A Physicist Finds the Invisible Hand Ain't There

A book is reported on the credit books Blog (HERE):

“Dynamics of Markets or Perspectives on Positive Political Economy:
econophysics and finance” by Joseph L McCauley, Cambridge University Press, 2007

“Standard texts and research in economics and finance ignore the absence of evidence from the analysis of real, unmassaged market data to support the notion of Adam Smith's stabilizing Invisible Hand. In stark contrast, this text introduces a new empirically-based model of financial market dynamics that explains the volatility of prices options correctly and clarifies the instability of financial markets. The emphasis is on understanding how real markets behave, not how they hypothetically 'should' behave.”

Comment
Professor McCauley is Professor of Physics at the University of Houston.

Modern economists like laud it over its sister social sciences because they regard our discipline as being akin to hard sciences like physics and not part of the sloppier ‘word’ sciences like sociology, psychology, anthropology, and such like (though there is in fact a great deal of quantitative work using hard data in these 'inferior' disciplines).

Well, hubris is well known to be an uncertain friend, especially when physicists begin to look over the advanced mathematical texts of modern economics and find them ‘primitive’ compared to where the hard sciences have moved on to since the 19th century (where economics is still stuck).

The first sentence ("Standard texts and research in economics and finance ignore the absence of evidence from the analysis of real, unmassaged market data to support the notion of Adam Smith's stabilizing Invisible Hand") summarises brilliantly the obvious problem, which Lost Legacy warns about daily:

‘how does the metaphor of an invisible hand actually work?’, or, more pointedly, ‘where is the invisible hand in the equations of, say, general equilibrium?’

Of course, there isn’t any such role for the invisible hand in their equations, not just because it cannot be modeled, but because it was always a literary metaphor and not a variable.

Smith treated the metaphor as such (he lectured in rhetoric too), as did most of his contemporaries and readers through to the late 19th century, when political economy slid into naked economics and finally into pure mathematics in mid-20th century.

From this, its exponents and popularisers found in the lonely metaphor a lovely magical allusion to something sacred and ‘nice’ to justify their version of the efficacy of markets.

The intention was perfectly worthy; markets were under the assault of the Soviet/Chinese ‘alternatives’ of full state control; of leftwing social democratic governments in Europe nationalizing the ‘commanding heights’ of the economy, with ambitions for state planning, and the Cold War was in earnest (Khrushchev, remember, threatened to ‘bury’ capitalism).

Any edge that economists could offer that favoured markets was welcomed by those not enamoured by the prospect of socialist state planning.

But, by grasping at ‘invisible hands’, falsely crediting them to Adam Smith, still a revered name in economics, and sliding over the absurdity of the notion, contradicted many times in Wealth Of Nations (over 50 times in Books I and II) – when markets were corrupted they were done so by humans, including by ‘merchants and manufacturers’, let alone capitalist-state interventions – they left the discipline open to ‘the Emperor is bare’ refrains when the hard sciences took a look at what such notions actually implied. Like Joseph L McCauley they findd them wanting.

Human behaviour does not comply with the hard sciences of physics, chemistry, atoms, electrons, orbits of planets or galaxies, gravity and space travel.

Smith warned about such illusions anout how human behave in Moral Sentiments when he talked of people not complying like wooden chess pieces, which are moved about the chess board by the hand that moves them. People have “a principle of movement of their own”. (TMS VI.ii.2.17: p 234; 1972 ed. Kessinger Rare Reprints, p 207)

Socialists and social democrats have never understood or accepted that basic flaw in their reasoning.

The real beauty of markets is not that there is an invisible hand – they don’t need one, and Smith never said they did – but that they work without the need for central direction; they need only the coordinating signals from relative prices, and while there are flaws and defects in them (after all, they are operated by humans) they are much better than all known and tried alternatives.

2008 Lost Legacy Prize Awarded to Fred

Comment of the Year in Left Blog (HERE):

“ECONOMY MELTDOWN: this isn’t over”

“I would love to know the word count for “greed” in the collected works of Milton Friedman. (I always specify that no money I send to the U of C will _ever_ be dispersed to programs in economics.)

I would also love to know the count for “invisible hand”. (Adam Smith used it _once_ in a passage that seemed to me to imply that good results did sometimes happen, but not always.)

Y’all hang in there – Fred”

Comment
Brilliant riposte! And good sense and awareness shown by 'Fred'.

After a long year of mythical views of Adam Smith, along comes Fred and demolishes a myth in short order.

He is a worthy winner of the 2008 Lost Legacy Prize.

A Professor Forgets The Fallibility of Merchants and Manufacturers and That Ayn Rand was Not a Smithian

From comments published in Journalnow.com (Winston-salem) 31 December (HERE):

"Matter of degree"

"Jay Ambrose ("The end of talk about greed," Dec. 22) argues that criticism of greed during the current financial crisis is misdirected because economic self-interest is different from greed. Perhaps, but it is only a matter of degree.

Ambrose essentially restates Adam Smith's claim that an "invisible hand" harmonizes many self-interested actions to produce the public good. One way to state this is that motives don't matter much, because good results emerge anyway.

Unfortunately for Smith's modern disciples, motives do matter. Smith never revealed how real, fallible humans would keep too much of the "self" out of self-interest. And when the excess of self appears, Smith's magical "invisible hand" usually goes missing. Fraud, now making headlines, is only one of the results.

Allen Greenspan, former Federal Reserve chairman, and a disciple of the self-interest-takes-care-of-everything school, recently recanted. Said he, his faith in "the self-interest of lending institutions to protect shareholders' equity" had been replaced by "shocked disbelief" as the system collapsed. His awakening was too late. As Fed chairman, Greenspan's faith in self-interest led to his failure to regulate institutions that were engaged in blatantly risky behavior.

If Greenspan had regulated more, we might have avoided the disaster that is upon us. The public good is too important to leave to "invisible hands" that are invisible because they aren't there when it matters."


Comment
Professor Donald Frey is incorrect to assert that “Smith never revealed how real, fallible humans would keep too much of the "self" out of self-interest”.

It is a clear from Smith’s many references in Wealth Of Nations to the rapacious behaviour of ‘merchants and manufacturers’, when they are helped by legislators and those who influence them to ‘fix’ markets so that they can narrow the competition and increase prices through their monopolizing spirit, that he was well aware, and said so often enough, that ‘merchants and manufacturers’ often acted against the public interest whenever they could do so.

Allen Greenspan was a adherent to the philosophy of selfish egoism of Ayn Rand, which had little enough to do with the self interest and moral philosophy of Adam Smith.

I hope Professor Frey conveys the difference between Ayn Rand and Adam Smith to his students (and staff), and also understands that the modern notion of ‘the invisible hand’ bears no resemblance at all to Adam Smith’s sole use of the metaphor in Wealth Of Nations that had nothing to with markets.

Two Paragraphs, One Completely in Error, the Other Absolutely Right

Jeff Schweitzer, who served at the White House during the Clinton Administration as Assistant Director for International Affairs in the Office of Science and Technology Policy, writes “The Big Lie Exposed: Wall Street as Institutionalised Fraud” in the Huffington Post, HERE:

“Wall Street is everything that Adam Smith feared. Smith, the father of modern economics, said that the invisible hand only works in a society adhering to moral norms that prohibit theft and misrepresentation. Yet theft and misrepresentation are the twin gods of Wall Street.”

And

“The market looks nothing like that envisioned by Adam Smith. In stark contrast to Smith's theories, the Street's history is nothing but one of fraud for the simple reason that the entire enterprise is built on a deeply fraudulent idea: that the future can be predicted.”

Comment
Two paragraphs; one absolutely fictitious (the ‘invisible hand’ had to do with “society adhering to moral norms that prohibit theft and misrepresentation”) and one absolutely right (“a deeply fraudulent idea: that the future can be predicted).”

For the first paragraph, what more can Lost Legacy comment on the myth of the invisible hand? Read my posts in any week from this past year (or past years) and there is likely to be an explanation of the origins of this myth.

Briefly, one more summary: Smith discusses how markets work in society in Books I and II of Wealth Of Nations without mentioning the metaphor of ‘an invisible hand’. Not a lot of people, especially among economists and those they advise, seem to know this.

In fact, the sole reference to ‘an invisible hand’ is in Book IV of Wealth Of Nations (IV.ii.9: p 456, OUP/Liberty Fund edition 1976; Edwin Canaan, 1937 ed. p 423, Random House).

Smith used this popular 18th-century literary metaphor only once after explaining why some (not all!”) risk-averse owners of capital-stock preferred to keep their capital investments close to them rather than undertake the greater risks (and greater profits) of sending it abroad to the British colonies in North America, and how this resulted in local domestic investment in projects and consequent local employment being larger than it would otherwise be (the whole being the sum of its parts arithmetically).

Nothing was said about how markets work, and nothing about “society adhering to moral norms that prohibit theft and misrepresentation” associated with ‘an invisible hand’. Moral norms were central to Adam Smith’s thinking, but had nothing to do the metaphor of ‘an invisible hand’.

From anecdotal tales and oft-repeated media assertions, most people – among whom I think Jeff Schweitzer is probably included – appear to believe that Adam Smith’s Wealth Of Nations is replete with ‘his’ so-called ‘theory’ of ‘the invisible hand’ of the ‘market’ and the ‘happiest of all possible happy societies’ (after Voltaire). It was a two word metaphor used only once in Wealth Of Nations; it was not a theory.

For further elucidation, may I suggest you download my paper, “Adam Smith and the invisible hand: from metaphor to myth" from the Home page of Lost Legacy (click the red words near the top of the page).

The second paragraph is true: the future cannot be predicted. Adam Smith did not make predictions about the future. And because the future cannot be predicted a great deal of modern economics is pure, though lucrative, mumbo-jumbo.

Banks, corporations, investment analysts, governments and their agencies, all hire high-salaried economists to predict the future; tv programmes and the media run regular features on the future of stocks, currencies and funds.

Like sporting outcomes, the unknown future creates the professional ‘science’ of probability, dressed up as prediction, otherwise known as gambling.

But this too had nothing to do with Adam Smith. When he mentioned ‘fortune’ it was clear that he considered it unpredictable.

Only in the models of neoclassical economics – absent as they are of people – do the players have perfect knowledge of each other’s preferences. On this paragraph, I agree with Jeff Schweitzer; as for the other paragraph we could not disagree more.

Adam Smith Accused of the Myth of the Invisible Hand

David Orr comments on “Shelf Life” posted by Woody Tasch, December 30th, 2008, on Powell’s Books Blog (HERE):

“But if we are going to get to the durable ideas that will show us the way forward, the way back towards life, then we are going to have to get around one product of "economic fantasy" whose shelf-life has been, and continues to be, particularly stubborn.

This is the myth that was planted in the modern mind by Adam Smith in the late 18th century. This is the myth-masquerading-as-market-making known as the Invisible Hand. Its shelf-life puts irradiation and ultra-pasteurization and EDTA to shame.”

Comment
Ah, but the fact is Adam Smith didn’t do any such thing. He used the metaphor of ‘an invisible hand’ once in Wealth Of Nations (Book IV), and his use of it had nothing to do with market-making, thoroughly covered in Books I and II, and without any mention of ‘invisible hands’.

Check it out for yourself.

The myth came from mid-20th century economists who invented a different use for the metaphor from that which Adam Smith used it (only once!) and their successors oversold it to the general public, who trust what prominent economics, including some Nobel prize winners, tell them.

See my paper, 'Adam Smith and the Invisible Hand: from metaphor to myth', downloadable from the Lost Legacy Home Page (in red ink near the top).

Adam Smith on Education

E. D. Kain writes in the indiepundit Blog HERE:
29 December:

“the engine of the republic”

“Indeed, the controversy over public schools is as old as the tradition of public school itself. Adam Smith was the first to argue in favor of school vouchers, a cause taken up later by Milton Friedman, and many of Friedman's students and successors. It has now become a mainstay of the modern conservative movement, with little room for debate.

Smith and Friedman argued that the public school system should follow the rules of the free market, and that the best way to do this would be to put the public schools in direct competition with their private counterparts. Conservative theorists today argue that taxpayers who choose not to send their children to public school ought to receive a tax subsidy, or voucher, to help pay for the private school of their choice. The voucher would be paid to the school of the taxpayer's choice, rather than directly into the public school system. This creates a very immediate competitive dynamic between the public and private spheres, as the funding of one is entirely dependent upon the funding of the other.”

Comment
Let me say, first of all, I agree broadly with the substance of E. D. Kain’s views on school vouchers as a means of improving the school system in the UK, which is failing broadly across the country, dominated as it is by a vast education bureaucracy, financed by taxpayers and managed by civil servants from the centre, operated through local education bodies and local schools, and ‘ran’ by state-paid employees (teachers and administrators) and their (several different) trade unions.

However, that is not my main interest in the above paragraphs.

“Adam Smith was the first to argue in favor of school vouchers.” I find this statement surprising and would respectfully ask where in Wealth Of Nations is this claim substantiated?

The situation which Adam Smith addressed is quite different from the educational circumstances of education provision in the developed countries today. Smith addressed another, more severe problem. It wasn’t that educational provision for children was deficient from what it could be, as now, but the fact that educational provision was almost completely absent for most children – girls, for a start, followed by most boys beyond a notional few years.

Smith knew that in Scotland, the situation was better than in England. He advocated in Book V, Article II, ‘Of the Expense of the Institution for the Education of Youth’ (WN V.i.f: pp 758-88; Canaan, ed. 1937. pp 716-40) the setting up – by government – of ‘little schools’ on the Scotch model, to which boys would be expected to attend to ‘read’, to ‘write’, and ‘account’ (p 785).

Moreover, he felt parents should contribute to a minimal education of their children via taxes and ‘moderate fees’:

“For a very small expence the public can facilitate, can encourage, and can even impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education.”

And in these ‘little schools’ in every parish (there were about 60,000 parishes in England and Wales) “children may be taught for a reward so moderate that even a common labourer may afford it; the master being partly, but not wholly, paid by the public, because, if he was wholly, or even principally, paid by it, he would soon learn to neglect his business.”

The background was Smith’s (at least rhetorical) exposition of the dangers to society of failing to educate the majority of children who were destined for a life of drudgery and toil in mind-numbing employment (his famous and much misunderstood passage at page 782) against the consequences of the division of labour, much approved from a productivity point of view in Book I, Chapter 1 of Wealth Of Nations), but dangerous in Book V.

Thus, he warns readers that the ‘stupid and ignorant’ could become socially dangerous, “unless government takes some pains to prevent it” (which meant the richer minority should support public education instead of ignoring it).

Adam Smith was making a case for reform of the UK education system to deal with 18th century problems. It is somewhat disingenuous to apply it word-for-word to the 21st century, where educational vouchers would serve a completely different purpose by addressing the problems arising from the gigantic waste and expense of low quality publicly-funded provision for children from 5-18, and the lack of initiative and performance becuase they are dominated by militant trade unions and government bureaucrats.

Thomas Jefferson, quoted by E. D. Kain in his post, was familiar with Wealth Of Nations and was influenced by Adam Smith’s authoritative views on education from primary through to the (dreadful) state of the English universities (Smith excepted the four Scottish Universities from his assessments of the two English universities).

Jefferson favoured government attention to the ‘rudimentary education’ of the US population, clearly influenced by Smith’s account and the state of education provision in the new republic.

Osmosis From Fact to Fiction

An Editorial in Dallasnews.com (Dallas Morning News) HERE:

Editorial: Capitalism without morality is piracy

“Adam Smith, whose 1776 work, The Wealth of Nations, is a foundational document of modern capitalism, taught that an "invisible hand" of self-interest guided the free market toward greater prosperity for all. In that famous volume, Smith wrote, "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."
But self-interest, in Smith's view, is not the same as selfishness. Capitalism's prophet believed it's in everyone's economic self-interest to behave morally – which entails being trustworthy. As he and other enlightened defenders of the market argue, capitalism works only within a strong moral framework that creates social trust. Absent a common moral sense restraining our worst impulses, capitalism becomes a kind of piracy”.

To which Ken Mathias, a reader, includes in his comments HERE:

“This editorial quotes Adam Smith's The Wealth of Nations: "Absent a common moral sense restraining our worst impulses, capitalism becomes a kind of piracy."

Comment
I would appreciate a source for the alleged quotation from Adam Smith’s Wealth Of Nations.

Smith never used the word, ‘capitalism’, in anything he wrote. The word was not used in English until 1854 (by Thackeray in his novel, The Newcomes) and Smith died in 1790.

It is an example of metamorphosis by Chinese Whispers (message: ‘send reinforcement we are going to advance’ became, eventually, ‘send three-and fourpence we’re going to a dance’).

Of course, Smith did not teach ‘that an "invisible hand" of self-interest guided the free market toward greater prosperity for all’.

He certainly said that if the political economy of mercantile commerce, the state-run system of the 18th century in Britain, was replaced by repeal of the many laws of the then current prevailing orthodoxy, such as monopolies, protectionist tariffs, restrictive labour, settlement and apprenticeship laws, and laws of entail and primogeniture, colonial monopolies, wars to defend them from rival neighbours, and wars for trivial ends (the egoism of Princes and governments) and thyeir jealousies of trade, then there would be slow and gradual progress towards opulence across the whole population.

These had nothing to do with magical disembodied body parts or invisible hands. The process of the spread of opulence was known and knowable. His single use of the metaphor was about something else (risk avoidance) (see my paper: Adam Smith and the Invisible hand: from metaphor to myth', downloadable from the link (in red ink) on the Lost Legacy Home page).

Adam Smith On Specialisation

Nurrahmanarifs Weblog HERE, publishes an interesting post :

“A Brief History of Industrial Engineering”

“Adam Smith’s Wealth of Nations [26] published in 1776 was one of the first works promoting “specialization labor” to improve productivity. He observed in pin making that the division of task into four separate operations increased output by a factor of almost five. Whereas one worker performing all the operations produced 1000 pins per day, ten workers employed on four more specialized tasks could produce 48,000 pins per day. The concept of designing a process to use the work force efficiently had arrived.

It should be noted, however, that what worked for one process (e.g., pin manufacture) in 1776 may not work well for a similar process today.”

Comment
Wealth Of Nations was not ‘among the first’ to promote the “specialization labor” to improve productivity. Adam Smith was a moral philosopher who did ‘nothing but observed everything’. He reported on what he observed. Many others before him had also noticed the division of labour, such as his tutor, Francis Hutcheson, not to mention Plato.

Entrepreneurs, or undertakers, did not need to read Wealth Of Nations to do what they were already doing and had been doing for centuries. If modern society depended on everybody reading one or two books, I suggest it would never have happened.

Smith understood this. Specialisation through the division of labour is not just a matter of splitting each main task in a small manufactory into many smaller tasks to increase output. It is also about splitting tasks (‘outsourcing’ today) into long supply chains, which Adam Smith illustrated with the supply chains involved in making the simple woollen coat of a common labourer – it’s in the much neglected second part of the ‘pin-making’ chapter [WN I.i.11: pp 22-24;Canaan ed. 1937: pp 11-12].

For these reasons (see my Adam Smith: a moral philosopher and his politcal economy, 2008, Palgrave Macmillan, for an account of Smith's - and Young's - significance in these matters), I do not agree that Smith's writing on specialisation and the division of labour "may not work well for a similar process today". If anything, Smith's description of the full supply processes work in ways not yet fully appreciated.

The full significance of his account of the manufacture of a woollen coat lay neglected until Allyn A. Young brought it to our attention in his 1928 article in the Economic Journal.

Eighty years later Young’s paper is still seeping into the consciousness of the discipline, particularly in attempts by neoclassical growth theorists to account for increasing (not decreasing) returns in their equations. The essence of the 'commercial' production process (long preceded by millennia of its slow and gradual social evolution) is fully revealed in parable of the 'woolen coat'.

