Behavioural Economics Wouldn't Break Adam Smith's Heart

Heidi Dawley writes in Media Life (popcult) HERE:

‘Simple fact is, we're fools with money’

‘We like to think we make rational buying decisions’

‘We as human beings are highly rational, and the belief we share in that rationality pervades our every thought and action across countless decisions each day, minor and major, from the $4 cup of latte we pick up on the way into the office to the really great deal we just got on our new flat screen TV, with free shipping.

Now here’s some disappointing news. That's all hooey.

This grand notion of rationality is entirely in our heads. In reality, we as humans are predictably irrational in our decision-making process, and that's proven over and over again by the poor buying decisions we make. We overpay, we buy things we don't need. And perhaps most discouraging, we never seem to learn from our mistakes.

In short, we're kidding ourselves about our ability to make rational buying decisions.

“The idea that we could compute all the possible options of every motion and decide what the optimal course of action is – I just think it’s inhumane,” says Dan Ariely, a behavioral economist at MIT and author of “Predictably Irrational: The Hidden Forces that Shape Our Decisions," a new book on how consumers really behave in the marketplace.

“We are just starting to understand that the reality that we experience is not just about what’s out there. It is about what we create.”

This of course hardly comes as news to marketers, whose very expertise is in persuading people not only to buy their products but to rest in the comfort that they made the wisest decision.

As a behavioral economist, Ariely looks beyond theory--say, Adam Smith's writings on capitalism and how it works or ought to work in the grand scheme of things, to how things actually work based on observing consumers in action.

It's enough to break Smith's heart, were he to return. A lot of Ariely’s experiments show just how much consumers are swayed by what they choose to believe versus the facts at hand. Call it willful self-deception. While believing they're weighing the evidence at hand, they often reach back into memory--all those associations built up over years--to make decisions.”

Comment
Heidi Dawley should relax her language at least in reference to Dan Ariely’s research: ‘to break Smith's heart, were he to return' is part of the problem for modern economists attempting to cope with the burgeoning evidence that the belief in Homos Economicus is not founded in studying human behaviour, but more important it’s not something that Adam Smith believed in either, for which there is plenty of written evidence in his works.

In fact, it is a travesty of Adam Smith’s thinking to assert as many modern economists do that Wealth Of Nations is founded on ‘the granite of self-interest’ (George Stigler, Nobel prize-winner).

The popularity of Homo economicus among neoclassical economists, and apparently accepted by most of a mathematical disposition, has more to do with it being easier to model a maximization of self-interest for predictive purposes using calculus, but the predictions that are derived apply to the highly simplified and abstract construct at the root of the theory and not to any identified or identifiable human being out of six billion on the planet.

Paul Graham's Disagreement Hierarchy (thank you Dani Rodrik)

From Dani Rodrik’s Blog (HERE) a most useful hierarchy of levels of disagreement is offered from Paul Graham’s Blog:

‘How to Disagree’

’The web is turning writing into a conversation. Twenty years ago, writers wrote and readers read. The web lets readers respond, and increasingly they do—in comment threads, on forums, and in their own blog posts.

Many who respond to something disagree with it. That's to be expected. Agreeing tends to motivate people less than disagreeing. And when you agree there's less to say. You could expand on something the author said, but he has probably already explored the most interesting implications. When you disagree you're entering territory he may not have explored.’

Comment
The list runs from: DH0: Name-calling, through to DH6: Refuting the Central Point. I have not reproduced it because it deserves a wider consideration (HERE).

Readers of Lost Legacy will note that I often disagree with posts from authors of Weblogs or postings in the main stream media about their interpretations or repetitions of the interpretations made by others about Adam Smith.

Sometimes I may get carried away by my exasperation (for which I apologise) but with Paul Graham’s hierarchy to refer to, I shall try in future to improve my arguments by climbing up his hierarchy of disagreement.

Readers are invited to remind me when I slide down Paul Graham's hierarchy, provided they ensure they rise towards the top in their reminders!

Shallow Psycho-babble and the Invisible Hand

Graeme Anfinson of North Dakota (29 March) writes in Left in East Dakota (‘I woke during my American Dream’) here:

‘Adam Smith the populist’

‘Michael Perelman's The Invention of Capitalism … destroys the myth that classical economists were against government economic intervention and points out that in order for market capitalism to develop, state power was needed to force a largely self-sufficient society into selling their labor for wages’.

Comment
If the State caused people to become wage-labourers from the 15th century to the appearance of capitalism in mid-19th century Britain (and elsewhere) it is a remarkable first in the history of the State, showing a consistency of purpose unarticulated in published sources, and a remarkable success across all States of varying types in countries across the globe.

Graeme quotes directly from Michael Perelman's, The Invention of Capitalism, page 208:

“I suspect that Smith's work earned much of his popularity because he expressed so eloquently what others deeply felt. Unlike many of the less educated populists, Smith was usually able to sublimate his rage into his charming theory of the invisible hand, in which competition and even aggression is channeled into harmonious actions that better the world. Frequently, cracks appeared in this fantasy, and the harsh reality of the world around him intruded. At such times, we can catch a glimpse of Smith's theory of primitive accumulation.”

Comment
Michael Perelman apparently is confusing what some 20th-century economists invented as a theory of Adam Smith’s when it was anything but a ‘theory’ (or any of the other elaborations as a ‘paradigm’, ‘concept’, or whatever), as if Wealth of Nations is riddled through with the metaphor of ‘an invisible hand’.

That his ‘charming’ metaphor is entirely absent from his theory of commercial markets (Book I and II) and makes a single appearance in a single paragraph in Book IV at the tail-end of an analysis of the consequences of risk avoidance is not well known, even among talented and senior economists as Michael Perelman, is amazing, though the new invention of it being caused by Adam Smith’s ‘sublimated rage’ is, er, of historic proportions.

Talk about history being but a fable agreed upon…

“Smith's vision of the bizarre heroism of the petit bourgeoisie seems to reflect his own rage at those who refused to adopt the values that were so dear to him. Even if Steuart's [Sir James Steuart] language was brutal, I suspect that society has more to fear from the repressed emotions of someone like Smith. His metaphor of the invisible hand may be relevant in this regard. We may equate friendship with an open, outstretched hand, but an invisible hand has something sinister about it. In this spirit, Macbeth requested that the darkness of night, "with thy bloody and invisible hand," cover up the crimes he was about to commit.’ ”

Comment
Note how Adam Smith’s metaphor is no longer a ‘charming theory’; it’s now only a metaphor, which is how it always was for Adam Smith. Michael Perelman has at least read Emma Rothschild’s classic, Economic Sentiments: Adam Smith, Condorcet, and the Enlightenment, Harvard, 2001 (or the earlier American Economic Review article, 1994) and should know that beside Shakespeare’s use of the invisible hand metaphor, its use is well known in literature, going back to classical times, and fairly common in the 17th-18th centuries.

Perelman resorts to phycho-babble: ‘I suspect that society has more to fear from the repressed emotions of someone like Smith’ and derives from this that his belief that ‘his metaphor of the invisible hand may be relevant in this regard’.

Good grief! Therapy upstages good-old basic reading of the original source to derive the meaning of a text.

Graeme Anfinson, a self-proclaimed leftist, asserts that he ‘can't recommend Michael Perelman's The Invention of Capitalism enough’. With the above selection’s from it, I can see why. Leftists have a conspiracy bias hardwired into their beliefs about the working of commercial societies and adding psycho-babble gives it a touch of modernity.

Backward Projection of a 20th-Century Myth

Political Lore (here) : 29 March, by Shaun Pickford:

“In the “Wealth of Nations”, Adam Smith believed that a successful nation’s free market will be guided by “an invisible hand”. In studying Adam Smith’s economic philosophies, the Founding Fathers of the United States kept the government out of the free market by writing no laws and regulations restricting any aspect of the market within the country. They knew that if they let this “invisible hand” run its course, the newly formed American economy would flourish. With nothing to hold them back, the Patriots of the country could specialize in anything of their choosing, develop a niche market and become a staple in their communities for their trade. The “specialists” would prosper, as would the others in their respective trades, thus developing a strong, sustainable, wealthy community that would later become a shining example for capitalism and free markets around the world.”

Comment
This is an example of a 20th-century backward-looking projection onto Adam Smith of a myth created by, among others, Chicago economists, and which is now well ingrained in public lore as to be a parody of Adam Smith’s analysis of how markets work.

Adam Smith’s ‘philosophies’ were a critique of mercantile political economy which had dominated English/British government policies for three centuries (and, it should be noted, was carried on in effect almost without interruption through to the 21st century, including until the mid-20th century, the mercantile policy of colonies, and their associated wars).

There are no references to invisible hands in Wealth Of Nations except once in Book IV (page 456 – read the whole chapter and not just the paragraph) which addressed another matter (risk avoidance) and not free markets.

The Founders had copies of the UK edition of Wealth Of Nations in Autumn of 1776. They did not ‘know’ about invisible hands and about the beenfits of letting them ‘run their course’. The metaphor was almost unremarked upon until the early 20th century, after which it was imaginatively created into a ‘theory’, a ‘concept’, a ‘paradigm’, and an ‘axiom’, by soem economists, which is rather mysterious as it was none of these to Adam Smith.

Please Note: Shaun Pickford’s article is under the heading: “Obama plans to shield us from ourselves in 2008, and ultimately destroy the “Shining City on a Hill”.

My criticism of the above aspect of the article in no way should be taken as a political comment on the merits of Barack Obama, or any other Presidential candidates. Lost Legacy does not comment on the merits of candidates in any country other than the one I vote in.

Correct Vision of Outsourcing (though not about Adam Smith)

In the 360° Vendor Management Blog (An Outsourcing Vendor’s Business Continuity and Disaster Recovery Plan) HERE: there is an article on outsourcing, which correctly notes that it is developing poorer economies and providing markets for richer countries. It’s what happens next that is crucial: legislate against outsourcing and ignore the opportunities to innovate into further degrees of ‘round-about’ production to add to future disasters’ or use the opportunities to increase market specialization.

“Pro-Globalism View of Outsourcing and Outsourcing Critics”

‘Adam Smith’s great “Invisible Handle” metaphor contains a balancing paradox. The West’s businesspeople moved factories and service operations to foreign countries to take advantage of low wages. These wages improved, creating new economies in once poor countries.

Over time, an equilibrium will be found and will persist until new entrepreneurs drive innovation, which will again make certain countries mighty until these innovations are outsourced or imported to other countries for the poor countries’ benefit.

Your only choice is preservation of self-interest - to become rich and wealthy through innovation.

In this global environment, the winners are those who realize their self-interest is tied to creation, not preservation.’

Comment
Now the metaphor of the invisible hand ‘contains a balancing paradox’! Adam Smith’s use of an invisible hand (Wealth Of Nations IV.ii.9: p 456) was about the consequences of risk avoidance among traders who preferred the domestic trade to foreign trade. No paradox was involved.

If this is meant to be about growth then it may well be on to something, but Adam Smith did not feature the metaphor in his chapters on growth (Books I and II). Allyn Young’s 1928 article in the Economic Journal explains brilliantly what Smith was saying about the role of the division of labour and specialization and innovation that more correctly addresses the point that 360° is advocating.

I agree that ‘self-interest is tied to creation, not preservation’ if this means that self interest should be tied to innovation. That it isn’t underlines my remarks in the previous post that self interest is not a catchall synonym for something that always has ‘positive’ outcomes.

Unless we realise this, unlike the Chicago epigones who have created a different Adam Smith than the man born in Kirkcaldy, we could make errors in equating a business person’s, any and every business person’s, behaviours and actions as being in the best interests of society. They may be and should be so but the evidence suggests they are not always so.

Which is not an error that the Kirkcaldy Adam Smith never made.

Misuse of Adam Smith's Name Again

On Jim and Joe’s Authenticity Journal (HERE)

‘Doing Good by Doing Well’ by Joe Pine quotes The Economist: ‘How good should your business be? Ethical Capitalism’

‘Some people complain that this sort of “good corporate citizenship” is merely another form of self-interest. Correct — and good. That’s the way capitalism works. Adam Smith was right: Businesses have done more good for the planet by pursuing their own self-interest than any other earthly entity.’

‘A dangerous myth is gaining ground: that unadorned capitalism fails to serve the public interest. Profits are not good, goes the logic of much CSR; hence the attraction of turning companies into instruments of social policy. In fact, the opposite is true. The main contribution of companies to society comes precisely from those profits (and the products, services – experiences and transformations too! – salaries and ideas that competitive capitalism creates). If the business of business stops being business, we all lose.’

Comment
Generalisations like those above can be misleading because they ignore the defects in the perfections claimed in them, enabling them to make extravagant claims.

‘Adam Smith was right: Businesses have done more good for the planet by pursuing their own self-interest than any other earthly entity.’

It’s not quite what Adam Smith said. His main criticisms of a certain number of ‘merchants and manufacturers’ are well known, specifically their proclivity for creating monopolies, for their ‘narrowing the market’, for their lobbying for tariff protection, and for their misrule in India. Hardly rallying cries for them ‘pursuing their own self-interest’.

Adam Smith supported competition in markets and was not slow to point out that the worst interferers in markets and the most dogged opponents of competition were 18th-century businessmen and their allies among legislators and those who influenced them.

The problem with statements like ‘Businesses have done most good for the planet’ that this ignores those businesses that have pursued ‘their own self-interests’ and who have undone much of the good that competitive businesses could do for the planet if they represented the overwhelming majority of their ilk.

The sentence ‘If the business of business stops being business, we all lose’, would have needed severe qualifications in Smith’s day. Can we really say that it does not require similar qualifications today?

Article on Adam Smith v J.J. Rousseau on Morality

From Sky of Ashes Blog (here, there is notice of an interesting article on “Commerce and Corruption: Rousseau's Diagnosis and Adam Smith's Cure" by Ryan Patrick Hanley (Marquette University, Ryan.hanley@marquette.edu).

Abstract:
‘Modern commercial society has been criticized for attenuating virtue and inhibiting the ethical self-realization of its participants. But Adam Smith, a founding father of liberal commercial modernity, anticipated precisely this critique and took specific measures to circumvent it. This article presents these measures via an analysis of his response to the critique of liberal commercial modernity set forth by Rousseau. It principally argues that Smith's distinctions of the love of praise from the love of praiseworthiness, and the love of glory from the love of virtue, were elements of a normative moral education that sought to elevate civilized man's corrupted self-love, and thereby recover within modern commercial society a respect for ethical nobility.’

Comment
The article is accessible from Here.

It is by subscription ($15 for downloadable access) from Sage and worth the price to read of this relatively neglected area of Adam Smith’s contributions. It raises an issue that underlies much of the controversy about morality and market economics, especially capitalism, but which is seldom discussed in context. As such it is enduring interest today.

