called: “The Four Boneheaded Biases of Stupid Voters (and we’re all stupid voters)” and you will get a lot out of it. Also, those of you teaching undergraduates, or employees long out of school, should find it helpful for class discussions.

Among the excellent material there is one paragraph upon which I must comment, as this is Lost Legacy. It involves a simple reference to the ‘invisible hand’, much as most conventional economists present it today. The first two sentences quoted below are absolutely fine. It’s the last one I find problematical and out of place:

“Yet profits are not a handout but a quid pro quo: If you want to get rich, you have to do something people will pay for. Profits give incentives to reduce production costs, move resources from less-valued to more-valued industries, and dream up new products. This is the central lesson of The Wealth of Nations: The “invisible hand” quietly persuades selfish businessmen to serve the public good. For modern economists, these are truisms, yet teachers of economics keep quoting and requoting this passage. Why? Because Adam Smith’s thesis was counterintuitive to his contemporaries, and it remains counterintuitive today.”

Comment
I agree that ‘For modern economists, these are truisms, yet teachers of economics keep quoting and requoting this passage’, which does not explain much, and linking it to Adam Smith and the Wealth Of Nations is an unfortunate error because it perpetuates a 20th-century myth promoted from within by neoclassical economists and now firmly embedded in the profession.

It is interesting that the metaphor of ‘an invisible hand’ is so beyond discussion by our best economists that Bryan Caplan can write the sentence: ‘The “invisible hand” quietly persuades selfish businessmen to serve the public good.’

Has he read what his sentence means: an invisible disembodied hand ‘quietly persuades’? Could he actually explain what this means, with reference to Wealth Of Nations? Is it a general principle of neoclassical economics that disembodied hands persuade ‘selfish business men to serve the common good’ (it certainly isn’t Smithian)? If they do, what exactly is the economic theory behind this persuasion? Or, to put it slightly differently, what does ‘an invisible hand’ explain that economics doesn’t explain without it?

That ‘For modern economists, these are truisms’ is a cause of regret. That they are linked to Adam Smith is doubly unfortunate. First, because it turns a simple metaphor for a phenomenon which Smith explains perfectly clearly before he uses the metaphor, a tolerably known and well-used 17th-18th–century literary device (that can be traced also relatively abundantly back to classical Greek and Roman times), and secondly, it introduces into the working of markets the notion of ‘invisible’ forces working to arrange optimum outcomes, of semi-magical, even divine, origin, when Smith and others made it clear from their analyses that markets evolved in the activities of humans without the assistance of ‘invisible gods’, or their disembodied body parts (see his ‘History of Astronomy' essay).

Wealth Of Nations discusses in great detail the working of markets from first principles (Book I) through to the accumulation of capital (Book II). Among these first principles were the propensity to truck, barter, and exchange; urge to self-betterment; the division of labour; extent of markets; theory of prices (natural and market prices; components of commodity prices); theory of growth; and productive and unproductive of labour.

Nowhere in 375 pages of the analysis and elaboration of these first principles, where he is covering the whole workings of the commercial economy, is there a mention, hint or allusion of an ‘invisible hand’ at work, and certainly nothing is said about ‘selfish businessmen’ being quietly persuaded ‘to serve the public good’.

Indeed, in these two books I have noted that there are 52 instances of where he specifically shows that the self-interests of certain individuals in society leads them to act against the interests of others and of the society they live and operate within. This Blog entry is not the place to list them, but I will do so in a separate entry shortly (they appear in my ms for my new book on Adam Smith).

Apart from any other circumstance, this suggests that Adam Smith did not regard the metaphor of ‘an invisible hand’ to be other than a metaphor for the argument he used on the single occasion when he used it. As a metaphor it was never one of his founding principles, otherwise it would have appeared in abundance in Books I and II; but it didn’t appear even once!

He uses the metaphor only once Wealth Of Nations, in Book IV, chapter ii on page 456. This is extraordinary for what has become a ‘truism’ of Smithian economics. So let’s look closer at the context. Chapter ii is about restraints on imports on goods that can be produced at home. Smith’s main argument is that they are unnecessary and when they are imposed they create a monopoly for domestic producers of the home market for formerly imported goods (higher prices). This diverts capital from where is would otherwise go, with no guarantees that it would be more beneficial than where it would go if allowed the freedom to do so.

Individuals seek the most advantageous employment of their capital, which necessarily is most advantageous for society; whatever their intentions. Individuals prefer their home market over distant markets because home markets have the advantage that his investments do not leave his sight (so to speak); he knows better with whom he transacts than foreigners at a distance; and he is more comfortable with the local legal protections and general justice than he is with foreign justice. This can be summarised as: the individual’s risk aversion is lower for domestic business than it is for foreign business.

By directing his capital locally he adds to domestic capital growth, which results in higher domestic growth than if he diverts some of all of his capital into foreign trade. Driven by his risk aversion, his preferences lead to higher domestic activity, and as the whole is the sum of its parts (by arithmetic), irrespective of his intentions (averting or lowering risk), the outcome is a public benefit in employment and capital turnover, and from free competition with foreign produced imports, prices per unit are lower than monopoly prices from laws preventing or restraining imports (raising real wages of the labouring poor).

After explaining all this, Smith sums up for readers (of which more in a moment) of his critique of mercantile political economy by using a metaphor:

‘By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.’ (WN IV.ii.9: p 456)

So the motives of security (risk aversion) and gain (profits) are frustrated by import restraints (mercantile political economic policy) and the result is higher domestic prices and the need to export capital, for higher compensatory profits to cover the greater risks of making gains in foreign trade.

Wealth Of Nations being a long, closely argued treatise on policy (not a general textbook of principles, such as Sir James Steuart’s Principles of Political Economy, 1767), it was written to persuade legislators and those who influenced them. Those who skipped the ‘technical arguments’ in Books I, II, and the historical argument in Book III, to read the direct critique of mercantile policies as practised by British governments, where certain counter-intuitive arguments against import controls (one of Bryan’s ‘bonehead biases’ and ‘stupid’ to boot) could be too difficult to grasp (but not difficult at all for modern trained economists), Smith slipped in a single metaphor for a complicated argument for those readers struggling with his analysis.

Nobody took much notice of the invisible hand in the 18th-century, few in the 19th century, and few in the early 20th century until the triumph of the neoclassical paradigm (Samuelson in particular, and the Chicago School), which turned it from a specific purpose metaphor in a general metaphor for how markets work, and, indeed, into a general ‘truism’. From this treatment by epigones, Smith’s original meaning was buried. The many occasions in which he refers to non-optimal behaviours (including import restraints!) is forgotten. The invisible hand became a mystical, magical and even divine rationalisation of the conduct of big business, perhaps an apology, for sub-optimal behaviours by corporations.

Am I alone in arguing this case? I hope not.

[If you are not already a readers of Bryan Caplan’s and Arnold Kling’s Econ Log Blog here visit it soon – it is among the best economist's blog on the Net]

A Misleading Quotation Exposes the Ignorance of the Quoter

Game of quotation swapping to show that Adam Smith was a) conservative, or b) a socialist, are relatively harmless. Some people even write entire books on the subject, or build propaganda careers out of it.

So Shawn Fremstad writing in the Blog, Inclusion (‘independent progressive new’) today has a teasing stab at the Heritage Foundation with a series:

‘Things Adam Smith Said that Would Get Him Fired From the Heritage Foundation’
and gives an introduction: ‘Adam Smith, the intellectual father of free-market economics, is revered by conservatives, but he also said a lot of stuff that would get him bounced out of the Heritage Foundation or most other conservative think tanks.’

His example quotation is:

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

Comment
I feel no need to defend the Heritage Foundation; they are big enough to defend themselves. However, I am inclined to defend Adam Smith’s legacy from misuse of his Works from what appears to be a politically motivated purpose, which, of course, is Shawn Fremstad’s right in a free society. My purpose is purely to set the record straight.

Shawn extracts a sentence from important paragraphs and he does not identify the source of his quotation, other than to write Wealth Of Nations, a two volume work of nearly 1,000 pages (depending on the edition). Readers of his Blog, not familiar with Smith’s Works, would have to rely in his interpretation, and in doing so may get the wrong idea. It may also be the case that Shawn does not have Wealth Of Nations to hand an is relying on a thrid-hand quote.

For those interested, the reference is: WN V.i.b.2: pp 709-10.

In Book V, Smith discusses the origins of civil government and the duties of the ‘sovereign’ or the government in a constitutional monarchy (as Britain was in his day – and still is). I shall quote the reference in full because it illustrates what Adam Smith was writing about, which puts a different slant on what Shawn makes him imply:

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

· The whole of Wealth Of Nations may be read on-line at the Adam Smith Institute web site: http://www.adamsmith.org/smith/won/won-index.html

I have restored some elementary punctuation to Smith’s original from the Glasgow Edition of The Wealth Of Nations, Oxford University Press. You can purchase astonishingly low-priced editions of all of Adam Smith’s Works from Liberty Fund, Indianna, via Amazon.

Smith is discussing the origin of civil government from hunter-gatherer societies (what Adam Smith called the ‘first age of mankind’, Lectures On Jurisprudence, 1762-63, pp 14-16). He was not discussing 21st century (or even post-18th century North America). He found the origins of justice in the invention of property and reported it as a moral philosopher, not a political commentator.

If Shawn has a different theory of the origins of justice – to protect the individuals natural rights against depredations on his person, rights and reputation and on his acquired rights in property – or if he imagines that the Heritage Society has a different theory of their origins – I would be interested in considering them.

Those hunting societies in Europe and the Near East 8,000 to 10,000 years ago, after the last ice-age, that formed small settled societies, developed civil governments among which problems they faced was who lived where in the settlements. This required the invention of the role of private property. Without such a concept they could never have developed shepherding (Adam Smith’s second age of mankind) to solve the elementary problem of who owned which deer, sheep, pigs or cattle, and they would never have gone on to develop agriculture (Adam Smith’s third age of mankind), from which, as they say, the rest is history.

Now there may be some (I’ve certainly met a few) who regret the long run consequences of that fateful decision of individuals to abandon relying on hunting towards the end of the ice-age and starting mankind, unknowingly and unintentionally, to create the recent history of mankind as we know it. There are even some still surviving who would welcome the end of property, though they wish to retain all the appurtenances of civilisation at the same time. I admire their self-sacrifice of the lives of billions of humans, including themselves, who would never have been born if the ragged survivors of the last ice-age had reverted to hunting as many did in the rest of the world and were found in the same state they were in when the descendants of the pastoral and farming tribes found them from the 15th to the 18th century.

I cannot speak with authority about what the hiring principles are of the Heritage Foundation (though I worry about the hiring principles of ‘Inclusion’ if Shawn Fremstad thinks it OK to fire people for the ideas they hold) but I am fairly sure that they are more familiar with Adam Smith’s Works than he credits them. The difference is that they have read the whole of the Work and not just selected quotations and that they understand the role of context in what an idea means.

APOLOGIES FOR ABSENCE

I HAVE BEEN LAID LOW WITH A HEAVY BOUT OF 'FLU OR SOMETHING LIKE IT PREVENTING ME FROM WRITING, LET ALONE READING.

HOPEFULLY,I SHALL RETURN TO LOST LEGACY TOMORROW, FRIDAY.

SEVERAL ITEMS FOR COMMENT ARE BACKED UP.

APOLOGIES ALL ROUND

GAVIN

More Myths About Adam Smith

Chandrabhan Prasad in the Daily Pioneer (New Delhi) writes:

“The final quarter of the 18th century was the launching pad for the industrial revolution. That phase witnessed battles between handlooms and powerlooms. The triumph of machine was facilitated by many factors, crucial being the intellectual umbrella hoisted by Adam Smith, and financial discipline administered by the London Stock Exchange.

Indisputably, as the earliest philosophical-mentor of capitalism, Smith in his book wrote about the socio-economic rational for a capitalistic order society. The London Stock Exchange accorded capital an institutional authority.

Thus, without Adam Smith and the London Stock Exchange, all discourses on the industrial revolution would be out of place. Without either of them, the machine on its own lacked any inbuilt vision. Self-mesmerised Luddites on the other hand, had their well thought of goals. They fought the machine with a purpose.”

Comments
There is a great deal of media commentary on Adam Smith in the Indian media, much of it showing the corrupting intellectual power of the Chicago version of Adam Smith, a 20th century fable now dominant in campuses across the USA.

Chadrabhan Prasad is no exception. He also adds to these errors a number of historical statements of problematic value.

Let me hypothesise if only to separate Adam Smith’s contribution to 18th century discourse from the extravagant claims that if it had not been for his contributions the so-called ‘industrial revolution’ would somehow of ‘lacked any inbuilt vision’ (whatever that means!), or that, again somehow, Wealth Of Nations facilitated ‘The triumph of’ the machine’.

These claims are spurious. Machine innovation was quite separate from people reading Wealth Of Nations; it had not have an immediate affect on such matters.

Watt developed the improved steam engine in the 1760s without reading the unwritten Wealth Of Nations (not written until 1776). Even his improvements were made by the accidental circumstance that Glasgow’s trade guilds prohibited young Watt from working as an instrument maker, and he was appointed by Glasgow University to work as such on its equipment. Among his tasks, he was asked to repair a model Newcomen steam engine, which he did and became fascinated by its design and took three years to improve on it. The only role that Smith played in these fortuitous events was to be a member of the University Senate at the time.

None of the other inventors mentioned by Chadrabhan Prasad passed through Smith’s ambit of influence. It is unlikely that they were influenced by his ideas when they solved purely mechanical problems and applied them in a few workshops.

Wealth Of Nations was a polemic against macro-level political economy then practised by the British government and it was not for many decades that those policies were changed. The process of change that led to the ‘IR’ had been underway for many years before Smith’s ‘intellectual umbrella’ was in place.

Smith did not write his book ‘about the socio-economic rational for a capitalistic order society’. He did not use the word ‘capitalistic’ nor the word ‘capitalism’, the latter first used in English in 1854 and thereafter by Karl Marx.

Smith’s concern was with the ‘fourth age of man’, or ‘commercial society’ as distinguished from the third Age of man agriculture. Commerce grew out of agriculture when the output of farming and herding, sufficient for the entire population, was produced by half the available workforce, leaving a surplus available for the artefacts of civil society, including infra-structure, trade, ‘machines’ to augment (but not to replace) labour, the generation of knowledge and its dissemination, inventions, civil government and so on. This process got underway repeatedly across Europe and slowly and gradually created the conditions for the invention of machines that replaced labour, and lifted the division of labour and trade to levels that raised per capita incomes above subsistence.

Adam Smith studied and analysed commercial society before the 19th century; he did not invent capitalism, nor accelerate it and most of what happened would have happened if he had become a parish church minister or had died in childhood.

To lay the burden upon his legacy of being instrumental in what happened in the 19th century can only appeal to believers in the other myths invented about him from the falsified legacy of 20th century neoclassical economists.

Ancient Chinese Thinkers On Liberty

From: The American Spectator "The Case for Market Taoism" by James A. Dorn, vice president for academic affairs at Cato Institute (24 September}:

“Lao-tzu, thought to have been an older contemporary of Confucius, may have been the first libertarian. In the Tao Te Ching ("The Classic of the Way and Its Virtue"), he argued that if government followed the principle of wu-wei (non-intervention), social and economic harmony would naturally emerge and people would prosper.”

”The essence of Lao-tzu's liberal vision is stated concisely in Chapter 57 of his book: "The more restrictions and limitations there are, the more impoverished men will be....The more rules and precepts are enforced, the more bandits and crooks will be produced. Hence, we have the words of the wise [ruler]: Through my non-action, men are spontaneously transformed. Through my quiescence, men spontaneously become tranquil. Through my non-interfering, men spontaneously increase their wealth."

"That passage, written more than 2,000 years before Adam Smith's call for a "simple system of natural liberty," is a reminder that China's legacy is not the commands of Mao Zedong Thought but the freedom of Lao-tzu Thought.”

The corruption that plagues China today stems from too much, not too little, intervention. When people are free to choose within a system of just laws that protect life, liberty and property, social and economic harmony will occur naturally. Top-down planning cannot impose spontaneous order; it can only evolve from decentralized market processes.

Good government must be in harmony with each person's desire to prosper and to expand the range of choice. By emphasizing the principle of non-intervention, Lao-tzu recognized that when government leaves people alone, then, "without being ordered to do so, people become harmonious by themselves." He thus understood, at least implicitly, that central planning generates social disorder by destroying economic freedom. When coercion trumps consent as the chief organizing principle of society, the natural way of the Tao and its virtue (Te) will be lost.

Disorder arises when government oversteps its bounds -- when it overtaxes and denies people their natural right to be left alone to pursue their happiness, as long as they do not injure others. Lao-tzu saw taxes, not nature, as the primary cause of famine: "When men are deprived of food, it is because their kings [rulers] tax them too heavily." Likewise, he recognized that rulers could easily destroy the natural harmony people cherish by destroying their liberty: "When men are hard to govern, it is because their kings interfere with their lives."

Freedom requires some boundaries if it is to be socially beneficial and not lead to chaos. Lao-tzu understood the need for rules but, unlike later liberals, did not develop the ideas of private property and freedom of contract that underpin a market-liberal order.”

Comment

James Dorn develops the theme to circumstances in Mao's Communist China and it current more heavily controlled market regime, and you should Google The American Spectator and follow links to the current issue to read the full article (sorry, but this laptop is restricted in space and does not always pick up URLs).

With its two thousand years of literacy, China contains within its some surprisingly modern analysis of society and it would be surprising if such thoughts could not be found written down somewhere in Chinese.

I am reading a scholarly paper at present written by a Chinese academic economist on 'Adam Smith and Confucius' and it is most interesting, to say the least about it. I shall report on it in due course on Lost Legacy.

With John Dorn's piece, there is an encouraging trend in bringing Chinese contributions into western thinking. Another benefit of freedom of expression.

Bryan Caplan Summarises his Critique of a Farewell to Alms

Bryan Caplan, co-athor of the Blog: EconLog (‘issues and insights in economics’) writes a lucid summary of his critique of Gregory Clark’s ‘A Farewell to Alms’ (Princeton University Press).

You should read his critique (here)

I commented on EconLog and I append my comments (on one aspect of Bryan Caplan’s critique) below:

“The Malthusian Trap is compelling but highly limited in what it explains. As production rises, per capita incomes rise above subsistence (itself slowly changing in content, as changing notions of subsistence take effect over long periods), which has the effect over generational time that more children survive to adulthood and reproduce, and continue the Malthusian ‘cycle’. Eventually, population increases reduces per capita income to subsistence, child mortality increases, and growth in population ceases, and occasionally reduces overall.

Gregory Clark documents the Malthusian Trap with data, showing that over millennia long periods, per capita incomes remained at subsistence (the calorific count) to around the year 1800, and concludes that before then, no economic growth was strong enough to overcome the recurring constancy of the Trap. After 1800 per capita incomes rose and continued rising for the first time in human history.