Adam Smith Influenced Post-1783 US Land Law reform

David Brin, ‘scientist and bestselling author’, writes the Contrary Brin Blog, HERE: and on 29 December he posted:

“Truth & Reconciliation Addendum: How radical might it all get?”

“Time for a historical factoid. At around the time of the 1775 uprising that sparked the American Revolution, vast sections (up to half) of the colonies of Georgia, New York, Pennsylvania, and Maryland were owned by individual families under charters granted by the British crown. The great landlords were mostly royal cronies - personal friends of the king - who never even visited their vast new fiefs. (Such cronyism was cited by Adam Smith as the great destroyer of free markets, rather than socialism, which he considered a much less worrisme threat.)

How did that earlier generation of Founders solve the problem? Certainly seizure of some Tory assets had a great deal to do with the breakup of those grossly unfair, unearned estates -- and such things might happen again, if the People must rise up against a new feudalism. Still, mass confiscation is a bludgeon, at-best unreliable. Often, it only leads to a new class of meddling masters, even worse than those who came before.

Fortunately the main rebalancing technique that was used, just after the revolution was far gentler and less socialistic. Across the 1780s and 1790s, many states passed laws against “primogeniture"... the automatic inheritance of all real property and titles by the eldest son.

That was it. Simple. But it sufficed.

Recall that primogeniture had been a strong tradition, that let aristocratic wealth and power remain concentrated in a few families. Hence, for a generation, American society (through consensus political action) stepped in to severely limit a landowner's right to decide which of his children would receive what. Instead, for a while, the law demanded equal distribution among all offspring.”

Comment
David Brin’s ‘factoid’, er, isn’t.

Adam Smith wrote about the political economy of colonies in Wealth Of Nations (WN IV.vii.b), which David Brin may wish to read to correct the false impression that it was the genius of the first generation of the Revolution to have discovered the means by which the newly independent colonies altered the economic history of the new states. It was certainly their political savvy which made the difference between the former British colonies and their South American counterparts, and became increasingly obvious within a few generations.

The Revolution’s leaders and many of their luminaries, right across the political structure of the new state, became familiar with Wealth Of Nations, for many years imported from Britain before an American edition was published (the Library of the US Congress holds George Washington's signed copy).

In Wealth Of Nations, many American readers no doubt turned to Chapter vii of Book IV: ‘Of Colonies’, and Part 2: ‘Causes of Prosperity of new Colonies’, where he discusses the failings of the Spanish, Portuguese, and French administrations (and has a disquisition of the early Greek colonies of antiquity), within which they would find the following:

“But there are no colonies of which the progress has been more rapid than that of the English in North America.

Plenty of good land, and liberty to manage their own affairs their own way, seem to be the two great causes of the prosperity of all new colonies.

In the plenty of good land the English colonies of North America, though no doubt very abundantly provided, are however inferior to those of the Spaniards and Portugueze, and not superior to some of those possessed by the French before the late war. But the political institutions of the English colonies have been more favourable to the improvement and cultivation of this land than those of any of the other three nations.

First, the engrossing of uncultivated land, though it has by no means been prevented altogether, has been more restrained in the English colonies than in any other. The colony law which imposes upon every proprietor the obligation of improving and cultivating, within a limited time, a certain proportion of his lands, and which in case of failure, declares those neglected lands grantable to any other person, though it has not, perhaps, been very strictly executed, has, however, had some effect.

Secondly, in Pennsylvania there is no right of primogeniture, and lands, like movables, are divided equally among all the children of the family. In three of the provinces of New England the oldest has only a double share, as in the Mosaical law. Though in those provinces, therefore, too great a quantity of land should sometimes be engrossed by a particular individual, it is likely, in the course of a generation or two, to be sufficiently divided again. In the other English colonies, indeed, the right of primogeniture takes place, as in the law of England. But in all the English colonies the tenure of the*39 lands, which are all held by free socage, facilitates alienation, and the grantee of any extensive tract of land generally finds it for his interest to alienate, as fast as he can, the greater part of it, reserving only a small quit-rent. In the Spanish and Portugueze colonies, what is called the right of Majorazzo takes place in the succession of all those great estates to which any title of honour is annexed. Such estates go all to one person, and are in effect entailed and unalienable. The French colonies, indeed, are subject to the custom of Paris, which, in the inheritance of land, is much more favourable to the younger children than the law of England. But in the French colonies, if any part of an estate, held by the noble tenure of chivalry and homage, is alienated, it is, for a limited time, subject to the right of redemption, either by the heir of the superior or by the heir of the family; and all the largest estates of the country are held by such noble tenures, which necessarily embarrass alienation. But in a new colony a great uncultivated estate is likely to be much more speedily divided by alienation than by succession. The plenty and cheapness of good land, it has already been observed, are the principal causes of the rapid prosperity of new colonies. The engrossing of land, in effect, destroys this plenty and cheapness. The engrossing of uncultivated land, besides, is the greatest obstruction to its improvement. But the labour that is employed in the improvement and cultivation of land affords the greatest and most valuable produce to the society. The produce of labour, in this case, pays not only its own wages, and the profit of the stock which employs it, but the rent of the land too upon which it is employed. The labour of the English colonists, therefore, being more employed in the improvement and cultivation of land, is likely to afford a greater and more valuable produce than that of any of the other three nations, which, by the engrossing of land, is more or less diverted towards other employments.” [WN IV.ii.16-19: pp 572-73]

Primogeniture was a regular target of Adam Smith’s in his writings and lectures. Britain was dominated by the ancient law of primogeniture and it was pernicious for all the reasons stated by David Brin.

However, typically, the law of primogeniture was made even more onerous by the legal device known as ‘entail’, which locked the entire estate into a non-divisible whole: no part could be inherited or sold separately; the whole estate could only be purchased subject to the entail applying in perpetuity.

The entail device was even more pernicious.

An inheritor, for example, finding himself (it was always male, of course) in need of funds to invest and improve his landed estate, assuming he was so inclined, or course, or he just wanted the money his prodigal life-style, could not dispose of parts of the estate; he had to sell, or pledge, the whole estate. This system prevented the development of a yeoman class of farmers on the one hand, and ensured the steady decline of landed estates inherited by persons uninterested in agricultural improvement.

No Revolutionary politician was unaware of the problems caused by primogeniture and entails. That some states had legislated before 1776 under British administration to reform primogeniture and entail laws was an excellent example to the rest post-independence. Adam Smith provided the political economy of the benefits of these moves.

I think David Brin, and others (many of them in the US media who seem to believe that history began only after 1783), should at least acknowledge that British thinking from the likes of Adam Smith, played a not insignificant role in the deliberations of the post-Revolution leaders and those who influenced them.

David also seems in his post (follow the link) to think that Adam Smith was aware of ‘socialism’ as an alternative to private ownership. He wasn’t. That was an issue in the 19th century, not the 18th.

The alternative to the commercial societies of the 18th century, guided by mercantile political economy and that it entailed, was Adam Smith’s version of commercial society, as outlined in Wealth Of Nations, absent monopolies, protectionism, jealousies of trade, special interests and their client legislators and those who influenced them, colonies, and wars for the trivial ends of princes and their governments. Smith had no views of ‘socialism’; it was not agenda in his day.

Whether he would have been a member of the Democratic Party is pure conjecture – about as relevant as whether he would have supported the New York Giants, or Manchester United…

Another Fairy Tale

John Goodwin comments on an editorial in the Democrat Herald (HERE):

”Marketolatry has been the reigning religion of global capitalism. It has exhibited blind faith in Adam Smith’s “Invisible Hand” (I. H.), which Smith believed governs the allocation of resources, capital and labor in the most efficient possible way.”

While Smith’s confidence in the market to self-regulate was conditional, later apostles like Milton Friedman and Alan Greenspan turned that principle into dogma. And dogmas have a way of becoming unconditional.”

Comment
People ascribe views to others also ‘need honesty”, which in this case requires acknowledgement that Adam Smith said no such thing. He did not ‘believe’ that that an invisible hand “governs the allocation of resources, capital and labor in the most efficient possible way.”

That is pure hyperbole and is untrue in every respect.

It may be that Friedman and Greenspan believed such nonsense, but Adam Smith did not. That a correspondent to a newspaper believes it to be true is a measure of how deep the myth of the inviisble hand has penetrated a nation's consciousness.

Something For the New Year?

On Judeopundit, HERE:

‘According to Fred Barnes, Obama has some "unusual ideas about the economy":’

"The American economy has worked in large part," he said last week, "because we've guided the market's invisible hand with a higher principle: that America prospers when all Americans can prosper." ‘That's not exactly the way Adam Smith described the invisible hand of free markets.’

Comment
The fact is Adam Smith never described anything about how ‘free markets’ were led by ‘an invisible hand’.

That is a myth, only sustainable by not reading Wealth Of Nations and, instead’ relying on statements about it by other who have not read Wealth Of Nations too.

If they did read Wealth Of Nations they would read through Books I and II, where Adam Smith describes and explains in detail how markets work without once mentioning the metaphor of ‘an invisible hand’.

They would also read Book III on ‘progress towards opulence’, which doesn’t mention the ‘invisible hand once’. The same with Book V, on government expenditure an taxation.

This leaves Book IV on mercantile political economy and the French Physiocrats, which does mention ‘an invisible hand’ for the first and only time in Wealth Of Nations, but this was not about markets and the invisible hand.

Strange, given the prominence associated with the myth that Adam Smith applied the fairly common literary metaphor to his theory of markets, and given the absolute confidence with which this myth is perpetuated by academe, including Nobel prize winners (who should know better), tutors across university campuses, graduates, and media commentators.

You can read my paper, “Adam Smith and the invisible hand: from metaphor to myth”, by returning the Lost Legacy Home page, and clicking on the link (in red 'ink'; you can't miss it).

Adam Smith Did NOT Have a Labour Theory of Value Outside Hunting

‘CLS’ posts on Classically Liberal Blog (HERE):

"Marxism wasn't all wrong but when they were...."

"The Marxists were right --- sort of. Actually it would be remarkable if they were consistently wrong. But Marxism is not consistently wrong. But, often when it is wrong, it is wrong in astoundingly gigantic ways. The clearest example of that is Marx’s labor theory of value. I don’t blame Marx too much for that error, after all he borrowed it from Adam Smith and David Ricardo”

Comment
I am not sure exactly what ‘CLS’ is getting at but I am sure that he does not understand Adam Smith on the so-called labour theory of value (LTV).

First, ‘CLS’ is wrong to name Adam Smith as the originator of what became known as LTV. It was a fairly common view among philosophers before Smith presented his framework (John Locke was prominent exponent long before Adam Smith). And Marx in the so-called fourth volume of Capital, ‘Theories of Surplus Value’ in which he lists all the earlier authors (including Adam Smith) from the 16th century onwards who influenced him in the 19th century (in his view) by getting their LTV wrong.

I have argued for some years now (I even have a draft paper, to which I intend to return) that Adam Smith did not have a LTV at all, except for the hunter/ scavenger – gatherer, first age of mankind.

It is quite clear that when the hunter or gatherer goes out into the bush to collect food for sustenance, animal skins for warmth, and wood to make shelter, that as it is his (or her) own labour that provides these resources, that these items belong to the labourer; he is the sole source of labour and therefore the sole owner of what he labours to produce. In that principle, in conformity with what Adam Smith understood as Natural Law (from Samuel von Pufendorf, the Natural Law jurist, he was perfectly consistent and right.

Smith makes it clear in Wealth Of Nations (I shall add references later as I am about to leave for a seasonal house party at my daughter’s) that with the appearance of property (shepherding, agriculture, and commerce), the labourer of the forest was no long the sole source of products desired by humans; it was not just his labour alone that made it possible to provide sustenance, clothing, and shelter (later the ‘annual output of the necessities, conveniences, and amusements of life).

The land was no long ‘free’; somebody else ‘owned’ it and charged for its use or exploitation; the means of subsistence (capital stock or the ‘grub stake’ until products were available) were contributed by others, who made what they owned available for use by the labourers. These other owners required a share in the output produced by whomsoever sought access or use of what they owned. The labourer’s labour was not longer the sole input; it was one of several inputs owned by others.

At this point the LTV dropped out of Adam Smith’s reckoning. He says so several times. But because this part of Wealth Of Nations is ‘badly’ explained and muddled it is not clear to fast readers, or readers of isolated quotations, or third-hand, off the cuff, remarks by tutors, media commentators, or the politically inclined, the myth has grown up that Adam Smith had a LTV for commercial (and by extension, capitalist) economies had a LTV and Karl Marx developed into his theory of surplus value.

Marx’s theory is quite different. The ‘surplus’ is the contribution of the other owners of inputs. He simply appropriates it from the other contributors!

A Smithian Scholar Moves to Take Charge

A post on Macleans.ca Blog caught my eye (HERE):

“A lesson in Iggynomics"

"What does the new Liberal leader know about the economy?"

"Michael Ignatieff drags around the longest paper trail of any Canadian politician. As an author, professor, high-brow journalist and broadcaster, he wrote a stack of books, countless lectures, and many articles, not to mention documentary scripts, usually about human rights, foreign affairs, and security. But not much about the economy. And as federal Liberal leader—the job he landed sooner than expected at the end of the recent parliamentary crisis—economic policy is his first priority.

Ignatieff’s two-pronged prescription—stimulus based equally on compassion and competitiveness—might sound suspiciously like a politician trying to be all things to all people. But his interest in blending ideas about creating and spreading wealth go back to his early days as an academic.

In 1983, when he was a research fellow at Cambridge University, Ignatieff collaborated with economic historian Istvan Hont on a paper about the 18th-century Scottish philosopher, and icon of economic conservatism Adam Smith. They read Smith’s Wealth of Nations as more than the foundational work on how competition creates prosperity. “Our argument,” Ignatieff and Hont wrote in the introduction to an essay collection entitled Wealth and Virtue: The Shaping of Political Economy in the Scottish Enlightenment, “is that the Wealth of Nations was centrally concerned with the issue of justice, with finding a market mechanism capable of reconciling inequality of property with adequate provision for the excluded.”

Ignatieff studied Smith at about the same time Harper was taking economics at the University of Calgary. Whether in England or Alberta, the academic atmosphere of the early 1980s was charged with the conservative doctrines of Ronald Reagan and Margaret Thatcher. For Harper, that climate was formative, pushing him permanently to the right. Ignatieff remained a Liberal, but the era’s lessons weren’t lost on him. “If you’ve studied and written about Adam Smith, you’re a believer in markets,” he said. “But Smith always believed that markets had to be regulated. So I’m a market guy, and I think we’ve all discovered that light-handed, smart regulation by government is needed to keep markets safe, honest, fair and transparent—that’s the lesson of the past six months.”

Comment
Michael Ignatieff has a distinguished academic record among Smithian scholars. He co-authored chapter 6, “Needs and justice in the Wealth of Nations; an introductory essay” (pp 339-443), in Istvan Hont’s magisterial, Jealousy of Trade: internatiomnal competition and nation-state in historical perspective, 2005, Belknap Press, Harvard, which alone establishes the quality of his credentials.

That he now has a career in Canadian politics as the federal leader of the Liberal Party provides a unique setting for him to switch from an observer into a doer and from being an influencer to a legislator.

I shall watch his progress as an opposition leader towards government with close interest.

A Text for the Season

Nick Nejad, in Rational Angle, selects a short extract (HERE) from Adam Smith’s “Theory of Moral Sentiments”

“...As nature teaches the spectators to assume the circumstances of the person principally concerned, so she teaches this last in some measure to assume those of the spectators. As they are continually placing themselves in his situation, and thence conceiving emotions similar to what he feels; so he is as constantly placing himself in theirs, and thence conceiving some degree of that coolness about his own fortune, with which he is sensible that they will view it. As they are constantly considering what they themselves would feel, if they actually were the sufferers, so he is constantly led to imagine in what manner he would be affected if he was only one of the spectators of his own situation. As their sympathy makes them look at it in some measure with his eyes, so his sympathy makes him look at it, in some measure, with theirs, especially when in their presence, and acting under their observation: and, as the reflected passion which he thus conceives is much weaker than the original one, it necessarily abates the violence of what he felt before he came into their presence, before he began to recollect in what manner they would be affected by it, and to view his situation in this candid and impartial light.

The mind, therefore, is rarely so disturbed, but that the company of a friend will restore it to some degree of tranquillity and sedateness. The breast is, in some measure, calmed and composed the moment we come into his presence. We are immediately put in mind of the light in which he will view our situation, and we begin to view it ourselves in the same light; for the effect of sympathy is instantaneous. We expect less sympathy from a common acquaintance than from a friend; we cannot open to the former all those little circumstances which we can unfold to the latter; we assume, therefore, more tranquillity before him, and endeavour to fix our thoughts upon those general outlines of our situation which he is willing to consider. We expect still less sympathy from an assembly of strangers, and we assume, therefore, still more tranquillity before them, and always endeavour to bring down our passion to that pitch, which the particular company we are in may be expected to go along with. Nor is this only an assumed appearance; for if we are at all masters of ourselves, the presence of a mere acquaintance will really compose us, still more than that of a friend; and that of an assembly of strangers, still more than that of an acquaintance.

Society and conversation, therefore, are the most powerful remedies for restoring the mind to its tranquillity, if, at any time, it has unfortunately lost it; as well as the best preservatives of that equal and happy temper, which is so necessary to self-satisfaction and enjoyment. Men of retirement and speculation, who are apt to sit brooding at home over either grief or resentment, though they may often have more humanity, more generosity, and a nicer sense of honour, yet seldom possess that equality of temper which is so common among men of the world.”

[TMS I.i.4.8-10: pp 22-23; 1872, Kessinger Rare Reprints, pp 22-23]

Comment
This is an important extract from Moral Sentiments, particularly the last paragraph about ‘society and conversation’. The society of other people and the normal relations of conversation with them is a harmonising influence of great consequence – yes, I know that conversations can cause trouble too – but the resolution of troubles requires conversation, as Smith notes:

“Men of retirement and speculation, who are apt to sit brooding at home over either grief or resentment, though they may often have more humanity, more generosity, and a nicer sense of honour, yet seldom possess that equality of temper which is so common among men of the world.” [Emphasis added]

Robert Burns, captured lonely brooding brilliantly when he wrote of the wife waiting at home in anticipation of her drunken husband's late return, in Tam O'Shanter: 'nursing her wrath to keep it warm'.
Burns read and admired Moral Sentiments and traces of his reading can be found in some of his poems.

Congratulations to Nick Nejad for selecting the extract.

Lost Legacy Posts Rate Increasing, and Readers too

Lost Legacy began in February 2005 and it reached its first thousand posts in July 2007, 29 months later.

Currently it has added another 704 posts from July 2007 to December 2008, 17 months later, standing tonight at 1704 altogether.

All very encouraging.

Looking at the monthly ‘unique visitors’ these stood at 4,675 for January 2006 (or first year) and the number of ‘page-views’ was 18,898 (suggesting that unique visitors were reading roughly 4 pages a visit).

For January 2007, the comparable figures were 12,550 ‘unique visitors’ and 53,585‘page views’, a nice increase.

For December 2008 (December 1 to December 26, with a few days to go and during a ‘holiday’ month) the nearly comparable figures were 15,685 ‘unique visitors’ and 92,427 ‘page views’.

These too are encouraging.

Lost Legacy is coming up towards 200,000 unique visitors and a million ‘page views’ a year.

I notice that the rate of readers’ comments on my posts is increasing, albeit ‘slowly and gradually’ too. For these comments, I am much grateful because it is from readers’ comments, positive or negative, that I get feedback about what you the reader wants me to cover.