News on the New Adam Smith Statue from New Zealand

Paul Walker (26 March) in The Anti-Dismal Blog(‘A blog related to all things to do with economics and related subjects’ in New Zealand) about the Adam Smith statue to be erected in Edinburgh in July this year (complete with picture).

He also posts on Adam Smith appearing on the Bank of England's £20 note. Adam Smith was also is in fact the first Scot to adorn an English banknote, and the first economist, and he appears on the Scottish Clydesdale Bank £50 note too, and both are clearly illustrated in Paul Walker’s post.

See all three ilustrations HERE.

New Book on Markets

Eamonn Butler, Director of the Adam Smith Institute, and author of ‘Adam Smith – a primer' (which I was so impressed with that I was delighted to write the introduction), is about to publish his latest book with the catchy title:

‘The Best Book on the Market: How to stop worrying and love the free economy’.

It is written inEamonn Butler's inimitable short, fun, anecdotal and accessible style.

He covers the basics about choice, competition and entrepreneurship, and prices, and aimes it at spreading understanding among the public, students – even politicians – that markets are actually a good thing.

John Blundell of the Institute of Economic Affairs says it ‘Vividly and simply explains competition, entrepreneurship and prices’.

Václav Klaus, President of Czech Republic, says that it presents solid arguments against government attempts to 'perfect' markets by obstructing competition and private ownership.

The former UK Chancellor, Lord Lawson, says ‘Anything which educates the public and politicians on how the free economy actually works is always welcome’.

I shall write a review of it for Lost Legacy soon.

Another Case of Invisible Hand Confusion

In a muddled melanage of authors quoting others I find in The American Strategist (here) that a
Patrick Doherty (here): quotes Steve Clemons quoting: William Pfaff (20 March) here:

'‘Adam Smith was the author of the theory of the invisible hand that guides unregulated markets to produce the optimum result, but he took for granted that the hand was clean.’

Comment
Nowhere in any of his books and writings did Adam Smith assert such a theory of a role for a disembodied body part.

The invisible hand is a metaphor for how individual merchants cope with their risk avoidance when choosing whether to trade locally or to trade abroad.

Adam Smith On Government

John Chapman (24 March) writes on AEI (‘American Enterprise Institute for Public Policy Research’) from Washington DC. (HERE)

“Economic Stimulus v. Economic Growth”

What drives economic growth? Adam Smith made this question the centerpiece of his famous book in 1776, entitled An Enquiry into the Nature and Causes of the Wealth of Nations. Smith's comprehensive answer, confirmed by David Hume and further elucidated by David Ricardo and John Stuart Mill, has been borne out in the centuries since. Modern economists would describe Smith's book, and indeed the classical vision more broadly, as one highlighting the institutions which drive growth, summarized as follows:

• Private property and limited government--Smith was a keen student of John Locke, who eloquently enunciated a natural right to liberty and property, rooted in the very nature of man. For Smith, in fact, property and limited government were the cornerstones of a system of natural liberty, and a necessary condition for the advancement of civilization itself. From the vantage point of the economist, property implies private ownership of the means of production (capital), and limited government implies a regime of low taxation and regulation. With this institutional backdrop, in fact, proper incentives are in place to guarantee maximal economic growth via development of other necessary institutions undergirding a society based on liberty
.
These are the necessary and sufficient institutional conditions which guarantee maximal growth in an economy (Keynes himself would agree, differing only regarding the relative stability of a market economy and government's role). Effective economic policy, both fiscal and monetary, thus consists in fully promoting this institutional mix.”

Comment
What claims to be about ‘classical fundamentals’ is suspiciously familiar as a modern presentation that relies on the association of ideas about Adam Smith rather than reflective of them.

“Private property and limited government”

Adam Smith certainly favoured private property in that the emergence of society from the Age of Hunting was what brought about the idea of property, and each successive Age (Shepherding, Farming and Commerce) developed the existence of property into ever more sophisticated forms.

That he favoured ‘limited government’ in the same sense (if at all) as a principle is a more complicated notion and a more questionable assertion. To some extent the assertion is brought about because of the detailed rebuttal of mercantile political economy in Book IV of Wealth Of Nations and his account of the roles of government in Book V, reflecting a far more primitive commercial economy in the 18th century than what may be required in the 21st century.

Mercantile governments from the 15th century pursued policies which inhibited optimal economic growth, evident in the 18th century when he was writing. These policies manifested themselves in the forms of the national pursuit of gold, instead of enhancing the annual output of the ‘necessaries, conveniences, and amusements of life’ (which we call GDP), of a ‘balance of trade’, by which was meant avoiding importing more than was exported, of ‘jealousy of trade’ by neighbours, seen as rivals rather than as partners, of the concomitant policies of protection, tariffs and prohibitions, domestic monopolies, and narrowing markets against competition, the Settlement Laws, the Apprenticeship Statutes, Primogeniture and Entails of land, and colonies and their associated wars.

These policies were seen by Adam Smith as a considerable burden of the wrong government policies, not a burden of government in itself.

Government was necessary for a vibrant economy in the stability of laws protecting property, defence capability to protect the nation, a nation-wide system of justice (without which society would ‘crumble into atoms’), and the promotion by the state of public works and public institutions of education, health, and the dignity of the sovereign. These too added to a formidable extension of government in the 18th century, funded by taxation and borrowing.

Given the state of Britain’s roads, harbours, bridges, streets in cities, lack of sanitation and such like, there would have to be a substantial increase in public expenditure just to get the infrastructure in place to facilitate commerce.

Those who link Adam Smith to ‘limited government’ have not appreciated (perhaps have never read) Wealth Of nations, Moral Sentiments, and Jurisprudence.

Be clear, the reason for relying on government was because individual private capital was in the main not large enough in the 18th century, and while government capital (from taxation and borrowing) was large enough, much of it was wasted on the above mercantile policies including the maintenance of colonies in America and the expenditure on foreign wars.

Adam Smith estimated the cost to Britain of the Seven-Years War with France was £175 million pounds. If this capital had been applied to increasing domestic output and productive employment in profitable enterprises, and the profits devoted to growth and not to prodigality and government waste, Britain would be able to ‘spread opulence’ that much sooner than it was likely to do if present arrangements and habits continued.

News About Adam Smith's Edinburgh Statue

Eamonn Butler, Director of the Adam Smith Institute announces today the unveiling date for the statue of Adam Smith on 4 July in Edinburgh, which was made possible by the Adam Smith's Institute's fund raising campaign from private sources (no taxpayers' enforced subsidies!) here:
http://www.adamsmith.org/blog/

“The Alexander Stoddart statue ‘currently in the workshops of Morris Singer, the specialist art founders, where sculptor Alexander Stoddart has been adding some finishing touches. According to Stoddart it is one of the best castings he has ever worked with, faithfully reproducing every detail of his original model.”

Eamonn Butler’s post includes a remarkably impressive photograph of the completed statue (here), and description of its showing ‘Smith in later life – he spent the last twelve years of his life in Edinburgh, where he had been appointed a Commissioner of Customs, which might explain his slightly stern look’.

There is even a sublimal references ‘in the work to Smith's support for trade with America. His neckware is modelled on that worn by Thomas Jefferson, his wig on a likeness of George Washington’, which makes its unveiling on 4 July more than coincidental.

The unveiling promises to be an international event of global importance, which may be particularly pleasing if anything emerges on 4 April from the purchase of Panmure House, Adam Smith’s former residence, further down the High Street, and not far from his grave site, that associates its renovation with his life’s work.

Now is the time for readers to consider a visit to Edinburgh around 4 July to participate in the celebrations – there will be many, including both serious academic conferences and ‘lighter’ gatherings. You can be sure that Lost Legacy will host at least one such event.

Economists Require Help in Understanding the Evolution of Value

In the introduction to my ‘Adam Smith: a moral philosopher and his political economy’ (Palgrave Macmillan, in press for July 2008), I include this observation about the state of modern economics:

“Adam Smith was much more than the contents of the five books of Wealth Of Nations, significant and profound as they are; he composed an integrated theory of society, recognisable today by anthropologists, sociologists, evolutionary psychologists, linguists, historians and philosophers, who are not normally avid readers of economics. If economists abandon large swathes of territory on what are regarded as distant and unrewarding frontiers of our discipline, we ought not to be surprised if they become peopled by migrants from other disciplines, who bring not just their energies but also their insights, and a willingness to incorporate into their own frontiers what economists neglect and leave fallow. It has been ever thus with declining ‘empires’.”

Something like his theme is often commented upon within and outwith the profession. I have been arguing thus for over ten years. In 1997, I was following up an interest in the history of bargaining from my professional work in negotiation training and consultancy (based on the conditional proposition outline by Adam Smith in Book I of Wealth Of Nations) by reading a few general articles on the behaviours of primates, such as Chimpanzees and Baboons, and I was struck by comments by their authors about dominance, alpha males and females, coalitions, hostility to intruders from other bands, and the exchange of rare sexual favours for the meat of recent kills.

This took up the best part of a year or two up to 2000, from which I turned to the descent of hominids and humans from the common ancestor. (I had been sidelined from professional work by a small stroke episode and had time on my hands for many months, fortuitously). The outcome was an unpublished manuscript, ‘The Pre-History of the Deal’, which fell between the marketing comment of several publishers that nobody was interested in a book by an economist on social-evolution, anthropology and primate behaviour, because specialists wouldn’t read it, nor would economists because they did not do such subjects.

In the intervening years, having returned to work, I have noticed several books (for example: The Company of Strangers) covering precisely this territory, and, as an economist, I also know that the few economists who have taken notice of bargaining quickly slid off into game theory and mathematics, which are pretty lifeless about the real world of bargaining with which I am familiar – those that teach the maths do not do real bargaining, except in short games for petty stakes.

Since retirement in 2005, I have been working on Adam Smith’s corpus, and it is not accidental that I have come full circle in respect of Adam Smith’s close interest in how society evolved through his four ages, from Hunting, Shepherding, Farming and Commerce, how languages evolved, how philosophy evolved and how history and political economy evolved. Indeed, Adam Smith, as Jim Otteson showed in his ‘Adam Smith’s Market Place of Life’ (Cambridge University Press, Cambridge, 2002), wrote his entire series of Works using a common theme of the unintended order of social life, an assessment with which I concur. I recommend you read Jim Otteson’s excellent book to open your mind to the real political economy of the real world.

This month, Paul J. Zak (editor), publishes articles by fifteen scholars, who work at and across the abandoned frontiers of economics from various related disciplines: Moral markets: the critical role of values in the economy, Princeton University Press, Princeton, New Jersey, and Oxford, England.

I am working my way through it and I am well pleased overall (of course, I see some small areas of contention, but nothing too serious). The book is divided into five parts: ‘Philosophical foundations of values’; ‘Nonhuman origins of values’; ‘The evolution of Values and Society’; ‘Values and the law’; and ‘Values and the economy’.

I have complete Book I and shall complete the other books over the next few weeks (I am busy with other projects too – who said that in retirement you get bored with too much time doing nothing?).

Amazingly, economists write about ‘value’ and demonstrate confusion of what they mean by value, which leads to dense fogs of confusion, as I know from compiling a paper on ‘Adam Smith’s Theory of Bargaining’ for the History of Economic Society’s 35th Annual Conference in Toronto this June (which readers may wish to consider attending - details from here.

I shall write sections of a review here, and look for other reviews of Paul J. Zak’s collection in Blog land.

Brad Delong on Karl Marx and Adam Smith

Sic Semper Tyrannis (‘just another Wordpress.com weblog)
Nathanjmorton reports: on ‘Brad Delong on Karl Marx’ here:

‘First, Marx the economist was among the very first to get the industrial revolution right: to understand what it meant for human possibilities and the human destiny in a sense that people like Adam Smith did not.

Second, Marx the economist got a lot about the economic history of the development of modern capitalism in England right–not everything, but he is still very much worth grappling with as an economic historian of 1500-1850.’

[Original was written by Brad Delong: “Karl Marx as Moralist-Prophet: Morning Coffee for Good Friday” (here)].

Comment
I don’t disagree often with Brad Delong but I have some concerns with his comparison of Karl Marx to Adam Smith.

There is much debate about the origins of the so-called ‘industrial revolution’ and even the dates when its first appeared and reached its full effects. That Karl Marx was able to make a full account of its effects on the economy, and later, on the world, is not difficult to explain. By the time that Marx was writing about it (from 1848), the effects of its substantial impacts were almost self-evident. By the time that Adam Smith was researching the history of the British economy (1748-76) there were precious few signs that indicated what was beginning to happen.

Smart modern economists, with the full panoply of research tools available to them on their desktops, blame Smith for not being aware, or worse, deliberately ignoring, the ‘many signs’ of what became known as the ‘industrial revolution’. They ignore the evident facts that a single local large manufacturer (Carron Iron, near Falkirk), mainly casting iron products using known technology, did not a ‘revolution’ make.

Adam Smith knew its owner, Dr John Roebuck, and exchanged correspondence with him as well as meeting him over the years, and it seems Roebuck didn’t know he was riding point for the coming revolution, or if he did (unlikely), Smith did not pick up his proclamation. Adam Smith looked backwards to what caused Britain to be in the shape it was in, and seldom looked forwards to what was likely to happen.

One exception to this lifetime record, was his ‘prediction’ that the American former colonies would be the world’s largest economy, and, if Britain and the colonies had joined together in 1776 into a representative parliament, then located in London, the government would move its location to New York by the late 1880s.

There is an interesting debate about these issues in C. P. Kindleberger, ‘The Historical Background: Adam Smith and the Industrial Revolution’, in Thomas Wilson and Andrew S. Skinner, The Market and the State: essays in Honour of Adam Smith’, Clarendon Press, 1976. Kindleberger debates with R. M. Hartwell on whether Adam Smith knew or should have known about the ‘industrial revolution’. I discuss these issues in my earlier book, Adam Smith’s Lost Legacy, Palgrave Macmillan, 2005.

On the evidence I find that Adam Smith was not aware, nor could be (nobody else was!), about what ‘the industrial revolution’ meant ‘for human possibilities and the human destiny’ in 1776. Karl Marx in the mid-19th century was able to examine and report his view of what ‘the industrial revolution’ meant ‘for human possibilities and the human destiny’in detail from, among other sources, Parliamentary papers, articles, and official reports by the box load.

If Marx is worth reading ‘as an economic historian’ of the events in Western Economies in the critical period of ‘1500-1850’, I would have to say that Marx also had the advantage of reading what many writers in the Scottish Enlightenment, including Adam Smith, had written about this period. Adam Smith centred his entire analysis of the rebirth of the commercial societies of the classical centuries of Greece, Rome, and others that preceded them, on the period after the interregnum centuries from the 5th to the 15th, when commerce (‘at last’) revived (Smith’s 4th Age of Man), and in Britain in particular, became the most advanced historically.