Clark’s central question is why only from 1800? What happened to locate what the discipline calls the ‘industrial revolution’ in England and not elsewhere in Europe, and, as an extension of that conundrum, why didn’t it happen in other countries and at other times in history (including some surely marginal candidates)?

Excluding institutional (widely defined) influences and qualitative growth in knowledge, this represents a challenge to current conventional thinking among economists and historians.

What does the Malthusian Trap argument leave out? In my view, it is too narrow a view of history. That the majority of a population remained on subsistence for 10,000 years, despite the agricultural ‘revolution’ – which ‘event’ that took several millennia – is not decisive.

The agricultural mode of subsistence (Adam Smith’s second ‘age of man’) did not do much better in subsistence terms, and perhaps did worse, pace Jared Diamond, than hunter-gathering, it did bring about definite changes that made it possible for an ‘industrial revolution’ (basically the invention and diffusion of power assisted machinery) to occur millennia later, which if humans had persisted with hunter-gathering only, they would not have ever industrialised, and nowhere did they create a mode of subsistence that did not require the entire population of the hunting-gathering band to produce the per capita subsistence of the entire population.

This change in economic roles created the inequality in per capita subsistence, power, and non-work roles for a minority and new work roles for what became ‘armed retainers’, servants and religious strata. It also created, or activated, the human ‘propensity to truck, barter, and exchange’, which led directly to divisions of labour in production and differential levels of per capita consumption (Adam Smith).

In the course of history, the ‘surplus’ of subsistence above that required for the producers of subsistence, net of the amount required for the per capita consumption of increases in population. It is not the constancy of the per capita consumption (an arithmetical result that hides the differential rates of consumption, and, tellingly, the subsistence of those ‘elites’, including producers of knowledge and innovators of technology) that is decisive for answering Gregory Clark’s conundrum. It is what the elite that controlled the modes of subsistence did with ‘their’ net surplus over long periods of time, which was derived from their ownership of property.

That is why I have argued that the history of what made modern commercial society possible is not a history of the labouring majority of the population; it is the history of the minority of elites. This not an ethically acceptable statement to some people who confuse their social preferences, admirable as they are (and which I share) for what drove history through all its diversions in waste, cruelty, rapine and vileness, memorialised in the detritus of past-failed civilisations, and the wanton cruelties of the elites.

So, we should examine what the elite, their retainers, innovators, philosophers and preservers of knowledge, artists, architects and infra-structure builders did during these millennia, and, crucially, what those who traded were doing in creating the foundations of the commercial society (Smith’s 4th age of man), from which in due course, given the concatenation of evolutionary processes and circumstances that brought about the new possibilities), created what eventually became Clark’s ‘1800’ and thereafter.”

Why I Criticise Misattributions on the Invisible Hand

Correspondents suggest occasionally (politely) that I should ease up on my critiques of the many references made to the ‘invisible hand’, on the grounds that it is: a) a hopeless quest given the widespread belief that it was Adam Smith’s ‘theory’, even if its wasn’t; b) it is not all that important to the world as it stands; c) it looks obsessive, which is not good for one’s reputation; and d) why does it matter?

I have always replied to these comments, explaining my reasons, not least because this is Adam Smith’s Lost Legacy, not a hagiographic column to his memory, and that the intellectual case against interpretations of markets as somehow (never explained) ‘magic’, ‘beyond human understanding’, and, occasionally, proof of ‘divine’ intervention in human affairs, is as unscientific as you can get, and economists, who claim pretensions to a science and at the same time pander to popular misunderstandings, that exclusively emanate from Chicago deserve the treatment that they get from my posts here.

Does it make any difference? Probably, but not all the time. Some of the people whose misattributions I have criticised, reply and acknowledge their ‘errors’; some acknowledge their ‘errors’ but as brazenly declare they will continue with their attributions because that is what the modern profession has decided to do, and it’s now ‘irreversible’ (a strange stance for scholars); and the third group simply ignore the posts (out of courtesy I try to send them a copy if I can find an address).

However, in case anybody wonders if I am imagining the impact of the misattributions of ideas to Adam Smith that he didn’t have, here is an example from today’s selection, this one from an OpEd in the Bangordailynews.com (Me; USA):

Richard B. Abbott: ‘Don't slap Adam Smith's invisible hand so hard’ (22 September 22 - Bangor Daily News):

“Daniel Callahan’s portrayal of Adam Smith’s "invisible hand" free market breakdown (BDN, Sept. 6) misses the mark. Adam Smith’s free market invisible hand is the result of thousands of free individual choices made in their own self-interest. These choices naturally flow to the most valued, efficient and highest-quality goods or services benefiting both the producer and the consumer, effectively raising our standard of living.

Daniel Callahan blames the problems of Ford and General Motors on failure of Smith’s "invisible hand" when, in fact, the "invisible hand" was working as it should as competitors produced vehicles that were more efficient and less expensive, taking market share away from them. Both vehicle manufacturers survived the competition by what Smith called the "home bias." There is always some local support for local products.

Adam Smith did not say that all self-interest was good, but in a free market desired goods are usually produced. Certainly Enron and WorldCom were not good due to criminal behavior. And the mortgage industries’ sub-prime woes are the consequences of home buyers taking on a low payment for the first year or five years, and hoping they can afford the later higher payment. "Those are flaws that can be corrected."
Callahan recommends universal health care based on several European models which would solve our morality issue — the many who do not get needed care with our expensive, fragmented system. This type of reform would satisfy the egalitarian distribution of social welfare. I’m sure Adam Smith would not object, but he would probably recommend a high deductible (true insurance) for everyone so a free market below the deductible between the patient and the doctor would develop, allowing his "invisible hand" to eventually produce less expensive, high-quality care just as it does in all other industries where a free-market economy exists with minimal third party interference.

Some health care experts, like Dr. Dean Ornish, believe that 50 percent to 60 percent of health care is due to poor behavior. People paying for their own routine health care bills would provide a powerful incentive to change poor behavior, and use resources wisely.

I am sure Adam Smith, or any economist, could argue that health insurance, as structured, private and government both, has added a layer of injurious regulations and costs, preventing a free market between patient and doctor and, essentially, has committed a cardinal economic sin by allowing free access and unrestricted demand that would normally destroy a finite resource through over-exploitation. But because health care is not a finite resource, as the industry grows, it simply crowds out other uses of our limited resources resulting in a lower standard of living, squeezing forever the bottom half of the income ladder. Continuing a noneconomic system where it is in the self-interest of the patient and the health care provider alike to overuse resources is a model for a death spiral and no amount of tweaking by government policy makers will change this.

To produce high-quality, less-expensive needed care, health care needs to be put on a sound economical footing. Patients need to be empowered with a high deductible (true insurance) policy for everyone (subsidizing the lower income with cash health savings accounts), which will allow Adam Smiths free market "invisible hand" to work its magic.

Comment
I have reproduced the OpEd in full so that you can get the full flavour of its arguments about Adam Smith and ‘his’ (actually it was a common metaphor in 18th century literature – plus in Shakespeare in 1605) invisible hand.

Note the last sentence: ‘which will allow Adam Smith’s free market ‘invisible hand’ to work its magic.’

The whole point about markets is that either side of the chains of connections among buyers and sellers, they do not need to know anything about what happens or might happen two or more links in any direction. That is not ‘magic’, nor divinely inspired. Because it works it is repeated. What doesn’t work is not repeated and over time is not replicable (the players run out of resources, just as a bird that does not look in the proper places for its food will run out of energy and not reproduce).

Of the argument about health-care finance I have no comments. Richard B. Abbott is billed as having 30-years experience in health care and he knows more about health-care provision in the US than I do. It’s not his health-care policies I am criticising; it’s his misuse of Adam Smith’s ideas that I am commenting upon.

If you read down today’s posts you will see arguments against Richard B. Abbott’s misunderstanding of Smith’s use the metaphor in Wealth Of Nations, hence I shall not repeat them here.

You can read Bangor Daily News (here).

Belief in Invisible Hands Belittle Adam Smith's legacy

Mary Kissel (editor of The Wall Street Journal Asia's editorial page) in Opinion Journal of the Wall Street Journal, writes a nice piece on a bustling market in New Delhi. It is worth reading, except for the usual attributions to Adam Smith:

“Passage to India: Adam Smith in a Delhi market.” (21 September):

“Shruti is educating me on Adam Smith's invisible hand in a free market--the real kind, that is.’

‘This, mind you, is a market that predates Smith himself. Built in 1650 by the Mughal emperor Shah Jahan's daughter, Jahanara, Chrandni Chowk covers several football fields' worth of space. The shopping conditions aren't attractive; at first glance, many of the crumbling buildings don't even look stable. It's the top-quality goods that draw the crowds. There's no government imposing order. And why should it? As Smith said, there's a "certain propensity" in human nature to "truck, barter and exchange one thing for another," so it's natural that a certain kind of system, guided by an "invisible hand," results. Chandni Chowk must be the perfect place to watch it at work.”

Comment
What is with people who feel a need to mystify how markets work?

On the one hand we have neoclassical economists quantifying every variable they can measure (ignoring what they can’t) to prove that their fantasy creations rest in general equilibrium, even though nowhere in the real world are their assumed conditions realised or realisable; on the other hand, we have the same ‘scientists’ claiming that in the real world there is a invisible hand (or is it many invisible hands?), which like Santa Claus must get around the trillions of transactions a day, ‘guiding’ real markets in such a manner that the whole system ‘works’, even though nobody has ever explained how it, or they, does its or their jobs.

For people claiming to be scientists, they behave like people imbued with pagan superstition.

Yet markets work in the context of all the things that neoclassical equations ignore and do so whether the invisible hand is invisible because that is its nature or because it doesn’t exist, which is why it is invisible.

Adam Smith’s explanation from his detailed analysis of markets (Book I and II of Wealth Of Nations) is perfectly understandable without the equations and without belief in invisible hands, a metaphor he used only once for a different purpose in Book IV.

In his posthumous 1795 'Essay on Astronomy' (Essays of Philosophical Subjects, edited by W. P. D. Wightman, Oxford), Smith refers to the three experiences of surprise, wonder and admiration that we go through when we confront something we do not know about. Our first reaction is ‘surprise’ at something out of the ordinary or of which we have no knowledge; ‘wonder’ as we begin to develop ideas about it; and ‘admiration’ once we understand what it is and how it works. Understanding never replaces our admiration, even awe, at its beauty, much as we can know all about the refraction of light and still admire a rainbow as we did when we first saw one.

‘Pusillanimous superstition’ was Adam Smith’s expression at the reaction of our savage forebears to phenomenon they did not understand, which they put down to the actions of invisible gods who were beyond human understanding. This was his first of only three uses of the ‘invisible hand’ in this case of Jupiter (the Roman god Jove).

Having fully explained how markets work, and how scores of interconnections among different chains of supply co-ordinated themselves without mentioning human guidance nor invisible hands, nor gods nor divine spirits, and, in his terms, having moved on readers of Wealth Of Nations from pusillanimous superstition from their surprise and wonder that markets worked, Smith would be disappointed to note how modern neoclassical economists have re-introduced silly superstition in the form of misappropriating an invisible hand metaphor into a major principle of his economics.

That Nobel prize winners (Stigler, Hahn and Tobin) introduce their version of an ‘invisible hand’ (not Smith’s) into the working of markets is bad enough, but that they explicitly identify it as Adam Smith’s theory (their scholastic authority giving credence to what is sheer nonsense) is worse.

I do not expect Mary Kissel to distinguish between what Adam Smith wrote and what his epigones claim he wrote, so that she writes about the propensity to truck, barter, and exchange and claims that ‘it's natural that a certain kind of system, guided by an "invisible hand," results’, even though that is a travesty of Adam Smith’s thinking. She is only misusing a metaphor as many scholarly economists do every day.

Chrandri Chowk was built in 1650 and has operated ever since as a market place. It is not a demonstration of equilibrium in its transactions’; it is not evidence of invisible spirits at work; there is nothing magical about how it functions; and realising these truths does not diminish our admiration for such market places one iota.

Markets are in the behaviour sets of all humans and they operate in many aspects of human life that has little to do, if anything at all, with buying and selling items. Smith made these points throughout all of his Works, from his history of natural philosophy, his history of languages, his history of morals, ethics and the practices of social harmony and disharmony, in the daily persuasions of life, in negotiated transactions across human behaviours and, of course, in, but not exclusively tied to, commercial markets.

Invisible gods, and their hands, do not guide human activities. Such beliefs belittle Adam Smith’s legacy.

Greenspan is Not the Second Coming of Adam Smith

William Neikirk reviews Alan Greenspan's memior in the The Swamp (Tribune’s Washington Bureau)(21 September): 'Greenspan's memoir: Adam Smith rides again'.

“Greenspan is the Adam Smith of our time. He believes in the "invisible hand" that guides free markets and leads to greater economic growth and wealth for those willing to take risks for the reward. The Marshall Plan after World War II was not nearly the stimulant to European recovery that were private, free market, he writes. Economies change through "creative destruction" of companies and industries that become obsolete.”

Comment
If Adam Smith believed that the invisible hand ‘guides free markets and leads to greater economic growth and wealth for those willing to take risks for reward’, it is remarkable that he never said so.

William Neikirk has bought the myth about the invisible hand being a central principle of Adam Smith’s. It wasn’t. It was a metaphor for something quite different in Book IV of Wealth Of Nations. His chapters on how markets function are confined to Book I and are remarkably clear without any mention of 'invisible hands' guiding anything.

Worse, his specific and only reference to ‘an invisible hand’ in Book IV, chapter 2, page 456, was about the reward to society of merchants who specifically were risk averse and unwilling to take ‘risks for reward’, in the case of them choosing to invest locally rather than abroad, where the risks were greater from long sea voyages, uncertain weathers, cheating inhabitants of distant countries and uncertain legal systems for seeking redress. (WN IV.ii.9: p 456)

Smith argued that because they were risk-averse (not risk seeking!) these merchants preferred to invest their scarce capitals locally and by doing so they increased the amount of capital locally, which in Smith’s growth model would increase local employment and add value to the use of raw materials, which in consequence would increase domestic capital and net growth.

This had nothing to do with markets nor anything remotely connected to ‘guiding them’, and if Alan Greenspan believed it was, then he had not read and understood Smith’s use of the metaphor of ‘an invisible hand’.

If, as William Neikirk alleges, Greenspan ‘believes’ that markets are ‘guided’ by an invisible hand, that is his privilege – he may also believe in fairies at the bottom of his garden for all it is relevant – but if he also believes that Adam Smith shared his fantasies, he is most decidedly mistaken.

Having clearly explained why governments do not need to impose import tariffs and why local merchants are prepared to invest locally from their risk aversion, he concludes that the sum of the parts (each merchant investing capital locally to make profits) will create a large ‘whole’, which follows a well-known arithmetical rule and not a mystical belief in disembodied body parts.

Greenspan most decidedly is not the ‘Adam Smith of our time’, nor is he Schumpeter’s ghost, whose quip about ‘the perennial gale of creative destruction’ is about all that most people remember Schumpeter for – and usually contract it, as demonstrated by William Neikirk in his review, to ‘creative destruction’.

Did Adam Smith 'Denounce' the Division Of Labour?

From Civilisation (fanatics centre), Civilisation IV: ‘Beyond the Sword’, a sort of gaming website with some interesting forums and occasional ‘off topic’ posting, (here) I came across this contribution from ‘Princeps’:

“While I've read some of Adam Smith's Wealth of nations, I haven't quite gotten to a good start.

But, apparently, in page 340 of book five, he writes that...

"In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible to become for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging..."

http://www.bibliomania.com/2/1/65/112/frameset.html

Basically, Adam Smith denounced division of labour (or its effects) rather harshly, which is quite strange given how he's worshipped. Maybe the mainstream intellects get sleepy even before reaching this part, I know I got bored trying to find it.”

Comment
‘Princeps’ ‘got bored trying to find’ Adam Smith’s quotation. Unfortunately that is how the majority of people acquaint themselves with Adam Smith’s writings, including top tutors in economics.

Most do not read his books through and nor do they appreciate what each book was about in its context. This means that they miss out a great deal of what Smith was doing. It’s a bit like reading a novel, not having grasped the characters and their situations and not really being aware of where they are or what they are doing.

In Adam Smith’s day, workshops were not remotely like modern manufacturing processes. There was hardly any power driven machinery, excepting windmills, water mills, a few Necomen steam engines for pumping water out of coalmines. The bulk of ‘manufacturing’ was by hand labour, and such machines as existed ‘augmented’ labour and did not substitute for it.

The famous pin factory was a hand driven work processes (18 of them in his example) which reduced each man’s labour to small steps, thus raising their productivity. Instead of a few pins a day, their output was raised to thousands.

But the division of labour was far more extensive than the pin factory; a little further on in the chapter (WN I.i) you find Smith describing the manufacture of a common labourer’s woollen coat and all the elements that went together to produce this item, most of them disconnected in location, including overseas for dyes, and all of them constituting distinct markets for their products and the trades they employed. Raw wool required farmers and flocks of sheep, metal scissors from a forge, from ore in the ground, and so on. This is as much a part of the division of labour as the boys working in the pin factory.

Adam Smith regarded the division of labour as the driving force for economic development when people stopped doing everything for themselves (and doing without everything they could not make for themselves), which in ‘rude’ society meant they were in abject and permanent poverty, with life spans of fewer than 30 years. This is covered in the first few chapter of Book I of Wealth Of Nations. If you haven’t read it yourself, do so now on one of the many copies of Wealth Of Nations available free on the Internet (Google for it).

Princeps has jumped from Book I to Book V and taken his quotation from the latter without explaining what Smith was doing warning about the deleterious effects on labourers who only work at single tasks for their working lives.

In Book V, Adam Smith is talking about the need for Britain to invest in education, especially of the young who at that time were often exposed to only a few years at school (to age 8 years), or not taught at all (girls were taught at home, did not go to school and certainly did not go to university). In Scotland, where Smith lived, a system of parish schools had been introduced in the 17th century where, in every parish, schools were open to boys to learn arithmetic, writing and reading, and some Latin, which if they showed promise they could be sent to university at aged 14, irrespective of their family circumstances and lack of finance. Most labourers were literate to a low standard, but not so in England.

To set up a national (UK) education system of a ‘little school’ in every parish, to pay for the buildings and pay the teachers (who would teach every class together), would cost money and this could only come from the taxes on the rich (the majority of people were poor and on basic subsistence). Wealth Of Nations was written for the literate people, mostly rich, who influenced government, or were members of it. Government in 18th century Britain was based on a very small franchise (Smith did not have a vote).

