Short Break in Posting

I am taking a short break in the north-west of Scotland, someway north of Oban, for a couple of days.

It may be possible to read posts but not to send them until Tuesday. Nothing much to do up there except walk a little, read a lot, and enjoy (I hope) some fine food. It's very cold today, with frost on the ground; on the west coast it's snowing, showering and blowing. Fine, bracing Scotch weather (think positive!).

On the way up I shall pass Inverary, where the 3rd Duke of Argyll had his Scottish residence and which Adam Smith may have visited, as the Duke was his main sponsor in his successful applications for his Glasdgow University chairs.

Smith's father had served the 2nd Duke of Argyll in the shananigans that brought Scotland into a parliamentary Union with England in 1707 - it was already a union of crowns.

His father also worked with the 2nd Duke's brother who became the 3rd Duke whom Smith knew, distantly. It was this fortuitous connection that earned him the Duke's favour in his university appointments and the opportunity to prove his genius.

Potted Biographies Add to Myths

Hanjae Lee (described as a 'teacher') writes a ‘biography’ of Adam Smith in the Blog, AP History HERE (I added 'sic' beside the 6 errors and one typo):

“I was born in 1723 in Scotland as the son of Adam Smith and Margaret Douglas. My father had died before I was born, so I was raised by my mother. I attended Glasglow [sic] and Oxford universities and became a professor of moral philosophy at Glasgow in 1752. After lecturing for a couple [sic] of years, I published The Theory of Moral Sentiments in 1759. In the book, I argued that the human communication depends on sympathy between “agent and spectator.” But what I truly focused on was economy. [sic]

I believe that the impulse of self-interest work toward the public welfare in economy. I even wrote a book about it: An Inquiry into the Nature and Causes of the Wealth of Nations. A person “neither intends to promote the publick interest, nor knows how much he is promoting it… he intends only his own gain.” If each person chases his own interest, the general welfare of the society fosters as a whole. [sic] Free trade system is essential in this context for the maximum development of wealth; trades enable exchange of variety of goods. It is the “invisible hand” that regulate the market system and satisfied the economic needs. [sic]
The theory I developed is SO good that it will be still studied three hundred [sic] years later. How do I know?

Comment
In its 228 words, there are 5 errors and 1 typo. Smith was elected Professor of Logic in 1751, and transferred to Moral Philosophy in 1752. He published The Theory of Moral Sentiments in 1759, six years (not 'a couple of) after (7 years if we include his lecturing from 1751, during which he was lecturing on moral philosopy from October 1751 in place of his predecessor who was ill).

He did not focus on 'political economy', though he taught it for some weeks only as part of his lectures in jurisprudence (notes of which we have from his students). some of which were transposed direct into Wealth Of Nations, in addition to which he taught for months on 'ethics'. His interest in 'police', the then current term for the duties of government including the economic welfare of its citizens, was evident in 1762-3, and in rhetoric, a long standing subject he taught from 1748.

He certainly wrote about self interest but did not consider that this would or does 'foster' the 'general welfare of the society ... as a whole'. It was the consideration of the self-interest of others that was the driving force of the successful propensity to conclude exchanges with others. Self interest could also be destructive of welfare - 'the vile rulers of mankind', etc., of which he gives over 70 examples in Wealth Of Nations.

Nor did he consider an 'invisible hand' would "regulate the market system and satisfied the economic needs". That is a mid-20th-century myth for which there is no evidence in any of Adam Smith's writings on how markets work. See my paper downloadable from the Lost Legacy home page.

Hanjae Lee has passed on the myths about Adam Smith emanating from modern economists who use them as propaganda for their version of how economies work.

Adam Smith on Tax and Borrowing

William Watson writes in Financial Post (National Post in Toronto, Ontario), HERE:

“The Tories' negative stimulus”

“A still older tradition that we might call Smithian, though I don’t think Adam Smith ever made this case explicitly, might argue that if stimulus packages mean the government’s share of the economy will grow, that may actually cause net economic contraction since government will be much less efficient producing things than the private sector would be. So in fact an apparently contractionary package that reduces the size of government might actually end up being stimulative. This Smithian interpretation is the only one, so far as I can see, that could lead you to conclude the Tories’ Economic Statement is stimulative.

….The government is declining to borrow the monies in question and pay them to people who undoubtedly would go out and spend them. Ricardo, on the other hand, might think it a wash while Smith might see it as a gain.”

Comment
I have no comments on the merits or otherwise of the policies proposed in Canada to deal with the current financial crisis under my standing ordinance of not commenting on politics in countries other than the one I vote in. However, I am free to comment on policies that its proponents or local columnists associate with Adam Smith.

William Watson qualifies his statements with: “I don’t think Adam Smith ever made this case explicitly”, which is absolutely appropriate because it is true. In Smith’s day there was not a great deal of thinking about managing economies, or what we call macro-economics, or the government’s role in these matters.

Political economy had macro elements – the monetary system, the Bank of England (and the Bank of Scotland), the currency (gold and silver, and paper currencies, the individual banks, balance of trade, foreign trade of consumption, domestic trade, taxation, and the annual production of wealth or “necessaries, conveniences and amusements of life”) – but of government directed macro-policy, this was no such a ‘big idea’ at the time.

The government ‘sector’ was relatively small compared to the 20th-21st centuries (under 15 per cent compared to over 35 per cent), and its biggest item was ‘defence’ spending. If activity slackened off, unemployment rose (lost amongst the general destitution of the countryside and the towns), and farms and enterprises experienced bankruptcies, people didn’t look to government for relief.

When a ‘recent’ war ended, Adam Smith noted how, when

“a hundred thousand of soldiers and seamen were deprived either of employment or subsistence”, which was “a number equal to what is employed in the greatest manufactures”, that while there was “some inconveniency” suffered, the seamen “gradually betook themselves to the merchant service” and the soldiers ‘were absorbed in the great mass of the people, and employed in a great variety of occupations” (WN IV.ii.42: pp 469-70; Canaan p 436).

It did not occur to him to demand government action; it did occur to him to advise government to move from protected to free trade ‘gradually and slowly’ to allow time for these events to work themselves out with the least direct harm to those affected.

William Watson is appropriately cautious in ascribing views to Adam Smith about situations he did not face, but because Smith considered waste and prodigality abundant features of government spending, with consequent negative affects on economic activity, growth included, Watson makes a plausible case for describing a possible ‘Smithian’ policy of not increasing the budget deficit to allow government deficit finance to ‘kick-start’ a sluggish or declining economy. To the extent that this is a current Canadian ‘Tory’ policy such a stretch of plausible ‘Smithian’ ideas ‘fits' Watson’s analysis in his opinion piece.

However, I am not inclined to go along with this argument, particularly as Britain is in a similar policy quandary. Government expenditure carries with it some degree of inherent waste, but some level of it nevertheless has some level of productive (in Smithian terms) effects; employing labour that covers its costs, including capital, plus a profit. A road, bridge, runway, or sports theatre, built by private companies with government funds, that earns profits adds to economic activity. So some element of that sort of activity is productive and positive, but it is unlikely to be sufficient or timely (big projects take years not weeks or months).

The other side of the argument is strictly Smithian. Taxation reduces private incomes, and though necessary for society at some level for defence, justice, public works and education (and the ‘dignity of the sovereign’), it also inhibits private consumption and savings below that they would otherwise have been.

Where taxes are ‘too high’ (a subjective assessment) and where, in consequence, government-determined choices displace private-consumption choices by depressing consumer demand, and the government choices are ‘locked into’ non-spending, because of ‘non-lending’ (a problem with retail banking at present), it may be Smithian to lower taxation fairly dramatically.

Of course, this would still increase government borrowing and its deficit. But by lowering taxes through removing taxation of all incomes below £12,000 per individual, so that millions of the poorest people pay no tax, and the rest pay no tax on the first £12,000 of their incomes (as recommended by the Adam Smith Institute HERE and HERE), there is more than an even chance that the result would be a fairly certain stimulus to private consumption, which would do more to re-activate the economy, albeit still slow and gradually, but also quicker than uncertain fortunes of big spending projects coming on stream in 12 to 18months, or even longer, from government ‘big projects’.

Smithian economics does not lead to a ‘do nothing’ anti-depression strategy, nor is it opposed to a government deficit. It is the quality of the counter-measures not their use that separates the advocates of big government ‘big fixes’ from Smithian better sense.

Governments do not trust individuals to do what is right; they prefer the visibility of big projects, not least for their photo-opportunities – and if that is too cynical they only have themselves to blame from their habits of a lifetime.

It seems to me that such a policy as the Adam Smith Institute proposes is compatible with any good government, Tory or otherwise.

Adam Smith Did Not Regard Taxation as 'Evil'

Michel Pireu writes (28 November) in Business Day HERE:

“Laissez faire — the scapegoat of the crisis”

"The name of Scottish philosophy professor Adam Smith has been linked with the cause of economic freedom ever since he published his Inquiry into the Nature and Causes of the Wealth of Nations in 1776."

"He had a lofty view of the importance of the law of supply and demand, believing that it affected far more than the market. “The natural effort of every individual to better his own condition” was the foundation of all political, economic, and moral systems."

In Smith’s view, taxation was essentially an evil: first it was an infringement of liberty: second, it distorted the natural operation of the market."

He believed self-interest could be safely left to serve the common good. “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. In spite of their natural selfishness and rapacity (the rich) are led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made, had the earth been divided into equal portions among all its inhabitants,” Smith declared.

Mainly from Ideas that Changed the World by Felipe Fernandez Armesto”

Comment
Michel Pireu is not quite being fair to Adam Smith and verges on being misleading about his ideas.

Adam Smith never believed that ‘taxation was essentially an evil’; he recognised the need to fund the essential activities of the sovereign state: defence, justice, public works and education (Wealth Of Nations, Book V).

These were essential for the continuation of society and for social harmony within it – without defence the society could be overrun by the depredations of neighbours (‘defence is of much more important than opulence’, WN IV.ii.30: pp 464-5); without justice the society would ‘crumble into atoms’; without public works to facilitate commerce, the society would not reach opulence; and without education, the poor in the society would be exposed to ‘the delusions of enthusiasm and superstition’ (WN V.i.f:61: p 789; Canaan, p 740).

Neither did he consider that taxation “was an infringement of liberty”. He was a strong believer in Natural Liberty as a philosophical approach to human rights for all societies, including those ‘despotical’, from the Natural Law theorists, Grotius, Pufendorf, Carmichael and Hutcheson.

But he considered that as the duties of government were clear, they had to be paid for and his first maxim of taxation was the ‘the subjects ought to contribute towards the support of the government, as near 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; Canaan, p 777)

Now, of course, certain taxes and certain levels of taxation, especially those that breached his maxims, ‘distorted the natural operation of the market’. But this never meant that taxes should be abolished. Indeed, as staunch a supporter of free trade as he was, he was also pragmatic enough to note that even with his overall view, Britain could not become a totally ‘free port’ without some level of tariffs or duties on some goods, because customs duties played such a large part in government revenues.

On self-interest, Michael Pirue (or his sources, Felipe Fernandez Armesto – did Pirue not check his secondary sources before making definitive statements about what Adam Smith actually said?) achieves his alleged quotation from Adam Smith by advertenly running two separate sentences from Moral Sentiments and Wealth Of Nations together without informing the credulous among his readers about what he had done, and thereby giving the wholly false impression that Adam Smith “believed self-interest could be safely left to serve the common good”.

Smith was never so imprudent (silly even) to assert such a thing.

The quotation from Wealth Of Nations about the ‘butcher, the brewer, and the baker’ comes from Wealth Of Nations (WN I.ii.p 26; Canaan, p 14) and the quotation about ‘natural selfishness and rapacity’ comes from Moral Sentiments, IV 1.10: p 184), and was about the delusion of rich landlords, not their exercise of self interest (and it has been discussed on Lost Legacy many, many times).

Adam Smith gave over 70 reasons why self interest cannot be assumed to always benefit societies and those in them in Books I, II, and II, of Wealth Of Nations.

He was not an ideologue; sometimes individuals benefited others (the propensity to exchange) and sometimes they didn’t (monopolists, protectionists, and such like – nowadays, polluters!).

Michael Pireu may want to reconsider the certainties by which he taints the legacy of Adam Smith. All he has to do is read for himself Smith’s works (or read Lost Legacy regularly).

Two Excellent Adam Smith Institute Briefing Papers

For the best analysis and thoughtful proposals on the current financial crisis I recommend two briefing papers from the Adam Smith Institute (London):

The first analyses the financial crisis, its causes, the 'remedies' so far proposed, and its proposals HERE:

The second makes radical alternative suggestions for the government of Britain on how it could achieve so much more if it took remedial steps to immediately benefit average earning families and the very poorly paid by abolishing all taxes for the lower paid (earning under £12,000) and reducing taxes on average incomes by the knock on effects on tax allowances. This paper is HERE

Both ASI Briefing papers are welcome in the current mood of pessimism; the solution is actionable now by a government that claims to want to 'do the right thing'.

[Disclosure: I am a Fellow of the Adam Smith Institute)]

The State is Not a Solution - it is Only a Tool

Philip Stephens writes in the Financial Times (London: 28 November) HERE:

“Broken banks put the state back in the driving seat”

“We are watching a bonfire of the old orthodoxies as well as of the vanities. This week Barack Obama promised to spend hundreds of billions of taxpayers' dollars to prop up the sinking US economy. Gordon Brown's British government announced it would soak the rich to pay for an economic rescue package.

In between times, the Bush administration all but nationalised Citigroup, the world's largest bank. For good measure it threw another, yes another, $800bn into the effort to thaw US credit markets. Everywhere you look, Keynes' demand management is replacing Adam Smith's invisible hand; printing money, a mortal sin under the fracturing Washington consensus, is the new prudence.”

“Still, the markets remain frozen, starving business of the oxygen of credit. Unless things change soon, the politicians will have little choice but to take direct control, and quite possibly, ownership, of the banks.”

“The risk is that the recalibration will go too far: that innovators and entrepreneurs will be put in the stocks with investment bankers; and that fettered markers at home will be accompanied by protectionism abroad. Lest we forget, for all its manifest flaws, a liberal trading system has delivered hundred of millions of people from abject poverty.”

“What matters is the political symbolism: for Mr Brown, fairness now trumps aspiration.”

Comment
There are few quick fixes in political economy. The belief that there are quick fixes bedevils both those who see the market as the cure for everything and those who have great faith in the State to achieve what ever legislators decide is ‘best’ for everybody they govern.

State believers carry the additional burden that they have control of resources – many tens of billions worth – and the power to enforce their writ, however disagreeable or inconvenient, over the rest of us.

When States makes mistakes the damage they do is irreversible in the short to medium term and is corrected (assuming the state chooses the appropriate corrective behaviour) at an even slower pace than markets can take to self-correct its mistakes. The problem arises when States make decisions that cause long-term damage (albeit unintended) and the do not, or will not, introduce corrective measures, despite the evidence of failure.

Thus, the current spate of glee among slaves to ‘States-are-better’ (at least the ones run by them) about the current monetary crisis as a propaganda tool against markets, often with side-swipes at the supposed responsibility for the crisis attributed to Adam Smith.

The Labour government is educated enough than to place all their bets on State management, but they are following a line that drags towards ever greater involvement of the State in economic decisions. They have the defining example of the Soviet experiment in total State control as background and they have the awesome examples of State control (plus Kleptomanic mismanagement) of puny economies among the developing countries as foreground (with Zimbabwe’s hopeless monetary madness to the side).