You can read Adam Smith’s rich analysis in his Lectures On Jurisprudence [1762-3] in the Oxford University edition of 1978 (also reproduced in the 1982 Liberty Fund edition, available at an economical price; check Amazon). Much of this is also expressed in Wealth Of Nations too.

Unless you are familiar with Smith’s social-evolutionary approach to the economy, much of his powerful analysis in Wealth Of Nations is diluted.

To this end, I am reading the final proofs (shameless plug) of my new book, Adam Smith: a moral philosopher and his political economy, (July 2008, Palgrave Macmillan) in which I focus upon the re-emergence of the commercial economy. I think you will find that Adam Smith's work in this area is every bit as good (shameless preference) as Karl Marx who wrapped his analysis in his skewed version of Adam Smith’s ‘Ages of Man’ trajectory.

Apart from this, there is a strong case for you book-marking Brad Delong’s weblog here.

Adam Smith on Markets and 'Rules'

Rik at Liberal Media Elite (‘foul mouthed commentary from America’s heartland’) writes (22 March):

‘Same Shit, Different Day' here:

‘Capitalism, with too much freedom, will drive itself off a cliff. Does it every time. The great capitalist voice, Adam Smith (hell of a guy, hell of a philosophy, hellaciously misunderstood by his proponents today), knew that markets have to have rules. Rules are also known by a less popular name…regulations.’

Comments
Adam Smith was not ‘great capitalist voice’ because he never knew the word nor the phenomenon, though he may have been some sort of a ‘hell of a guy, hell of a philosophy, hellaciously* misunderstood by his proponents today’.

Hellacious = ‘distasteful and repellant’; or (slang): ‘extraordinary or remarkable’, so take your pick.

Adam Smith favoured social arrangements in a regime of justice (otherwise ‘society would crumble into atoms’ (TMS II.ii.3.4: p 86) which is not the same thing as markets being governed by ‘rules’ or ‘regulations’, so much as their being subjected to competition.

He didn’t think that rules and regulations – the law even – should be used to support monopolies, coercion by ordinances, city councils and states at their borders to use tariffs and ‘rules’ to protect domestic merchants and manufacturers from imports and prohibitions’, nor applied in a modern context for businesses and state organizations to be allowed freedom to pollute the environment, to dump toxic waste to poison people, or to employ labour in dangerous processes.

The issue is about which set of ‘rules’ should apply, which is a moral and therefore a political question. It is not a case of a society without rules versus a society governed entirely by rules; it is which sets of 'rules' are supportive of the spread of opulence to the labouring majority and their families.

I do not think Adam Smith regarded mandatory 'foul mouthed' commentary in place of educated discourse was a contribution to civilised learning.

A Graduate of Balliol College, Oxford Quotes Adam Smith, an Earlier Graduate

Martin Meenagh blog (here) writes (21 March):
‘Adam Smith on War’

"Adam Smith used to be at Balliol, which was my college for most of my fifteen years in Oxford, before he left in 1746 to do 'less drinking and more thinking'. In 1776, he more or less invented economics with what Borders, if it had a clue, would no doubt describe as the 'Enlightenment Classic', The Wealth of Nations.

Like many great works, Smith's words contain quotes that challenge any simplistic reading of his ideas. So, for instance, the apostle of markets and commerce warned citizens to be wary of concentrations of capital and of business as an ongoing conspiracy against the public. Smith pointed out that those who profess to trade for the public good are often neither public nor good. You can, on the morning that McDonalds contemplated being offered the sponsorship of British hospitals, read Milton Friedman on Smith's view of business in a semi-mad lecture here.

This Good Friday Morning, recalling the Iraq War, both Glenn Greenwald, the liberal American constitutional lawyer and journalist, and Don Boudreaux at Cafe Hayek, the free-market website, have found another quote from Smith. It details the position of supporters of Imperial Wars. It is very worth thinking about;

In great empires the people who live in the capital, and in the provinces remote from the scene of action, feel, many of them, scarce any inconveniency from the war; but enjoy, at their ease, the amusement of reading in the newspapers the exploits of their own fleets and armies. To them this amusement compensates the small difference between the taxes which they pay on account of the war, and those which they had been accustomed to pay in time of peace. They are commonly dissatisfied with the return of peace, which puts an end to their amusement, and to a thousand visionary hopes of conquest and national glory from a longer continuance of the war."

Comment
Did Adam Smith say: ‘'less drinking and more thinking'? No source is given but I would like confirmation that this was a genuine quote from him.

Martin quotes from Wealth Of Nations via both Glenn Greenwald (whom I quoted in the post below) and Don Boudreaux at Cafe Hayek (always a good read).

Now apart from a few quibbles, this is the third approximately accurate (it’s always better to be approximately right than absolutely wrong!) statement I have found today about Adam Smith’s views and that alone pleases me.

Again it’s a member of the 'younger' generation expressing appropriate comments about Adam Smith in place of the usual problematical confusions with Bernard Mandeville’s Fable of the Bees (1724).

If such more accurate ideas spread, Lost Legacy will have less to do.

A Young College Student Gets it Right

Kelse Moen ‘(a College junior from Sharon, Ma. Due to his strong belief in individual liberty and the free market, he currently serves as attorney general of the Emory College Republicans. He is pursuing a double major in philosophy and political science’) writes an interesting piece, ‘The Iraq Recession’, here:
On The Trail:

‘As many commentators have already realized, our economy is suffering from what could be called ”the Iraq recession.” Though John McCain claims to hold Ronald Reagan as a role model, he could learn more from the eighteenth century economist Adam Smith. That luminary of intellectual conservatism opposed the British Empire for diverting money from the domestic economy and into the government and military. This led him to support the fledgling American Revolution. Yet the old maxim of peace and commerce with all nations has given way to the imperial mercantilism that Smith despised.’

Comment
Another well-written piece (two in one morning!). What a change from my usual task of exposing nonsense about Adam Smith's views.

Be clear, however, I am making no comments on the Republican candidate's alleged need to learn about Adam Smith or whatever. My admiration for Kelse Moen's understanding of Adam Smith's critique of mercantile empires from the diversion of scarce capital away from the domestic economy to protect monopoly trading, which also penalises the domestic consumers from higher prices.

If only more quoters of Adam Smith's writings understood what Wealth Of Nations was mainly about, summairsed in Book IV.

Latest Views on Adam Smith's House

A correspondent writes in The Scotsman (21 March) here:

‘Seize the chance to celebrate an Enlightenment giant

‘The old maxim about the prophet who goes without honour in his own land would seem to apply to Adam Smith, author of The Wealth of Nations, one of the most influential books ever written. It almost beggars belief that Edinburgh council has instructed the sale of his former home, Panmure House, to the highest bidder, for a paltry few hundred thousand pounds, when it should be sparing no effort to ensure the building is kept in the public realm (your report and Letters, 18 March).
Smith, simplistically, is often viewed as the inventor of modern capitalism. In reality, he was a profound humanitarian thinker, a fervent opponent of slavery, a champion of American liberty, a critic of monopolies, a proponent of public education and an author of genius with an international reputation during and beyond his lifetime.

Panmure House is one of the Canongate's few remaining 17th-century mansions, and its association with Smith provides Scotland with a stunning opportunity to celebrate an Enlightenment giant who helped to create our modern world. He appreciated the virtues, as well as the limitations, of the liberal-capitalist system, and his views on the present state of the global economy would be instructive.

The building should be in the ownership of an academic institution or museum trust, restored and used as an international study centre. A public appeal for funding would attract support from both sides of the Atlantic. It should be launched without delay.

The Scottish Government played its part in saving Dumfries House. It could take a leading role in any campaign to redeem this beautiful building in the heart of the world heritage site.’

DAVID J BLACK

Comment
I concur with the general sentiments of David Black . Though being 'kept in the public realm' does not mean that a purchase should require public funds from tax payers.

Adam Smith on Distant Wars

Davissondave writes (20 March) in the Blog: Alien Intelligencer (‘there is no other’) (here) writes ‘An Amusing War’ and quotes

“Glenn Greenwald offers up (here): this still timely observation by Adam Smith -

‘In great empires the people who live in the capital, and in the provinces remote from the scene of action, feel, many of them, scarce any inconveniency from the war; but enjoy, at their ease, the amusement of reading in the newspapers the exploits of their own fleets and armies. To them this amusement compensates the small difference between the taxes which they pay on account of the war, and those which they had been accustomed to pay in time of peace. They are commonly dissatisfied with the return of peace, which puts an end to their amusement, and to a thousand visionary hopes of conquest and national glory from a longer continuance of the war.’

It’s a shame more folks don’t read Smith, especially since his name is taken in vain for so many wrong-headed ideas. Smith also supports government intervention to aid the poor, free public education, minimum wage laws, and abundant taxes on luxury items. If free market libertarians actually read Smith they would be appalled at his liberal, interventionist rhetoric.”

Comment
I am pleased to see a correct assessment of Adam Smith’s views for once. The actual quotation is from Wealth Of Nations, Chapter III, ‘Of Public Debts’ (WN V.iii.37: p 920). It remains essentially plausible today, particularly with the instant 24/7 news cycle we have and the vivid images of conflicts in progress on tv (at least until the bad news arrives).

In Adam Smith’s day, news took weeks to arrive back home (from India it took months; from the American colonies and Canada, weeks). Adam Smith also had a remedy for the public’s role in undertaking ‘revenge’ wars:

“Were the expence of war to be defrayed always by a revenue raised within the year, the taxes from which that extraordinary revenue was drawn would last no longer than the war. The ability of private people to accumulate, though less during the war, would have been greater during the peace than under the system of funding. War would not necessarily have occasioned the destruction of any old capitals, and peace would have occasioned the accumulation of many more new. Wars would in general be more speedily concluded, and less wantonly undertaken. The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and government, in order to humour them, would not be under the necessity of carrying it on longer than it was necessary to do so. The foresight of the heavy and unavoidable burdens of war would hinder the people from wantonly calling for it when there was no real or solid interest to fight for.” (WN V.iii.50: p 926)

Hyperbole About Adam Smith

‘Alhwang’ (?) writes:

“Adam Smith was a big proponent of free market economics. Some may say that he “invented” capitalism. But who invented Adam Smith? Clearly, saying that Smith invented capitalism would be a naive statement, and nobody invented Adam Smith, but it was the old tale of the Walletin spectre that scared him straight into supporting self interest and competition.”

The above is from ‘Prince Al in A Can’ Blog ('and other embarrassing stories from my childhood') HERE which you should read to follow the context.

Comment
“Some may say that he ‘invented’ capitalism” is fairly common hyperbole. It’s also nonsense.

Nobody ‘invented’ capitalism, or any other social arrangements to secure subsistence. Among the people who contributed to the discovery of how to manage their resource-based survival from way back in what Adam Smith called (Lectures On Jurisprudence) the ‘first age of man’, or ‘hunting’ (he missed out the all-important role of gathering, a large female-driven occupation upon which all depended), there were no moral philosophers around to awake from their deep thinking and to pronounce the solution that worked.

And every other ‘age’ was discovered by trial, error, and experiment, and passed through the generations by multitudes of anonymous individuals.

Adam Smith never knew the phenonemon or the word ‘capitalism’, a word invented in English in 1854 and the roots of which were formed in the ‘age of commerce’ from the 15th century in Western Europe (and which was previously practiced in the classical era of Greece and Rome up to the 5th century) and before that in the middle-east, Asia, and India.

Adam Smith Quotations Out of Context Again

Dave Bath writes on “Adam Smith and the financial crisis” on the Balneus Blog (here)

“In many respects, The Economist is maintaining Adam Smith’s love of free trade and disgust at way managers/directors avoid responsibility, and thus ruin the wealth of worlds.

Such observations are entirely consistent with Adam Smith’s distaste for the managerial classes, who mention An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Smith comments on these managers and directors:

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

Comment
A typical exaggeration by misusing a quotation from Wealth Of Nations (from WN V.i.e.18:p741), which referred to an 18th-century chartered Trading Company with a legal monopoly in a distant region, India and all trade east of Cape of Good Hope, and not necessarily to similar joint-stock companies (e.g., Bank of England, Bank of Scotland, Royal Bank of Scotland, canal building companies, insurance companies, etc.,), which did not have monopoly status, as always the critical factor for Adam Smith.

Adam Smith’s disgust for the East India Company, which is expressed unreservedly in his rhetorical style in Book V of Wealth Of Nations, was disgust at the King’s advisors, those who influenced legislatures, and the structures of corporate governance they created and which created the opportunities for fraudulent misbehaviour for which they was famous.

It should be noted that the East India Company was a year away in sailing time and the control of the conduct of the managers by the directors in London was minimal. Today, managers are within seconds only of supervision and checking, a wholly different regime, plus detailed legislation regarding their conduct.

Let's Assume We Had a Bottle Opener...

Nineteen Edinburgh Academic Economists express their “Fears for the future of Adam Smith's house” in this morning's edition of The Scotsman (18 March) (here):

“As economists, we agree with your leader, "Would suit entrepreneur" (12 March), concerning Panmure House, which has been placed for sale by Edinburgh City Council.
This beautiful, historic building is best known as Adam Smith's home in Edinburgh. Panmure House therefore has important associations for anyone interested in the Scottish Enlightenment, in economics and philosophy, or in the history of Edinburgh.

The availability of Panmure House is an excellent opportunity for a new and exciting development of an historically important building near the Scottish Parliament. It would be ideal as the base for a research or policy institute for economics in Scotland. It could also serve as a study centre for Adam Smith and the Scottish Enlightenment.

The sale is being advertised as a "development opportunity", with a possibility of conversion for residential or commercial purposes. If it were converted without account of its historical importance, this would likely prevent its future public use. The possibility of the house being lost to the public is extremely worrying.

(DR) SIMON CLARK; (PROF) MARTIN FRANSMAN; DONALD GEORGE; (DR) OLGA GORBACHEV; (PROF) MAIA GUELL; (DR) RICHARD HOLT; (PROF) ED HOPKINS; (DR) KOHEI KAWAMURA; (DR) TATIANA KORNIENKO; (PROF) JOHN HARDMAN MOORE; (DR) COLIN ROBERTS; (PROF) JOSÉ V. RODRÍGUEZ MORA; DONALD RUTHERFORD; (PROF) JÓZSEF SÁKOVICS (DR) SANTIAGO SÁNCHEZ-PAGÉS; STUART SAYER; (PROF) ANDY SNELL; (DR) STÉPHANE STRAUB; (PROF) JONATHAN THOMAS”

Comment
The attitude of the signatories above contrasts with some of the responses in US Blogs.

One soulless ideologue of the extremist ‘market’ persuasion, driven by his mindless vulgarity on the normally sane Marginal Revolution blog to exclaim that if Panmure House was demolished and a MacDonald’s erected in its place: ‘So be it’!