Therefore, as part of his persuasion of readers to support a national education system, to which their taxes would pay, supplemented by small contributions from parents, excepting the indigent very poor who could not afford even a penny, he had to give his readers good reasons for doing so, if they were not persuaded on moral grounds.

For this reason he wrote the paragraph quoted, and others, to appeal to their political interests and concerns, specifically their fears of rebellion. Remember, there had been the Scotch rebellions of 1715 and 1745, wars with France (the seven-years war) and, coinciding with the publication of Wealth Of Nations (1776), the American rebellion, resulting in American Independence. Also, in the 1790s, the French revolution caused severe fright among British aristocrats, which highlighted Smith’s points.

He specifically draws attention to problems of ignorance made worse by single focus daily work, and the dangers of ignorant people being misled into rebellion by agitators. These were real fears of people among his readers (but not shared by him). He suggests that for a small amount these schools would educate children and enable them to resist misleading ideas. Hence, to make his case, he laid on the rhetoric pretty thickly in Book V.

Incidentally, once power-driven machinery was introduced in the 19th century, which replaced many tasks of labour, the process of reducing the number of pin factories and the labour employed in them progressed to the extent that by the 20th century, there were two pin factories in Britain instead of hundreds, and each machine operated by one person did all of the steps previously undertaken by 18 men, such that by today the world’s pin supplies are made in a handful of factories. But remember, many labourers made the pin machines via the division of labour.

Great News from Canberra for the History of Economics

Recently, the Australian Bureau of Statistics initated a move to transfer Economic History and the History of Economic Thought from the classification of Economics into a miscellaneous groupong including philosophy and Religion.

This was regarded by scholars in these fields as an appalling misjudgement on the part of ASB. Apart from any career implications such as in academic appointments, promotion, teaching, research grant awards and the recruitment of students (plus concerns about 'tenure', which was not a concern of mine having refused tenure during my professorial career on grounds that it is 'protectionist', as in the old Guild systems), there were serious concerns that the ASB proposal represented a complete misunderstanding by data processsors in a government statistical function of the intimate and integrated nature of economic history and the history of economic thought in the broader discipline of modern economics.

It would have separated what is presently modern neoclassical economics, with its largely mathematical content, from the rich theory of economics as it developed from the 18th century (and earlier), and which has recently turned the subject into the study off 'fairy stories' about purely abstract mathematica economies without any contact with the real world.

Advising countries on development on the assumption, say, of infinite velocity of the key variables, when in fact history shows that development is a far more complex, 'slow and gradual', as emphasised by Adam Smith, process that is closely connected to non-economic influences (history, culture, ideas, politics, and so on)that should be accounted for, and would have the results, and has the results, of costly programmes emanating from neoclassical advisors to such as the World Bank, IMF and the major aid donors among governments that have been prevalent since the mid-20th century, let alone the damage done to the candidate countries and their economies.

The campaign, led by the History of Economics Society, and in particular Sandra Peart, its current President (see her Blog: Adam Smith Lives!), and supported by other history of economics associations across the world, several of the Nobel Prize Winners in Economics, and many distinguished scholars working in mainstream economics, who still connect to the history of our subject (it's the next generation that we are concerned about), which Sandra Peart has documented in her excellent Blog, has had the effect that the Australian Bureau of Statistics in Canberra, Australia, has relented and re-considered its earlier proposals.

We should be grateful for their decision. Bureaucrats do no like changing their minds and when they do we should be encouraged. I believe the history of economic thought and economic history have emerged stronger a result and we should build on our relief from what would have been the beginning of the extinction of it, and the crippling of economics itself, if these proposals had gone forward.

Here is the message I received this morning from Glyn Pritchard, of ASB, in response to the letter of protest I wrote after being alerted to this problem by Sandra Peart of 'Adam Smith Lives!' Blog:

"Thank you for your submission to the Australian Standard Research
Classification review.

Your concerns with regard to the proposed treatment of Economic History and
History of Economic Thought have been formally noted by the review team,
and your submission and interest together with others on this issue has
been taken into consideration. On the basis of the information received by
the review team, the proposal with regards to these research fields has
been revised. The revised proposal is to keep Economic History and History
of Economic Thought within Economics. The revised proposal is based on
extensive feedback on this issue and the core reasoning behind this
proposal is as follows:

the techniques used in Economic History research are identical to those
used in other areas of applied economics- the subject matter is
historical economic data;

the History of Economic Thought can be described as being primarily
concerned with the development of economic theory.

The current thinking is therefore to align these categories with the
respective sub-categories of applied and theoretic economics. I appreciate
your input to this process and the classification in its entirety is not
due to be finalised until November 2007. Publication of the new
classification is expected early in 2008.

I hope that this addresses your concerns and thank you again for your
submission. If you have any further concerns please contact Dr David Brett
- david.brett@abs.gov.au .

ABS appreciates such feedback in informing its deliberations for this
review.

Regards

Glyn Prichard, Director
Innovation and Technology National Statistical Centre, ABS

Labour MP Quits Aussie Parliament Quoting Adam Smith

‘Valedictory’ speech by Carmen Lawrence MP, an occasional Webdiary columnist for much of Webdiary’s existence is published today in Webdiary (‘patron power’) an Australian Blog. It contains this paragraph:

“The contemporary position of many governments, including this one, is that Adam Smith’s ‘invisible hand’ should be allowed almost unfettered operation to allocate goods and services in our community, including health and education. What that view of the world fails to understand is that Adam Smith himself was a very strong proponent of the need for institutional controls and the insertion of humane values into the operation of the economy because he recognised the limitations of market forces. The marketplace, competition, efficiency—such concepts underestimate the necessary human dimension to our lives. We continue to allow this agenda to dominate our policies at the cost of our humanity, our inventiveness and equality in our society.”

Comment
She is of course referring to the Australian Government, of which, to put it mildly, she is a trenchant and relentless critic (as she is entitled to be in a free society). Of her political agenda for Australia I shall say nothing; that is the business of the voting citizens of Australia.

I am concerned with Adam Smith’s ideas. Carmen Lawrence notes correctly that “Adam Smith himself was a very strong proponent of the need for institutional controls and the insertion of humane values into the operation of the economy because he recognised the limitations of market forces”. However, she has added a twist on her attribution of human values to Adam Smith that is not quite correct.

Adam Smith ‘recognised the limitations of market forces’ in the sense that in 18th century Britain he didn’t think individuals or groups of individuals would risk their small capitals in large ventures that would not produce a return, which is actually the ‘market forces’ at work.

Bear in mind that failed ventures, from incorrect business decisions, were every bit as unwelcome to Smith as prodigality of revenues in unproductive consumption, because they detracted from the important role of productive labour in creating the net revenues for the growth of employment and the increase in wealth (the ‘necessaries, convenience, and amusements of life’).

Therefore, those ‘public works and public institutions’ he advised that were too large for individuals to undertake, but which were of benefit for a commercial society, such as roads, harbours, canals, and sanitation, and institutions such a education and health expenditures to combat ‘noxious diseases’ (leprosy, etc.,), should be financed by taxation (though not necessarily undertaken solely by public bodies, a point that is often forgotten).

In mid-18th century Britain, capital was scarce compared to 21st century Australia. The tax base was also fairly limited compared to today. Smith was at best sceptical of governments borrowing to fund wars, and the idea of social security spending was not agenda in his days. Governments since Smith’s time have borrowed money for much wider purposes than fighting wars and while Carmen Lawrence may be comfortable with her country not being engaged in any wars, she may not be so circumspect about borrowing much more money for her social agenda. The extent of borrowing and its purposes are a matter for the Australian electorate, which may not coincide with Carmen Lawrence’s preferred policies.

From denouncing those who make the ‘market’ the sole answer to all problems of government failures, she has to be careful in a rich society like Australia (it used to call itself the ‘lucky country’) that she does not conclude the government is the sole, or best, answer to what she believes are ‘market failures’.

That some people who attribute to Adam Smith the notion that everything should be decided by market forces, a view he did not express in Wealth Of Nations, while he did express on many occasions deep suspicions of governments influenced by ‘shop keepers’ and ‘merchants and manufacturers’. But neither was he comfortable with politicians and governments decided the minutia of what people should do with their capital and how they should decide on their preferences.

Also, he never expressed any notion that 'an invisible hand' operated nor should operate 'unfettered ... to allocate goods and services in our community'. In fact, the metaphor of the invisible hand did not refer to markets at all; it was about 'risk aversion' to investing abroad (WN IV.ii.9: p 456, and Lost Legacy posts passim).

He also warned against ‘men of system’ who, in their conceit, believed they knew what was good for everybody; who saw society as a giant chessboard with wooden prices on it called ‘people’, whom they believed they could move about by dictating their movements for their own version of what was good for them. But, alas, for their pretentions people have 'motions' of their own. He wrote this in Moral Sentiments (TMS VI.ii.2.16-18: pp 233-4), his book on humanity, morality and social harmony.

If Carmen Lawrence has not read Moral Sentiments, she might find it interesting for a truer perspective on Adam Smith’s philosophy. I do not think that Carmen, and others who espouse the same agenda, have a monopoly of the human virtues, neither do the modern conservative epigones have a monopoly of their claimed affinities to the moral philosophy and political economy of Adam Smith.

It is a safe bet that they haven’t read Adam Smith’s works, apart from isolated quotations, and as my memories of Australia include a fairly strong labourers’ predilection for gambling on horses, ‘tommo’s two-up’ and slot machines), I’ll chance a quid of two on such a bet.

Can Government Funded 'Enterprise' Agencies do Better than Markets?

I came across a new Blog on the block a few days ago and I am recommending that you take a look at it over a week or so. It describes itself: “The Lockesmith Blog" which 'hopes to play an important role in the growing resurgence of the scholarship of classical liberalism through the exploration of the principles of individualism, private property and the free market, the rule of law, and social toleration.”

Yes, that’s John Locke and Adam Smith, complete with their likenesses on the heading line.

“LockeSmithBlog” (from a group at Belmont University, USA) post a typical piece, “Bad Policy for an Entrepreneurial Economy” by Jeff Cornwall (18 Sept)

“America is in the midst of an entrepreneurial economic transformation the likes of which we have not seen in over 100 years. Over half of the GDP comes from businesses under 200 employees, and for the past twenty years these small companies have created 70-80% of all new jobs every year.”

Visit LockeSmith Blog for the rest of its first posts, and scroll down its first few here.

Have a look at Jeff Cornwall’s post on ‘Socialised Entrepreneurship’. I wonder what he would make of Scottish Enterprise, which has done something similar for nearly years (declaration of interest: I occasionally worked for Scottish Enterprise, original Socttish Development Agency, as a consultant and tutor on negotiation since 1980). The post certainly made me think about this issue and the role of such agencies.

I think the LockeSmith Blog is written in an authentic Smithian tradition (so far). I think the good folks at the Adam Smith Institute in London would be interested in it too.

$10,000 For a Script Idea, but is it Good Idea?

From National Association of Manufacturers (‘We are the millions of people who makes things in America’) 18 September: Carter Wood sets a challenge: “Any Pro-Business College Bloggers Out There?”:

America's Future Foundation, which supports development of young, free-market-minded leaders, is sponsoring a contest for the best college (graduate and undergraduate) blogger of a classical liberal persuasion. Award is $10,000.
The focus is on young people who wish to be journalists or writers. Screenwriters, too? As we just noted, TV dramas sure need a shot of some scripts influenced by Adam Smith or John Locke (more than Grammy-winning Terry O'Quinn, we mean). Or Horatio Alger.”

Comment
Well, here’s your chance if you’ve got in you! A drama in which an entrepreneur is not a sadistic, mean spirited, selfish, profiteer, of the kind we see almost nightly on tv.

Children are brought up on the steady diet of central-casting’s version of business. Profit is almost always spat out in tones of disgust.

Though I wonder what we’ll get instead of script writers working in Adam Smith’s ideas, or John Locke's. I’m not sure who Terry O’Quinn is, or for that matter who ‘Horatio Alger’ is either.

But then, I’m not a drama specialist.

Whichever Adam Smith Alan Greenspan Now Rejects It Wasn't the Adam Smith Born in Kirkcaldy in 1723

From Newsweek online, 17 September: “The economics of human behaviour: Alan Greenspan discovers that human beings are … irrational!” by Daniel Gross.

‘The acolyte of Ayn Rand believed market capitalism was ordained to triumph in the 20th century because it spoke to human strivings in a way that collectivism couldn't. But when Newsweek editor Jon Meacham and I interviewed Greenspan last week and asked what he learned from writing his new memoir, “The Age of Turbulence”, he said that the experience made him appreciate that human nature is far more complex than what he learned about it from Adam Smith and The Fountainhead.”

Greenspan seems to argue that since the case for capitalism is so overwhelmingly rational, the opposition to it must surely stem from very deep-seated, immutable characteristics. “And that carries me to the general conclusion that if you're going to model an economy, you have to do far better in understanding how the unit of the economy functions—i.e., the human being.”

As he compiled the book, Greenspan lifted his eyes from spreadsheets and data sets long enough to notice certain universals in human behavior—beyond profit-seeking. “When you get to be my age you see teenagers who replicate each other generation after generation, and it's all crazy and idealistic in the same ways,” he said. Greenspan also recalled his discovery that people in all sorts of isolated societies smile, and that when Lewis and Clark encountered the Indians of the Northwestern United States, they found certain commonalities: “These were societies that truly grew up without contact with the rest of the world.”

Looking to human nature also helped Greenspan solve a perplexing economic mystery. Over the last 150 years, it seems that the maximum productivity growth the economy could achieve over a long period of time was 3 percent annually—despite a series of productivity-enhancing innovations, from the steam engine to the Internet. His conclusion? “What ultimately looks to be the case is that's the pace at which human beings operate,” he said. People simply can't process new ideas more quickly. “The answer is that the human race, no matter how one defines it, is not smart enough to do better.”

Comment
I have had occasion to comment on Alan Greenspan’s knowledge of Adam Smith before on Lost Legacy (see archives, 2005), which if what is reported is accurate, he does not seem to be acquainted with his Works to any degree.

His image of Adam Smith is firmly stuck in the Chicago model of Adam Smith, which has little acquaintance with the man from Kirkcaldy.

Of Ayn Rand, I only know what I read of her’s earlier in my youth, before I went to university to study economics, though I have all of her books on my bookshelf here in France (except one which Jim borrowed in 1958 and did not return). Her objectivist rationality model of selfishness has little in common with Adam Smith; more a coherent version of Bernard Mandeville.

May be Alan Greenspan confuses the two philosophers. Neoclassical economists have erected a complete mathematical structure on rationality which even a superficial glance across a café’s occupants ought to raise questions as to its generality to all humans.

Adam Smith on the other hand made a study of human behaviour in The Theory of Moral Sentiments, showing a far more complex set of behaviours among humans than the myth of rational maximisers.

That Greenspan concludes now that “you have to do far better in understanding how the unit of the economy functions—i.e., the human being”, is welcome (better a sinner that repenteth …), though for all his influence today it may be a trifle late to be effective. His interviewers reveal that he found that ‘when Lewis and Clark encountered the Indians of the Northwestern United States, they found certain commonalities.’

If Greenspan had read Smith’s Lectures On Jurisprudence and Wealth Of Nations more closely (if he read either at all; the latter perhaps only for well-known quotes) he would have found that Smith wrote about the reports of travellers in North American (French and British) about the lives and habits of the inhabitants (the earlier invading migrants from Asia) and of his general conclusions that human nature (in all its richness, not rationality) within a known range, as exemplified in literature and history (Herodotus, Cicero, Shakespeare, and Machiavelli, and many more) was shared among and between the distance and present ages.

So, whatever Greenspan claims to have ‘learned about [human nature] from Adam Smith’ certainly did not come from the Adam Smith, born in Kirkcaldy in 1723, though it may have come from the mythical Adam Smith, whom George Stigler claimed ‘was alive and well in Chicago’ in 1976.

As for Fountainhead my memories of it included a range of characters, but not Ayn Rand’s heroes, who were anything but in the mould of rational maximisers, but who were more representative of the human nature he claims to have discovered lately. It wasn’t Adam Smith who misled him; he misled himself in becoming a convert to Ayn Rand, while wandering the street of Manhattan and not on a road to Damascas.

Smith understood the need to take into account the pace at which people move under their own motions, not as wooden chess pieces as the playthings of ‘men of system’ who ‘are wise in their own conceit’ (TMS VI.ii.2.16-18: pp 233-4), but as complex characters in their own rights. That is why he advised, many times in Wealth Of Nations, that philosophers should take account of the ‘slow and gradual’ pace of change, and not rush into things because they seem right at the time.

Modern economists, consulting their equations like ancient Romans consulting their astrologers and readers of the runes, issue proclamations, and worse, predictions, and forecasts, often not stopping to consider why they are so often wrong.
Greenspan admits to realising the accuracy of forecasting in his profession has not been very successful.

There is a connection between those failures and his belief in rational mankind, integral as it is to neoclassical economics, yet if he had cared to look more closely at Adam Smith’s Works he would have found not just a similar wrestling with the facts of human nature, but also a determined habit of not predicting the future.

You learn more by looking backwards in history, recent and distant, than by pretending to have an ability to look forwards to what has not yet happened.

A Libertarian on Adam Smith

In the Blog: Colliding Softly (here) there is an article “On the Art of Writing and Science” (the author is not identified), much of which I would probably be sympathetic to, except for these two paragraphs:

“When Adam Smith wrote about the division of labor and how the individual actions of people doing essentially different things come together to create change in a unified direction as by “an invisible hand”, it made sense. In rural society, where most people were working on the family farm, dividing chores meant increasing efficiency. This is even more true for the industrialization, where the division of labor could increase productivity by enormous numbers.

But does this mean division of labor always makes for increased production? Certainly not. History proves only the fact that division of labor was more productive (or, maybe, less unproductive) than the immature market production processes available at that time.”

Comment
The author quotes from Murray Rothbard (whom I have criticised for his views on the division of labour and for muddling his reading of this chapter in Wealth Of Nations: see Lost Legacy archives for details), and I am, not impressed if the author regards Rothbard as a reliable source on Adam Smith.

As for ‘come together to create change in a unified direction as by “an invisible hand”, I am totally perplexed by what this part of the sentence means. Smith never mentioned ‘an invisible hand’ as a prime principle or even a part of his political economy.

If the metaphor of the invisible hand had been a principle it would have been appropriate to include a mention of it in Book I or Book II, even Book III. But it comes up in Book IV of Wealth Of Nations as a metaphor in a lonely paragraph that has no connection whatsoever with the division of labour, nor for that matter with the working of markets.

Joining in this manner to the division of labour would be read by thousands of readers, who have not, and probably will never, read Wealth Of Nations, who will conclude that Smith did mean what this paragraph implies he did. But the truth is he didn’t.

So why do libertarians perpetuate the myth that Adam Smith did have a theory, concept, principle, or belief in an invisible hand (when not accusing him of outright plagiarism or following Schumpeter's highly negative assessment of his works)?