Markets are better at generating economic activities than States. They are better at sustaining growing economic activities than States. They are also better at correcting faults in economies than States. But States have a role too.

Adam Smith saw their roles as defending the population from invasion (defence) and the trespasses of citizens on each other’s rights (justice). He also saw the State from its taxation revenues as the instigator of those public works that would facilitate commerce.

In his day the priority was the construction of a road transport system, canals, bridges, and harbours, which would not pay an individual, even a group of them, to undertake (add to which total there was the cost of erecting pavements in towns, street lighting, and sewage disposal. This amounted to a massive national expenditure, against which he considered the £176 millions spent in conducting the seven-years was a wasted opportunity.

Smith also saw the need for a massive investment cost in education. A ‘little school’ in every parish was ambitious and expensive. The majority of parents were poor in 18th-century Britain and, except for the very poorest, he felt they should contribute a few pennies for the salaries of the teachers. Today, we have moved on with two-hundred years of rising incomes and, to be frank, public education facilities are sub-standard. With the built – and to be built – public school estate, we need to move on and introduce the ‘voucher’ system to raise educational standards steadily.

The same reform agenda could be offered for health and welfare, two massive items in state expenditure (and taxation). On that other line expenditure in the State’s budget, defence, the last paragraph in Wealth Of Nations (WN V.iii.92: p 947; Canaan, p 900) said it well:

Britain should “endeavour to accommodate her future views and designs to the real mediocrity of her circumstances”.

What people ignore at their peril, the brute course of events will remind them - eventually.

Notice

NOTICE:

I have started to include the reference details to the 1937 Edwin Canaan edition of Wealth Of Nations from Random House to the usual reference to the scholarly structure given from the Glasgow Edition of ‘Adam Smith’s Works and Correspondence', published by Oxford University Press (also in the popular-priced printed edition from Liberty Press).

This is because not all readers have access to the Oxford University Press edition and the most popular edition, at least in the USA from observations and correspondence from readers, is the Canaan 1937 edition.

The 1904 edition of Canaan’s edition is also one that appears online on various sites, which is very handy too for quick online checks, though it does not follow the same reference points as the Oxford scholarly edition, used widely in the journal literature.

There have been several critical comments on the Oxford University Press, Glasgow Edition, not for its editorial work – which is sublime – but for the fairly high fees (£800-£1500) that its right’s department charges for quoting from its volumes in a published scholarly work.

Authors whose scholarly books are unlikely to make vast sums of money (‘popular’ books by scholars can pay their way, but they are unlikely to quote too much directly from the OUP editions) and heavy permissions’ fees can mean that the OUP makes more from the published book than the author.

Much noisy discussion ensues about how anybody can claim copyright in the 21st century over Adam Smith’s works all published during 1755-90? However, the claim to copyright is not in the words so much as in the minutely detailed editorial treatment, produced at considerable expence, that covers notes on all the variations in words and paragraphs from all the editions of his books, which OUP authors and editors include as notes and footnotes.

Short of copying out the words from early editions (1st to 6th) published in his lifetime – a major task for any scholar today – users of the OUP editions will just have to stump up the OUP permissions’ fees.

To assist those who do no have access to the OUP edition I shall endeavour, where time permits and location allows, to provide both the OUP refernce details and the Canaan 1937 page number.

Adam Smith on Banking Behaviour and Misbehaviour

‘Vino S’ writes on ‘Adam Smith on Banking’ on ‘My political blog and other musings’, HERE:

“Adam Smith had more complicated views on economic, philosophical and political questions that some of his supporters or detractors assume. Here is a quote from him on banking, a sector which has contributed so much to our current financial crisis:

"It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country. " - Adam Smith”

Comment
I made the following comment on the ‘Vino S’ selected quote:

It is better if people read the whole of Adam Smith’s chapter on banking in Wealth Of Nations, ‘Of Money considered as a particular Branch of the general Stock of the Society, or of the Expense of maintaining the National Capital’ (Book II, chapter ii, pp 286-320; Oxford University Press, 1976, or pp 270-313, Edwin Canaan’s 1937 edition, Random House edition).

They will find Smith’s late 18th-century grand panorama of banking practices in Britain including the role of money as the ‘Great Wheel of Circulation’ of the economy, of the prudent banking that adds to the capital stock and to productive labour, of the imprudent and fraudulent behaviour of some individuals and, alas, some bankers, and the need on occasion for government intervention by laws and regulations to prevent the contagion of malpractice and dangerous behaviour.

Of the latter he had this to say about necessary government intervention (perhaps of great relevance for those of who reject any intervention on principle:

“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; Canaan, page 308)

Brilliant Gem, But a Bit of Dross Too

Professor Mark J. Perry, a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan, writes Carpe Diem ('Professor Mark J. Perry’s Blog for Economics and Finance') and today’s post includes a gem and a dud (in the midst of a lively article, the overwhelming large part of which is excellent, but the dud bit tarnishes it).

First, here is yesterday’s gem, untarnished in its amusing brilliance, quoted by from The National Review, 22 January, by Bennett Owen:

And Grandpa provides yet another piece of political humor - the six miracles of socialism:
- There is no unemployment, but no one works.
- No one works, but everyone gets paid.
- Everyone gets paid, but there's nothing to buy with the money.
- No one can buy anything, but everyone owns everything.
- Everyone owns everything, but no one is satisfied.
- No one is satisfied, but 99 per cent of the people vote for the system.

I like that. Fifty-nine words worth more than a picture could paint or a thousand words could possible improve upon!

But now for the tarnished dud in the post:

“Giving Thanks for Capitalism, The Invisible Hand, the Miracle of the Free Market and No Turkey Czar”, HERE:

"You probably didn't call your local supermarket ahead of time and order your Thanksgiving turkey this year, did you? Why not? Because you automatically assumed that a turkey would be there when you showed up, and it probably was there when you showed up "unannounced" at the grocery store to select your bird.

And the reason your Thanksgiving turkey was waiting for you? Because of "spontaneous order," "self-interest," and the "invisible hand" of the free market - "the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many." Even if turkeys appear in grocery stores every Thanksgiving only because of the "selfish greed" or "corporate greed" of turkey farmers and/or supermarkets, it sure works for me.

In a 2003 Boston Globe column titled "Giving Thanks for Capitalism" (available only in the paid archives) Jeff Jacoby explains below why he is thankful for the miracle of the invisible hand that makes turkeys automatically available so efficiently at Thanksgiving:

“No turkey czar sat in a command post somewhere, consulting a master plan and issuing orders. No one forced people to cooperate for your benefit. And yet they did cooperate. When you arrived at the supermarket, your turkey was there. You didn't have to do anything but show up to buy it. If that isn't a miracle, what should we call it?

Adam Smith called it "the invisible hand" -- the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many. Out of the seeming chaos of millions of uncoordinated private transactions emerges the spontaneous order of the market. Free human beings freely interact, and the result is an array of goods and services more immense than the human mind can comprehend. No dictator, no bureaucracy, no supercomputer plans it in advance. Indeed, the more an economy *is* planned, the more it is plagued by shortages, dislocation, and failure."

It is commonplace to speak of seeing God's signature in the intricacy of a spider's web or the animation of a beehive. But they pale in comparison to the kaleidoscopic energy and productivity of the free market. If it is a blessing from Heaven when seeds are transformed into grain, how much more of a blessing is it when our private, voluntary exchanges are transformed - without our ever intending it - into prosperity, innovation, and growth?

As economist Steven Landsburg wrote in "Armchair Economics" about the invisible hand: "It is something of a miracle that individual selfish decisions lead to collectively efficient outcomes."

Comments
Apart from Adam Smith not ascribing the metaphor of ‘an invisible hand’ to markets, used only once in Wealth Of Nations in Book IV, but not at all when discussing how markets in commercial societies worked in Book I and II.

See my downloadable paper, “Adam Smith and the Invisible Hand: from metaphor to myth” (see Lost Legacy’s Home Page and follow the instructions).

The ascribing to ‘Heaven’ or God’s (is that the Judeo-Christian or the Muslim God?) direct intervention in procuring turkey dinners to a ‘miracle’, is pure nonsense (and, no doubt is offensive to those who buy drugs instead of turkeys and end up in the earthly version of hell).

Adam Smith did not call it "the invisible hand"; it may be a commonplace among some individuals “to speak of seeing God's signature in” markets by analogy with spider’s webs, but it is not a scientific explanation of what makes turkey farmers get up each morning and go to work of producing turkeys for Thanksgiving.

From the sublime to the avaricious, Professor Perry leaps to "selfish and corporate greed" as the explanation for turkeys turning up on the shelves for sale, and absolves those afflicted with these vices with the blessings of doing God’s business to “promote ends that benefit many”. There is no vice in seeking to buy what your family need for Thanksgiving from people willing to sell the means, so that they can feed and cloth their own families. Self-interest is not selfishness nor greed. It is a virtue.

But what a theological mess the introduction of God, heaven and miracles causes if the society requires selfishness and greed!

But the economist need not burden herself with this mumbo jumbo. Markets do not work on miracles – a flimsy force for sustainable food security – and an ahistorical perspective to boot.

Early humans, sitting around a small fire and in hunger, looked up when they heard the scavengers and gatherers returning to camp, bringing with them arms full of nutritious meat and marrow bones, plants, leaves and berries, and, in their pusillanimous superstition and credulity, they may have praised their stone or wooden sacred gods in their ‘thanksgiving’; but there was nothing sacred, or miraculous, about their good fortune.

The same processes which sent the scavengers and the gatherers out that morning and (may have) resulted in the successful search for food, are the same which sets the turkey farmers to work – if they don’t work, they don’t eat (or today, earn what enables them to do so).

Economists who resort to miracles, hand of god, and heavenly-providence type of non-explanations for markets, pander to their own smugness of keepiogn the truth to themselves, because without doubt, Professor Perry, and the many others who do so, are quite aware of how markets work (as did Adam Smith in Books I and II of Wealth Of Nations).

I think it better – and more respectful – if we economists tell ’em how it is, and not indulge in pandering to their credulity about pseudo-babble.

However, for reminding us about the six 'miracles' of socialism, Professor Perry is forgiven...

Neither Laugh Nor Weep, But Understand

Stephen Zill writes on “Economics for Everyone: Whither Capitalism? U.S. system waning?” in La Voz Weekly (the voice of Anza College) HERE:

“But first, let's get a few things straight: for one, pure free-market capitalism (henceforth simply "capitalism") has never existed; not here in the U.S. or anywhere else. A pure capitalist economy would have little role for government beyond much like that of a referee - to enforce the established "rules of the economic game."

Perhaps the closest example of pure capitalism we have ever seen was Industrial Revolution Era England. And it may come to a surprise to many of you that the U.S. is not the freest economy on the planet ¬- and by freest, I mean the least government intervention in the economy (according to the Heritage Foundation, Hong Kong currently holds that distinction as it has for the last 14 years).

Among its other features, the capitalist system is characterized by "markets" (do we really need to define those again?). In a pure capitalist economy, the questions pertaining to how and what goods and services get produced and who receives those goods and services is answered - or any problems that may arise are solved - in the market place, and with no government involvement.

… the conservative magazine National Review featured a drawing of a weeping Adam Smith (the "father" of free-market capitalism) and the words, "Adam Smith's Lament."

Comment
Stephen Zill writes a readable piece for a college magazine and it would be somewhat churlish to go through it line by line as if he had written for an academic journal. But to the extent that he reflects fairly common views about economics and the current crisis, I would like to pick up on an idea he has expressed, if only to correct aspects of this common view.

I start with the last quoted line about Adam Smith ‘weeping’ in a supposed ‘lament’ for ‘free market capitalism’. Allowing for rhetorical licence, Stephen misunderstands what Adam Smith’s approach to his work as a philosopher was about. He was not a proselytizer, visionary, a ‘man of system’, a man with a mission, not was he emotionally involved with his subject. He was a moral philosopher whose self-stated role was to ‘do nothing, but observe everything’.

The accolade, it is such, of being ‘the "father" of free-market capitalism’ was awarded two hundred years after his death in 1790 by modern economists with their proselytizing axes to grind, who share the unenviable status of neither thoroughly reading Adam Smith’s works nor understanding him. Quotations from them do not count; imputing their modern concepts to Adam Smith do not count (and is dangerous), and associating him with modern capitalism, a word and a phenomenon not invented until 1854, is quite absurd, and doesn’t count.

Why should Adam Smith ‘weep’ over a monetary ‘crisis’ in today’s economies?

He didn’t ‘weep’ over the direction taken by successive governments in respect of their commercial economies from the 15th century onwards. He analysed them as a philosopher and identified the source of their ‘mercantile’ errors – hoarding of gold and silver, instead of growing their real economies; their ‘jealousies of trade’; their political and sometimes – too often – their military contests; the monopolistic spirits of sovereign legislatures and the men who influenced them; the in-depth idiocies of their laws of primogeniture and entails; the Acts of Settlement; the monopolies of the Guilds; the Apprenticeship Acts; Chartered Trade Companies; wars for trivial ends; and the encouragement of chartered colonies that cost too much to defend and distorted the domestic economy.

All of these would have been a greater cause of distress to Adam Smith if he had been so inclined. But he wasn’t.

He observed and wrote about how they affected the wealth of nations; how the country could be so much more conducive to growth and the consequent opulence that would follow, particularly in the spread of opulence to working men and their families that constituted the greater part of the population.

Whether Stephen Zill’s assessment of ‘pure market capitalism’ applies today, or has ever applied, is not relevant to Adam Smith’s political economy, which never included advocacy of laissez-faire, or complete non-intervention by government.

Wealth Of Nations covers a formidable agenda for government intervention (he felt Britain’s wars cost far too much, given the ‘mediocrity of its circumstances’ which could be better spent on infra-structure development to facilitate commerce, defence of the island against barbarian invasions, the maintenance and application of the instruments of justice, based on liberty, and the education of people of all ages.

The fact that US commentators have never understood what Adam Smith was about is the main cause that fuels the media’s treatment of the current crisis in the way that they do.

It has nothing to do with how modern capitalism in its varied forms has developed historically to where it is today. It is that subject that Adam Smith would be interested in and not how it relates to some pure notion of how it ‘ought’ to be.

He would neither weep nor laugh about things as they are – he would try to understand them from his historical perspective, and pass them on to all those who were interested.

Behaviours, Not Rationality, Drive Markets

Peter Foster writes on “The dangers of behavioural economics” in Financial Post, Toronto (25 November) HERE about the alleged dangers of big bonuses on decision-making – apparently they are do not improve performace. (For the details, follow the link).

Peter Foster writes:

“What is perhaps most fascinating about the rise of behavioural economics is that it reminds us that “conventional” academic economics somehow became sundered from human nature. We might remember that 17 years before he published The Wealth of Nations, Adam Smith published The Theory of Moral Sentiments. Smith never for a second imagined that humans were rational calculating machines. Similarly, the greatest economists of the twentieth century — von Mises, Hayek, Schumpeter and Keynes — all regarded homo economicus as a nonsense. Keynes was the odd man out, however, because he believed in an even more fanciful construct — homo politicus — a brilliant individual motivated solely by the public good.

