Adam Smith's Possible Thoughts on Mental Illnesses and Sympathy

A discussion on the radio yesterday about the reaction of work colleagues and (strangely) within the immediate family during which a person who had recovered from a mental illness (without saying what was involved) asserted that other people react to physical illnesses with far greater sympathy and understanding than they do to mental illnesses or disorders.

This struck me as odd in that I thought that any illness would attract sympathy from relatives and even some degree with others.

But Adam Smith explains that even within physical illnesses there are degrees of sympathy. The impartial spectator has sympathy for what it understands. Perhaps this extract from Moral Sentiments gives a flavour of Smith’s thinking, which I have lightly applied to mental illnesses (read the chapter for a fuller explanation).

“Pain never calls forth any very lively sympathy unless it is accompanied with danger. We sympathize with the fear, though not with the agony of the sufferer. Fear, however, is a passion derived altogether from the imagination, which represents, with an uncertainty and fluctuation that increases our anxiety, not what we really feel, but what we may hereafter possibly suffer. The gout or the tooth-ach, though exquisitely painful, excite very little sympathy; more dangerous diseases, though accompanied with very little pain, excite the highest.

Some people faint and grow sick at the sight of a chirurgical [surgical] operation, and that bodily pain which is occasioned by tearing the flesh, seems, in them, to excite the most excessive sympathy. We conceive in a much more lively and distinct manner the pain which proceeds from an external cause, than we do that which arises from an internal disorder.”
(TMS I.ii.1.9-10: p 30: Chap. I 'Of the Passions which take their origin from the body', p 27)

James Hutton's Right to Precedence

The introduction to a remarkable, and welcome, booklet celebrating the opening of the recently beautifully restored (from Lottery funds) 19th-century Rotunda in Scarborough, England, contains these paragraphs which I noticed:

“The 1770s to the 1820s was a period of major change and modernisation in Britain, with the Industrial and Agricultural revolutions in full swing. There as a renaissance in scientific thought too, which led to the birth of a new science, geology. Edinburgh lay at the centre of its development, primarily becaude ot was there that James Hutton (1726-1797), who had studied at both Edinburgh and Leiden universities, began challenging the established idea that the Earth was created in 4004 B. C. Hutton owned land in Berwickshire, where he observed the way that rivers eroded their surroundings to transport sediment to the sea. He realised that those sediments would ultimately form solid rock which could be uplifted to form mountains and eroded again. This process implied the passing of immense intervals of time. In 1795 Hutton published his revolutionary ideas in a book called Theory of the Earth.

A few years earlier, in 1797, a young man in south-west England was appointed as a surveyor’s assistant. He was called William Smith (1769-1839), and is now immortalised as the ‘Father of English Geology’,”

Comment
My interest in James Hutton primarily is in his friendship and collaboration with Adam Smith. While acknowledging the major contributions of William Smith (no relation) to geology (‘father of English geology’), I was taken aback by the implication (‘a few years earlier') that William Smith he had a claim to precedence over James Hutton (widely credited as the ‘father of modern geology’).

James Hutton made the essence of his theory of the Earth in a paper (Concerning the system of the Earth, its duration, and stability), read to the Royal Society of Edinburgh at two meetings in 1785 (the first part was read by his friend, Joseph Black, the physician and chemist, in March and the second part by Hutton in April). His book, The Theory of the Earth, was published later but that does not affect Hutton’s rightful 'claim' to precedence.

Papers read at either of the Royal Societies in Edinburgh or London, or other prestigious bodies like the Linnaean Society, London, are clear statements of proven precedence, as applies from the reading of the papers on natural selection read at the Linnean Society on behalf of both Alfred Russell Wallace and Charles Darwin in July 1858.

My interest in James Hutton and his theories of the Earth is partly because of my current research project on the claims of many Smithian scholars that Adam Smith was motivated by his alleged beliefs in Christianity or some form of Deism, of which I intend to report in due course.

Meantime, search the Lost Legacy archives for my earlier article on James Hutton on 29 May 29 May, 2006: “James Hutton, geologist and Friend of Adam Smith'.

David Warsh on the Bail Outs

David Warsh, author of Economic Principals, a weekly on-line news commentary on what economists have done and are doing about issues, big or small, and of the most promising specialist research subjects, plus deep background to the interface between economic research and practical, at least in their intentions, policies.

His recent on-line contribution contains this interesting piece about the source of current attempts by governments to revive stagnant banking systems:

“What Just Happened?

The emergency continues, a little less desperate than before. A remedy that works – direct government investment in threatened institutions in exchange for equity – seems to have been settled on in most industrial democracies.

A number of mysteries remain. For instance:

How deep has been the opposition between the Federal Reserve Board and the US Treasury Department these last fifteen months? Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson have presented a generally united front. But what goes on behind the scenes? What of their staffs? The sheer opacity of Paulson’s initial plan to buy and hold troubled securities, and the clumsiness with which it was presented, has yet to be explained. What was the process by which it was developed and internally reviewed?

And where did the ultimately successful plan come from, anyway? Ten days ago it appeared that it was UK Prime Minister Gordon Brown’s idea. True enough, Brown boldly and confidently tackled his banking crisis at its root. A cartoon in the Financial Times depicted leaders of other industrial nations following him along in a cheerful dance. There followed the standard paeans to John Maynard Keyes.

But the basic blueprints Brown adopted had been drawn up in Stockholm in late 1992, when central bankers in Sweden, Norway and Finland moved swiftly to rescue their big banks after the collapse of a property bubble. The rescue succeeded, though its aftermath lingered on for four years.

What were the channels through which Swedish influence flowed to London and Washington? This is an especially interesting question because of the experience of the early 1930s, when Gustav Cassel argued without success that overly restrictive American monetary policy was making matters worse, and Gunnar Myrdal devised budgetary policies implemented by the new Social Democratic government in 1933 that spared Sweden the worst of the Great Depression.

In other words, economists of the Stockholm School implemented successful macroeconomic policies several years before John Maynard Keynes published his General Theory of Employment, Interest and Money in 1936, even if they were unable to make the case for what they were doing to the wider world.”

Comment
Worth some thought, given that the media is searching for the guilty perpetrators of the current problems and for those culpable who were party to the disregard of warnings about their ‘spend-now-borrow-and-tax-later' policies. Come to think of it, the UK government is in effect continuing with the same policies that worsened the outcomes of what they conveniently call a 'global' crisis, an one partly of their own making.

David Warsh wrote the influential, Knowledge and the Wealth of Nations: A Story of Economic Discovery (W W Norton & Co Ltd, 2007). For a news review, see HERE, and for David’s own statement about his book, see HERE.

I claim no affinity in today’s topic to Lost Legacy’s main interests in Adam Smith’s moral philosophy and political economy but I strongly recommend that readers try a sample of Economic Principals (details HERE).

I started reading Economic Principals after I read Warsh’s book Knowledge and the Wealth of Nations, the title of which caught my attention, of course.

While I had qualms about Warsh’s repetition of the Chicago version of Adam Smith (reported on Lost Legacy at the time), he re-ignited my curiosity with his account of Paul Romer’s revival of increasing returns in respect of neoclassical growth theory (I have long since my student days been sceptical of Harrod-Domer's 'kife-edge' and Solow’s exogenous dead-end theories of growth).

From which re-reading, howwer, I was drawn to Allyn Young’s 1928 Economic Journal seminal article, ‘Increasing returns and economic progress’ (it’s online via google) and to the rehabilitation of Adam Smith’s growth theory in the context of the real importance of the division of labour (not the ‘pins’!) (discussed in my Adam Smith: a moral philosopher and his political economy, 2008, Palgrave Macmillian).

What might Economic Principals do for your research and interest in economics?

Adam Smith on Experts and Celebrities

An anonymous author of ‘Politics we believe in’ posted in RomeSentinel.com (‘serving Onieida county in the heart of New York state’) HERE, which reads like a manifesto (or, in extremis, to be like a recitation of a creed). It contains this sentence:

‘We believe Adam Smith’s abiding suspicion of anyone who claims special privilege or expertise.’

Comment
I understand the mood implied in this statement, especially in the context of the rest of declaration, and I can think of several places where Adam Smith expressed thoughts that could contribute to a manifesto writer to summarise them into the quoted sentence. But there is something – I know not what off hand – that is either missing or is left out.

Smith wasn’t too impressed by some examples of men of privilege – ‘vile rulers of mankind’ and he mocked the awe directed at what we describe today as ‘celebrities’, a far wider social phenomenon in the 21st century than was common among the narrower confines of 18th-century aristocratic society.

Smith's mocking tone was relieved by his observations that such popular reverence about the trivia of the daily lives of the ‘rich and powerful’ was a necessary part of the ‘distinction of ranks’ in a stable society (TMS I.iii.2: ‘Of the Origin of Ambition, and the distinction of Ranks’). Of course, in republican America there is little if any similar distinction of ranks based on birth and family lineage than was commoner in the centuries that preceded the foundation of the USA, but i the USA (and elsewhere) there is no mean application of the ‘celebrity’ culture of ‘wealth and fame’ among popular attitudes.

As a scholar, Adam Smith respected ‘expertise’ – his praise of thsoe who demonstrated it is not uncommon for distinguished ‘men of letters’ throughout his books.

Again, at the same time, he was also given to writing withering criticism of those who presumed (like sovereigns, statesmen, legislators in ‘councils and senates’, and those who influenced them, such as scheming ‘merchants and manufacturers’) that they knew better what people wanted, or how they should go about their lawful business, and who attempted to exercise ‘an authority which could safely be trusted … to no single person’ and would ‘be dangerous’ in ‘the hands of a man who had the folly and presumption’ to ‘fancy himself fit to exercise it'. (WN IV.ii.10: p 456)

Adam Smith was not a ideologue. Firm statements he made about many things often had a modifying qualification to go with it. Societies, Smith knew, are complex, not absolutes. And no student of history, of which there is a dearth in our generations, can fail to appreciate the quiet wisdom of Adam Smith as set against slight caricatures of him, even when meant in the best of sense as in the author while ‘serving Onieida county in the heart of New York state’.

A Step in The Right Direction

David C. Korten writes in Sott.net (‘signs of the times’) (7 October), HERE:

“The Betrayal of Adam Smith”

“Smith strongly disliked both governments and corporations. He viewed government primarily as an instrument for extracting taxes to subsidize elites and intervening in the market to protect corporate monopolies. In his words,

"Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.''

Smith never suggested that government should not intervene to set and enforce minimum social, health, worker safety, and environmental standards in the common interest or to protect the poor and nature from the rich. Given that most governments of his day were monarchies, the possibility probably never occurred to him.

Indeed, these same conditions are fundamental to Adam Smith's famous assertion in The Wealth of Nations that the invisible hand of the market translates the pursuit of self-interest into a public benefit. Note that the following is the only mention of the famous invisible hand in the entire 1,000 pages of The Wealth of Nations.

By preferring the support of domestic to that of foreign industry, he [the entrepreneur] 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.

Smith assumed a natural preference on the part of the entrepreneur to invest at home where he could keep a close eye on his holdings. Of course, this was long before jet travel, telephones, fax machines, and the Internet. Because local investment provides local employment and produces local goods for local consumption using local resources, the entrepreneur's natural inclination contributes to the vitality of the local economy. And because the owner and the enterprise are both local they are more readily held to local standards.

Even on pure business logic, Smith firmly opposed the absentee ownership of companies:

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

If corporate libertarians had a serious allegiance to market principles and human rights, they would be calling for policies aimed at achieving the conditions under which markets function in a democratic fashion in the public interest. They would be calling for an end to corporate welfare, the breakup of corporate monopolies, the equitable distribution of property ownership, the internalization of social and environmental costs, local ownership, a living wage for working people, rooted capital, and a progressive tax system.

Corporate libertarianism is not about creating the conditions that market theory argues will optimize the public interest, because its real concern is with private, not public, interests.”

Comment
David C. Korten is almost on the right track, but his quotations deprived of their context leave them open to enough misinterpretation to weaken some part of his conclusions.

‘extracting taxes to subsidize elites’

Hardly the whole story. The use of taxation to ‘maintain the dignity of the sovereign’ was a small part of the purpose of taxation, just as the splendid buildings in Washington DC are part of maintaining the dignity of the United States. Of course, splendid palaces can become burdensome and their maintenance and repair can be objectionable amidst a country’s mass poverty (think Iraq under Hussein).

But the main purposes of taxation were to fund the first duty of the sovereign, the defence of the citizens from invasions, defence being more ‘important than opulence’; the maintenance of justice, without which society ‘would crumble to atoms’, the erection and maintenance of public works that facilitate commerce; and public institutions such as education of all ranks of the people through a system of’ little schools’ in every parish on the Scottish model. Smith's reference to public support for health measures was confined to palliative care for victims of ‘loathsome diseases’ like leprosy and supported specific interventions in certain fields – banking being one – where the conduct of individuals threatened the entire society.

He never saw a role of government as having an appropriate role in “intervening in the market to protect corporate monopolies”. The exact reverse, in fact; Book IV of Wealth Of Nations is a detailed critique of misguided policies imposed by legislators to pass laws protecting monopolies, forming Guilds, pursuing trade policies of protectionism and misguided mercantile political economy.

Civil government was originally established “for the defense of the rich against the poor, or of those who have some property against those who have none at all”.

But this was not its permanent feature. Without families who set up the first experiments in herding animals and farming the land having security in their property, there would have been no movements from the hunter-gatherer mode of subsistence. That was Adam Smith’s point in the quoted passage, from his Lectures in Jurisprudence delivered in Glasgow University in 1762.

Anarchists, libertarians and Marxists who pounce on these remarks in justification cannot create an alternative history of how a section of the dispersed human race moved from hunter-gathering to commerce without the establishment of property 8-11,000 years ago.

Smith believed that the surest way to “protect the poor and nature from the rich” (accepting for the moment that this is a way to express it) was by the institutions of Natural Liberty and by the poor becoming richer from their participation in the world of commerce. As opulence spread across all ranks of society and liberty was assured, the poor would be major beneficiaries. He did not speculate as to what might happen if those conditions were realised.

David C. Korten’s recognition that the invisible hand appears only once in Wealth Of Nations (Book IV in fact) is welcome but he presents the context as the ‘famous assertion in The Wealth of Nations that the invisible hand of the market translates the pursuit of self-interest into a public benefit’.

Yet Smith never presented the ‘invisible hand’, even in the single instance where he cites the metaphor, as anything to do with ‘the market’ (all covered in Books I and II of Wealth Of Nations) nor as a general ‘law’ that it ‘translates the pursuit of self-interest into a public benefit’. That least is a fiction added to modern economics from the 1950s, completely transforming economic theory into a branch of religion.

“Smith firmly opposed the absentee ownership of companies”.

Not quite. His strictures against ‘companies’ were directed at the experience of the Royal Chartered trading companies, in particular the East India Company, the directors of which were in London and officers of the Company, and the underling managers, were in India, a year’s sailing away (two years there and back) and who operated in an awful manner that disgraced them and those nominally in control. It was difficult enough to manage the Royal Chartered British Colonies in North America – only weeks away in sailing time – let along a group of grasping buccaneers out of sight, out of reach, and out of any sense of common decency and humanity “long before jet travel, telephones, fax machines, and the Internet.”

As for ‘corporate libertarians’, I have much sympathy for David Korten’s description of them, bearing in mind that modern economies are a long way from the commercial economies that Adam Smith knew and wrote about.

One thing has not changed though – human nature and its corruptibility – and an affliction shared by all sides of the argument from Left to Right.

Smith understood this, which is why he never predicted the future, nor argued that if legislators and those who influenced them read Wealth Of Nations and Moral Sentiments and adopted his analyses and associated policies the world would change into a utopia.

He was no ideologue, nor was he an idealist. He was a philosopher and he saw his life’s work as ‘doing nothing and observing everything’. As it happens, those he wrote for in the 18th century did not take heed; his legacy was emasculated in the 19th century and in the 20th century it was turned on its head, with little change expected in the 21st.

A Reader Comments and I Concur

Michael Webster, reader of Lost Legacy, introduced the thinking behind the modern economists’ ‘theory of an invisible hand’, which they incorrectly call Adam Smith’s theory (see his comment on Friday’s post “The Invisible Hand Gang” below).

I have stated these origins of the modern ‘invisible hand’ notion many times on Lost Legacy and therefore I agree with Michael Webster. I read John McMillan’s ‘Reinventing the Bazaar’ a year or so ago and found: a) it is an exciting and readable voyage through the world of markets - all those market minded commentators keeping their heads down at present should read it; and b) McMillan’s account of the invisible hand’s transformation from commonplace literary metaphor in mid-18th century into its mythical 20th-century status is accurate, though now well beyond its originators intentions.

Arrow and Debreu’s works are of theoretical interest only, but of little consequence for much else. Diminishing returns is no longer in pole position; increasing returns has moved up the starting order; exogenous growth theory left unexplained major components of growth; endogenous growth theory brings disequilibrium into the heart of the old equations, and, of course, the enormous change in the role of governments since the late 19th century and their expenditures as a proportion of GDP has added new dimensions inside market economies, not least from the role of politicians, or as Smith might have put it, from legislators and those who influence them.

True, Smith wrote (WN IV.ii.9: p 456) in the case of some merchants (not all!), that ‘only’ for their ‘own security’ – a.k.a, risk avoidance – they would prefer to invest their capital locally, as many did (increasing the domestic investment), rather than risk the greater uncertainties of sending it abroad, especially across the North Atlantic, despite which many individuals continued to trade abroad (hence reducing the amount of capital that could have been invested locally). The net sum added/detracted from domestic investment, and the metaphor was intended for those 18th-century readers who could not follow Smith’s argument, despite which too many seem unable to udnerstand it today after two hunred years plus of advances in economics.

From this sole example, which applies ‘in many other cases’ (Smith doesn’t state if by ‘many’ he meant a large number or a significant proportion), yet the ‘worshippers' of the metaphor of the invisible hand, i.e., what ‘most classical market economists think’, extend it to all cases.

Michael Webster asserts:

“Whether or not Adam Smith had the insight about prices and an invisible hand is going to be largely irrelevant to them.”

They may believe, of course, what they wish, but the consequences of purveying an untruth that corrupts what Adam Smith was teaching about the role of markets is unhelpful when policy makers discuss markets. We may also note here that Adam Smith (at least not the one born in Kirkcaldy in 1723) did not bless markets with quasi-religious ‘pusillanimous superstition’ (there is a large literature by senior economists purporting to find godly apparitions in competitive markets).

Those who inject ‘invisible hands’ (even ‘feet’ too!) over-egg their ‘theories’ of markets as ‘promoting ends’ (social benefits) whatever the motivations, intentions, and behaviours of market makers, which we know to be false by the numerous of cases of fraud, pollution, monopolies, cartels, dangerous products and practices that regularly surface and, as now, occasionally cause massive crises of confidence.

Adam Smith was never a proponent of laissez-faire. His support for Natural Liberty transcended commercial societies – natural law theory applied to all societies as a standard of conduct – but he gave instances in Wealth Of Nations for example where interventions were justified to restrain ‘injudicious’ banking behaviours that threatened greater disasters socially:

“To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.”