I find the libertarians’ assessment of Adam Smith perplexing. Yet they can be so right on other things.

Somebody Called Larry Kudlow on Adam Smith

In the Nationalreviewonline, 17 September there is an article: 'how about Reagan and Thatcher' by Larry Kudlow here:

"But the real hero of the last couple of decades is undoubtedly the triumph of free-market capitalism around the world. Krishna Guha of the Financial Times is the only one to have picked this up. He captures this nicely in his book review of The Age of Turbulence. Give credit to Adam Smith’s “invisible hand” and Joseph Schumpeter’s “gales of creative destruction” for making Alan Greenspan’s Fed job a lot easier.

Comment
I am not sure who Larry Kudlow is or what he is about, but if he believes in the version of the ‘invisible hand’ represented here then he is not likely to know much about the Adam Smith who was born in Kirkcaldy in 1723.

Adam Smith Was Interested and knowlegable About China

In a PR sheet from (PR-GB) we get a piece on the Internet in China:
‘Internet is growing in China’ (written by EditorsChoice, 16 September)

‘Adam Smith, the Scottish economist and philosopher from the 18th century, who wrote the ‘Wealth of Nations’ and is considered the father of capitalism, could never think of China as a place where he would be admired and respected for his economic thoughts.. Global Scan found that 74% of the Chinese population believes that the market economy is the best system for the future development of the world. This is a great surprise if we take into consideration that just 25 years ago, the Chinese government was the only master in economic issues.

Adam Smith as many modern economists never dreamed of China as one of the leading capitalist minded countries in the world. Capitalism and Adam Smith are well known among Chinese people nowadays.’

The article is here.

Comment
This is not a serious piece about Adam Smith and China. In Wealth Of Nations he mentions China on several occasions, describing it as the richest country in the world but a stagnant one, its stagnation caused by the limitations of its soil and climate and the nature of its laws and institutions that permit it, but with different laws and institutions it could continue its progress towards opulence [see: WN I.viii.24-26: pp 89-91].

This is virtually the opposite of what 'editors choice' asserts about him and alleges he would be surprised about.

He says much more as well, but that requires that the author read his books instead of press releases from people who haven’t read them either.

A Darwinian Conservative Joins the Debate on Gregory Clark's New Book

Larry Arnhart (Darwinian Conservatism Blog) contributes a most interesting post to the debate over Gregory Clark’s ‘A Farewell to Alms’ (Princeton University Press), here.

“My interest in the book comes from its Darwinian theory of the Industrial Revolution.

"Explaining why the Industrial Revolution emerged first in England, beginning around 1800, is one of the great questions in the social sciences. Throughout human history up to that point, all societies were caught in what Clark calls "the Malthusian trap." Clark shows that the average person in 1800 did not enjoy better material standards of living than the average person of 100,000 BC. This was because short-term increases in income due to technological improvements would bring growth in population, which would eventually force income down as greater numbers of people would divide up the limited resources. In the long run, birth rates would have to equal death rates. This was the natural economy of all animal species as subject to natural selection, including human beings. But then something happened in England around 1800, so that average incomes rose without falling, and this has spread to the most prosperous societies over the last 200 years.

The common explanation from many economists is that the institutional incentives for productivity--private property rights, free markets, low taxes, rule of law, limited government--developed first in England. The human preferences for accumulating material wealth had always been there throughout history, but the cultural evolution of institutional incentives in England was necessary to direct and channel these preferences. Before reading Clark's book, this was my position.

Against this, Clark offers some powerful empirical evidence that many, if not most, of these institutional incentives were already present in England in the Middle Ages, when private property was protected, taxes were low, markets were free, and so on. So there must have been something else at work to explain the emergence of the Industrial Revolution in the 19th century.

Clark's answer is that from 1200 to 1800 in England, there was a Darwinian process of "survival of the richest" by which the richest families had the highest fertility rates, so that their offspring spread through the population of England. This evolution favored the spread of middle class or bourgeois values. "Thrift, prudence, negotiation, and hard work were becoming values for communities that previously had been spendthrift, impulsive, violent, and leisure loving" (166). "The bourgeois values of hard work, patience, honesty, rationality, curiosity, and learning" were embedded "into the culture, and perhaps even the genetics" of the English (11).

I would suggest that Clark's position needs to be reformulated slightly. He has shown that explaining the English Industrial Revolution as a product of institutional incentives is not sufficient. But by implication those institutional incentives are still necessary conditions for the "survival of the fittest" to bring about the cultural evolution of bourgeois values over hundreds of years. The crucial point, then, is that introducing capitalist, liberal institutions into a poor society is not going to immediately bring prosperity. That might require a long period of cultural evolution.

Comment
Larry Arnhart’s contribution is particularly interesting. Especially his concluding sentence: ‘The crucial point, then, is that introducing capitalist, liberal institutions into a poor society is not going to immediately bring prosperity. That might require a long period of cultural evolution.’

This goes to the heart of the current concern with poorly developing and non-developing societies today. Despite billions entering their economies via aid and trade, they stubbornly rest not very far from whence they started from, except in small pockets of opulence, surrounded by vast numbers of desperately poor people.

Which returns me to Gregory Clark’s explanations of the ‘survival of the richest’ in England. More rich parents’ children survived than poor parents’ children, therefore, rich families values spread widely. It is plausible on grounds on the inheritance of traits, with the proviso that this would need to work over very long periods, and that behavioural traits could be inherited, assuming they are strong enough formed in all rich children.

But the poor did not disappear totally, or even close to totally. There were more of them proportionally and absolutely. Despite the culling of the generations, their traits (however defined) were strongly represented in each successive population. There was also upward mobility – not from peasant to duke, but from serf to overseer, from foot soldier to cohort leader, from hewers of wood to carpenter, from blacksmith’s labourer to blacksmith, and so on.

Considering that by the 18th century all the food consumed was produced by the labours of half the population, leaving the other half in search of employment, or idly consuming their rents. Accepting occasional dearth and the odd local famine, the non-farming half somehow found some level of means of subsistence within growing economies.

And as Gregory Clark’s focus is on the per capita consumption and not the gross output, which he concedes was steadily growing, it follows that something was driving that growth. I have suggested it was Adam Smithian growth.

The mechanism for Smithian growth was set out in Wealth Of Nations. The ‘great wheel of circulation’ turned, and maintained and created employment from the masters’ circulating capital (the ‘maintenance’ of labour – subsistence wages) and the purchases of raw materials for labour to add value upon. Other capital stayed with the masters and took the form of Fixed Capital, which remained idle unless labour was hired and materials were bought.

Both capitals were from masters’ savings from their revenues earned from sales. A large proportion of the annual revenue from markets was for immediate consumption, joining labour’s wage spending, but even a small proportion ending up as savings for employment-creating capital generates growth, which, over the long run increases gross annual output, the most important event in human history.

All this happens no matter how long per capita consumption remains steady. In this context, Gregory’s focus on per capita income since Roman times (or since 100,000 years ago) is not the relevant phenomenon in economic history. In fact, it obscures what was actually going on, in my opinion.

Smithian growth focuses on what is important in economic history: growing GDP from widening and deepening markets, which when aligned to innovation and new technologies leaps to unprecedented levels. And behind growing GDP is not just the output or trade in specific products wool, coal, wheat, and so on, but the developing interconnections in, between and among, more and more complex products, that is complex in how they are put together by the increasingly widespread trading links at all levels and over long distances, each contributing to the foundations of the commercial economy, the prelude to what some people call the industrial revolution.

Wealth Of Nations is about these processes. Everybody knows of the pins example of a division of labour within a production process. Fewer realise the importance of the example of the common labourer's coat, later in Chapter II of Book I. This is of greater importance to the questions raised by Gregory Clark and his suggestions about ‘survival of the richest’ (interesting and plausible as it is). Look for market linkages, their complexity, their breadth and depth, after several hundred years from the 14th century. In Britain, these linkages of multiple markets in many locations and in many countries, are where the answer to the questions of AFTA reside, in my opinion.

The cumulative affect of the slow and gradual evolution of markets overcame the Malthusian Trap, which was about food subsistence (diminishing returns), which when joined with consumption goods (not subject to diminishing returns!), broke the trap, in this case, perhaps forever.

Don't Mention Utopia!

Ulrich Beck, professor of sociology at Ludwig Maximilians University of Munich and at London School of Economics and Political Science, writes in the Shanghai Daily.com 14 September:

‘Nation States change in a cosmopolitan world’:

“In the intellectual movement of the Scottish enlightenment during the late 18 century, thinkers like David Hume and Adam Smith developed an important idea of the market as a circle of sympathy.

The exchange of goods and information between peoples is a force to combine different cultures and nations into a circle of mutual understanding and bestow on them an awareness of a common fate.

Therefore, benevolence and civilization can replace cruelty and barbarism.”
“For a long time, sociology has thought in the framework of the nation-state. Now it needs a change to embrace what I call "methodological cosmopolitism."

Ulrich Beck takes this idea to a new alignment of nation-states with ‘global capital’, in which nation-states ‘are becoming more and more dependent on global capital in making domestic and foreign policies. But, while neo-liberalists, the ideological parasites of global capital, are celebrating their version of "globalization", it is, in fact, far from the end of the story and the end of history.’

‘Nation states, if enlightened through cosmopolitism, can unite with the social movements and base their power on a sounder legitimate base.In that case, global capital can reconcile and cooperate with these anti-powers, and win for themselves greater legitimacy.’So my central outlook is a cosmopolitan world, in which states, civil societies and companies interact with one another to take control of global risks and promote humanity.”

And the way head? :‘Social movements in the fields of the environment are becoming more global, intentionally rather than instinctively. People realize that environmental catastrophes could break out at any time and in any place. Nation states, if enlightened through cosmopolitism, can unite with the social movements and base their power on a sounder legitimate base.In that case, global capital can reconcile and cooperate with these anti-powers, and win for themselves greater legitimacy.”

Comment
It was said in the 19th century that ‘God was in the detail’, which the 20th century transcribed as ‘the Devil was in the detail’. And it is here that sociology-speak earns itself its bad name.Ulrich seems to be saying that the national-states (a multitude of government forms) ‘unite’ with the ‘social movements’ (anti-globalisation protestors of various hues, i.e., anti-capitalists of the former Marxist-left, various anarcho-libertarian groups, and smaller violence cults), all in the name of ‘humanity’ (subject to a multitude of interpretations from various tyrannies associated with social-controls of what people can and cannot do), and somehow ‘share’, exactly what? Power? Monopoly of Violence?

Do governments meeting in plenary sessions or bilaterally bring with them crowds of demonstrators to join in the debates on what to do about this or that problem (the environment, species decline, how far their citizens may travel, and how often, etc.?). Exactly who do these ‘social movements’ represent, how did they acquire their ‘legitimacy’ to speak for anybody else (do noisy vegetarians speak for non-vegetarians, who were cleared off the streets in tussles?).

Ulrich Beck offers the admonition: ‘We should not be utopian, however.’(!)

Neither Adam Smith nor David Hume thought that markets required governments to manage them, never mind what in practice can only be described as ‘mobs’ of people feeling strongly about something (say, they don’t like Jews, or Papists, or Islamists, or advertising, or air travel, or life-styles, and so on). How this will go down in totalitarian China is moot.

Markets were to be governed by the laws of justice, not ‘men’, especially not mobs of them. Monopolies were to be curbed severely by competition, not regulators and teams of inspectors. I think there is much detail to sort out in Ulrich’s proposals.

Why Did the Industrial ‘Revolution’ Occur in Britain?: a contribution to a debate at Marginal Revolution

For the debate see Marginal Revolution Blog

“In one part of the UK, Scotland, the events around the tail-end of Scotland being an independent country from the ‘Glorious Revolution’ of 1688 did have a profound effect, directly related to the catholic-protestant divide (and the divide within the protestant church). There was much religious strife, including violence, in which many prominent Scottish aristocrats suffered grievously (thumb screw treatment, etc.).

The survival of the national Church of Scotland was a major issue in the debates from 1703 to the Act of Union with England in 1707. Should the catholic ex-king James 3rd of England and 8th of Scotland return to power in a counter-revolution (the Jacobites, English and Scottish), this would return religious strife to Scotland.

Thus, many pro-Scottish aristocrats switched to supporting Union once the English accepted the independence of the Church of Scotland and the limitation of the Church of England to south of the border. This political battle, following the disaster of the Darien ‘colony’, divided Scotland roughly between its backward and catholic highland region and its protestant (various sects) lowlands.

Adam Smith senior played a role in the pro-Union causes; his son benefited for that connection in his efforts to become, first a Minister at Oxford, and then a professor in Glasgow. By the 1750s, Scotland (especially Glasgow) benefited from the British colonial trade; and from inter-British trade with England. The agricultural reforms and ‘improvements’ initiated by the Dukes of Argyle and the 3rd Duke’s expensive experiment sin industrial chemistry (he set up works to produce sellable products with local entrepreneurs and sponsored much scientific research).

These institutional changes added to the commercialisation of the UK (less so the Highlands which remained rebellious and poor), which over the century added to the events leading to what some people call the industrial revolution. James Watt was employed at Glasgow University where he innovated Newcomen’s steam engine, using a teaching model that had broken down (Smith was on the Senate that appointed him).

The Scottish Enlightenment developed among a core group of intellectuals, chemists, metallurgists, geologists, mathematicians, moral philosophers, divines and literary figures, all of whom knew each other, argued, corresponded, past around their papers, and mixed with those on the ground working away at their commercial and agricultural projects that were to transform the country by the mid-19th century.

Much of this groundwork does not show up in data about finances, trade, and living standards. But it does place the events around 1688 and afterwards into a growth-inducing frame."

Conclusions on Gregory Clark's 'Farewell to Alms'

The last four chapters of Gregory Clark’s ‘A Farewell to Alms’ are now under debate at Marginal Revolution (here).

The four chapters are not as comprehensive a conclusion as I was looking for; perhaps reading it in sections over three weeks (so much else intrudes!) is not the best way to grasp the magnitude of his hypotheses of the ‘labour quality’ argument and ‘downward mobility’. I am not convinced of the ‘genetic’ side of these arguments mentioned in some reviews, mainly because I did not feel that Gregory said all that much about how this worked biologically in his book in such a short time period. It was more of a tentative inference than a theory, or an explanation short of a theory.

On economics, he is much stronger, but just as assertive, sometimes too assertive, dismissing what he finds wanting in economics (by which he must be referring to neoclassical economics), and using, without explanations of ‘why’ they are OK, but the rest of neoclassical economics is not, in his use, for example, of ‘Cobb-Douglas production functions and Solow’s growth theory. For it is in neoclassical economics that his targets of the ‘economists’ at the World Bank, IMF and ‘western’ consultancies find their explanations for what they believe is ‘wrong’ with developing and non-developing countries, which he objects so much to, without too much detail.

His dismissal of ‘institutions’ as having any explanatory value over the 500 years of ‘slow and gradual’ economic growth is breathtaking, especially as he does not explain exactly why they deserve such treatment, as if nothing, absolutely nothing, happened institutionally on his wide definition of what is institutional (not just actual institutions, such as systems of government, but also what appear to be the habits, cultural histories, laws and such like). If there is an extensive literature in this field that I have missed (entirely possible), I would appreciate guidance.

Surely, the slow and gradual institutional effect would take time to take its form, as represented in the ‘quality of labour effect’ and while it may not be picked up in the data as exists, it was nevertheless working away in the background. How would you measure ‘quality of labour’? How does it suddenly appear in work habits?

When the Royal Navy took in any young male who looked fit in the press gangs, they soon learned discipline and quality work habits because their absence would invite informal physical punishment by the bo’suns’ mates and, in severer cases, formal punishment in flogging. Ordered aloft for a few hours in a gale as punishment soon improved the quality of a new seaman’s labour.

It is here that Gregory is too selective. Britain was the first to ‘industrialise’ using power-driven machinery substituting for labour, raising productivity beyond what the pure division of labour that ‘augmented’ labour could achieve (though I have my doubts that the IR happened divorced from the extension and deepening of commercial society), and by elimination of all else, it must come down to the quality labour (education, dexterity, prolonged attention to the completion of tasks) which was not present to the same extent – though definitely present in the Netherlands – in the rest of Europe, and, later, under imperialism, colonialism and de-colonialism in the poorer countries.

Britain also had a far more developed interconnected markets for decades before others. Approximately half of the available workforce produced all the food for the country by mid-18th century, which meant the other half sought work in non-agricultural pursuits, productive, driving growth, and in non-productive, as soldiers, seamen, retainers, and menial servants. The former produced growth (in Smith’s growth model), the latter enlarged demand for final consumption.

Given the long historical time frames taken in originating what is called the industrial revolution in Britain, what happened from standing starts in India and China over two centuries, and in Africa, in less than 60 years, ought not to be surprising. If we had been studying Britain in say, 1450, 1550, 1650, or 1750, who would have predicted that Britain in 1850 would have become the world’s industrial power? If we had examined the data as it was known in 1810 (60 years later), who would not have concluded that whatever had been predicted was not happening. To what would they put this down to?

Adam Smith, in a rare, and for him even unique, prediction noted in Wealth Of Nations (Book IV and V) that the British colonies would with a hundred years from 1776, would be the world’s leading economic power, such that if Britain and the Colonies were joined together in a parliamentary taxation system, a seat of government based on taxation revenues would move from London to the colonies. This shift in economic power would be based on the vast expandability of American agricultural output, its growing population, migrant and domestic, ending of the British manufacturing monopoly, and on the inevitable growth in the manufacturing strength of the colonies.

As it happened, while America’s world power position came about in the 20th century, Britain’s world lead was eroded by other European powers by the end of the 19th century and, most definitely in the 20th century. If ‘quality of labour’ and ‘downward mobility’ were the explanatory variables claimed for them by Gregory, they must have been working away within the differing institutional contexts of these countries too. As also in 20th century Japan, and 21st century India and China (and the other Asian ‘tigers’). Indian major companies are buying major British companies, and do not wish to inculcate ‘Indian’ work habits under colonialism in them.

In China’s case, then the ‘richest country in the world’, Adam Smith believed that it had long ago ‘acquired that full complement of riches which is consistent with the nature of its laws and institutions; but its present complement (1770s) ‘may be much inferior to what other laws and institutions, the nature of its soil, climate and situation might admit of.’ He adds: ‘A country which neglects or despises foreign commerce, and which admits the vessels of foreign nations into one or two ports only, cannot transact the same quantity of business which it might do with different laws and institutions’. (WN I.ix.15: pp 111-2)

Singapore (and Hong Kong), a tiny island off Malaysia, went from next to little, on independence in a few decades to among the richer nations. The people before then were not imbued with a work ethic particularly different from what Gregory describes in Chapter 17 in respect of India. The ‘rich’ did not suddenly breed downwards! Their institutions and habits changed. Endemic corruption was virtually eliminated. Meritocracy drove education, etc. These had important economic effects, not the least when they stuck at it, year in and year out.