The power of the market meanwhile does not derive from human rationality but from the fact that it rewards or punishes commercial behaviour on the basis of its contribution to society. It is doling out a whole mess of punishment right now, despite the attempts of government to shove cushions down everybody’s shorts.

Man is fatally flawed and periodically subject to Extraordinary Popular Delusions and Madness of Crowds, but a far great delusion is that there is a political solution to his shortcomings.

Unfortunately, behavioural economics is regarded as a new tool with which our political masters might improve us. That is far more potentially damaging than the most elaborate of bonuses.”

Comment
On the whole I agree with Peter Foster in his disdain for the fanciful theories of Homo economicus and Homo politicus, because I am not too fond of the idea of human rationality driving all behaviour in the economic models common among modern economists, other than in the sense we can rationalize any decision into it being rational for that person in those circumstances.

The fad for ‘explaining’ why some (it’s always some, never all, though the obvious caveat is often ignored in the admiration of the ‘rationalist’ for the beauty of the alleged explanation) behaviour can be seen to be ‘rational’.

For instance, teenage girls becoming pregnant is supposedly a rational search to qualify from welfare payments (but why don’t all girls who might believe they would benefit from welfare become pregnant?), or teenage boys develop criminal tendencies to enhance their prestige among their peers (but why do so many more boys in the same circumstances of broken families, slums, unemployment and poor education, not become criminal recidivists?).

Of course a ‘rational’ explanation for these girls and boys not covered by the initial explanation can be advanced too on other grounds, but if every variation is ‘rational’ too then ‘rational’ is no longer the explanation. People do what they do because that’s what people do when they do whatever they do!

Markets are the net effect of all behaviours, not just rational ones. And many of these behaviours are not captured in the rational calculus. Adam Smith understood that truth.

In the Home of the Enlightenment

I stepped out of my comfort zone today to attend a conference at the Royal Society of Edinburgh (founded 1783; Adam Smith was a founding member (he was already a member of the Royal Society of London since 1773; he was admitted as a fellow in 1767).

The occasion was the commemoration of the great Scottish Physicist, James Clerk Maxwell, by the unveiling of a statue to him in George Street, Edinburgh, just along from the RSE building. The RSE represents the prime members of the Scottish scientific community and I found the talks of immense interest.

Without the mathematics of James Clerk Maxwell on the electronic spectrum, the immensely practical work of others would not have been possible that took society into the electronic age. The maths are difficult, but the benefits have been enormous. Would that we could say the same about maths in economics; electrons and atoms are well behaved, but people are not.

I reflected while listening, and later while discussing with several scientists whom I recognised, on the wonder of James Clerk Maxwell's work that led to so much of great benefit all around us, compared to the predictions and policy reocmmendations of economists - the British Chancelor giving precise predictions of when growth will return to the UK in the third quarter of 2009, a prediction few are rash enough to be so precise.

Mathematics that assumes order where there is precious little evidence of it is no security that the predicted will happen. Economists who desparage history have cause to be more modest in their certainties.

Melbourne 'Discover Capitalism' Club Sounds Most Interesting

A Blog advertising a discussion group announces an event entitled:
"Comparing Adam Smith & Ayn Rand on The Moral Foundations of Capitalism"
HERE:

The text about the discussion announced the background to the event:

“Our goal will be to identify
1. All the ways in which Adam Smith and Ayn Rand are similar
2. All the ways in which Adam Smith and Ayn Rand are different

Timothy Warner will present the basics of Adam Smith's approach.

Prodos will present the basics of Ayn Rand's approach.

This will not be a debate - but a careful, thoughtful, and thorough exploration; a mapping out of the terrain of each Thinker's thinking.

Many people treat Adam Smith's Wealth of Nations as a stand-alone defense of the Free Market. However, without a proper grasp his earlier work, Theory of Moral Sentiment, it is simply not possible to fully appreciate where Adam Smith is coming from and what he really means.

My research indicates that the term "the invisible hand" first appeared in Theory of Moral Sentiments (first published in 1759) - not in Wealth of Nations. But I'm still checking on this.

Most of us know Adam Smith as an Economist - as the father of Economics. Few are as versed with his work on Moral Philosophy. I believe you'll find Tim Warner's depth of understanding and clarity of communication on all things Adam Smith very strong.
Ayn Rand is more widely recognized as a moral philosopher and as an advocate of a particular kind of morality - one which explicitly leads to the advocacy of Free Market Capitalism.

She once wrote: "I am not primarily an advocate of capitalism, but of egoism; and I am not primarily an advocate of egoism, but of reason. If one recognizes the supremacy of reason and applies it consistently, all the rest follows."

Free Market Capitalism "follows" from Ayn Rand's epistemological and moral premises.
Free Market Capitalism "follows" from Adam Smith's epistemological and moral premises.

Are the two approaches compatible? If so, to what extent? Where do they diverge? Are any differences due to different views of Man? Of thinking? Of happiness? Of human relationships? Of the nature of reality? What does each thinker treat as most important or least important?”

There are many, many questions to explore. Come armed with your own! It's going to be a super evening! I look forward to your passionate intellect!”

Comment
It really sounds a worthwhile event and if scheduled on a regular basis it would be worth attending regularly (I assume the subjects discussed at the meetings change each time). On these grounds its sponsors and attendees appear to be serious people and similar in kind to regular readers of Lost Legacy.

Unfortunately, the discussions are not within easy reach of Edinburgh because the Club, ‘Discover Capitalism’, is in Melbourne, Australia. Any reader who knows of the club would be most welcome to inform Lost Legacy of its qualities, especially as it holds to the following principles for the conduct of its debates:

“Our members come from a wide range of politics and ideology within the pro-Capitalism spectrum, including: Conservative, Classical Liberal, Objectivist, Christian, Atheist, Libertarian, Liberal Party of Australia. Discussions are friendly but vigorous. We take ideas (and good manners) seriously!”

The nearest we have in Edinburgh to the Melbourne Club is the ‘Tuesday Club’ (to which dinner meeting I shall attend tomorrow evening – Tuesday, 25 November), which has a stimulating procession of good speakers and a club ‘rule’ that all attending are expected to speak in turn after the main speaker’s discourse, all over an excellent dinner.

While the Tuesday Club is ‘right of centre’, it is not homogenous in its views, and nor are its speakers. Last month’s was delivered by a senior ‘spin’ manager from the UK Labour Party’s cabinet-level-team of ‘spinners’ – and very thoughtful he was too in making the ‘Unionist’ case against Scottish independence. Being chairman for the night, I stuck to a self-denying ordinance not to speak, especially as long speeches by some members were followed by long responses albeit of excellent quality from the speaker.

However, if I ever get to Melbourne (again) I would hope to attend a meeting of the ‘Discover Capitalism’ club, unless I am told by Lost Legacy readers that its actual practice is different from its billing.

Meanwhile, members of the 'Discover Capitalism' club may want to discover something about Adam Smith and his Works from reading Lost Legacy regularly between their meetings.

Real Wealth

From Airllelon’s Investing and Trading Blog, complete with video links to U-tube-style pieces by the author (HERE) I find this piece:

"Week in Review: The Death of Keynes Mercantilism?"

"It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country" - Adam Smith

For decades now, Keynes has been held as the pinnacle of "capitalist" thought, and the latest in the evolution of what started with Adam Smith.

There's only one tiny problem with that little concept.

Keynes was no capitalist. Keynes ideas are a direct descendant of everything that Adam Smith opposed. Keynes ideas are a descendant of Mercantilism. Capitalism isn't dying, because Capitalism hasn't been practised. Keynes Mercantilistic thoughts and theories are what are dying.

Keynes firmly supported concepts found in Mercantlism. Which is that government should work in partnership with private companies.

In a Capitalistic society, there can be no lobbyists.

In a Capitalistic society, governments do not work as partners with private industry.

In a Capitalistic society, private industries do not seek capital from the government when they are doing poorly."

Comment
To quote a phrase, “there’s only one tiny problem with that little concept”. The author of the piece goes on to recommending to readers that they buy silver, not gold, because silver is doing better at present, which is partly exactly what Smith considered was a central fallacy of ‘mercantile political economy’!

Gold, silver, and cash money are not wealth in Smith’s eyes. They are illusionary wealth by being stored claims on the real wealth. They do not create wealth in themselves. Hording gold or silver will not add to the wealth of nations.

Wealth according to Adam Smith was the ‘annual output of the necessities, conveniences, and amusements of life’, or the real goods and services of consumption, and working capital.

Revenues from engaging in productive work can be spent on final consumption or re-invested in future productive employment; the balance between these ends determines whether growth in the next period’s annual output of real wealth occurs.

Too much prodigality in consumption and too little in re-investment is not good for an economy, or the people in it. Hoarding metallic ‘symbols’, such as gold and silver is a psychological comfort to individuals but does nothing for the economy. Printing more money is not a substitute for generating the means to produce real wealth when it is disconnected from the real economy; too much printing leads to inflation, not more real wealth (see Zimbabwe).

Strong boxes, protected vaults, brim full of gold and silver, are sterile unless part of the great wheel of circulation that puts to work real resources, primarily labour, capital, and work in progress.

Adam Smith did not write about ‘capitalistic’ society – that came later in the mid-19th century. Long before the commercial entities in the 19th-20th-21st centuries sought governmental help for whatever mess they were in, powerful entities in ancient times sought relief of various kinds from their states, usually in the form of retribution against former clients and competitors, punitive expeditions, revenge missions, armed interventions and lucrative supply contracts. Emperors, kings and ‘strong’ leaders, also sought help from traders – sometimes as excuses to intervene with neighbours in pursuit of plunder and tribute, and colonies and empires.

What is needed by those who write about the ‘perils’ of modern capitalism and modern states is a little more historical knowledge beyond what they apparently misunderstand to be the unique behaviour of the current age. Unless they are only interested in selling their 'solutions'...

Adam Smith Is Innocent

F. Meekins writes about “Nation's Capital Implements Measures Violating Rights & Property” in Red State HERE.

I found yet another ludicrous example of the effect of decades of brainwashing that creates the self-deluding consequences of repeating a mantra made up by otherwise deserving top-class economists, some of them Nobel Prize winners, and daily – hourly! – mimicking in the media by epigones (and not just a few hacks), who assume that if something is said often enough, it must be true, but sadly for them it isn’t.

I refer to the invention of a myth, albeit a myth with the authority of Adam Smith’s name on it, namely that there is a mysterious, almost Divine-sourced force, called by modern economics a ‘concept’, a ‘theory’, a ‘paradigm’ even, known (short gap for sound of trumpets) as ‘the invisible hand’.

Here is the offending sentence:

“According to social planning, the new urbanism, sustainable development, or whatever other flurdelore you want to dress it up with, it is no longer satisfactory to allow concentrated areas of population to develop, expand, or contract in compliance with forces attributed to Adam Smith’s invisible hand.”

‘Attributed’ by whom? Certainly not by Adam Smith! See Lost Legacy archives for detailed rebuttals.

Mystery Claim from India

‘Sundara’ writes in Timepass (21 November) HERE:

‘Why TATA is branded as an Indian company?’, which contains this paragraph:

“According to Adam Smith's absolute advantage in any trade that involves more than one country, it can be seen that one country gains and the other lose. Thus the countries which exports raw materials and basic services and imports high tech service which are costlier than then exports the country does. Thus the company holds the brand identity of India to the world thus acting as a gateway to the country. From my point of view this is the main reason for the company to branded as an Indian company.”

Comment
Whatever the meaning of the paragraph intended by its author, ‘Sundara’, the reference to Adam Smith on ‘absolute advantage’ is mystifying. Smith never said anything about trade making one country gain and its trading partner lose.

Partners in trade always have the option to decline to trade because trade is voluntary. If it isn’t voluntary because for some reason a partner has had the right to veto a transaction taken away, then it isn’t ‘trade’; it's some kind of criminal extortion, which in Smith’s presentation was subject to the intervention of the justice system.

Parties only volunteer to engage in exchange transactions because they believe at that moment that the trade makes them better off in some way. This does not exclude the possible reaction afterwards of 'buyers' or 'sellers' regret.

What the parties gain from a specific exchange is not decided by the money price that they pay or receive; hence looking at cash equivalents alone is futile. The money price is only one element in a transaction and in supply and demand theory, all other elements are held constant.

Apart from this, I still have no idea what ‘Sundara’ is talking about.

Is Adam Smith 'Disproved' by Ants?

Mark Thoma posts a most interesting article that debates the generality of Adam Smith’s famous opening chapter of Wealth Of Nations on the division of labour. It is prompted by an article on a study of the behaviours of rock ants, which asks: are ants more productive from specialisation?

The report of the research is published too in the New York Times (20 November) with the somewhat extravagant headline, “Adam Smith, Disproved” by HERE by Catherine Rampell. The research was undertaken by Anna Dornhaus: “Specialization Does Not Predict Individual Efficiency in an Ant” (HERE):

It’s worth a look over. Read Chapter 1 of Wealth Of Nations first and then read the research. What do you think? The comments to Mark Thoma's post are also worth reading (selectively, at least).

Another Blog Notices Lost Legacy

A post from Lost Legacy has been picked up by the Blog, Sauce Captain (Economics, Freedom, Behaviour, Sundries) HERE:

‘An excellent post crossed my path today from the blog Adam Smith’s Lost Legacy."

Comment

I appreciate people in Blog land finding Lost Legacy posts interesting and worthy of comments. It also introduces Lost Legacy to wider audiences. It might lead some readers to go on to reading Moral Sentiments or Wealth Of Nations too.

Adam Smith on Bargaining

Stephen J. Dubner writes the Blog: Freakonomics (‘the hidden side of everything’) HERE:

‘The Weirdest Cookbook You Will Ever Need

Shopsin has just written a book that is half cookbook and half memoir, entirely fascinating. I had never sat down and read a cookbook from cover to cover but that is what happened with Shopsin’s book (co-written with Carolynn Carreno). It is called Eat Me. The introduction is a reprint of a New Yorker article by Calvin (Bud) Trillin, a regular at Shopsin’s.

Trillin also figures in a story that Shopsin tells in the book, a story that illustrates the creativity with which we human beings barter and exchange. Gains from trade indeed. Adam Smith would be proud:

I’ve never used cookbooks for recipes, but I do like to read them to get ideas and to see how different cooks do things — and I especially liked doing this way back when I first started cooking. Back then, Bud Trillin used to bring me the review copies of cookbooks that were sent to him. He would bring in a stack of cookbooks, and in exchange I would give him 25 percent of the face value of the books in food credit. It was a great deal for both of us.

*From Smith’s An Inquiry Into the Nature and Causes of the Wealth of Nations: “Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that.”

Which provoked the following interesting comment from a reader, Michael Sullivan:

The quote from Adam Smith is interesting in that it is, strictly speaking, no longer true. There was a case involving an orangutan at a zoo. The zookeepers came in one morning and found the orangutan in the moat separating his enclosure from the public. They moved the orangutan back to his enclosure, berated the staff for not locking the door and considered the incident closed. The next morning they found the orangutan back in the moat. Thinking that it was unlikely that the staff would forget to lock the door after being berated the previous day, they investigated further and found that the orangutan was using a piece of wire pried loose from somewhere in his enclosure to pick the lock on the door. So, they removed all wire that he could use to pick the lock. This solved the problem, for a while. When they again found the orangutan in the moat, they again investigated. What they ultimately found out was that there was a female orangutan in an adjoining enclosure who was overweight and therefore on a diet. She was giving the male orangutan pieces of wire in exchange for some of his food. I may have some of the details of this story wrong, but the basic point is that there is no way to describe the interchange between those two orangutans other than as a barter transaction, thus disproving the second half of Adam Smith’s statement.” Michael Sullivan”

Comment
Stephen Dubner is correct in that the exchange between “Calvin (Bud) Trillin” and “Shopsin” is a clear example of the normal exchange common in commercial societies and societies with elements of commerce in their mode of subistence.