Weeks or months without comments at all, is not quite discouraging, but it gets lonely wondering if I am talking to myself!

Thank you all who take the trouble to read Lost Legacy posts – and to those other economics Blogs that refer to Lost legacy or reproduce extracts, or whole posts even; it is the best form of reward to be noticed without getting big headed (to paraphrase Adam Smith in Moral Sentiments).

A Debate 'Rages' on Modern Economics

Richard Murphy Blogs at Tax Research UK HERE:

Readers are recommended to follow the link and see whether you agree with Richard Murphy that economics is not a science or with his protagonist, Tim Worstall, that Richard is striking at straw men and missing the point (that his caricature of modern economics is empty of relevant content). Richard keeps claiming that he has ‘won’ and that Tim has ‘lost’, though Tim keeps coming back with credible arguments in support of his propositions and in opposition to Richard’s. At which point Richard unilaterally called the debate off.

Now, I have an interest in this ‘debate’, as regular readers would note, in that I am concerned at the obsession of modern economics of understanding their models rather than the real economy. I am not too fond of notions of general equilibrium either. But modern economics has developed some useful tools to aid policy making, a point tellingly made by Tim, and studiously avoided by Richard.

There is an extensive comments section between Richard and Tim, which must be read as it elaborates many of the themes raised in the debate, most of them revealing what is at stake.

Richard seems to be firmly convinced by the Green arguments about man-made climate catastrophe and the prediction that the world is collapsing from over-consumption by the richer economies (which leaves the poorer economies future somewhat bleak). Richard doesn’t say anything about what he would do about that appalling problem, other than it’s all the fault of ‘neo-liberals’, a shadowy group which everybody can believe in if it is repeated often enough (replacing the Jews as the scapegoats of the last big depression in the 1930s?).

What was an intelligent debate seems to have slid into wild accusations towards the end; it all going one way in fact.

As a Smithian economist, I take the view that human kind is unlikely to decide about these matters by some sort of scientific agreement. Plans to ‘save’ the world will give the would-be planners comfort, but not much else, and is already this decade’s political title, self-awarded by the Prime Minister, and probably mumbled by Al Gore too.

Of course, ‘activism’ (like sitting on runways, blocking traffic, digging up GM crops, or worse) will happen. But if the ‘remedies’ of the activists are inappropriate, they may well be worse than adjusting to the discomforts of climate change (a less directional prediction to the former title of ‘global warming; it takes in a new ice-age too, and one of them of bound to be right, eventually).

So follow the link and make your own mind up, HERE:

Disclosure: I too am a Fellow of the Adam Smith Institute, but I do not follow a strictly ‘neo-liberal’ agenda, at least as presented by Richard. I favour competitive markets where possible and state intervention where necessary, as Adam Smith did.

In view of Richard's limited view of exchange relations, I recommend that he downloads my paper, "The Prehistory of Bargaining: a multi-disciplinary treatment", from the Home Page of Lost Legacy (in red near the top).

Adam Smith on Competition Among Religous Sects

Catherine Rampell writes in the New York Times, 26 December, on “Hanukkah Economics” HERE:

“What Would Adam Smith Say About Today’s Hanukkah?

A Slate piece, by the Columbia Business School professor Ray Fisman, talks about Adam Smith’s argument for why religious competition was a good thing, and whether it stands up to the fact that “a minor holiday largely unrelated to Judaism’s core values has earned outsize importance, primarily so parents can bribe their kids into keeping the faith.”

Comment
Hanukkah is a Jewish religious festival, which “commemorates the rededication of the Holy Temple in Jerusalem”, on the ‘25th day of Kislev’ and is celebrated for eight days in November or December. It pre-dates the Christian ‘Christmas' by 200 years, though the coincidence of dates may be fortuitous.

However, Ray Fisman, may (I have not read his article) be misreading Adam Smith on religious competition. This had little to do with economic competition; it related to the power of an Established Church.

In England the Church of England was (and remains) the official church, headed by the sovereign (who, by law, still enforced, cannot marry a Roman Catholic; I take it marrying a Jew or a Moslem is out of the question).

In Scotland it was, and is, the Church of Scotland, detached from government and in many senses superior to the weak governments at the time. Scotland ‘lost’ its parliament when the two countries formed a parliament of the United Kingdom – the crowns had unified a century earlier when James VI of Scotland became James I of the United Kingdom (North American friends and antipodeans, please note that there is no such title extant as the ‘Queen of England’).

Smith’s concern was with ecclesiastical establishments that were aligned with political interests. In becoming Established, such churches became embroiled in ‘violent religious controversy’ and ‘violent faction’ (Wealth Of Nations, V.i.g: pp 788-814; Canaan, 1937. pp 740-66) Before my Islamic friends smirk at the Christian capacity for ‘violent controversy’ over holy doctrines, please contemplate the murderous contentions between today’s Sunni and Shia adherents.

Zeal and religious enthusiasm go together, and Adam Smith and others had personal, almost daily, experience of zealot-led disturbances in Scottish life in the 18th century, especially on Sundays when named individuals were treated abominably for whatever ‘sins’, real and imaginary, had come to the attention of zealot-minded busy bodies.

The last person hanged for blasphemy was a student, Thomas Aikenead, on 8 January 1697; the last witch burned to death was Janet Horne in 1727 (when Smith was just 4 years old); ‘the never to be forgotten’ Francis Hutcheson, a minister of the Ulster Church, experienced the ire of ignorant zealots in a petty incident when they accused him of apostasy (Smith was his student at Glasgow University, 1737-40).

Smith favoured that ‘every man [be allowed] to chuse his own priest and his own religion as he thought proper’ because this would dilute religious ‘zeal’ and make it ‘altogether innocent when society is divided into two or three hundred, or perhaps into as many thousand small sects, of which no one could be considerable enough to disturb the publick tranquillity” (p 793; p 745).

This was his main concern; to allow freedom of religious belief as an antidote to the excesses of the Established Churches when interfering in the daily lives of people.

To this wish, he added two more: education in science, because science was the ‘great antidote to the poison of enthusiasm and superstition’, and ‘the frequency and gaiety of public diversions”:

“The state, by encouraging, that is by giving entire liberty to all those who for their own interest would attempt without scandal or indecency, to amuse and divert the people by painting, poetry, music, dancing; by all sorts of dramatic representations and exhibitions, would easily dissipate, in the greater part of them, that melancholy and gloomy humour which is almost always the nurse of popular superstition and enthusiasm. Public diversions have always been the objects of dread and hatred to all the fanatical promoters of those popular frenzies. The gaiety and good humour which those diversions inspire were altogether inconsistent with that temper of mind which was fittest for their purpose, or which they could best work upon. Dramatic representations, besides, frequently exposing their artifices to public ridicule, and sometimes even to public execration, were upon that account, more than all other diversions, the objects of their peculiar abhorrence.” (WN V.i.g: p 796; Canaan, 1937 ed. p 748)

I recommend readers to cast their minds over what is probably the most neglected chapter in Wealth Of Nations and which deals with what he considered to be an obstacle to the spread of opulence among all the members of a society, and, as it stood in Britain, a cause of much needless unhappiness (how many economists writing on measuring ‘happiness’ today have read it, I wonder?).

Catherine Rampell would certainly benefit from understanding why Adam Smith advocated widespread religious tolerance, manifested in a society allowing all forms of religion to compete for the attention of potential adherents, and for open competition among the numerous sects was one element of his policy of avoiding a dominant religion emerging to gain political power and influence.

That was, after all, the brilliant insight of the Founding Fathers in their legislative separation of religion from the State in the US constitution.

An Imaginary Perspective of History

Niall Ferguson, a contributing editor of the Financial Times and the author of ‘The Ascent of Money: A Financial History of the World’ (Penguin), writes in FT.com, 27 December, HERE:

“An imaginary retrospective of 2009”

“As Adam Smith had foreseen in The Wealth of Nations, economic liberalisation had allowed the division of labour and comparative advantage to operate on a global scale.”

Comment
Er, not quite. Long before Adam Smith (genius that he was) put pen to paper, global markets operated across Europe, and from the geographical explorations of the New World, began to link up with distant lands, in their case by systematic plunder by Spain in Central America and in India and south-east Asia (Dutch, Portugal, England (Britain) and France.

Adam Smith’s account of the global links in the manufacture of the common labourer’s woolen coat (Wealth Of Nations, Book I, chapter 1) is a description of what was happening already, before a version of ‘economic liberalisation’ came into practice.

Indeed, long before anybody wrote about free economies and a large-scale roll back of legislative interventions in economic life, there was a brisk, sustained, and expanding trade between and within European countries from the 14th century, which contributed the international division of labour.

Adam Smith, as a philosopher, was an observer, not an initiator.

‘Overselling’ his role is persistent, though a relatively minor transgression on his reputation.

Of far greater importance are the daily distortions of his radical assessment of how economies work and how they may be better able to work if people, not just legislators and those who influence them, would also first observe and not then offer prescriptions to ‘improve’ what happens anyway, often without the slightest contact with what is happening now and what brought to pass the ‘fine mess we are often in’.

Legislators and Outcomes Are Not as Intended

Steve Gilbert posted on the Sweetness and Light Blog (26 December), "What Has Been Obama’s Plan All Along?" HERE:

“It should come as no surprise, then, that we have a tendency to take our free-market system as a given, to assume that it flows naturally from the laws of supply and demand and Adam Smith’s invisible hand. And from this assumption, it’s not much of a leap to assume that any government intrusion into the magical workings of the market— whether through taxation, regulation, lawsuits, tariffs, labor protections, or spending on entitlements—necessarily undermines private enterprise and inhibits economic growth. The bankruptcy of communism and socialism as alternative means of economic organization has only reinforced this assumption. In our standard economics textbooks and in our modern political debates, laissez-faire is the default rule; anyone who would challenge it swims against the prevailing tide.

It’s useful to remind ourselves, then, that our free-market system is the result neither of natural law nor of divine providence. Rather, it emerged through a painful process of trial and error, a series of difficult choices between efficiency and fairness, stability and change. And although the benefits of our free-market system have mostly derived from the individual efforts of generations of men and women pursuing their own vision of happiness, in each and every period of great economic upheaval and transition we’ve depended on government action to open up opportunity, encourage competition, and make the market work better.”

Comment
I pass over the subject of the post about Obama; it is not relevant to my comments on the above two extracted paragraphs and I do not comment onm politcs in other countries.

The political economy summed in the extracts is only the media’s version of Adam Smith, who never linked his chapters on supply and “effectual demand” to anything to do with the metaphor of “an invisible hand” (only mentioned once throughout Wealth Of Nations). Nor was Adam Smith linked to ‘laissez-faire’ in his lifetime; he never used the words and, if anything, considered those who used them, such as the French Physiocrats in the 1760s, were too extreme in their ambitions for commercial economies.

Adam Smith never flinched from swimming “against the prevailing tide” (neither does Lost Legacy on these matters.) Hence , I am pleased that the first sentence of paragraph two, “It’s useful to remind ourselves, then, that our free-market system is the result neither of natural law nor of divine providence”, is so clear and unequivocal.

Why? Because the advocates of myths about Adam Smith and laissez-faire and invisible hands, quite often go on the link him to “the magical workings of the market”, a wholly superstitious assertion.

Markets did emerge “through a painful process of trial and error” but not via “a series of difficult choices between efficiency and fairness, stability and change”.

True, individuals may have made choices, but wholly without any ‘system’ of ‘equity, fairness, stability, and change’ in mind. All those sorts of assertions are a post-event reconstruction by ideologues.

As is the idea that “government action” opened up “opportunity”, encouraged “competition”, and made “the market work better”, which is so contrary to historical fact as to be breathtaking.

Elizabethan governments certainly intervened with 'good' intentions – to increase the pace of commercial changes in 16th century – but in almost (I may have missed some) every case the result of their legislative interventions (The Statute of Apprenticeships – for ‘quality’; the town Guilds – to ensure regular supplies of produce to consumers; and the Settlement Acts – to curb local burdens from beggars and ‘welfare’ scroungers) was the opposite and unexpected because they removed competition and didn’t increase it; the Guilds restricted competition and raised monopoly prices; and instead of settling people these laws prevented it.

Legislative intentions are processed by people and people have interests that can and do work against the intentions of the legislators, giving the legislators the benefit of the doubt for the sake of the argument (I reserve judgment on the intentions of those who influence them).

Richard Epstein Reports Accurately the Kirkcaldy Adam Smith

Economics (‘just another Blog tagging resource for Economics students’) (26 December) posts extracts from a summary of an Econ Talk podcast between Richard Epstein and Russ Roberts HERE:

“Richard Epstein of the University of Chicago talks with EconTalk host Russ Roberts about the relationship between happiness and wealth, the effects of inequality on happiness, and the economics of envy and altruism. He also applies the theory of evolution to explain some of the findings of the happiness literature.”

“People think Adam Smith was a proponent of getting whatever you can and get ahead; but that was not his view; Theory of Moral Sentiments. Word “sentiment”–what he meant was the effort to figure out how people react toward the misfortunes of others. You don’t treat them as acutely as if they are your own; but you are not completely indifferent either. Impossible to only care about your children but not your children’s friends. Theory of inclusive fitness.”

Comment
Great to see positive reports of Adam Smith’s thinking because it makes a change (for the better). Would that the habit would spread!

So much is reported that carries ‘lies, damned lies, and as good as lies, otherwise known as quotations torn from their context’.

A Pensioner Defies the Tide

Robert Sheer, a company-pensioned retiree from the Los Angeles Times, writes: “Republicans bring Socialism to America” on the ‘Fold/Spindle/Mutilate 2.1' Blog HERE:

“It’s enough to drive one back to the invisible hand of Adam Smith. Personally, I would rather we took our chances these days with letting the corporations sink or swim on their own without government interference. If tough love was good enough for troubled families cut off the public dole by Clinton’s welfare reform, which summarily ended the federal poverty program, why have a poverty program for troubled corporations?”

Comment
Big Government is always accompanied by big business. The complex connections between legislators and those who influence them (and those many others who attempt to influence them) makes for a large non-separated, non-independent, and largely dependent capitalism, well short of the ‘ideal’ of laissez-faire, as imagined by exponents of ‘free- enterprise America’, of which Robert Sheer would appear to be an advocate.

Ironic, that the only use by Adam Smith of the metaphor of an invisible hand in all of Wealth Of Nations was in relation to the risk avoidance of some, but not all, merchants who preferred to use their capital locally rather than risk it in profitable ventures abroad (that is in the British colonies in North America) and in so doing they automatically (by the arithmetical ‘law’ that the whole is the sum of its parts) made more capital available for increasing local employment and profit-making enterprises in Britain than would it otherwise would have experienced.

And even then, not to put too fine a point on it, the British state was intimately connected to both sets of merchants – those who traded with the North American colonies and those who stayed at home – through the Navigation Acts (since Cromwell’s time, when Britain was menaced by Dutch naval power), which enforced a total monopoly on sea trade for British-owned and British-crewed shipping; through various monopoly laws forcing colonists to send their exports only to Britain first (some of which was then re-shipped in local shipping to the continent) and, forsooth, forced them only to import British products for re-sale and use in the colonies. All this backed by the military presence of British troops and naval vessels, and British laws, at no small expense (the 7-years war alone cost £120 million). The rebellion of the colonists swapped one interfering government for another one (albeit a much improved version; the US Constitution is a monument to civilisation).

As governments got bigger, the intimate connection of monopolists, protectionists with government, and the application of multiple laws and legal processes, spending grew in step. And so it has in the USA, of which Robert Sheer now calls on government not to ‘bail out’ large sections of the US economy in pursuit of a nirvana under the slogan of taking ‘our own chances’. What bravery! What sacrifice of personal chances in pursuit of principle (one, incidentally, that never existed)!

What happens next when Robert Sheer’s pension folds under growing claims for pensions along with collapsing capital assets that are the source of his pension, dry up under ‘tough love’ capitalism? There is a pile of paper entitlements to earnings from real assets, but no locked box of cash lying in some vault somewhere from which Robert’s pension is paid each month!

Frankly, I am in awe at Robert’s defiance. I am also old enough to know that when the proverbial hits the fan he will need the stoicism of a saint not to demand that politicians do something about his new status of poverty, such as by adopting the ‘right’ policies (whatever they are) to get the economy ‘moving’ again.

And I wouldn’t rely on the so-called invisible hand to set it right; the metaphor is not about how markets work, so much as what risk-avoidance drives separate people to do or not do with their scarce assets.

Adam Smith Favoured Publicly Funded Public Works

Nissim Mannathukkaren, Assistant Professor with Dalhousie University, Canada, posts on Pragotiti (‘progress and people’) HERE:

“Whose media? Which people?”

“What the urban middle classes and the elite want is not democracy but Adam Smith’s night watchman State which does nothing more than the strong and efficient protection of the life, limbs and property of the people (read the classes).”

Comment
As I mentioned yesterday, the phrase the “night watchman State” did not come from Adam Smith – he never used such a phrase; his ideas of the duties of the state went well beyond the ‘first duty’ of security – and, anyway, the phrase itself was not used until the 1850s, and then not by an adherent of Smith’s political economy.

The ‘night watchman state’ was first uttered by Ferdinand Lassalle, a firebrand, leftwing socialist, in his disparagement of bourgeois state intervention, taunting them because they did not advocate taking full advantage of the awesome state power of 19th-century European states to take over much of the commercial activities of their economies.

How then did it become associated with Adam Smith? Well, possibly, via the usual route of assimilation by those who hadn’t read their Adam Smith too closely, if at all, and from their not appreciating what he was talking about in what quick readers of Book V of Wealth Of Nations thought were his ‘modest’ proposals for government.

Defence expenditures (the first duty of the sovereign) were the largest single budget expenditure in the 18th century (the seven years war cost £125 million). It continued to rise until after the Napoleonic Wars (the on-and-off 23years war). Justice (the second duty) was also expensive, especially as the number of possible crimes codified into law rose dramatically in the last quarter of the 18th century (and led to the colonisation of Australia from 1788 for convicts).

But the real potential source of approved growth lay in the third duty, that of expenditures on public works and public institutions that facilitated commerce or were advantageous for social stability.

Roads, harbours, canals, and bridges formed a massive agenda for public expenditure and if carried out diligently would have added tens of millions to public expenditure annually for much of the next 50 years. To which, in time, would have spread expenditurs from what was called ‘police’ to city water, sewage and refuse disposal, and public health (he also suggested palliative care of leprosy victims and other ‘loathsome diseases’ in Wealth Of Nations - glimmers of a public health service?

Of public institutions, the main one was the ‘education of youth’. The public provision of ‘little schools’ in every parish (about 60,000 of them) alone would have been a massive budget line for the buildings and state subsidies of teacher remuneration, supplemented by fees charged to all parents, except the most destitute.

Smith already supported the public funding of the Royal Mint and the Post Office, plus various government inspectorates to ensure quality in certain outputs (bullion assaying; hallmarks; stamping of certain cloths, etc.,), and government officers of customs and excise, tax collectors and civil servants.

‘The dignity of the sovereign’, or the expenses of government, was a separate budget line too, and was bound to grow as governments grew larger across the economy at both national and local levels, as seen in the magnificent 19th century town halls and public buildings erected across the UK.

So, if ‘even Adam Smith’ had a large, and potentially growing, public expenditure agenda, it was consistent with his central theme that these expenditures were to ‘facilitate commerce’, and not to manage it or ‘crowd it out’, or replace it.

If anything, Smith’s admonition to his readers was to facilitate commercial markets where possible (clearly, in time, capital would become, and became, available for privately-financed, infra-structure projects), and also to utilize publicly-funded activities where necessary.

As always, Adam Smith was not an ideologue.

Postscript: a merry Christmas to all readers who catch this post today; and season's greetings to everybody else later.