Despite Gregory’s certainties about what doesn’t cause long term growth, such as in his treatment of Douglas North amidst that endless (and useless, because they are arguing about an equation, not the real world) debate among neoclassical growth theories on ‘exogenous’ or ‘endogenous’ growth, is sad; North has more useful things to say about long-term growth than Gregory seems to credit him with.

In fact, if anything Gregory ought to step away from neoclassical economics for a while and view his hypothesis afresh. ‘A Farewell to Alms’ is too important a work to leave his data hanging on a thin layer of theory, mainly based on an artificial, abstract, and non-historical approach to the nature and causes of the wealth of nations.

In sum, Gregory Clark’s ‘Farewell to Alms’ is a major step forward in a debate, ostensibly about Britain’s role in 19th century capitalism, but one that is actually about the role of the ‘X’ factors in non-developing, or not developing fast enough, 21st-century economies. If legislators, public servants, interested experts and concerned economists wish to influence that debate, they would do well to start with ‘A Farewell to Alms’.

However, I also think reading Adam Smith’s Wealth Of Nations and his Lectures On Jurisprudence would be a good place to gain perspective from what was about ‘the nature and causes of the wealth of nations. Added to, or as background to, Gregory Clark’s ‘Farewell to Alms’, together, they provide a solid platform for taking the debate forward, as we must.

Tyler Cowen and Marginal Revolution deserve our thanks for providing such an instructive medium to re-think our shibboleths, confirm our doubts and test both of them against our ‘certainties’. I learned a lot from every contributor, and Gregory’s book.

Visit Marginal Revolution and follow the debate.

Mandeville Is Not a Safe Guide to Adam Smith

“Culture: A Euro of Excuses' in 'Bits of News' (USA), 12 September 2007, by Henry Midgley

"Bernard Mandeville in the Fable of the Bees took on this impression. Mandeville argued that private vice makes public virtue. He suggested that it was our immoral appetites, our selfish desires that came together to make a strong state. Our desire for riches led us to improve ourselves and hence to improve economically our surroundings- this basic argument taken up by Adam Smith turned into modern economics. At its base it depended on the assertion that it was not, to paraphrase Smith, the benevolence of the butcher and baker which fed us but their selfishness. It was the vicious nature of humanity, humanity's desire to compete, to emulate, to gain things, which led ultimately to us all earning more and living in a better way. Along the way humans would behave horribly to each other- but so long as that happened within a law that secured the peace- it would work ultimately to the general advantage.

Within that gross over simplification of Mandeville, I hope you see what I'm getting at here. Many jobs involve immorality of one kind or another, even if they are completely moral, the mechanics of ambition (ie the office politics and backstabbing) are profoundly immoral. But if one accepts Mandeville's central argument that it is through our private vices that we create public goods- like for example wealth and prosperity and even national power- then you can argue that such immorality is necessary ultimately for society to function. An adultery agency may give employment to a loving father, a caring sister or a gentle mother. It provides for a desire which we may find repugnant but how can it be banned. Private vice, aiding people to commit adultery, generates money and that money helps society. It creates wealth and creates opportunities for people, therefore it can't be bad for society to tolerate it.

But that leaves us with a question and upon that question the whole of our society turns. We cannot ultimately get away from the fact that this is a profoundly unethical activity. To work in this industry is to be quite frankly immoral. We have therefore a contradiction. On the one hand this activity must be legal and because we live in a market and there is a human desire to commit adultery, that desire will ultimately be satisfied. But on the other it is deeply immoral. Mandeville and his present disciples sweep away these problems by arguing that if something benefits us all, it must be good. Essentially if capitalism brings out our viciousness, we should revel in it. I'm not so sure that we can resolve that contradiction so easily. This is immoral, this is vicious and the fact that the founders of it will be rewarded with business is an odd quirck of a system which I support.

Private vice may lead to public virtue, but its still vice.”

Comment
Bernard Mandeville’s thesis is often confused with Adam Smith’s, so much so, that often the author making the error does not bother to mention Mandeville at all and just lumps the whole of his thesis on Adam Smith and proceeds to link the very ideas that Smith rejected explicitly in Moral Sentiments (Book VII.iv. pp 306-314: ‘Of Licentious Systems’).

In Wealth Of Nations, which despite the gap in publishing dates – 1759 to 1776 – was taught along side his class in ethics to the same students between 1751-64, using the exact same reference to the ‘butcher, brewer, and baker’, his classic references to the purchase of one’s dinner from the aforementioned ‘butcher, brewer, and baker’ was not occasioned by either party’s ‘selfishness’. It was never Smith’s view that those selling items for dinner were acting from their ‘selfishness’ any more than he argued that those readers who the seek to purchase the ingredient for one’s family’s dinner were committing an act of ‘sefishness’.

As a moral philosopher, Adam Smith knew the difference between ‘self-love’ and ‘selfishness’, though it is not clear that Henry Midgley knows the difference. In particular Smith advises those seeking to purchase food, and other items, that they appeal to the seller’s self interests and do not exclaim about their own self interest. (WN I.ii: page 26-7).

Adam Smith wrote extensively about human motivations, including their ‘delusions’, and to get a clear perspective on this, and the differences between Mandeville and Smith, I suggest you read Moral Sentiments, Part IV, pp 179-87: ‘Of the beauty which the appearance of UTILITY bestows upon all productions of art, and the extensive influence of this species of Beauty’.

Adam Smith, it may be noted in this context, was not of the view that every action of every person in pursuit of their self interest was necessarily, nor consequentially, for the common or public good. People cornering the market, acting like monopolists, pursuing competitive means at the expense of those they ‘jostle’ aside, importuning the legislature for their private good to institute tariff protection measures, engaging in licentious behaviour (including in Henry Midgley’s case, breaching social norms of behaviour), are the direct objects of Adam Smith’s personal ire and his intellectual criticism of mercantile political economy.

Adam Smith was not a Dr Pangloss (Voltaire's Candide) figure believing that we live in the best of all possible worlds.

If Henry Midgley wishes to write a piece for his explanation for a service provision of assistance in adultery, he should stick to Mandeville and should leave Adam Smith out of it. He may know something about Mandeville (and easy author to quote), but I doubt on this performance that he knows much about Adam Smith.

September's Lost Legacy Prize for Hannah Miller

From Philly.com (‘the region’s home page’), Philadelphia Daily News - Philadelphia, PA, USA is a letter ‘In defense of Hannah Miller’ by Ben Burrows:

“RE THE RECENT criticism of op-ed writer Hannah Miller":

Hannah Miller volunteers her time to make democracy work. She is no socialist. She works hard to restore the human face to the capitalism described by Adam Smith, an economy of small shopkeepers and manufacturers, competing fairly in a controlled marketplace.

Timothy Dowling (letters, 8/30) doesn't understand the capitalism of Adam Smith. Dowling takes his description of capitalism from Karl Marx: the inhuman facade of Social Darwinism gone mad.

Dowling is apparently angry at the misuse of government by so-called conservatives, at tremendous cost to the taxpayer, to waste our country's resources on boondoggles like unworkable missile defenses, to bleed our people and resources in the pursuit of an Iraqi White Man's Burden whose appropriateness is long since past, even in the time of Winston Churchill.

Giving every child an equal start in health and education is no more than to give reality to the belief that all of our children are created equal.”

Comment
I know not who Hannah Miller is, or Tom Dowling her critic, nor what has been exchanged between them, but Hannah Miller’s approach to Adam Smith is refreshing in the context of the USA: ‘the human face to the capitalism described by Adam Smith, an economy of small shopkeepers and manufacturers, competing fairly in a controlled marketplace.”

What a change from the usual misrepresentation of Adam Smith by too many US academics! How far from neoclassical theorists who claim Adam Smith as their ‘patron saint’, ‘alive and well and living in Chicago’, and how far they have taken their version of him from the Adam Smith who was born in Kirkcaldy, and never went near Chicago - it didn't exist when he was alive.

I suggest we award September’s Lost Legacy Prize to Hannah Miller for highlighting the Kirkcaldy Adam Smith’s efforts to propagate ‘the human face to the capitalism’.

Adam Smith's Views of Exchange Value

‘Ktibuk’, a correspondent asks (9 September) on Mises.org Bloghere: http://blog.mises.org/archives/007085.asp#comments

Gavin,
What does "capital" have to do with theory of value?

My answer:

When discussing Adam Smith on his theories of value I address what he wrote and not value theory since the mid-18th century. Smith wrote about exchange value within his theory of growth, in which capital, labour and land have places. These factors create products for exchange, through the ‘propensity to truck, barter, and exchange’, which he implies appeared long before commercial society.

In ‘rude society’ there were no markets. Each individual was independent of others and laboured for his own ends, living in small groups of related families. When hungry he hunted or gathered (in practice the women folk gathered), when wet he built shelters, when cold he made animal skin ‘clothes’. There was no capital because everything ‘produced’ was for immediate consumption. Possessions had to be carried; hence, were limited to essential ‘tools’ (stone axes, etc.,). This was the first age of ‘man’.

Labour was unambiguously the sole factor of production (there was no ‘ownership’ of land and all it contained). Labour was the sole measure of value: what it cost in toil to produce. Smith opined, in a ‘just so’ story, how two hunters traded beaver for deer. As each unambiguously owned what they had killed (the original LVT) they exchanged deer for beaver in the ratio of the labour effort required to find, catch and kill each animal. This was Smith’s use of a LVT (as commonly understood in his days – cf. John Locke).

With property in land and in ‘stock’ (capital), the components of ‘price’ changed, from a mono-factor to a multi-factor, when looked at from the producer’s perspective. Labour no longer determined value; owners of land or stock, shared the sales revenue. Labour could still be regarded as a numeraire for measuring exchange value, but not for determining it (a confusion in LVT).

Ownership of land was enforced by property relations (civil government), which protected the private property of individual owners from the those without property (other than their perfect right in their labour). Ownership of ‘stock’ came from ‘saving’ out of consumption (a ‘grub stake’ idea).

In Smith’s concepts of fixed and circulating capital, fixed capitals are instruments (tools) of production that augment labour and they remain under the control of the ‘stock holder’ (their owner). Circulating capital consists of the ‘maintenance’ (subsistence) of hired labour and the raw materials upon which they work. Circulating capital necessarily leaves the stockholder’s possession (he pays out wages and buys in materials), including when he uses his fixed capital.

Sales revenue, net of costs, is his profit, which he divides into his immediate consumption and to augment his capital stock (the source of growth). Labourers live on their family’s maintenance (under ‘Malthusian’ conditions); idle landlords reap their rents from what they didn’t sow.

Prices in commercial society are determined by the quantity (‘effectually’) demanded and the quantity supplied. Smith’s ‘natural’ and ‘market’ price mechanism is similar to Richard Cantillon’s, 1734, and Turgot’s, 1766. When markets clear at ‘natural prices’ the factors receive their ‘natural’ shares of revenue; when market-determined prices rise above ‘natural’ prices, the quantity supplied rises; when they fall below ‘natural’ prices, the quantity supplied falls. Smith did not have an equilibrium price model; price oscillated, or ‘gravitated’ around natural prices in disequilibrium.

Prices are determined within the ‘propensity to truck, barter, and exchange’ by pairs of individuals and not just by the dictates of abstract markets. Smith elaborated on what influences the producer’s price preference (that which is profitable, net of costs). It is an error to say Smith had a ‘cost of production’ value theory. The exchange process was not determined solely by buyers, nor by sellers. ‘Higgling and bargaining of the market’ was sufficient ‘for carrying on the ordinary business of life’.

The buyer is not interested in the seller’s costs (wages plus rent), or the seller’s profits ‘from hazarding his capital. Seller’s price competition lowers prices; as did, longer term, the ‘finer’ division of labour that increased labour productivity. Smith outlined the ‘conditional bargain’ (Book I, page 26: ‘Give me that which I want, and you shall have this which you want.’ In short, prices are determined by bargaining, between a seller concerned with costs plus profit, and a buyer concerned with the lowest price consistent with supply of the wanted good.
At this point, ‘subjective’ valuation has a role and while Smith did not elaborate on subjective judgement, it is implied in his bargaining model (and in his example of the use-value of water in the Arabian desert).

And that is what capital has to do with exchange value: it is an element in the seller’s preference for the determination exchangeable value of a good; i.e., the ratio at which a good is exchanged.

A Week-End Debate on Adam Smith

Juan Fernando Carpio writes (8 September) on Mises.org Blog:

"In chapter three [WN II.iii.1: page 330] one can find another quote that supports my interpretation of Smith's: "Thus the labour of a manufacturer adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master's profit.". There is ignorance or disregard for the pure capitalist (investor) role, speculators and so on."

My reply:

"Juan Fernando Carpio,
The full quotation from Wealth Of Nations that opens Chapter iii in Book II, page 330, ‘On the Accumulation of Capital, or of productive and unproductive labour’ reads:

“There is one sort of labour which adds to the value of the subject upon which it is bestowed. There is another which has no such effect. The former, as it produces a value, may be called productive; the latter, unproductive, labour. Thus the labour of a manufacturer adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master's profit. The labour of the menial servant, on the contrary, adds to the value of nothing. Though the manufacturer has his wages advanced to him by his master, he, in reality, costs him no expence, the value of his wages being generally, restored, together with a profit, in the improved sale of the subject upon which his labour is bestowed. But the maintenance of a menial servant never is restored. A man grows rich by employing a multitude of manufacturers: He grows poor, by maintaining a multitude of menial servants.’ [WN II.iii.1: page 330]

Productive labour produces products that are sold by masters for a price and out of the revenue received by the ‘master’.

The ‘entrepreneur’: from the 18th-century French usage of the word: ‘between takers, buyers or purchasers, has shifted meaning in the 21st century. The common French usage of ‘entrepreneur’ is as a ‘haulage contractor’, etc., in the French village where is live. In English (and American) it has been expanded to mean any risk taking in business.

The master recovers the wages he paid to the labourer (or ‘manufacturer’; in the 18th century, these were persons who used their ‘hands’ to make things, i.e., handmade products, but not a 21st-century large-scale modern ‘manufacturer’) when the master sold his goods in markets. Wages were at the subsistence level as determine socially.

Out of the balance of revenue from sales that was left after paying wages of labourers, the master, recovered the cost of the materials used by the labourer, and retained the rest (if any) as his profit. This profit share came from his ownership of the circulating capital that maintained labour in their employment, paid for the raw materials or semi-manufactured produce (today: ‘work in progress’). The master’s capital was at risk because he may not have recovered his capital his outlays (the maintenance of the labourers, and his purchases of raw materials), or made sufficient profit to justify taking such risks. In which case, he would leave the business and seek other profit opportunities (lend his capital at interest or hire other labour to produce something else).

If you continue reading Book II of Wealth Of Nations, you will be introduced to Smith’s ‘model’ of the ‘great wheel of circulation’ (Fixed and circulating capital) and see how he believed that this created net growth in a commercial economy.

It is absolutely clear, beyond argument in fact, though that never stops academics from arguing, that profit was the share of the revenue to owners of capital from employing labour in productive output and from selling the products in markets. It was never a ‘wage’ for the master’s work. He took his profits and either consumed them (tendencies to prodigality) or invested them in productive work (frugality).

You may also note that Adam Smith never discussed ‘capitalism’ and did not recognise the phenomenon, nor the word. The first use of ‘capitalist’ in English was in 1793 (Smith died in 1790); Turgot used the French word ‘capitaliste’ in 1766. The first use of ‘capitalism’ in English was in 1854 in William Makepeace Thackeray’s novel: ‘The Newcomes’, and thereafter, of course, by Karl Marx.

Adam Smith’s description of the ‘age of commerce’ was a much simpler affair than modern ideas of finance capital. He spoke of owners of ‘stock’, owners of ‘capital’, and ‘undertakers’.

Should you have further quotations for clarification, I would be delighted to offer my views, or, rather, Adam Smith’s views on his behalf.

To which ‘Anthony’ interjects a comment:

Smith's views on profits were closely related with the LTV [Labour Theory of Value] it seems. It's not too difficult to see how Marx would go along a different route with regard to the formation of profits (based on the LTV.)

I reply to ‘Anthony’ (9 September):

Anthony
Discussing Smith and the Labour Theory of Value would take us a long way from this thread. Briefly, he argued that labour ‘originally’ was the source of all wealth in, and the distinction is important, ‘rude’ society of hunting and gathering. There was no ‘capital’ present in this first ‘age’ of mankind. Labour owned the product its labour; land was owned by nobody; there was no ‘capital’ present in this first ‘age’ of mankind, and nobody made ‘profits’.

But Smith moved the argument away from labour in savage society to labour in the ages of shepherding and agriculture, and the appearance of property, civil government and laws. His presentation of these distinct changes is muddled because it is mixed together, as he switches from describing ‘rude’ and ‘savage’ society to societies where other contributors to wealth production, denominated as the annual output of the ‘necessaries, conveniences, and amusements of life’. It is necessary to read these chapters carefully to disentangle the loose strands of his arguments [Wealth Of Nations, I.v-viii: pp 47-104] to understand his so-called labour theory of labour.

Labour contributed essential components of man made products, and was no longer the sole source of value because owners of land and of primitive capital (direct savings out of earned ‘rents’ and ‘profits’) were contributors to output. In the age of commerce, labourers earned their wages, landlords rented their lands and masters earned their profits from their ownership and risk taking only. In short, for Smith the ‘labour theory of value’ no longer applied. Prices were determined by the quantity supplied and the ‘effectual’ (quantity) demanded.

Adam Smith, like Richard Cantillon (1734) and Turgot (1766) distinguished between ‘natural’ prices (where the factors of production received their ‘natural’ shares of the revenue) and ‘market’ prices, where the entrepreneur got what he got (by price determine solely quantity supplied and quantity demanded). If price rose above 'natural prices' he was able to pay his labourers and the landlord, his profits rose above the natural profits; if not, he made losses and (under perfect liberty) he changed his business activities, to recoup losses in the next period(s).

This is quite different from the Marxian labour theory of value”

Rich Landlords Could Do No Other

‘Steve J’ posts this on Radamisto here (9 September):

"THE UNKNOWN ADAM SMITH
It's obviously unrealistic, but Smith did believe in a more equitable distribution of wealth and thought it would occur naturally.

From his The Theory of Moral Sentiments, ed. by Knud Haakonssen, pp. 215-16:

"The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces."

Comment
That Smith thought there should be a more ‘equitable distribution of wealth’ (defined as the ‘necessaries, convenience, and amusements of life’) is correct.

I am less sure it had anything to do with ‘an invisible hand’, the metaphor used by Adam Smith to describe what happened naturally and of necessity. The landowners did not till their fields; the labourers’ did that and had to receive at least their subsistence to continue to survive and to breed and for enough children to survive to replenish the labour force each generation.