The section of Wealth Of Nations from which Dubner quotes is at WN I.ii.2: p 26, and is part of the most important, but under-appreciated passages, in the whole book.

Even in this quote, Smith states the conditional proposition: “this is mine, that yours; I am willing to give this for that.” He follows this up later in the same paragraph:

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

On the substance of Michael Sullivan’s comment, I am only partly convinced, not least because Sullivan admits to not being sure of the accuracy of his account of the incident (I would love the read the actual report), but also because I have read various similar accounts of apparent exchange among primates, which specialists claim were coincidental (mainly 'sex' for 'food'), though this exchange of 'wire' for 'food' is exciting in that it appears purposeful.

For those interested some years ago I wrote a ms, “The Pre-Hisrtory of Bargaining”, from which I have presented a version in two-parts, the first part of which I presented at a conference of the “European Association for Evolutionary Political Economy” in Rome a week or so ago. You can read a copy from the Lost Legacy home page (HERE).

This paper looks at Adam Smith on bargaining exchanges and its evolution from exchange behaviours (‘quasi-bargaining’) among the primates, including the evolutionary tracks of the numerous Hominid species to the Homo sapien species as hunter-gatherers.

The second-part, as yet unpublished on Lost Legacy takes the evolution of bargaining through the invention of property – shepherding and farming – to the emergence of commerce.

I believe I show that Adam Smith’s statement of the conditional proposition is absolutely correct and holds today. Presently, I reserve my final views on whether the second part of Smith's above statement is sound or is 'disproven', as Sullivan asserts.

There are several reports of other primates implicitly exchanging in an intentional manner, over which disciplinary experts are divided at present.

Adam Smith on Natural Liberty

Sauvik Chakraverti writes, 19 November, in Antidote, (‘libertarian opinion from Indyeah)’: "Adam Smith... And Marathi Politics’ HERE

“The news that the government of Maharashtra has dictated 80 per cent reservations in jobs for locals must be viewed as an Injustice, given that Justice demands a Rule of Law in which there is neither Preference nor Restraint.

This is preferential treatment for locals – and it brings to mind what Adam Smith wrote on the subject. This quote is from The Wealth of Nations:

“All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society. According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.”

Comment
Sauvik Chakraverti's quotation is to be found at WN IV.ix.51: pp 687-8. From what is reported to be happening in Maharashtra the quotation appears to be apt, though I do not know enough about the circumstances to comment authoritatively.

However, Sauvik Chakraverti gives me an opportunity to make a comment on Natural Liberty and Adam Smith.

Adam Smith was educated at Glasgow University in the principles of Natural Liberty, a school of thinking notably espoused by the distinguished lineage of Grotius, Pufendorf, Carmichael, and Hutcheson, and it was taught in the Scottish universities in the 18th century.

Many readers of Wealth Of Nations, however, mistakenly confuse the precepts of Natural Liberty – philosophically an element of moral philosophy – with those associated with laissez-faire economics.

Smith was careful to distinguish the jurisprudential roots of Natural Liberty which was applicable in all societies, independently of their subsistence basis of their economies, from the political economy of commercial societies.

Cointrary to myth, he did not advocate laissez-faire economics though he was familiar with the Physiocratic terminology of some of its members (he met and discoursed with them in Paris and elsewhere, and in correspondence and the exchange of manuscripts but he never used the words laissez-faire in anything he wrote).

Tellingly, he made many references to either curbs on the behaviours of ‘merchants and manufacturers’ and to interventions that he considered necessary by governments to curb the freedoms of some of the same people, of whom he was suspicious of their tendency to act against the interests of consumers. There are over 50 instances of him mentioning the less than beneficial actions of sel-interested individuals in Books I, II and III of Wealth Of Nations.

On such set of commercial entrepreneurs that he wrote extensively about were the bankers of Scotland and the rest of the UK at the time. After a long discourse in Book II, chapter 2, on banking operations and some of managers and customers' dangerous failings on occasion, he drew a line between Natural Liberty and total commercial freedom:

“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.95: p 324]

I think this is clear enough.

It separates ‘freedom’ as a legal concept and as a practical policy by a qualifying restraint where a person’s freedom has deleterious consequences on the public good.

Clearly, not all individual putsuits of self interest necessarily and unintentionally benefit society; hence mythical theories of the invisible hand imposed on Adam Smith by 20th-21st century economists are a manifest violation of Adam Smith’s intellectual integrity and a gross abuse of his legacy. In short, a violation of his Natural Liberty rights.

My thanks to Sauvik Chakraverti for creating this opportunity to comment on this important distinction.

Adam Smith Always Chose Prudent Discretion

Andy Guess writes a report of an academic meeting in Inside Higher Ed HERE:

Walter Block, an economics professor at Loyola University, New Orleans, a Jesuit institution, gave a talk this month, “Injustices in the Politics and Economics of Social Justice,” at Loyola College in Maryland, a fellow Jesuit institution.

“When Austrian Economics and Jesuit Theology Don’t Mix”

“Loyola College’s president, the Rev. Brian F. Linnane, e-mailed students: “While economics faculty members have issued a response and apology, I feel it is important at this time to remind all members of the Loyola community that while our commitment to academic freedom ensures that we welcome students, faculty and guest speakers of all academic and political perspectives, we will not endorse or support racism, sexism or any other form of intolerance.

“We are a Jesuit institution, and as such, a respect for diversity is one of our defining values, and an essential component in our commitment to preparing men and women to become leaders in a rapidly changing world made all the more rich by the many cultures and viewpoints that shape it.”

Perhaps almost as notable as the president’s direct response was the condemnation issued jointly by the college’s economics department and the Adam Smith Society student group, which is named for the 18th-century free-market economist. In an unsigned letter to the student newspaper, members of the department wrote, “It is important to note that the remark was offensive not just because it was racially insensitive, but because it was erroneous and indicated poor-quality scholarship. There is ample scholarly evidence that, after adjusting for productivity-related characteristics (e.g., years of schooling, work experience, union and industry status, etc.) a considerable wage gap remains.”

Block, who is also a senior fellow at the Austrian-oriented Ludwig von Mises Institute, said in an interview that Smith would be “spinning in his grave,” and that he may include the incident in a book he is writing on racial and sexual discrimination, to be published by the Institute.”

Comment
Adam Smith worked as an academic philosopher in a society largely devoid of free speech and academic freedom in the sense that neither he nor his colleagues could speak freely on matters of religion for example. David Hune did and paid the price, refused chairs in both Edinburgh and Glasgow Universities.

Meanwhile, they could, should they wish, make outrageous statements denigrating Africans and in defence of slavery. This latter didn’t change too much right into the 19th century.

Even gentlemen and much lauded scholars such as Thomas Carlyle could publish a pamphlet in 1848 ‘On the Negro Question’ (an absolutely disgusting pamphlet which would shock many devoted admirers of Carlyle).

I have given Carlyle’s pamphlet its polite title; an edition of it was titled ‘On the Nigger Question’. It was also the source for Carlyle’s most famous slur on economics as the ‘dismal science’ which he directed at J. S. Mill for his defence of recently liberated black slaves in Jamaica being as human as Europeans, and which an ‘urban myth’, presumably in ignorance, keeps linking Carlyle’s comments to Malthus and Ricardo and not to his own putrid views on race.

I am not clear why Adam Smith would be ‘spinning in his grave’ (a common claim, twice this week already!) over this incident.

Smith certainly had harsh things to say about the slave trade and the jail-refuse who undertook it and about the futility of the economics of slavery. He thought all men were born with the same capacities – the famous ‘porter’ and the ‘philosopher’ example in Wealth Of Nations – and that it was education that made adult differences possible, plus of course birthrights from the ‘right’ parents.

For reasons given above, he was more exercised by threats to Liberty than the absence of democracy. He participated in some student unrest whilst at Glasgow University as an undergraduate 1737-40 over the local religious zealots hauling their much beloved Professor France Hutcheson (an ordained minister in the Ulster Protestant Church), before a Scottish church court on the absurd charge of apostasy. In his adult professorial and writing life Smith avoided prudently any controversy with the then ‘thought police’ in the church by not provoking them, though I believe he cocked-a-snoot at them by the use of very careful language when mentioning religious subjects in Moral Sentiments, they being too ignorant to see through his rhetorical skills in using underwhelming apparent endorsements of religious orthodoxy (my current research project).

Professor Block answered a question under the assumed protection of his right to free speech; his detractors presumably consider themselves also to be protected by the same right. As long as neither side threatens the other side’s rights, all remains well. But if one or both sides go beyond their rights to threaten the other side’s rights, all is not well.

Adam Smith had a greater respect for the absolute need for justice than for the right to silence one’s opponents by barracking, boycotts, civil disorder, and righteous conduct that denies others their rights.

The Loyola community is a long way from the extremes which these sensitive-issue disputes tend to go eventually. I trust it will pause and reflect, having made its views known and now leave Professor Block alone and the good Professor might stay in New Orleans and not venture back to Maryland to re-ignite the flames on the grounds that where ignorance (of the mores of civilised intellectual discourse) predominate, common vulgarity asserts itself.

Remember Human Nature!

Richard Larsen writes in Ventura County Star (Camarillo, California) HERE: ‘Adam Smith must be turning over in his grave’

“What these free-market mystics believe in is the ideal, and that can work in theory. Even communism in its ideal form could work, except for the one tiny thing that plagues every ideal — people. People find ways to alter an original concept and use it to their advantage and against others, a sort of reverse redistribution of wealth — from the great masses to the wealthy few.

And capitalism and communism have been two concepts heavily altered by the people who embraced them. Communism failed. Do people really want to consider capitalism and its free-market system so sacrosanct that any failings go unchecked?

The capitalism of today is markedly different from the capitalism espoused by Adam Smith, a Scottish moral philosopher and a pioneer in political economy. Though he never used the word "capitalism" in his "An Inquiry Into the Nature and Causes of the Wealth of Nations," published in 1776, Smith is considered by many to be the father of capitalism.

The core theory of capitalism is that a vibrant marketplace with the means of production and distribution privately owned would create jobs, quality products and a sustainable economy. Competition would assure low prices while a strong work ethic and pride of ownership would assure adequate wealth for all.”

Comment
Richard Larsen is right: Adam Smith did not write about capitalism (a word invented in 1854) and the fact that some people believe him to be the father of capitalism does not a fact make, in fact!

There was a lot more to the market commerce that Adam Smith wrote about than is generally passed for ‘free markets’ by propagandists of the status quo.

Smith’s works were embedded in the society of Britain in the mid-18th century, of which he had considerable criticisms, many of which have not been acted upon even by the 21st century.

We are still debating in serial world conferences about freeing world trade from its current levels of protectionism, of which the most advanced market economies continue to be powerful protectors of their own trades!

David Hume’s ‘jealousy of trade’ still stalks the lands of the richest countries on earth, and, it must be said, are alive and well in the richest and poorest of the developing countries too.

Cartels of oil producers survive (what happened to the theory of cartel instability?); administered exchange rates are sometimes set by bureaucrats not by markets; vast government spending and revenue raising agenda continue to dominate the world’s economies on a scale never remotely akin to ‘big spenders’ like 18th-century Europe in both secular democracies and pretend ‘democracies’, and outright tyrannies too.

And on the role of real ‘people’ – strangely absent from most modern economic models because aside by ‘rational’, ‘consistent’ and ‘predictable’ Home economicus, a bogus ideal invented in the late 19th century and perfected into almost religious belief in the mid-20th century – assumed away.

People, real people, feature in all of Adam Smith’s works and their influence on events is, to coin a phrase, highly visible, and without illusions on Smith’s part, he reported that if left to themselves they still have to contend with those among them who interpret their self interest in a manner not allowed for in modern economic models, not out of their ignorance, but precisely driven by their native intelligence.

That’s why Adam Smith made such a play about the need for justice in any society, barbarian or opulent.

I was at dinner last night with three distinguished economists and I remarked during one conversation that human nature is the one universal constant we can be certain of when contemplating any economy, including its forms of government.

Smith Knew the Differences Between Self Interest and Selfishness

There is much in the media at present that attempts to draw easy conclusions about the causes of the current financial crises, often of a kind that finds the sins of commission in the commercial market system and the virtues of omission in the state sector.

Hardly, a day goes by when we are not lectured on the ‘end of market capitalism’ and its replacement by what amounts to state capitalism. Fair enough, it’s a free country in this constitutional monarchy and in the largest capitalist market economy, the United States of America.

However, the constant drum beat of nonsense about self interest as taught by Adam Smith, frankly is tiresome because it is so untrue that he didn’t know the difference or, worse, ‘changed his mind’ in Wealth Of Nations, that I think it worthwhile to note something he wrote in Moral Sentiments in a discourse on the effects of a supposed earthquake ‘the great empire of China’ and how a ‘man of humanity' might react to an event, then about two years return distance away by sailing ship.

I have quoted the first part of the discussion several times on Lost Legacy, mainly, perhaps in vain, to correct scribblers who draw the absolutely wrong conclusions from it, namely they calim that even a man of humanity would prefer to save his little finger, of immediate, close and personal interest to himself, rather than save the ‘ruin of a 100 millions of his brethren’. Many quote this thought experiment of Smith as if he concludes the triumph of the ‘man of humanity’s’ sselfish elf-interest over millions of earthquake victims.

They are totally wrong. They should have read on:

“When our passive feelings are almost always so sordid and so selfish, how comes it that our active principles should often be so generous and so noble? When we are always so much more deeply affected by whatever concerns ourselves, than by whatever concerns other men; what is it which prompts the generous, upon all occasions, and the mean upon many, to sacrifice their own interests to the greater interests of others? It is not the soft power of humanity, it is not that feeble spark of benevolence which Nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self-love. It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration. It is from him only that we learn the real littleness of ourselves, and of whatever relates to ourselves, and the natural misrepresentations of self-love can be corrected only by the eye of this impartial spectator. It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the smallest injury to another, in order to obtain the greatest benefit to ourselves. It is not the love of our neighbour, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own characters.” [TMS III.3.5: p 137)

Comment
If that is not a final and devastating rebuttal of the ‘selfish greed’ libel against Adam Smith, I don’t know what he could have written in its place.

'Geko’s', ‘greed is good’, outburst slipped in for dramatic affect of a Hollywood script writer did not come from anything that Smith wrote. They expose their ignorance those who claim he did.

They confuse Bernard Mandeville’s satire of [1705-1732] 1924, 'Fable of the Bees, or Private Vices, Public Benefits’, (Oxford University Press) with Smith’s writings from 1744 to 1790 (Mandeville died in 1733; Smith was 10). Now, of course, Smith knew of Mandeville’s writings; he described them as ‘licentious’ in Moral Sentiments (TMS VII.4: pp 306-14).

The piece quoted above from Moral Sentiments is clear and unequivocal.