(WN II.ii.94: p 324: read Book II, chapter 2, of Wealth Of Nations, which is instructive for resisting extremist rants about market infallibilities, such as quasi-religious beliefs in invisible hands.)

Adam Smith was never an ideologue about markets, nor about human behaviour (for evidence of the latter see his Moral Sentiments; see also my recent Adam Smith: a moral philosopher and his political economy, 2008, Palgrave Macmillan).

Invisible hand myths are propaganda, not science. They undermine the credibility of competitive markets and give succour to the enemies of markets, who call for ever tighter state-imposed regulations and the triumph of politicians over myriads of market decisions, despite Adam Smith’s clear warning:

“The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.” (WN IV.ii.10: p 456)

The problem is that the mythical theory of the invisible hand, which Smith never countenanced as part of his theory of markets (Book I and II of Wealth Of Nations), discredits his more important warnings about ‘statesmen’ legislating (i.e., governments, planning commissions, and such like) to assume an authority for which they are incapable of exercising, all because ‘modern economists’ have lauded the invisible hand for purposes which Smith never endorsed. Unwittingly, they encourage those who would ram anti-market propaganda down their throats and silence the intellectual and practical case for markets.

The circled wagons of market economies are now under legislative pressure (election campaigns and failing governments in the US and UK) from a revived Left, the forces of which lurk restlessly just beyond the light of our campfires. They have been given a new breath of life by incompetence, recklessness, and self-interested selfishness (there's nothing ‘enlightened’ about them at all) by those who were complicit in the myth of the invisible hand and those who fell asleep when supposed to be on guard duty.

The End of Invisible Hands?

Hartmut Fischer and Bruce Wyndick (professors in the department of economics at the University of San Francisco) write in the San Francisco Chronicle, 24 October, with contribution from with their department colleagues, professors Jacques Artus, Michael Lehmann, John Veitch and Sunny Wong, HERE:

“Test your economic meltdown IQ”

“Greetings Economics 101 class. As you are well aware, we are living in perilous economic times. Adam Smith's invisible hand, which we studied with admiration in the first week of class, appears to have annihilated a significant portion of our economy. The crisis has entirely reshaped the presidential campaign just days before election day.”

Comment
Follow the link for the answers and then the questions in their article, but my interest is not in the intellectual ‘fall out’ from the financial crisis. It is in the seeming ‘confession’ that the professorial instructors teach (at least until the second week of term) the mythical theory of the invisible hand of the market, gratuitously attributed to Adam Smith, the moral philosopher, born in Kirkcaldy, Fife ( 1723-1790).

This attribution likely would offend many authors who used the invisible hand metaphor before Adam Smith (some of them were contemporaries of Adam Smith), because we know how possessive academics and literary figures are about their prior use of an idea, a phrase, or a metaphor.

Among these authors who have legitimate claims for the metaphor to be associated with their names we have:

“Homer (Iliad, 720 BC); ‘And from behind Zeus thrust him [Hector] on with exceeding mighty hand’;

Horace, Fulminantis manus Jovis (‘The mighty hand of thundering Jove’);

Ovid of Caeneus at Troy: ‘twisted and plied his invisible hand,inflicting wound within wound’;

Lactantius (De divinio praemio, c.250-325): early use of ‘invisibilis’;

Augustine, 354-430AD, “God’s ‘hand’ is his power, which moves visible things by invisible means’;

Shakespeare, (1605) ‘Thy Bloody and Invisible Hand’;

Glanvill, J. 1661. ‘nature work[ing] by an invisible hand in all things’; ‘invisible intellectual agents’;

Voltaire (1694-1778) in (1718): “Tremble, unfortunate King, an invisible hand suspends above your head’; and ‘an invisible hand pushed away my presents’;

Daniel Defoe, ‘A sudden Blow from an almost invisible Hand, blasted all my Happiness’, in Moll Flanders (1722); ‘it has all been brought to pass by an invisible hand’ (Colonel Jack, 1723);

Nicolas Lenglet Dufesnoy (1735) an “invisible hand” has sole power over “what happens under our eyes”;

Charles Rollin (1661-1741), whom Pierre Force describes as ‘very well known in English and Scottish Universities’, said of the military successes of Israeli Kings “the rapidity of their consequences ought to have enabled them to discern the invisible hand which conducted them”;

William Leechman (1755): ‘the silent and unseen hand of an all wise Providence which over-rules all the events all the events of human life, and all the resolutions of the human will’;

Charles Bonnet (whom Smith befriended in Geneva in 1765) wrote of the economy of the animal: “It is led towards its end by an invisible hand”;

Jean-Baptiste Robinet (1761) (a translator of Hume) refers to fresh water as “those basins of mineral water, prepared by an invisible hand”;

Walpole, H. 1764. ‘the door was clapped-to with violence by an invisible hand’

Reeve, C. (1778) ‘Presently after, he thought he was hurried away by an invisible hand, and led into a wild heath’. ”

[The sources of these references are listed in my paper: “Adam Smith and the Invisible Hand: from metaphor to myth”, presented at the History of Economic Thought, 40th Anniversary Conference, September, 2008: available for download; send for an electronic copy from: gavin AT negwebDot com)]

The professors from the University of California apparently inducted their innocent students into the myth that the metaphor had something to do with economics as taught by Adam Smith. So much were they enthused by the miraculous powers of the metaphor that they “studied [it] with admiration in the first week of class”.

Unfortunately, events apparently intruded because the mystical invisible hand now “appears to have annihilated a significant portion of our economy”, which is an amazing accomplishment for an entity that does not exist and never has existed, and particularly not in Adam Smith’s political economy.

That it exists, or not as the case may be now, was an invention of some modern economists from the mid-1950s who invented mathematical models to prove the existence of a theoretical general equilibrium in a mythical economy (Debreu and Arrow - for which they won their Nobel Prizes).

This myth passed through economics graduates and tutors like an infection, and was spread by politically motivated economists to politicians of a rightwards disposition until it quickly became a mantra for all kinds of ideological propositions that seemed to exculpate corporations and governments (two social structures that were never as non-aligned as its proponents implied) from responsibility for their conduct - whatever they did had social benefits in extreme versions, though clearly a counter-factual if they looked outside their windows.

That this was claimed to be done in the name of Adam Smith’s life’s work only had credibility because neither the originators of the myth nor its proponents actually read or were familiar with Adam Smith’s Works, which actually had no illusions about how ‘merchants and manufacturers’, even in the early stages of commercial economies, would behave when they aligned their interests with legislators and the people who influenced them.

This was true in Adam Smith’s lifetime – indeed, Wealth Of Nations includes a stern polemic against the ‘mercantile political economy’ which dominated British state-managed economic relationships – and it has been true ever since.

Since the western economies grew as they did to produce opulence on a scale never reached in history which, contrary to Karl Marx raised mass living standards to unprecedented levels, they have continued to practice much of the mercantile political economy criticised by the Adam Smith born in Kirkcaldy, though sadly lacking in the mythical world of the Adam Smith invented by economists in the environs of 59th Street, Chicago.

Clearly, the six good professors of the department of economics at the University of California, perhaps unwittingly, have been complicit in this deception. They can check this out by turning to the opening two books of Wealth Of Nations, which are about how commercial economies in Smith’s day operated without him making a single mention of ‘an invisible hand’. Strange!

They can also turn to Book IV, which contains the only mention of ‘an invisible hand’ in Wealth Of Nations (on page 456 of the Oxford University Press ‘Glasgow Edition’), which is also strange because Book IV.ii. is about the risk avoidance of some, but not all, merchants when choosing between sending capital abroad or investing it locally.

This ought to cause them to ponder how this was made into a convenient ‘theory of markets’ by overly zealous scholars seeking, dare I say, a ‘quantum of solace’ for their general equilibrium abstractions which are well short of confirming that such entities existed in the real world – a bit like the theory of the ‘ether’ to explain what ancient physicists did not yet understand’. And once they understood the physics they abandoned the theory of the ether.

I hope the same response will follow once our six economists understand how Adam Smith from Kirkcaldy understood how markets work - without invisible hands.

The Invisible Hand Gang

Richard Murphy writes on the Blog, Tax research UK, 24 October, ">HERE:

“Farewell Adam Smith: welcome the new economy"

As Greenspan said:

'I made a mistake in presuming that the self-interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders.'

So farewell to the mythical ‘invisible hand’ of Adam Smith.”

[I was just about to compose my rebuttal as a rebuttal in Lost Legacy when I noted somebody had placed a comment already and I paused to read it. Here it is, in full]:

And a reader of Tax Research UK comments on its Blog:

1. Alex Cobham wrote:

Not that you do this here, Richard, but Smith has so often been traduced that it’s worth dropping in a few original quotes to illustrate how distorted the a view of him the ‘invisible hand’ gang have promoted.

1. On unregulated business (referring to local rather than international, but clearly in conflict with the popular interpretation of the invisible hand line):

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices.”

2. the ‘invisible hand’…
… gets one mention only in The Wealth of Nations, and in a very specific circumstance around international trade - see e.g. Prof Gavin Kennedy on this here:
http://adamsmithslostlegacy.com/2008/04/adam-smiths-use-of-invisible-hand.html

3. On banking regulation
“To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law, not to infringe, but to support.

“Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.”

4. On equity
“No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed and lodged.”

You could go on. I haven’t spent nearly as much time as I might like reading Smith, but even without doing that it’s clear that he was a varied and intelligent thinker and writer - not a narrow-minded ideologue.

He didn’t need to be right every time - who is? - to be a towering figure in founding economics. And he certainly doesn’t deserve the distortion of his work by the ‘invisible hand’ gang - or the abuse he sometimes gets from others who believe that distortion.

Comment
Well done, Alex Cobham. Worthy Winner of October’s Lost Legacy prize. I like the 'invisible hand gang'

Who said Lost Legacy is a wasted fight?

There are small signs that the fight for Adam Smith’s Lost Legacy has had some effect, judging from snippets in some Blogs.

I am so pleased, but the struggle continues…

Adam Smith on What Kept Industry in Motion

‘Braintree’ posts on the Blog, ‘Dow WTF?!’ 23 october, HERE:

‘Adam Smith, Merit and Demerit

“In Wealth of the Nations, Smith also confessed that the success of capitalism depended on the propagation of the myth of human equality, noting that the myth is a necessary “deception which arouses and keeps in continual motion the industry of mankind.”

Comment

“the success of capitalism depended on the propagation of the myth of human equality”

That is news to me.

I suspect Braintree has made it up, or to be charitable, mixed up. Tut, tut!

The evidence for my assertion (I do not mean to be gratuitously rude) is the rest of Braintree’s sentence, which he alleges is a quote from Wealth Of Nations:

“noting that the myth is a necessary “deception which arouses and keeps in continual motion the industry of mankind.”

I recognised this immediately as in fact a quotation from chapter IV of Moral Sentiments (TMS IV.1.9: p 183) and it has nothing at all to do with equality!

Smith outlines his theory of utility and beauty and notes how people are often more pleased with an object of beauty (widely conceived) than they are with its utility.

He gives examples of a room with chairs in it that are disarranged, and their owner, ‘angry with his servant’, puts them into the appropriate order, even though he could ‘have set himself down upon one of them’ where they were, instead of placing them neatly against the wall. From this Smith concludes that it is not the ‘conveniency’ that is important to this man but ‘their arrangements’, which bestows upon his chairs their ‘propriety and beauty’.

Likewise, a man with a watch that happens to run two minutes slow, so he ‘sells it for a couple guineas’ and ‘purchases another at fifty, which will not lose above a minute in a fortnight’. What interests the man with a watch is not its timekeeping per se (remember, time the 18th century was less of a burning issue than it has become today), but the ‘perfection of the machine which serves to attain it.’ Leading Smith to ask: ‘How many people ruin themselves by laying out money on trinkets of frivolous utility’ (TMS IV.1.6: p 180).

After the parable of the ‘poor man’s son, whom heaven in its anger has visited with ambition’ he concludes:

“And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants.” (TMS IV.1.10: p 181).

It is the pursuit of trinkets and frivolities that keeps inudstry in motion, not the myth of equality. 'Keeping up with the Joneses' is about competing to be better than others, not about equality.

Now, this has nothing to with Adam Smith preaching ‘equality’, an absurd suggestion with the contrary state of others, visible to him and all who stepped out of their houses and passed by the multitudes of people around them from all classes and levels of opulence and poverty (poor people in Edinburgh and Glasgow tended to walk a lot mroe than today).

Braintree claims that Adam Smith taught that “the success of capitalism depended on the propagation of the myth of human equality”. He didn’t.

And anyway ‘capitalism’ as a word and phenomenon were unknown to Adam Smith, who died in 1790 (the word being invested in 1854 by Thackeray, the novelist, in his book, The Newcomes, and the phenomenon something that evolved in the 19th century.

Smith saw commerce and industry as generating employment for poor families and a means to spread opulence down to the poorer section of the community, which was the larger proportion of society. The rich became better off, but so did the poor who needed a share of opulence the most. His views were no myth, as anybody reading Moral Sentiments and Wealth Of Nations would realise.

I won’t bother going to examine Braintree’s assertions about Adam Smith’s views on ‘merit’ and ‘demerit’. His misrepresentations above are enough for one day.

Get On Your Bikes

Dom Sansom (Suva) writes to the editor of the Soloman Star, the island’s leading Daily Newspaper, 24 October, HERE:

“DEAR EDITOR – If you are worried about the global economic downturn how it may affect us, the father of economics, Adam Smith, (1723-1790) and author of The Wealth of Nations, theorised that the behaviour of rational people is governed by enlightened self-interest.

It’s hard to think of a better example of enlightened self-interest than giving up the car and going by bicycle.

Do that and you’re guaranteed to save a four-figure sum (self interest part) every year while dramatically reducing your carbon footprint and helping the environment (enlightened part) at the same time.

If divorcing the car is a step too far, cycling to work just three days a week could easily save you hundreds of dollars a year, while contributing to your fitness and well-being.”

Comment
But why do readers buy cars in the first place, all imported into the Soloman Islands, along with bicycles too?

Yes, because people can afford them. Adam Smith noted that people had ‘a coach and four’ because they were rich; they weren’t rich because they had a coach and four; and the same with car ownership and bicycle use. They will do what they do because they can or can’t do it (some people who can afford to drive cannot ride a bicycle).

Dom Sansom’s letter, however, is topical; the Island’s Prime Minister, Dr Derek Sikua, is in court charged with driving under the influence of liquor. Perhaps the good Dr will lead the way by taking up his bicycle and save money, reduce his carbon footprint, and save the environment too. More likely, the taxpayer will provide him with a personal driver.

But Dom Sansom is to be congratulated by applying modern economics (though not quite Smithian) to a problem and, with a single policy, addressing several objectives too.

Adam Smith and Keynes

Susan Lee writes on a ‘A Keynsian Halloween’ in Forbes.com, 24 October HERE:

“Keynes' central (and disputable) insight was that markets were not self-correcting during economic downturns. He rejected Adam Smith's idea that businesses, when they found they were holding too much inventory, would drop their prices. Lower prices would then entice consumers back into the market and the economy would perk up again.

Instead, Keynes argued that downturns could become protracted. When faced with too much inventory, businesses would cut back production and lay off workers. Since the unemployed wouldn't have money to spend, the economy could stagnate at low levels of production and employment.”

Comment
A bit unfair to Adam Smith, who was not in a position to speak of what all businesses would do, as might be inferred from what we know of a modern market economy. Dearth and feasts in his day came from agriculture and not the relatively small commercial sector, itself separated into local impacts only.
Notions of ‘managing an economy’ were two centuries later.

Even with this qualification, Susan Lee’s contrast between Smith and Keynes (surely ‘Keynesian’ and not ‘Keynsian’?) is not quite right. Smith spoke of what a seller would do in a local market – too many apples on the barrow would lead to a fall in price per apple.

Even if that local example of a seller’s reaction to a lack of buyers was extended to the entire country, it would still lead to a drop in prices. To suggest it wouldn’t is to deny experience.

Whether this would revive the economy or not is not an issue addressed by Adam Smith, though it might be addressed by post-Smithian economists who, across the board, claimed Smith authored their versions of economics popular from Mill, Marshall, and the neo-classicals, when clearly he didn’t, as a reading of Wealth Of Nations shows.

When Smith discussed ‘the natural and market Price of Commodies’ (WN.I.vii.pp 72-81), he followed his argument through as market prices fell. Landlords would withdraw their land as rent income fell; as wage income fell, labourers would look for other work; and employers would withdraw from that line of activity as prfots fell (WN I.vii.13: pp 74-5), and eventually market prices would adjust to their ‘natural rate’.

Smith discusses at length the effects on price of changes in ‘effectual demand’; he does not discuss general slumps in demand across all commodities; but for what he does discuss, his ideas are broadly correct. By the early 20th century, Keynes moved the discussion well beyond the simple effectual local demand ideas of Smith.

Indeed, late 19th century economists generalized Smith’s arguments pertaining to local market conditions into strong assertions about ‘laissez-faire’ as if they were Smith’s views (he never mentioned laissez-faire) and adopted the policy of leaving markets to solve the trade cycle, as if this was Smith’s view. The epigones were responsible for this turn of events.

Keynes, brought up, so to speak, with this so-called Smithian package, struck out in a different direction (‘The End of Laissez-faire’, 1926) and went on in the General Theory (1936) to prescribe solutions as he saw them for a stricken economy and not just a reaction by a market-stall holder of too many apples left over near closing time in a street market.

Hence, Susan Lee ascribes to Smith a view that he did not articulate about a condition he did not face and credits to Keynes a criticism he had no business making in regard to Adam Smith, but he did have grounds for his criticism if directed at contemporary 20th century economists. She should have written:

‘He rejected the contemporary idea popular among his contemproaries that businesses, when they found they were holding too much inventory, would drop their prices.’

As in so many other areas of economic commentary by columnists and professional economists, including Nobel Prize winners, they attack an innocent man for the doctrinal sins of his successors.

Is Twice in a Week a Trend?

It’s nice to be quoted on other Blogs and this is happening more frequently lately two events are not yet a trend, but it's better than once a year!

Ben Cohen (the editor of www.thedailybanter.com) posts on Huffington Post (23 October) HERE: a reference to Lost legacy in an article “Andrew Sullivan Hasn't Read Adam Smith”

This quotes from my piece which takes note of my piece on Lost Legacy , “Speak Softly About Big Ideas”.

More Comment on Daily Kos Quotes

Part 2: ‘wipeltz’ writes in Daily Kos, (‘the state of the nation’) 22 October, HERE:

"Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniencies, and amusements of human life. But after the division of labour has once thoroughly taken place, it is but a very small part of these with which a man's own labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase."

Comment
This is part of Adam Smith’s explanations for the long-term and general effects of the division of labour, which went a long way beyond the famous pin factory example showing the increase in productivity from the way process work may be separated among several labourers.

The substantive point of Adam Smith’s focus on the division of labour was both historical – it raised the living standards of the meanest paid labourer well above the living standards of the hunter-gatherer and also began the long road to extending the life spans once the ‘Mathusian trap’ was breached from the 18th century onwards.