The conditions of the sale are that the purchaser offers more than £700,000 and more than the second highest bidder. Fair enough.

The building is being sold by the Families and Children department of the City Council (along with many other properties that the Council has acquired over the years). So selling Panmure House to the highest bidder is perfectly sensible in a cash-strapped City Council, which has had its budget frozen at the current level without the usual above-inflation annual increase in its local rates extracted from its citizens.

The issues, implicit in the academics’ letter are that the sale notice is rather sudden and it needs more time for interested parties (like the local universities – of which there are four) to assemble the funds (preferably not from taxpayers) for a serious bid. I understand that the closing date for sealed bids is about three weeks or so away.

One help may be that Panmure House is ‘A listed’ and therefore heavily restricted in what a purchaser can do with it, which may keep certain future users at arm’s length.

I visited Panmure House recently and inspected its potential along the lines suggested by the Edinburgh academic economists, and I concur that it would make an ideal centre for studies related to the Enlightenment and its relevance for today’s economy, business and innovation.

But this is one occasion among many in which the old joke among economists just will not do: ‘Let’s assume we had the money for a viable bid, then this is what we would do…’.

Adam Smith and Tourettes Syndrome

Martin Kelly (‘thoughts from the West of Scotland’) writes a speculative article on whether Adam Smith suffered somewhere on the Tourett syndrome. (here):

‘In search of Historic Tourettists’ (16 March)

“Whether or not this adds any weight to the conclusion may be debatable; but Claudius seems to have shared a personality characteristic, the tendency to take long digressions, with the second possible historic Tourettist - Adam Smith.

Wikipedia's page on Smith notes,

"Contemporary accounts describe Smith as an eccentric but benevolent intellectual, comically absent minded, with peculiar habits of speech and gait and a smile of "inexpressible benignity."[6]"
'Peculiar habits of speech and gait'...hmmm...

In his book on 'The Wealth of Nations', P. J. O' Rourke wrote,
"He talked to himself. His head swayed continually from side to side. When he walked he looked as of he was headed off in all directions...Dining at Dalkeith House, the country seat of the Duke of Buccleuch, Smith began a scathing commentary on some important politician with the politician's closest relative sitting across the table. Smith stopped when he realised this. But then he began talking to himself, saying that the devil may care but it was all true...(w)hen Smith was a government official in Edinburgh he had a ceremonial guard consisting of a porter..wielding a seven foot staff. Each day when Smith arrived the porter would perform a sort of drill team exercise. One day Smith became fascinated by this and, using his bamboo cane in plca e of the staff, matched the porter's every motion, present arms for present arms, about face for about face, parade rest for parade rest. Afterward no one could convince Smith that he'd done anything odd". (pps 172-173)

Why should he think that? He was a sufferer of complex tics who couldn't stop blurting out what he thought and who'd just undergone an echopraxic episode. At that time, for him to walk behind his porter in that manner must have been the most natural thing in the world to do.”

Comment
Having no expertise in Tourette syndrome I cannot give an opinion. If any reader has views on the possibility, please let us all know.

I should say I have always been sceptical of anecdotes about Adam Smith, given that some of them were recorded by social voyeurs like Alexander Carlyle who didn’t take to Smith, especially, it seems because he was welcomed by persons of high-social standing, when Carlyle ( a minister of the church) considered himself highly socially adept, especially with the ladies (I have no information of what the ladies concerned thought of Carlyle)

Adam Smith, Chess Boards and Looking Outside Our Windows

Marshall Manson writes ‘Academics Getting Too Specialised?’ (here) 16 March:

“For the last couple days, I attended a conference that involved a number academics. Listening to the discussion got me thinking: Has academics become too specialized?
Not too long ago, I read the excellent book, How the Scots Invented the Modern World. Among other things, it focuses on Scotland during the Enlightenment, and it reminded me how great thinkers of that era were not specialists. The most famous, of course, is Leonardo da Vinci. He was a painter, inventor, scientist and mathematician. As such, he was aware of the many other great thinkers of his age.
Like Da Vinci, famed father of modern economics, Adam Smith, was an enlightenment era academic. But he famously spent huge amount of his time in the coffee houses of Edinburgh and Glasgow exchanging ideas with the greatest minds of his age from a wide range of disciplines.

Mutli-disciplinary expertise wasn’t limited to Smith and Da Vinci. Surgeons were naturalists. Geologists were moral and natural philosophers. Lawyers were interested in physics and chemistry. (Check out this list for many more examples.)
As such, the great thinkers were constantly challenged by the best ideas from other disciplines. Myopia induced by specialization was impossible.

Over the last few days, I listened to hours of academic presentations. Only once did a speaker suggest looking to other disciplines for guidance. And his remarks, it seemed, were met with skepticism among the assembly.

Why shouldn’t the principles that underly physics or philosophy or psychology impact the theory and practice of communications? It seems to me that it should. And it seems to me that professors of all stripes could benefit from looking beyond their own fields a little more often.’

Comment
Apart from one or two minor quibbles, I completely agree with Marshall Manson’s sentiments. Modern economics is now a sub-branch of mathematics and not much advanced for all that. It is obsessed with predicting the future, where it track record is not good, and pretty useless in dealing with the present, and as for the past, that is a foreign territory. It is not often that they ‘look outside their windows’.

Adam Smith was interested in mathematics, both as a student and as a professor and, later, a gentleman scholar, but he was very clear on its limitations when dealing with people as if they were wooden pieces on a chess board (Moral Sentiments, VI.ii.2.17, p 234), absent a ‘principle of motion of their own’.

Fortunately the tide is turning. Neuroscience is providing some welcome insights into phenomena normally preserved by what is called still, mainstream economics, as is anthropology, sociology, history, evolutionary psychology, primate studies, biology, philosophy, jurisprudence, languages and linguistics, and evolution. Some of these take us back to where the Enlightenment was located and where Adam Smith was in his element.

It is not the mainstream economics is totally useless; it’s just inadequate. Like Adam Smith, I think we should prefer to look outside our windows.

Adam Smith on Self Interest and 'Good' Outcomes for Society

John Reiniers writes(16 March) in Hernando Today in The Tampa Tribune (here)

‘At the time of our founding we were consumed by the Protestant ethic which was both fundamentalist and worldly at the same time. It was the ideal environment to foster the development of capitalism. We were not encumbered by an economically stagnant feudal "business" model, cluttered with monarchs and lords of the manor. We were jump started by a coincidence of history - the publication in 1776 of the Wealth of Nations by Adam Smith - the father of economics and native of Scotland.
Smith introduced the notion of an individual guided by his own self-interest promoting the greater good "of the society more effectively than when he really intends to promote it which was no part of his intention." (The immutable law of unintended consequences.) And the funny thing is that Smith, like our founders, advanced an economic system grounded in "natural law" (more of a self-regulating economy), which was based in part upon the wisdom of God as perceived by man, and ironically best expressed earlier by that practical colonial sage Ben Franklin who observed: "God helps them that help themselves." (But, thought Smith, not to the point of selfishness.)

It would naturally follow for Smith to see government as an impediment to economic success: "Natural law implies a restriction on the functions of government, in the interests of the liberty of the individual." That sure sounds like the mindset of our founders too.’

Comment
This is an interesting argument, but if the American colonies were not ‘encumbered by an economically stagnant feudal "business" model, cluttered with monarchs and lords of the manor’, it is a fact that Britain certainly was so ‘encumbered’, and the commercialization of the declining feudal economy began amidst the ‘feudal business model’ and Britain led the way well into the 19th century.

Adam Smith pointed to the absence of primogeniture and entails in colonial land law (in contrast to Spanish and Portuguese South America), inherited from the British administration that most of its colonies enjoyed, as the decisive influence on the agricultural boom operating in most of them that showed dramatic positive results before and after the 1776-83 rebellion. The fact that primogeniture and entails continued in Britain remained inhibitors of UK economic growth.

‘The immutable law of unintended consequences’ operates both ways. It may be the case that the notion of ‘an individual guided by his own self-interest promoting the greater good of the society more effectively than when he really intends to promote it which was no part of his intention’ can be true in some cases; it is also true that individuals ‘guided by their own self interest’ may not be ‘promoting the greater good’, whatever their intentions.

Adam Smith gives over 50 examples of self interest also having unintended consequences that do not promote the ‘greater good’ of society (in Books I and II of Wealth Of Nations), (not the least of them being the legal institutions of primogeniture and entrails operating widely in the UK!). The connection for self-interest to do ‘good’ for society is not automatic, nor inevitable. Monopolists, protectionists, and purveyors of a host of self-interested behaviours are at least as numerous as those instances that that do ‘good’.

Natural law depends on a system of justice, without which society would ‘crumble into atoms’ (Moral Sentiments), and justice depends on the existence of government. Natural law and liberty were not conceived as being applicable to commercial society only; they were the jurisprudent principles of all societies, and it did not imply ‘a restriction on the functions of government, in the interests of the liberty of the individual’. That notion is a post-Smithian creation.

Adam Smith’s account of the duties of government (Book V, Wealth Of Nations) sets out an extensive agenda for governments in commercial society. His critique of government interventions in Book IV of Wealth Of Nations was directed at some government policies and fallacies, engendered by interested parties, who influenced legislators, and was not a blanket condemnation of government intervention in general.

Many phoney 'free-market' politicians, and those who influence them, favour non-intervention in their indulgences in their self-interest selectively, and they pay large sums to persuade governments to intervene to ‘narrow the competition’, legalise their restrictive practices, and maintain destructive tariffs.

More On Adam Smith and Bernard Mandeville's Differences

Mark Koyama replies to my comments on Bernard Mandeville and Adam Smith’s difference on his blog, Oxonomics, here and I respond as below:

Adam Smith defined wealth as the ‘annual production of the necessaries, the conveniences, and the amusements of life’. Clearly, without the production of the ‘necessaries’ to subsistence level, society would not continue, and this was the experience in the ‘1st Age of Man’ (hunting). After property was introduced, the ‘2nd and 3rd Ages of Man’ (shepherding and farming), ‘conveniences’ were produced (unequally distributed), followed by the 4th Age of Man’ (commerce, ‘industry’, ‘arts’, artifacts, cities). ‘Amusements’ or Luxuries (mainly ‘superior’ decoration, dress, clothes, shelter, appurtenances of living) have been associated with each age.

To say that ‘Smith and Hume' were ‘both defenders of luxury' is not to say much, except in the sense they did not go along with the moral teachings that railed against the facts of human history. A hunter painting his face for his religious devotions was engaged in consuming a ‘luxury’ – it was neither a necessary nor a convenience; a woman carving an animal’s bone for decoration was engaged in luxury production; a priest commanding a temple be built, likewise. As societies became ‘affluent’ – defined as a surplus of annual product over subsistence – the rich and powerful ‘spent’ their affluence on artefacts, tools of war, decoration and splendid buildings, sacrifices to the gods, and succour for the priests who observed of their religions.

In the later years of the first millennium, after the fall of Rome, Adam Smith noted the decline and then collapse of Western Europe’s economy; commerce lapsed, agriculture became ‘pitiful’, and internecine local wars were the norm.

By c. 15th century, commerce was reviving. Smith’s ‘defence’ of luxury should be seen in this context: society advanced from basic ‘necessaries’ through to ‘amusements’. Those purveyors of ‘supercilious superstition’ (mainly of the religious kind) who denounced luxury missed the significance of the spread of opulence, albeit unequal in its distribution.

Adam Smith regarded the main event of the return of commercial society was from the annual growth in annual product and he analysed how growth was likely to raise the annual consumption of the labouring poor by creating ever widening paid employment through the division of labour and specialisation in a non-equilibrium open economy. (Note: this is not the same as the equilibrium dominated models of 20th-century neo-classical economics).

To say that Smith ‘accepted Mandeville's analysis of commercial society’ is somewhat extravagant, to put it politely. I think a close reading of Smith’s Moral Sentiments (TMS IV.ii.4) discussing Mandeville’s ‘pernicious system’ does not support anything like that assertion. Smith discusses Mandeville’s version of human morality; that ‘human virtue’ is ‘the mere offspring of flattery begot upon pride’. I assume I need not rehearse here Smith’s detailed arguments against Mandeville, based on Smith’s theory of moral sentiments, especially his contrast of Mandeville’s denunciation of every passion as ‘wholly vicious’ in ‘any degree and in any direction’ with earlier ‘popular aesthetic doctrines’ which were once similarly popular and which argued that the virtues should face ‘extirpation and annihilation’.

Smith drew attention to Mandeville’s passing popularity, and conceded that ‘it could never have imposed upon so great a number of persons, nor have occasioned so general and alarm among those who are friends of better principles, had it not in some respects bordered upon the truth’ (TMS IV.ii.4.14: p 313). He also noted that the ‘vortices’ of Des Cartes were believed in for a century, though they did not exist, until it was realised that they were impossible and did not have the effects credited to them. Similarly, Mandeville’s ascription of vice to the virtues felt by people was not ‘connected’ to their experience of themselves.

It is commonplace to find almost daily references to Smith supposedly believing in the positive good of ‘greed’ in the economy, often associated with ideas about selfishness attributed to him, but which he never wrote about in his books, and that the actions of business leaders, no matter how selfish their motivations, ends up doing good, blessed by ‘an invisible hand’ to cover the miraculous transformation of 'good' springing from ‘evil’. This is so contrary to his denunciation of the 'merchants and manufactuers' who form monopolies, support protections, generate 'jealousy of trade' against neighbours, promote wars, colonies and other mischief as to be a woonder in itself.

In this libel, the perpetrators are confusing Adam Smith with Mandeville. It stems from the vulgar tutorial presentations of neoclassical economists, who read quickly quotations from Adam Smith, not his books, and who create myths of about his use of the metaphor of ‘an invisible hand’.They conclude with conviction, ‘bingo’!; what they believe in their attributions are monsters of their imaginations.

A Question of Values

Marginal Revolution, a Blog that is sensible, normally, carries a post by Alex Tabarrork, here, comments as below:

“Markets in Everything: Adam Smith's House

The house where Adam Smith lived for many years with his mother and which more recently was used as a home for troubled youth has been put up for sale by the Edinburgh Council for £700,000. Sir Alan Peacock says "It's a disgrace that the council has agreed to dispose of a building as significant as this. It should be saved for the nation."
I think it would be a disgrace if the house went to anyone but the highest bidder. Posted by Alex Tabarrok 13 March.

To which I have commented:

“Alex Tabarrock

I think you may be misunderstanding Sir Alan Peacock - a distinguished classical economist of ripe vintage. He has a letter in The Scotsman this morning clarifying his point:

'I am grateful to you for reporting the sale of Panmure House (12 March). I was quoted correctly but readers may be left with the impression that I was opposed to sale to a private buyer. This is not true, though a case might be made for some restriction on its use as a building of historic interest . As your leader suggests, it would be an excellent opportunity for private initiative, perhaps with a view to promoting genuine interest in and concern for the Enlightenment tradition."