Meanwhile, I have nine more exam scripts to grade ... before the usual family dinner.

Intellectual Life Does not Influence Everyday Life That Much

Canadian Content Blog carries an article, “The evangelical roots of economics” from “Let there be markets: The evangelical roots of economics”, extracted from Gordon Bigelow’s piece in Harper's Magazine (HERE):

“When evangelical Christianity first grew into a powerful movement, between 1800 and 1850, studies of wealth and trade were called “political economy.” The two books at the center of this new learning were Adam Smith’s Wealth of Nations (1776) and David Ricardo’s Principles of Political Economy and Taxation (1817):

"This was the period of the industrial transformation of Britain, a time of rapid urban growth and rapidly fluctuating markets. These books offered explanations of how societies become wealthy and how they can stay that way. They made the accelerated pace of urban life and industrial workshops seem understandable as part of a program that modern history would follow. But by the 1820s, a number of Smith’s and Ricardo’s ideas had become difficult for the growing merchant and investor class to accept.

For Smith, the pursuit of wealth was a grotesque personal error, a misunderstanding of human happiness. In his first book, The Theory of Moral Sentiments (1759), Smith argued that the acquisition of money brings no good in itself; it seems attractive only because of the mistaken belief that fine possessions draw the admiration of others.

Smith welcomed acquisitiveness only because he concluded—in a proposition carried through to Wealth of Nations—that this pursuit of “baubles and trinkets” would ultimately enrich society as a whole. As the wealthy bought gold pickle forks and paid servants to herd their pet peacocks, the servants and the goldsmiths would benefit. It was on this dubious foundation that Smith built his case for freedom of trade.

By the 1820s and ’30s, this foundation had become increasingly troubling to free-trade advocates, who sought, in their study of political economy, not just an explanation of rapid change but a moral justification for their own wealth and for the outlandish sufferings endured by the new industrial poor. Smith, who scoffed at personal riches, offered no comfort here. In The Wealth of Nations, the shrewd man of business was not a hero but a hapless bystander.

Comment
This type of article which links books written in 1759 (Moral Sentiments) and 1776 (Wealth Of Nations) by Adam Smith with another by David Ricardo in 1817 (Principles of Political Economy and Taxation) with the collective views of a “growing merchant and investor class to accept”, only become acceptable by distance of the reader from the relevant events.

While many ‘merchants and investors’ were educated at the time (and many others weren’t) it is a bit of a stretch to accepts that they were familiar with Smith’s and Ricardo’s texts (the last author is especially suspicious of people such as busy ‘merchants and investors’ being familiar with his work – a most obscure text if ever there was one!).

I suspect that the influence of intellectuals is much less than commentators might think, perhaps in the belief that because we read these works still, it must have been the case that they were widely read by entrepreneurs too. It is more likely that if none of the above books were written, that events in markets, development, innovation and growth would have continued in much the way that they did anyway. There is an intellectual life and an everyday life; the latter may influence the former but the former is less likely to influence the latter.

The chattering classes who ‘translate’ notable texts, and who make notable text more familiar to the each other and to those who listen to them, also filter ideas in the process of their popularising versions of them, quite often at the expense of vulgarising their authors’ ideas, where they don’t suppress things they choose to ignore. Hence, Adam Smith’s holistic ideas were filtered down to a few words, such as ‘laissez-faire’ (which happened not to be his ideas at all – he never mentioned these words once), or ‘night watchman state' (spoken not by Smith but by the socialist firebrand, Ferdinand Lassalle, who actually mocked the idea of a smaller, leaner bourgeois state).

A century later, in fact, a further filtering took place around the metaphor of ‘an invisible hand’. In all these cases, the extent of the knowledge of many people who have heard the name ‘Adam Smith’, but never read his books, is limited to these three erroneous propositions alleged to be his, ‘laissez-faire', ‘night-watchman state', and ‘invisible hand’.

The idea that the “growing merchant and investor class” gave a moment’s thought to either Adam Smith or David Ricardo, frankly, is quite ludicrous. That the educated classes of religious orthodoxy and evangelical enthusiasm concocted a ‘plausible’ narrative as described by Gordon Bigelow is perfectly possible. That it had anything to do with Adam Smith’s ideas is quite irrelevant, as anybody turning the pages of either of his books would grasp in no time.

Incidentally, per capita incomes rose throughout the 19th century, despite the dreadful conditions of those urban labourers at the very bottom of the social heap and they continued to do so throughout the 20th century. If the urban poor were near destitute, the lot of the rural poor was even worse, as it is today for the same division of populations in the poorer countries of the world.

Adam Smith Favoured Publicly Funded Public Works

"KerPlonka" (HERE):

“Economic Miscellany"

“Given that infrastructure in Canada is generally agreed to be in bad need of some work, given the economic value infrastructure has, and given that even Adam Smith was in favour of certain kinds of infrastructure spending, this is a hell of a lot better than spending money on John Turner-style make work programs or government day cares or whatever.”

Comment
I was struck by the unnecessary word ‘even’ in front to Adam Smith: “even Adam Smith was in favour of certain kinds of infrastructure spending”.

Presumably ‘Kerplonka’ has little familiarity with the Adam Smith (born in Kirkcaldy in 1723) who was author of Wealth Of Nations (1776; Book V, to be exact).

Maybe he is more familiar with the ‘Adam Smith’ invented in Chicago in the 1950s, who is credited with all kinds of ideas he never held.

The Kirkcaldy Adam Smith, on the other hand, was very much in favour of public works and public institutions that facilitated commerce, which he considered should be funded by government in their construction, and that their management and maintenance should be funded by some combination of public and private monies, including by charges for those who used the facilities (with the rich paying more where practicable).

It is pleasing to see that the Kirkcaldy Adam Smith is coming to the attention of the good people of Canada. I hope their interest in the genuine article will continue.

An Evolutionist Speaks Out About Economists' Pretensions About Science

Massimo Pigliucci, professor in the departments of Ecology and Evolution, Stony Brook, NY, contributes an important piece of work in the Blog,
Rationallyspeakingout.org (‘a site devoted to positive scepticism') (HERE):

“Economics learns a thing or two from evolutionary biology”

“Economics is supposed to be a solid discipline, founded on complex mathematical models (and we all know math is really, really difficult). They even give Nobel prizes to economists, for crying out loud! And yet, economics has always had to fight off the same reputation of being a “soft” science that has plagued sociology, psychology, and to some extent even some of the biological sciences, like ecology and evolutionary biology. Indeed, like practitioners in those other fields of inquiry, some economists admit of being guilty of “physics envy,” that is, of using the physical sciences as the model for what their field ought to be like. Turns out even the assumption that a good science should be modeled on physics is “flawed,” to use Greenspan’s apt phrase.

“A recent article by Chelsea Wald in Science (12 December 2008) puts things in perspective by asking how it is possible that so many smart people in the financial sector made irrational decisions over a period of years, despite clear data showing there was a problem, and eventually leading to a worldwide economic crisis that is at the least poking at, if not shaking, the foundations of capitalism itself.

Part of the answer is to be found in the persistent idea in economics that “markets” work because people are rational agents who act in their own self-interest and have perfect, instantaneous access to relevant information about the businesses they are considering investing in. Economists are not stupid, and they know very well that perfect rationality, complete information and instant access are all light years away from the reality of how markets operate. And in fact recent models have relaxed these assumptions to some extent. But it is so much more tractable to model things that way! After all, physicists do it too: remember those problems in Physics 101 that started “consider a spherical cow…”?

“Perhaps not surprisingly, there is another science that has been inspiring economists for some time now: evolutionary biology. The old “efficient markets hypothesis” underlying classical models is being replaced by the “adaptive markets hypothesis,” where Adam Smith’s invisible hand becomes more directly analogous to natural selection.”

”As evolutionary biologists have found out, natural selection is not an optimizing process, but a satisficing one, meaning that it produces whatever outcome happened to be achievable at a particular historical moment and that works “well enough” for the problem at hand. Moreover, it does so while “wasting” a lot of resources and often marching straight into dead ends (just think that over 99% of the species that ever existed went extinct). The emerging picture is much more realistic than the rationalist paradigm, but it sure is a lot more messy too.”

“There is another lesson to be learned from evolutionary biology that will not make economists, or the public at large, particularly happy: when complex systems evolve over time the paths they take is contingent on historical accidents (as opposed to being deterministic, like the laws of macro-physics, outside quantum mechanics). Sociologists, psychologists, ecologists and evolutionary biologists will readily tell their economic colleagues that it is certainly possible to explain past events (the extinction of the dinosaurs, the dot-com bubble) by the use of sufficiently complex causal-historical models. What seems to be out of reach, however, is precisely what economists want most: predicting the future, the hallmark of “good” science.”

“The moral of the story is that all of the above is not a failure of economics, sociology, psychology, ecology or evolutionary biology. It is the predictable outcome of the fact that these sciences deal with complex, historical systems, unlike much (though not all) of physics. The real assumption we need to get rid of is the highly persistent and pernicious one that physics is the golden standard by which all other sciences ought to be measured. Now if we only could convince federal funding agencies of that...”

Comment
What a breath of fresh air from Professor Massimo Pigliucci! I wish (more in hope than expectation) that fellow economists will read all of his article. But because there are large dollops of research-grant money – and even bigger salaries from financial institutions (and government agencies) – available to smart-talking economists, who tell the grant agencies exactly what they want to hear, there is a steady demand for the services of 'future predictors' and no amount of their constant failures to do better than tossing a ten-pence coin could do, will curb the willingness to believe those in the prediction business.

It’s at least as bad as the historians of the immediate past, when they already know what has happened, who cannot agree on what caused, led to, or contributed to whatever is the latest ‘fine mess’ we’re in.

The historical precedents for this quite silly state of affairs goes back to classical times, and almost certainly farther back than that. Romans believed in ‘omens’ and fortune tellers, and even great generals, who pitted their lives against formidable foes, eagerly listened to what soothsayers and mystics had to say about the next few hours in decisive battles.

Among economists, we have bought the unscientific myth that if we spend a century creating beautiful mathematical models of an imaginary economy, without people in all their complexity and unpredictability, and our competence is judged by our understanding of the model, but not the reality of real economies!

We are a ‘hard’ science and much ‘superior’ to ‘wishy-washy sociology, psychology and history, even though it is well-known that humans are not ‘well behaved’ like physical objects. We are not like wooden pieces on a chess board, as Adam Smith put it.

It is worrying too that just as more economists begin to realise that “the old 'efficient markets hypothesis' underlying classical models is being replaced by the 'adaptive markets hypothesis,' into which realisation, the oldest nonsense in modern economics (invented as a mass myth from the 1950s), is being re-introduced into the latter, under the guise that the metaphor of “Adam Smith’s invisible hand”, such that it is to be regarded as “more directly analogous to natural selection.”

Please spare us from this spurious nonsense; it’s bad enough that the proponents of the so-called scientific basis of economics have got away with their claims that the mystical disembodied body part was the ‘most important idea’ of modern economics, which is something that they never got from the texts of Adam Smith (see my paper: 'Adam Smith and the Invisible Hand: from metaphor to myth’, 2008 and downloadable from the homer page of Lost Legacy).

The myth of the invisible hand is a fabrication to support propaganda for corporate bodies to behave with all the monopolistic spirits and protectionism of the ‘merchants and manufacturers’ of his day, against whom Adam Smith railed in Wealth Of Nations because they persuaded legislators and those who influenced them (and they ‘bought’ not a few) to assist them in narrowing the competition and raising prices.

Follow the link to read Professor Massimo Pigliucci’s short article HERE.

Foucault on Economics

Undergraduate Economist (perspective of an economics student) writes
HERE:

‘Foucault on Economics’

“Very often economics is taught (in India) as if the present day economics is what has evolved out of the previous economic theories. Therefore, the multiple paradigms that prevail in economics are seldom expressed clearly. It is not uncommon to learn the theories of Adam Smith, David Ricardo, Thomas Malthus, etc under Classical theories. Then, they are forgotten. They are mentioned as the initial thinkers. No more are they mentioned nor their relevance. For, neo-Smithians, neo-Rocardians, neo-Malthusians, etc are very much present. And, they do come out with better theories than the neoclassical economists.

This post suggests that one ought to know that there are ‘other’ truths (heterodox economic theories) apart from the truth that we are taught – neoclassical economics. And in this aspect, a reading of Foucault will prove to be immensely insightful.”

Comment
My advice to an undergraduate economist, especially someone who realises that their syllabi raises more questions than it answers, is to pursue their doubts, but to continue their studies diligently too, always.

There is much doubtful about neo-classical economics, as I sometimes allude to on Lost Legacy, but for purposes of earning the right to say so, and to research and teach alternative ideas, such as are found in Adam Smith and others, it is necessary to pass the examinations that are set by adherents of the current orthodoxy, and competence in neo-classical economics is the required standard by which academic posts are filled.

By all means read beyond the official reading list (Foucault included, though, personally, I would place Adam Smith’s Lectures on Jurisprudence at the top of my list), but you must read the official list too.

Your fellow students, who soak up uncritically the class tutors’ reading lists, believe me, with one or two exceptions, will read just enough to pass their tutors’ exams and will leave many subsidiary titles alone. For you, read all titles on the list, and in the citations and footnotes, in addition to the alternative titles, all more than enough to pass your exams.

And to pass them is the objective for you to go on to follow your doubts and, perhaps, create the alternative approaches, currently in the shadows.

Tim Duy on The Pursuit of Wealth

Tim Duy writes “The Pursuit of Wealth” and it is posted on the Economist’s View Blog by Mark Thoma (HERE):

In it he quotes the famous parable of the ‘poor man’s son, whom heaven in its anger has visited him with ambition’ (TMS IV.1.8: p 181; 1872 edition, Kessinger Rare Reprints, pp 159-160). This provokes a lively correspondence, some of which appears to take Smith’s parable as a assault on enterprise. In response I posted the following contribution to the discussion:

Tim Duy deserves to be congratulated for drawing wider attention to Adam Smith's writings in "The Theory of Moral Sentiments".

Some of the above commentators should turn to the chapter Tim quotes from (TMS IV.i.8: p 181). If they do so and turn over the page they will find on page 183 a typical Adam Smith admonition to counter the rather depressing parable of the 'poor man's son', which should answer some commentators who may have missed Smith's main point in the chapter.

He wasn't downgrading the pursuit of wealth (the "annual output of the necessaries, conveniences, and amusements of life") at all. He was simply putting the individual motivations that drives such (few) people to get up in the morning. He was putting them in context:

"And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants." (TMS IV.1.10: p 183)

Isolated quotations from Adam Smith often smother his great subtlety of expression by missing his counter-points.

Santa Clause and Invisible Hands

‘Chuck’ (claiming to be ‘a fictional character in a fictional on-line magazine’) writes the Chuckling (on line magazine) Blog, HERE:

“Annual Xmas post”

“Like you, we live in a superstitious nation in which the airwaves are saturated with references to all the worst sorts of mumbo jumbo. And children, you know, are very susceptible to that kind of nonsense, especially when they see it on tv.”

“The reality is that wars and recessions, boom times and depressions will come and go and Adam Smith’s "invisible hand" will continue to assure social results that are beyond the ability of a regular Joe to influence.”

Comment
Adam Smith’s so-called ‘invisible hand’ is a myth. It was manufactured in the mid-20th century from a single instance in Wealth Of Nations (1776).

It is a law of arithmetic that the whole is the sum of its parts, and in Smith’s case, the metaphor is about the consequence of individuals acting in accordance with their degrees of risk avoidance, to which he appended (once only) the popular 18th-century literary metaphor.

The mythical invisible hand sits well in a ‘superstitious nation’ when economic commentaries ‘are saturated with references to all the worst sorts of mumbo jumbo’, in which otherwise intelligent economists ‘are very susceptible to such kinds of nonsense, especially when they’ they hear it from Nobel prize winners who claim the authority of Adam Smith for its provenance.

Given what has been made Adam Smith’s singular use of the metaphor in Wealth Of Nations in Book IV, entirely absent from any connections to his clear explanation of how markets work in Books I and II, the widespread belief in the magical powers of ‘an invisible hand’ applied to markets is akin to believing in Santa Clause at Christmas.

Santa is a harmless enough mythical story to entertain little children, but such beliefs become a serious source of error when legislators and those who influence them believe in invisible hands, supposedly guiding people’s behaviours, especially when there exists a strong set of behaviours, well documented by Adam Smith, who warned of the power of certain behaviours to damage the very economies supposedly benefiting from them.

Merry Christmas readers.

Now back to grading exams…)

Adam Smith Quotations Out of Context

Maureen Tkacik writes in Vanity Fair (18 December) Here:

“Ponzi Nation: What Spitzer, Madoff, Geithner, and Adam Smith Can Teach Us About Our Own Mass Stupidity”

“The scale and simplicity of the Madoff scam seems to be moving the conventional wisdom in a sober new direction: We all fooled ourselves somehow by believing vast wealth could be easily generated. But here is a bit of actual wisdom, courtesy of Adam Smith:

“But the rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin”.

Luckily for America, profits are expected to be pretty low this year.”

Comment
Beware of Adam Smith quotations from authors who do not give a source; it usually signifies that they have not read Wealth Of Nations or Moral Sentiments. OK, so it’s only Vanity Fair, but the habit extends to economists writing in media publications too.

For the record, it’s from Wealth Of Nations at WN I.xi.p: p 266, or Canann,1937 ed. pp 249-50.

However, Adam Smith is discussing long term trends in the fundamentals of economies not annual fluctuations. So ‘pretty low’ profits for ‘this year’ are, well, meaningless in terms of the quotation. But Maureen Tkacik is in the good company, so to speak, of many professional economists who quote (but probably don’t read) Smith, Ricardo, and Marx, on the same theme of the rate of profit falling with economic prosperity.

Some have even found 'evidence' that this signifies the terminal decline of capitalism. Adam Smith saw the decline in the rate of profit as evidence of prosperity, which he never confused with a decline in the absolute amount of profits in a society.

If real wages rose secularly over the trend, this was the ‘spread of opulence’ that he welcomed; necessarily, if real wages rose as a trend then profit rates would fall as real incomes transferred from capitalists to labourers. Look at what he says a few lines down from the out-of-context quotation from Maureen above:

“Merchants and master manufacturers are, in this order, the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the public consideration. As during their whole lives they are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen. As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of the society, their judgment, even when given with the greatest candour (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects, than with regard to the latter. Their superiority over the country gentleman is, not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his. It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction, that their interest, and not his, was the interest of the public. The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.” [WN I.xi.p.10: p 267; Canaan, p 250]

If real wages decline in the USA that is because those concerned among modern day 'merchants and manufacturers' are persudaing legislators and those who influence them to bias the tax system and to narrow the market for their products.

I am most grateful to Vanity Fair for provoking me to add a little knowledge to Lost Legacy’s weekly output.

It's the Fault of the Invisible Hand!

From an editorial at TimesCall.com HERE:

“Adam Smith’s “invisible hand” should be doing its work of finding the place where supply and demand intersect; it shouldn’t be reaching for the wallets of hardworking investors.”

Comment
Clichéd journalism inevitably reads as crass; in this case it’s meaningless too.

Adam Smith’s use of the metaphor had nothing to do with supply and demand analysis or “reaching for the wallets of hardworking investors” (‘hardworking’ as an adjective is more than overworked this season too).

I can see a first year economics student objecting to her tutor’s critical remarks about her incorrect answer to a simple supply and demand question with the response: ‘Not my fault; the invisible hand got it wrong again!’

I Have Posted Comments Today

I am busy grading MBA/MSc exams today and probably over the weekend, but readers may wish to scroll down the last few posting to which I have responded to some comments on fairly important issues.