Totally independent hunter-gatherers could meet their basic needs in a few hours work per day, but while the ‘propensity to truck, barter, and exchange' remained relatively undeveloped – they had little surplus output to exchange among their small bands – nobody produced a surplus of items that they could exchange, except only occasionally, for the small surplus output of others, until the leap from personal independence to dependence took place. With shepherding, farming, and commerce, that leap was accomplished.

For their incomes from specialized work, labourers earn the means to exchange multiple selected items produced by others. Yanomamö tribes on the Amazon have access to scores of items; New Yorker tribes on the Hudson have access to billions them. How many they can access at any one time depends on their relative incomes, which is Smith’s point. The rich can acquire more.

"This disposition to admire, and almost to worship, the rich and powerful, and to despise, or at least neglect persons of poor and mean conditions, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments." [Moral Sentiments, I.iii.3.1: p 61]

Comment
This comes from the opening chapters of Moral Sentiments, 'Of Propriety', and they are well worth reading.

Nowadays, the mob worships celebrity, some of whom have dubious merits for which they are celebrated. In Smith’s day they were ‘rich and famous’ and were found in monarchies and governments all over Europe and, er, the British colonies.

Smith has much to say about them and about the mob who worshipped them or gained vicarious pleasure from learning of their extravagant foibles, triumphs and tragedies. Where would literature be without the classic tales of the phenomena of the rich and powerful (and before anybody gets smug, cast your mind back to the Camelot Kennedy family – no relation)?

Here is another paragraph along the same lines:

“Of such mighty importance does it appear to be, in the imaginations of men, to stand in that situation which sets them most in the view of general sympathy and attention. And thus, place, that great object which divides the wives of aldermen, is the end of half the labours of human life; and is the cause of all the tumult and bustle, all the rapine and injustice, which avarice and ambition have introduced into this world.” [TMS I.iii.2.7: p 57)

How true! How relevant! Read Adam Smith for yourself; don’t rely on a few quotes, especially those tossed about to stiffen somebody’s otherwise weak and partial arguments.

Some Comments on Quotations from Adam Smith

‘wipeltz’ writes in Daily Kos, (‘the state of the nation’) 22 October, HERE:

"Adam Smith, socialist? The search for the Historical Adam

“Very possibly, some of the original text has been corrupted during its various editions . Did the Historical Adam really prefigure the class analysis that showed up later in Karl's Manifesto to the Exploited?

Most notably and possibly inserted much later, under the influence of Karl's Manifesto:

"Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all."

Comment
Adam Smith taught at Glasgow University from 1751-64 and some students in his class took detailed notes of his lectures, which were found in two versions in 1895 and 1958 in two separate places (Oxford and Inverness), and were published as his Lectures in Jurisprudence (Glasgow Edition, OUP) in 1978).

Many parts of the lectures were taken verbatim into Wealth Of Nations. He accounts for the origins of post-hunting societies such as shepherding andifarming, both of which require property rights if they are to become established. This happened in parts of and the Near East (from 11,000 years ago) and Western Europe (from 8,000 – 6,000 years ago).

Those parts of the world that did not evolve property (most of North and South America, Africa, South Asia and Australia, but not North Africa, Arabia, India, and China) remained hunter-gatherer societies until the 20th century, with a few remaining isolated instances today.

With property came civil government to protect it against the poor, hence Smith’s statements. He could have added, because it certainly became a feature of history, protection against jealous rich families who eyed the property of rich neighbours. These were the origins of law and justice.

"All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind." [WN III.iv.10: p 418]

Comment
This is a part of Smith’s account of the withering away of the power of the feudal lords, and how their vileness was the author of their downfall.

It is perhaps best understood by quoting the whole paragraph (better still read the chapter):

“But what all the violence of the feudal institutions could never have effected, the silent and insensible operation of foreign commerce and manufactures gradually brought about. These gradually furnished the great proprietors with something for which they could exchange the whole surplus produce of their lands, and which they could consume themselves without sharing it either with tenants or retainers. All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons. For a pair of diamond buckles, perhaps, or for something as frivolous and useless, they exchanged the maintenance, or what is the same thing, the price of the maintenance of a thousand men for a year, and with it the whole weight and authority which it could give them. The buckles, however, were to be all their own, and no other human creature was to have any share of them; whereas in the more ancient method of expence they must have shared with at least a thousand people. With the judges that were to determine the preference this difference was perfectly decisive; and thus, for the gratification of the most childish, the meanest, and the most sordid of all vanities, they gradually bartered their whole power and authority.” [WN III.iv.10P 418]

Adam Smith Was Not a Socialist Nor a Neo-Con

One of the more pleasing consequences of the current financial crisis and its recessionary tendencies is the greater interest in the works of Adam Smith, though, sadly, mainly to mock the false image of his ideas created by neoclassical economists from the 1950s, but also happily, in places, to take an interest in what he actually wrote.

One such example of somebody expressing curiosity about Adam Smith’s ideas is that of ‘wipeltz’, for example, who writes in Daily Kos, (‘the state of the nation’) 22 October, HERE:

‘wipeltz’ asks: ‘Adam Smith, socialist? The search for the Historical Adam’, followed by several quotations from Wealth Of Nations and one from Moral Sentiments, which he/she finds curious in view of Adam Smith’s reputation in the media and academe for his being installed on a pedestal by various figures, including Nobel Prize winners as an icon of laissez-faire, small government, and the ubiquitous ‘invisible hand’ that allegedly asserts that when anybody pursues their self interest, usually elided into ‘greed’ and selfishness’, by some mystical process they end up benefiting society as well as themselves.

Readers of Lost Legacy will recognize that ultra-libertarian ideas about Adam Smith and his political economy are often misleading.

Here is the comment I sent to Daily Kos in response to the questions by ‘wipeltz’:

First the good news for readers of KOS: none of the passages quoted by ‘wipeltz’ from Wealth Of Nations and Moral Sentiments were ‘possibly inserted much later, under the influence of [Marx's] Manifesto’, itself a very strange idea.

While the majority of economists have not read Wealth Of Nations, a small minority of scholars in each generation have read Smith’s Works closely and none have reported to my knowledge any such corruptions. We can state categorically that the worry that ‘Very possibly, some of the original text has been corrupted during its various editions’ is unfounded.

The Wealth Of Nations, published in 1776 and the five editions of it (1776, 1778, 1784, 1786, 1789) edited by Adam Smith before he died in 1790, are intact as he wrote them. The definitive six-volume edition of Adam Smith’s Works and Correspondence is known as the ‘Glasgow Edition’ and was published by Oxford University Press throughout 1976-83.

A popular priced, ‘exact photographic reproduction’ of the Oxford University Press volumes is published by Liberty Fund, Indiana. [I can assure any Kos readers who may suspect its integrity that no changes or omissions have been made in the Liberty Fund reprints.] An authoritative American edition of Wealth Of Nations was edited by Edwin Canaan in 1904 and reprinted in 1937 by Random House, and it is still widely used by scholars. My copy is kept on my desk for reading Canaan’s editorial footnotes.

Perhaps, one brief comment: while the actual text written by Adam Smith has not been altered, his ideas have largely been emasculated from their original meanings by modern economists from the mid-50s onwards. In particular in respect of ideas Adam Smith never advanced, such as laissez-faire (he never mentioned the words), a so-called ‘invisible hand’ explanation of how markets worked (only mentioned once in Wealth Of Nations and on a different topic), ‘small’ government (Smith had a relatively large public expenditure agenda), and ‘non-intervention’ in markets (Smith made several suggestions for intervention, including in banking).

I shall discuss the various quotations offered by ‘wipeltz’ in Daily Kos in a later post today.

Speak Softly About Big Ideas

Andrew Sullivan (‘The Daily Dish’) writes in The Atlantic, 22 Oct, HERE:

“Adam Smith On Spreading The Wealth”

“The intellectual father of market capitalism:

‘The necessaries of life occasion the great expense of the poor. . . . The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. . . . It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.’

Notice how he puts it: "not very unreasonable."

In my view, still lamentable. But also not a rigid rule, since real conservatives do not believe in rigid rules. My view - again - is that the obvious problems of the US economy right now are not the same as they were in the 1970s. I would prefer a candidate who would cut entitlements and defense to a candidate who raised taxes on the successful.”

Comment
They are not the same as they were in the 1770s either.

Taxation in Britain at the time that Adam Smith was writing and editing Wealth Of Nations did not include income taxes (that came later in 1798 - Smith died in 1790), and import taxes, tariffs and excise duties contributed a major source of government revenue.

In the item quoted by Andrew Sullivan (incidentally from WN V.ii.e.6: p 842; ‘Taxes on the rent of homes’) Smith was addressing readers, among whom were legislators and those who influenced them, who were likely to have to pay an increase in rent taxes.

Persuading any group of tax payers (or non-taxpayers) of the merits of a particular tax payment is hard at the best of times and as Adam Smith was neither a campaigning politician, nor a man of system, ‘wise in his own conceit’ (Moral Sentiments, pp 233-4), he states his proposition in modest language with a view to appealing to the widest constituency, for which the tone “It is not very unreasonable” is the appropriate language.

If Andrew Sullivan were to use similar language when he tries to persuade people with whom he deals, I dare say he might find himself reaching many more willing readers (or investors) than, perhaps, he manages today with a blunter tone of voice.

A Snigger on Me...I'll Loosen Up...

‘Hume’s Ghost’in his Blog, The Daily Doubter ("Doubt is not a pleasant condition, but certainty is absurd." – Voltaire’) writes (19 October) HERE:

‘Communist Adam Smith on spreading the wealth'

"Servants, labourers, and workmen of different kinds, make up the far greater part of every political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labor as to be themselves tolerably well fed, cloathed and lodged." - Adam Smith, The Wealth of Nations Bk. 1, Ch.8

[More precisely it's: WN I.viii.36: p 96]

Comment
To which I posted a comment, taking it seriously:

“I am surprised that you equate Adam Smith’s concern for the relative position of labouring people in society and their families with a ‘communist’ view.

Smith believed that commercial economies, if allowed to grow by the use of sufficient of the revenues from business for investment in productive enterprises (those that sold their output and recovered their costs, plus a profit), instead of spending the bulk of their revenues on non-productive activities – prodigality in consumption, wasted government expenditure on wars for trivial ends such as dynastic successions of princes, colonies, and ‘jealousy of trade’- would enable employment to expand year-on-year and thereby permit labourers to participate in the trend to opulence.

Now his language may have been antiquated by today’s standards and as there was no welfare state or even a call for the redistribution of income (except from fairly active charities), nevertheless this view formed an important part of his Wealth Of Nations.

Read the quotation in context and sample commonly held views to the contrary of Smith’s about keeping workers on low wages to induce them to work longer hours, and so on.

Smith a communist? No! He was a man of ‘humanity.”

To which ‘Hume’s Ghost’ replies (20 October):

Hume's Ghost said...

“It was sarcasm, dude.”

Comment
Oh, dear!

Best Article on the Financial Crisis Bar None

Eamonn Butler writes, 21 October, in The Australian (Canberra) HERE:
“No such thing as a free lunch”

"WITH turmoil in the world's markets, politicians and commentators have been demanding more regulation and control of the financial sector. Kevin Rudd even says it was caused by extreme capitalism. Their reaction is predictable, but entirely wrong.

This crisis was not caused by capitalism being fatally flawed. It was caused by politicians forcing the banks to give out bad loans, monetary authorities flooding the West with cheap credit and regulators being asleep at the wheel.

Indeed, one can date its origin precisely, to October 12, 1977, when US president Jimmy Carter signed the anti-redlining law. Before then, lenders generally denied loans to people in poor neighbourhoods, believing that the local mix of low incomes and a weak housing market would lead to many people defaulting. But the politicians -with good intent - wanted to make home ownership available to all Americans. So lenders were forced into giving out risky mortgages, what we call sub-prime loans.

By 1985, this torrent of bad business had nearly bankrupted the US's savings and loan institutions. So the government took on their bad debt and encouraged them to consolidate, unwittingly making them too big to be allowed to fail.

Meanwhile, several other problems worried the monetary authorities. In 1987, the US stock market plummeted, fearing that other lenders could collapse. There have been other successive crises. Asia's markets sank. Mexico, Argentina and even Russia defaulted on their loans. Over-valued dotcom stocks crashed. Then there was 9/11. Each time, Western authorities responded by flooding the markets with cash.

After 9/11, the Federal Reserve took US interest rates down from 6.25 per cent to just 1 per cent, fearing this blow to investor confidence could sink the markets. But, again, its action boosted the wrong market by sustaining the credit bubble.
With loans six times cheaper, mortgage applications soared.

Lenders, awash with the Fed's cash, happily issued more sub-prime loans. With more people buying homes, house prices soared. Buying a house seemed a certain money-maker, so more people got more loans and bought more houses, continuing the spiral.
In London, that other great financial centre, a decade of government overspending saw public debt soaring. Private debt and house prices soared even faster.
So for 10 years, economies boomed, the champagne flowed and everyone had a great party. But it was financed by fake money, printed by the authorities solely to keep the party going. When the realisation broke, the long party turned into the inevitable hangover we suffer today.

The regulators, meanwhile, were unconscious on the floor. The US mortgage institutions, Fannie Mae and Freddie Mac, had 200 regulators on their case but still went bust for $US5 trillion. These semi-governmental companies allowed investors to believe the bad mortgages were guaranteed by government, causing credit rating agencies to give their dodgy bonds high scores.

Mortgage lenders repackaged these bad debts across the world, but nobody cried foul. Institutions were lending 30 times their asset base. Though the Bank of England knew that the huge mortgage lender Northern Rock was failing, the 2500 staff of Britain's financial regulator seemed to do nothing until it collapsed six months later. Even then, they had no coherent plan.

When the government is persuading the casino to hand out free chips and the regulators are standing drinks at the bar, you shouldn't be surprised if the customers place a few risky bets. It's the management, not the system, that deserves our scorn for breaking the basic rules of economics: there ain't no such thing as a free lunch.

Any sustainable solution has to get finance back to those basics. But the bailout package includes so many treats for special interests that it could save the culprits without helping the victims.

But it's a big world out there. China, the world's fourth biggest economy, continues to grow at nearly 10 per cent. India and other emerging economies are expanding, too. Even with the West in recession, world growth next year will probably be near 4 per cent. That's pretty good.

Western capitalism has been dealt a severe blow by inept politicians and officials. But global capitalism continues to pull hundreds of millions of people out of poverty. It's a great system. Let's not break it.”

Comment
Brilliant!

I have reproduced it in full – risking my relations with the good folks at The Australian (er, I always support Australia against the English at Rugby…).

It summarises the current crisis and points the finger at the real culprits. Readers may wish to circulate it in their own blogs and ask their readers to do likewise (don’t forget to credit it to The Australian newspaper, among Australia's best newspapers).

Eamonn Butler is director of the Adam Smith Institute and author of Adam Smith: A Primer (2007, IEA, London), and The Best Book on the Market (2008, Profile Books, London).

'Free Market Capitalism' is Not Laissez-Faire

P. A. Triot (‘pen name of a retired journalist’) writes in OEN (OpEdNews.com) HERE:

“Government right to intervene economic matters”

“Neoconservative, by any name, means only one thing: laissez faire capitalism.

Free market capitalism is the newest name for laissez faire capitalism.
Laissez faire capitalism was first introduced to the world in the 18th century by Adam Smith who wrote "Wealth of Nations." Smith is regarded as the "father of modern economics."

The term "free market" was mentioned by Smith in his book as a condition of laissez faire capitalism.

The late Milton Friedman piggy-backed on Smith's concepts by sort of tweaking the lexicon and advocating free market capitalism all the way to a Nobel prize in economics (awarded in 1976).

The concept of free markets is in sharp contrast with controlled markets or regulated markets, in which governments regulate prices or supplies--either directly or indirectly.

What's left is that laissez faire capitalism and free market capitalism are synonymous terms.

All of this is simply economic theory, not fact at all.”

Comment
‘P. A. Triot’ (patriot – get it?) makes an argument (read it from the link) that is founded on muddled history of Adam Smith’s contributions to political economy.

Smith never mentioned ‘laissez-faire’ once. He was familiar with the ideas of its exponents – French small merchants who wanted the French Minister, Colbert, to ‘leave us alone’ instead of regulating everything they could do quite well on their own. It became a slogan of some of the Physiocrats, but not all of them – Dr Quesnay, their leader, for example did not advocate it, and has been lumped with Adam Smith, first by mid-19th century conservative agitators (the Manchester School) and then a century later by propagandists, some of them Nobel Prize winners, of neoclassical general equilibrium theories and ‘free market’ American big business.

Adam Smith, meanwhile, was far more pragmatic. He certainly advocated freer markets than were available in mid-18th century. He heavily criticized the regulation and interferences of legislators and those who influenced them, the waste and prodigality of governments, the mercantile political economy of his day, dominated as it was false notions of gold and silver being wealth and thereby subjecting the real economy to policies that encouraged ‘jealousy of trade’, hostility to trading with and the trading of political rivals (France, the Dutch provinces, and Spain), and the record of sovereigns embarking on frivolous wars and colonial adventures.

His critique of governments that intervene in the economy is often taken by rightwing ideologues as proof that he opposed government intervention per se and favoured small government; his criticism of companies engaged in distant colonial adventures (the East India Company) for their rapacious behaviour and their internal lack of controls is often taken by leftwing ideologues as proof that he would have opposed capitalist firms as they developed in the 19th century and justifies their opposition to modern corporations.

Neither view is accurate, either as statement of fact, nor as a guide to Adam Smith’s prescriptions for commercial economies. It is not just a question of Adam Smith being ‘more nuanced’ that the caricature asserts; they are just plain wrong.

Wealth Of Nations has both general application and a specific context. It is not a textbook on economics, though it is based on current knowledge of his many predecessors, plus his own contributions derived from his historical analysis of how the commercial economies were revived (they had a long history in the classical world) after the long, near thousand year interregnum following the fall of Rome in the 5th century, and what was so exciting about the steady economic growth then germinating in western Europe, and particularly in Britain.

Smith saw the mercantile political economy in its various guises as distorting what caused the growth towards opulence; its related policies of forming trade monopolies through distant colonies, and the consequent wars that followed; its waste of scarce capital in various forms of prodigality; the legal system of primogeniture and entails as blocking agricultural prosperity through yeoman farming (as was sucessfuly shown in his mind by agricultural prosperity in some of the British colonies in North America which has abolished the legal inhibitions on land ownership); and the capture of the legislature by special interest groups that imposed protection, tariffs, prohibitions, and local-producer monopolies that widened private markets but narrowed competition to the detriment of the interests of consumers – the sole end of production.

Within his analysis there are many evident indicators that there was a crucial role for the government in creating and maintaining the necessary instruments for facilitating commerce (not running it). His programme for government expenditure was extensive but focussed: public works and public institutions such as infrastructure – Britain need functioning roads and highways, dredged ports and rivers, canals, bridges, and towns with night-lighting, pavements, sewage disposal, and police, backed by an independent judicial system and a reform of education provision, including for the children of poor labourers in schools part-funded by taxes and household contributions.

The first duty of government was defence and the island situation of Britain required a navy and an army (defence was more important that opulence) but the hostile stance of Britain towards neighbours since the fall of Rome, costs tens of millions (over £100 million in the seven-years war) that would be better spent on the above projects and on commercial activity that would increase employment and living standards.