Edinburgh has a long tradition of respecting its ancient architecture, which is why, what we call the New Town, an excellent example of Georgian architecture almost as old as the United States, is a thriving and much sought after part of the City 200 years later, and in the case of the 'Old Town', of even older vintage, with the Royal Mile looking structurally much as it did when Adam Smith was alive. You can still see the Customs House, where Adam Smith worked, much as it was when he worked there from 1788 to 1790.

Panmure House, where Adam Smith lived from 1778 to his death in 1790, and which is about 500 yards down the same street, is an 'A listed' building in the Edinburgh scale of architectural value, and is already legally protected, which severely proscribes what a new owner could do with it.

'Sell to the highest bidder' is an unthinking act of intellectual vandalism. Would you care if a sovereign wealth fund was to buy the house and the land (about a third of an acre) and build an apartment block upon it, or a car park, or a super store? Probably not.

Given the alternatives, including an educational facility for scholarly and visitor interest in Adam Smith's works and, as Professor Peacock suggests, an interest in the Enlightenment, a strong case can and should be made for it being sold for a self-funded private initiative to disseminate Adam Smith’s (and David Hume’s) ideas to a wider audience, to promote scholarship and visitor interest, allied to educational initiatives.

Partial knee-jerk reaction from job-protected academics to impose market solutions on others, which the beneficiaries of the pernicious tenure system in academe shelter behind, is unconvincing.

Robert Skidelsky on Adam Smith

Robert Skidelsky writes in the Cyprus Mail on ‘The moral vulnerability of markets’:

‘Adam Smith wrote that “consumption is the sole end and purpose of production”. But consumption is not an ethical aim. It is not positively good to have five cars rather than one. You need to consume in order to live, and to consume more than you strictly need in order to live well. This is the ethical justification for economic development. From the ethical point of view, consumption is a means to goodness, and the market system is the most efficient engine for lifting people out of poverty: it is doing so at a prodigious rate in China and India.’

Comment
Robert Skidelsky is a distinguished professor emeritus of political economy and best known for his magnificent biographies of John M. Keynes. In this article (here) he makes a moral case against rampant consumption based on envy, greed and (above all) high level borrowing.

However, I think his use of part of a sentence from Wealth Of Nations to support his case is not quite sound, because he uses an argument of Adam Smith (about the need to oppose ‘producer interests’ in favour of consumer interests) as an argument against consumption.

Here is the full sentence within the full paragraph:

‘Consumption is the sole end and purpose of all production; and the interests of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that is would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end of all industry and commerce.’ [WN IV.viii.49: p 660]

A Serious Debate on the Invisible Hand

On a forum for historians of economic thought, I am engaged with several distinguished scholars in a mini-debate on the meaning that Adam Smith attached to the metaphor of 'an invisible hand', which regular readers of Lost Legacy will know exercises my energies and efforts from time-to-time.

I am pleased with this development because it means I am addressing serious people (not the usual media-light commentators who merely repeat what they were taught or read elsewhere in the media). We can assume safely that they are familiar with Adam Smith's work and have read his books. Therefore, if I can influence them to re-read what they already know - and which other readers to read out of interest - perhaps the isolated position that I am in as a defender of Adam Smith's Legacy may become less lonely.

Below is a contribution to a debate from the distinguished Professor Patrick Gunning, Professor of Economics, College of Business Feng Chia University 100 Wenhwa Rd, Taichung Taiwan and my comments. Professor Gunning writes:

‘I would refer to the following passage in WON:

"But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the wors e for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it." Book 4, chapter 2.

In light of the brewer statement (i.e., the butcher, brewer and baker statement -- Book 1, chapter 2), and other statements about self interest in WON, it seems to me that this invisible hand statement can be transferred seamlessly to the domestic economy without compromising Smith's intended meaning. Thus, it seems to me that attacks on the traditional view of Smith's meaning of the invisible hand (e.g., that it is mythology) are misguided and possibly wishful." Pat Gunning

Comment
Professor Gunning quotes part of Adam Smith’s Chapter 2 of Book IV only. I offer below a summary build-up to the famous extract that Professor Gunning selects. It is my case that the extract must be read in the context in which Adam Smith wrote it:

WN: Chapter II on 'an invisible hand': Taking each numbered paragraph up to the famous metaphor:

1 Restraints upon importation - increase monopolies in home market

2 Protected home monopolies encourage protected industries at expense of other
domestic industries - overall the benefits or otherwise not 'evident'.

3 General industry limited by the capital of society - no regulation can
increase society's capital; can only divert it.

4 Individuals seek most advantageous employment - this serves his
interests, but is also advantageous to society.

5 Merchants prefer home trade provided they can obtain 'ordinary, or not a
great deal less', profit, and consequently supports domestic industry.

6 [long paragraph] Merchants prefer 'upon equal of nearly equal
profits' [elsewhere in Book IV Adam Smith shows colonial trade was more
profitable than domestic trade] the 'home' trade to 'foreign' trade of
consumption, and to 'carrying trade' (shipping). Explains in detail why
home trade preferred (explicitly: lower risks of domestic versus foreign
trading); knows local people 'better', knows laws better. Repeats (twice) the condition for preferring domestic trade on 'same or nearly the same
profits, and 'saves himself the risk and trouble of exportation'.

7 Individuals who support domestic industry necessarily direct
industry to produce greatest value.

8 Individuals will seek to increase profits and directs capital to the
industry likely to produce greatest profit.

9 Individuals [for reasons explained earlier] in supporting domestic industry for the 'greatest value' to their own capital, necessarily raise
society's annual value. He does not intend to promote society's interests, only his own. 'Intending' his own 'security' [risk avoidance] he 'intends his own gain' and [same sentence] 'he is in this, as in many other case, led by and invisible hand to promote an end which was no part
of his intention'.

Adam Smith’s supporting argument is deep in the context of the home versus foreign trade, and ‘his security’ (risk avoidance) is even mentioned in the sentence that contains the metaphor of the invisible hand.

The risk-avoidance issue is of major relevance to Adam Smith’s use of the metaphor; the context is not en passant to its use.

The consequence is simple arithmetic: if parts of industry strive to make their profits larger from individual motivations, then it follows that the whole-industry profits are larger. The whole is the sum of its parts (arithmetic law).

Adam Smith’s House is For Sale!

Adam Smith's House is For sale. Panmure House, in which Adam Smith lived from 1788 until his death in 1790 in Edinburgh, is on the market for £700,000.

It is owned by Edinburgh City Council and has been used by its welfare department for many year. The external appearance building is as it was when Adam Smith lived there, but the inside has been heavily changed over the year.

Adam Smith took up residence at Panmure House in 1788 after his appointment as a Scottish Commissioner of Customs where he worked diligently four days a week until a few weeks before he died. It is just off a close in the Royal Mile and about 200 yards from Canongate Church Yard where he is buried.

Further up the Royal Mile High Street between Edinburgh Castle and Holyrood Palace at the bottom, the Customs House where he worked is still standing as a splendid Georgian Building, which since early 19th century, is owned by the City Council and is its political and administrative headquarters. Later this year, the 20-foot statue of Adam Smith is to be erected opposite the old Custom’s House where he worked. This statue has been funded entirely from private subscription under the initiative of the Adam Smith Institute.

Details about the statue are available from www.adamsmith.org or info@adamsmith.org

It was from Panmure House that Adam Smith walked up to the Custom’s House, passing his future grave site, and the hustle and bustle of Edinburgh’s Old Town, not all that much different, except for the obvious fittings of modern life, from when he took his daily walk to work.

I take the same walk when taking visitors, who want to see where Adam Smith lived and worked, as I did recently, as reported on Lost Legacy, with a German journalist who was writing an article on the Scottish moral philosopher and political economist for a German news magazine.

If the money could be raised, Adam Smith’s house could be restored as an educational centre to promote knowledge about Adam Smith’s views (his true legacy) and with his links to the street he lived in, it could attract many visitors. However, there is a requirement, of course, that the restoration could be self-financing.

Here is the announcement in this morning’s Scotsman.
“Adam Smith home left to market forces” By Brian Ferguson

"IT IS the historic building where one of Scotland's greatest thinkers spent his last years.

Adam Smith, the celebrated philosopher and economist, lived with his mother in the house in a close off Edinburgh's Royal Mile for 12 years before his death in 1790.

But it is largely unknown that the Canongate building is where the "father of capitalism" held court in later life – as it is hidden away off the tourist trail and in recent years has been used as a centre for troubled youngsters.

However, campaigners, who have fought for greater recognition of Kirkcaldy-born Smith, have been left dismayed after discovering that the city council has put the building on to the open market.

The council has been repeatedly urged to instigate plans to convert the property, built for the Earl of Panmure in 1691, into an "Adam Smith Museum" or study centre in his honour.

But the council has instead put the building, previously converted into a home for Canongate Boys' Club, up for sale with a £700,000 price-tag and will plough the proceeds into refurbishing a community centre.

Agents handling the sale say they are expecting significant demand for the building, which they believe could be converted to become offices or flats . But the prospect has horrified experts months before Smith's long-awaited statue is due to be unveiled on the Royal Mile.

The veteran campaigner Professor Sir Alan Peacock said: "It's a disgrace that the council has agreed to dispose of a building as significant as this. It should be saved for the nation."

Dr Eamonn Butler, the director of the Adam Smith Institute, said: "We've thought about approaching the council about Panmure House in the past to see what we could do. I doubt we'd be able to bid for it."

Comment
Fact: Adam Smith’s mother, nee Margaret Douglas, lived at Panmure house for 6 years (1778-1784) until she died. His cousin, Janet Douglas, his cousin lived with him too until she died in 1788, as the ‘housekeeper’.

Again: Adam Smith Did Not Agree With Bernard Mandeville

Mark Koyama, of Oxonomics (‘economic perspectives from the dreaming spires’) writes a comment on my previous post: “Private Vices, Public Benefits: The Straussian connection between Adam Smith and Mandeville” (here)

“Kennedy begins:

'I know Bruce Fein is out of his depth in the sentence: ‘Smith recognized the happy convergence of private greed and public good in competitive markets.’

I actually think this statement is fair. Fein might well be thinking of the oft-quoted line about a the butcher and the baker. But Kennedy writes:
'This was never anything that was written by Adam Smith. Quite the reverse!”

Comment
Mark Koyama has to do more than that to give his opinion that it is a ‘fair’ judgement. If Smith did write anything that suggests he ‘recognized the happy convergence of private greed and public good in competitive markets’, Mark is obliged to cite the evidence.

What he cites in fact is: ‘Fein might well be thinking of the oft-quoted line about a the butcher and the baker,’ but does not explain his meaning. An interesting choice, but as I have explained many times on Lost Legacy (and in my book, Adam Smith’s Lost legacy, Palgrave, 2005) the ‘butcher, brewer, and baker’ paragraph is a clear example of the difference between seeking one’s self interest, as Adam Smith explained it, and the ‘private virtue’ of ‘selfishness’.

Here is Adam Smith on bargaining in Wealth of Nations (he made similar statements in his Lectures, 1762-3):

‘But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens.’ (WN I.ii.2: pp26-70).

Apart from avoiding confusing 18th century ‘self love’ with selfishness. Note how his success in gaining another person’s ‘help’ depends on ‘if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them.’ And he repeats this as: ‘We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.’

This requires him to consider the other person’s ‘self love’ and not to insist only his own. This is, decidedly, is not ‘selfish’ behaviour. It requires an active concern for others in seeking what we want. Smith expresses this as a bargain:

‘Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.’

‘Truck, barter, and exchange’ by bargaining is not selfish and the point Smith is making is that by addressing what the other party needs we receive what we want. Bargaining mediates the self interests of both parties. Two bargainers start with two solutiosn to the same problem: the buyers and the sellers do not agree on the common price. In bargaining they eventually agree to a single solution in the form of a price they both agree to exchange at.

Two parties acting purely selfishly would be unable to modify their demands and improve their offers. They would inevitably deadlock in a battle of their egos; nobody would get their dinners and the butcher, the brewer, and the baker, would make no sales. Fortunately, the propensity to ‘truck, barter, and exchange’ is entrenched in human behaviour and society is more harmonious because of it.

Mark Koyama links Mandeville to Machiavelli ‘any attempt to impose virtue on society would led to poverty’. Adam Smith would have recoiled at the notion that ‘virtues’ could be ‘imposed’ on society; he said virtue ‘cannot be extorted by force’ (an obvious assertion, I hope) (TMS, p78, passim).

True, it is the main theme of the Fable of The Bees’ too, but who was proposing to do so?

It would take too long to go through the Smithian impartial spectator idea, but it’s all set out in Moral Sentiments, along with Smith’s analysis of the negative virtue of justice which is imposed by force.

Mark Koyama’s opinion on Adam Smith’s relationship with the licentious philosophy of ‘greed’, ‘selfishness’, private vices’ as presented by Bernard Mandeville is problematical when set against Smith's books.

Ill-Informed Attribution to Adam Smith Of Views on Selfishness

Richard Gwyn, regular columnist for the Toronto Star, contributes his version of Adam Smith’s moral philosophy and political economy (here), under the unpromising title of ‘Selfishness blamed for recession’. Yes, it’s a re-run of the Bruce Fein Folly in my post earlier this morning.

Read on:

”As is well known, Adam Smith, the 18th century author of that groundbreaking economic treatise, The Wealth of Nations, decreed that the motivating force of economic growth was selfishness.

The desire of businessmen and shopkeepers and entrepreneurs to make money benefited everyone, he argued, because others picked up part of this extra money in the form of jobs or sales or whatever.

Less well known is that Smith himself assumed that selfishness was self-regulating, or at least had some decent limits.

In a second book, The Theory of Moral Sentiments, now little-read but that Smith himself regarded as the more important one, he wrote: "How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him."
Would that Smith were right. But he wasn't.
Our contemporary contribution to the history of human evolution has been the doctrine that ``greed is good'' and, indeed, that unlimited greed is even better.”

Comment
What a travesty of the truth. Clearly, ‘everyone does not know’ what Richard Glynn claims they do know. I am always suspicious of claims that ‘everyone knows’, whether in newspaper columns, dinner party discussions, debates in pubs and from politicians.

Selfishness and Adam Smith do not go together. If Richard had read Adam Smith in ‘Moral Sentiments’ and ‘Wealth Of Nations’ instead of a few quotations from unreliable sources (Christmas Crackers?) he would know that selfishness is treated critically by Adam Smith.