If the landlords did not do at least that, they would themselves be at risk of diminishing their wealth, and at risk from neighbouring landlords who did do enough to replenish the labour force and who would covet their weaker neighbours and take their land by force.

In short, as explained in my paper, ‘Adam Smith’s Invisible Hand: from metaphor to myth’ (2007: for the History of Economics Society, 34th Annual Conference, GMU, June), landlords could do no other.

Adam Smith laid great store by society’s progress to opulence, which would benefit all of society’s Great Orders. Growing employment would raise the money wages of the labouring poor, the division of labour would extended and deepen, reducing costs per unit and thereby raise the real wage, and the propensity to truck, barter, and exchange, would promote social harmony.

Reading Moral Sentiments, Wealth Of Nations and Lectures On Jurisprudence shows Adam Smith’s unity of his ideas, and will make him less unknown.

Only in California? Tagging Employees Like Cattle?

A weird story. Can it be true?

“Posted by ScuttleMonkey on 3rd September
from the not-quite-cattle-yet dept.:

InternetVoting writes "California has passed a bill banning companies from requiring employees to have RFID chips surgically implanted. Already one company has been licensed by the federal government, implanting more than 2000 people. At least one other company — CityWatcher.com, a Cincinnati video surveillance company — already required RFID implants in some employees. 'State Sen. Joe Simitian (D-Palo Alto) proposed the measure after at least one company began marketing radio frequency identification devices for use in humans. "RFID is a minor miracle, with all sorts of good uses," Simitian said. "But we shouldn't condone forced 'tagging' of humans. It's the ultimate invasion of privacy.

From a comment by a reader of Slashdot:

“To quote the grandfather of free-market capitalism":

"Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters." -- Adam Smith, The Wealth of Nations, Book 1 Chapter 10 [WN I.x.c: pp 157-8]

Free market capitalism does not require blind acceptance of any working conditions, in fact, abuse that potentially damages workers or reduces their motivation, capacity and desire for work damages the very engine of wealth creation in society, ruining the greatest asset the economy has.

Adam Smith most certainly recognized the disparity in power between employers and employees, and while there are a whole lot of people who like to twist the idea of free market capitalism into an anything-goes feast for the new aristocracy and corporate owners, the fact is that the state has many legitimate roles in a free market. As long as it stays away from protecting the owners and investors from competition.”

Comment
The story itself could be filed under ‘Only in California’. Read it and make up your own mind.

In so far as the attributions to ‘the grandfather of free-market capitalism’, they may be ignored. Adam Smith was neither the usual ‘father’, nor the ‘grandfather’ of ‘free market capitalism’, a phenomenon not known to him or others in his day and for some time later (1854 in fact).

He wrote about his analysis of the ‘age of commerce’, as it was reviving from the 15th century to the mid-18th century. The long, slow, and gradual evolution of commerce in Britain was the subject of Wealth Of Nations, and he subjected mercantile political economy to close scrutiny for its distortions in national monopoly trade, jealousy of trading partners, called preposterously, ‘rivals’, colonies, chartered monopoly trading companies, wars over trivial ends, and the failures to grow the economy more efficiently to the benefit of all orders of society, particularly the labouring poor.

A Flattering, But Wrong, Attribution of an Author's Words

To have your words attributed to someone else is a burden most authors dread.

‘Bad Samaritans’ by Alan Moore (a co-author with Tomin T. Ahonen of
“Communities Dominate Brands” quotes a piece on his blog (here)

“America's greatest treasury secretary, Alexander Hamilton, met an untimely death in a duel in 1804. But his economic ideas keep firing back. In his 1791 "Report on the Subject of Manufactures", he quarrelled with the free-trade doctrines of Adam Smith and other liberal economists. He believed the government should shelter and nurse American industry through its infancy until it was strong enough to stand against Britain's manufacturing might. Critics of free trade have reached for this "infant industry" argument ever since.”

And he develops the quoted ideas by a reference to a book (I commented on it on Lost Legacy on 31 August):

“It is a story told in Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism by Ha Joon Chang.”

Then Alan Moore first quotes The Economist:

“Chang curates awkward historical facts calculated to discomfort neoliberals. He takes particular delight in puncturing the free-trade pretensions of the British. In 1860, 84 years after the publication of “The Wealth of Nations”, Britain forswore most import duties. But in earlier decades Britain had prospered behind manufacturing tariffs as high as 55%. It also invented some of the tricks and contrivances now associated with East Asia's aggressive export promotion, such as allowing exporters to reclaim duties paid on imported inputs.”

And he then states:

“However the counter argument via the Adam Smith Institute is :

“Hamilton’s call in 1791 (Smith had died the previous year) to stand against ‘Britain's manufacturing might’ was not an appropriate description of British manufacturing strength so much as a description of Britain’s long held (since the 15th century) mercantile policy that had dominated its American colonies through an imposed monopoly of American trade.

The colonies were not permitted to develop local manufacturing activities and had to import everything of that nature from England (and after 1707, from Britain) and had to export everything it produced to Britain, which would re-export some of it to Europe. From an American point of view, it is no wonder that people like Hamilton confused the doctrine of Adam Smith, which were not pursued by British governments in practice, and the mercantile policies of monopolies, trade restrictions and colonies that were.”

I recognised this instantly as something that I wrote (an author knows his own words as a mother knows her children) and I didn’t get the from the Adam Smith Institute, genuinely flattered as I am to have Lost Legacy's posts attributed to the prestigious Adam Smith Institute, a leading campaigner for introducing competition into markets presently clogged with regulations and into the British state’s provision of goods and services that would be more efficiently distributed though market mechanisms than by state-employed bureaucrats.

I still prefer to have my own words attributed to Lost Legacy – and I am sure that the good folk at the Adam Smith Institute would prefer this also, as they may not always agree with every post of mine on Lost Legacy.

You will find the original paragraph of mine quoted above posted at:

“A Korean Economist Misreads Adam Smith, as did Alexander Hamilton (and Frederic List)” on Adam Smith’s Lost Legacy (31 August).

I trust that Alan Moore will publish a correction.

Silly Saturday Stories on Adam Smith: no. 4

“Saving the environment requires re-writing Economics itself” by Susan Chan, writing in The Canadian (‘Canada’s new socially progressive and cross-cultural national newspaper’ (8 August, Toronto):

‘Western industrial civilization has basically bought into the models of "economic prosperity", which have been taught in economics classrooms. The prevailing models of economics which emphasize the virtues of "market growth", irrespective of social and environmental costs, was substantively developed in the nineteenth century.
Today's economics, was developed in the era of Adam Smith, and other great scholars at the time, and which in the post World War II societal milieu, was further engineered to serve the interests of large corporate enterprises (by implicitly giving the 'rights of individuals' to the entities). The University of Chicago School which embraced the exploitative economic doctrine of "Human Capital", was at the forefront of the corporate oriented manipulation of economics.’

And Susan Chan’s answer to the problem she identifies:

“Saving the environment, requires the replacement of the current model of "market"-biased economics with a revitalized people-driven economics. In such a context, social and environmental considerations would not be an afterthought. In such a rejuvenated "New Economics", social and environmental consideration would be at the core of all societal decision-making processes, as well as implemented public policies.”

Comment
How did Adam Smith get into her conflation of 230-years of economics? I suspect only because Susan Chan has heard of his name and has not read 'Wealth Of Nations', or 'Moral Sentiments', and not even 'Lectures On Jurisprudence'. If she had she would not write what she has on this occasion.

Adam Smith has no connection with the economics of Chicago University, a town that did not exist when Smith was alive, other than Chicago faculty from the 1930s quoted his name as some kind of blessing of neoclassical economics and, as its graduate spread across the US and Canada, the ‘connection’ became established by repetition.

Smith analysed the benefits of markets in creating surplus output each year over a previous year, and from this surplus (the content of growth), consumption was able to rise (the majority of people were desperately poor) and also investment of raw materials and people’s labour from additional employment in infra-structure (better housing compared to the hovels they lived in, and which many poor people still live in, though not perhaps in Toronto), education on a national scale, health facilities, knowledge and systems of justice.

Susan Chan disregards the process of economic growth as if it is disposable without returning humanity to the living conditions and life spans of the past in the ‘West’ and the same conditions that still operated in much of the undeveloped, and non-developing, countries a long way from Toronto.

Well meaning, comfortably off and educated citizens in Canada, unintentionally I am sure, should take a close look at the history of growth since Adam Smith’s days (though, let's be clear, what happened in the economies of Britain, parts of Europe, and in the newly created ex-British colonies that became the United States, was not a direct result of Adam Smith's writings - it would have happened anyway).

Of course, there are problems still. It is by no means perfect – whenever was it? - but it is an enormous improvement on the Malthusian ages that preceded it.

A ‘revitalised people-driven economics’ sounds just great in weather-proof, centrally heated and air conditioned, sanitary facilitated and IT connected homes in Toronto. How it will play in the rest of the world is another matter.

Going back to age of subsistence is a certain death sentence for some, including those who will never be born, and shorter-lives of perpetual, but, ‘revitalised’ and ignorant subsistence for those that survive. There is absolutely no guarantees that any civilisation will not regress. Ill-thought out tinkering is not a safe policy.

Repeated Denials and Doctoring Quotations Damage the Offenders and not Adam Smith

Juan Fernando Carpo comes back! He does not know when he is sawing the branch he is sitting on. He writes on Mises Blog:

"altogether different, are regulated by quite different principles, and bear no proportion to the quantity, the hardship, or the ingenuity of this supposed labour of inspection and direction. "

He is still talking about wages of management, which is not the risk-taking (uncertainty if we pick up the difference brilliantly made by Knight centuries later) that the capitalist brings to the process.

It is a sorry and monumental mistake on the part of Smith. James Mill was less of a communicator (we owe Smith a lot in the world) but more of an economist.

The editor of Mises.org noted this, so you can deal directly with me, there is no need to call mother superior."

Comment

'The full sentence you partly quote, says exactly the opposite of what you claim for it, so I shall quote it in full, and emphasise the words you dropped and shall place them in square brackets, so that there is no room for ambiguity:

“[IN THE PRICE OF COMMODITIES, THEREFORE, THE PROFITS OF STOCK CONSTITUTE A COMPONENT PART ] altogether different from the wages of labour, and regulated by quite different principles.”
[WN I.vi.6: p 67]

Of this you assert: ‘’he is still talking about the wages of management’! It says : ‘therefore the profits of stock’, which have nothing to do with how wages are formulated. Profits of stock(an 18th-century term for capital!) are not ‘wages of management’.

That you insist that the talking ‘about the wages of management’, despite Smith explicit and unambiguous denial that he is, suggests either that you continue to insist that he is because your original article requires him to be so and you hope continual denial (and doctoring) of the written evidence will somehow justify your assertion, or that you are deliberately misquoting him to make an unjustified criticism of Adam Smith because you believe he was somehow responsible for whatever Karl Marx made of his misreading of Adam Smith.

Either way it is a lapse in normal scholarly standards, and it is to that point I expressed surprise that the editor of Mises Blog did not draw your attention to your error. I am not sure what you mean by a ‘mother superior’ in this context.

That you report that ‘The editor of Mises.org noted this’ surprises me, because although I have had occasional differences with Mises Blog on other misattributions of one or two of its authors on Adam Smith, overall I respect its quality standards.

It is also slightly worrying that you deliberately drop the words in square brackets in your above quotation from Wealth Of Nations. It is tantamount to a deliberate attempt to mislead readers who do not read the full quotation in Wealth Of Nations:

“[IN THE PRICE OF COMMODITIES, THEREFORE, THE PROFITS OF STOCK CONSTITUTE A COMPONENT PART ] altogether different from the wages of labour, and regulated by quite different principles.” [WN I.vi.6: p 67]

‘Altogether different from the wages of labour’ is unambiguous. ‘Different’ in English means ‘not the same as’; ‘altogether different’ means there is no similarity whatsoever, therefore the ‘profits of stock’ are both different from wages’ and are ‘regulated by quite different principles’, which means, unambiguously, ‘quite different’, and not the same, ‘principles’.

In short, despite your continual denials of what Adam Smith actually said, compared to what you have imputed, Adam Smith did not compare profits from stock (or what the owner of the capital earned from owning the capital), it was NOT regarded by Smith as the same as a ‘salary’ or a ‘wage’.

The ‘grave error’ with ‘monumental’ consequences are Juan Fernando Carpio’s and not Adam Smith’s. Thankfully, though sadly, in view of his repeated denials, Juan Fernando Carpio’s errors will not have any consequences, except perhaps to his academic reputation.

Book Your Final Seminar Debate Next Wednesday on Gregory Clark's 'Farewell to Alms'

News from Marginal Revolution (here)
will host the last debate on Gregory Clark’s ‘A Farewell to Alms’ (Princeton University Press) on Wednesday next, 13 August. Tyler states: ‘I've been very happy with the experiment and we'll do another one; it is important to do just the right book.’

This will cover chapters 14 to 17 of AFTA, and will also include discussion on the book as a whole.

So far it has attracted a wide range of serious commentary and the readership is likely to have been much greater than those many joining in the discourse. My own comments are a minority of the comments posted to the debate, and I have learned as much from the comments from many others, as I received from reading ‘AFTA’.

Arnold Kling of EconLog (here) praises Tyler Cowen’s achievement in hosting such a debate (readers tackle a few chapters at a time and then contribute or read the debate that follows, and then move on a week later to the next few chapters) as the ‘Best Comment Thread Ever’.

With Gregory Clark commenting on the comments as well, it is a great learning experience, normally confined to in-house university seminars, but which readers everywhere can observe and join in.

I hope to see you all at next Wednesday’s on-line graduate seminar at Marginal Revolution.

Claims of Adam Smith's 'Monumental Error' Shown to be False

A debate about Adam Smith’s ‘grave error’ on Mises.org Blog (here.

First the statement of the ‘monumental’ and ‘grave error:

‘Adam Smith and Karl Marx's basic and monumental (in consequences) error'

Juan Fernando Carpio writes:

“What could these two thinkers, considered to be opposites, have in common? It turns out that Karl Marx inherits from Adam Smith a very basic error, one which has monumental consequences and has changed the world forever.

Adam Smith tells us in his famous treatise on the wealth of nations that in primitive conditions or small towns, those who would go to the market to sell their produce, cattle or manufacturing obtained salaries (wages) from their neighbors in the process. Salaries? Grave error.”

My initial question to Juan Fernando Carpio:

“Could you give a reference in Adam Smith's works to his use of the word 'salary', or a 'substitute' word, please?

And perhaps also to the source reference to his statement that for going to market someone received a 'salary' or 'wage' or 'income'.
Thanks, Gavin Kennedy."

To which Juan Fernando Carpio responded:

“For Gavin Kennedy:

"The profits of stock, it may perhaps be thought, are only a different name for the wages of a particular sort of labour, the labour of inspection and direction. They are, however, altogether different, are regulated by quite different principles, and bear no proportion to the quantity, the hardship, or the ingenuity of this supposed labour of inspection and direction. They are regulated altogether by the value of the stock employed, and are greater or smaller in proportion to the extent of this stock. Let us suppose, for example, that in some particular place, where the common annual profits of manufacturing stock are ten per cent. there are two different manufactures, in each of which twenty workmen are employed at the rate of fifteen pounds a year each, or at the expence of three hundred a year in each manufactory. Let us suppose too, that the coarse materials annually wrought up in the one cost only seven hundred pounds, while the finer materials in the other cost seven thousand. The capital annually employed in the one will in this case amount only to one thousand pounds; whereas that employed in the other will amount to seven thousand three hundred pounds. At the rate of ten per cent. therefore, the undertaker of the one will expect an yearly profit of about one hundred pounds only; while that of the other will expect about seven hundred and thirty pounds. But though their profits are so very different, their labour of inspection and direction may be either altogether or very nearly the same. In many great works, almost the whole labour of this kind is committed to some principal clerk."
Chapter six. His treatment of wages and labor is anything but a call for confusion and disregard for the role of the pure capitalist.”
[Wealth Of Nations: I.vi.6. p 66]

To which I replied:

“I asked for a source for your statement that an entrepreneur going to market on behalf of others earned a 'salary'.

Your reference does not give one. 'Salary' is not a word I believe Smith would use.

In the reference you give from Book I, he speaks of profit as the earnings of capital and excludes these earning as comparable to 'wages', in this case of supervision. He gives an example showing this.

I do not think you have made your point about Adam Smith at all.

'Capitalism', pure or otherwise, was never mentioned by Smith (the word was invented in English in 1854). Turgot used the word 'capitaliste' in French. Smith wrote about commercial society before 19th century capitalism. He died in 1790.”

To which Juan Fernando Carpio replied a few hours later:

“Gavin, it's not the terms that matter, but the underlying concept. I think the line "The profits of stock, it may perhaps be thought, are only a different name for the wages of a particular sort of labour, the labour of inspection and direction." is pretty clear.

To which I replied this morning:

“I have no wish to bash this issue to death, but when reading Adam Smith, you must read closely what he writes. He often states a proposition and then follows it with a rebuttal.

Remember, he was a rhetorician in the classical mode, a form of argument now redundant. He was also a university teacher and in the 18th century his classes consisted of boys, all necessarily qualified in Latin (lectures used to be given in Latin in 18th century Scotland, though Smith, fluent in Latin, lectured in English). The first line you quote is 'pretty clear' - he states what some people 'may perhaps' have 'thought':

"The profits of stock, it may perhaps be thought, are only a different name for the wages of a particular sort of labour, the labour of inspection and direction."

This does not mean that he 'thought' it too, for he goes on in the very next line to repudiate that 'thought':

"They are, however, altogether different, are regulated by quite different principles, and bear no proportion to the quantity, the hardship, or the ingenuity of this supposed labour of inspection and direction. They are regulated altogether by the value of the stock employed, and are greater or smaller in proportion to the extent of this stock."

Now that is what Smith 'thought' and believed, and it is more than 'pretty clear', it is ABSOLUTELY clear, that he believed in the second sentence and NOT the first.

If the terms do not matter, 'the underlying concept does', and Smith makes it clear what he considers to be the 'underlying concept'.

Adam Smith did NOT on this occasion make a 'monumental error' (I cannot speak for Karl Marx!), but you are in danger of making an error of attribution to Smith something in which he said something completely different to that which you have attributed to him.

The Mises.org editor should have noted this.”

Comment
I have had occasion to question the use that writers in the Mises tradition sometimes use in their attributions to Adam Smith in order to discredit him. The most glaring example was the publication of papers by Murray Rothbard, a leading ‘Austrian’ economist, on Smith’s alleged ‘errors’ (plus plagiarism to boot) on the division of labour. Rothbard completely muddled Smith’s account and blamed him for Marxism! (See archives for 2005-6)

Juan Fernando Carpio is following a similar line of criticism of Adam Smith, though I believe, so far, in his case that his error is one of innocently misreading Smith’s text, rather than from malice, as it was in Rothbard’s case.