That the “the late Milton Friedman piggy-backed on Smith's concepts’ is certainly true, but the responsibility for Smith’s works appearing in the distorted frame they have become, lies in the economics profession that has chosen to ignore the history of economic thought (lowly regarded by many modern economists as fit only for the elderly, the less talented, and the untenured).

If they were to read Adam Smith in context, they would find many of the failed policies imposed on legislators by the epigones, who quote Smith, but never read him for themselves, fully explained within his fairly primitive explanations of where Europe was going wrong, and, perhaps, why the global economy is still achieving less than it could achieve, if what has so far gone right (billions lifted out of poverty), despite the politicians and their advisors, was supported by arrangements that permitted commercial markets to do their work.

At that point, ‘Patriot’ would not equate ‘laissez-faire’ to ‘free-market capitalism' nor consider them as experienced in the real world.

The Utopia of Root and Branch Reform

Benjamin Barber, author of ‘Consumed: How Markets Corrupt Children, Infantilize Adults and Swallow Citizens Whole’ writes in Guardian Unlimited (UK) (HERE):

“Decades of eroded trust and democracy did the damage

The roots of the financial turmoil are a democratic deficit. Restoring civic faith is crucial for market economies to function”

“Because the secret of the invisible hand is not economic capital but social capital. Adam Smith knew that moral sentiments no less than capital markets undergird the wealth of nations. The liquidity crisis is a political crisis; the credit deficit is a democratic deficit. For trust is the social capital that permits private capital to be exchanged, contracts to be enforced, promises to be kept, expectations to be realised. Democracy is the common sea in which all those competing market boats and bickering fiscal sailors are kept afloat.
So although it was bad loans and greedy bankers and stupid hedge fund managers and ignorant investors who made the mess, it has been four decades of de-democratisation that has done the real damage.”

Comment
Benjamin Barber’s article is a storming piece, of which I have only quoted a sample, that brings in Reagan and Thatcher as villains, and a host of faceless sinners, including real and imaginary governments (the ones we have had and the imaginary ones Benjamin speaks with the assurance of the proselytiser who has all the answers), who are different in an array of qualities as not to have been seen in all history and whom are exceedingly rare as individuals in the world we live in.
However, follow the link to see what I mean.

His assurance that “the secret of the invisible hand” was that Adam Smith was not talking about “economic capital but social capital” because “Adam Smith knew that moral sentiments no less than capital markets undergird the wealth of nations”, is contentious.

It runs two ideas, one wrongly imposed by modern economists on Adam Smith and the other a general thesis of Adam Smith’s about how societies evolve and individuals in them are socialised into the mores of whatever society they grow up in (even one consisting of ‘robbers and murderers’, see TMS II.ii.3.3: p 86).

Whatever else Adam Smith may have meant by his use of the popular 18th-century metaphor of ‘an invisible hand’ in Moral Sentiments and Wealth Of Nations it was not about ‘economic’ or ‘social capital’.

In its only singular use in Moral Sentiments (TMS IV.1.10: p 184) had nothing to do with capital; it was about rich landlords feeding their servants, retainers and tenants from the annual output of their fields because, if they didn’t their power would crumble as their dependents starved in the winter – they had no other choice, whatever their motives (who would labour in their fields and grand houses?).

Its only use in Wealth Of Nations (WN IV.ii.9: 456) had nothing to with capital, but was about the risk-avoidance of some, but by no means all, merchants in choosing between trading in foreign countries, particularly the British colonies in North America, where the perceived risks were higher, or trading locally where the risks were lower, and thereby, unintentionally, raising national investment above what it otherwise would be (by arithmetic, the ‘whole is the sum of its parts’). There was an abundant trade between Britain and its colonies, including India.

In neither case was the metaphor more than a metaphor for readers who did not understand why this happened. It only became a ‘theory’, ‘a paradigm’, or a ‘concept’ from the mid-20th century under the evangelical guise of Chicago-led neoclassical economists who burdened Smith’s reputation with something he never asserted.

Benjamin creates a theory of the ‘democratic deficit’ that also has nothing to do with Adam Smith, who didn’t have a vote in the 18th-century British electoral franchise, and was more concerned with the progress of Liberty in the United Kingdom than with democracy, and with major changes in the dominating political economy of the day.

He didn’t expect much to change in the proclivity of legislators and those who influenced them (the body politic) to act in the interests of ‘merchants and manufacturers’ and was, therefore, not too optimistic that they would dismantle the economic arrangements that they and their allies gained from. (He said that expectations that 'free trade should ever be entirely restored in Great Britain' were 'absurd' and 'Utopian'; WN IV.ii.43: p 471)

Whether what Benjamin advocates so vociferously would come about by replacing the entire democratic system that exists in the USA and elsewhere with something else like ‘social capital’ is not my area of expertise (I don’t vote in the USA).

However, I quote below from one of his anonymous correspondents who is unconvinced:

“MoveAnyMountain” writes:

This is an interesting use of the word "democratic". If I choose to invest my money in a company I like, this looks democratic to me. The market is just made up of a billion or so people like me - some directly, some through intermediaries such as pension funds.

What the author seems to be arguing is that the market will be more "democratic" if control of my money is taken from me and those other billion people and entrusted to a small oligarchy of buffoons we have a say about every four or five years.
How is this democratic? It is a demand for a massive level of State control over my life and my assets. Such as they are. It is about as undemocratic a proposal I have seen in a long while.

The author is also flatly wrong about markets. They run on trust. But they also build trust. Societies that trade have higher levels of trust than those that do not. Markets reward trustworthiness and hence there is far more of it in market economies. China has poisoned milk, Denmark does not. Every product you see is the result of thousands of people who have never seen each other co-operating in a capitalist enterprise that relies on and builds trust.

So the solution is to trust me with my money. I know what I want done with it. If I trust my bank (which I picked because it was so boring and trustworthy) then the Government ought to trust me to manage my money myself. The solution is not to let people I do not know and do not trust control it for me. After all, British civil servants are so much more trustworthy with money than the Banks aren't they? Anyone remember the Dome?”

Comment
I suggest readers follow the link and read Benjamin’s article in full for themselves.

Adam Smith on Land Reform

Pitsburgh Tribune-Review Editorial, 19 October, (HERE):

"A stunning advance":

"What will those agrarian reformers running China think of next?

Unlike urban areas, where free markets have been allowed to flourish, China's agricultural sector is impoverished by the inequities and inefficiencies of socialism.

But now comes word of a breakthrough in modern economic thinking: China's rulers plan to implement a policy that by 2020 will permit peasants to buy and sell land-use contracts.

It's not up to 16th-century British common-law standards yet but the reform could lead to such things as bigger, more efficient farms and the use of land rights as collateral for bank loans.

China's peasants still won't be able to own their own land. But both Mao and Adam Smith are spinning in their graves at the prospect of basic property rights coming to China.”

Comment
I can see why Mao, a revolutionary in a hurry, might be ‘spinning in his grave’, but the point about Adam Smith doing likewise baffles me.

The issues is about getting from where we are to where we want to be, a subject that Adam Smith dealt with on several occasions, and on all those occasions he took a pragmatic not an ideological stance: move ‘slowly and gradually’, a careful step at a time to ensure the changes became embedded and that social disruption was minimized, especially where it concerned the lives of labouring families.

Now today's Communists leaders are ultra-cautious – they want to hold onto their power at all costs, and the pace they have chosen – from now to 2020 – fits their mindset. And they have the awful example of Mao Tse Dung if they were inclined to take risks. The billion people in China are not easily regimented. Mao’s madness of his ‘great leap forward’ to Communes killed millions from starvation and only the rigid tyranny of the Communist State prevented its political collapse.

Smith for example is renowned in modern times for being in favour of free trade. Many economists interpret that reputation as a rigid, ideological, no compromises, stance of the ‘father of economics’ (a somewhat dubious distinction, if taken too seriously), but Wealth Of Nations makes clear there were serious exceptions to his recommendations that the British economy be transformed into free trade, above all in that it should be done slowly, taking into consideration the effect of a change in policy on the employees in the currently protected businesses, whose families would suffer deep privations if its was undertaken at a stroke.

I wish some free traders who are too free with quoting Adam Smith would actually read Book IV of Wealth Of Nations and appreciate what he actually wrote and why he was cautious about sudden change.

In China, the state owns all the land; peasants own none of it. Moving from owning nothing to owning something is an exhilarating change for the good. Adam Smith would approve. He opposed the legal forms of primogeniture and entails which together froze the land in great estates which could only be passed intact to the eldest male relative and could never be allowed to sell of smaller sections of a property to others. The proprietor could only sell the estate intact, undivided, and entire.

Smith favoured abolishing entails – this action would free-up parcels of land in vast unproductive estates for productive use by small farmers (sturdy yeomen) and he pointed to those British colonies in North America that had followed this policy which had created rapid economic growth as a result (compared to the experiences of Spanish laws in South America). The transformation would not be instant. Many great estates were productive and their owners invested in wealth creation, but many more were rundown, semi-impoverished and in decay as agricultural businesses, their owns clinging on to a few acres around their palatial buildings, with a few poverty-stricken tenants not much better off.

The Chinese appear, in effect to be holding onto their ‘entail’ policy, but promoting where they can control it, the right of their tenants to buy and sell their ‘land-use rights’. This will have the effect of consolidating small parcelts of land into more viable farms. In time, it will create a new farming class, one step short of private ownership of land. By 2020 and beyond, the expropriated Chinese peasants of the Communist decades, who take advantage of these reforms, will become large-scale private farmers and have political clout to go with that economic status.

Why would Adam Smith ‘spin in his grave’? He always took the long view of history.

Indeed, as I recently passed by his grave in Edinburgh (en route to Panmure House, now owned by Edinburgh Business School Heriot-Watt University) – I have to admit I heard no sounds of him ‘spinning’, but maybe I may have - I can't be sure - caught a faint sound of somebody chuckling…

Aline van Duyn Understands Adam Smith on the Invisible Hand

Aline van Duyn writes (17 October) in FT.Com HERE:

“Adam Smith’s “invisible hand” has been replaced in the world financial system by a very visible government fist.

The theory by the famous 18th century economist was originally part of a discussion about domestic versus foreign trade. It has since been applied to markets more generally. It suggests that, in a free market, an individual pursuing his own self-interest will make choices which will also tend to benefit the entire community”.

Comment
At last! A true statement about Adam Smith’s only use of the metaphor of an invisible hand and, importantly, the extension of it since (from mid-20th century) by others who imply it was from Smith’s writings.

In fact, Smith showed that individuals pursuing their own self interest may make choices that will benefit the whole community, but, on the other hand, and in a significant number of cases, such as pollution, fraud, monopoly, high prices, narrowing the competition, politically motivated taxation and subsidy policies, trade protection, prohibitions, import barriers, sanctions, wars for ‘frivolous ends’, colonies and ‘jealousy of trade’ – all of which initially are the ideas and actions of individual decision makers – cannot be said to be for the ‘benefit of the entire community’.

In Books I and II of Wealth Of Nations Adam Smith gives over 50 examples of individuals not acting for the ‘benefit of the entire community’, while in Book III and IV the numerous cases of non-socially beneficial actions of individuals that he discusses form the core of their content.

Remarkable! Aline van Duyn understands the dangerous role that modern versions of the invisible hand explanations have in policy discourse today, to which the critics of open markets and trade harmony are subjecting under the guise of mocking the myths of invisible hands with withering fire all across the media.

Cynics, like the one I quoted from only this week (in my response to Joseph Stiglitz in the New Statesman (UK)), who asserted that Lost legacy’s persistent efforts to correct those who have misused Adam Smith’s Legacy and who created and sustain the myth of the invisible hand, are more than complacent; they are complicit in their cynicism.

The truth is found by reading what Adam Smith wrote in his works and correspondence. The truth will out, despite the cynics...the struggle for the truth continues.

'Any Port in a Storm'

In Business Week, 16 October, HERE:

“Forget Adam Smith, Whatever Works” by Pete Engardio

"Federal Reserve Bank of Dallas President Richard W. Fisher addressed the high and mighty of global finance in Washington during pivotal meetings of the Group of Seven and the International Monetary Fund. The gravity and complexity of the 15-month-old credit crisis called for action that transcended familiar ideological categories, he hinted, such as free markets vs. state intervention. Fisher even borrowed a Chinese proverb popularized by the late Chinese leader Deng Xiaoping: "No matter if it is a white cat or a black cat, as long as it can catch mice, it is a good cat."

Comment
The reference to Adam Smith is in the headline alone, with nothing else about him in the text.

I agree, if the implied meaning about forgetting Adam Smith if this refers to his alleged, though false, views about the laissez-faire, zero government, invisible hand toting version of the mythical Adam Smith touted by Chicago trained or influenced economists.

However, I disagree if Pete Engardio refers to the real Adam Smith born in Kirkcaldy in 1723 and author of the Wealth Of Nations, who was never an ideologue, nor an extremist, nor even a single- issue exponent of moral philosophy and political economy.

The real Adam Smith was a pragmatist in all his policy advice. For example:

regulate those aspects of private banking services where the public were put at risk from the imprudent behaviours of individuals who borrowed or lent (Book II);

promote free trade and reduce or abolish tariffs slowly and gradually to prevent domestic employment being reduced suddenly; recognise that defence is more important than opulence, therefore keep the protectionist Navigation Acts in place, despite working against British commercial interests; leave some level of tariffs on foreign imports because they are necessary to fund government revenue (Book IV);

choose between public commissioners or private managers on grounds of which worked best; arrange where feasible for luxury users of publicly-funded roads to pay higher tolls than poorer people; charge small fees for parents sending their children to publicly-funded local ‘little schools’, and charge less or nothing at all for the most indigent (Book V).

‘Whatever works’ is sound advice, especially in emergencies and crises. 18th century Sailors used to say: ‘any port in a storm’.

There is of course a need, afterwards, to pay prudent attention to the detail, but the broad admonition should be entertained, rather than rigidly rejected in a fit of ideological purity.

A Correspondent Writes

A correspondent writes to tell me:

“Gavin,

You’re correct, but alas, such is the world! As much as I am tempted to launch myself into a discussion of Adam Smith, whose ideas have passed into legend, and that’s not meant positively; it wasn’t Smith’s fault that his work has been turned into propaganda and prostituted; poor old Marx has suffered a far worse fate, even in his own lifetime, leading him to exclaim in frustration – I am not a Marxist!

Still, isn’t that an academic debate, far removed from the rude world we live in? Such debates begin to resemble theology and arcane disputes about the lives of the saints and their ‘holy’ words.”

Comment
Below I select three of today’s many articles from around the world, linking Adam Smith, via the metaphor of the ‘invisible hand’ in a form which Smith did not use it and with conclusions that he did not remotely state, from three continents and three different authors:

1

“Economic regulation, which is quite different from price controls in theory and practice, is a sine qua non of the market economy. The unfettered “invisible hand”, which Adam Smith told us would allocate resources efficiently in the market place, surely needed some guidance in order to make butchers, who were prominent merchants in Smith’s time, not cheat sellers with faulty weighing machines, or sell meat that’s stale on prices for a fresh cut.”

Business Daily, 16 October, “Crisis a case of abused self-regulation" by M. J. Gitau, Niarobi, Kenya (HERE)

2
“In the 1980s, the proponents of the "free market" dogma and "neoliberal globalization" as a policy framework dug up and bannered the argument of laissez faire capitalism that greed ought not be considered a negative attribute since it is a necessary and powerful force for driving social progress. Greed was presented as the crucial motor of the capitalist system.

Of course, it wasn’t called greed then; it was decked out as individuals simply motivated by self-interest. Adam Smith’s theory of the "invisible hand" of the market provided the rationale that the individual drive for self-gain magically self-regulates and transforms itself into the common good.”

Business World, Manila, Philippines, 16 October, “Greed at the heart of capitalism”, by Carol Pagaduan-Araullo

3
“Another big problem is the almost blind faith that Friedman's followers and most other present-day economists have in Adam Smith's "invisible hand." They believe that the free market, unimpeded by government, will almost inevitably produce good outcomes. This kind of thinking substitutes theology for economics. And many times, it just isn't true.

Smith (1723-1790), a Scottish philosopher and college professor, was, of course, the founder of modern capitalist economic theory. In context, it is clear that when he writes about "the invisible hand" in his first great work, "The Theory of Moral Sentiments," and again in his more famous book, "The Wealth of Nations," he is referring to the hand of God or some equally inexorable force of Nature. In "Moral Sentiments," published in 1759, he ties the invisible hand directly to God. In "Wealth," 17 years later, he is less specific. But here too, Smith portrays "the invisible hand" as a powerful, superhuman force that makes things turn out right, in spite of human selfishness and rapaciousness. Either way, Smith's premise is based on faith, rather than on observation.

If, however, one looks at human experience rather than invoking faith or religion, one must observe that all too often things do not turn out right. All kinds of economic calamaties, not to mention genocides, natural disasters, disease pandemics, and other catastrophes have afflicted humankind since its beginnings, punishing good people as well as evil ones. The invisible hand that makes things turn out right is often nowhere in evidence. The market often works, but sometimes it doesn't.

Actually, Smith himself acknowledges this by his use of the word "frequently," rather than "always," when he writes that men unintentionally promote the common good. Even the founder of capitalist theory was not nearly as optimistic about "the invisible hand" inevitably creating "the magic of the marketplace" as are many of today's conservatives. Despite this, they continue to insist on citing him as the authority for their nonsensical claims about the infallibility of laissez faire capitalism.”

The Huffington Post, New York,16 October, “Whatever Happened To 'The Magic Of The Marketplace' And 'The Invisible Hand?'”, by Sandy Goodman, (HERE)

Comment
Lost Legacy is about carefully putting the case of economists and philosophers to read Adam Smith’s Works and Correspondence and discovering exactly what he wrote about.

This means spending some time each day providing regular reminders that the source for the three correspondents above, and many scores of others each day, mistaken claims about the link between the metaphor of ‘an invisible hand’ and the mystical, magical, god-like force to which it is attributed, had absolutely nothing to do with markets, theories of prices or competition, supply and demand, or the consequences of individual’s choices, in anything that Adam Smith wrote.

The myth of the invisible hand and its attribution to Adam Smith was invented (not too strong a word) by neoclassical and post-neoclassical economists in the United States from the Second World War onwards, who associated his name to their general equilibrium theories and their admonitions on how to run the American economy. This, they thought gave their empty mathematics some historical ballast and legitimacy.

Sadly, many economists who took an interest in the history of economic thought, as well as modern economic theory, and knew better than endorse what they knew to be an intellectual fraud, shrugged their shoulders and said (and say!): ‘So, what; it’s a harmless white lie. Smith’s dead, most economists have never read Wealth Of Nations, and attributed 'facts' are immune to anybody seriously contesting them.’

Probably true. My correspondent above displays not just a degree of cynicism; it’s also an invitation to complicity in purveying dangerous nonsense in place of intellectual honesty.

The epigones oversold Adam Smith, and like the fools who oversold the toxic debts they created – egged on by legislators who urged swapping prudent banking for social engineering and social inclusion – have unleashed potent propaganda, as in the three examples above, that may in consequence deepen a financial crisis into a large-scale assault on free markets, open economies, and global trade.