Fear and Greed in City Markets

David Freud, an adviser to the Government on welfare reform and author of “In The City”, Bene Factum Publishing, writes in Mail online, 16th November 2008 (HERE)

“Crisis caused by lack of fear, not too much greed”

'It's all about fear and greed,' a hardened trader at the investment bank for which I worked told one of my trainee analysts in the Nineties.

It was the standard rough and ready explanation as to how share prices are constantly poised between concerns about where they will move next.
We had the lesson printed on some T-shirts and wore them on lively days in the market.

Greed has had a mixed press over the ages.

One of the Catholic Seven Deadly Sins since around the year 400, its iniquity was badly undermined by the famous economist Adam Smith's theory of the 'invisible hand', which promoted the notion that individuals may well help society most when they act in their own self-interest.

The arcane debate about where to draw the line between 'self-interest' and 'greed' is about to become considerably less theoretical as the City braces itself for the inevitable regulatory backlash to the current financial crisis.

'Greed' has been blamed for the avalanche of debt that has built up in recent years and which is the base cause of the crisis now overspilling from the financial markets into the general economy.

In practice, it is self-interest and the desire to make a profit that drives business activity across the whole economy, just as much as in the City, although the City tends to reflect those forces in more primeval form.

It is not because we have had too much self-interest, or greed, that we have hit this crisis but because we have had too little fear.”

Comment

I was immediately unimpressed by the theme, partly because last month I refereed an excellent manuscript on the economics of defence entitled in part, ‘Fear or Greed’, which title is plausible for a catchy tv chat show, or to a late-night discussion about war fighting in an officers' mess, and partly because David Freud’s piece repeats the usual nonsense about “Adam Smith's theory of the 'invisible hand'", a wholly contentious assertion regularly refuted on Lost Legacy (new readers may scroll down this month’s postings for evidence – or visit any monthly archive if not convinced; better still read Wealth of Nations!).

Given that Adam Smith did not mix up self interest and selfishness (this is absolutely clear in Moral Sentiments and in Wealth Of Nations) that part of Freud’s thesis is redundant as far as Smith’s role in concerned.

Those modern economists who incorporated their own theories of mystical invisible hands and markets in their 1950s general equilibrium mathematics maybe have much to answer for but Adam Smith is in the clear.

I leave the extent to which the catchy though incorrect title claim applies to the City of London, and to sports fans or gamblers generally.

Self Interest and Selfishness

Simon Caulkin, management editor, writes in The Observer (UK), 16 November, HERE:

“Guess what? Self-interest is bad for the economy”

“Self-interest as the driver that, like an invisible hand, permits individuals acting on their own behalf to benefit society as a whole goes back to Adam Smith. But Smith at least realised the drastic inequities it would cause and proposed measures, including progressive taxes, to mitigate the worst effects. No such caution has been in evidence since the 1960s as the concept has become the central belief around which all Anglo-American corporate governance, and thence management as a whole, revolves.

“Not so in economics, whose central tenets - rational agents, the invisible hand, efficient markets - derive from economic work done in the 1950s and 1960s, 'which with hindsight looks more like propaganda against communism than plausible science. In reality, markets are not efficient, humans tend to be over-focused on the short term and blind in the long term, and errors get multiplied, ultimately leading to collective irrationality, panic and crashes. Free markets are wild markets' - for which classical economics has no framework of understanding.

“It's an error to think that management, or even economics, can ever be a 'hard' science, not least because of their self-fulfilling premises. That doesn't mean they are unworthy of study and understanding. On the contrary. But, as Greenspan sorrowfully acknowledges, the first step on that path is to bow to empirical observation and stop trying to prove the Earth is the centre of the universe.

Comment
Simon Caulkin confuses self interest universally benefiting everyone unintentionally, as an idea of Adam Smith’s (he asserts that the idea ‘goes back’ to him), when in fact Smith gave an instance of this happening when merchants preferred to invest their capital locally rather than send it abroad (Wealth Of Nations IV.ii.9: p456).

He also said this happened in many other instances, but he did not say this was a universal consequence of all individuals pursuing their self interest, ‘enlightened’ or otherwise.

Smith had a fine sense of history and he knew the difference between self interest and selfishness. In fact, he gives over 70 other instances in the Books I, II, and III of Wealth Of Nations where individuals exercising their the self interest had consequences that were anything but beneficial to society as a whole.

The merchants above were activated by their risk avoidance; they didn’t need an invisible hand to lead them to avert avoid adding to their risks. Smith used the metaphor as a literary device, not as an instrument of social behaviour.

The belief that there were invisible hands ensuring that thereby anything done by corporate bodies benefits society was “more like propaganda against communism than plausible science” is half right, though ‘communism’ was not the target; it was more positive than that. It was propaganda, alright, but not just by corporate-minded economists in favour of their clients being given a free hand to do whatever they wanted; it was also, and mainly, an attempt by mainstream economists to legitimise their mathematical models of general equilibrium.

Gordon Brown is no Adam Smith

James Cusick writes in the Sunday Herald (HERE)

“Gospel of Adam Smith may not be enough for Brown”

“IF GORDON Brown had been looking for a personal anthem that could have been played as he entered the G20 summit in Washington yesterday, he needn't have searched further than the song by the reggae singer Shaggy - It Wasn't Me.
Who insisted he'd ended boom and bust? It wasn't me. The chancellor during a decade of growth and nothing saved for the downturn? Wasn't me. Who put in place a system of financial policing which failed at the first crisis? It wasn't me.
Instead, with Brown increasingly seeing himself as the hybrid heir to John Keynes and Franklin Roosevelt all rolled into a "global saviour for a global era", perhaps Sinatra's My Way, played throughout the entire Washington gathering, would have been equally fitting.”

Comment
Well said. Read the whole article HERE.

When putting out a raging fire it may not be the best idea to call on the services of the fire-raiser whose behaviour before the fire ensured that it would burn more intensely.

A German Nationalist Critiques Adam Smith

Bernard M, an American teacher of English in Tapei, Taiwan (HERE)

"A critique of Adam Smith by Friedrich List (1789-1846)

This quote by List is from his The National System of Political Economy. He was one of the driving forces behind the German Zollverein (customs union), which is credited with propelling Germany's economy to world-class levels.

"ADAM SMITH'S doctrine is, in respect to national and international conditions, merely a continuation of the physiocratic system. Like the latter, it ignores the very nature of nationalities, seeks almost entirely to exclude politics and the power of the State, presupposes the existence of a state of perpetual peace and of universal union, underrates the value of a national manufacturing power, and the means of obtaining it, and demands absolute freedom of trade.

Adam Smith fell into these fundamental errors in exactly the same way as the physiocrats had done before him, namely, by regarding absolute freedom in international trade as an axiom assent to which is demanded by common sense, and by not investigating to the bottom how far history supports this idea."

Comment
Friedrich List (1789-1846) was a German nationalist who lived in the USA for many years and who wrote the ‘National System of Political Economy’ (1841) in opposition to the universal system of free trade between nations advocated by Adam Smith. List grossly exaggerated the influence in practice of Adam Smith on what he called the ‘English’ political economy, under which, he alleged, England had become surreptitiously a national manufacturing power at the expense of other nations, and which policy must be avoided by the numerous separate states within Germany, which should follow what 'England' had done not what Adam Smith had claimed to advise.

Adam Smith’s critique of mercantile political economy was directed at existing policies of successive English and UK governments, represented by wealth measured by the net flows of gold into a country from its trading policies, necessitating trade protections, tariffs and duties, local manufacturing monopolies, the Navigation Acts, hostility to trading neighbours (‘jealousy of trade’), wars for trivial ends, colonies and the prodigality of governments.

Wealth Of Nations contains a free trade, competitive and anti-monopoly preference, modified by circumstances, such as ‘defence is more important than opulence’ for an island economy; some level of customs duties are necessary to contribute to the expense of government while the tax base is small; the necessary duties of government – defence, justice, public works to facilitate commerce, education and expenses of government; and necessary regulations to protect society from rogue elements – require taxation according to the revenue enjoyed by citizens.

The fact that the UK government followed parts of Adam Smith’s advice, but ignored much of it, was ignored by List, or regarded as hypocrisy and a political cover for Britain’s real strategy for commercial advantage in a world economy.

List concluded that the best national policy (picked up by Jefferson in the USA for the protection of new industries ) was for the mini-states in Germany to form a union of states, establish manufacturing industries behind tariffs, and develop themselves into a major economic power.

His patriotic politics were have some influence with German nationalists later in the 19th century, and were mimicked by protectionist sentiments elsewhere.
He concluded the preface to the first edition of The National System of Political Economy with this typical sentence:

“But my sole encouragement lies in the thought, that nevertheless much will be found in my book that is new and true, and also somewhat that may serve especially to benefit my German Fatherland.”

(Friedrich List, [1841] 1916. The National System of Political Economy, p xliv, trans. Sampson S. Lloyd, introduction J. Shield Nicholson, Longmans, Green and Co. London)

Food Miles and Adam Smith

Pierre Desrouchers, Associate Professor, University of Toronto, writes in Le Marche Libre, HERE:

“Buy Global: the ‘food mile’ perspective distorts the environmental impacts of agricultural production”

“Our modern globalized food supply chain is a demonstrably superior alternative that has evolved through constant competition and ever more rigorous management efficiency. Indeed, a world food chain characterized by free trade and the absence of agricultural (and other) subsidies would deliver lower prices and more variety in a manner that is both more economically and environmentally efficient. The underlying principle would be very simple. As the Scottish economist Adam Smith wrote more than two centuries ago, it is the "maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy."

“Feeding a rapidly growing world population in a sustainable manner requires long-distance trade to insure that food is produced most efficiently in the most suitable locations, in the process economizing on all required inputs relative to alternatives”.

Comment
Correct!

An example of the proper use of Adam Smith’s Legacy.

Economist's View Takes an Interest in the History of Ideas

Mark Thoma in his Economist's View Blog links to the previous post on the Islamic scholar who wrote about the division of labour, including in a 'needle' factory with 25 operations and in the making of a loaf of bread. HERE

I urge readers to bookmark Economist's View and read an informative Blog from an informed modern economist who, from the regular contents of his 'Links' feature, shows a regular intertest in the history economic thought.

I wish more regular working economists took a similar interest in the discipline's history of ideas. They could start, if they haven't already done so, by looking up the 1928 article in The Economic Journal by Allyn Young on how the extended division of labour all along the multiple supply chains of final consumption articles and services is a major contributor to economic growth. I discuss Allyn Young's thesis in chapter 10 of my Adam Smith: a moral philisopher and his political economy, Palgrave macmillan, 2008.

If you try Google for 'Allyn Young' you can find a reproduction of the entire 1928 Economic Journal article.

Of course, the main point about yesterday's post was to advise readers that the works of early Islamic and Persian philosophers have much that should interest modern economists.

Early Islamic Scholars on the Division of Labour

A scholarly article in the Journal of Institutional Economics, 2008, vol 4: 3, pp 403-413, ‘Nasir ad Din Tusi on social co-operation and the division of labour: fragment from The Nasirean Ethics’ by Guang-Zhen Sun (Monash University, Victoria, Australia) contains interesting material on a neglected part of the history of scientific endeavour:

“In particular, al-Ghazali (1058-1111), ‘unquestionably the greatest theologian of Islam and one of its noblest and most original thinkers’ (Hitti, Philip K. 2002: 431 [History of the Arabs, 10th edition, Palgrave Macmillan, New York]), makes some observations of the vertical division of labour that strikingly resemble Adam Smith’s in an interesting manner. In his most important book, Ihya Ulum al-Din (Revivification of the Sciences of Religion), al-Ghazali wrote:

“For a bread, for example, first the farmer prepares and cultivates the land, then the bullock and tools needed to plough the land. Then the land is irrigated. It is cleared from weeds, then the crop is harvested and grains are cleaned and separated. Then there is milling into flour before baking. Just imagine – how many tasks are involved; and we here mention just only some. And imagine the number of people performing these various tasks, and the number of various kinds of tools, made from iron, woods, stone, etc. If one enquires, one will find that perhaps a single loaf of bread takes its final shape with the help of perhaps more than a thousand workers.’ (Ihya, 4:118; quoted in Ghazanfar and Illahi, 1990: 390; 'Economic Thought of an Arab Scholastic: Aby Hamid al-Ghazali, 1058-1111', History of Political Economy, vol. 22: 381-403)

In further articulating the gains from, and necessary coordination in, the manufacturing division of labour, al-Ghazili took need production as an example, ‘even the small needle becomes useful only after passing through the hands of needle-makers about twenty-five times, each time going through a different process. As it happens, al-Ghazali’s needle example well resembles, over a ‘great gap’ in time as Schumpeter may tend to call, the French Encyclopédie’s ‘Epingle’ (1750s) production (consisting of eighteen separate processes), from which Smith’s famous pin-factory story was taken (cf. Edwin Canaan’s footnote 4 on page 8 in Smith 1776/1950). Does there really make much of a difference between the 25-stage needle production and the 18-stage pin production, the prototype of the division of labour principle due to the great influence of Smith’s (1776) justly celebrated system of economic analysis, so far as the division of labour is concerned?”

Comment
The notion of the ‘Great Gap’ in science between the 7th and the 13th centuries was due to Schumpeter’s assessment was published in his 1954 classic, History of Economic Analysis, pp 73-74 Allen & Unwin, London (edited from the unfinished manuscript by his wife, Elizabeth Boody Schumpeter). The information in the article eliminates Schumpeter’s assessment, or at least confines it to European experience only.

Edwin Canaan’s footnote in the 1937 edition, p 5, of Adam Smith’s Wealth of Nations, that is referred to above reads [the reference to ‘Adam Smith’s Lectures, p 164’ is to Edwin Canaan’s 1896 ‘Lectures on Justice, Police, Revenues and Arms. Delivered in the University of Glasgow by Adam Smith reported by a student in 1763, Clarendon press, Oxford; also known as ‘LJ(B) 1978’):

‘In Adam Smith’s Lectures, p 164, the business is, as here, divided into eighteen operations. This number is doubtless taken from the Enclyopédie tom. V. (published in 1755), s.v. Épingle. The article is ascribed to M. Delaire, ‘qui décrivait la fabrication d l’épingle dans les ateliers même des ouvriers’, p 807. In some factories the division was carried further, E. Chambers, Cyclopœ dia, vol ii, 2nd edition., 1738, and 4th ed., 1741, s.v. Pin. makes the number of operations twenty-five.’

This corresponds to the 25 operations mentioned by al-Ghazali. There is a full examination of Adam Smith’s use of sources in the pin making in J.-L. Peaucelle, 2006. ‘Adam Smith’s use of multiple references for his pin-making examples’, European Journal of the History of Economic Thought, 13:4: 480-512.

There was also some controversy on Lost Legacy in January 2008 between myself and Tim Harford over whether Adam Smith actually visited a pin factory or simply said he did. Harford remained convinced that Smith did not visit a pin factory, despite what Smith wrote in Wealth Of Nations:

“I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations’ and they managed to produce ‘upwards of forty-eight thousand pins in a day’ or ‘four thousand eight hundred pins’ each (Canaan: Wealth Of Nations, I.i: p 5).

Perhaps the most significant aspect of al-Ghazali’s extract is in his bread making example and in his estimate that ‘a thousand workers’ may be involved in making a loaf of bread, and which is a significant indicator of the extent of the division of labour even in fairly simple agricultural societies.