If Juan Fernando Carpo read to the end of the paragraph he quoted, he would find Adam Smith’s views made quite explicit:

‘In the price of commodities, therefore, the profits of stock constitute a component part altogether different from the wages of labour, and regulated by quite different principles.’ [Wealth Of Nations, I.vi.6: p 67]

The owners of capital receive the incomes from capital as the owners of the capital concerned. If there is a clearer statement of the refutation of Juan Fernando Carpo’s attribution to Adam Smith of views he never held, I do not know how it would be written differently.

Therefore, on this occasion, Smith did not make a ‘monumental error’ that had ‘grave consequences’. Whatever was ‘inherited’ by Karl Marx, it was not from Adam Smith.

It is Juan Fernando Carpo who is in academic ‘danger’ of making a ‘monumental’ error of embarrassing proportions if he does not simply retract his attributions to Adam Smith. Whether he does or not is up to him, but I am comforted to know that in Juan Fernando Carpo's case it will not change 'the world forever'.

Gregory Clark responds to Comments on His new book

Over at Marginal Revolution, the debate over Gregory Clark’s ‘A Farewell to Alms’ (Princeton University Press) continues here.

Gregory Clark responds to my earlier efforts:

“I do not want to debate Gavin Kennedy on intellectual history (that would be like me challenging Roger Federer to a tennis match).

But I do relish debate him and others on my court, which is economic history.
The widespread impression that between 1300 and 1800 England experienced significant institutional improvements is just wrong. There were changes, yes. But not improvements.

England in 1300 was a highly commercial society, with commodities like grain flowing freely across England, and between England and the rest of Europe. In 1300 in London you could rent storage in granaries for grain on a weekly basis. Court records reveal a web of debt stretching out from London into the Midlands between grain suppliers and London merchants (see the work of Bruce Campbell and his co-authors on the medieval London grain market).

The peasantry rather than being the subjects of abusive overlords, had instead largely expropriated from their supposed masters they land they cultivated, paying rents well below market values in most cases.

Guilds restricted trade and crafts in towns, but there was so much competition between different towns that these restrictions could have only modest effect.
Transport costs in 1300 were no greater than in 1750 (though these costs did fall in the late 18th c).

Taxes and trade restrictions, unlike in 1800, were minimal.
So why was medieval England largely stagnant technologically?”

Posted by: Gregory Clark at Sep 5, 2007 9:30:45 AM

And my reply:

Gregory Clark
You appear to be under the impression that there are wide differences between us and that I reject your hypotheses about the IR (being of long gestation, and not a ‘revolution’), when on that issue we are in complete agreement. Development out of the ‘Malthusian trap’ was, and remains, a long, slow and gradual process, lasting from the revival of commerce in Western Europe, following the near millennia after the fall of Rome.

Your comments about ‘institutions’ address a debate in the profession of which I have no part. By institutions you include all the social arrangements in society from structures of organisations of the state, church, and laws, habits, motives, taxation policies, relative prices, and rewards, net of taxes, and so on.

You may also be addressing a debate among the World Bank, IMF, ‘the Washington Consensus’ and modern neoclassical economics, its equilibrium growth theory and all, of which my comments on your narrative have said nothing (except, en passant to express severe doubts about the applicability of Solow’s neoclassical growth theory to actual growth as it occurred from ‘1800’, which in my humble view was not, and is not, an equilibrium process.

Sweeping generalisations about ‘nothing changed’ between 1300 and 1800 are not proven on the basis of what I have read so far to page 271, or that it is mystery why Babylon did not produce the IR, or China, etc. Cumulative changes did occur over the 500 years you identify, though not in the poorest majority’s subsistence (I believe that focus should be not just about calories). The crudest of produced artefacts entered consumption trends in considerable amounts, via ‘hand-me-downs’ from the discards of richer families and from cheap substitutes (from the evolving pedlar trader networks across Europe (see: Laurance Fontaine, 1996. ‘History of Pedlars in Europe’).

Economic history is not, in my humble view, a history of the subsistence fates of the majority of people (they have that in common with the majority of the history of the human race to the emergence of shepherding, agriculture and commerce and beyond). Economic history is the history of the consumption of the richer members of society. It’s what they, and their intellectual retainers, achieved in terms of creating an evolving economy and in building the knowledge base, while socially keeping the poor in their ‘place’ on subsistence and extracting from them the surplus for what we call civilisation. The economic history of the poor is pretty desperate, then and now. The existence of stone-built Europe could not have been achieved without some of the surplus output to feed rising populations being diverted to today’s ruins across Europe.

The economy that produced the common labourer’s coat, identified by Smith as an example of the existing extent of people’s inter-dependence across commercial societies and the concomitant growing absolute dependence individually, did not suddenly appear in 1800; it took centuries to reach the commercial levels of the 1760-76 examples drawn on by Adam Smith.

You ask why nothing changed ‘technologically’ after 1300. Among other things, including the slowly expanding knowledge base, the commercial market evolved, slowly and gradually. Despite all the set-backs, misleading policies, including mercantile political economy (and colonialism, jealousy of trade, warfare technology, especially marine) gross measures of output increased without raising per capita incomes, except in short periods, from growing populations. States of ‘Free trade’, with not much to trade in large enough volumes to make significant differences, are misleading. There were no regulations on bank credit in 1300 because there were no banks (only wealthy families, some of whom lent money). That England had a grain trade with the rest of Europe was hardly enough to promote what happened four of five centuries later, and which had to happen before what happened was able to happen. Consumption spending rose from Elizabethan times (mainly in new products – starch for fashionable clothes).

Development does not depend on ‘perfect’ institutions, so-called laissez-faire (certainly needed for Solow’s equilibrium growth model), and such like. If anything like perfect liberty were absolutely necessary for growth, paraphrasing Smith, no country in the world would have progressed (which not the same as saying imperfect institutions and economic policies will always create growth).

In summary, what our debate is about is mainly your narrative remarks, not your data. You have made many important points in AFTA (I agree totally with Tyler Cowen on the importance of your book), prompting me to follow up your detailed cases by consulting your multiple references. Presently I am in France to the beginning of October without access to my library and the university’s resources. On my return, you may be assured that I will follow your references up closely. In the meantime, you may do yourself the courtesy of re-reading Adam Smith’s Wealth Of Nations and his Lectures On Jurisprudence. That way we will be both see where each of us is coming from. I don’t think we are all that far apart on fundamentals; but I will know more about that after the next section of AFTA.

Hence, I don’t regard our debate as competitive or akin to tennis match! My differences are with your narrative, so far as I have read it to page 271. From critical discourse there isn’t a ‘winner’ or a ‘loser’; there is only progressive improvement in the knowledge base.

Comment
You should go to Marginal Revolution and read the whole debate (38 readers’ comments since yesterday). The standard is high and also informative.

It can be found here:

Long Post on Important Subject for All Interested in the History of Economics

To All Readers:

Please read the correspondence below and, if you agree with the comments from Sandra Peart, President of the History of Economics Society (and its most distinguished list of co-signatories among economists), send supporting email/letter with your comments to Dr. Brett (address included in the correspondence).

The closing date for comments in Canberra is 12 September.

I append my supporting letter:

September 6, 2007

Dr. David Brett
Australian Bureau of Statistics

Asrc.comments@abs.gov.au

Dear Dr. Brett,

I have appended my name to the letter from the President of the
History of Economics Society, copied below.

Let me make a single point of relevance to the history of economic
theory to today's research in economics related to policy issues of
immediate and pressing concern.

I refer to the causes of economic growth, of desperate interest to
everyone affected by it in the poorer countries and the richer
countries. The area that attracts my research effort is in trying to
untangle the causes of growth from the 15th century to the 18th
century. How did Britain, a tiny island off the continent of Europe
reach growth trajectories that lifted its population within a hundred
years from 1750 to 1850 (during which it founded the New South Wales
Penal Colony, of relevant effect on the activities of your Bureau) to
a continuing rise in per capital incomes across its population?

What follows from this research is what is not happening in poorer
countries, many not growing at all) that did happen in Britain (and
other European countries, including the USA) that is replicable today
in these countries?

That is an example of the work that your pending decision to shift it
to an item in history, archaeology, religion(!) and philosophy.
Economic growth for poor countries is not a contemplative subject; it
is, I submit, a scientific venture of immediate relevance.

Please re-consider your decision.

Yours sincerely


Gavin Kennedy
Emeritus Professor

Heriot-Watt University
Edinburgh
Scotland
UK

From Adam Smith Lives! Blog:

HET and Economic History being threatened "down-under"

Some of you may know of the difficulties facing those who teach and do research in the history of economic ideas in Australia. This note was recently sent to the HES listserve by John Lodewijs. After some initial discussion, I composed the letter below the first note and sent it on behalf of the HES. If you feel inclined to do so, please consider joining in the attempt to reverse the relocation decision. Email your comments and concerns to Dr. David Brett at
Asrc.comments@abs.gov.au
Thanks.

___________________________
Dear fellow HES subscribers,

The study of HET and Economic History
is being threatened in Australia.

The Australian Bureau of Statistics is revising its research
classifications. Effective from 2008 they are removing from the
Economics listings the fields History of Economic Thought and Economic
History. These will no longer be considered as legitimate research
fields in economics. Instead "Economic history" and "history of economic
thought" will be "relocated" into a category of "History, Archeology,
Religion and Philosophy". It is also proposed that in any future
revision HET and Economic History will be eliminated entirely.

This has dire implications for tenure, promotion, research funding and
even our academic positions.

The effect of this, of course, is to legitimate the view that the study
of the history of economics is not itself a part of economics.

We are asked to provide feedback by 12 September but as can be seen
below the ABS person responsible for this says "The Economic History
and History of Economic Thought group will not be reinstated". It's a
done deal. This defeats the whole purpose of getting feedback. Note also
the tone, saying in effect - we are lucky to be classified anywhere, in
the next revision we will be totally eliminated.

There is additional information below. First is a letter that Tony
Aspromourgos has sent and on the public record indicating his dismay at
this development. Then the ABS person responsible for this
reclassification, David Brett, provides his justification for the
deletion of HET and Economic History in a public letter to Alex Millmow,
President of HETSA.

If you feel moved to complain about this, and support your HET
colleagues in Australia, please email your concerns to:

asrc.comments@abs.gov.au


You might also like to let your colleagues in Economic History know
about this.

Thanks for your help.

John Lodewijks
_______________________________
Dear Colleagues,

I'm pasting a letter in below that I've just sent to Dr. Brett at the Australia Bureau of Statistics. If you would like to "sign" the letter and make your views known, please email David Brett at asrc.comments@abs.gov.au to let him know. Note that time is short so if this interests you please send your notes in soon. Thanks in advance for your support.

Sandra Peart
____________



September 5, 2007

Dr. David Brett
Australian Bureau of Statistics

Asrc.comments@abs.gov.au

Dear Dr. Brett,

We urge you to reconsider the decision to “relocate” “economic history” and “history of economic thought” into the “History, Archeology, Religion and Philosophy” category of the Australian Bureau of Statistics. Such a relocation will carry with it serious implications for tenure, promotion, and research support for economists who work in the history of economic thought and economic history. Looking to the future, this decision will mean that fewer professors will be versed in the historical approach to economics.

The result will be costly both for the economics profession as a whole and also for the students we teach. The history of economic thought has always been an important component of the literature on economics. It has shown the richness of the roots of economic theory and provided a base for the debate and discussion of the competing schools of economic ideas.

A relocation of the History of Economic Thought and Economic History will privilege technical approaches over the literary approach. We suggest that economics needs both approaches. Senior figures in the profession accept this. At the 2007 History of Economics Society annual conference, Nobel laureate, James Buchanan gave the Distinguished Visitor Lecture, “Let Us Understand Adam Smith”. That lecture will be published in the Society’s journal, Journal of the History of Economic Thought¸ published by Cambridge University Press. It should be noted that a second Nobel laureate, Vernon Smith, was on the 2007 HES conference program as well and that Vernon Smith has also given the HES Distinguished Visitor Lecture in the past.

In recent years the mathematical and quantitative sides of economics have been emphasized at the expense of areas such as the history of economic thought. There is, however, much evidence of growing interest in the History of Economic Thought and Economic History as research areas at the graduate level. The Society supports a young scholars program at its annual conference; each year, the number of applications increases and we now receive many more applicants for support than we can fund.

As additional evidence that senior members of the economics profession support the historical approach, we note that Nobel laureates Kenneth Arrow, Ronald Coase and Paul Samuelson welcomed the establishment of the European Journal of the History of Economic Thought in 1992 and Paul Samuelson is a member of the editorial board of the journal. The major history of economic thought journals, EJHET, HOPE, and JHET, all publish fine scholarly articles and have included contributions by Samuelson, Buchanan, Debreu, Klein, Solow Simon and Arrow.

Though the point is obvious, we cannot emphasize enough that these are senior economists, as opposed to researchers in “Philosophy, Religion, and Culture”. Though there are of course writers in these latter areas who also take an interest in the history of economic ideas and economic history, our strength lies primarily within the economics discipline, itself.

The case must be also made for continued support of the Economic History and History of Economic Thought on the basis of the mission of teaching undergraduate economics majors. The typical economics professor today has had little training in moral reasoning or civic engagement, and his or her interests are narrowly defined by formal modeling and statistical testing. This means that the economics major – absent the historical approach – is becoming less and less appropriate for students interested in business or public policy. At the undergraduate level, economics students increasingly become familiar with techniques they rarely understand. At the national level in the United States, the Association of American Colleges and Universities (AAC&U) has strenuously made the case for increased breadth in our undergraduate education. An education in economics that includes room for historical approaches to economic thinking, falls squarely within the AAC&U recommendations and offers students opportunities for applied moral reasoning and policy analysis.

Indeed, if we to lose EH and HET as part of economics, we can expect that a professoriate trained with PhDs in economics will find it difficult not only to teach economics majors, broadly conceived, but also to communicate economic ideas to students in introductory courses who are there to meet general education requirements. The resulting increased narrowness of graduate training in economics will make it even less likely that new PhD’s will be able to teach introductory courses that have the breadth and context to reach students who aren't necessarily interested in the major but who wish to learn economics as part of a liberal education program. As a consequence, the economic literacy of the citizenry itself will suffer.

For all these reasons, we urge you to reconsider your decision.

Yours sincerely,



Sandra Peart, President, History of Economics Society, Dean, Jepson School of Leadership Studies, University of Richmond

Humberto Barreto, HES Electronic List Moderator, Professor of Economics, Wabash College
Brad Bateman, HES Past President, Provost and Executive VP, Denison University
Evelyn Forget, HES Vice-President, Professor and Academic Director, Community Health Sciences, University of Manitoba
Wade Hands, HES Past President, Professor of Economics, University of Puget Sound
Steven Horwitz, HES Executive Committee, Charles A. Dana Professor of Economics, St. Lawrence University
Thomas (Tim) Leonard, HES Secretary, Economics, Princeton University
David M. Levy, HES Executive Committee, Professor of Economics, George Mason University
Maria Cristina Marcuzzo, HES Executive, Direttore del Dipartimento di Scienze Economiche Università di Roma "La Sapienza"
Perry Mehrling, HES past Vice-President, Professor of Economics, Columbia University

September 05, 2007

Latest From the Debate on 'Farewell to Alms' by Gregory Clark at Marginal Revolution

Over at Marginal Revolution, Gregory Clark's Farewell to Alms contionues to be debated.

Gregory Clark coments on my contributions:

'Smith is all about Smithian Growth in the millenia leading to 1776 - the expansion of the economy by reducing the impediments to trade, and thus extending the division of labor. This growth thus has at its base institutional improvements. Some modern economists, such as Avner Greif, give great weight to an extension of this vision whereby the key to growth is the devising of institutions which allow trade.
AFTA argues these processes, at least in the years 1200-1800 in England, were inconsequential. Trade possibilities were probably as good in 1300 as in 1800. The economy had improved somewhat, but technological advance dominated throughout.
AFTA thus argues for many purposes, Smith was a minor figure. The great intellectual figure of the era was Malthus, whose thinking was much more attuned to the realities of the pre-industrial world."

To which I replied this morning:

"Gregory Clark neatly summarises his impression of the differences between our approaches. Let me be clear: I have no axe to grind for forcing Adam Smith as a ‘major’, nor resisting an assessment that he was a ‘minor’, figure. It seems to me as a reader of Greg’s book (rigorously following Tyler’s ‘rules’ to read and debate in restricted order to page 272), that much of what Gregory asserts as ‘new’, ‘last 70 years research’, etc., about the period to 1800 (itself an arbitrary watershed) was discussed in detail by Adam Smith (WON, and LOJ), and indeed formed much of his distinct contribution, and was in place before 1763. That is all I have been saying in this debate. Greg rejects these statements, but so far in AFTA (what a brilliant contraction!) I read nothing to contradict the view that Greg has a view of Adam Smith heavily influenced by The Neoclassical Distortion. It would be better if he demonstrated he had read WON and LOJ.

That ‘Trade possibilities were probably as good in 1300 as in 1800’, I find breathtaking. I have noted his references and will read these on my return to Edinburgh from France in October. But I find it weird (‘exasperating’ even) that Greg make these sorts of grand statements. Exactly what were people in 1300 going to trade (and with who?) in 1300 comparable to what they could trade in 1800 among themselves and with Europe and north America (Europe couldn’t even sail to America until the end of the 15th century).

Feudal agriculture was not a place that potential traders could wander off their Lord’s lands (with what?) and go to the mainly miserable collection of hovels, called ‘towns’, and take advantage of hardly existent trade potentials. This was not the American ‘west’. In find references to that period being ‘laissez-faire’ problematical (it wasn’t in France, the source of the laissez-faire phrase in 1690).

There were pedlars travelling long distances across Europe with what they could carry for petty trades a few centuries after 1300. This was part of the long and slow process of the re-emergence of the age of commerce, and it had a long way to go before trade became significant. The Elizabethan government adopted a policy of encouraging domestic manufacture (early import substitution of ‘luxury’ goods and ‘secret’, i.e., ‘stolen’ technologies), to reward the people who established them (often, incidentally ‘merchant’ adventurers who were the younger sons of well-off local people!) and to set to work ‘indigent’ and unemployed familes, children included. From the early 1600s to the mid-18th century, local dispersed commercial process continued in fits and starts, often suppressed by the town guilds, letter patent, and outright corruption, otherwise known as mercantile political economy) to establish the markets that Greg claims were always there since 1300.

So my ‘axe’ is not so much to heap praise on Adam Smith as to question Greg’s narrative supporting his impressive and interesting data. My only comment on Malthus, writing in the early 1800s, is that his major idea – the ‘Malthusian trap’ – appeared at the moment it was being thwarted.