What Are Students Learning?

A student writes in a Blog All Things Bright and Beautiful
an article (HERE):

‘Adam Smith, Thomas Jefferson, and Fannie Mae’

"In 1776, the United States signed the Declaration of Independence, espousing the highest ideas for human freedom, for a government’s true role: to protect the rights of the citizens, and pledging the “lives…fortunes…and sacred honor” of it’s best citizens, the founders, to make it come true. That same year, Adam Smith published his master work: “The Wealth of Nations.” Coincidence? I don’t think so.
I’m in a class right now that is in the middle of exploring the implications of our economy on our freedom and vice versa. Adam Smith suggested an impractical economy with zero government involvement: the Free Market. We live (theoretically) under capitalism, which has a limited role for government, essentially to maintain a predictable environment that facilitates honest business transactions."

Comment
What is being taught to the students at whatever institution they are in?

As it’s a student reporting on his/her class notes, I shall withhold the withering comments the piece deserves.

A Nobel Prize Winner on the Financial Crisis Misquotes Adam Smith

An article by Joseph Stiglitz in the New Statesman is fine until he draws in Adam Smith to make a point:

"This crisis is a turning point, not only in the economy, but in our thinking about economics. Adam Smith, the father of modern economists, argued that the pursuit of self-interest (profit-making by competitive firms) would lead, as if by an invisible hand, to general well-being. But for over a quarter of a century, we have known that Smith's conclusions do not hold when there is imperfect information - and all markets, especially financial markets, are characterised by information imperfections. The reason the invisible hand often seems invisible is that it is not there. The pursuit of self-interest by Enron and WorldCom did not lead to societal well-being; and the pursuit of self-interest by those in the financial industry has brought our economy to the brink of the abyss.

No modern economy can function well without the government playing an important role. Even free marketeers are now turning to the government. But would it not have been better to have taken action to prevent this meltdown? This is a new kind of public-private partnership - the financial sector walked off with the profits, the public was left with the losses. We need a new balance between market and government."

Professor Joseph E Stiglitz is chair of the Brooks World Poverty Institute at the University of Manchester and a 2001 Nobel prizewinner

Comment
I sent the following comment to New Stateman:

Adam Smith did not say that ‘competitive firms’ pursuing self-interest would be led ‘as if by an invisible hand to general well-being’.

In Book IV – the only place in Wealth Of Nations he mentions the popular 18th-century literary metaphor of ‘an invisible hand’, he was referring to merchants choosing between investing locally or abroad (the American colonies) and, because most (not all) of them were risk-averse to the dangers and uncertainties of foreign trade and foreign investment, they naturally preferred the relative security of their home market and, by the arithmetical law of the whole being the sum of its parts, thereby domestic investment would he higher and more local people would be employed. (WN IV.ii.9: page 456).

The ‘invisible hand’ metaphor had nothing to do with markets, the behaviour of firms, supply and demand, nor price theory which are all covered in Books I and II with no mention of invisible hands. Nor, incidentally, was the invisible hand metaphor prefaced with ‘as if’; that’s another myth!

Hence, ‘the reason the invisible hand often seems invisible is’ because its alleged association with Adam Smith on markets and firms’ behaviours is wholly fictitious.

The myth was created by mid-20th century neoclassical economists, including Nobel Prize Winners, and gives a misleading aura of a mystical force at work, though markets were thoroughly analysed by Adam Smith without mentioning invisible hands.

However, Adam Smith gives over 50 instances in Books I and II of Wealth Of Nations (Book III and IV are replete with such instances) of self-interested individuals acting against the interests of society generally; this is ignored (most economists do not read Wealth Of Nations) in favour of associating Adam Smith with ideas he never had to purvey ideas that should stand on their own and be judged as such.

Rich Folks Who Blame Adam Smith

Rebekah and Stephen Hren writing in The Huffington Post (‘the internet newspaper’), 14 October, HERE:

“The First Death Rattle of Our Unsustainable Economy (Part II)”

“The second huge contradiction goes back to Adam Smith and The Wealth of Nations. Not many folks we know have actually read this book, it's a hefty tome and the lengthy digression on silver incomprehensible, but since it supposedly underpins our economic system it's worth referring to every now and then. Many folks would be surprised to find how vociferous Mr. Smith is in his call for government regulation of markets, and his belief that ultimately the wealth of a nation should be measured by the living standards of its people, not by the height of accumulated piles of material goods. Mr. Smith points out that, as we all know, division of labor increases productivity. But what Mr. Smith passes over is that this increased production of material goods comes at a hefty price: tedious, repetitive work often isolated from our surrounding natural environment. Since satisfaction in our work declines as it becomes more isolated from the whole and more repetitive, it becomes necessary for us to gain our satisfaction in life away from our work and instead we often look for satisfaction via the things we consume. Unfortunately, it is impossible to find any lasting satisfaction through consuming things (just ask your belly), and, the physical world being finite, we eventually run out of things to consume.
Since our current economic system is riddled with contradictions that are forcing its implosion as it abuts the physical limits of our planet, what do we do next? Fortunately some very smart people have been ruminating on this subject for the last few decades, and we'll take a look at what they have to say in our next entry.”

Comment
I am always cautious about appearing to take seriously the folksy approach to Adam Smith which measures his worth by the weight of his Wealth Of Nations (would they remark the same about the size and weight of the Oxford English Dictionary?), or his alleged ‘incomprehensible’ digression on silver’ (we call it ‘evidence’ in scholarship, Rebekah and Stephen!).

Our Huffington authors claim that Adam Smith believed “the wealth of a nation should be measured by the living standards of its people, not by the height of accumulated piles of material goods”.

Strange, I must say, but then it’s not clear if they got beyond their incomprehension about the significance of silver. If they had done so, they would have noticed that Adam Smith defines wealth several times as the ‘annual production of the necessaries, conveniences, and amusements of life’, which may be regarded as total output per year goods, even, dare I say, figuratively, the “height of accumulated piles of material goods”!

His concern with the distribution of income in 18th-century Britain was with the basic poverty of the bulk of the population of day labourers and their families, whose only prospect of sharing in wealth was from employment from the growth of the economy.

Have Rebekah and Stephen actually read Wealth Of Nations or are they relying on R. J. O’Rourke’s amusing, but unreliable, version of it? I ask, not intentionally I assure readers, this impertinent question because they write that “Mr. Smith points out that, as we all know, division of labor increases productivity. But what Mr. Smith passes over is that this increased production of material goods comes at a hefty price: tedious, repetitive work often isolated from our surrounding natural environment.”

[Digression!]Why the use of “Mr”? He has a first name, Adam, which they could use, but if that is too informal for someone they have not been introduced to (it’s down to the mores of their social class) they could have used ‘Professor Smith’ or “Dr Smith”.

Now back to the ‘division of labour’. Yes, the example of the pin factory certainly shows that the productivity of labour increases through the arrangements that take advantage of the division of labour. But this was not something Adam Smith discovered; it was known long before the 18th Century by many philosophers and scholars. Smith never claimed that he invented the idea of the division of labour, nor that the world waited until Wealth Of Nations to utilise it.

Indeed, the evidence that Smith draws upon to make his points on enhanced productivity from the pin factory he visited is similar to accounts of pin factories in France. [If interested in evidence, Rebekah and Stephen can read the article by J-L. Peaucelle, 2006, ‘Adam Smith’s use of multiple references for his pin-making examples’, in the European Journal of the History of Economic Thought, vol13:4, pp 480-512]

Our authors, Mr. and Mrs. Hren, write:

“But what Mr. Smith passes over is that this increased production of material goods comes at a hefty price: tedious, repetitive work often isolated from our surrounding natural environment”.

Excuse me for being impatient, though not I hope, impertinent, but how could they write such breathtaking nonsense, for that is what it is, when ‘Mr. Smith’ did precisely the opposite to what they allege he ‘passes over’:

“In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.” [WN V.i.f.50: pp 781-2]

I ask again: have our Huffington authors read Wealth Of Nations or did they only flick through it, their wrists straining to hold up the book, and thereby miss the above paragraph? Did they adopt the implication of their statement that “it's worth referring to every now and then”, but between their ‘now’ and the ‘then’, they missed out Book V, pages 781-2?

They write: “Unfortunately, it is impossible to find any lasting satisfaction through consuming things (just ask your belly), and, the physical world being finite, we eventually run out of things to consume.”

Obviously, Rebekah and Stephen have reached that surfeit of consumables that they have “run out of things to consume”, which is way beyond what the majority of the world’s population can achieve even if they trebled many times over what they earn at present (our authors could offer to swap their exhausted life styles for a random poor couple blocks away from wherever they live).

Adam Smith had plenty to say about this condition from the vantage point of mid-18th-century Scotland, which was hardly a consumer paradise. In his Moral Sentiments (1759) he relates the parable of the ‘poor man’s son, whom heaven in its anger has visited with ambition’. I shall make a small quotation from it – it being too long to lengthen this post as it stands, but well worth close study by Rebekah and Stephen as they look around their home in shame and apparent disgust at what they have accumulated:

“The poor man's son, whom heaven in its anger has visited with ambition, when he begins to look around him, admires the condition of the rich. He finds the cottage of his father too small for his accommodation, and fancies he should be lodged more at his ease in a palace. He is displeased with being obliged to walk a-foot, or to endure the fatigue of riding on horseback. He sees his superiors carried about in machines, and imagines that in one of these he could travel with less inconveniency. He feels himself naturally indolent, and willing to serve himself with his own hands as little as possible; and judges, that a numerous retinue of servants would save him from a great deal of trouble. He thinks if he had attained all these, he would sit still contentedly, and be quiet, enjoying himself in the thought of the happiness and tranquillity of his situation. He is enchanted with the distant idea of this felicity. It appears in his fancy like the life of some superior rank of beings, and, in order to arrive at it, he devotes himself for ever to the pursuit of wealth and greatness. To obtain the conveniencies which these afford, he submits in the first year, nay in the first month of his application, to more fatigue of body and more uneasiness of mind than he could have suffered through the whole of his life from the want of them. He studies to distinguish himself in some laborious profession. With the most unrelenting industry he labours night and day to acquire talents superior to all his competitors. He endeavours next to bring those talents into public view, and with equal assiduity solicits every opportunity of employment. For this purpose he makes his court to all mankind; he serves those whom he hates, and is obsequious to those whom he despises. Through the whole of his life he pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquillity that is at all times in his power, and which, if in the extremity of old age he should at last attain to it, he will find to be in no respect preferable to that humble security and contentment which he had abandoned for it. It is then, in the last dregs of life, his body wasted with toil and diseases, his mind galled and ruffled by the memory of a thousand injuries and disappointments which he imagines he has met with from the injustice of his enemies, or from the perfidy and ingratitude of his friends, that he begins at last to find that wealth and greatness are mere trinkets of frivolous utility, no more adapted for procuring ease of body or tranquillity of mind than the tweezer-cases of the lover of toys; and like them too, more troublesome to the person who carries them about with him than all the advantages they can afford him are commodious.” (TMS IV.1.8: p 181)

Please read the rest of this chapter. It is most enlightening of Adam Smith’s real views and not what quotation grabbers extrapolate from their imaginations. As for Rebekah and Stephen’s thesis in their articles (with another one to come), I shall leave readers to make their own minds up about them – Lost Legacy’s interests are confined to the misuses of Adam Smith’s legacy and not the aimless discontents of wealthy authors and readers of the Huffington Post.

Is Smithian Justice Related to Rawls?

Richard A. Epstein (14 October) in Forbes.com HERE:
writes a most interesting piece on “The Risk-Free World Of John Rawls” and I recommend that you follow the link.

“At the broadest conceptual level, Rawls is a modern disciple of Adam Smith. In his Theory of Moral Sentiments, Smith wrote that matters of justice can only be resolved if people distance themselves from their own positions in particular disputes. Smith therefore sought to take the posture of an "impartial spectator." In time, this view evolved into Rawls' famous pronouncement in A Theory of Justice that the soundness of social institutions should be tested from "behind a veil of ignorance," where, again, people are ignorant of their particular role in society.
As an abstract proposition, this approach offers solid theoretical foundations for Nozick's libertarian orientation. Strong competitive markets do not favor one individual over another. They work well to harness individual self-interest to generate massive amounts of wealth, widely distributed in society, through voluntary transactions. Behind the veil, rational people should the support of strong and transparent markets as their first order of business. [Is there a word missing in this sentence?]

Nozick could be faulted for not understanding how to create the needed social infrastructure to support these transactions. But Rawls made a far greater blunder when he posited that individuals behind the veil of ignorance would not be acquisitive ("self-interest" is not an entry in the index to his book) but would be highly risk-averse. This assumption makes entrepreneurial activities take a back seat to the "difference principle," which looks to help the worst off in society first.”

Comment
I am currently reading Moral Sentiments (again, of course) as preparatory work for my next project, a critique of the oft-asserted view, or presumptive claim, that Adam Smith was ‘thoroughly religious’, ‘a Christian’, or a ‘Deist (I finished re-reading David Hume’s posthumous Dialogues Concerning Natural Religion, 1779, edited by Norman K. Smith, Bobs-Merrill, yesterday on the same mission; I first read the Dialogues in 1965 when I purchased a copy in Edinburgh, without appreciating its content.

The assertion by Richard Epstein that Adam Smith wrote that ‘justice can only be resolved if people distance themselves from their own positions in particular disputes’ is not something that I immediately recognize as Smith’s viewpoint about justice, nor as an instance of the 'impartial spectator' at work.

If corrected I would be as much obliged to a reader as embarrassed. From this tentative perspective, I can see a tiny glimmer of light in relating Rawls to Smith through a distant lineage, but I remain convinced the lineage is more tenuous than of substance.

Gordon Brown in Heroic Mood

It’s beginning to look as if Gordon Brown has found his narrative; yes the one about his survival from the abyss he fell into as his government began to crack and nearly unravel.

Some are already comparing it to Mrs Thatcher’s difficult time in the polls until she discovered the Falkland Islands, which her Minister of Defence, John Nott, appeared to signal he had decided to leave undefended by withdrawing its token naval protection vessel, HMS Endurance, scheduled for decommissioning in 1982.

The Argentinean dictator, General Galtieri, took the hint in desperation, and tried a ‘diversionary war’ to deflect popular unrest at his country’s economic crises; Mrs Thatcher instinctively reacted with her ‘iron will’ and re-took the islands and basked in immediate popularity and electoral acclaim.

Gordon Brown has seized the moment of the financial crisis with its dramatic opportunities to lay claim to similar acclaim and electoral success, reversing the past months of decline and indecisiveness, to appear a leader of iron will and determination. The script is already under composition:

In Times Online 10 October, we read HERE:

‘Gordon Brown invokes past heroes in surprise fighting speech at Cheltenham’

“He quoted Field Marshall Montgomery and his belief that his troops were his most important asset. He invoked General Sir William Slim, known as “Uncle Bill”, who was written off by snootier superiors until he defeated the Japanese in Burma to become one of the most admired British officers in the Second World War.

Even Adam Smith, patron saint of the free market and the other famous son of Kirkcaldy (“a bit more famous than me”), was dragged into line to support the huge stakes the British taxpayer has taken in leading banks this week. “He had a moral sense that we all share some sort of responsibility for each other and he believed that where necessary you have to intervene.”

Comment
Brown projects the images of these famous heroes (no reports that he quoted Mrs Thatcher’s appointment with destiny) and by implication projects their ‘now is the day and now is the hour’ moments onto himself.
Be clear I am not knocking his own moment on the knife edge of destiny – Smithian commentators ‘observe’; they do not ‘preach’.

I do expect that if the whole of Gordon’s financial programme of ‘rescue’ and ‘reversal’ works with a presentable heroic narrative (his scrptwriters we may be sure are working hard at several drafts), the polls will reverse into a massive lead for Labour and a great temptation to call the election he fumbled last year, as he taunts the Tories with: ‘you wanted an election - you’ve got one!’

Whether that leads to four more terms for Labour is another matter.

However, I doubt if any accomplished politician and party leader is capable of living Adam Smith’s ‘moral sense’ merely by telling us what we already know – that he had one – or that he knows what Smith meant by ‘responsibility’ for others, or the limits to ‘intervention’.

Smith was hostile to a ‘man of system’ who believed he knew what was best for everybody and treated people as if they were wooden pieces on the chess board of their panaceas, forgetting that people act under ‘different’ laws of motion to those the man of system tries to impose upon them.

This is the fatal weakness of politicians, especially those who are convinced that they have shaken the hand of their destiny, when in reality they are merely 'wise in their own conceit' (Moral Sentiments VI.ii.2.17: p 233)

A Quotation From Adam Smith Too Far?

Cynicuseconomicus (HERE), 11 October, assesses a global conspiracy:

“Economic Crisis - Conspiracy and the New World Order?”

“I have had some comments that have suggested that the crisis is all a big conspiracy for a new world order. As regular readers will be aware, I am more inclined towards the principle of foolishness and stupidity. I followed a link to the Daily Kos, and had a quick look through an article to get a feel for a feel of how these theories are being presented. I remain unconvinced that this is all the result of a plot, but do have concerns at the power that might be taken by government resultant from nationalisations, and the cosying up of world leaders to 'fix' the problems. The latter brings to mind a quote from Adam Smith:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Whilst not entirely apt, I think that the idea carries over to this well. This leads neatly into the current state of the panic that is driving countries to act in unison.”

Comment
A quote too far, perhaps?

The notion that a group of mercers, butchers, tinsmiths, carpenters, wheelwrights, and such like, acting under law that established their monopolies by incorporation in the towns where they traded, while keeping a jealous eye on any interlopers trying to setup shop in the town but not having served the required seven-year apprenticeship to a master living in the town (and he having served his apprenticeship too), had any similarity to modern bankers, speculators, and such like, is only just short of being ludicrous.

Smith had no time for the Incorporated Towns and their in-built monopolies that ‘widened the market and narrowed the competition’, enabling their trades folk to charge higher prices to a town’s citizens.

As for conspiracies and new world orders, follow the link to the cynic’s Blog.

Adam Smith on Taxes

Rick Bolton writes (10 October) in the Chillicothe Gazette.com (HERE) an opinion piece headed: 'Wall Street CEOs should be held accountable for their actions'; a reasonable proposition in the current crisis.

However, if we are going to punish the guilty we should include among them those legislators responsible for the policies of increasing public debt to pursue their visions for what a modern country should encourage and who legislated to make such policies a reality. Sub-prime mortgages were also a form of social-engineering with what are called 'toxic consequences', unforseen, or ignored, by their proponents, which overly smart money traders hyjacked to make 'loads of money'.

Rick Bolton asserts that: ‘Even Adam Smith, author of "Wealth of Nations," the capitalist bible, favored a progressive tax structure. Smith believed those who benefit the most from the market should pay a higher rate in taxes.’

Comment

Ignore the nonsense about Wealth Of Nations being ‘the capitalist bible’…

The actual statement by Adam Smith is slightly different:

“I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.” (WN V.ii.b.3: p 825)

Yes, he confirms that the richer should pay higher taxes, but this is not quite the same as ‘those who benefit the most from the market’ should pay more; all people in society benefit from ‘markets’.