Adam Smith and Charles Darwin

The Sensuous Curmudgeon [SC] Blog (16 December) discusses “Adam Smith’s Invisible Hand and Charles Darwin’s Natural Selection” (HERE):

[First SC quotes part of ‘the invisible hand’ reference - ‘with paragraph breaks supplied’ by SC]:

“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it.

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.”

[I have already quoted the fuller reference in my previous post. SC asks:]

“Where does Darwin’s theory of evolution fit into this?

It has often been remarked that the theory of evolution, according to which life on earth evolves without the guidance of a designer, is remarkably similar to the way a free-enterprise economy develops, with each enterprise doing its best to prosper, yet without the “benefit” of a centralized planner.

Was Charles Darwin influenced by Adam Smith? He was certainly aware of Smith’s work. Darwin mentioned Smith in Descent of Man, and provided a footnote to Smith’s Theory of Moral Sentiments. See: The Descent of Man. But that was in connection with Darwin’s discussion of emotions. It was his only mention of Smith, and he never used the expression “invisible hand.” We wish he had, as it would have been a useful metaphor for the misleading appearance of intentional design in nature.
Although it’s easy to make too much of this, we observe that throughout Origin of Species, Darwin uses the expression “economy of nature.” Additionally he has passages that literally suggest economic behavior, such as this in Chapter 4 - Natural Selection:

We leave you with the following tentative conclusions: (1) Darwin was a late product of the Scottish Enlightenment; (2) Darwin was influenced by Adam Smith’s ideas, far more than is apparent from his one mention of Smith; and (3) The theory of evolution is remarkably compatible with free enterprise economics, especially regarding the ‘invisible hand’.”

Comment
When I read Charles Darwin’s, The Descent of Man, and selection in relation to sex’, [1871] 1981, Princeton University Press, New Jersey, in 2003 (I was researching the pre-history of bargaining at the time), I marked the paragraph referring to Adam Smith in Part 1, chapter III, p 81 and footnote 17, because it discusses, if briefly, Darwin’s assessment of Smith’s views on ‘sympathy’ from chapter 1 of Moral Sentiments.

In distinction to Smith, Darwin concludes that ‘sympathy’ became an instinct (much like Francis Hutcheson, Smith’s tutor, asserted). This certainly establishes that Charles Darwin had read Moral Sentiments, or at least chapter 1.

First, SC includes the following sentence quoted above: “It was his [Charles Darwin’s] only mention of Smith, and he never used the expression “invisible hand.”

This is a strange statement from SC given that hardly anybody mentioned the ‘invisible hand’ metaphor in the 19th century. It did not have the significance given to it from mid-20th-century onwards. From this, I conclude that SC has not himself read Wealth Of Nations with its sole reference to the metaphor and acts on the modern popular myth that the metaphor had far greater significance than was accorded to it both by Adam Smith and by his 18th- and 19th- century readers.

Secondly, SC notes that evolution suggests that “life on earth evolves without the guidance of a designer” and is “remarkably similar to the way a free-enterprise economy develops, with each enterprise doing its best to prosper, yet without the ‘benefit’ of a centralized planner”. I agree with both statements.

However, SC seems to reverse his statement, that both evolution and the economy develops without ‘benefit of a centralized planner’, with his ‘tentative conclusion’ that “the theory of evolution is remarkably compatible with free enterprise economics, especially regarding the ‘invisible hand’ ” Yet the existence of ‘an invisible hand’ would suggest that these statements are contradictory.

If life evolved without ‘intentional design’, as I believe it did, and economies evolve ‘led by an invisible hand’ (which I consider nonsense and contrary to Smith’s treatment of markets, in which he never mentions an invisible hand) then it cannot be “a useful metaphor for the misleading appearance of intentional design in nature”.

Why do we need an invisible hand metaphor to deny ‘intentional design’ when how markets evolve and operate are themselves a clear example of the denial of such an assertion to begin with?

Neoclassical theories Do Not Explain How Modern Economies Function

‘Crisis papers: editorials and other articles’ posts (16 Dec) on Democratic Underground.com (HERE):

“Theory vs reality: why market absolutism fails”

“The Perfect Market"

”Neo-classical economists, and their political acolytes, are convinced that “free markets,” completely undisturbed by government interference, yield optimum social and economic results. For example:

“In the free market, the individual would have to produce a good that the other person desired in order to receive a good in return. Adam Smith's "invisible hand" of the market guides all participants in society to promote the best wishes of everyone else by pursuing his own wants and desires.” (Jacob Halbrooks)

To sum up: “Economic man” and “perfect markets” are abstract constructs which, due to their clarity and simplicity, allow theoretical economists to devise complex mathematical models. However, they have no counterparts in the real world, which compromises the application of these concepts in public policy.”

Comment
Overall, most of the criticism of neoclassical economics contents in the article I have written myself in Lost Legacy. However, there are caveats that I would make in case this is taken as my agreeing that criticism of neoclassical economic theory amounts also to criticism of markets in the real world. It most certainly does not; neoclassical economics is not the same as real world markets.

Markets are real; modern economics is a theory, and theory in social sciences should be judged by how it reflects the real world. The theory that the earth was ‘fixed’ and ‘unmoving’ at the centre of the solar system was ‘elegant’, increasingly complex (72 separate vortices to make things ‘fit’ badly), and also utterly wrong. Observations eventually corrected the foundational error. But the constituent elements making up the solar system were predictable and hardly changing, unlike the constituent elements making up an economy.

With markets, observations of how they ‘worked’ led to theories about them closely related to what was observed, and a ‘foundational’ theory about them, as in Adam Smith’s 'Wealth Of Nations’, appeared before mathematical theories about markets from the 1870s were applied, refined, and given a ‘life’ of their own in the 20th century.

Scores of the brightest economists from mid-20th century onwards detached from observing how markets were evolving from those that Adam Smith had written about and how they were changing. The theorists wrote increasingly complex models of how their models worked, not how markets worked. In time, the scores became thousands and they trained tens of thousands of students about the ‘beauties’ of the models of markets. Precious few of whom observed what was going on around them (they ceased to look outside their windows).

Long detached from the real world inhabited by real humans, economists refined their assumptions about 'Homo economicus', ‘rational behaviour’, ‘perfect markets’, ‘growth theory’ and ‘general equilibrium’, until they came to believe that their ‘as if’ models were true factually as well as ‘proven’ mathematically. Those who had the attention of legislators and those who influenced them, turned their abstractions into policy absolutes and have few claims to ‘making a positive difference’ in how the world performed – and in developing countries their performance record is not good.

That ‘perfect free markets’ as an abstraction had never applied as a reality, (Smith, for example, never used the words ‘laissez-faire’) was ignored; they became a principle assumption of policy, even though the active presence of ‘big government’ falsified assumptions about ‘perfectly free markets’. Worse, the manifest competitive failings of corporate giants, which needed attention on grounds of competitive justice, were vocally protected on the authority of prominent economists on grounds that any corrective intervention was an ‘abuse’ of ‘free markets’!

Even policies that were perfectly compatible with Adam Smith’s advice on how to deal with legislative abuses by some ‘merchants and manufacturers’ were resisted, aided and abetted by lobbyists of legislators and those who influenced them from interest groups funded by the same abusers. These real and powerful active forces in ‘free’ markets' do not appear in the equations of general equilibrium.

Worse, the theorists of modern economics, from the very top of the profession right through to the keenest, brightest, and most convincing of graduates of the top schools, truly believed (yes, with almost religious conviction) the metaphysical assertion of Jacob Halbrooks, as quoted above, namely, that ‘Adam Smith's "invisible hand" of the market guides all participants in society to promote the best wishes of everyone else by pursuing his own wants and desires’.

And they believe this nonsense despite the contrary evidence of exactly what Adam Smith said in Wealth of Nations (WN IV.ii.9: p456); they neither “look outside their windows”, nor read the books that they misquote from.

So, in the abstract world of neoclassical markets, they introduced into them a mystical, abstract, and wholly imaginary force that is their sole claim to the relevance of their abstractions for the real world, namely that “an invisible hand”, disembodied, ubiquitous and multi-talented, ‘leads’ each and every player to do exactly what they are required to do by a mysterious force (some actually credit it to God!) that guides their every transaction, of which there must be trillions taking place each working hour, irrespective of the outcomes, into a utopian perfect harmony. Not only is this wishful thinking; it is contrary to ordinary facts.

It’s nonsense, but unlike the harmless fun of the myth of Santa Clause visiting each child with presents once a year, the myth of an invisible hand is pernicious when economists, who should know better, come to believe that it exists as the guiding principle of markets.

I have sometimes felt, when addressing my peers with the gist of my paper on the invisible hand myth (downloadable from the Lost Legacy home page), that I am spoiling their party by pointing out that, like Santa Clause, it is a myth.

First of all, Adam Smith did not relate his use of the metaphor of ‘an invisible hand’ to market transactions; this was an invention of neoclassical theorists, aided by propagandists (some paid, others out of their misguided, convictions) for the activities of large corporations, which corner markets and act non-competitively, and in some cases destructively.

Added to the waste and destructiveness of big government, the combined effect of monopolistic corporations and bad government is an indictment of the economics profession’s inability to realize their shortcomings as the subject is presently constituted. Economists who understand how markets work in the presence of big government would have something worthwhile to contribute, but economists, who onlyunderstand how their models work in the abstract, fall far short of what is needed to guide policy makers.

Adam Smith on Earthquakes and 'the man of humanity'

Stephen F. DeAngelis writes Globalization and Morality : Enterprise Resilience Management Blog HERE:

This issue carries a report of the debate over globalisation, in particular a report by Jagdish Bhagwati, the famous professor at Columbia University, New York, who has spearheaded the defence of global free-trade in academe and public commentaries.

As usual, I agree with almost everything Bhagwati writes (I have often called for him to be awarded a Nobel prize) with a reservation about this paragraph:

“Bhagwati goes on to reflect on another perspective of globalization's connectivity.
"Adam Smith famously wrote of 'a man of humanity in Europe' who would not 'sleep tonight' if 'he was to lose his little finger tomorrow' but would 'snore with the most profound security' if a hundred million of his Chinese brethren were 'suddenly swallowed up by an earthquake, "because" he had never seen them.' For us, the Chinese are no longer invisible, living at the outside edge of what David Hume called the concentric circles of our empathy. Last summer's earthquake in China, whose tragic aftermath was instantly transmitted onto our screens, was met by the rest of the world not with indifference but with empathy and a profound sense of moral obligation to the Chinese victims. It was globalization's finest hour."

Comment
Regular readers may recall that I have commented on the misuses of this paragraph from Moral Sentiments on several occasions. The problem comes from reading part of the paragraph and not taking in the rest of it. I was corrected some years ago by Professor Sandra Peart on my misreading (politely, of course; Sandra is a paragon of scholarly manners) of the passage.

Far from Adam Smith making his point and leaving it there (the bit that Jagdish quotes to make a good counter-point to Smith’s apparent speculation with the real life reaction of ‘people of humanity’ after the recent and very real earthquake in China. It’s a good point. But it is unfair to Adam Smith. Here’s why?

The piece Jagdish Bhagwati quotes follows in full:

“Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connexion with that part of the world, would be affected upon receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment. He would too, perhaps, if he was a man of speculation, enter into many reasonings concerning the effects which this disaster might produce upon the commerce of Europe, and the trade and business of the world in general. And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquillity, as if no such accident had happened. The most frivolous disaster which could befal himself would occasion a more real disturbance. If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own.”
And now the true account of Smith’s alleged cynical attitude in his thought experiment. I say, alleged because those who do not read on jump to the wrong conclusions. Smith asks: “if ‘the man of humanity’, obsessed with saving his ‘paltry’ finger, of which he is highly emotional about, could save ‘his brethren’ in China from the earthquake disaster, but at the cost of losing his little finger, what would he do?”

Well, if he rolls over and snores at the earthquake news it’s obvious: he keeps his little finger! But does he? Read on and find out. I think you will agree that what Smith says next turns the whole, somewhat cynical, assertion he begins with on its head, and treats us to one of his thunderous affirmations of the moral spirit, which he finds in human kind when exposed to the society of his fellows:

“To prevent, therefore, this paltry misfortune to himself, would a man of humanity be willing to sacrifice the lives of a hundred millions of his brethren, provided he had never seen them? Human nature startles with horror at the thought, and the world, in its greatest depravity and corruption, never produced such a villain as could be capable of entertaining it. But what makes this difference? 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.4.4: pp 137-38; 1872, Kessinger Rare Reprints edition, p 119-20)

However, the whole paragraph is an example of Smith the educator at work (remember The Theory Moral Sentiments [1759] is written up from Smith’s lecture notes in ethics that he taught at Glasgow University (1751-64).

The shocking earthquake in Smith’s time that had a dramatic affect on European men of letters occurred on 1 November 1755 in Lisbon, Portugal, and this probably inspired him to develop it as a China example (the Lisbon earthquake sorely affected Voltaire for example). Portugal is a short sea voyage from Britain; China, in those days, was more than a year away in sea time, and over a year back, and was about as far as you could get in popular imagination, which suited his example.

The clue is in his early reference to the ‘man of humanity’ who performed the subject of his questions about the little finger, leaving no doubt in a reader’s mind of the appropriate opinions of any such man preferring his little finger to the death of 100 million people.

In sum, the benevolent generosity of the genuine concerns and sacrifices to send assistance to the victims of the more recent earthquake in China does not contrast with Adam Smith’s parable the reaction of an 18th-century ‘man of humanity’; the same passion for others is common to people both then and now.

Professor Bhagwati should find another example and leave Adam Smith out of it if he is only going to quote a part of the paragraph.

The broader point is that globalisation has not made people less caring than in ancient times and it doesn't need a 'little finger' example to make that point. In fact globalisation makes it easier to mobilise real resources (not just sympathy) and get them to China in hours and days, which was an impossibility in the 18th century. By the time that news of the earthquake reached Europe it would be 'old news', over a year old.

An Atheist Quotes Adam Smith for Moral Authority

David Ian Millar (a guid Scot’s name) writes a column in San Francisco Chronicle, ‘Finding My Religion’ and this week’s offering is HERE:

“Mac Geek Mike Lee is a committed atheist living a deeply spiritual life”

[David interviews a self-proclaimed atheist, who used to be an evangelical Christian]

David: “You talk and write a lot about radical altruistic capitalism -- what is that, exactly?

Mike: In "Wealth of Nations," Adam Smith explained that people did not have to exploit others to be wealthy. Smith showed that everyone could be wealthy if they each went about their business to their own selfish ends, but within reason, and with an eye toward the common good. The caveat is important, because without it, capitalism fails at its primary goal, which is the betterment of all mankind.

"I call the sustainable form of capitalism that creates profits for all "altruistic capitalism," and the form that creates profits for some to the detriment of others I refer to as "exploitative capitalism." Most businesses ignore the distinction and pursue whichever is most convenient. Our radicalism is in our complete rejection of making money to the detriment of others, to the point where we might be a little too nice. But better we be too nice, rather than just nice enough.

David: It's interesting that you have a focus on social causes in your business, although you're an atheist. Some people feel like the world would run amuck if we didn't believe in God, that morality comes from or is at least enforced by people's spiritual beliefs.

Mike: Adam Smith tackled this exact question in his first book, "Moral Sentiments." What he eventually comes to is that humans, unique among animals, have the power to imagine themselves in another's situation. And Richard Dawkins proves that this aberration, this "empathy," is a net win for natural selection. Empathy leads to altruism, which is the impulse to help others. From this springs a central tenet that is the basis for all morality: Treat people like you want to be treated. Rather than being told (what to do) through some clumsy book addled with arcane rules, my ethics are woven into my very genes.”

Comment
[By the way I am not picking on religious subjects at all. This came up in my Giigle alerts service from for today's references to Adam Smith]

Of course, Mike Lee elides ‘self-interest’, which Adam Smith spoke of, into ‘selfishness’, which Smith always opposed, but skip that slip and focus on the message: all are better off from exchange relations.

We should also remember that the full range of human behaviours is available to every person engaging in exchange behaviours and to the full range of alternative actions available to those who want something they have not got. There are many other actions people can take as an alternative to bargaining, such as plunder, fraud, and violence at one extreme and ‘toss-a-coin”, mediate, instruct, and give in, at the other.

Mike Lee expresses his personal moral stance and does so without spiritual beliefs in invisible beings. This supports my contention yesterday that religious-minded people do not have a monopoly on morals.

Interestingly, Mike calls up Adam Smith in support of his atheistic moral stance. I applaud his choice of his authority for his business ethics. Of the moral issues, readers may make their own minds up; you can follows the link to read the rest of the interview.

The Philosophy of 'Outrage'

Josh Cohen is quoted by John Perry for Philosophy talk: the Blog (HERE):

“For much of the past century, the idea of a political philosophy devoted
to both liberty and equality seemed to many people a contradiction in terms. Outraged by vast differences between the lives of rich and poor, egalitarians condemned the classical liberalism of John Locke and Adam Smith for giving undue attention to legal rights and liberties, while remaining indifferent to the fate of ordinary people. Traditional liberalism, they complained, prized equality before the law, but showed complacency in the face of profound and grim inequalities of fortune on earth.

Classical liberals, in contrast, embraced personal liberty, and condemned egalitarians for their paternalism and willingness to sacrifice human freedom in the name of some possible future utopia.”
(From "The Importance of Philosophy: Reflections on John Rawls
S. Afr. J, Philos. 2004, 23(2))

Comment
John Perry reports the views of Josh Cohen and prefaces the quotation with his own statement:

“Rawls changed all that with A Theory of Justice. The importance of this book in starting a new era of political thought and re-invigorating the whole ethical side of philosophy in America cannot be overestimated.”

It is not my brief to dispute the assertions of modern-day moral philosophers but it is to challenge the things they say about Adam Smith (I am not concerned with the views of John Locke on this occasion).

“egalitarians condemned the classical liberalism of …. Adam Smith for giving undue attention to legal rights and liberties, while remaining indifferent to the fate of ordinary people.”

This is a curious sentence. It signifies a profound difference between 18th-century moral philosophers and their modern equivalents, living in secular democracies without the non-trivial tyrannies of an Established Church, and with a Bill of Rights protecting their freedoms to be ‘outraged’ and inform anybody who listens to their views about the world as it is and how they would have it changed. These freedoms were not available to Adam Smith and he was not protected from the long-reach of the powers of the sovereign state that decided what was permissible and what was punishable.

Brave souls sitting in the comforts of 21st-century affluence and Human Rights laws should, perhaps, be humble when condemning their predecessors who didn’t even have a right to vote under the existing franchise, let alone the freedom to be ‘outraged’. Adam Smith observed and wrote about the problems of society within the ‘rules’ of discourse prevalent in his day, and any reading of Wealth Of Nations cannot fail to impress just how much he highlighted the problems of the poverty of the majority of people in British society.

Adam Smith openly stated his role as a philosopher was to ‘do nothing and observe everything’, which he did in all his Works, often resorting to a device that exposed the many flaws in human conduct by appending them to historical figures, not their contemporary examples, which allowed him to condemn ‘vile rulers’ in the past, but who were also clearly present in his day, and at the same time to comment upon would-be radical reformers who conceived of ‘schemes’, ‘plans’, ‘utopias’, and fully worked-out futures to relieve humanity from its manifest burdens.

Egalitarians who were ‘Outraged by vast differences between the lives of rich and poor’ (in which particular and unique age are we thinking of’? Is it in the 18th-19th-20th or 21st century?) wanted Adam Smith to do what?

Smith’s task as he saw it was to observe how society arrived at where it was in 18th-century Britain and point out where and why it was deficient. If the measures he painstakingly analysed were ‘slowly and gradually’ changed, he believed there would be a spread of opulence to the poorest ranks of society, which arguably was the right thing to do in mid-18th-century Scotland.