As stated, I look forward to reading the next chapters. If I am wrong I shall admit to it. So far I think Greg has to have a ‘big finish’."

Comment
There is a lively debate in progress at Marginal Revolution here
and you will gain much from it.

You should also read Gregory Clark's 'Farewell to Alms' (Princeton University Press)

A Perceptive Student on Economic History Debates

Ian Dunois, a student at George Mason University reports here on his impressions of the Summer Institute at GMU in June, followed by impressions of the History of Economics Society 34th Annual Conference. I attended the last day of the SI and all of HES, and have reported here on Lost Legacy (June, July).

Ian's is a student eye view and very perceptive he is too. If forced to choose I preferred the Summer Institute. I learned a lot from the speakers on their specialist subjects, speaking as specialists, and I learned much from the discussion sessions between the speakers (who had time to respond) and the audience of specialists and post-graduate students. HES was great too, but the pace was too fast in places and ideas were not properly unpacked. The plenary sessions were terrific though.

Next years 35th HES conference is in Toronto. I may go to the SI instead.

Ian writes: In most economic circles you find that economists know who Adam Smith was and his work, along with Ricardo and John Stuart Mill. Ask most in the circles to debate over their ideas and you would find that most have not even read the ..." How true...!

Adam Smith's Edinburgh

Ever wondered about Adam Smith’s Edinburgh and his grave headstone? If so, head over to skeptic lawyer’s piece plus its photographs here.

They are very good photgraphs and so is the author’s narrative, with the comments on the ‘City Fathers’ (inheritors of the old corporations who rule the roost over graveyard monuments, even discouraging visitors with money from offering to pay to clean up the site!).

News that Smith’s statue is ready for placement is most welcome (I have seen photos of it – it looks great, though I am not sure about his facial ‘likeness’ yet, until I see it up close). This magnificent project, the initiative of the incomparable Adam Smith Institute, and funded entirely by private subscription, is to be placed sometime soon.

Hope you can make the event when dates are announced. Eamonn Butler, Director of ASI, says he hopes there will be an internaitonal symosium/conference arranged (I see the Cato Institute is floated as a possible sponsor).

A Marketer Buys a Fallacy About Adam Smith

ChaosScenario (here)
has this piece on “The Integrity of Marketers Throughout History”. Don’t get me wrong, Thomas Sowell’s ‘A Conflict of Visions’ is a good read.

It’s the quote from Wealth Of Nations and the Blog author’s comments that are problematical:

“Last week I finished reading Thomas Sowell's excellent treatise, A Conflict of Visions, and I came across this little quote by famed philosopher Adam Smith that reminded me that the reputation marketers have for being dishonest is well earned.
"The proposal of any new law or regulation of commerce which comes from this order [merchants and businessmen], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it." -Adam Smith, Wealth of Nations, (1776)

Smith's disclosure here is particularly remarkable when we reflect that he advocated a laissez faire economic system, or a system that operates with minimal government intervention.
What can we do to reverse thousands of years of negative experience? Should that even be our goal, or should we simply tend to our own houses, allowing (as Smith suggested) the laws of supply and demand weed out the stragglers and reward the achievers? - Cam Beck.”

Comment
Almost right and almost as wrong.

Adam Smith never ‘advocated a laissez faire economic system’. That was the French Physiocrats, or some of them, whom he visited in 1764-6. Nor is it quite true he advocated “a system that operates with minimal government intervention.” His was not a 'nighwatchmen state' (that was said mockingly by a Lassell, a socialist; and picked up by the 19th century 'Manchester School' of laissez faire promoting campaigners.

These are post-mid 1960’s insertions by neoclassical economists misreading Wealth Of Nations, or rather not reading it at all, but just believing what their tutors told them (most of whom hadn’t read Wealth Of Nations either – we know this because he never mentioned laissez faire once in anything he wrote and they would not knowingly assert that he did if they knew it wasn’t true, would they?).

The quote is about ‘merchants and manufacturers’ imbued with the mercantile political economy of the mid-18th century, who try to persuade the legislature (government) to adopt ‘any new law or regulation of commerce’ to institute monopolies or protection from competition in this or that product market.
It is not about ‘marketers’ as we know them today. It’s about monopolists seeking to narrow the competition, raise prices and ensure higher profits, common enough occurrences in the Adam Smith’s day.

He was not opposed to government intervention as a matter of principle as such. He certainly didn’t think any individual, government minister or official could make production, pricing or marketing decisions for anybody at all. He saw specific roles for government and states them in Book V of Wealth Of Nations; he was not sure about whether publicly-funded activities should be managed by the state or by private persons. Officials could be lazy and incompetent; private individuals could be duplicitous and negligent. He left that question unanswered.

Hence, “Cam Beck” is off target on these issues.

Latest on Reading Gregory Clark's 'Farewell to Alms'

The deeper I get into ‘A Farewell to Alms’ (Princeton University Press) the outline of Gregory Clark’s main thesis begins to take shape. I cannot anticipate its full form, but I am getting restless with it already. I find the book enjoyable to read, and exasperating in parts at the same time. His main but flawed criticism of Adam Smith, apart from lumping him carelessly with neoclassical economics, jars when he quotes in place of the so-called ‘industrial revolution’ a phrase that could have come direct from both Wealth Of Nations (1776) and Lectures On Jurisprudence (1762-3), namely ‘slowly and gradually’, and while claiming this as a correction to the wilder ideas of 19th century and 20th century economic historians, he also uses it to take a side swipe at Smith, as if he wrote something different.

Smith historical analysis would sit easy with Clark’s ‘brief economic history of the world’. Smith sourced the habits of commercial society right back in the hunter-gatherer ‘rude’ societies, the ‘very slow and gradual consequence’ of ‘the propensity to truck, barter, and trade’. His assessment of each ‘age’ that followed – shepherding and agriculture – was that they increased the productive powers of labour.

Hence, the history of the last ten millennia is not the fact that subsistence levels of consumption did not change (which Smith agreed was the case to the 18th century), but that total output of the ‘necessaries, conveniences, and amusements of life’ did change constantly. To focus on per capital averages and not on gross annual outputs is misleading.

Technology did change and improve constantly, though not year-by-year. Clark is in a hurry – ‘why did it take so long?’, etc. I find asking why Babylon didn’t go on to a massive rise in per capita income a most strange idea. How many ‘hanging gardens’ could they produce and who would invest their non-extistent capital in them elsewhere? Labour is not enough for speeding through to the commercial age.

The pace began to ‘quicken’ (relatively speaking; more like separate strands were converging slowly: think of Smith’s account of the common labourer’s jacket) in the 16th – 18th century. Everything else was dragged along not just by knowledge, but by its dissemination (printing, art, culture, languages, and inter-actions on a scale in Europe). The image that Clark gives by way of criticising standard ‘explanations’ of applying neoclassical rational thinking to all (something Smith could never be accused of) and to history is perfectly justified, though his examples sometimes are quite, er, ‘silly’, for example in respect of the alleged economics of slaves doing a deal with their masters. Isolated examples are not data. Nor does it help, in my view, that Solow’s neoclassical growth theory, with its equilibrium explanations and assumptions, etc., is used to explain history. Growth is a process of disequilibria.

History, since ‘rude’ society is the history of the ruling orders, who built the artefacts of civilisation out of the surplus extracted from the subsistence labour of the majority. This raised poor bright people as well as it gave roles for disinherited rich sons. That innovators did not gain the prizes they are supposed to have lusted after is not germane. They didn’t know they were going to be cheated out of their ‘letters patent’. Think of Harrison’s chronometer and his non-‘prize’ denied to him by rivals for many years, which changed shipping by enabling longitude to be measured on great circles, anywhere on earth, thus raising productivity.

It is not the certainty of prizes, or rewards, that drove them – that prizes didn’t come after the fact cannot be said to have influenced their work beforehand. If James Watt had not been refused the right to work as an instrument maker in Glasgow by the local Guild, and the Senate at Glasgow University, a member of which was Adam Smith, had not appointed him to the University in 1763, which was outside the Guild’s legal rights to prohibition, he would not have been given the University’s model Newcomen steam engine to repair, which he did and then went on the improve it. Such are the tenuous events that led to Britain’s lead in power-driven machinery in the 19th century.

I look forward to the next chapters.

Grudging Respect from Tim Worstall to Brad Delong

My colleague, Tim Worstall, over at Adam Smith Institute Blog (with whom I also have cordial relations - they are right on most policy issues) here, had to admit, against his principled stance as a card-carrying member of the liberal classical economist fraternity, that Brad Delong writes some good stuff.

I happen to think Brad Delong writes mostly good stuff, especially on economic history and on modern comparisons among developed and developed countries. Try a sample here.

True, I do not see eye-to-eye with Brad Delong on some major policy issues (and on some of his ‘wilder’ extravagances about the US President; as Head of State the office requires the respect of citizens even if they disagree politically, as Brad, of course, does; I don't vote in the USA so I am completely neutral). But that is his business and his right in a free society. It should have nothing to do with his contributions to the discourse among we economists. In this, he is one of the big players in the Blogsphere, and worth reading regularly.

So, incidentally, is Tim Worstall here.

For excellent daily commentary, with most of which I agree, I hit Tim Worstall’s Blog every morning – he seems to get up as early as I do – he writes from Portugal, but is close to UK politics and the idiocy of many UK politicans (I vote in the UK so my views are permitted).

Why I Don't Agree with Sam Vaknin on This Occasion

Sam Vaknin writes on InfoMean Blog (3 Sept) on the subject of The Happiness of Others here

In his article (worth reading as it is clear enough for non-specialists) he makes two points about Adam Smith:

‘The “Hidden Hand” of Adam Smith (which, among other things, benignly and optimally regulates the market and the price mechanisms) - is also a “mutually limiting” model. Numerous single participants strive to maximize their (economic and financial) outcomes - and end up merely optimizing them. The reason lies in the existence of others within the “market”. Again, they are constrained by other people’s motivations, priorities ands, above all, actions.’

Comment
You won’t be surprised to note that I am not impressed with the ‘hidden hand’ any more than with Smith’s ‘invisible hand’, or at least what modern posterity has adapted the metaphor to mean.

Smith’s use of the metaphor in Wealth Of Nations most certain did not do anything to do with ‘benignly and optimally regulates the market and the price mechanisms’. That is a fallacy.

The price mechanism is dealt with in Book I without the slightest hint that anything invisible, hand or otherwise, orchestrated ‘benignly’ its working. He fully explained the market without resort to such nonsense. If it had been in his mind he would have stated it as a central principle of his political economy along with the ‘propensity to truck, barter, and exchange’, the ‘division of labour’ and the desire to ‘self betterment’. He didn’t and didn’t need to.

In Book IV, his single reference in his book to ‘an invisible hand’ is to the risk aversion of merchants, in the absence of tariffs and other state inventions, including monopolies of the American colonial trade, would prefer to invest their capital locally, which would have the consequence that the sum of local capital investment would be greater because he merchant would strive to make profits from so doing, and on the principle (not stated) that the whole is the sum of its parts, local domestic investment would be higher than it would be if they trade abroad.

Risk aversion fully explains their behaviour; the metaphor was a way of asserting this (which is the role of a metaphor in rhetoric – Smith lectured on the subject of metaphors in ‘Lectures in Rhetoric and Belles Lettres’ in 1763) (Liberty Fund.
Sam also writes:
‘Adam Smith, on the other hand, adopted the spectator theory of his teacher Francis Hutcheson. The morally good is a euphemism. It is really the name provided to the pleasure, which a spectator derives from seeing a virtue in action. Smith added that the reason for this emotion is the similarity between the virtue observed in the agent and the virtue possessed by the observer. It is of a moral nature because of the object involved: the agent tries to consciously conform to standards of behaviour which will not harm the innocent, while, simultaneously benefiting himself, his family and his friends. This, in turn, will benefit society as a whole. Such a person is likely to be grateful to his benefactors and sustain the chain of virtue by reciprocating. The chain of good will, thus, endlessly multiply.’

Comment
Not quite right. Francis Hutcheson believed that the human moral sense was innate, placed there by God and people were born with it. Adan Smith didn’t. He did not adopt Hutcheson’s impartial spectator (the idea of the spectator circulated in the 18th century, for example David Hume).

Smith’s impartial spectator (Moral Sentiments, 1759) was formed by each child’s contact with others, including parents and adults, and other children (the ‘great school of self command’). Today, this is called ‘socialisation’. People learn what is acceptable to others (and themselves) by interacting and seeing their actions in society’s mirror. While the impartial spectator is ‘within the breast’, the norms of acceptable behaviours are formed from being in the society of others.

Steps away from acceptable behaviour are subject to the rules of justice and the dictates of the magistrate. Without justice, the negative virtue, society would ‘crumble to atoms’.

Relying on the opinion of the impartial spectator is insufficient for harmony in society, so is love and benevolence. The impartial spectator curbs those who follow its dictates and by seeking to be praise worthy (not just praised) the society can function, even if people do not love or have affection for each other, through the mechanism of the ‘mercenary exchange of good offices’.

Of course, mutual love is preferred but it is not necessarily in abundance. We remain a society of strangers.

Sam’s piece is an example of well-written and clear thinking, but on these two counts I am not inclined to agree with him on this occasion. Read his piece and see if you agree.

[Sam Vaknin is the author of “Malignant Self Love - Narcissism Revisited” and the editor of mental health categories in The Open Directory, Suite101, and searcheurope.com. His address is: http://samvak.tripod.com]

Markets as Best Listening Devices Invented by Humans

I have posted a couple of Nicholas Gruen’s excellent articles on aspects of Adam Smith on Lost Legacy, connected with English literature and Smith’s Moral Philosophy linked to Wealth Of Nations. They are above average for Blogland and way above average for many of the posts that cross my screen about Adam Smith.

Yesterday, Nick Gruen posted another one: 'The market in economic development:’the best listening device we have’, which can be found here.
It is an excellent case in a modern application of Smithian political economy.

Nick posts in an Australian Blog called Club Tropocano (don’t ask, ‘cos I don’t know what is means). I do know that it contains well-written pieces. All readers of Lost Legacy should read Nick's short piece to get feel for the relevance of Smithian ideas today, especially in development questions as countries trying to get on a growth trajectory face much the kind of problems that Smith addressed in Wealth Of Nations in reference to his critique of mercantile political economy (which was NOT purely about obsessions with accumulating gold).

Read Nick Gruen now at:
http://clubtroppo.com.au/2007/09/02/the-market-in-economic-developmentthe-best-listening-device-we-have/
and let me know what you think of his idea.

Credit Where Credit is Due

Chris Dillow over at Stumbling and Mumbling Blog delivers a piece on Adam Smith’s impartial spectator that is right on the money. Excellent exposition, a phrase I seldom use when discussing Dillow’s interpretations of Wealth Of Nations, or, as in this case his Theory Of Moral Sentiments.

But credit where credit is due.

It's found in his: ‘Conscience: God or Socialisation’ here:

Visit it and read his account of John Humphrey’s (a BBC main presenter) concerns about the existence of God.

A Sunday 'Just So' Story from Malaysia

Puvan J. Selvanathan in ‘NSTonline’ (New Straits Times, Malysia) 2 September, writes “The ‘invisible hand’ now made visible”:

'For about 150 years after the Industrial Revolution of the late 18th century, this virtuous circle sustained, building the robust eco-nomies of today’s wealthiest nations.

As the first Industrial Revolution gathered steam, Adam Smith (1723-1790), the "Father of Modern Economics", published The Wealth of Nations (1776). He spoke of an "invisible hand" that drove singularly exploitative capitalists to better society in spite of themselves. Although opportunists, it was.

Essentially, no matter how bad big business was, the free market kept them honest by forcing them to compete with each other; hence, they strove to deliver quality goods and services at the best prices, or risk losing customers to competitors.

Industrialists created factory towns to guarantee a reliable, happy pool of local labour. The "invisible hand" provided the shops, houses and schools which supported the successive families that were integral to the factory itself — generations working side by side and then replacing each other.

Whatever the company didn’t provide became the responsibility of the government, to whom both businesses and workers paid taxes. Government had a clear role to ensure that "public goods" (such as clean water, sanitation and social welfare) were properly administered and maintained so that basic civic standards were equitable and protected; and that the regulatory environment (property rights and rule of common law) was properly defined and enforced so that society knew how to behave well.

Comment
Behind some of the less than correct history, Puvan J. Selvanathan, has something interesting to say in his (?) contrast with the situation in ‘Globalisation’, of which I have no comment.

The so-called ‘industrial revolution’ was actually a many decades-long process by which power-driven machinery, first steam, then electricity, in factories employed many thousands of workers, and administrative and managerial staffs, to produce products as inputs into other products, some proportion for which were goods for immediate consumption.

Like the so-called ‘agricultural revolution’, which lasted several-thousand years, the ‘industrial revolution’ is an highly controversial idea of a ‘revolution’. Adam Smith analysed the revived commercial society from the 15th to the 18th century. He was unaware, as were his contemporaries, of what Rostow called the ‘take-off’ to the consumer society of the 19th-20th centuries.

The roots of commercial society were evident from the 15th century. They were never a ‘free market’ (a point I shall debate soon with Greg Clark, author of 'Farewell to Alms’, on Marginal Revolution, Tyler Cowen’s Blog), nor did Smith write about ‘an "invisible hand" that drove singularly exploitative capitalists to better society in spite of themselves’ and ‘their profiteering motives that kept them in check because they always aimed to extract the most returns from their customers’.

He wrote about ‘merchants’ (wholesale and retail in their warehouses and shops) who were not kept in check by ‘competition’ (would that they were!) but who usually formed monopolies in the towns in which they were located to rig markets against consumers (‘people of the same trade ….’, etc.,).

Smith’s reference to ‘an invisible hand’ was about merchants who were risk averse and for a similar ‘or nearly the same profit’, would prefer to trade locally than trade at a distance (mainly abroad) and in consequence their capital would remain local, adding to domestic economic growth. Abolishing tariffs would force them to compete locally, but Britain kept tariffs, which was Smith's point and not a description of existing free trade in Britain.

In fact, Adam Smith was criticising mercantile political economy that through its monopoly of the American colonial trade made it very profitable for them to assuage their risk aversion and go for the higher profits from such monopoly trade (see Book IV, chapter 2, Wealth Of Nations). The ‘invisible hand’ did not provide ‘the shops, houses and schools’. Smith called on government to provide schools (Book V, Wealth Of Nations); ‘shops and houses’ were provided by merchants and private citizens and had nothing to do with ‘hands’, invisible or otherwise.

Universal education was not adopted in England until 1870 and took years to fully implement. It had been operating for boys in Scotland since the 17th century in ‘little schools’ in every parish.

Puvan J. Selvanathan’s account is idealised and not representative of what happened.
He has written a 'Just So' story of history, separated from the known facts.