Taxes in Smith’s mind were for the funding of civil government, and partly because the tax base was much narrower in his day than it is now – many poor people could not contribute much at all (income tax had not yet been invented). He envisaged luxury goods, packages, houses, and rents being subject to tax and discusses in detail the tax practices of the UK, which soon shows how different the tax regimes have become in the intervening two centuries.

He clearly believed that certain people were more ‘able’ to contribute because they received higher revenue, which they respectively enjoy under the protection of the state.’

It wasn’t just because they received more revenue; it was because they enjoyed their revenues because the agencies of the state secured and protected their property rights. Without ‘justice’, society must in a moment crumble into atoms’ (Moral Sentiments, II.ii.3.3: p 86). The beneficiaries of state expenditures should in equity contribute to the revenue raised necessary for the government to function.

At the time Smith wrote Wealth Of Nations he was not just asserting taxation policy for market economies; most European economies were significantly, if not predominantly, agricultural societies with smaller commercial markets and government publicly-funded sectors.

It was also a fact that the maxims outlined by Adam Smith were not ‘his’ maxims; he reported on existing practices ‘recommended… more or less to the attention of all nations’ (WN V.ii.b.7: p 827).

Adam Smith Online

eBookMall publishes Adam Smith’s books online at reasonable prices (HERE)

It’s blurb says that “Adam Smith is the author of Adam Smith: The Theory of Moral Sentiments, An Inquiry Into The Nature And Causes Of The Wealth Of Nations, Harvard Classics, Vol. 10: Wealth of Nations, and more...”.

Comment
Clearly I do not do commercial endorsements (at least without a fee!) but looking through the various editions of Adam Smith in the list I am impressed at the selection of a couple and the prices.

The most expensive ($30.80) is Knud Haakonssen’s edition of Adam Smith’s Moral Sentiments, but the editorial work by Professor Haakonssen is of the highest standard. He is a distinguished Smithian scholar on Smith’s moral philosophy.

The Harvard Classics, Vol. 10: Wealth of Nations, albeit abridged version readable on these platforms at 98c Windows PC, Palm, Pocket PC, Windows Mobile, SymbianOS, Blackberry, iLiad, eBookMan, may be a good-buy, though its blurb, presumably written by a publisher’s assistant describing it as: ‘The first complete system of political economy by the articulator of laissez-faire capitalism’, is somewhat off-putting for a scholarly reader.

A Microsoft reader version of Wealth Of Nations at $4.95 for Windows 98+, Tablet PC, and Pocket PC 2003 platforms, at 2MB, with no editorial details may be worth the cash. It promises ‘ClearType, advanced navigation, search, personal library, bookmarks, notes, and drawing.’

There is less doubt about the quality of the editorial work in the 2-volume edition of Wealth Of Nations that is edited by Andrew Skinner (formerly Adam Smith Professor at Glasgow University – where Adam Smith taught from 1751-64) in two volumes, originally published in print form by Penguin.

In my view, this is the best edition of Smith’s classic since the publication of the Glasgow Edition of the Works and Correspondence of Adam Smith, published in 1976 by Oxford University Press (and available at popular prices from Liberty Press, Indiana), to which Andrew Skinner was a co-editor and made important editorial contributions too. Both volumes contain excellent editorial introductions by Andrew Skinner which are authoritative in content.

It’s available in All Palm & Pocket PC handheld devices plus all Windows and Macintosh computers, price $15.60 each for volume I (Books I-111) and $18.00 for volume II (Books IV and V).

Check out the website for details of the other versions and to order your downloads.

Postscript:

TAL reports in the comments that Liberty Fund editions of the Glasgow Edition of Wealth Of Nations are free for downloads - it gets better with this news.

A Pleasant Shock from a Forbe's Book Review

A book review ‘Learning From The Prisoners’ in Forbes.com by David Henderson 10 October, includes this passage:

“The authors err badly, though, in writing that the prisoners' dilemma shows Adam Smith's mistake in claiming that each firm pursuing its self-interest leads to an outcome that is best for them all. Adam Smith never said that. Smith's focus was on what's good for the society in general, and he had no special concern for the wellbeing of firms.

Indeed, the temptation to cheat on cartel pricing is one of the main protectors of consumers. In the bigger picture, therefore, the prisoners' dilemma, because it leads to cheating on cartel pricing, is a major pillar of the modern Smithian view that free markets are good for consumers.”

Comment
What a breath of fresh air such critical comments in a book review can evoke at present.

David Henderson tells off two opinionated authors, Avinish K. Dixit and Barry J. Nalebuff, for their clichéd assertions about Adam Smith.

The mythical Adam Smith that modern economists take on trust from their tutors without reading Adam Smith's works for themselves has a habit of undermining their credibility.

Congratulations David Henderson. Read the full review HERE.

Smith on Banking Interventions

‘Migeru’(?), 10 October, writing in European Tribune (HERE) quotes from Wealth Of Nations, without explanation of the context, a piece called ‘Adam Smith on Banking’ and risks giving a wrong impression of exactly what Adam Smith was discussing.

“In The Wealth of Nations, when discussing Banking reform in Scotland in the latter part of the 18th century, Adam Smith had the following to say
“To restrain private people, it may be said, from receiving in payment the promissory notes of a banker[,] for any sum, whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law[,] not to infringe, but to support. Such regulations may, no doubt, be considered as in some respect a violation of natural liberty.”

[‘Migeru’ adds: ‘Just so it cannot be said that I take the consecutive paragraph out of context’ (which has the effect of doing precisely what he/she claims they are not doing):

“But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as or the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.”

Comments
Reading the two parts of the same paragraph (WN II.ii.94: p 324) with the break in between raises a doubt whether ‘Migeru’ quotes them to show that the current interventions in the affairs of the world’s banks is a violation of Natural Liberty and therefore worthy of opposition by supporters of Natural Liberty, or a justification for intervening on these occasions to curb some individuals who otherwise would/might ‘endanger the security of the whole society’.

To make sure about Smith’s message here check the context. Chapter II, Book II, is a long chapter on banking: ‘Of Money considered as a particular Branch of the general Stock of Society, of the Expence of maintaining a National Capital’, pp 286-329.

It discusses the role of money and the banking facilities in the economy. It is descriptive if how banks work and their role in facilitating the ‘great wheel of circulation’. It also discusses the foibles of bank customers and also those of some bankers and how they can threaten the prosperity of society.

In the particular case of banks issuing paper bills for small sums, as low as sixpence, the risks from over issuing paper are severe on the credit worthiness of others. Smith suggested that the legislature forbid such practices and show why, as well as answering a possible objection from those who support the general principle of Natural Liberty (which Smith espouses strongly in other pages) by acknowledging that it is indeed such a ‘violation of Natural Liberty’, but it is nevertheless justified.

Now what role does this have for today’s banking crisis? It’s not clear from Migeru’s posting.

Ultra-conservatives and extreme libertarians may use it to support letting the financial system collapse as the least of the two evils, one of which includes state intervention; remnant Marxists and extreme socialists and social democrats may use it as part of their disparagement of Adam Smith in the guise of the Chicago version of him.

The best antidote to both is to read Chapter II of Book II of Wealth Of Nations and judge for yourself. The failings of politicians and rogue bankers and some of their customers was sufficient to cause the current crisis.

Smith gives several mid-18th-century examples to show decisively he was a pragmatist, not an ideologue.

Financial Crisis Caused by Politicians, Not Markets

Read John Morgan’s letter to The Capital Times (Madison, WI) HERE:

‘Perhaps next economic system will work for all’:

“Dear Editor:
The meteor of toxic mortgage slammed into Earth and the dinosaurs of Wall Street are biting the dust.

The invisible hand of the free market clenched itself into a fist and beat up the market, then held itself out for a government loan.

After the economics books are rewritten, maybe Adam Smith will be taken off his pedestal, and maybe someone will invent an economic system that works for everyone, not just the favored.

Maybe cooperation and benevolence are a better foundation for economics than competition and greed.”

Comment
It’s not a new ‘economic system’ that we need – Adam Smith did not invent one; he observed what was going on around him in the 18th century and reported on it in Wealth Of Nations.

Adam Smith did not discover ‘the invisible hand of the free market’ – that is a myth. His use of the well known 18th-century-metaphor – widely used in literature at the time, and far back into classical times (it’s in Shakespeare too) was not even about markets and how they work, which he fully explained elsewhere in Books I and II in Wealth Of Nations without mentioning anything about invisible hands.

There is no need to ‘rewrite’ the ‘economics’ book. The first task is to read Wealth of Nations for the very first time in the case of 98+ per cent of working economists today, and not just rely on isolated quotations torn from its context and spread about with the authority of modern ‘top’ economists, including some Nobel Prize winners.

Many of them would be surprised that Adam Smith never advocated ‘greed’, nor gave a free pass, all areas, to businesses to do whatever their self-interested owners regarded as a sufficient reason, under the illusion that they were blessed by a mystical, implicitly religious’ force of an invisible hand, irrespective of the obvious flaws in such a ‘theory’ (‘pusillanimous superstition’, as Adam Smith described belief in such phenomena).

Legislators on both Britain and the US were complicit in the behaviours that brought the finance system into its current crisis; for political ends they punted the socially attractive notion of lending money to people unable to sustain re-payments and disregarded the standards of prudence they claimed for their economic management. Governments caused the crisis, not Adam Smith, nor anything alleged to have been written in Wealth Of Nations.

Chicago Has Much to Answer For

Lawson A. Omokhodion (MD/CEO of the defunct Liberty Bank) writes an interesting opinion in The Guardian (HERE) of the banking business in Nigeria and his interpretation of the lessons from the current banking crisis:

‘How not to manage a banking crisis’

by Chief Lawson A. Omokhodion (MD/CEO of the defunct Liberty Bank):

“THE managers of the OECD economies are a marvel to watch. When the situation is right, they preach the monetarist glamour of free market, globalisation, liberalisation and the supremacy of the invisible hand of 'Adam Smith'. But at other times, they are not shy to radically embrace the Keynesian principle of the role of big government in economic transformation. The OECD economies can subsidise its production systems while kicking against a similar initiative in the developing economies.”

Comment
There are those in the OECD (and the World Bank, IMF, Wall Street, City of London, and Treasury Departments around the world, who do believe in the mantra that Chief Omokhodion recites on their behalf.

It’s the usual nonsense about the mystical belief in “the supremacy of the invisible hand of 'Adam Smith'” that caught my attention.

And that is a problem which Chicago created for economists when they invented the false image of Adam Smith as a believer in laissez-faire, a ‘small’ night-watchman state, and invisible hands mysteriously converting the actions of ‘merchants and manufacturers’ into benign outcomes for society, somehow, as long as they followed their self-interests (eliding in selfishness).

This creates a series problem for advocates of market solutions when those same behaviours are shown to be less than benign (pollution, monopolies, cartels, and anti-competitive). Chicago has given the enemies of markets a stick with which to beat up on proponents of Smithian economics of growth and employment.

Downloadable Adam Smith Classics

Adam Smith’s works are often quoted from but seldom read.

This promotes both a reckless circulation of well-known quotations of sentences and paragraphs which are misleading and sometimes exactly opposite to the meanings that Adam Smith intended and the corruption of the actual passages, sometimes run together with other sentences from markedly different parts of his books to give the impression that Adam Smith made the statements together.

The publishers of the Library of Economics and Liberty have long made available two of Adam Smith’s main books, usually referred to on Lost Legacy by their short names, Moral Sentiments and Wealth of Nations.

The online texts are downloadable for quick reference. Until recently they were produced in rather ancient type faces and had an ‘eccentric’ reference system. I was pleasantly surprised recently when referring to them to find that the typeface has been modernised (easier to read) and the reference system is close to the scholarly framework established by the Glasgow Edition of the Works and Correspondence of Adam Smith, published by Oxford University Press, 1976-1985. This is a vast improvement and will be welcomed by Smithian scholars and those interested in reading his works for themselves.

Liberty Fund came to an agreement with Oxford University Press that it could reproduce the exact layout and typeface used by OUP when producing their expensive bi-century edition in an edition that was of a high publishing standard and at a fraction of the price. In the case of Wealth Of Nations (2 vols.) and Moral Sentiments they are still priced at under $20 each.

May I suggest that Lost Legacy readers download both books, details below?

Adam Smith. 1776. ‘An Inquiry into the Nature and causes of the Wealth Of Nations’, 5th edition, 1790, edited by Edwin Canaan. Re-set in modern type, 2008.

Available on-line: http://www.econlib.org/library/Smith/smWN.html


TABLE OF CONTENTS
Preface, by Edwin Cannan

Editor's Introduction, by Edwin Cannan

Volume I
Introduction and Plan of the Work

Book I: Of the Causes of Improvement...

I.2. Of the Principle which gives Occasion to the Division of Labour

I.3. That the Division of Labour is Limited by the Extent of the Market

I.4. Of the Origin and Use of Money

I.5. Of the Real and Nominal Price of Commodities, or of their Price in Labour, and their Price in Money
I.6. Of the Component Parts of the Price of Commodities

I.7. Of the Natural and Market Price of Commodities

I.8. Of the Wages of Labour

I.9. Of the Profits of Stock

I.10. Of Wages and Profit in the Different Employments of Labour and Stock

I.11. Of the Rent of Land
Tables for I.11.

Book II: Of the Nature, Accumulation, and Employment of Stock
II. Introduction

II.1. Of the Division of Stock

II.2. Of Money Considered as a particular Branch of the General Stock of the Society...
II.3. Of the Accumulation of Capital, or of Productive and Unproductive Labour

II.4. Of Stock Lent at Interest

II.5. Of the Different Employment of Capitals

Book III: Of the different Progress of Opulence in different Nations
III.1. Of the Natural Progress of Opulence

III.2. Of the Discouragement of Agriculture in the Ancient State of Europe after the Fall of the Roman Empire
III.3. Of the Rise and Progress of Cities and Towns, after the Fall of the Roman Empire
III.4. How the Commerce of the Towns Contributed to the Improvement of the Country
Book IV: Of Systems of political Œconomy
IV. Introduction

IV.1. Of the Principle of the Commercial or Mercantile System

IV.2. Of Restraints upon the Importation from Foreign Countries of such Goods as can be Produced at Home
IV.3. Of the extraordinary Restraints upon the Importation of Goods of almost all Kinds, from those Countries with which the Balance is supposed to be Disadvantageous
Volume II
IV.4. Of Drawbacks

IV.5. Of Bounties

IV.6. Of Treaties of Commerce

IV.7. Of Colonies

IV.8. Conclusion of the Mercantile System

IV.9. Of the Agricultural Systems, or of those Systems of Political Œconomy, which Represent the Produce of Land, as either the Sole or the Principal, Source of the Revenue and Wealth of Every Country
Book V: Of the Revenue of the Sovereign or Commonwealth
V.1. Of the Expences of the Sovereign or Commonwealth

V.2. Of the Sources of the General or Public Revenue of the Society

V.3. Of Public Debts

Appendix

Footnotes (Book I, Ch. I-IX)

Footnotes (Book I, Ch. X-XI)

Footnotes (Books II-III)

Footnotes (Book IV)

Footnotes (Book V)

Adam Smith, 1759. The Theory of Moral Sentiments, 6th edition, 1790, A. Millar. Re-set type face, 2008:

http://www.econlib.org/library/Smith/smMS.html

TABLE OF CONTENTS
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I. Of the Propriety of Action Consisting of Three Sections
II. Of Merit and Demerit; or of the Objects of Reward and Punishment
III. Of the Foundation of our Judgments concerning our own Sentiments and
Conduct, and of the Sense of Duty
IV. Of the Effect of Utility upon the Sentiment of Approbation
V. Of the Influence of Custom and Fashion upon the Sentiments of Moral
Approbation and Disapprobation
VI. Of the Character of Virtue
VII. Of Systems of Moral Philosophy

Footnotes

Adam Smith on 'the vile maxim of the masters of mankind'

Susan George, Chair of the Board of the Transnational Institute, and author, inter alia, of ‘Hijacking America: How the religious and secular right changed what Americans think’ and 'We the peoples of Europe’, gave the Schumacher Lecture this week (4 October) 'Transforming the Global Economy: Solutions for a Sustainable World’.

A passage in it contains these ideas:

“At this point in the discussion, especially when one is speaking to concerned, engaged, decent people like those likely to be found at a Schumacher lecture, someone will raise two highly pertinent questions. The first is this: “ Isn’t there a point where people with huge fortunes say ‘enough is enough’ and start sharing?” Some do—Bill Gates and Warren Buffet are oft- cited examples. But as a class, I’m sorry to say that the answer is no. We know a lot about poverty lines but there is no such thing as a wealth line and the word “enough” is not part of the vocabulary of this class. You needn’t believe me. Listen to the expert who said “All for ourselves and nothing for other people seems in every age of the world to have been the vile maxim of the masters of mankind.” That was not Karl Marx but Adam Smith, in his classic 1776 treatise on capitalism, the Wealth of Nations. Little has changed since then.”

Comment
Susan George’s first sentence above sounds innocent, but when you think of all the people not at her lecture who have claims to being ‘concerned, engaged, decent’ and who may not share her views, it is somewhat ‘offensive’, or if that is too strong, ‘arrogant’, if not ‘pretentious’ to identify the 'good among' her listeners.

Self-praise ‘is no recommendation’ was taught at the schools I attended and haughty self claims to possessing the virtues are the vice of some fairly unpleasant people down the ages and Susan George would not wish to be associated with that ilk (the parable of ‘the widow’s mite’springs to mind, just behind ‘Holy Willie’s prayer’).

However that is not my main qualm about her paragraph. I refer to Adam Smith’s statement: “All for ourselves and nothing for other people seems in every age of the world to have been the vile maxim of the masters of mankind.”

The quotation is interesting as it comes from Book III of Wealth Of Nations, chapter IV, and here it is in the paragraph it is quoted from:

“But what all the violence of the feudal institutions could never have effected, the silent and insensible operation of foreign commerce and manufactures gradually brought about. These gradually furnished the great proprietors with something for which they could exchange the whole surplus produce of their lands, and which they could consume themselves without sharing it either with tenants or retainers. All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons. For a pair of diamond buckles, perhaps, or for something as frivolous and useless, they exchanged the maintenance, or what is the same thing, the price of the maintenance of a thousand men for a year, and with it the whole weight and authority which it could give them. The buckles, however, were to be all their own, and no other human creature was to have any share of them; whereas in the more ancient method of expence they must have shared with at least a thousand people. With the judges that were to determine the preference this difference was perfectly decisive; and thus, for the gratification of the most childish, the meanest, and the most sordid of all vanities, they gradually bartered their whole power and authority.” [WN III.iv.10. p 418]

Susan George sources he quotation in Adam Smith’s “in his classic 1776 treatise on capitalism, the Wealth of Nations.” Regular readers of Lost Legacy will know that Wealth Of Nations was not a 'treatise on capitalism' - it was a critique of the mercanile policies of UK Governments in the 17th and 18th centuries. Also Smith never used the word 'capitalism' - it wasn't invented until used by Thackeray in 'The Newcomes' in 1954.