Coming from Scotland, which for centuries embroiled itself in bloody dynastic turmoil and, recently in his lifetime (1745-6), had rebelled in pursuit of its last dynastic war with disastrous consequences for all concerned, he was ever mindful of the price paid by the ordinary folk for instant solutions to ancient problems proposed by the ‘outraged’ prophets touting future remedies.

He summed up his rejection of what he called ‘the man of system’ and prefaced his remarks with his own philosophy for “slow and gradual change” to ameliorate the poverty of the many from the spread of that necessary opulence so beyond the reaches of those who lived without it as things stood:

“The man whose public spirit is prompted altogether by humanity and benevolence, will respect the established powers and privileges even of individuals, and still more those of the great orders and societies, into which the state is divided. Though he should consider some of them as in some measure abusive, he will content himself with moderating, what he often cannot annihilate without great violence.

When he cannot conquer the rooted prejudices of the people by reason and persuasion, he will not attempt to subdue them by force; but will religiously observe what, by Cicero, is justly called the divine maxim of Plato, never to use violence to his country no more than to his parents. He will accommodate, as well as he can, his public arrangements to the confirmed habits and prejudices of the people; and will remedy as well as he can, the inconveniencies which may flow from the want of those regulations which the people are averse to submit to. When he cannot establish the right, he will not disdain to ameliorate the wrong; but like Solon, when he cannot establish the best system of laws, he will endeavour to establish the best that the people can bear.

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

Some general, and even systematical, idea of the perfection of policy and law, may no doubt be necessary for directing the views of the statesman. But to insist upon establishing, and upon establishing all at once, and in spite of all opposition, every thing which that idea may seem to require, must often be the highest degree of arrogance. It is to erect his own judgment into the supreme standard of right and wrong. It is to fancy himself the only wise and worthy man in the commonwealth, and that his fellow-citizens should accommodate themselves to him and not he to them. It is upon this account, that of all political speculators, sovereign princes are by far the most dangerous. This arrogance is perfectly familiar to them. They entertain no doubt of the immense superiority of their own judgment. When such imperial and royal reformers, therefore, condescend to contemplate the constitution of the country which is committed to their government, they seldom see any thing so wrong in it as the obstructions which it may sometimes oppose to the execution of their own will. They hold in contempt the divine maxim of Plato, and consider the state as made for themselves, not themselves for the state. The great object of their reformation, therefore, is to remove those obstructions; to reduce the authority of the nobility; to take away the privileges of cities and provinces, and to render both the greatest individuals and the greatest orders of the state, as incapable of opposing their commands, as the weakest and most insignificant” TMS VI.ii.2: pp 233-34; 1872 ed. Kessinger Rare Reprints, pp 207-08).

John Perry and Josh Cohen may differ vigorously with Adam Smith on the appropriate actions that should be taken in face of society’s manifest ills and outrages, but they are woefully unfair, inaccurate and unjust in accusing Adam Smith of “remaining indifferent to the fate of ordinary people”.

He lived in a society with far deeper poverty, broken hearts, and shorter, miserable lives than anything that graduates of Harvard are ever likely to experience. But he was never indifferent to what he observed.

The World Began Before 1776

Joseph Martini writes in Give and Go (‘random musings on authentic happiness’) HERE:

"Economist Adam Smith didn’t contemplate conscious, rationalized idiocy on such a large scale; his “invisible hand” was no match for such a massive, wanton snow job."

I enjoy Tedd's blog and often agree with his observations and conclusions. However, in this case I respectfully disagree.

Actually, Adam Smith anticipated exactly what has happened in this particular boom/bust cycle.

He made it very clear that considerable structure was needed before the invisible hand of the market could work efficiently.

For example, property rights must be strong, and there must be widespread adherence to moral norms, such as prohibitions against theft and misrepresentation.

In his time, property rights were only recognized among the aristocracy.

Adam Smith developed his theories in a centralized, heavily planned and dictatorial society where some individuals were above the law and others were effectively without any rights.

He saw the system of his time as corrupt and inefficient--a massive and wanton snowjob that enriched the few at the expense of the many.

He even anticipated the influence of special interests, writing that:

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

Comment
“He made it very clear that considerable structure was needed before the invisible hand of the market could work efficiently.”

No, he didn’t say anything remotely like that. He did not link his singular use of the metaphor of ‘an invisible hand’ to markets, efficient or otherwise. That’s a myth (see my downloadable paper on the Home page of Lost Legacy: 'Adam Smith and the Invisible Hand: from metaphor to myth’.

“For example, property rights must be strong, and there must be widespread adherence to moral norms, such as prohibitions against theft and misrepresentation.”

Property rights were invented long, long before commercial markets appeared. Smith shows this in his Lectures on Jurisprudence (1762-3) (published by Liberty Fund in 1982).

The invention of property in the near east between 11,000 and 8,000 years ago was the trigger that set humans on economic development via shepherding and farming, neither of which was viable if flocks could wander and other humans could hunt them at will, and wild animals and other humans could access farmers’ crops for a free lunch.

With property, civil government became necessary to keep the poor (and rich neighbours!) from inflicting their depredations on what belonged to others. The evolution of laws about property over millennia enabled markets in time to grow.

“In his time, property rights were only recognized among the aristocracy.”

That is a gross exaggeration, Joseph Martini, and is probably from rhetoric you heard in junior school around the 4th of July celebrations. Adam Smith, for example, was not an aristocrat – he didn’t even have a vote in the restricted franchise of the time – but he owned property, and his rights were recognised in the Scottish courts.

When he inherited some of his father’s property, lawfully passed to his elder stepbrother, who died young, Adam secured his property rights through the Aberdeen and Fife civil courts. Britain in the 18th century was awash with laws recognising property rights well beyond the restricted aristocratic classes. Where do you think that the British colonies in America got their legal foundations from? (See Ian Ross, The Life of Adam Smith, 1995, Oxford University press).

“He even anticipated the influence of special interests, writing that:

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

The quotation is from Wealth Of Nations (WN I.x.c.27: p 145; Edwin Canaan, ed. 1937: p 18). It is not evidence of Adam Smith’s ‘anticipation’ of special interests at all! If Joseph Martini were to read the whole chapter he quotes from, he would see that Smith discusses the consequences of' (1563), which legally forbade anyone to enter a trade who had not served an apprenticeship (under the guise of ensuring ‘quality’, and other spurious 'spin'), but which became a monopolistic practice ruthlessly imposed by the ‘tradesmen’ to narrow the market and raise prices.

In short, instead of anticipating ‘special interests’, Adam Smith wrote about the then 200-year experience of them at work against the itnerests of both competition and consumers. And note, he was taking about shopkeepers, artisans, craftsmen and such like, who were legally organised into local Guilds.

If we are to understand Adam Smith it is first necessary to read his books. It is also, perhaps, necessary to be accurate about history - it began long before 1776, important as that date was for civil government.

Adam Smith and the 'Hand of God'

Ralph Martire, executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank, writing in the State Journal-Register (Illinois) HERE (10 December), brings a divine hand of god into his argument, not by direct quotation from Adam Smith but via Sir Isaac Newton (1643-1727):

“Growth in wages a key to economic recovery”

“The free market wage failure in America is a failure under classic, capitalist theory. And by classic, I mean original, as in Adam Smith.

Modern proponents of free markets at all costs have a tendency to forget the strong moral — in fact religious — underpinnings of capitalism. “The Wealth of Nations,” Smith’s seminal work, was published back in 1776, and was greatly influenced by the thinking of Sir Isaac Newton, “Mr. Natural Law” himself. As Newton believed the properties of natural science were put into place by the Almighty, Smith saw the hand of God behind economic principles.

Which is why Smith could base most of his theory on people acting out of self-interest, while simultaneously believing there exists a fundamental aspect of every person that causes him to be concerned about “the fortune of others and render their happiness necessary to him, though he derives nothing from it.”

Extending that divinely imbued concern for others to the economic principle of wages wasn’t a stretch for Smith. Recognizing that business owners have the advantage over workers when setting wages, he nonetheless posited that wages wouldn’t fall below an amount sufficient to cover living expenses. Smith maintained that even for low-end workers, a husband and wife will always “earn something more than what is precisely necessary for their own maintenance.”

That divinely inspired sense of concern for others was just as important for capitalism to work as envisioned by Adam Smith, as was the motivation of individuals to act in their own self-interest. Unfortunately, the modern school of capitalist thought has not only elevated unabated self-interest to the top of the heap — it has completely eliminated concern for others from the equation, with predictable consequences….

… That means the federal government should borrow a page from Adam Smith, and implement policies that give businesses the incentive to increase the wages paid to workers, so they finally earn “something more than what is precisely necessary for their own maintenance.”

Comment
After admitting that there is nothing in his article that is by direct quotation from Adam Smith to infer that “the divine hand of God” was “behind economic principles”, Ralph Martire, a tax consultant (step up from Matthew, a mere the tax collector, and a disciple of Jesus in the New Testament) asserts by tenuous association of Adam Smith with Isaac Newton.

The inspiration for Adam Smith's ideas about Natural Law (often confused with laissesz-faire) was not Newton (whom he admired) but Samuel Pufendorf, whose philsophical ideas were part of the Scottish teaching of moral philosophy via Carmichael and Hutcheson, and whose influence on Smith on Natural Law, including free commerce, was definitive; see Smith's 'History of Astronomy' begun in 1724 while he was at Oxford qualifying to be ordained into the Church of England, a quest he gave up in 1746). The 1872 edition of Moral Sentiments (published by Kessinger Publishing Rare Reprints: Google it) contains Smith's 'History of Astronomy', which is worth reading).

Please be clear, I am not arguing about whether there is a religious dimension to capitalism or not; I am arguing that the religious dimension alleged to be in Adam Smith’s works and thinking is grossly exaggerated, even quite wrong.

I have not detected a strong religious (Christian) element in Wealth Of Nations and my current research into assertions of Smith’s overt religious (including Deist) elements in Moral Sentiments suggests a weak case supporting such assertions too. Partly, the problem is compounded by many religious people of all creeds claiming a monopoly of moral behaviour; the rest of humanity is dismissed as immoral or amoral (some religious zealots, down the ages and even today, think it is their mission to kill apostates).

Adam Smith’s analytical writings on how commercial economies operated do not include a role for divine intervention; even his singular mention of the popular metaphor ‘an invisible hand’ in Wealth Of Nations was not related to anything of heavenly origin; it was related to the simple reaction of some but not all earthly humans to the personal emotions of risk avoidance when contemplating whether to invest their scarce capital at home or abroad.

Those who invested abroad felt less insecure than those that invested at home, and of those that invested at home they added to gross domestic annual product (as we would express it today) by doing so, on the arithmetical principle of the whole is the sum of its parts. This made the invisible hand a metaphor for a very worldly phenomenon.

Ralph Martire sees in Smith’s observations on the subsistence level of lowly-paid labourers and their families a “divinely inspired sense of concern for others”. However, moral philosophers, according to Smith's own definition of their role, were people who ‘did nothing, but observed everything’.

Smith’s unsentimental observations on all kinds of events, histories and behaviours, have been remarked on (for example, on slavery, the role of women in poor families, young boys employed in workshops, girls not educated formally, soldiers on duty, inferiors obsessed with superiors (‘celebrities’), and people awaiting their fate under justice, etc., etc.,).

These observations of Smith's were not ‘divinely inspired’ so much as the normal observations of an educated humanist. If divine inspiration was a necessary condition for a sense of ‘humanity’ there was precious little of it about among people in the 18th century, and even less in the millennia following the fall of Rome (I am not so sure we are basking in mass ‘humanity’ in the 21st century).

Should Richard Martire wish to advance a theory that the ‘hand of God’ is present in the mode of subsistence then that is his absolute right to do so. It is not his right to attribute authoritatively to Adam Smith a theory which Smith did not express, and by extention, attribute the theory to the working of actual economies in the real world.

NB: a correspondent has suggested that my accounts of Adam Smith’s views on (pagan) religion may cause offence to Christians among Lost Legacy’s readers. I assure him and all readers that I respect the right for people to hold and practise their belief systems (and not just those of the numerous Christian churches and sects) and do not mean to offend particular individuals.

My concern is solely with assertions, assumption, and claims that are made from time to time that Adam Smith shared particular religious beliefs on the basis of weak evidence, and the disregard of stronger evidence against, particularly in the context in which Smith had to write and disseminate his moral philosophy and political economy.

A Senator Speaks...

Senator Fritz Hollings writes on “Economists and Free Trade” HERE:

“The irony is that economists learn in their very first class in school that it was a trade war which brought us our initial freedom as a country, and that semi-protectionism later helped build the United States. England started a "trade war" with the Colonies by adopting the Navigation Act of 1651 that required all trade be carried in British vessels. Manufacturing was forbidden in the Colonies, even the printing of the Bible, and then the Townsend Acts drafted by Adam Smith placed heavy import duties on a wide range of items. All of this precipitated the Boston Tea Party that started the Revolution.”

Comment
I have no comments on the general tenor of the Senator’s article – follow the link and read for yourself his views on some important contemporary issues.

However, I think the Senator may be more than a little harsh on Adam Smith’s well-known association association with Charles Townshend; more a case of Smith’s guilt by association, than a smoking gun.

Quite a lot is known about Adam Smith’s relationship with Townshend and his more important and longer relationship with Townshend’s stepson, the Duke of Buccleugh.

True, Smith worked for Townshend after resigning his Glasgow Chair on 1764 and taking his stepson, the Duke of Buccleugh, then a minor, on the normal educational tour to France that sons of gentlemen in those days enjoyed/endured as their rite of passage. This occurred in 1764-66 (November).

True, Townshend was the British Chancellor of the Exchequer, and was fated to be the author of the British policies that triggered the ‘disturbances’ that morphed into the rebellion of the British colonies in North America, followed by the successful foundation of the United States of America.

True, Adam Smith from November 1766 to March 1767 was in London and was consulted by Townshend on taxation policies that might redress the enormous debts that Britain had incurred in the various wars with France (the seven-years war cost £120 millions in defence of the £20 million a year trade between the colonies and the mother-country).

But Adam Smith’s contributions to Townshend’s thinking were largely, if not totally, confined to the creation of a ‘sinking fund’ to pay down the national debt to more manageable proportions (see Townshend’s letter to Smith, December 1766, pp 328-34, Correspondence of Adam Smith, Liberty Fund, 1987).

True, Smith agreed with the principle that the colonies should contribute to British taxation (as did Benjamin Franklin) as equity suggested. The issue for the parties involved was what kind of taxation and how much, and who decided the details?

For Smith, there were certain maxims of an equitable taxation system that were relevant, accepting the principle that government must be funded to conduct their main duties, which Smith set out in Wealth Of Nations (defence of the people against invasions; defence of the people against neighbourly injustices; public works to facilitate commerce and public institutions to facilitate the education of the youth; and financial support for the ‘dignity of the sovereign’, or what today we call the legitimate expenses of government.

That he recommended the standard ‘maxims’ of taxation that were commonly known in his day, if not always practised, in his day (as set out in Book V of Wealth Of Nations). Townshend’s taxes that he imposed on the colonies did not conform to the maxims alluded to by Adam Smith; it is, therefore, most unlikely that Adam Smith agreed to support the imposition of Townshend’s tax plans, let alone that he ‘drafted’ them as the good Senator asserts.

But there is a more telling evidence, beyond speculation, of Smith’s hostility to legislators being the private beneficiaries of their legislation, such as was the case of Townshend’s imposed taxes in the colonies; the ‘tea taxes’, for instance, were imposed on the colonies on tea imported under the monopoly of the East India Company.

The history and contemporary behaviours of the East India Company, excoriated heatedly by Adam Smith in Books IV and V of Wealth Of Nations made absolutely no concessions to excuses from the officers and speculators associated with its management of India, which made it impossible that he would be associated with any such suggestions because Charles Townshend was one of the prominent speculators active in the shares and business of the East India Company, a fact well-known in public affairs and public comment.

Smith left London in March 1767 for Edinburgh; the Townshend taxes were introduced into Parliament in June 1767, and they evetually provoked rebellion. We know of Smith’s interest in American affairs and where his sympathies lay.

He accepted in Book IV of Wealth Of Nations the right of the colonists to representation in parliament if they were taxed by it (he discusses his recommendations of parliamentary union with the colonies at WN IV.viii.c.75: pp 622-34; Canaan 1937 edition, pp 587-8).

In effect, Smith reversed the colonists’ demand of ‘no taxation without representation’, into ‘no representation without taxation’.

But by the time that Wealth Of Nations was published in 1776, events had moved on from protest towards rebellion and, in my view (explained more fully in my Adam Smith: a moral philosopher and his political economy, 2008, Palgrave Macmillan), was a major reason why he carefully avoided writing on American affairs, particularly after its ‘revolutionary’ (for the 18th century) constitutional developments.

He went further; his promised book on how civil governments ‘ought’ to be directed or the ‘theory of jurisprudence’, which he constantly assured readers right up to his death in 1790, would be completed, never appeared and, in fact he had the manuscript burned a few days before he died.

Indeed, he deliberately sought and lobbied influential friends, including the Duke of Buccleugh, to use their ‘interest’ (influence) to persuade the Prime Minister to appoint him as a Scottish Commissioner of Customs in 1777-8 and then used the excuse of how busy this made him to avoid undertaking the necessary work to complete his manuscript.

The records, minute books, and correspondence of the Customs Commission show Smith intimately involved 4-days a week on this work from 1788 until a few weeks before he died in 1790.

To publish a major theory on jurisprudence without discussing the developments in the former British colonies was neither possible nor politic.

Smith was a moral philosopher who taught, wrote and observed the necessity for the maintenance of the distinction of ranks for stable societies, including constitutional monarchy. For him to publish anything that would allow legislators, and those who influenced them, on behalf of mercantile promotion of their monopolies, protectionism, ‘jealousy of trade’, and everything else he opposed in Wealth Of Nations (for they surely would, and did in 1793, after he died in 1790) would be to make it too easy for them continue their perfidious influence, which, in Smith’s often stated view, held back the spread of opulence to the poorest majority in British society. These were his lifetime objectives and not any allegedly abstract principle of 'laissez-faire' (which he never mentioned) and pure free trade, which qualified several times - Smith was not a 'man of system .. wise in his conceit' (see Moral Sentiments, TMS VI.ii.2.17: pp 233-4); he was not an ideologue.

Therefore, the unjust attack on Adam Smith’s authentic role in the run up to the rebellion of the British colonists in North America is cheap political rhetoric from a US Senator (‘Sir’) and it is contrary to the historical evidence.

A Student’s Joy…

‘Somena woman’ writes in Somena Media (HERE) (12 December) that she has ‘lucked out’(?) which, presumably, means it was her lucky day:

“1 Exam Down - 1 to Go

Just wrote my European History final exam. I lucked out. 1/3 of the marks were devoted to an essay that I got to write about Adam Smith. Since I've been a devotee of Smith's for a decade, I really enjoyed writing about that. It was fun.

Next up - Canadian History prior to Confederation.”

Comment
I share her joy.

I am less concerned with what she learned about Adam Smith (I fear the worst!) than that she has read about him, but, perhaps, she has been tempted to delve into, even read, some of his Theory Of Moral Sentiments or Wealth Of Nations.

A hint of her thinking shows in her advert for ‘anti-big government' T-shirts…

Also, if her tutor put a question about Adam Smith into her exam, then it follows they are teaching about him too.

I hope they use as background a decent biography, such as the definitive scholarly text by Ian Ross, The Life of Adam Smith (1995; Oxford University Press).

The best ‘popular’ (in the nicest sense) biography, is James Buchan’s, Adam Smith and the pursuit of perfect liberty’, (2006: Profile Books), which I endorse fully for its measured accuracy and sympathy with what Adam Smith was about.