The notion that selfishness was good came from a earlier commentator, Bernard Mandeville (1670-1733), whose book, ‘The Fable of Bees’, which made him famous, began as poem and was fleshed out to a best seller in various editions, 1714, 1724 and 1731 (it was recently reproduced in an economically priced two-volume edition by Liberty Fund).

Smith’s robust critique of the ‘private vice, public good’ argument is in Moral Sentiments (Book VII). The notion was popularized by a Hollywood script writer in ‘Wall Street’. Smith did not assume that selfishness was ‘self-limiting’ or had ‘decent limits’. He disregarded its utility altogether.

In fact he asserted the opposite. People act in their self interest and the 18th century idea that was not the same as selfishness. Take the famous quotation (Wealth Of Nations I.ii. pp26-7) about seeking our dinner from the ‘butcher, the brewer, and the baker’, which is commonly misinterpreted by people who confuse Bernard Mandeville with Adam Smith (from not having read either or both authors).

Smith’s advice was not to expect our dinner from their ‘benevolence’ (we cannot ALL live on the benevolence of others – who would everybody rely on for their dinner?) – nor by having regard to ‘our necessities’ (surely a selfish notion to think only of ourselves), but to address their ‘self love’ and their ‘advantages’, not our own self love and our advantages, which is an unselfish approach on our part.

In bargaining for our dinner, or whatever, from others the nature of our behaviour is to ‘propose to them: ‘Give me that which I want, and you shall have this which you want’. In short, the practice two-way bargaining, each addressing the self interests of others, and by considering the interests of other people, we address our own too!

On Richard Gwyn’s views about the current moral situation in Canada I have no comment. My objection is only to Richard Gwyn’s ill-informed article is his linking, or rather mis-linking, of his opinions on moral standards to the considered views of Adam Smith, a moral philosopher of distinguished reputation, as expressed in his books, which contain nothing remotely like Richard Gwyn’s assertions.

Bruce Fein's Follies From Confused Identities of a Witness

Bruce Fein, an authoritative and distinguished constitutional lawyer, writing in the Washington Times (11 February) here makes two statements under his title ‘Economic Follies’

‘But politicians generally, like the French Bourbons, tend to forget nothing and learn nothing. They believe they can outfox the laws of supply and demand and improve on Adam Smith's "invisible hand" in allocating economic resources.

‘Smith recognized the happy convergence of private greed and public good in competitive markets. Farmers, businessmen and professionals alike would be spurred by competition to innovate and minimize prices to capture consumer patronage.’

Comment
Adam Smith’s use of the metaphor of ‘an invisible hand’ was not referring to the ‘laws of supply and demand’. He was referring to the risk avoidance of certain merchants who preferred to conduct their business locally, even if it was more profitable to trade abroad (as it was in mid-18th century Britain with its American colonies), because the risks, trouble, and uncertainties of the characters of the people they might deal with abroad (or getting there) were not worth the risks of business failure, let alone piracy, storms at sea, and other accidents of voyages. [WN IV.ii.9: p 456]

Inserting the (obligatory) reference to Adam Smith in the paragraph adds absolutely nothing to the correct reference to the ‘law of supply and demand’). Bruce Fein should know that, but anybody scribbling about economics knows it looks more authoritative if they can work in the name of Adam Smith, even if they are completely wrong in the association, because most people, except Adam Smith readers, would not realise their error.

I know Bruce Fein is out of his depth in the sentence: ‘Smith recognized the happy convergence of private greed and public good in competitive markets.’

This was never anything that was written by Adam Smith. Quite the reverse! The notion of ‘private greed’ and ‘public good’ was not Adam Smith’s. It was the title and the philosophy of Bernard Mandeville’s popular book: ‘The Fable of the Bees, Or Private Vices, Publick Benefits’ [1724] A recent edition was published by Liberty Fund.

Adam Smith severely criticised Mandeville’s assertion and he described his philosophy as ‘licentious’ in his first book, 'The Theory of Moral Sentiments’ (1759) [TMS VII.ii.4: pp 306-14]. He did not change his mind about the findamental errors of the notion of ‘private vice, public benefits’ through his books four edition to 1790.

Obviously, Bruce Fein does not know this, for otherwise he would not have written his sentence (would he?). Lawyers are trained to lead evidence that will not trip up their case, and on these errors he should not have called on Adam Smith as a supporting witness.

Surely Some Mistake?

Danny Kam on "Community of the Risen" here asks: ‘Were the Antifederalists right???’, in the course of which discussion he writes:

‘Capitalism works better when the world is decentralized so that he market can work supply and demand with Smith’s invisible hand seen only in the background.’

Comment
No Sense of Irony? How do you 'see' and 'invisible hand'?

Silly Sunday Stories

In RA Republican American (8 March) (here):
we get:

“Consistency will permit innovation

Adam Smith's "invisible hand" is hard at work in America's energy economy, asking only that Congress and hyperactive state attorneys general let it perform its inevitable magic.

Mr. Smith, an 18th-century Scottish economist and philosopher, believed social good came from people pursuing their self-interest in a free market. The history of the United States and other Western nations with free-market traditions, compared with that of countries that have imposed central economic planning, goes a long way toward proving the truth of his theories.”

Comment
What is at work in energy markets are, er, markets. There is a ‘lot of ruin’ in markets (to paraphrase Adam Smith in another context) and though they are interfered with, imposed upon by government regulations, monopolistic players, criminality and fraudsters, natural disasters and events, they still show signs of continuing to do their job.

Adam Smith was keenly interested in allowing markets to work and he never saw a need for an ‘invisible hand’ to guide them to work. That is a myth, a wholly post-Smithian construction developed in the 20th century, not the 18th.

An Invisible Hand Becomes 35,000 Visible Individuals!

Amar Shah writes (8 March) in Financial Markets: ‘from rags to riches … where real advice matters’ here:

“A Full Blown Recession & America in Denial

Forget government “of the people, by the people, and for the people.” Adam Smith’s “invisible hand” is now a small group of 35,000 highly paid, greedy lobbyists demanding handouts. They run America from the shadows, for those at the top of the economic food chain and vastly outnumber Washington’s 537 elected officials.”

Comment
Adam Smith’s use of the invisible hand metaphor was not about people or mystical gods. Markets always consist of real people. There is nothing invisible about them, nor miraculous about how they work. They are well understood.

Triumph of Hope Over Meaning

“As Adam Smith said, “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. There is no reason that doesn’t apply to the environmental as well.”

From: Eyes Open (’searching for questions amidst too many answers’) 8 March, here and mentions Adam Smith to give undeserved authority to a torn out of context quotation by herbertanzer, :
“Saving the earth to save ourselves”

Comment
That can mean that anybody doing whatever is in their self interests, as they see it (polluters and all), that they promote society’s interest either ‘frequently’ or not at all on those other occasions when it does not promote society’s interests.

In short, it is a hope or an expectation and is not a sure guide to policy. i.e., not very interesting.

[The quote comes from Wealth of Nations, Book IV.ii.9: p 456]

A Little Humour About the Invisible Hand

In the comment's sections on an earlier post there is a small exchange showing the correspondent reader has a sense of humour about the invisible hand. I though many may have missed it, so I reproduce it here for your amusment:

"'Smith's Markets Were Not Led by Invisible Hands'

3 Comments:

"Thomas said...
Oh, come now. It is obvious that there is a special consideration in WoN for truckers. This highly quotable Invisible Hand was so invisible ... you know the rest. If there was a corresponding invisible hand for the Police, would it be more difficult to stop traffic?

Tom
Austin, Texas

4:54 AM


Gavin Kennedy said...
Thomas
I like your approach to humour and economics.

Gavin

11:58 AM


Thomas said...
Zen Koan: What is the sound of one invisible hand clapping?

I discovered one profound answer to the koan in it's original form and find that deep thought on my version will lead to a renewed Smithian enlightenment. You, sir are supplying a demonstration of the answer nearly every time some fine individual abuses the meaning and context of AS's IH.

Captain Renault: What in heaven's name brought you to Casablanca?
Rick: My health. I came to Casablanca for the waters.
Captain Renault: The waters? What waters? We're in the desert.
Rick: I was misinformed.

Casablanca (1942)"

Thanks due to 'Thomas'.

'Holey Moley' and Myth of the Invisible Hand

An academic spat that reveals a great deal about the state of the discipline was provoked by an announcement from the European Association for Evolutionary Political Economy (EAEPE) about its 2008 Conference(6-8 November) in Rome, Italy, on ‘Institutional History of Economics Research Area’. It stems from the innocuous ‘CALL FOR PAPERS’.

Professor Pat Gunning, Professor of Economics/ College of Business
Feng Chia University, Taiwan, R.O.C., opines the view:

‘Holy moley!!

Out go the invisible hand comparative advantage, demand and supply, and the quantity theory of money. How can these perspectives on the history of economics be adopted without destroying the subject matter? Have these people gone bonkers?

"The inquiry seeks to contribute not only to history of economics but also to economics - instead of an orthodox outlook that ignores the possibility of such cross-fertilization."

Fat chance, it seems to me.

Pat Gunning’

Comment
I do not have an enough information to offer much between Professor Gunning and the European Association for Evolutionary Political Economy (EAEPE), though at a glance I would like to attend its conference out of interest because social evolutionary change characterizes much of what Adam Smith was about in his work.

However, I do have fairly strong views on the use of the metaphor of the ‘invisible hand’, as readers of Lost Legacy will recognize. Professor Gunning appears upset that the invisible hand is not included (though in the official ‘call for papers’ I did not notice that exclusion immediately).

I hope that we may reach a situation where the misuse, misattribution and misleading promotion of the metaphor is sidelined in economics at an early date. Failing that goal, I hope that its automatic tagging as an idea of Adam Smith’s is at least neutralized in the near future, which presently gives a respectable cover for modern economists to accord it an authority that it does not deserve, without realizing how ridiculous they make themselves amidst their insistence of their claims to the status of a science.

Nobody has yet accounted for the invisible hand in their use of it in markets, nor how it is alleged to operate as a disembodied body part, nor even what it adds to the theory of markets.

Adam Smith knew better than to make such a claim for the metaphor, which he used to a) describe as ‘pusillanimous superstition’ by pagan savages (History of Astronomy); b) to give literary flair to the behaviour of rich landlords feeding the ‘thousands they employed’ and their families (they could do no other and survive themselves) (Moral Sentiments), and c) to refer to the risk-avoidance by domestic merchants (Wealth Of Nations).

In none of the only three cases in which he used the metaphor of the invisible hand did he include its use in his theory of markets.

If Professor Gunning thinks that he did, he may point to where in his Works he did so; if he thinks the modern 20th-century interpretations are somehow Smithian, he is greatly mistaken. Perhaps, a visit by him to the European Association for Evolutionary Political Economy (EAEPE) conference may be useful. He could offer a paper on: ‘The Surreptitious Evolution of the Invisible Hand Metaphor into a Theory’. I for one would attend the conference just to hear that alone.

Adam Smith on Creating a Market for Religions

Bastiat is a guest writer for Scragged.com (here) writes:

“Christopher Hitchens Doesn't Get It”

“So, powerful mass movements such as the world’s organized religions – even accepting Hitchens’ argument that they are: “violent, irrational, intolerant, allied to racism, tribalism and bigotry” – can serve a critical role in maintaining liberty. They do this because they compete for, and limit, the concentration of resources. Adam Smith’s Invisible Hand has a role to play even in this unlikely marketplace.

Beware the False Prophet

As a classical liberal, I tend to think one of the primary goals of political discourse should be helping others reject the lure of the mass-movement mentality and embrace individualism. That’s not likely to happen overnight – the desire to belong to a large, enthusiastic movement seems to be embedded in human nature as witness the recent youthful enthusiasm for Mr. Obama's brand of enthusiasm. So, until we’re able to make real headway against collectivism in general, we need to recognize the importance of playing the various enemies of individual thought and action off of one another. By ensuring that religions check the power of the state, that political parties and candidates check each other, that socialist movements check the power of religion, and that all collectives are kept in a diluted state by competition with each other, we can better ensure that individual rights will go unmolested by any one movement’s achieving ascendancy for its own agenda.”

Comment
Bastiat is almost right, but is sidetracked by the myth of Adam Smith’s invisible hand (“Adam Smith’s Invisible Hand has a role to play even in this unlikely marketplace”).

The formation of religious sects (the largest of which all started as small sects of dedicated followers), their efforts at conversion, their internal struggles (all experienced them), and the eventual conquest of state authority by the largest (Judaic, Christian, Islam), are akin to a market place, in which competition for consumers (converts or the retain members) is endemic.

Adam Smith has a whole section of Book V of Wealth Of Nations on the organization of religious belief, its politics, economics, institutional evolution and its role in any society. It’s rather long and albeit its length, it’s a small part of Smith’s whole section on religion, and it is placed here for your convenience (you can look it up for yourself, of course – it’s worth reading in full):

“But if politics had never called in the aid of religion, had the conquering party never adopted the tenets of one sect more than those of another when it had gained the victory, it would probably have dealt equally and impartially with all the different sects, and have allowed every man to choose his own priest and his own religion as he thought proper. There would in this case, no doubt have been a great multitude of religious sects. Almost every different congregation might probably have made a little sect by itself, or have entertained some peculiar tenets of its own. Each teacher would no doubt have felt himself under the necessity of making the utmost exertion and of using every art both to preserve and to increase the number of his disciples. But as every other teacher would have felt himself under the same necessity, the success of no one teacher, or sect of teachers, could have been very great. The interested and active zeal of religious teachers can be dangerous and troublesome only where there is either but one sect tolerated in the society, or where the whole of a large society is divided into two or three great sects; the teachers of each*143 acting by concert, and under a regular discipline and subordination. But that zeal must be altogether innocent where the society is divided into two or three hundred, or perhaps into as many thousand small sects, of which no one could be considerable enough to disturb the public tranquility. The teachers of each sect, seeing themselves surrounded on all sides with more adversaries than friends, would be obliged to learn that candour and moderation which is so seldom to be found among the teachers of those great sects whose tenets, being supported by the civil magistrate, are held in veneration by almost all the inhabitants of extensive kingdoms and empires, and who therefore see nothing round them but followers, disciples, and humble admirers. The teachers of each little sect, finding themselves almost alone, would be obliged to respect those of almost every other sect, and the concessions which they would mutually find it both convenient and agreeable to make to one another, might in time probably reduce the doctrine of the greater part of them to that pure and rational religion, free from every mixture of absurdity, imposture, or fanaticism, such as wise men have in all ages of the world wished to see established; but such as positive law has perhaps never yet established, and probably never will establish, in any country: because, with regard to religion, positive law always has been, and probably always will be, more or less influenced by popular superstition and enthusiasm. This plan of ecclesiastical government, or more properly of no ecclesiastical government, was what the sect called Independents, a sect no doubt of very wild enthusiasts, proposed to establish in England towards the end of the civil war. If it had been established, though of a very unphilosophical origin, it would probably by this time have been productive of the most philosophical good temper and moderation with regard to every sort of religious principle. It has been established in Pennsylvania, where, though the Quakers happen to be the most numerous,*144 the law in reality favours no one sect more than another, and it is there said to have been productive of this philosophical good temper and moderation.