She notes that “Little has changed since then”, which is an underwhelming assertion, given that Smith says that the ‘vile maxim’ seems to have operated continuously ‘in every age of the world’. If it has operated in ‘every previous age’ there is no surprise that it continues to operate within every known society that exists, has existed, or is likely to exist.

In the case that Smith discusses in Book III he describes “How the Commerce of the Towns Contributed to the Improvement of the Country”, doing so, it must be remembered, by the new traders of the towns undermining the feudal rulers of the countryside, who traded their power (their armed retainers and serving tenants called to arms to inflict their Lords’ miseries on neighbours, rivals, and enemies or friends of the king) merely for “a pair of diamond buckles, perhaps, or for something as frivolous and useless”. Since the 18th century, liberty has been strengthened by secular democracy, a not insignifcant difference.

Once again context matters.

Adam Smith on Regard for the Elderly

Daniel Bulone contributes an interesting piece on Adam Smith’s Tunnel Vision (‘observations on exchange’) HERE:

He discusses the relatedness of ideas in Smith’s Moral Sentiments with Matt Ridley’s ideas in The Origins of Virtue: Human Instincts and the Evolution of Cooperation (1996). He writes:

“Though what he [Smith] is saying is technically true, Smith's points on the elderly seem somewhat appalling. "In ordinary cases, an old man dies without being much regretted by any body." Caring for the elderly does not fit into Smith's idea of pure self-interest, and it certainly does not suit Dawkins' scenario of protecting future generations. It does, however, fit Frank's reevaluation of altruism. In The Origins of Virtue, it states that "the virtuous are virtuous for no other reason than that it enables them to join forces with others who are virtuous, to mutual benefit." Caring for the old is not logical, but neither is giving blood or mentoring children. All of these activities inspire, as Ridley says, a sort of awe at the kindheartedness of the individual. By appearing altruistic, people open themselves up to new connections and resources.”

Comment
I think this may be misleading. The full paragraph in Moral Sentiments reads:

“This sympathy too, and the affections which are founded on it, are by nature more strongly directed towards his children than towards his parents, and his tenderness for the former seems generally a more active principle, than his reverence and gratitude towards the latter. In the natural state of things, it has already been observed, the existence of the child, for some time after it comes into the world, depends altogether upon the care of the parent; that of the parent does not naturally depend upon the care of the child. In the eye of nature, it would seem, a child is a more important object than an old man; and excites a much more lively, as well as a much more universal sympathy. It ought to do so. Every thing may be expected, or at least hoped, from the child. In ordinary cases, very little can be either expected or hoped from the old man. The weakness of childhood interests the affections of the most brutal and hard-hearted. It is only to the virtuous and humane, that the infirmities of old age are not the objects of contempt and aversion. In ordinary cases, an old man dies without being much regretted by any body. Scarce a child can die without rending asunder the heart of somebody.” [TMS VI.ii.3: p 219]

This is somewhat different in its implications that Daniel Bulone draws from its last but one sentence. One’s children are more cared about than other’s elderly relatives. It is in the ‘eye of nature’ through which ‘a child is a more important object than an old man’. In the interests of the propagation of the species (one of Smith’s fundamental animal drives common in the species) it must be so: no children, no future propagation; no ‘old men’, life continues.

He adds: ‘It is only to the virtuous and humane, that the infirmities of old age are not the objects of contempt and aversion.’ The ‘virtuous and the humane’ qualifies Smith’s approach to the elderly, manifested in his lifetime devotion to his frail mother who died in his house, aged 90, and was cared for by him and his cousin Janet with tender love. He inconsolable as seen in his correspondence:

‘I should have immediately acknowledged the receipt of the fair sheets; but I had just then come from performing the last duty to my poor old mother; and tho’ the death of a person in the ninetieth year of age was no doubt an event most agreeable to the course of nature; and, therefore, to be seen and prepared for; yet I must say to you, what I have said to other people, that the final separation from a person who certainly loved me more than any other person ever did or ever will love me; and whom I certainly loved and respected more than I ever shall love or respect any other person, I cannot help feeling, even at this hour, as a very heavy stroke on me. Even it this state of mind, however, it gives me very great concern to hear that there is any failure in your health or spirits.’

Correspondence of Adam Smith, Letter no 237 to William Strahan [MP; Smith’s publisher] 10 June 1784, p 275 [Strahan died 9 July 1785]

Daniel Bulone reads into Smith’s observations of how people regard elderly people (not necessarily how they are treated by the ‘virtuous and humane’) that ‘Smith's points on the elderly seem somewhat appalling.’ If they are appalling, it is an observation, not a recommendation.

Even today, in a much more ‘virtuous and human’ age, a report that an old man dropped dead in the street would not attract the kind of regard that a report that a child had dropped dead. Read any newspaper, watch any tv news channel for confirmation. Personal grief overrides impersonal observation.

Invisible Hand Distortions Again

J. R. Nyquist writes (3 october) in Geopolitical HERE:

‘Political Blame and the Myth of Government-Sponsored Salvation’

“According to Adam Smith’s notion of the “invisible hand,” financial selfishness (a.k.a. greed) is a positive force in a free economy. In one of the most celebrated passages in Smith’s book, An Inquiry Into the Nature and Cause of the Wealth of Nations, we read: “[the businessman] intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of 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.”

Comments
J. R. Nyquist has not only changed the meaning of Adam Smith’s passage in Wealth Of Nations (WN IV.ii.9-10: p 456), he has also hidden the context to which the passage refers. It may be ‘one of the most celebrated passages’; it is also to most misrepresented.

Selectively quoting some sentence only a reader gets, and it is intended that he gets, a wholly misleading meaning of Adam Smith’s views. Taken as quoted, the reader assumes Smith is describing a general condition of market-based economies and the conduct of a businessman.

Self interest is not selfishness. That was a view of Bernard Mandeville (1724) in ‘Fable of the Bees: Private Vice, Public Virtue’, not Adam Smith in Wealth Of Nations (1776). Smith was not talking about ‘businessmen’ going about their daily activities in markets; he was talking about traders deciding whether to supply the locality or to engage in foreign trade (to the British colonies in North America).

Some traders engaged in shipping exports and imports because of the higher profits from the monopoly status Britain held in its colonies, backed by the Navigation Acts and the protection of the Royal Navy (though the Atlantic was a dangerous, risky place, as nobody controlled the weather).

Others, a majority, were risk-averse; they preferred the certainties of local trade, they trusted the legal system, knew the individual traders they dealt with, and their capital turned-over more quickly. It was their estimate of the risks involved in the two different activities that led them to trade locally. In doing so, they added to local capital investment which made the local activity larger than it would have been if the foreign trade of consumption and domestic trade were perceived as risk-equal.

This conclusion followed from the ‘whole is the sum of its parts’ – more parts meant a greater whole by the laws of arithmetic. For those readers who did not follow the economic analysis he used the metaphor of ‘an invisible hand’, but the metaphor added nothing of substance to his analysis of the consequences of risk aversion

Subsequently, over a hundred years later in fact, and then on a mass scale from mid-20th century, the metaphor has been elevated to a general principle, despite it not having that role in Smith's theoriy of markets Wealth Of Nations.

It has become a popular justification for the false notion that ‘merchants and manufacturers’, elided into modern ‘businessmen’, can act selfishly and still create social benefits. What a multitude of anti-social ‘crimes’ that such a notion covers up. Never mind pollution, fraud, monopolies, restrictive trade practices, and conspiracies to cartels, and such like; it’s OK, because Adam Smith said so – but he didn’t!

Misquoting Adam Smith Undermines Analysis

In what is otherwise a fairly sound analysis of the current crisis, Marc Chandler in Seeking Alpha (HERE) asks: ‘What happened to Free Markets?’, in the course of which, unfortunately, he makes these remarkable assertions:

“The whole notion of an economy as a separate sphere of activity is nonsensical. The patron saints of the church of laissez faire, Adam Smith and David Ricardo, thought they were analyzing political economy. Moreover, they understood this political economy to be a moral economy insofar as it tried to promote certain values and behaviors. Pssst, Adam Smith was a moral philosopher.”

Comment
Adam Smith never said he favoured laissez-faire (he never used the words). He was not in favour of laissez-faire though he knew those among the French Physiocrats who advocated such a system. His writings on the economy included many statements that were contrary to laissez-faire, not the least that he was suspicious of the motives and behaviours of ‘merchants and manufacturers’ who could not be trusted because when left alone they sought to expand their markets and narrow the competition in favour of their local and colonial monopolies.

So Adam Smith would have made a poor ‘patron saint of the church of laissez-faire’. The reputation Smith’s alleged passions for such notions as laissez-faire is wholly inaccurate and borders on the irresponsible, and comes from attribution by modern economists and not from the works of Adam Smith (which most of them have never read). As for David Ricardo and laissez-faire I leave it to Ricadians to comment.

“There is this myth that once upon a time there were free markets and then the state encroached. But what was meant as allegorical has been assumed as fact. The narrative is simply not true. Positive state action was needed to turn the factors of production (land, labor and capital) into commodities that could be bought and sold. The corporate form of organization has been sanctioned by the state. The state's power of taxation can have significant impact on the incentive structure for economic activity.”

Comment
If there is such a myth prevalent across the world it had nothing to do with what Adam Smith wrote about. True, he was a moral philosopher, but he was also an historian and there is nothing in his works to suggest he believed that ‘free markets existed and then the state encroached’.

His Lectures on Jurisprudence, delivered in Glasgow University 1762-4 (and most likely before that from 1751-62) do not mention any such historical state of affairs.

Indeed, Smith's lectures, which covered pre-history to the 18th century, show that once property was ‘invented’ about 8,000 years ago and civil government established, the state has had a continual existence in all the millennia since. Moreover, Wealth Of Nations, which covers a similar time span (after all, large parts of it are verbatim from his Glasgow lectures), is focused on his critique of mercantile political economy, which is largely about state-led intervention in markets, which link directly to his non-recognition of the relevance of laissez-faire assertions to the markets that he discussed.

It was not ‘positive state action was needed to turn the factors of production (land, labor and capital) into commodities that could be bought and sold’. That is to miss the whole point about societies bedded in property relations. It is the establishment of systems of justice that are critical to society and not ‘positive state action’ (Book V, Wealth Of Nations) which were firmly approved of by Adam Smith ('without justice society would crumble to atoms').

There is no doubt that ‘The state's power of taxation can have significant impact on the incentive structure for economic activity’ (when added to state borrowing powers). The modern state is a major economic player (between 30 and 45% of the GDP in peacetime, potentially rising to 80 percent in wartime (UK: 1942-45), and near 100% in state-run economies (Soviet Union, etc.,).

Relying on inaccurate statements about Adam Smith undermines Marc Chandler's analysis.

David Warsh's Economic Principals Gets It right

At last some sensible comment and analysis of the so-called ‘bail-out’, which too many serious economists are treating as a test of one’s virility as free-market economists, as if these irregular events are final proof of the need to call for government passivity and trust in markets to correct with all the brutal force of unforgiving militants for laissez-faire, while others from the left, the doomsday environmentalists (often with a marxist tinge), and the 'we are doomed' fringe, see their chance to extend government into ever greater roles in place of markets.

I refer to the article, The Enormous Bodkin, by David Warsh, of Economic Principals, (subscription) which gives an historical slant to the current problems, while showing that mostly the economics profession, as trained in the past thirty years, is not treated to any passing familiarity with the nature and causes of ‘the cycles of manias, panics and crashed that have been a familiar feature of global capitalism since its emergence in the seventeenth century’. Indeed, as David Warsh shows, leading introductory textbooks scarcely mention them.

I shall make one small quotation from Economic Principals (with apologies to David Warsh for doing so without his permission as the copyright owner):

“This is not the bankruptcy of modern economics, as my friend Robert Samuelson put it the other day in Newsweek, a shattering of the conceit that the problem of stability had been solved once and for all. Economists have done pretty well at stitching the global economy together these last thirty years, during a period of unprecedented growth. The failure to give recurring financial crises a more prominent place in its undergraduate texts is, however, somewhat embarrassing, or so it seems to me. Kindleberger was of the opinion that both Keynesian orthodoxy and monetarism were incomplete because they left out credit cycles altogether (he was writing in the mid ’70s, remember). He was right. Last summer, Olivier Blanchard, of the Massachusetts Institute of Technology, now serving a stint as chief economist of the International Monetary Fund, observed in a survey of macroeconomics that the New Keynesian orthodoxy that, for the past twenty years or so had constituted the mainstream textbook view, had, with respect to asset prices, fallen “short of the mark.”

It had become vividly clear, he wrote, that financial institutions do matter, and that shocks to their capital or liquidity positions can be potentially seriously damaging to macroeconomic health. Research on credit and financial markets was proceeding vigorously, though, Blanchard concluded, and “one can be confident that progress will happen rapidly.”

It can’t happen too quickly for the next editions of those introductory texts.”

Comment
If that doesn’t wet your appetite to subscribe to David’s weekly online sense on economics (from www.economicprincipals.com – 1.617.666.3365) you may be beyond saving from ideological paralysis – present but not involved in what’s going on around you.

Another Misuse of Adam Smith's Views

David Sogge, 3 October, writes in Casino Crash: ‘Adam Smith responds to Bank Bailout!’ (HERE)

“Many know the Adam Smith remark (1776): “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public…” But Smith wrote other things that Wall Street types would choke on, including some remarks pertinent to the bailout plan railroaded at high speed through the US Congress at their behest.

Here are last two sentences of Book I of Smith’s Wealth of Nations:

“The proposal of any new law or regulation of commerce which comes from this order [profit takers], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”

Comment
Both quotations, in my view, are used without the necessary and prudent qualifications, which suggests that David Sogge, of the Transnational Institute, an organization ‘acting in the spirit of public scholarship’, which displays an unscholarly carelessness with Adam Smith’s ‘Wealth Of Nations’, a not uncommon feature of many of those who quote snippets from it.

The first quotation, shorn of its context, appear to be a general statement about ‘trades’, which today is easily taken by general readers to be applicable to modern businesses operating in a system of company laws, when in fact Smith referred to the behaviours of traders, journeymen, artificers, petty merchants, and members of the corporate guilds that managed the economic activities of towns which, by law, were privileged to make all kinds of decisions that could, and frequently did, restrict competition and raise prices against consumers.

The relevant context is found in Wealth Of Nations (WN I.x.c.14-32: pp 139-47).

Modern businesses are not analogous to Smith’s reference to ‘trades; indeed, today there are severe legal prohibitions and penalties on collusion of the kind identified by Smith in 16th-18th-century Britain. If anything, Smith’s reference to ‘trades’ in his context is more closer to the behaviours of modern trade unions – some still called ‘Guilds’ in the USA – than to modern businesses. Recently, the European courts fined heavily certain businesses that were found guilty of price collusion and even Hollywood was shut down by a 'Guild' for weeks.

The second quotation from Book I of Wealth Of Nations (WN I.x.p.1-10: pp 264-7) is part of a discussion about the three great orders: those who lived by rent (landlords), those who lived by wages (the employees), and those who lived by profit (18th-century merchants and manufacturers).

Smith felt that the [proprietors of land] were ‘inseparably connected with the general interest of society’ and ‘can never mislead [society]’ when it promotes its own interests ‘concerning any regulation of commerce or police’ (the latter an 18th-century word for providing society with the wherewithal to consume food – no food, no society).

The interests of labour were also strictly connected to society because wages arose from producing the ‘real wealth’ of society and rose or fell to reflect when society was healthy or in decline. Unfortunately, argues Smith, the labourer was ‘incapable of either comprehending his interests, or understanding [society’s interests] with his own’. This was part of Smith’s later notion that expenditure by government on the education of all children was justified in view of the prevailing ignorance among the majority of the population (Book V, Wealth Of Nations).

The third order, those ‘who live by profit’, put into motion ‘the greater part of the useful labour of society’, but the rate of profit is inversely related to the prosperity of society; high in the poorest and low in the richest. This gives them a peculiar role in that their interests are counter to those of a society because they do best when they restrict competition and when they promote monopolies. They tend to understand their interests, and accordingly they promote legislation that serves their interests. They oppose free trade in favour of restrictions, both monetary (tariffs and prohibitions) and strategic (jealousy of trade, hostility to foreign traders, military means, the Navigation Acts, and colonies.

Wealth Of Nations was not a textbook in economics; it is a critique of 18th-century mercantilist political economy (Books III and IV), using Britain as the prime example. It is in this context that the second quotation must be understood.

It was Smith’s intention that his readers, particularly legislators and those who influence them understood the consequences of their pursuing policies that served the interests of those merchants and manufacturers who stood the gain at the expense of the other two orders, and at the expense of growth of the commercial economy, particularly as faster growing economies were associated with higher wages and lower profits (though larger capitals produced greater absolute amounts of profit, albeit at lower rates), and, critically higher wages would raise the incomes of waged workers and their families.

Passing the quotation off as part of a critique of the ‘bailout’ of the debt-laden banks, which marketed high-risk loans at the behest of legislators, including republican and democratic presidents, senators and representatives, is disingenuous.

It is interesting that many participants in the debate use quotations from Smith (out of context) and myths about Smith (the so-called invisible hand) to criticise the so-called bailout and the so-called US ‘free market’ (actually a mercantilist economy in many ways), but seldom is any critic spelling out what should be done that will avert the early consequences of doing nothing.

The failure of credit availability among the banks will show up, fairly rapidly, in business failures, unemployment, and severe misery for millions in the famous ‘main streets’ across the USA, and it is this prospect that legislators (facing elections) will focus on quickly once they connect with their electorates (another aspect of 21st century circumstances not available to Adam Smith – he didn’t have a vote under the existing franchise).

Markets Remain Better Than The Alternative On Most Occasions

‘M.K.’ in the Mauritius Times opens his/her apparent ‘solution’ to the current turmoil in global finance with an example of muddled knowledge about Adam Smith, HERE:

“So much talk about good governance: how about putting it into practice?”

“Adam Smith, a Scotsman and founder of modern economics, is reputed to have advocated the laissez-faire doctrine of free markets in 1776. It is not quite certain whether he also advocated that governments should not interfere at all with the working of markets. However, free market capitalism, following in his wake, has imposed the view over centuries that the markets operate most efficiently if left to themselves without government interference. If we consider the havoc that the working of the free capitalist markets of the United States and Europe is currently wreaking on global markets, we would think twice before accepting wholesale this kind of laissez-faire doctrine. We must at least learn a lesson.”

Comment
Yes, Adam Smith was a Scotsman, but anointing him as the ‘founder of modern economics’ may be going too far.

Certainly he was a great thinker, certainly he synthesized a great deal that is important in modern economics still, and certainly his historical importance is in the front rank, but modern economics of the neoclassical variety – the dominant consensus – hardly owes much to Adam Smith’s Wealth Of Nations.

Except as a presentation volume given to retiring academics, Smith’s Wealth Of Nations, which they almost certainly never read as a student nor as an tutor, and almost as certainly they will leave on their bookshelf, unread too, it remains almost unread among the profession that allegedly owes its foundation to him.

If they did read it they would conclude that Adam Smith was not an advocate of laissez faire; he never used the words at all, anywhere in all of his one million words. The laissez-faire notion was first put forward in France by some of the Physiocrats in mid-18th century France, and Smith was very familiar with the men and their ideas, so there can be no question that his non-use of the words was other than deliberate.