For a students, who prefer a short summary, the very best is Eamonn Butler’s: Adam Smith – a primer, (2008; Institute of Economic Affairs), which summarises Adam Smith’s political economy as he intended it to be taken (disclosure: I wrote an introduction for it).

The more students who read about the authentic Adam Smith the better – in my humble opinion.

US Economist's View Quotes Lost Legacy

Mark Thoma’s Economist’s View reproduces yesterday’s post from Lost Legacy (fully credited): ‘An Historian on British History - Adam Smith's Lost Legacy’ (HERE), for which I am grateful.

Economist's View is a major US economics blog and should be read regularly for its coverage and for its postings to keep in touch with authoritative writings on US political economy.

The Importance of Market Entrepreneurs

Mark Engler, a writer based in New York City, is a senior analyst
with Foreign Policy In Focus and author of How to Rule the World: The Coming Battle Over the Global Economy (Nation Books, 2008), writes in Portland independent media center (HERE):

“Adam Smith was not an economist. In the 1750s, when he was a professor
at the University of Glasgow in his native Scotland, Smith served as
the Chair of Moral Philosophy. The designation is telling. The rise of
modern economics departments in universities was a late-nineteenth and
twentieth century phenomenon. Economics in its infancy, characterized
by the pursuits of Smith, Ricardo, John Stuart Mill, and Marx, was not
a matter of graphs and econometric models. It was a broader
investigation into social life, a look at how society structured
labor, production, and exchange. And it concerned itself greatly with
the ethical implications of this structure.

As early as the 1950s, economists began establishing a greater role
for socially accumulated knowledge in mainstream understandings of
growth. During that decade, Nobel-Prize winning economist Robert Solow
argued that advances in knowledge are, in fact, the primary driver of
today's growth. Alperovitz and Daly write, "Solow calculated that
nearly 90 percent of productivity growth in the first half of the
twentieth century (from 1909 to 1949) could only be attributed to
'technological change in the broadest sense.'" This suggestion was a
radical shift away from accounts that stressed the more specific
agency of capitalists and entrepreneurs—or of laborers, for that matter
—in expanding our economy.”

Comment
On theories of economic growth I agree with Mark Engler and I suggest that Solow, and others, went 'astray' because their models are 'closed' and their aggregated variables are better thought of as open processes, with increasing returns (lowering costs) in their constituent parts (see Alyn Young, Economic Journal, 1928).

Mark Engler's article develops a theme and while I agree with some parts I also find parts of it unconvincing. The discoverers of knowledge – a cumulative process, if passed on – have a more justified claim to the rewards from development because without their crucial role as discoverers, inventors, innovators and educators is more relevant than the “agency of capitalists and entrepreneurs”.

Well, there is a specific historical example of a society that was the most advanced in the world in inventive science and technologically, which also stagnated. I refer to the old Empire of China which by the 15th century was ahead in so many inventions that they are still being catalogued today by enthusiasts for Chinese history.

But over several decades in the 15th century, China fell into stagnation (partly reported by Adam Smith in the 18th century in Wealth Of Nations), and didn’t really recover until the 19th century (after which there was another interregnum under, first the depredations of the western colonial imperial powers and then, in the mid-20th century, the violent failings of the communists.

The missing ingredient was demonstrated convincingly by the turn away from world trade by the Chinese Emperor, whose writ in these matters ran far and wide. The entrepreneurs and merchants turned inwards and away from the exploitation of scientific knowledge, and no progress was made thereafter in inventions, technology or science. China did not advance into a commercial age; if it had the entire history of the world would have been quite different.

As knowledge revolutions broke through and spread across the backward West, especially in that part of Europe left devastated by the fall of the western Roman empire in the 5th century (of which Adam Smith writes a great deal) that had presaged the thousand-year interregnum, or the ‘dark ages’, which began to end in the West, fortuitously just as China was entering its own self-imposed dark ages.

This development, catching up with old China was accompanied by the age of commerce (‘at last’), as Smith described it in his lectures in 1762), the appearance of ‘entrepreneurs’ and ‘commercial’ adventurers, who turned knowledge into innovative products on scales unimaginable ever before also produced funded feedback (economic growth) to boost a continuing scientific and technological advance of all knowledge without precedent.

Knowledge of the configurations of the stars was interesting, but long-distance overseas trade on a regular basis drove the need for both accurate timekeepers for safer navigation from knowing longitude as well as latitude and for accurate charts for safer seamanship, once the ‘secrets’ of discovery gave way to the less dramatic open-seas of regular trade routes. Knowledge is necessary (three cheers to the discoverers!); but not sufficient. What made the difference are the entrepreneurs and the creators of industry.

Markets were not discovered by a scientist; they operated millennia before the science of economics appeared (and their merits are still hotly debated). Scores of ideas are dormant until somebody finds a use for them and somebody markets those uses successfully.

Lost Legacy Quoted

Tusar N. Mohapatra writes Market Time (HERE) (12 December): quoting my post on the “Evolution of civil justice and the process by which moral sentiments were exchanged and agreed within society” in “The Long History of Markets and Exchange” from Wednesday's Lost Legacy.

I am always happy for fully-credited extracts from Lost Legacy. It helps spread Adam Smith's authentic ideas, without fear or favour. Market Time is published in India where Lost Legacy has a fair number of regular readers.

An Historian on British History

Richard Reeb asks in DesertDespatch.com (9 December) HERE:

“Whatever happened to political economy?”

“In a previous column I questioned the idea that there is something called “the economy” and suggested instead that we refer to our multiple transactions in the global marketplace with the term of the United States Constitution, viz., commerce.
This is not just a matter of semantics. For if we choose our words with care, we accurately name the things to which the words refer. Before the term “economy” was applied to our domestic and foreign commerce, it referred to a virtue — of individuals, businesses and nations. The first dictionary definition of economy, after all, is “careful, thrifty management of resources, such as money, materials, or labor.”

Just as households and businesses must practice economy in order to make the most prudent use of their resources, so must governments. But with its powers of taxing, spending and borrowing, government has access to considerably more resources than any household or business. That means the temptations and opportunities for abuse are much greater.

As the purpose of our national government is to make laws for the common defense and general welfare, it is not, by definition, designed, like the household, to meet the daily recurrent needs of anyone; or, like a business, to make a profit. It exists to make households and businesses safe and secure.

For most of our history, American government has practiced political economy, out of conviction and necessity. That is, it is limited in its scope and its powers and not entitled to huge sums to conduct its functions, however greater those were than anyone else’s. And as long as the federal government in particular performed its constitutional functions, heavy taxation was both difficult to justify and hard to obtain against jealous state governments.

To appreciate the soundness of this limited view of economy, it is helpful also to be mindful of what commerce is and why it is so indispensable to modern republics. In ancient times, commerce referred to sea-going trade, as commerce includes the root “mer,” meaning sea. Hence, Athens, a naval power, supported commerce that its rival, Sparta, a land-based power, took little interest in.

Commerce contributed greatly to the decline of medieval feudalism, a system that combined perpetual armaments and subjugation by the lords of the peasants. Those aristocrats who aspired to national crowns found the nascent commercial classes a vital alternative to depending upon their rivals for financing their kingdoms, especially their wars.

The middle class, so called because its members were neither aristocrats nor peasants, made money in trade with cities and states other than their own. In return for protection or favored treatment, they would lend money to kings.

There were essentially two approaches that kings of the early modern nation states took toward the generation of national wealth. One supported acquisition of precious metals and hoarding them for national purposes. Spain, the first great nation at this time, was an exponent of that view. Another view, favored in Britain, was that it was better to encourage merchants to build their fortunes with limited regulation, as a growing commerce funded government with minimal taxation.

Adam Smith’s Wealth of Nations provided the most powerful argument for the second view of national wealth. The British government was no less tempted to commandeer the resources of the country than the Spanish, but Smith made a compelling case for laissez-faire (let them do as they please) as far more productive than national missions to exploit natural resources the world over to enrich the government’s coffers. Smith’s famous “invisible hand” was not blind to the avarice of businessmen (quite the contrary) but rather saw them as more efficient producers than any government could ever be.

As we stand on the brink of massive efforts to “rescue our economy” from its current credit crisis, it is helpful to remember these historical lessons on how to build up national wealth and, by implication, what diminishes it. The federal government tried to spend its way of the Great Depression and failed, just as its massive programs 30 years later failed to end poverty. Only individuals and businesses practicing economy, supported by a government practicing the same virtue, can accomplish that.

To the extent that our government embarks on a massive program of public works, business bailouts, unemployment compensation, forced unionism and uneconomical energy schemes, our current crisis will become much worse and we will imagine only that we didn’t do enough rather than far too much to “save” our commerce.”

[Richard Reeb taught political science, philosophy and journalism at Barstow College from 1970 to 2003, and is the author of “Taking Journalism Seriously: ‘Objectivity’ as a Partisan Cause” (University Press of America, 1999).

Comment
On the whole Richard Reeb’s article is very good. It is quite close in its treatment of history to Adam Smith’s approach and analysis in his Lectures on Jurisprudence (1762-3), published in 1982 and, later, which he reproduced in Wealth Of Nations (1776), both republished by Liberty Press, Indianapolis. For this I was impressed by Richard Reeb’s understanding as presented in a few sentences.

First, I would agree which Richard’s depiction of the Spanish policy of mercantile political economy – seize the gold from its colonies in South America (of which Smith was extremely critical of their barbaric methods) and then hoard the gold in Spain under the misunderstanding that gold constituted real wealth.

I would agree that “Adam Smith’s Wealth of Nations provided the most powerful argument” that national wealth did not consist of gold and silver bullion, but consisted of the ‘annual production of the necessaries, conveniences, and amusements of life’ and ‘that it was better to encourage merchants to build their fortunes with limited regulation, as a growing commerce funded government with minimal taxation’ (I am not sure that Smith made an issue of the amount of taxation; he remarked also that the expenses of the State required the continuation of some level of tariffs and duties, despite this inhibiting some level of foreign trade).

But from here I think Richard conflates his analysis of the errors of mercantile political economy and Adam Smith’s advocacy of his alternative policy to the dominant political economy of his age, to imply that with “the most powerful argument Wealth Of Nations” the errors of the old political economy were approved, replaced and practiced by Britain. Would that this happy event had happened!

The problem for the ‘most powerful argument’ of political economy is the politics part of it. Britain was engaged throughout the 18th century with numerous wars and their related diplomatic intrigues, and practised the far more important errors of mercantile political economy than the ‘gold-hoarding fallacy’, prominent as it may have been in the debates at the time.

I refer to the fallacy of the ‘jealousy of trade’ which necessarily led to trade wars, penal tariffs, trade monopolies such as the Acts of Navigation, and at the apex of the errors, the foundation of colonies.

Britain, an island commercial economy with a burgeoning naval power around Europe and across the north Atlantic and Caribbean, followed these aspects of mercantile political economy with a ruthlessness that made it a major European power, which not even the loss of its north American colonies (excepting Canada and its Caribbean possessions) dealt a stunning blow, or even a serious inhibition.

Adam Smith’s robust critique of the errors of mercantile political economy (Books III and IV of Wealth Of Nations), were not adopted by the British or any other government of the day, and, if I may suggest, are still largely ignored by modern historians of economics.

Richard Reeb, sees a set of ideas and assumes they became government policy; they were a menu for change but were treated by politicians more a la carte than table d’hote.

Indeed, having lost one Empire, Smith admonished the government (in the last paragraph of Wealth Of Nations, V.iii.92: p 947; Canaan, p 900) to “endeavour to accommodate her future views and designs to the real mediocrity of her circumstances”. Instead, Britain continued to found a second Empire around the remnants of the first in north America, the Caribbean, India, Australia, and New Zealand (and other spots around the globe).

My last comment, not surprising to regular readers of Lost Legacy, is the statement that “Smith’s famous “invisible hand” was not blind to the avarice of businessmen (quite the contrary) but rather saw them as more efficient producers than any government could ever be”.

This needs to be treated with caution on two grounds: first, the ‘invisible hand’ is and remains a myth as presented by Richard (details of Smith’s actual singular use of the metaphor in Wealth Of Nations can be consulted in regular posts, and my detailed critique downloaded from the Home page).

Second Smith’s preference for ‘businessmen’ over sovereigns and governments was conditional on competition, justice and education. He considered the damage that business monopolies, protected markets, tariffs, and ‘jealousy of trade’ did to the spread of opulence, severely qualified whether their merits on ‘efficiency’ worked for the public good.

Bad government and bad traders were close competitors in distorting a commercial economy; I would not give the latter the endorsement of a blank cheque for their superiority over the former.

But Richard Reeb's article is well worth reading and passing around.

The Long History of Markets and Exchange

Peter Foster writes in National Post (here):

“Where anti-capitalists hang themselves”

A few lines quoted from a debate arranged by the John Templeton Foundation on markets and whether they morally corrode participants:

“All-too-typically, he attempts to recruit Adam Smith to the left, noting Smith's concern with the "subversive dynamism of the market." But that was nowhere near the Sage of Kirkcaldy's concern about the "folly and presumption" of the likes of Mr. Gray. Mr. Gray does eventually admit the greater moral corrosion of centrally-planned economies but makes the astonishing claim that "actual life in Soviet societies was more like an extreme caricature of laissez-faire capitalism."

Comment
It is the corruption of markets that attracted Adam Smith’s ire, and not markets as such. Adam Smith did not write a textbook of doctrine about markets; he wrote about what he observed, not what philosophers, both contemporary (example, J. J. Rousseau’s condemnation of improved society and its failings, of which he was hardly a shining moral example) and long-past luminaries of the ancient world (example, Plato), made of the quite enormous possibilities of wealth, the ‘annual output of the ‘necessaries, convenience, and amusements of life’, for the real lives of really poor people.

Smith’s historical, ‘looking backwards’, perspective, showed all too clearly the moral corruption of ‘the rulers of mankind’ as individuals in all societies, those with nothing, those with next to nothing, and those with a few artifacts, trinkets, and ‘baubles’ that made them ‘great’ compared to societies still running ‘free’ in the forest.

He wasn’t too impressed with the purveyors of superstition, the misleaders of men and their pusillanimity, the posers who pandered to their pathetic tastes for undeserved praise from their ‘inferiors’, and legislators and those who influenced them with patently false doctrines of political economy, civil government and ‘divine’ rule.

But about commerce, he had few doubts. He debated Rousseau’s ideas, those of Bernard Mandeville, and those of mercantile political economists like Sir James Steuart and, instead, he saw commercial markets and exchange relationships in all areas of his Works, including in the origins of language, the progress of natural philosophy, the evolution of civil justice and the process by which moral sentiments were exchanged and agreed within society (and not through the senses), as being the cause and the consequence of the unintended, uncontrollable, and unforeseen actions, not plans, of human individuals relating through exchanges with each other since they finally began to secure themselves in their societies from the primitive, near animal, horizons of their earliest modes of subsistence.

Smith knew from his friend, the geologist James Hutton, how the world had evolved over ‘unimaginable’ long time periods (and not from 4004 BC!), and he achieved much a hundred years before Darwin discovered natural selection and before political economy began the long march away from how and why markets worked, and towards abstractions upon which there is still no agreement as to how they correspond to the real world of human societies.

Mr Gray, a lovely man no doubt, is forgiven because he does not know what he is writing about in respect of Adam Smith.

Adam Smith is Innocent

David Glenn Cox posts in OpEdNews.com (HERE) and writes ‘In the Shadow of an Apocalypse’:

“In their zealotry to make America over in the vision of Adam Smith they have overdone it and killed the goose that laid the golden eggs in the process. The combination of outsourcing and the throttling of wages have created a critical mass in our economy and the creators of the term "Great recession" need to start again. How about the nuclear depression, or the depression to end all depressions, or even the victory over the American worker depression?”

Comment
The above is from trenchant attack on all things Republican in America, of which I have not comment because, a) I do not comment on the politics of other countries; confining my efforts to the country in which I vote (Scotland); and b) I am less depressed about such matters in the knowledge that the US Constitution limits to two terms in which any individual President can hold that office and the current incumbent is about to be replaced by the one elected in November, only a few weeks away.

I am disappointed that David Glen Cox misreads (or, more likely, misheard) the opinions and observations of Adam Smith on the workings of commercial markets economy in general and his views on the prospects for the new republic of the United States.

How David Glen Cox sees “in the vision of Adam Smith” anything evil, morally reprehensible, or likely to kill ‘the goose that laid the golden eggs’, is so far beyond my comprehension as to be unbelievable, and saddening. My flabber is well and truly gasted.

Adam Smith was an enlightened 18th-century moral philosopher whose study of previous societies since the human species began to move out of the forests to become, first, scavenger-gathers, later hunter-gatherers, and then in some small pockets of the globe, following the last great ice-age about 8,000-11,000 years ago, discovered shepherding and, eventually farming, which led him to see the bold possibilities, despite the ‘vile rulers of mankind’, arising from the invention of property through (‘at last!’) to commercial society.

Smith had no doubts that from commercial societies, there had been a spread of what in his time was considered to be opulence, reaching right down to the poor labouring folk and their families, who made up the bulk of the population.

He didn’t consider – certainly did not agitate or demand – that the spread of opulence showed be forced by government (he displayed contempt for the slavish willingness of legislators and those who influenced them to promote policies than benefited those who monopolized, protected, and enhanced their private interests), nor did he expect the necessary changes to come about other than ‘slowly and gradually’.

But he did expect with confidence that the spread of opulence would occur from continual economic growth, the defence of societies from invasion, the institutions of justice, and the appropriate investment by undertakers (entrepreneurs), and failing these improvers, and because of the capital involved, by enlightened governments, which would also invest in the institutions of education for all children, irrespective of income.

In so far as, ‘America’ is concerned, he made the rare prediction in Wealth Of Nations (p 624; Canaan ed., p 590), while discussing ‘Of the Advantages which Europe has derived from the Discovery of America and from that of a Passage to the East Indies by the Cape of Good Hope’ (WN IV.vii.c) he also wrote:

“Such has hitherto been the rapid progress of that country in wealth, population and improvement, that in the course of little more than a century, perhaps, the produce of America might exceed that of british taxation.’

Well, it certainly achieved that and much more, and today the USA stands as the world’s largest economy, notwithstanding the withering criticism, plus not a little of the bile of David Glen Cox against Adam Smith, in these matters a wholly innocent philosopher.

And this directs me to my final point; to what extent has David Glen Cox contributed to the present state of the USA, as he sees it? What has he done to use the opportunities of any commercial society, and one with a constitution such as that operating in the United States, the separation of powers, and representative democracy, in which, unlike Adam Smith, who never had a vote under the British 18th century franchise, David Glen Cox has been free to vote, to run for office, or set up a co-operative or a business, to pursue for profit and not-for-profit an employment creating entity, and to run it on honest, reputable lines which correspond to his moral outlook?

Adam Smith’s ‘vision’ was precisely captured in the answer to that question. He was no friend of monopolists, protectionists (there are strong hints in David Glen Cox’s piece of protectionism and not a little angst about poorer countries developing themselves out of poverty – what David Hume called ‘jealousy of trade’, and the cause of too many wars for disreputable ends).

I ask these questions, because if someone regards his country as so awful as David Glen Cox apparently does, I suggest he take an early long, good look at himself in a mirror, and ask what he did to make something better happen, before he vilifies Adam Smith so strongly and unfairly.

Smith is dead; David Glen Cox evidently is very much alive and has lived through much of the last several decades.

An Epidemic of Invisible Hand Nonsense

Three Silly ‘Atrocities’ Attributing the Myth of the Invisible Hand to Adam Smith:

1: “Will Obama raise fuel taxes?” by John Kemp in the UK guardian.com HERE:

“Adam Smith's theory of the "invisible hand" has price changes acting as a signal to ration demand and encourage supply.”