But though this equality of treatment should not be productive of this good temper and moderation in all, or even in the greater part of the religious sects of a particular country, yet provided those sects were sufficiently numerous, and each of them consequently too small to disturb the public tranquillity, the excessive zeal of each*145 for its particular tenets could not well be productive of any very harmful effects, but, on the contrary, of several good ones: and if the government was perfectly decided both to let them all alone, and to oblige them all to let alone one another, there is little danger that they would not of their own accord subdivide themselves fast enough so as soon to become sufficiently numerous.
In every civilized society, in every society where the distinction of ranks has once been completely established, there have been always two different schemes or systems of morality current at the same time; of which the one may be called the strict or austere; the other the liberal, or, if you will, the loose system. The former is generally admired and revered by the common people: the latter is commonly more esteemed and adopted by what are called people of fashion. The degree of disapprobation with which we ought to mark the vices of levity, the vices which are apt to arise from great prosperity, and from the excess of gaiety and good humour, seems to constitute the principal distinction between those two opposite schemes or systems. In the liberal or loose system, luxury, wanton and even disorderly mirth, the pursuit of pleasure to some degree of intemperance, the breach of chastity, at least in one of the two sexes, &c. provided they are not accompanied with gross indecency, and do not lead to falsehood or injustice, are generally treated with a good deal of indulgence, and are easily either excused or pardoned altogether. In the austere system, on the contrary, those excesses are regarded with the utmost abhorrence and detestation. The vices of levity are always ruinous to the common people, and a single week's thoughtlessness and dissipation is often sufficient to undo a poor workman for ever, and to drive him through despair upon committing the most enormous crimes. The wiser and better sort of the common people, therefore, have always the utmost abhorrence and detestation of such excesses, which their experience tells them are so immediately fatal to people of their condition. The disorder and extravagance of several years, on the contrary, will not always ruin a man of fashion, and people of that rank are very apt to consider the power of indulging in some degree of excess as one of the advantages of their fortune, and the liberty of doing so without censure or reproach as one of the privileges which belong to their station. In people of their own station, therefore, they regard such excesses with but a small degree of disapprobation, and censure them either very slightly or not at all.

In every civilized society, in every society where the distinction of ranks has once been completely established, there have been always two different schemes or systems of morality current at the same time; of which the one may be called the strict or austere; the other the liberal, or, if you will, the loose system. The former is generally admired and revered by the common people: the latter is commonly more esteemed and adopted by what are called people of fashion. The degree of disapprobation with which we ought to mark the vices of levity, the vices which are apt to arise from great prosperity, and from the excess of gaiety and good humour, seems to constitute the principal distinction between those two opposite schemes or systems. In the liberal or loose system, luxury, wanton and even disorderly mirth, the pursuit of pleasure to some degree of intemperance, the breach of chastity, at least in one of the two sexes, &c. provided they are not accompanied with gross indecency, and do not lead to falsehood or injustice, are generally treated with a good deal of indulgence, and are easily either excused or pardoned altogether. In the austere system, on the contrary, those excesses are regarded with the utmost abhorrence and detestation. The vices of levity are always ruinous to the common people, and a single week's thoughtlessness and dissipation is often sufficient to undo a poor workman for ever, and to drive him through despair upon committing the most enormous crimes. The wiser and better sort of the common people, therefore, have always the utmost abhorrence and detestation of such excesses, which their experience tells them are so immediately fatal to people of their condition. The disorder and extravagance of several years, on the contrary, will not always ruin a man of fashion, and people of that rank are very apt to consider the power of indulging in some degree of excess as one of the advantages of their fortune, and the liberty of doing so without censure or reproach as one of the privileges which belong to their station. In people of their own station, therefore, they regard such excesses with but a small degree of disapprobation, and censure them either very slightly or not at all.

Almost all religious sects have begun among the common people, from whom they have generally drawn their earliest as well as their most numerous proselytes. The austere system of morality has, accordingly, been adopted by those sects almost constantly, or with very few exceptions; for there have been some. It was the system by which they could best recommend themselves to that order of people to whom they first proposed their plan of reformation upon what had been before established. Many of them, perhaps the greater part of them, have even endeavoured to gain credit by refining upon this austere system, and by carrying it to some degree of folly and extravagance; and this excessive rigour has frequently recommended them more than anything else to the respect and veneration of the common people.

A man of rank and fortune is by his station the distinguished member of a great society, who attend to every part of his conduct, and who thereby oblige him to attend to every part of it himself. His authority and consideration depend very much upon the respect which this society bears to him. He dare not do anything which would disgrace or discredit him in it, and he is obliged to a very strict observation of that species of morals, whether liberal or austere, which the general consent of this society prescribes to persons of his rank and fortune. A man of low condition, on the contrary, is far from being a distinguished member of any great society. While he remains in a country village his conduct may be attended to, and he may be obliged to attend to it himself. In this situation, and in this situation only, he may have what is called a character to lose. But as soon as he comes into a great city he is sunk in obscurity and darkness. His conduct is observed and attended to by nobody, and he is therefore very likely to neglect it himself, and to abandon himself to every sort of low profligacy and vice. He never emerges so effectually from this obscurity, his conduct never excites so much the attention of any respectable society, as by his becoming the member of a small religious sect. He from that moment acquires a degree of consideration which he never had before. All his brother sectaries are, for the credit of the sect, interested to observe his conduct, and if he gives occasion to any scandal, if he deviates very much from those austere morals which they almost always require of one another, to punish him by what is always a very severe punishment, even where no civil effects attend it, expulsion or excommunication from the sect. In little religious sects, accordingly, the morals of the common people have been almost always remarkably regular and orderly; generally much more so than in the established church. The morals of those little sects, indeed, have frequently been rather disagreeably rigorous and unsocial.” (WN V.i.g.8- 12: pp792-96

In case you are interested; no, I do not have views on Christopher Hitchen’s views on religion. It’s enough to be taking on the larger part of the economics establishment at Lost Legacy, without joining in an inconclusive endless 'war' about religions.

Markets Are At the Core of All Human Relationships

Martin L. Johnston writes about books in CITYPAPERONLINE which via Kermit Frosch reports on a 'Symposium on Giovanni Arrighi's Adam Smith in Beijing: Lineages of the 21st Century.

Giovanni Arrighi Finds Adam Smith's Capitalism in China's Emerging Economic Might (here)

"ADAM SMITH--A SCOTTISH ECONOMIST whose most famous treatise, The Wealth of Nations, was published in 1776--has long been the patron saint of capitalism. So it's more than a little surprising that Giovanni Arrighi, a sociology professor at the Johns Hopkins University, argues that the country that is fulfilling Smith's vision today is not the United States but China. In his 2007 book, Adam Smith in Beijing: Lineages of the Twenty-first Century, Arrighi makes a case for Smith as a thinker more concerned with well-functioning markets than unbridled capitalism.
precisely because he found that the country successfully used markets to get things done. "Contrary to widespread opinions, markets are quite crucial as instruments of government, but particularly in countries the size of China," Arrighi says. "This is a crucial insight of Adam Smith."

Comment
What starts of wishfully thinking (“the patron saint of capitalism”), which is a post-Smithian reconstruction of Wealth Of Nations, written and published long before there was what today we call ‘capitalism’, a word never used by Smith because it was unknown to him, both as a phenomenon and word, that was invented in English in mid-19th-century literature – to be precise, William Makepeace Thackery’s ‘The Newcomes', published in 1854 and popularized by Karl Marx – is finally rescued by his ‘case for Smith as a thinker more concerned with well-functioning markets than unbridled capitalism’.

The fact is that markets long preceded capitalism, a point completely missed by Karl Polanyi (‘The Great Transformation', 1944), who considered markets to be part of the title of his book and occurring only in mid-19th century, is well established by Adam Smith (among many others, contemporaries and those who preceded him) and by modern research (see Morris Silver, Economic Structures of Antiquity, Greenwood Press, 1995, ‘Markets in antiquity: the challenge of the evidence’ pp 95-177).

That several respectable modern authors have followed Karl Polanyi’s theory is regrettable.

Adam Smith recognised markets as being an ancient institution, indeed, he was for some reason more accurate than he realised (or than Polanyi gave him credit) when he introduced in Wealth Of Nations that most prescient of ideas, that describes his iconic statement of ‘the propensity to truck, barter, and exchange’:

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

Exchange, individual, bilateral, and social goes back into pre-hitory and covers markets in language development, ideas, and knowledge, law and justice, customs, modes of living and subsistence, moral sentiments, international relations and, in fatc, all aspects of human relations.

Smith Was Right, Ricardo Was Wrong

Niranjan Rajadhyaksha asks: “Will high food prices strangle growth? The differing views of Adam Smith and David Ricardo can shed light” in the Wall Street Journal (livemint.com), 4 March (here):

“The 18th century [sic] English economist, David Ricardo, believed that societies would be forced to cultivate increasingly less fertile land as demand for food expanded. Food prices would rise, pushing up wages and rents. This would leave a smaller part of the national income for profits. Low profits would make new investments unattractive to the capitalist class. Ricardo believed that the capitalist economy would eventually settle into a stationary state of zero growth.

Ricardo was proved wrong. The discovery of the Americas led to a sudden increase in the supply of high-quality land. Technical improvements increased farm productivity. Relative prices of food have fallen dramatically over the past century. But the Ricardian belief that an agricultural pinch would act as a constraint on economic growth got a fresh lease of life in the development debates of the 1950s.”

Comment
Reading Ricardo on these terms seems strange, but is explained, perhaps, by the zero sum version of an economy prevalent among economists until recently. When you capture an economy within an equilibrium framework, any movement in one variable (food prices) is bound to have knock-on effects in other variables (wages, rents), which was not helped by the Ricardian anchor of diminishing returns. Agriculture remained the largest sector of the economy in employment and output, and was itself trapped in the mercantile policy of price regulated tariffs (the ‘Corn Laws’) until they were repealed in 1846.

Low profits, wrote Smith, are associated with expanding economies and new industries generate higher profits, which shifts capital towards them. ‘The acquisition of new territory [North America], or new branches of trade, may sometimes raise the profits of stock’ (WNI.ix12: p 110)

High profits are associated with stagnating economies, mercantile monopoly policies and prodigality. The doom-laden versions of Ricardian economics dominated popular thinking, even as the evidence of the real world contradicted them. The beautiful irony of Malthusian gloom lies in his articulation of the so-called ‘trap’ of misery of permanent poverty for the majority was being undermined by rising per capita real incomes all around him and on through the 19th-20th-and 21st centuries for commercial markets. Something was wrong with the diminishing returns model, though to be fair, the Malthusian trap had operated with impunity for thousands of years. The difference from the late 18th century was the re-appearance and expansion of commerce.

“Smith came before Ricardo. His was the more optimistic view. This 17th [sic] century Scottish economist believed that the division of labour and specialization would spur innovation and growth. No stationary state for him.

In a recent blog post on economic history, Mark Koyama of Oxford University compared the two views of economic growth. “There are, broadly speaking, two different perspectives in economic history: a Ricardian/Malthusian perspective…emphasizes the significance of the constraints that bound pre-industrial economies… This view was certainly the dominant view amongst economic historians in the post-war period and it seems also to have dominated discussions in development—particularly the emphasis on importance natural resources, savings and population control and the comparative neglect of institutional considerations that typified the approach taken in the 1950s and the 1960s follows from a Ricardian paradigm,” writes Koyama. He earlier described “Smithian growth based upon falling transactions costs and increases in specialization and the division of labour.”

Comment
“No stationary state for him [Adam Smith]”. Not quite true. Within Adam Smith’s model of growth there was a ‘stationary state’ conclusion:

‘In a country which had acquired that full complement of riches which the nature of its soil and climate, and its situation with respect to other countries allowed it to acquire; which could, therefore, advance no further, and which was not going backwards, both the wages of labour and the profits of stock would probably be very low. In a country fully peopled in proportion to what either its territory could maintain or its stock employ, the competition for employment would necessarily be so great as to reduce the wages of labour to what was barely sufficient to keep up the number of labourers, and, the country being already fully peopled, that number could never be augmented. In a country fully stocked in proportion to all the business it had to transact, as great a quantity of stock would be employed in every particular branch as the nature and extent of the trade would admit. The competition, therefore, would everywhere be as great, and consequently the ordinary profit as low as possible." [WN I.ix.14: p 111]

He also pointed to China’s stagnation and its causes:

"But perhaps no country has ever yet arrived at this degree of opulence. China seems to have been long stationary, and had probably long ago acquired that full complement of riches which is consistent with the nature of its laws and institutions. But this complement may be much inferior to what, with other laws and institutions, the nature of its soil, climate, and situation might admit of. A country which neglects or despises foreign commerce, and which admits the vessels of foreign nations into one or two of its ports only, cannot transact the same quantity of business which it might do with different laws and institutions. In a country too, where, though the rich or the owners of large capitals enjoy a good deal of security, the poor or the owners of small capitals enjoy scarce any, but are liable, under the pretence of justice, to be pillaged and plundered at any time by the inferior mandarines, the quantity of stock employed in all the different branches of business transacted within it, can never be equal to what the nature and extent of that business might admit. In every different branch, the oppression of the poor must establish the monopoly of the rich, who, by engrossing the whole trade to themselves, will be able to make very large profits. Twelve per cent. accordingly is said to be the common interest of money in China, and the ordinary profits of stock must be sufficient to afford this large interest.