This example corresponds to Smith’s example of the manufacture of a ‘coarse and rough’ ‘woollen coat’ for day labourers (WN I.i: p 11) and which he elaborates after drawing attention to the question of “How many different trades are employed in each branch of the linen and woollen manufactures, from the growers of the flax and the wool, to the bleachers and smoothers of the linen, or to the dyers and dressers of the cloth!”:

“Observe the accommodation of the most common artificer or day-labourer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation. The woollen coat, for example, which covers the day-labourer, as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! how much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them.”

(WN I.i.p 11; it is similar wording to his lectures [LJ(A) vi 21-3: pp338-9; LJ(B) 211-13: p 489])

There are good reasons to believe that the extent of the division of labour through all the trades that co-operate (unintentionally) to produce the ‘necessaries, conveniences, and amusements of life’ for final consumption is of greater significance than localised divisions of labour in plants to economic growth and development. This aspect was picked up by Allyn Young in his seminal 1928 article in Economic Journal, which has done much to bring Adam Smith back into contention as the author of a more realistic growth theory than modern neoclassical models.

Thanks are due to Guang-Zhen Sun for his article that brings to the attention of readers a neglected early economic essay that has interesting things to say about the division of labour. As Smith notes in Wealth Of Nations the ‘trade of a pin maker’ is one in which ‘division of labour has been very often taken notice of” (thus disavowing any originality in his use of it), but I am fairly sure he was unaware of the contributions from Arabic and Persian predecessors in the 12th century.

The Parable of the Sentry Who Fell Asleep

This is the first of a series of posts (not necessarily of this length) that I am adding to Lost Legacy as announced last week. These are intended to be educational about Adam Smith's Works and will reflect what I am working on at the time. Comments are welcome, as are questions.

In Book II of Moral Sentiments Adam Smith discusses justice and how it affects all of society. He notes how:

“All men, even the most stupid and unthinking, abhor fraud, perfidy, and injustice, and delight to see them punished. But few men have reflected upon the necessity of justice to the existence of society, how obvious soever that necessity may appear to be.” (TMS II.ii.3.9, p89]

From this observation, he becomes more precise; we focus on individual events and individual perpetrators, and fashion our abhorrent reaction against their conduct on an individual basis; we do not relate it to the broader, Kantian, view that if everybody behaved in that manner then society would crumble. We see this most clearly, says Smith, in the ‘man of humanity’ who contemplates the severity of the punishment of an individual despite the affect on a society:

“A centinel, for example, who falls asleep upon his watch, suffers death by the laws of war, because such carelessness might endanger the whole army. This severity may, upon many occasions, appear necessary, and, for that reason, just and proper. When the preservation of an individual is inconsistent with the safety of a multitude, nothing can be more just than that the many should be preferred to the one. Yet this punishment, how necessary soever, always appears to be excessively severe. The natural atrocity of the crime seems to be so little, and the punishment so great, that it is with great difficulty that our heart can reconcile itself to it. Though such carelessness appears very blamable, yet the thought of this crime does not naturally excite any such resentment, as would prompt us to take such dreadful revenge. A man of humanity must recollect himself, must make an effort, and exert his whole firmness and resolution, before he can bring himself either to inflict it, or to go along with it when it is inflicted by others. It is not, however, in this manner, that he looks upon the just punishment of an ungrateful murderer or parricide. His heart, in this case, applauds with ardour, and even with transport, the just retaliation which seems due to such detestable crimes, and which, if, by any accident, they should happen to escape, he would be highly enraged and disappointed. The very different sentiments with which the spectator views those different punishments, is a proof that his approbation of the one is far from being founded upon the same principles with that of the other. He looks upon the centinel as an unfortunate victim, who, indeed, must, and ought to be, devoted to the safety of numbers, but whom still, in his heart, he would be glad to save; and he is only sorry, that the interest of the many should oppose it. But if the murderer should escape from punishment, it would excite his highest indignation, and he would call upon God to avenge, in another world, that crime which the injustice of mankind had neglected to chastise upon earth.” (TMS II.ii.3.11: pp90-91)

Comment
This is typical of Adam Smith’s use of religious-sounding statements which are taken by Christians, and those readers who find religious beliefs, including Deism, confirmed in Smith’s works, when a closer reading of his sentences suggests the constant element of his deliberate equivocation on all matters of religion and superstition.

This assertion of mine is supported by the context of him being a professor in a university in a strict Protestant country like Scotland, where academic freedom was severely curtailed and where candidates for university chairs had to profess their approved religious faith to be appointed to – and to keep – their chairs.

On his election to the Chair of Logic and Rhetoric by the society of Glasgow University on 16th January 1751, Smith completed the mandatory rituals; he read his dissertation in Latin, ‘De Origine Idearum’, which the assembled professors heard and approved ‘unanimously’ as ‘proof of his qualifications’.
Lectures in Scotland in the early 18th century were delivered in Latin and the dissertation and its delivery would qualify him on that score, as would its contents if they conformed to accepted Protestant theology.

There were other requirements – religious tests were rigorous, not notional – and the assembly of professors adjourned to the local Presbytery of Glasgow where he signed the ‘Calvinist Confession of Faith’ and took his ‘Oath de Fideli’ to be admitted as a Professor of the University. These ritual completed, he returned to Edinburgh as a new Professor of Philosophy (details in W. R. Scott, 1937: Adam Smith as Student and Professor, pp 138-9, Jackson & Son; Ian S. Ross, 1995. The Life of Adam Smith, p 108, Clarendon Press, Oxford).

There are two elements to Smith’s theme in this section of Moral Sentiments. First, his choice of the opinions of “A man of humanity”, a literary device he uses throughout his two major Works, who “must recollect himself, must make an effort, and exert his whole firmness and resolution, before he can bring himself either to inflict it, or to go along with it when it is inflicted by others.”

Clearly, ‘the man of humanity’ struggles within himself to be sympathetic to the official view that the sentry who slept on his watch should be punished by death. It is the quality of mercy that is under strain in such a person, though the sentry’s fellow soldiers at risk and in their beds may be less complaisant.

Smith contrasts the attitude of a ‘man of humanity’ considering the sentry who fell asleep and hoping that he was reprieved, to that of his attitude to “the murderer [who] should escape from punishment”. The murderer’s reprieve for same ‘man of humanity’ would “excite his highest indignation” and he “would call upon God to avenge, in another world, that crime which the injustice of mankind had neglected to chastise upon earth”.

This an example of the sentences scattered about Moral Sentiments that allegedly proves that Adam Smith was religious, but read what follows carefully: “Nature teaches us to hope, and religion, we suppose, authorises us to expect, that it will be punished, even in a life to come.”

The words “and religion, we suppose, authorises us to expect” is not the statement of a true believer; it is a statement of a philosopher deliberately and skilfully weakening an alleged definite truth in his society sufficient for him to remain unmolested by the religious zealots then patrolling the expressed views of people to seek out apostasy and atheism wherever the careless words of people left them open to the trouble the zealots could and regularly did cause when they believed they had found them.

Underlining this view of Smith’s purpose he adds that God’s punishment in the after-life “cannot serve to deter the rest of mankind, who see it not, who know it not, from being guilty of the like practices here”.

God’s justice is not certain, though people believe “that he should hereafter avenge the injuries of the widow and the fatherless, who are here so often insulted with impunity”. The key word is ‘should’, not would.

And he ends with a sentence carefully constructed to evade the hapless vigilance of the zealots:

“In every religion, and in every superstition that the world has ever beheld, accordingly, there has been a Tartarus as well as an Elysium; a place provided for the punishment of the wicked, as well as one for the reward of the just.”

Christians, Protestant and Roman Catholic, share a common belief and it is one that “every religion and every superstition that the world has ever beheld” that the wicked who escape judgment on Earth will surely not escape the wrath of the gods they believe in.

Heaven and hell are beliefs based on hope, shared by many, but were they genuinely shared by Adam Smith?

'Das Adam Smith Problem' Again

Among the books that I purchased at the Rome conference, one immediately caught my eye: Serge-Christophe Kolm, “Reciprocity: an economics of social relations”, Cambridge University press, 2008. Kolm is Professor of Economics at the Ecole des Hautes Etudes en Science Sociales, Paris; the bibliography contains 35 of his impressive publications in economics, many of them related to themes of reciprocity and justice.

I began reading his extremely interesting and informative study of reciprocity en route home because reciprocity is a theme of my analysis of the ‘Prehistory of Bargaining’. At this early stage I am not yet sure how much Professor Kolm’s in-depth knowledge of reciprocity will influence revisions of my earlier conclusions – ‘good reason perforce must give way to better’ (Shakespeare, Julius Caesar; though, admittedly, the character who says this died in the next Act).

However, I was surprised to read this paragraph on page 39:

“Adam Smith was convinced by Parisian economists, if not to abandon the ‘moral sentiments’ of his first major study (which included reciprocity), at least to propose that if you need meat, you should expect it not from your butcher’s altruism but from his self interest in an exchange.”

There are many non-critical comments that I could make on the rest of this section in Kolm’s book, but these must await later treatment. For the moment I draw attention to something critically wrong with the hypothesis presented by the above paragraph in relation to Adam Smith alledgedly ‘changing his mind’ between the writing of Moral Sentiments, published in 1759, and the writing his famous lines about appealing to the self-interest of the ‘butcher, brewer, and baker’ as published in 1776 in Wealth Of Nations. This misconception is fairly common among economists; in its original form it was known as ‘Das Adam Smith Problem’, from the number of German authors in the late 19th century who believed they had discovered a flaw in Smith’s Works.

An hypothesis that Smith’s contact with the Parisian Physiocrats ‘changed his mind’ only has credibility if no account is taken of what Adam Smith was teaching in Glasgow from 1751-64 (perhaps longer if his lectures in Edinburgh from 1748-51 are taken into account).

We have credible evidence for the contents of these from the sets of students’ notes, one set found in Oxford in 1895: Lectures on Justice, Police, Revenue and Arms, delivered in the University of Glasgow by Adam Smith, edited by Professor Edwin Canaan and published in 1896 by Clarendon Press, Oxford, and another set found in Aberdeen in 1958 by Professor John M. Lothian.

Both sets of student notes, with extensive editorial work by R. L. Meek and W. D. D. Raphael and P. D. Steen, were published by Oxford University Press in 1978, Adam Smith, Lectures in Jurisprudence.

Adam Smith visited France in 1764-66 and met many of the French Phsyiocrats, widely known as the economistes. Professor Kolm appears to believe that Adam Smith was ‘convinced’ by his ‘Parisian friends’ to either change his mind or at least to downplay the themes he published in Moral Sentiments in 1759 when he came to write Wealth Of Nations, between 1764 and 1776.

This fairly common assertion is indicative of the unfamiliarity of those who make it with Adam Smith’s Jurisprudence lectures delivered in 1762-3 and read for him in ‘1766’ – more likely in 1764 by his temporary replacement after Smith left Glasgow suddenly in January 1764 to escort the Duke of Buccleauch on his French tour.

The Jurisprudence lectures are not only fairly close to being verbatim; they are also dated by day and month. The example of the ‘butcher, brewer, and baker’ was delivered on Monday, 28 March 1763, more than a year before Smith met some of the Physiocrats (he spent his longest time in Paris in 1765-6).

Smith says to his class:

‘Man continually standing in need of the assistance of others, must fall upon some means to procure their help. This he does not merely by coaxing and courting; he does not expect it unless he can turn it to your advantage or make it appear to be so. Mere love is not sufficient for it, till he applies in some way to your self love. A bargain does this in the easiest manner. When you apply to a butcher or brewer for beer or for beef you do not explain to him how much you stand in need of these, but how much it would be [his] interest to allow you to have them for a certain price. You do not address his humanity, but his self love. – Beggars are the only persons who depend on charity for their subsistence.’ [LJ(A) vi.45-6: P 347-8]

And in ‘1766’ [1764], Thomas Young, his stand-in lecturer reads from Smith’s script, which unknown students took down, saying:

“Man, in the same manner, works on the selflove of his fellows, by setting before them a sufficient temptation to get what he wants; the language of this disposition is, give me what I want, and you shall have what you want. It is not from the benevolence, as the dogs, but from selflove that man expects any thing. The brewer and the baker serve us not from their benevolence, but from selflove. No man but a beggar dependence on benevolence, and even he would die in a week were their entire dependence upon it.’ [LJ 219-20: pp 492-3; see also: Ian S. Ross, 1995. The Life of Adam Smith, p 196, Clarendon Press, Oxford]

Evidence that Smith had taught these doctrines even earlier, perhaps duing 1748-51 in his public classes in Edinburgh, comes from a paper he is reported to have read to the Political Economy Club in Glasgow in 1755 (known as the ‘1775 Paper’), which Professor Dugald Stewart quoted in 1793 in his eulogy to the memory of Adam Smith, who died in 1790:

‘A great part of the opinions [Smith observes] enumerated in this paper is treated of at length in some lectures which I have still by me, and which were written in the hand of a clerk who left my services six years ago [1749]. They have all of them be constant subjects of my lectures since I first taught Mr Craigie’s class, the first winter I spent in Glasgow [1751-2] to this day, without any considerable variation. The had all of them been the subjects of lectures which I read at Edinburgh the winter before I left it, and I can adduce numerous witnesses, both from that place and from this, who will ascertain them sufficiently to be mine’ (D. Stewart, ‘Account of the Life and Writings of Adam Smith’ Transactions of the Royal Society of Edinburgh, 1793, published in Adam Smith, Essays on Philosophical Subjects, [1795] 1982, Oxford University Press, Oxford.

Taken literally, Smith claims to have been delivering the main themes of his political economy as long ago as 1748-51 in Edinburgh and from 1751 in Glasgow. Moreover, we know from his lecture schedules that he delivered his lectures on Ethics (which formed the bulk of the Theory of Moral Sentiments and his lectures on Jurisprudence to the same students in Glasgow who took their ‘AM’ degrees).

If there was a major contradiction between the two subjects as taught by Adam Smith it would have been obvious to him at the time (and his students, some of whom went on to become academics of note; for example Professor John Millar, reported by Dugald Stewart, op cit. ESP I.17, p 274-5). On the basis of this evidence, I think that Professor Serge-Christophe Kolm’s assertion that:

“Adam Smith was convinced by Parisian economists, if not to abandon the ‘moral sentiments’ of his first major study (which included reciprocity), at least to propose that if you need meat, you should expect it not from your butcher’s altruism but from his self interest in an exchange,”
is fatally challenged.

For the record I do not think there is any inconsistency in Smith’s treatment of self interest in Moral Sentiments and Wealth Of Nations. In other words, there is no ‘Das Adam Smith Problem’.

Why economists should study the origins of bargaining?

Having presented part 1 of my paper, ‘The Prehistory of Bargaining: a multi-disciplinary approach’, to the EAEPE in Rome, I had a conversation later with one of the participants about why I worked on such a subject, it being distant from the normal concerns of economics.

In parenthesis I must confess I have asked myself the same subject many times since I moved on from my research and the writing of successive versions of my incomplete manuscript in 2003.

I began the work almost accidentally while pondering why economists had so little to say about the ubiquitous behaviours of negotiation, which dominate human relationships, and not just in commerce. While teaching and writing about negotiation for many audiences, I had consumed fairly early on the sum total of books and papers appearing within the modern discipline, beginning with Zeuthen (1931) and Hicks (1931), Nash (1950) and onwards.