Smith was too familiar with the actual behaviour of ‘merchants and manufacturers’ to have been as trusting of their working fairly and with other than grievous suspicion of their motives, as the words laissez-faire (‘leave alone’) imply. Indeed, Wealth Of Nations is full of his critical assessments of the merchants and manufacturers and their doings, unless curbed by both the vigilance of the law and the scepticism of legislators. MK can be assured that we are certain, beyond reasonable doubt, that Adam Smith never advocated ‘that governments should not interfere at all with the working of markets’. He made many statements quite to the contrary of such notions.

The notion ‘that the markets operate most efficiently if left to themselves without government interference’ would depend for credibility on what is meant by ‘without interference’. If we mean without the interference of individual legislators, then there is no doubt that such people are totally incapable of improving on free markets.

Day-to-day management of markets, and in their absence, management by state politicians and civil servants, has always proved to be less efficient – and incidentally, less fair - than creating the appropriate conditions by which the working of markets are as free as possible. Nobody, except extreme unreconstructed statists, advocates seriously the replacement of markets with Soviet- style socialism, or post-war nationalisation of the ‘commanding heights’ of the economy.
There is bound to be some degree of intervention by state agencies (defence, justice, public works, financial and banking regulations, the mint, the central bank, and such things as weights and measures education and health.

This does not mean that the current state arrangements are optimal – far from it – or that publicly funded services must be managed and delivered only by public employees and that there is no room for such services to be delivered in private and voluntary non-state personnel.

Visit www.adamsmith.org for a detailed exposition of many ideas that would improve the distribution of publicly funded services in current economic circumstances. Whereas, reverting to old notions of wholesale nationalisation programmes would only make everything worse, drab and tatty along all dimensions.

On Throwing Out the Baby With the Bathwater

Joel Bakan teaches law at the University of British Columbia and he is the author of The Corporation: The Pathological Pursuit of Profit and Power, and writer/co-creator of the documentary film ‘The Corporation’. He has a piece in today’s Vancouver Sun, which is fairly typical of many of the current crop of op-eds and columns around at present; they take the current financial crisis to kick their boots into either markets or government interventions in pursuit of their firm views on what’s wrong with international finance, or into those who have different views to theirs about what’s right about the way the economy is or is not working.

Ideologues Unanimous are holding packed meetings to celebrate their certainties, while foaming at their mouths when tossing their bile at whomsoever they regard as complicit in the failure of confidence within financial markets. It is amazing how many of them are so certain about the causes of the current problem – even down to naming the individuals whom they judge to be guilty – when if it were as simple as that we’d all be in the know too, but aren’t.

Lost legacy does not take sides in what is essentially a political problem. It observes; it doesn’t proselytize in the debate about the balance between free markets and free governments. It does express views on the alleged, asserted, and impugned contributions of Adam Smith in the ideologues’ obsessions.

Take Adam Smith’s alleged role in Joel Bakan’s article (HERE):

“Meltdown is a sure sign that free markets don't work"

“To begin with, he [Milton Friedman] said, corporate firms have one, and only one, obligation -- to make as much money as they can for their shareholders. "A corporation is the property of its shareholders," he said. "Its interests are the interests of its stockholders. Now, beyond that, should it spend the stockholders' money for purposes which it regards as socially responsible but which it cannot connect to its bottom line? The answer I would say is no."

Second, Friedman told me, there is little, if any, legitimate place for government to regulate what corporations do in their pursuit of profit. Accordingly, he said, governments should wind up their roles as economic overseers. They should deregulate.
The meltdown on Wall Street was caused, in part, by the inherent contradiction between these two ideas. If corporations are designed solely to make money for their shareholders, and if governments have no place in regulating what they do, what is to stop them from acting recklessly and dangerously in their pursuit of profit?
Friedman's answer to this question -- which he borrowed from, and attributed to, Adam Smith -- was that an "invisible hand" guides markets to ensure firms act responsibly to society, consumers and their investors. The popularity and influence of this idea, spouted by economists with near mantra-like devotion (at least until the past few weeks), is puzzling. Would you want an invisible hand to guide your surgeon's knife, or protect your neighbourhood from crime?

Why is the economy so special -- how is it that the invisible hand works there but nowhere else? The Wall Street meltdown suggests that, in fact, it does not.”

Comment
I have one major problem with Joel Bakan’s article.

“Friedman's answer to this question -- which he borrowed from, and attributed to, Adam Smith -- was that an "invisible hand" guides markets to ensure firms act responsibly to society, consumers and their investors.”

Milton Friedman was an effective propagandist for markets in preference to legislatures running an economy, and with this I have no quarrel in general. But like many commentators, he over-stepped the mark when he associated Adam Smith with parts of his advocacy.

Regular readers of Lost Legacy will be familiar with my constant corrective comments on the myth of ‘an invisible hand’ – to which Milton Friedman was a major disseminator – and they will know, as will all who actually read Adam Smith’s works (The Theory of Moral Sentiments and Wealth of Nations), that Adam Smith used in metaphor only once in each book and on both occasions it had nothing to do with his how markets work, as reported in Books I and II of Wealth Of Nations.

His sole reference to ‘an invisible hand’ in Moral Sentiments [TMS p 184) was about rich landlords having to distribute the produce of their farms to their employees, otherwise they would not survive the winter to labour in the fields in the Spring, despite their landlord’s illusions that their ownership of a beautiful and bountiful harvest was for their own consumption only. His sole reference to ‘an invisible hand’ in Wealth of Nations (WN IV.ii. p 456) is about the arithmetical consequences of risk aversion (the whole is the sum of its parts) and had nothing to do with markets (nor was it a theory, nor a principle, nor a paradigm - it was a metaphor).

Hence, Milton Friedman’s claim that Adam Smith believed or asserted ‘that an "invisible hand" guides markets to ensure firms act responsibly to society, consumers and their investors’ is patently incorrect, false, and a myth. The contrary view that Adam Smith did write what Friedman – and many others, including Nobel Prize Winners, distinguished scholars and eminent members of our profession – say he did is a study in the psychology of unsubstantiated beliefs.

Now I do not assert that convincing such personages to the contrary is ever going to be easy – several distinguished colleagues at the recent 40th Anniversary Conference of the History of Economic Theory, in Edinburgh, remained ‘unconvinced’ in the discussion of my paper *(that was my failing, of course) and two at least were quite antagonistic of the very notion of an invisible hand being a mere metaphor, and nothing I said, even by reading out from Moral Sentiments or Wealth Of Nations, affected their firm views.

So it’s not surprising that Joel Bakan’s report of his conversation with Milton Friedman is sincerely believed by him to be the link between free markets and the errors that caused the present crisis. Though to be fair, he does qualify his own report about Adam Smith and Friedman’s assertion about the invisible hand: ‘which he borrowed from, and attributed to, Adam Smith’. Joel, after all teaches law and knows the weakness of unqualified assertions.

Where I agree with Joel’s article is that Friedman’s often pronounced belief that corporate bodies have no responsibility for anything other than making money for their shareholders. Such extravagant assertions are not correct, in my view. Corporations, like any other institution or natural person, have obligations, not the least of them, to conduct themselves within the law (including such regulations as are passed lawfully to make laws operational).

The history of corporations includes the kinds of behaviours criticised by Adam Smith in Books IV and V of Wealth Of Nations regarding the awful behaviours of the East India Company and the people in it.

There is also the history of slavery, which history should not be confined only to the experiences of slavery in the British Colonies and afterwards in the USA, of which the British slave trade was stopped by law in 1808. There is also the unfortunate neglect of the millennia of experiences of slavery in eastern Europe, the near East and the Arab sphere of influence in Africa, and in India and China too until recent times. This history suggests that left to their own ideas of corporate responsibility there is a real danger that corporation, governments, and private individuals will behave irresponsibly and inhumanely unless the legislature intervenes.

Therefore, in advocating minimalist corporate responsibility, Milton Friedman was plain wrong. Working within the law and common decency, corporations are better suited to operating in competitive market economies. That part of Friedman’s outlook was right, considering the alternatives.

But overall I do not accept that Joel is right when he claims that "Meltdown is a sure sign that free markets don't work". In the absence of free markets, within the law and actining decently, he would soon notice the difference in Vancouver.

*Readers interested in the myth of an invisible hand can find it discussed in my book, ‘Adam Smith: a moral philosopher and his political economy’, Palgrave Macmillan, 2008, or in my paper, ‘Adam Smith and the Invisible Hand: from metaphor to myth’, 2008. The latter is available online if you write to: gavin –at – negweb-Dot com

Adam Smith Was Not Ideological on Banking Crises

Peter Boettke pleads “PLEASE, Just Say No!” on the authoritative Blog: “The Austrian Economists” (HERE):

“But IF we shut down our borders and if we raise the costs for domestic trade; and IF we make it very costly for innovators to think up new ideas and find the financing to bring those ideas to life in the market place, THEN a real crisis will result. If instead, we were to use the current financial mess to learn the right lesson and get government out of the business of doing business, and instead restrict government to the minimalist role of the "nightwatchman state" we will see market adjustment proceed ruthlessly and quickly cleaning out the malinvestments and redirecting resources to more efficient uses and people to more effective employments of their time and talents.

Get government out of the financial industry, let businesses fail, let reallocation of resources and people take place, and lets build effective restraints on government so that we don't end up in this mess again.

In my opinion, we ought NOT do the bail out, but even if for sake of argument I granted that we should, I would argue that there are insurmountable difficulties in the policy action proposed so that we cannot achieve what is intended with this bail out in terms of serving the public interest (it will definitely succeed in serving private interests).

Perhaps the best words ever written on this were in fact penned by Adam Smith himself, so I will leave you with those:

‘What is the species of domestick industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it’ (The Wealth of Nations, Vol. 1, p. 456)’.
VOTE NO.”

Comment
Of the economics of Peter Boetkke’s argument I am fairly sure he may be correct, but on the political economy of it I am less sure that he is being practical.

Academic economists, enjoying high salaries and tenure, may have a personal interest in being relaxed at the consequences of specific stances which pure economics dictates, but to be fair, politicians on higher salaries and with more tenuous tenure dependent on the vagaries of the narratives of their rivals, who seek to replace them in the electoral lottery, may legitimately be less sanguine about their electoral prospects if they vote in either way, for or against, the ‘bailout’ of easy to despise bankers.

Be clear, and admittedly, I am not taking a stance either way on the Bill’s merits, though as a pensioner I am aware of the personal risks if the entire edifice crumbles…

My interest is in the appropriate use of Adam Smith’s legacy which makes me uneasy about the actual quotation from Wealth Of Nations that Peter considers ‘the best words ever written on this’ subject. It comes, of course, from a set of passages referred to on Lost legacy many times each month – those related to the arguments around the use of the metaphor of ‘an invisible hand’ on the same page (WN: p 456).

As I understand the Bill, it does not seek to ‘direct private people in what manner they ought to employ their capitals’, which if it did it would indeed be a folly because ‘no council or senate whatever ... would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it’. It is proposing to use taxation revenue to add liquidity to the system.

The issue is not about directing ‘private people’ to ‘employ their capitals’; it is about ensuring that existing enterprises, teetering on the brink of a general bankruptcy for want of liquidity have the necessary capital to go about their ‘private business’. That is altogether different and comes from a situation completely unknown to Adam Smith in his day.

A single mid-18th-century bank (the Ayr Bank) that failed lost the capitals provided by its shareholders and the deposits of its customers which, while disastrous for those involved (shareholders, savers, creditors, employees, and customers trusting that the bank was managed by people of ‘fortune, probity, and prudence’ [WN II.ii.28: p 292]), it was not catastrophic for an entire society, as may be likely in the current financial crisis, not the least because of its global not local nature.

Smith’s entire chapter in Book II reveals his understanding of the emergence of banking as a force in a commercial economy. It pays modern economists to read it. They will see how troublesome considerations in the early days of banking led gradually and eventually to the weaknesses presently found in modern global banking. That ‘great wheel of circulation’, which is so critical for a growing economy before the industrialization of commerce, is always vulnerable to the ‘excesses’, which caused the current crisis.

Smith spends pages discussing the effects of a run upon banks, the fraudulent practices of ‘drawing and redrawing’ (this ‘ruinous resource’), ‘clipping of coins’, management of ‘debtors’, keeping an eye on the increase in customers and their ‘conduct’, the ‘discounting of bills’, ‘fictitious payments’, and the plausible blame for ‘distress’ due to the claims by those refused credit of the ‘ignorance, pusillanimity, and bad conduct of the banks’, when in fact they were attempts at prudent banking.

Bank ‘liberality’ in the issuing of bank notes beyond what was sensible (promises of quick and profitable repayments?), led to a ‘fatal cycle’ and caused ‘real distress’.

One small reform that Smith sought was that of the legislature restricting banks from issuing small-denomination notes. This practice led to ‘a very considerable inconveniency, and sometimes a very great calamity to many poor people’. Smith’s comment on what may be done to rectify the outcomes of these practices is revealing to ideologues revelling in their certainties about practical not utopian economics:

“To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed” ( WN II.ii.94: p 324).

I would have thought these words would be more relevant to the current debate than those Peter quotes from Book IV above, and very much contrasts with his general approach to who knows best about an individual’s circumstance – the individual or the government? As a general statement the knowledge of the individual is paramount over the government's is acceptable; as a practical question when the financial system faces a possible global collapse, the issue is no longer so clear cut.

Individuals also make private decisions to behave irresponsibly (or fraudulently, or ignore high risks). It’s not the bank that decides to behave recklessly, but the individuals employed in it. If they are not restrained by the bank’s rules of governance, they must be restrained by the justice system, i.e., the collective decisions of other individuals in the legislature and the executive. Competition both pushes bankers to be more circumspect and more liberal in their conduct. Which predominates is not a matter of theory; it is determined by the balance of their conduct and expressions of their self-interest as they see it.

‘The most urgent necessity’ argued Smith justifies the abrogation of a normally correct economic policy (WN IV.v.b. 39: p 539; in reference to the absurd interventions of governments in the corn trade, nominally to deal with ‘dearth’, but which often promote 'famine'). It may be that the global financial systems is approaching or has reached that point. That is something that political economists may have a legitimate viewpoint.

I am not convinced that pure theory is of much help in determining the answers and I much prefer that we approach our determinations in the manner that Adam Smith demonstrated: sound principles tempered by sounder applications of them to different and changing particular circumstances.

Adam Smith was never an ideologue.

[I am currently reading Riccardo Rebonato's Plight of the Fortune Tellers: why we need to manage financial risk differently, Princteon University Press, 2007]

More Nonsense About Adam Smith and the Turmoil

Antonio C. Abaya writes (1 October) in Cebu Daily News (HERE):

“Free market and gov't intervention”

“This is not the end of capitalism. It is not even the end of American capitalism.
American capitalism, especially as zealously protected by the Republican Party, is anchored on the hitherto unshakeable belief in what is reverentially referred to by its priests and acolytes as “The Market.” Meaning, that the Free Market, the Unseen Hand of Adam Smith, is the best, and even the only, arbiter of economic decisions in the allocation of resources. Hence, according to this secular religion, the best government is the one that interferes the least in the workings of The Market. But that has now been stood on its head.”

Comment
Typical of much that is broadcast during the current financial turmoil.

Link Adam Smith to the turmoil; link his ideas to those who allegedly take extreme stances on the role of markets; bring in remarks about the ‘invisible hand’ metaphor and claim that Adam Smith had a theory about invisible hands working in markets; claim Smith believed that self-interest/greed would always benefit the community if left alone; assert that the current turmoil can only be resolved if governments intervene; and conclude that markets have failed.

None of this would have been plausible if Chicago economists had justified their theories on their merits instead of annointing them with the distorted approvals of a mythical Adam Smith (definitely not the Adam Smith born in Kirkcaldy in 1723) who mostly said the exact opposite in many cases to his alleged views and the fantasies of the epigones who understood nothing about the contexts in which he wrote.

A Gem Amidst the Dross

It is a positive sign that not every commentator on current affairs in the current corporate finance crisis purveys the inaccurate nonsense that a source of the problem lies in anything written by Adam Smith, the man born in Kirkcaldy in 1723.

Eli Cox, Chair, department of Marketing at McCombs School of Business, writes in McCombs Today (‘News from the McCombs School of Business’) HERE (30 September).

“Cox: Creed of Greed Not Supported by Adam Smith

“Ordinary Americans have a deepening mistrust of free-market capitalism as our nation has gone from Enron, WorldCom, Adelphia and Tyco to Bear Sterns, Freddie Mac, Fannie May and Lehman Brothers. Sadly, this mistrust is justified because too many corporate executives have adopted the creed of greed. This creed is based on the false view that Adam Smith believed that that personal greed generates the public virtue of economic growth. In fact, Smith would have been revolted by this misrepresentation of his views, as he actually wrote the following:

“Justice [the human virtue of not harming others]…is the main pillar that supports the whole building. If justice is removed, the great fabric of human society which seems to have been under the darling care of Nature must in a moment crumble into atoms….Men, though naturally sympathetic, feel so little for others with whom they have no particular connection in comparison to what they feel for themselves. The misery of one who is merely their fellow creature is of so little importance to them in comparison to even a small convenience of their own. They have it so much in their power to hurt him and may have so many temptations to do so that if the principle of justice did not stand up within them in his defense and overawe them into a respect for his innocence, they would like wild beasts be ready to fly upon him at all times. Under such circumstances a man would enter an assembly of others as he enters a den of lions.”

Smith is most famous for The Wealth of Nations (1776) but he discussed the ethical foundations for a free-market system in his first book, Theory of Moral Sentiments (1759). The quote found above is drawn from The Wealth of Nations states that unbridled greed destroys a free market system.

The pernicious view that “economic man” is selfish and rational and that Smith’s invisible hand will clean up the mess has been perpetuated by the Chicago School of Economics. Milton Friedman (Nobel Price 1976) argued that corporate managers should be economic men who should maximize profits without engaging in socialist activities like caring for workers or the environment. What he failed to recognize is that corporate managers may and often do try to maximize their own wealth at the expense of stockholders as well as customer.”

Comment
How true! At last a sign that some of the vast faculty of economists, trained in the academic world that has long been dominated by Chicago since the early 50s and by those who went onto teaching across the Western World’s universities, colleges, and school, have not lost their critical faculties – they show signs of actually reading what Adam Smith wrote and not what their tutors told them.

[I have long expressed the view to students over 35 years teaching that the patron saint of students was Saint Thomas – ‘don’t trust what you are told by tutors – read it for yourself!]

I commend Professor Eli Cox for his gem of truth amidst the current dross that passes as acceptable in the plethora of published pieces during these last two weeks.

He is right to assert that the myths of the majority fed on Chicago’s misappropriation of Adam Smith’s legacy contributes to the popular groundswell of distrust of markets and in consequence strengthens the corporate statists in favour of even bigger government.

Friedman, and the many others, who linked free markets to their myths about invisible hands, laissez faire and the elision of self interest into greed, severely damage the constant struggle for clean markets, open and transparent competition, and tolerable levels of public goods in place of big government in too close an alliance with big corporate interests.

Markets, operating under a regime of justice (and the prosecution of corporate criminals), are part of the solution; they are not the problem.