A defect in the law may sometimes raise the rate of interest considerably above what the condition of the country, as to wealth or poverty, would require. When the law does not enforce the performance of contracts, it puts all borrowers nearly upon the same footing with bankrupts or people of doubtful credit in better regulated countries. The uncertainty of recovering his money makes the lender exact the same usurious interest which is usually required from bankrupts. Among the barbarous nations who over-run the western provinces of the Roman empire, the performance of contracts was left for many ages to the faith of the contracting parties.*73 The courts of justice of their kings seldom intermeddled in it. The high rate of interest which took place in those ancient times may perhaps be partly accounted for from this cause."(WN I.ix.15-16: pp 111-2)

However, Adam Smith’s growth theory was different from Ricardo’s and most modern economists. His was not based on the equilibrium constraint, and this fact was steadily ignored until the mid-20th century. Smith’s was an increasing returns, not a diminishing returns theory, and this was rooted in the propensity to exchange, the division of labour and the inter-linked supply chains that necessarily developed in consequence. The famous ‘pin factory’ was only part of Smith’s division of labour. Perhaps the more important other part is in the same chapter as the pin factory: the account of the supply chains that linked together to produce the common labourer’s woolen coat:

“Observe the accommodation of the most common artificer or day-labourer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation. The woollen coat, for example, which covers the day-labourer, as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! how much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them. Were we to examine, in the same manner, all the different parts of his dress and household furniture, the coarse linen shirt which he wears next his skin, the shoes which cover his feet, the bed which he lies on, and all the different parts which compose it, the kitchen-grate at which he prepares his victuals, the coals which he makes use of for that purpose, dug from the bowels of the earth, and brought to him perhaps by a long sea and a long land carriage, all the other utensils of his kitchen, all the furniture of his table, the knives and forks, the earthen or pewter plates upon which he serves up and divides his victuals, the different hands employed in preparing his bread and his beer, the glass window which lets in the heat and the light, and keeps out the wind and the rain, with all the knowledge and art requisite for preparing that beautiful and happy invention, without which these northern parts of the world could scarce have afforded a very comfortable habitation, together with the tools of all the different workmen employed in producing those different conveniencies; if we examine, I say, all these things, and consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilized country could not be provided, even according to what we very falsely imagine, the easy and simple manner in which he is commonly accommodated. Compared, indeed, with the more extravagant luxury of the great, his accommodation must no doubt appear extremely simple and easy; and yet it may be true, perhaps, that the accommodation of an European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages.” (WN I.i.11: p 22-24)

Employment in agriculture and other products of the land is now a minority activity in a country’s GDP. Productive employment, defined as the production of ‘vendible’ products in markets for revenue, dominates economic activity. As improvements in quality, cost and distribution (now global) are generated all along the supply chains of billions of products in trillions of transactions, the rise in per capita incomes is relentless. Allyn Young put well (Economic Journal, 1928):
specialisation and the division of labour cause ‘cumulative’ improvements all along the economy’s supply chains which, necessarily, use each other’s outputs as inputs into their outputs. It’s a far more powerful force than a hasty reading of Wealth Of Nations (more often a quotation only from it) that stops after the account of the pin factory would suggest.

What Adam Smith called the ‘spread of opulence’ brought about commercial economies, despite the many imperfections imposed by continuing mercantile policies, ‘consistent with the nature of [each country’s] laws and institutions’, despite lapses in the administration of justice, natural calamities, human wars, social disorder, and the malfeasance of state and private officials, bears witness to his optimism for the revived ‘age of commerce’.

Ricardo was wrong – and obscure too; read his works for examples. Niranjan Rajadhyaksha, despite the slips in his(?) analysis is asking the right question. I am not so sure that he did enough to provide the appropriate answer.

Smith's Markets Were Not Led by Invisible Hands

John Shultz, Independent analyst and Contributing Editor, Logistics Management Magazine, writes in The Expert Network (here) Gerson Lehrman Group:

“With Capacity Exiting Trucking Industry, Will Rates Inevitably Rise?
Analysis of: Current Transportation Capacity Glut is Forcing Many Independent Truckers Out of Business”

“Implications: The current slump in ground freight demand is taking its toll on some independent truckers, pinched between high fuel costs and slack demand. One truck repossession company reports it more than doubled the number of trucks it repossessed in 2007 compared with 2006. But at least one transportation consultant believes this is a good thing because "the invisible hand of Adam Smith" means that eventually this lessening of capacity will mean higher trucking rates for the survivors. Implications: The current slump in ground freight demand is taking its toll on some independent truckers, pinched between high fuel costs and slack demand. One truck repossession company reports it more than doubled the number of trucks it repossessed in 2007 compared with 2006. But at least one transportation consultant believes this is a good thing because "the invisible hand of Adam Smith" means that eventually this lessening of capacity will mean higher trucking rates for the survivors.”

Comment
The economics are sound: a fall in supply price following a fall in demand will reduce supply capacity eventually. But what has this got to do with Adam Smith’s sole use of the metaphor of the invisible hand in Book IV of Wealth Of Nations?

Adam Smith’s lengthy analysis of markets in Books I and II does not even mention the metaphor of the invisible hand. Including it in an exposition of the supply and demand relationship adds absolutely nothing to an understanding of the market changes.

Its only possible use is to imply some sort of authority to the analysis by using Adam Smith’s name and the famous metaphor, but what it does in fact is expose the analyst who makes the reference as knowing little about Adam Smith at all.

Have a Laugh at Adam Smith and Others

Tim Worstall posts (here) in The Business (London global business magazine) which links to a paper on the history of economic theorists that will bring a smile (or a smirk) to your face (don’t read it in public; they may call the men in white coats to take you away).

It’s called: ‘Adam Smith and all that’ by John Creedy (a distinguished academic in the very field he mocks so well).(here)

Here’s Tim’s taster:

"Adam Smith is the most famous economist ever, as well as being a Good Man (in fact he was so good, he was said by his friends to be overflowing with moral sentiments). He was the leading economist of the British school of classical economists. However they had the good sense to write in English rather than Latin, and not to wear togas.

His most famous book is called The Wealth of Nations, of which every literate person has heard. However, no one reads this book any longer: it therefore can be said to have acquired the status of a true classic. One reason it is not read these days is that, like Shakespeare’'s plays and the King James Bible, modern readers realise immediately that it is made up entirely of famous quotations. It is not quite clear why his contemporaries failed to realise this obvious point.

Adam Smith was born, educated, taught and lived in Scotland most of his life. However, he travelled on horseback to Balliol College to find out if education in Oxford was really as bad as he had been told.— It was.”

Comment
Definitely worth a read!

Gertrude Himmelfarb's New Book and Gordon Brown's Introduction

David Runciman writes a review of Getrude Himmelfard’s new book, (here) The Roads to Modernity: The British, French and American Enlightenments by Gertrude Himmelfarb in The Sunday Times 2 March. Perhaps because it carries a forward by Gordon Brown, the British Prime Minister, the review discusses his motivations.

“The case Himmelfarb wants to make depends on separating out three different “Enlightenments” — the British, the French and the American. All three were founded on the principle of reason, but only one — the French — turned reason into its own religion, crushing everything else in its path. In Britain, by contrast, reason was “humanised” through the philosophy of, among others, Adam Smith, who made it clear that self-interest was compatible with moral sentiment. This “sentimental” Enlightenment produced a society of tolerant, sceptical individualists, by contrast to the dogmatic and intolerant French. Meanwhile, in America, both rationality and sympathy had to take a back seat to the pressing demands of achieving liberty from the British Crown, and building a new kind of state that could sustain that freedom….”

“The story Himmelfarb tells is a familiar one, and it contains its own share of clichés (she portrays the French philosophes as unfeeling snobs with a weakness for enlightened despotism) but she writes with real grace and her effortless prose brings the history of ideas to life. Brown, however, is less successful in trying to explain what this story might have to teach people living in Britain today. He says in his introduction that the social virtues of sympathy and benevolence that Himmelfarb identifies at the heart of British Enlightenment thinking “have remained a dominant theme of Britishness ever since”. But this entirely glosses over the lesson Himmelfarb herself draws, which is that the only society in which these virtues are now on prominent display is America. She argues that it was the American experiment with liberty that in the end allowed room for the religious impulses needed to underpin “the passion for compassion”. The Victorians may have had this passion, but during the 20th-century the British people lost it, and though Himmelfarb does not spell it out, it is clear that much of the blame in her eyes lies with the architects of the welfare state.

So what is a Labour prime minister now doing writing an introduction to an apology for such a distinctively American form of compassionate conservatism? Even by his own standards, Brown is being exceptionally disingenuous in claiming that Himmelfarb shows us what it still means to be British, given that she is really saying that what it once meant to be British now means being American. But Brown has another aim in view — to remind us that at the heart of Britishness lies a form of Scottishness, given that so much of the British Enlightenment had its origins in Scotland. He uses Himmelfarb to continue his campaign to resurrect Adam Smith as the godfather of his own version of benevolent capitalism, and he repeats verbatim a claim he made in his recent introduction to Iain McLean’s Adam Smith, Radical and Egalitarian: “Coming from Kirkcaldy as Smith did, I have come to understand that his Wealth of Nations was underpinned by his Theory of the Moral Sentiments, his invisible hand in the economy supported by the helping hand in civil society.”

“This is not just embarrassing — when people want to know how Brown finds the time to write all this stuff, “by plagiarising himself ” is not a good answer — it is also absurd. What about those of us who don’t come from Kirkcaldy? And what about people who do live in Kirkcaldy today — are we really meant to believe that theirs is still the model of “mutual societies, craft unions, insurance and friendly societies and co-operatives and faith groups” that Brown extols as the essence of what it means to be British? Brown has taken a book that roots ideas in particular places and times and chosen to identify those ideas with quite different places and times to suit his own political purposes. It is worth asking how a prime minister finds the time to write this stuff, because he really ought to have better things to do….”

“In his introduction, Brown says the social virtues “have remained a dominant theme of Britishness ever since . . . a theme that finds its best expression in the British tradition of strong voluntary associations and faith groups”. But what does he have to say of his muse’s conclusion, which approvingly cites proposals to replace welfare with workfare? Not a squeak.”

Comment
Those of us living through the Gordon Brown tenure as Prime Minister may be perplexed as to what he is really about. Writing introductions to academic books closely linked to the 18th century Enlightenment, with obligatory re-announcements of his close affinity with Adam Smith through living in Kirkcaldy (Brown was born in Glasgow), are becoming serially embarrassing, as is much of the performance of his government in recent months.

In one area Gordon Brown may have something in common with Adam Smith, who made a far more effective influencer that he would ever have made as a politician; it is not clear yet that Gordon Brown will do as well as he did when he was Chancellor of the Exchequer before taking over from Tony Blair. He has two years to reverse this growing impression.

Where P. J. O'Rourke is Misleading

A review of P. J. O’Rourke’s book on Adam Smith in Sunday Herald (Glasgow) provides readers with an unusually not quite accurate account of Adam Smith's ideas, much of the interpretation of which I cannot agree, though it is partly correct! Read it here.

‘Adam Smith: the father of capitalism … and one of its fiercest critics’

‘American satirist PJ O’Rourke is in Edinburgh this week to address a pensions conference. In this extract from his acclaimed new book on Adam Smith, the “awed admirer” of the Scottish Enlightenment reveals the truth about Kirkcaldy’s greatest son.

ADAM SMITH cannot be said to have constructed the capitalist system. What he did was provide the logic of a level ground of economic rights upon which free enterprise could be built more easily. And he suggested to the builders that they use the wheelbarrow of free trade, the plumb bob of self-interest, and all the specialised tools of specialisation.

However, when Smith undertook to consider how free enterprise allocates what it produces - "the order according to which its produce is naturally distributed" - he hit capitalism hard enough to make its boiled shirtfront roll up like a window shade.
Some acolytes of Smith might be surprised if they ever read him. He wrote that "the oppression of the poor must establish the monopoly of the rich", and that profit is "always highest in the countries which are going fastest to ruin"…

Comment
Adam Smith’s assertion is from a discussion in which a commercial system is dominated by mercantile monopolies and protection which keeps profits high and restricts price-reducing competition. Out of context, it is not against high profits; Smith argued that a competitive market economy would produce high output and lower prices, with lower profits.

‘Adam Smith was tough on the landed gentry: "As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed." He would have been amused to see the dukes and duchesses of England reduced to keeping circus animals and other attractions on their great estates and letting fat daytrippers waddle through their stately homes, camcording the noble ancestors on the walls.

"Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent and regard to the pernicious effects of their own gains. They complain only of those of other people.”

Comment
Another statement from Wealth Of Nations (Book IV) on the domination of the UK economy by the colonial trade with North America, which drew scarce UK capital at cost to Britain’s domestic economy.

By ensuring a monopoly of Atlantic trade (the Navigation Acts) those merchants who traded with the British colonies, sold British exports dear to the colonists and bought American exports cheap, plus they restricted the amount that cold be sold in Britain, which they sold dear to British consumers (tripling profits on capital way above domestic returns). That was the source of high profits from the colonial trade, which some of their spokesmen in the House of Commons blamed upon the high wages of American labourers, caused mainly by the shortage of labour, not their excessive wage demands.

Free migrants into America soon learned that if they saved some capital from their high wages they could buy cheap land and make a good living working for themselves. Those too poor, or indolent, many of whom were indentured debtors, earned higher wages from the shortages of labour than they could expect in Europe. Of course, the black slaves earned their subsistence only.

O’Rourke’s selective quotations can give a wrong idea of what Adam Smith was arguing about against mercantile political economy, especially when turned into generalizations about economics out of the context with which he was concerned.

"The interest of the dealers in any particular branch and trade or manufactures, is always in some respects different from and even opposite to, that of the public."

‘And Smith was no enthusiast for the privatisation of government functions. Concerning the East India Company and its rule of Bengal, Smith wrote: "The government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatever."

Comment
An almost misleading use of ‘privatisation’ (which is the selling off of existing government owned and managed activities, whereas the East India Company was already a private company which was awarded a monopoly Royal Charter over trade where hardly any serious trade was undertaken by the British government. It was the awful consequences of creating a legal monopoly that was the problem that assumed the powers of an absent government that Smith criticised, often violently, and had nothing to do with what we know as ‘privatisation’ today.

That is about all I can comment upon with respect to the copyright laws and without provoking the good people of the Sunday Herald into a sharp riposte from their lawyers. I suggest you follow the link and read the rest for yourself. Just be careful what you take from the many quotes in what is a well written article in the O'Rourke style. They are only a small part of the Adam Smith's legacy.

TaxProf Blog Distributes PDF on Adam Smith's Taxation Maxims Applied

TaxProf (‘A Member of the Law Professor Blogs Network;
courtesy of Professor Paul L. Caron)here): contains a PDF of an interesting article on Adam Smith’s tax framework applied to modern Florida by Beverly I. Moran:

Abstract:

‘Moran Presents Adam Smith and the Search for an Ideal Tax System Today at Florida

Beverly I. Moran (Vanderbilt) presents Adam Smith and the Search for an ideal Tax System at Florida today as part of its Faculty Colloquia Series.

'Increasing inequalities in income and wealth undermine the capitalist promise of universal prosperity and political liberty. To explore that growing tension, this article examines the key role of taxation in the original vision and extensive writings of Adam Smith -- the father of capitalism. Comparing that vision to the current United States tax system reveals many important inconsistencies, particularly the current penchant for simultaneously taxing
wages and exempting (or delaying) taxes on wealth and wealth appreciation. The article proposes several ways in which the U.S. tax system could more closely align with Smith’s capitalist vision. These ways of more closely adhering to a capitalist ideal include exempting a portion of wages (equal to the earnings of almost half of the United States population) from all forms of taxation and introducing a wealth tax on amounts greater than needed for working people to enter the housing market.’

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You can download the PDF (worth reading)