Surprisingly, Zeuthen and Hicks were least useful in that they were about the process of coercive bargaining through threats and their affect on the participants’ willingness to risk strikes or lockouts if they did not comply with the other party’s offers or demands. Incidentally, Zeuthen’s book was entitled ‘Problems of Economic Warfare’, to which Joseph Schumpeter contributed the forward to the English edition.

While such approaches had interest within the confines of a special case of bilateral monopoly, they were not within the scope of the universal experience of voluntary exchanges that take place in commerce. We all buy and sell; we don’t all run trade unions or large corporations, and nor do we all negotiate the termination or wars between belligerents.

Economists moved on from interest in the behavioural aspects of price determination once satisfied with the robustness of supply and demand theory. Dealing with managers almost daily through Business Schools, price determination was not a distant coincidence of MC=MR, once the players got ‘close and personal’ in their everyday work of buying and selling in multiple meetings, post-tender negotiations, and in covering multiple contingencies during the life of a contract. It seemed something was missing in price determination theory.

John Nash wrote ‘The Bargaining Problem’ in 1950 (Econometrica, XVIII, pp 155-62), which ‘solved’ it by assuming away the process of negotiation, covered in Zeuthen and Hicks), to concentrate (brilliantly) on the determination of the optimal bargain (where the product of the parties’ net numerical utility gains were maximised). This too was not immediately applicable to the behaviours of bargainers in the real world (though the insight was interesting!).

I soon turned back to Wealth Of Nations to re-read what Adam Smith had to say about the bargaining problem and was not disappointed. My educative work with bargainers, and repetitive observations of them at work (a rare privilege), had already taken into account that the significant element of their process was the multiple consideration of the ratios of exchange in making their offers; each made offers to settle the price (or whatever the subject of their deliberations) and eventually worked their way to either an irretrievable disagreement (a failure) or an agreed solution to the terms of an agreement (a success).

Struck by Adam Smith’s statement of the process and outcome, I was impressed:

“Whoever offers to another a bargain of any kind, proposes to do this. Give that which I want and you shall have this which you want, is the meaning of every such offer; and it is this manner that we obtain from one another the far greater part of those good offices that we stand in need of.” (WN I.ii.2: p 26)

This is what I witnessed bargainers the world over (no exaggeration) doing two hundred years after he published Wealth Of Nations. Yet, among economists –even those few writing about bargaining – I found nary a mention of it. In the intervening years to 2000-3, I kept coming back to this absence of comment or recognition of Adam Smith’s statement of the bargaining process by modern economists.

Smith, famously, wrote however briefly about exchange and not just in Wealth Of Nations It is a common feature in all his writtings. For him exchange was a universal constant if you like, and had great significance among humans long before commercial society appeared. In that most famous other quotation – often quoted but seldom sung about – he set it out:

“This division of labour, from which so many advantages are described, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another” (WN I.ii.1: p 25)

In the same paragraph, Smith identified tentatively that the ‘propensity to exchange’ was probably ‘the necessary consequence of the faculties of reason and speech’. This suggests that exchange behaviour was learned and not innate. The question became what process of social evolution promoted conditions for the learned behaviour of bargaining?

And that started my quest to answer the question.

Smith himself had much to say about how bargaining may have emerged with, for exampe, his parable of the deer and beaver hunters transacting by ‘higgling and bargaining’ to find a satisfactory ratio for their exchange. I was not satisfied that this was more than an attempted ‘explanation’ for an imaginary exchange for another purpose.

That is why I widened my search beyond economics to history, eventually to prehistory, to evolutionary psychology, to anthropology, to sociology and beyond.

Some part of this work is contained in my paper, ‘The Prehistory of Bargaining: a multi-disciplinary approach’, Part 1 of which you may download from the Lost Legacy Home page.

Comments and questions, of course, are most welcome.

Why study the history of economic thought?

Why study the history of economic thought?

This is a fair enough question deserving of an answer. The presumption behind the question is that modern economics provides what is needed to conduct economic policy; that the subject has moved on considerably since ‘dead, mainly white, male economists’ wrote their treatises and most of what they wrote has been improved upon.

The average graduate economist, 23 years old and commencing her or his career knows about a far sharper economic reality that was ever imagined by Petty, Cantillon, Smith, Quesnay, Turgot, Say, Malthus, or Ricardo. Also, the world has moved on too (well parts of it have) from the mainly agricultural, pre-industrial economies of the 17th-18th, early 19th centuries.

And anyway, some tell us, students of physics do not study Newton’s Principia as part of their education (they couldn’t anyway, as few modern graduates can read Latin). But physics is about eternal verities – the solar system is unchanging for all intents and purposes – and once the orbits were understood when it emerged from the truly ‘dark ages’ of “God’s” Earth being the centre of the universe, now passed over in embarrassment, the subject moved on to yet further mysteries inside the atom and inside the creation of the universe in the so-called ‘Big Bang’.

Economics defies similar certainties despite a massive sophistication in the attempts of mathematics to crack the continuing mysteries of how economies work that prevent reliable predictions on what is about the happen next. Even after the early economists attempted to explain growth, modern economics has not yet satisfactorily found a solution. Growth economics is a prestigious research subject – the best brains of the best graduates are deployed in finding the crock of gold – and it has so far failed to explain growth. True, it is narrowing the search down, but even that is controversial.

While Adam Smith’s attempt a growth theory was dismissed in classes on growth economics for decades, the glaring fallacies of what passed for growth theory in the post-war years (Harrod-Domar, Solow, etc.,) remained highly regarded as the foundations from which a modern growth theory could be built. That work is still in progress (Paul Romer, etc.,), while whether there should be any growth at all is capturing political attention by creeping up the agenda among legislators and those who influence them.

Interestingly, a revised interest in Adam Smith’s contributions in growth related theory – divisions of inter-sector labour (the labourer’s common coat) – came to the attention of modern growth theorists in the form of increasing, rather than decreasing, returns from Allyn Young’s 1928 article in the Economic Journal.

Ricardo’s diminishing returns fitted the well-behaved, closed-system mathematics of the marginal revolution (from the 1870s onwards) and missed the essential dynamism implied in Smith’s much broader concept of the division of labour, misled by the narrow attention on the (in)famous pin factory and its restricted application as conceived by a host of economists, including Francis Horner (1800s), Ricardo (1817), Mill (1849), Marshall (1900s), the ‘Marginalist’ School (1870s onwards), and the moderns (including Schumpeter) since then.

Knowledge of the history of economic thought proves productive when it is practised.

Per Capita Incomes Misleading as GDP grew 1000-1820

Angus Maddison had his paper, The West and the World Economy, 1000-2030: Maddison and Malthusian Interpretations, read by a colleague because he was unable to attend the EAEPE, Rome conference through serious illness.

Judging by the slides of tables he provided it appeared to be an excellent paper, somewhat marred by the stand-in speaker who was not always clear in his English (but, then I cannot speak Italian and would sound awful over the 40 minutes of a presentation).

I shall skip the details until I read a copy of Maddison’s paper, and I shall pick up one thing about these useful statistics; somewhat similar comments were made by me on Lost Legacy during the online discussions we had over Greg Clark’s on ‘Farewell to Alms’ (Princeton University Press) about a year ago.

These concern the conclusions drawn from estimates for ‘per capita incomes’ over the period to ‘1820’ (Angus Maddison) or ‘1800’ (Greg Clark). Per capita income comes from dividing GDP by numbers in a population. It does not signify actual per capita consumption of individuals. If the majority of a population is on or near subsistence it is perfectly feasible for GDP to grow and for actual consumption to remain near or not much above subsistence.

Now there was some growth in what constituted subsistence over the period 10 around 1800, or perhaps a bit earlier in mid-century. Several commentators have said so (including Adam Smith), but overall there is not much to shout about if ‘subsistence’ is pretty near not being much at all. Certainly, the upper orders experienced degrees of opulence, and those in paid employment could reach living standards, in comparison to ‘savage’ Princes in North America or Africa, that were favourable in terms of abodes, artefacts and conveniences.

There is no doubt that GDP maintained steady, but slow, growth over the centuries concerned. Whether the majority of poorer people’s incomes rose steadily before the end of the 18th century is another question. This raises the obvious question as to where was the additional GDP going? True, the upper orders consumer more – their per capita incomes probably grew throughout this period – it was, is, ever thus. But while large relatively, it does not account for the entire ‘surplus’ in the growth of GDP.

I suggested in our discussions of Greg Clark that we should not forget that the civilisations of the ancient past and earlier (Egypt, Babylon, China, India, Greece and Rome) were noted for their stone-built cities, massive public works, ‘hydraulic’ irrigations, stone megaliths, fortifications, war technologies (including shipping), roads, temples, and artefacts of varying degrees of sophistication.

Now these constitute long term uses of GDP consumption of considerable magnitude (somebody might think about undertaking this task sometime soon!) for it provides a useful insight into the capital expenditures of these societies. Bear in mind too that ‘stock’ or capital in Adam Smith’s view consisted of the subsistence of labour plus raw materials made ‘beautiful’ by skilled hand craftsmen and craftswomen. Funds useable for productive growth in reproducible output were controlled by the elites of these earlier societies who could siphon-off considerable revenues to whatever purposes they wished, including troops, uniforms, boots, weapons, materials and subsistence.

If, as I believe, these factors are ignored by researchers in these fields, then it is no wonder that Maddison argues with Malthus, and that Clark quarrels with Adam Smith and casts these centuries as ‘richer’ than they were in per capita incomes of the poorest majority. Once productivity began to grow faster after 1800, then per capita consumption of the poorest majority followed the middle and upper orders in an upward and continuous trend.

Brief Report From Rome

European Association for Evolutionary Political Economy 20th Annual Conference, Rome

I presented my paper, The Pre-History of Bargaining: a multidisciplinary approach (downloadable from the Home page), this morning and it attracted several questions and comments. Given only 25 minutes to present the paper and answer any questions there was not much time for elaboration.

Among the questions asked was why I say that neoclassical theories of bargaining are mainly about wage negotiations (Zeuthen, Hicks,Pen, Harsanyi, Coddington, Cross, which are coercive - strikes and lockouts) and not mutual gains for both parties. Nash (1950) published a Theory of Bargaining which was premissed on the assumption that the process of baragaining was assumed away! The questioner argued firmly that neoclassical exchange was voluntary, to which I commented that neoclassical price theory does not incorporate bargaining being based on price theory.

Adam Smith was quite specific that when someone bargains they use a conditional proposition: 'Give me that which I want and you shall have this which you want'. This is the 'meaning of every such offer' (Wealth Of Nations, WN I.ii.2: p 26). They are not price takers; they 'higgle and bargain' with each other. What today we call the 'negotiation dance'. That process is to too difficult to model. Price theory assumes it away.

A philosophy lecturer asked why I called it a theory of bargaining and not a theory of exchange. Well, my paper is labelled 'Part 1', which goes from the evolution of the Hominids (about 18 species of them) through to the emergence of Homo sapiens in Hunter-gatherer societies, and Part 2 continues the account through the invention of property to shepherding and farming before history was recorded, though both weak quasi-bargaining (reciprocity) and strong quasi-bargaining (enforced reciprocity) operated in the millions of years prior to human society and for thousands of years before full bargaining appeared.

One colleague asked whether mine was a genetic theory of social change, to which the answer is know, but evolution of the hominid and later human species was continuing through the 5 million or so years following the speciation of the Hominids from the common ape ancestor with the chimpanzees. My account of these changes was coincidentally partly genetic, but not causally.

The chairperson was worried that I was going to predict the future of the human species; fortunately I was able to assure her that I followed Adam Smith's self-denying ordinance, not to make predictions Economists divide into two: those who make predictions and those who don't; the former are always, in my view proved wrong; the latter who look backwards and not forwards, can explain why sets of predictions were falsified; the former avoid such explanations, but usually keep making the.

Changes at Lost Legacy

When Palgrave Macmillan published “Adam Smith’s Lost Legacy” in 2005, I opened the Lost Legacy Blog and have kept it going almost daily since, and in these past few weeks I have been reflecting on its achievements, its success in attracting readers (and keeping them), and readers’ responses in the comments sections and in private correspondence.

Overall, I am pleased, but I want to improve Lost Legacy in any way I can that is feasible and, to quote common enough word today, that is sustainable. One idea that has been gaining support from within my own thinking at least, is that I need to broaden out from my mainly reactive challenges to the almost daily verbal ‘atrocities’ against Adam Smith’s writings and correspondence in the world’s media.

Much of these incorrect attributions are written by economists who ought to know more about the history of economic thought (this set includes several Nobel Prize winners) and those educated by academic faculties across North America and British universities, who were not required to read for themselves the works and correspondence of Adam Smith (or for that matter any other major contributors to economic theories) and have taken their tutor's assertions as authoritative (as most of whom probably took their tutors views as 'gospel' too).

The result overall is that a purely fictional ‘Adam Smith’ emanating from Chicago is widely believed to be the authentic Adam Smith (the one born in Kirkcaldy in 1723), even though the authentic Kirkcaldy philosopher’s work is checkable in their original format, whereas the Chicago version is a parody of them.

What I intend to do in future weeks and months is add to Lost Legacy’s output by shifting its emphasis from repetitive polemics against repetitive atrocities to more thoughtful short pieces, with a few longer essays on the thoughts and context of Adam Smith, both as he wrote them, and as they can be shown to have relevance today.

Thus, instead of repeating regular expositions of what he meant by his use of the metaphor of ‘an invisible hand’, I shall refer readers to my paper on ‘Adam Smith and the invisible hand: from metaphor to myth’, which is downloadable by readers from the Lost Legacy Home page. As I produce other papers, I shall add them to the downloadable list.

Meanwhile, I shall produce more expositions of themes and thoughts from Adam Smith’s considerable published output, some a few paragraphs long, others more substantial. I shall also experiment with short series versions of connected ideas as expressed by Adam Smith - consider these as in the style of ‘companion’ compositions to the Works and Correspondence of Adam Smith. Readers may collect these together for their future reference.

I shall write these in my role as an educator, not as a doctrinal authority; where I am shown to be wrong in my assessments I shall acknowledge my errors and re-present the ideas as corrected. Where readers ask questions of clarification I shall be delighted to provide such explanations as I can honestly provide.

To start this new approach off, I shall be bearing in mind this new role as I continue my current research project which aims to assess the extent, if any, to which Adam Smith had a religious theme in his works, beginning with his Theory of Moral Sentiments (1759). This work may produce potential postings on other things beside my main theme on possible religious roots in Smith’s thinking. These past few weeks I have noted several other topics worth me commenting on for the interest of readers (please let me know if they prove to be of interest or not).

I shall commence posting on them once I return from Rome and the 20th annual conference of the European Association for Evolutionary Political Economy (of which more later).

Absence from Thursday to Sunday While In Rome

I am preparing for my visit to the European Association for Evolutionary Political Economy conference at the University of Rome Tre, which commences on Thursday, where I shall present my paper, ”The Pre-History of Bargaining: a multi-discipline approach (part1)” which you can download from Lost Legacy by clicking on the notice (in red) on the Home page.

Like many academic conferences today (though not the History of Economic Thought annual conference), the EAEPE conference provides very little time (under 30 minutes) to present one’s paper, including time for any comments and questions, plus there are eight simultaneous streams under way through each of three x 2-hour sessions per day, providing much competition for audiences.

Well, at least there is a chair person in attendance, so EAEPE guarantees at least one academic to hear the presentation! Nevertheless, the opportunity to present a paper is not to be missed and I am grateful to the EAEPE organisers for accepting my late(ish) submission. The Conference website by the way is: http://eaepe2008.eco.uniroma3.it

It is the first airing of my paper (I hope the present part 2 elsewhere, or perhaps both together, should an opportunity arise to do so).

Should any readers of my downloadable paper wish to receive a copy of my 8-slide PowerPoint presentation for EAEPE I would be delighted to send it to you. (simply mail me at gavinAT negweb DOT com). Any feedback offered, critical or otherwise, would also be a pleasure to read.

My absence in Rome necessitates that my posting on Lost Legacy is curbed from Thursday to Sunday, perhaps even Monday too, as I return to Edinburgh on Sunday evening to attend my daughter’s birthday party (always a major family event). If I find an Internet café, or if I can work my new Apple i-phone, I might be able to post!

New Blog Roll Pending

I am in the process of revising Lost Legacy's Blog Roll (the list on the lefthand column headed 'other sites to visit'), which should appear later this week.

Some of the original sites of 2005 have ceased operating, among them Sandra Peart and David Levy's site, 'Adam Smith Lives!', the demise of which is much regretted. Others ceased to have much meaning for me or readers here.

I have added some new ones, which I have found myself reading this year. Appearing on the Lost Legacy Blog roll is not necessarily an endorsement of their content. I read many things with which I disagree; the criterion is: are they well written when expressing interesting views contrary to mine (for example, the quasi-Marxist 'Stumbling and Mumbling' or views with which I do not quiet agree, such, as the Friedmanite 'Streetwise Professor?', and a couple with which I find myself in agreement most times, such as the inestimable, "Economists' View" from Mark Thoma or "Economics and Liberty".

I would have included a lively Scottish site that appeared about a year ago but its author has recently taken a 'sabbatical', 'Adam Smith was a Socialist', written by a young SNP activist; not that it said much about his highly contentious thesis title, but it was a readable insight into the ground-based politics of a segment of the Scottish population.

If any reader has suggestions of a Blog they think would interest Lost Legacy readers, let me know quickly as I can still include good suggestions.

Gavin

Biggest Debts Show 'Competent Financial Management': claim

Ian Dale, a most readable centre right Blogger, but sensible with it, writes Ian Dale’s Diary HERE:

Today he asks a question that bothers me too:

“Bemusing Economic Questions of Our Time: No 94

If the UK economy is best placed to withstand the economic crisis, can anyone explain this table from last week's Der Spiegel?
Global Financial Injection (billion euros) from Bank guarantees, buying up of bad credit and capital injection)

Great Britain 571
USA 519
Germany 500
Ireland 400
France 360
Holland 220
Russia 139
Austria 100
Spain 100
Switzerland 48
Norway 41
Italy 40
Saudi Arabia 30
Portugal 20

Comment
Government spokespeople may respond that we are the world’s biggest borrowers because the British economy is so strong after ten years of Labour financial management that everybody wants to lend us the money, or some such spin.

The harsh fact remains that our economic ‘management’ has created the need to borrow more than anybody else and the rest of the world’s economic management requires them to borrow less.

As for ‘bringing forward’ public works projects, even if the planning permissions and public enquiries have been completed, they are unlikely to have an impact on the economy for many, many months, possibly years (especially if the planning circusses begin).

Such ideas for policies could be filed under ‘Pending projects; short-term ‘news management’, among the spinners’ filing cabinets.

Hat Tip: Ian Dale

Adam Smith and 'Das Adam Smith Problem'

Ed Kaitz writes (1 November) in American Thinker (HERE):

“… Adam Smith Problem”

[Please note I only discuss Ed Kaitz’s ideas on ‘Das Adam Smith Problem’ here and shall not comment on the views of presidential candidates in line with the long-standing Lost Legacy’s self-denying ordinance to only discuss the political policies of people in the country in which I vote (Scotland, UK)]

‘German scholars in the nineteenth-century exercised a good amount of frustration over something they dubbed "das Adam Smith Problem." To the consistency-minded Germans the brilliant yet humble Scottish economist and "father of capitalism" had nevertheless left a rather dubious literary legacy: two monumental and influential books that seem to argue in radically divergent and quite insurmountable directions.

…in the first of Smith's books, The Theory of Moral Sentiments (1759), Smith makes a quite humane and often beautiful case for the power of human sentiment in the practice of social virtue. He binds humanity together at an extraordinarily deep level and demonstrates why "we sympathize with the natural resentment of the injured" when, for example, greedy industrialists "violate fair play" and "throw down" their competitors "in the race for wealth and honors." Indeed, Smith seems to foreshadow the bleak finale expertly captured by Orson Wells in his Citizen Kane when he argues that the twilight years of greedy men will be filled with thoughts of "terror and amazement" at their prior conduct and make them outcasts from "the affections of mankind".

Conversely, in his magisterial The Wealth of Nations (1776), Smith relentlessly drives another point: that our darker and asocial instincts of self-preservation, retaliation and competition nevertheless provide the potent and necessary ingredients to "rouse the industry of mankind." In short, in his commanding treatise on capitalism it is self-interest and utility, not benevolence and sympathy that can solve the problem of economic scarcity: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." Indeed, what mystified German scholars was the quite sensitive and touching portrayal of human community in Smith's first book and statements like the following in his second: "It is his own advantage, indeed, and not that of society, which he has in view."

Similarly, to Smith, the only way to produce the public good is to not think of the public good! In his words: "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." Self-interest then produces the public good through what Smith famously called "the invisible hand." More wealth is created for everyone when each thinks about his own interest. To Marx and Rousseau however this doesn't cut it since the very definition of morality is to think of others first, not yourself.

As a sentimentalist philosopher, Smith also noticed something quite remarkable about the human condition: we're all hard-wired with common sentiments concerning what constitutes fair competition and what appears to us as fraud or greed. We universally condemn the behavior of rapacious capitalists who "throw down" their competitors - they appear "detestable" to us. He recognized in his Theory of Moral Sentiments that the virtue of "justice" was required to keep these people in line with proper legislation. The danger however is that the lawgiver might "push" this legislation "too far" and "destroy liberty, security, and justice."

Why was Smith so concerned with preserving freedom? Because he understood that human sentiments like "beneficence" were only possible in a free society. In short, unlike justice, which can be extorted by force (threat of punishment), moral virtues like beneficence or fellow-feeling would completely disappear under something like socialism or communism: "Beneficence is always free, it cannot be extorted by force, the mere want of it exposes to no punishment; because the mere want of beneficence tends to do no real positive evil." Our common sentiment, in short, "approves" of fellow-feeling only if it has not been extorted by force. No one, says Smith, can force you to be a good neighbor - this has to be done freely.

Smith is interested in taking stock of human beings and finding out how to both preserve freedom and benefit society within the bounds of our given nature. Justice is there to force good behavior "to a degree" in a capitalist economy but we also need to recognize that the self-preservation instinct is the only dynamic engine for increasing wealth and avoiding poverty. But beneficence, freely given and not forced, serves as another check in the "race for wealth and honors." It is our common human sentiment says Smith that keeps us from looking "mankind in the face" and claiming that we prefer ourselves to all others.”

Comment
Ed Kaitz is a gifted writer and college teacher (I can’t give more details as there appear to be several 'Edward Kaitz’s' in US universities and all are plausible candidates as authors of the American Thinker article, which appears to be right of centre in tone).

He does a reasonable job in his discussion of the issues involved in ‘Das Adam Smith Problem’, to which I make some observations for readers who may not be aware of the missing links in Ed Kaitz’s exposition.

The German origins of the ‘Das Adam Smith’s Problem’ in the last quarter of the 19th century come from a misunderstanding occasioned by the different dates of publication of Moral Sentiments (1759) and Wealth Of Nations 1776) and is often presented today as Smith having ‘changed his mind’ in the 17 years between publishing his two books. This is a wrong inference from the separated publication dates.

Students’ notes of Smith’s lectures (1762-3 and ‘1764’) at Glasgow University were discovered in 1895 and 1958 and show that he taught his classes both from lectures that became Moral Sentiments and lectures that became Wealth Of Nations to students in the same classes. Large sections of his Lectures in Jurisprudence (1762-4; published in 1978 by Oxford University Press) were taken verbatim into Wealth Of Nations, as were taken his classes in Ethics into Moral Sentiments. The ideas matured together, first as lectures to students and then as prose for his two books, and there were no contradictions between the two books despite the different dates of their publication.

Moreover, Smith revised both books in the different editions published after their publication: Moral Sentiments' editions: 1759; 1761; 1767; 1774; 1781; 1790) and Wealth Of Nations editions: 1776; 1778; 1784; 1786; 1789. These co-terminus editions, together with the fact that his lectures in the 1750s-60s were delivered to the same classes of students each year, show conclusively that there is no question of Adam Smith ‘changing his mind’ about moral motives and economic behaviours.

If his students had not noticed that ‘he seem[ed] to argue in radically divergent and quite insurmountable directions’ in his lectures, contemporary faculty colleagues would have noticed and commented, and more importantly, he would have noticed too. The imagined ‘problem’ was noticed by nobody until misinformed
faculty in Germany a hundred years later jumped to the wrong conclusions, by which time philosophy and political economy were quite separate disciplines, though for Scottish moral philosophers a hundred years earlier they were part of the same discipline.

Ed Kaitz explains why "we sympathize with the natural resentment of the injured" when, for example, greedy industrialists "violate fair play" and "throw down" their competitors "in the race for wealth and honors" and then neatly implies a switch from Smith’s discussion ‘Of the sense of Justice, of Remorse, and of the consciousness of Merit’ in Moral Sentiments (TMS II.ii: p 82) to what a casual reader would suppose is Wealth Of Nations, because Ed Kaitz continues ‘for example, greedy industrialists’, when in fact Kaitz is still quoting from Moral Sentiments. The fuller quotation below illuminates the distinction (not that Smith would probably have meant the same thing as Kaitz in introducing ‘greedy industrialists’as we know some of them from 19th -20th-century history today:

“Though it may be true, therefore, that every individual, in his own breast, naturally prefers himself to all mankind, yet he dares not look mankind in the face, and avow that he acts according to this principle. He feels that in this preference they can never go along with him, and that how natural soever it may be to him, it must always appear excessive and extravagant to them. When he views himself in the light in which he is conscious that others will view him, he sees that to them he is but one of the multitude in no respect better than any other in it. If he would act so as that the impartial spectator may enter into the principles of his conduct, which is what of all things he has the greatest desire to do, he must, upon this, as upon all other occasions, humble the arrogance of his self-love, and bring it down to something which other men can go along with. They will indulge it so far as to allow him to be more anxious about, and to pursue with more earnest assiduity, his own happiness than that of any other person. Thus far, whenever they place themselves in his situation, they will readily go along with him. In the race for wealth, and honours, and preferments, he may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit of.” (TMS II.ii.2.1: p 83)

That there are examples of ‘greedy industrialists’ in the recent past behaving in reprehensible manners, has nothing to do with Smith’s point about people who ‘justle’ and forego the patience of the ‘impartial spectator’. For an account of Smith’s theory of the ‘impartial spectator, see my Adam Smith: a moral philosopher and his political economy, 2008, Palgrave Macmillan).

Ed Kaitz states ‘we're all hard-wired with common sentiments’, which may express Kaitz' view but it isn’t Adam Smith’s. The notion that we are born with a moral sense was that of Smith’s tutor, Professor France Hutcheson, among others, which Smith explicitly rejects in Moral Sentiments.

People learn about what others will go along with as part of their socialization (as we term it today), starting with the chastisement from parents and other adults, and then in the ‘great school of self command’, our school fellows, and on throughout our experience until we become mature adults. Other people set the boundaries of our behaviour, as we do theirs, which is Smith's very point about impartial spectators.

Hence, the notion that “what constitutes fair competition and what appears to us as fraud or greed” and that “We universally condemn the behavior of rapacious capitalists who "throw down" their competitors - they appear "detestable" is Ed Kaitz’s interpretation (to which he is entitled) but it was never an assertion of Adam Smith in either of his books.

Similarly to assert that Smith believed that ‘moral virtues like beneficence or fellow-feeling would completely disappear under something like socialism or communism’, is a construction too far if meant as a belief of Smith’s. Neither ‘socialism or communism’ had any meaning for Smith in the 18th century; these horrors were a long away ahead, which Ed Kaitz is perfectly entitled to articulate but not to enroll Adam Smith (who died in 1790) into his beliefs, though I agree with Ed’s sentiments.

Ed Kaitz quotes from Moral Sentiments that each man “naturally prefers himself to all mankind, yet he dares not look mankind in the face, and avow that he acts according to this principle”. If the immediately preceding sentences from the same section of Moral Sentiments are read we can see Ed's spin on these words is unjustified:

“There can be no proper motive for hurting our neighbour, there can be no incitement to do evil to another, which mankind will go along with, except just indignation for evil which that other has done to us. To disturb his happiness merely because it stands in the way of our own, to take from him what is of real use to him merely because it may be of equal or of more use to us, or to indulge, in this manner, at the expence of other people, the natural preference which every man has for his own happiness above that of other people, is what no impartial spectator can go along with. Every man is, no doubt, by nature, first and principally recommended to his own care; and as he is fitter to take care of himself than of any other person, it is fit and right that it should be so. Every man, therefore, is much more deeply interested in whatever immediately concerns himself, than in what concerns any other man: and to hear, perhaps, of the death of another person, with whom we have no particular connexion, will give us less concern, will spoil our stomach, or break our rest much less than a very insignificant disaster which has befallen ourselves. But though the ruin of our neighbour may affect us much less than a very small misfortune of our own, we must not ruin him to prevent that small misfortune, nor even to prevent our own ruin. We must, here, as in all other cases, view ourselves not so much according to that light in which we may naturally appear to ourselves, as according to that in which we naturally appear to others. Though every man may, according to the proverb, be the whole world to himself, to the rest of mankind he is a most insignificant part of it.” (TMS II.ii2.1: pp 82-83)

Finally, Ed Keitz asserts:

“Conversely, in his magisterial The Wealth of Nations (1776), Smith relentlessly drives another point: that our darker and asocial instincts of self-preservation, retaliation and competition nevertheless provide the potent and necessary ingredients to "rouse the industry of mankind." In short, in his commanding treatise on capitalism it is self-interest and utility, not benevolence and sympathy that can solve the problem of economic scarcity: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."

This is a misreading of the paragraph in Wealth Of Nations (WN I.ii: pp 26-7) – a misreading widely shared by the majority of economists (and philosophers) who quote it. Smith actually enjoins readers to serve the self interests of others, in this case the ‘butcher, brewer, and baker’, in order to serve their own self interests (food for themselves and their families). Be other-directed and not self–directed!

The ultimate selfishness is to expect our necessary sustenance from others, free, gratis, and for nothing! Who will give the butcher, the brewer, and the baker things that they and their families need in food, clothing and shelter, let alone the objects considered necessary for a decent living standard? Smith observed, he did not preach.

If Ed Kaitz reads Adam Smith’s books as he wrote them and as he taught his students for years before, he will really understand why ‘das Adam Smith problem’ is a fantasy created by some talented people who didn’t understand his ideas, nor did they know about the context from which they were generated.