Comment
Oh, no it didn’t!

Adam Smith wrote nothing about ‘invisible hands’ in his statements about ‘signals’ from ‘price changes’ to ‘ration’ or ‘encourage’ ‘supply’ or ‘demand’. The statement is false, misleading and a myth.

2 Pat Crowley writes about Rhode Island’s Future (HERE)
and asks:

“Adam Smith’s Invisible Finger: where does it point in Rhode Island?”

“Rhode Island has nearly $50,000,000 worth of faith in the invisible finger of Adam Smith. Actually, the number is $50,381,453.25. That is the amount of money we gave out to Rhode Island companies in bonds, grants, loans, loan guarantees, matching funds, or tax credits".

Comment
It doesn’t point anywhere because he didn’t use the metaphor for such a purpose (anyway, if it is invisible, how would anyone know where it is ‘pointing’)?

If Rhode Island's government spends $50 million, ask the state accountants where it has gone. If it has no discernable effect on economic activity, ask the politicians. It has nothing to do with Adam Smith.

3 In KXnet.com (HERE) (8 December), we get this nonsense about Adam Smith:

“Shocker: Denying Companies Illegal Labor Forces Wages, Benefits To Rise”

“Now, typically you wouldn’t invoke Adam Smith and his “invisible hand” in an instance where the government is arresting and deporting workers, but in this instance it works.”

Comment
A meaningless jumble about Adam Smith’s views, using the myth of ‘an invisible hand’.

From standard economics: if the supply of labour reduces for any reason, and effectual demand remains the same, then there will be upward pressure on wage rates. Adam Smith said as much in Books I and II of Wealth Of Nations without invoking anything remotely related to the metaphor of ‘an invisible hand’, only mentioned once, in Book IV and for an entirely different subject.

The Invisible Hand - Again!

Dolores S. Saltzman writes a guest column in the Ithacajournal.com (HERE):

“Insights of Adam Smith shed light on current financial crisis”

The 18th century writings of Adam Smith, especially the work popularly known as “The Wealth of Nations,” supposedly informed American economic policies for the last 30 years. Smith famously said, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard for their own interest.” In trying to further understand how markets worked he sometimes used the familiar term “invisible hand.” Personal gain was surely a powerful motivator. We must agree. Call it greed if you wish, but in the case of markets, personal self-interest is often beneficial to society."

Comment
The sentence, “In trying to further understand how markets worked he sometimes used the familiar term “invisible hand” is utterly wrong in respect of Adam Smith.

He used the metaphor of ‘an invisible hand’ only once in Wealth Of Nations (Book IV, Chapter 2) and used it nowhere else in that long book; in particular he did not use it in reference to ‘how markets work’ at all (covered clearly in Books I and II).

Dolores S. Saltzman repeats a modern myth about Adam Smith and the invisible hand that is promoted by people who have not read Wealth Of Nations, or his Theory of Moral Sentiments (in which he uses the metaphor again, only once and, again, not in reference to how markets work. That makes only twice in over a million words!).

‘Tis a pity because it could have been a good article.

Adam Smith Partly Understood

‘DJ Mitchell’ writes in AsymptoticLife.com HERE) writes on “Spirituality and Economics”

"How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it." —Adam Smith, The Theory of Moral Sentiments (1759).

Of the fallacies of modern times, perhaps none is so pervasive and destructive as the belief that capitalism as a system runs on pure greed. "Self-interest" has been redefined as selfishness, and self-benefit is perceived as the only motivation for commerce. Little wonder that we've become a nation led by the greedy, an economy dependent on "hysterical consumerism," a society in which trust is largely relegated to history, and a system of morals in which what is legally permitted trumps what is right.

But Adam Smith, the father of capitalism, told a very different story: "enlightened self-interest" did not mean greed; it acknowledged that a healthy society promotes individual wellbeing. It also recognized a sympathetic desire to help those in need. In other words, at the very root of capitalism is the maintenance of the community of individuals. This includes such antiquated ideas as a handshake as contract, but also the knowledge that a healthy community means better quality of life for everyone who lives there. And, as Adam Smith points out, it means developing charity— giving to those in need just because they need it.

This regard for the wellbeing of others, besides being essential for capitalism to function, brings us to the realm of spirituality: most broadly, concern for that which is outside ourselves. Less broadly, it refers to that which is not material. And in yet narrower (but perhaps most common) usage, it refers to the quest to know God. But this narrow definition should not dissuade us from using the term in its broader sense, as Smith did and as spiritual teachers have for millenia.
“"[A]s we sympathize with the sorrow of our fellow-creature whenever we see his distress, so we likewise enter into his abhorrence and aversion for whatever has given occasion to it. Our heart, as it adopts and beats time to his grief, so is it likewise animated with that spirit by which he endeavours to drive away or destroy the cause of it." —Adam Smith, The Theory of Moral Sentiments.

Action without understanding sometimes has dire consequences for others. A misguided American boycott of products made with Bangladeshi child labor threw thousands of Bangladeshi children out of work, leaving them to starve on the streets. Dutch aid workers had to step in to feed these children. A holistic understanding of the realities in Bangladesh would suggest that, though we object to child labor, it's better than the alternatives currently available.”

Comment
I found this post partially encouraging in that it appears to understand certain aspects of what Adam Smith was attempting to report in his life’s work and I am always grateful for evidence of that.

However, I am less sure that the religious, or ‘spiritual’ slant on his work is justified in what Adam Smith wrote, though ‘DJ Mitchell’ is perfectly entitled to his point of view.

I hope to discuss the spiritual issues raised by supporters of various denominations and separate religions on market economies at some time soon, but I should remark in the meantime that Adam Smith in particular, and markets in general are often assailed by proponents of the view that markets are abominations of their view of god’s purposes and therefore against the teachings that they hold sacred, and also that proponents of alternative views that markets are the very embodiment of their god’s purpose on earth.

That they quote from the same source materials (Adam Smith and the Bible) for these contrary views is quite remarkable, though they often show evidence in their dragging of Adam Smith into their interpretations for either view that they have not understood (possibly not even read) Adam Smith’s Theory of Moral Sentiments or his Inquiry in the Nature and Causes of the Wealth Of Nations, and neither are they familiar with the history of the 18th century.

‘D. J. Mitchell’ seems to have grasped part of what Adam Smith was about, and we should be pleased with that.

Additional Service for Scholars at Lost legacy

I have acquired a copy of Adam Smith’s Theory of Moral Sentiments [1759] 1872 edition published by Alex. Murray & Co, London, from Kessinger Publishing Rare Reprints in new condition. This was arranged through alborders@paperbackshop.co.uk for less than $10; it arrived a week later.

The Kessinger reprint edition also contains all of Adam Smith’s Philosophical essays, first published posthumously in 1785, edited by Joseph Black and James Hutton (Smith’s close friends and his literary executors). Smith's "History of Astronomy" is exceptionally important because he began writing it while he was at Balliol College, Oxford (1740-46).

I shall, where possible, and time permits, add references from the 1872 edition of Moral Sentiments. This is to facilitate scholars and others who do not have copies of the Oxford University Press/Liberty Fund editions, or who wish to make quotations from Adam Smith’s works and correspondence for scholarly debate and illumination without incurring high permission fees from OUP for their editorial work on writings that have been in the public domain for over two-hundred years.

Those Who Stoked the Fires are Least Able to Make them Safe

Balgeet Grewal, managing director and vice-chairman of Kuwait Finance House, ‘the largest Islamic bank in the world’, writes in the StarOnline (Malaysia)(HERE):

“Can Asia spend its way out of the crisis?”

“Policy makers very often confuse disenchantment with truth. The inconvenient truth in financial markets today is that government spending is crucial to jumpstart a beleaguered global economy.
The “invisible hand” of Adam Smith is more and more being replaced by perceptible government intervention as the tangled knot of economic problems becomes difficult to unravel.”

Comment
Adam Smith’s use of the metaphor of ‘an invisible hand’ was originally used in the context of the risk avoidance of some merchants in 18th-century Britain who took what they considered to be a safer route of investing their scarce capital in local business rather than take the risk of losing it by sending it to the British colonies in North America, where its security was more doubtful, access to fair treatment in the justice system operating in those colonies was suspect, the rate of return, if any, would take several years instead of several months, and the unpredictable weather and sea journey was unknown, apart from the risks of fraud from distant personages.

Because these risk averse traders invested locally, this added to local, and national, investment in productive activities, which led to a higher level of local economic activity and output than would be the case if they, and those who were less risk averse, sent their capital abroad.

A simple arithmetic case of the whole being the sum of its parts.

Now that takee quite a lot of space to explain, briefly, what Adam Smith considered to be the main issues. He actually took a little longer in fact in Wealth Of Nations to cover the same points (Wealth Of Nations, IV.ii: pp 452-56; 5 pages).

To keep his readers alert to his main point he ‘coined a phrase’ so to speak, and called upon a well-known metaphor from contemporary, and much earlier, literature which readers would be familiar, of ‘an invisible hand’.

Smith lectured in rhetoric and we have a set of his lectures taken down by some of his students in 1762-3, in which he described the role of metaphors.

While discussing how Shakespeare used metaphors, he described them as a ‘figure of speech’ in which ‘there must be an allusion betwixt one object and an other’, and that a metaphor can have ‘beauty’ if it ‘is so adapted that it gives due strength of expression to the object to be described and at the same time does this in a more striking and interesting manner’. (See Smith, A. [1762] 1985, Lectures in Rhetoric and Belles Lettres, 29 November, 1762, p 29, ed. J. C. Bryce, Liberty Fund, Indianapolis).

In short, a metaphor is representative; it does not have substance; it is not identical to its object. It is not a paradigm, nor a theory of markets; it is ‘a figure of speech’.

The problem is that some brilliant economists from the late 1940s (Samuelson, Debreu) and from the 1950s (Friedman, Stigler, Arrow) Tobin, and almost everybody since in academe, took the metaphor (which had hardly been notice before then – Edwin Canaan’s 1937 still popular text does not mention it as a side note in his authoritative edition of Wealth Of Nations, p 423) and popularised the invisible hand, credited to Adam Smith – though he had many predecessors, including Shakespeare, Defoe, Voltaire, as a mystical, almost divine (in some cases among US economists of a religious disposition, specifically the ‘hand of God') force said to be present in the operation of markets.

That ‘semi-divine’ view of the invisible hand now dominates academic and popular discourse and it is a view that Lost Legacy has conducted and will continue to conduct a relentless struggle, in order to rescue Adam Smith’s name from association with such unscientific – frankly nonsensical –treatment of how markets work.

The importance of this lonely struggle is seen today when capitalist market economies are driven and discredited from the centre of policy discussions on what to do about the current crisis, and the whole burden of counter-recessionary actions is transferred from markets to the sole determination of politicians, who were directly complicit in the very causes of the current crisis.

Those who stoked the fires of credit-based growth are judged by themselves to be those best able to put them out. The Labour government is preening itself as the saviour of the problems it created, and early manifestations of their ‘solution’ is to demand that the banks lower their interest-rates - wait for it - and offer more credit to propositions that are unprofitable and which they consider on current pricing to be too risky.

Balgeet Grewal’s article, written in the petro-dollar safe-haven of Kuwait, advises us that: “The inconvenient truth in financial markets today is that government spending is crucial to jumpstart a beleaguered global economy”, and “beleaguered” governments all know the address from where they can get the big loans they judge they need (what else can the billionaire dollar holders ‘invest’ their dollars?).

Adam Smith on Government

I came across the following passage while re-reading Adam Smith’s Moral Sentiments. It refers to his comments on the character of civil governments, both those “fitted either to promote or to disturb the happiness both of the individual and of the society”, which may cast light on the vexed question of the degree to which Adam Smith approved or disapproved of the institutions of civil government – the State – as believed by many who preach his hostility to these institutions.

“The characters of men, as well as the contrivances of art, or the institutions of civil government, may be fitted either to promote or to disturb the happiness both of the individual and of the society. The prudent, the equitable, the active, resolute, and sober character promises prosperity and satisfaction, both to the person himself and to every one connected with him. The rash, the insolent, the slothful, effeminate, and voluptuous, on the contrary, forebodes ruin to the individual, and misfortune to all who have any thing to do with him. The first turn of mind has at least all the beauty which can belong to the most perfect machine that was ever invented for promoting the most agreeable purpose: and the second, all the deformity of the most awkward and clumsy contrivance. What institution of government could tend so much to promote the happiness of mankind as the general prevalence of wisdom and virtue? All government is but an imperfect remedy for the deficiency of these. Whatever beauty, therefore, can belong to civil government upon account of its utility, must in a far superior degree belong to these. On the contrary, what civil policy can be so ruinous and destructive as the vices of men? The fatal effects of bad government arise from nothing, but that it does not sufficiently guard against the mischiefs which human wickedness gives occasion to.” (TMS, IV.2.1: p 187)

In my opinion, the above paragraph (expanded in the rest of his chapter) points to a typical Smithian stance; specifically, he regarded the institutions of civil government as justified and necessary, from their first appearance in the “Ages of Shepherds and Agriculture” [LJ(A) i.27:p 14] through to his time. This historical view left him much room for critical comment of “the mischiefs which human wickedness gives occasion to” in all its institutions, including those in the ‘Age of Commerce’.

Those who believe governments of a kind that is compliant with their politics do no wrong, and those who believe that markets, compliant with their ideology, are always right or are always wrong, may wish to reflect that the common factor in all civil governments and all modes of subsistence in history and today, was and is the presence of human beings with their capacity to be among “the prudent, the equitable, the active, resolute, and sober” or among “the rash, the insolent, the slothful, effeminate, and voluptuous”, or some mixture of the two extremes.

Adam Smith did not take sides, nor blind himself to the triumph of hope or despair over historical observation and scepticism

Invisible Hand Myths in Melbourne

Toby Norgate writes in The Age (Melbourne), Business Day, HERE.

Dogs are barking for some reform

“Commentators have suggested recently that because of the fallibility of investors the markets should turn to merit regulation. But making regulators merit assessors will not work. As with the old Soviet Union, governments (and regulators) can never be as efficient or effective as Adam Smith's invisible hand of the market.”

Comment
Governments and regulators can never be as efficient or effective as markets, for sure, but Adam Smith never had “an invisible hand of the market”, either as a theory or as a metaphor even.

He covered his theory of markets in Books I and II of Wealth Of Nations without a single mention of an invisible hand. Strange that. He mentioned the metaphor of an invisible hand only once and it is found in Book IV of Wealth Of Nations (WN IV.ii.9: p 456; Canaan, p 423), and it wasn’t about markets.

It was about the risk avoidance of some merchants in their not trading with the British colonies in America (meanwhile, of course, many others did engage in the risky Atlantic trade, being less risk averse).

How come the metaphor was promoted from the mid-20th century to a ‘theory’, ‘concept’, ‘paradigm’ even, of markets under the name of Adam Smith?

Briefly, some modern theorists found what they considered to be most significant, namely that they could show a mathematical model of an economy that was in general equilibrium, first mooted in 1871 and finally was ‘proven’ in the late 1940s.

Paul Samuelson, one of the searchers and the author of one of the most successful textbooks on economics, introduced his readers to an alleged Adam Smith’s invisible hand in the midst of markets, guiding the players to harmonious market equilibrium. Read by tens of thousands of students, many of whom went on to lecturing across the United States and the UK, the myth of the invisible hand gained credibility (without a shred of evidence that Adam Smith wrote anything to justify his inclusion, or his collusion, in the myth).

Meanwhile, in Chicago, many latched onto the invisible hand as ‘pure propaganda’ against Soviet planners and social democrats who preached and enforced State management of their economies. Among the luminaries of Chicago, Milton Friedman, a great proselytiser for free markets, liberty, and smaller state structures, taught invisible hand, laissez-faire economics, as if it was in the tradition of Adam Smith. Several Nobel Prize winners (among them George Stigler) added their lustre to the spread of the myth, until it became a dominan belief among economists, media commentators, and politicians.

Hence, to find the myth propagated in the Age in Melbourne in 2008 is hardly surprising. But it is still a myth and contrary to Adam Smith’s use of a lonely metaphor en passant of something completely different.

Lost Legacy Quoted on Blogs

A post on the “Failures - exposed, reflected upon, considered” Blog (HERE):

“Transformation of Smith and his message”

“Adam Smith, the father of modern economics”, pleaded for leaving all economic activities to be regulated by market forces without any restraint from state or any other organized group. He believed, “the invisible hand” would coordinate them and run them without any violent ups and downs.”

This paragraph or one along the same lines is leveled at those who question wisdom and efficiency of so-called free markets associated with the name of Adam Smith, father of modern economics, who originally propounded the idea in his Wealth of Nation. However, many proponents of the theory seem to have either very scarce idea of the original context and intended message of Smith’s work or a specific aim to befit it to an agenda fitting their narrow socio-political and economic aspirations. Below is an elaboration on misconceptions arising from a paragraph above."
"
Then follows a post direct from Lost Legacy of 25 July 2006:
“Fanatics' Foundations Founded on Nonsense” HERE (follow the link).

Comment
There is also another link to Lost Legacy via the Undergraduate Economist (perspective of an economics student) Blog:

‘On the ‘Invisible’ Adam Smith’ by Alex Thomas describing Lost Legacy as “a must read for those who want to ‘know’ Adam Smith”.

“This post mainly deals with the common misconception about Adam Smith, whose name is known to all students and professors of Economics; the misconception being the notion that he advocated laissez-faire. Sadly, his works are not as known. (Though the names of his two major works are widely known) So, this post tries to makes visible what is commonly invisible regarding Smith.

In the Indian Schools, textbooks in Economics associate him with the ‘wealth definition’. In Frank ISC Economics, which is authored by D K Sethi and U Andrews, Adam Smith is supposed to have defined Economics as “A science which enquires into the nature and causes of wealth of nations.” Definition is “a concise explanation of the meaning of a word or phrase or symbol”. [Dictionary.com] Adam Smith has never defined Economics is the afore mentioned way. Is it ‘right’ to teach such ideas? Isn’t it against the ethics of academics? A large number of students are programmed in such a way in school, whereby their notion of economics is constituted only by neoclassical economics. Plurality in economics has been totally done away with. Teachers teach what is printed in the textbooks. No questions are asked.”

Comment
All mentions of Lost Legacy are welcome. I have noticed several references recently to Lost Legacy in the Indian press and its blogs. All adds to the global work to rescue Adam Smith from the clutches of the modern epigones.

A Mystic Writes Arrant Nonsense About Adam Smith and Religion

‘G. K. Chesterton', writing in the Blog, The ChesterBelloch Mandate, a sort of cod catholic ‘distrubutist’ religious sect (HERE):

'Chesterton' posts the ‘Case of Adam Smith’, of which the following is included:

“In giving one or two examples, in this and the next article, I will start with the secular sciences of the early nineteenth century; those before being entangled in the theological struggles. For one case; does anybody realise what a queer and fantastic faith is covered by the very name of Adam Smith? He is considered a dull and stolid person who invented Free Trade; but he invented much more marvellous things. He had a philosophy and even a religion; and a very rum religion it was. Its theological thesis was this: that God had so made the world that He could achieve the good, if men were sufficiently greedy for the goods. If everybody worked meanly and sordidly for money, the result would be a prosperity that would prove the benevolence of Providence. Adam Smith’s idea of justifying the ways of God to men, was to tell the men to do unjustifiable things which God would justify. Adam Smith was a mystic. He was a sort of Quietist, except that he certainly did not tell people to keep quiet. His creed was that if business men would bustle about from purely business motives, the bringing of good out of evil was the business of God. But he believed that God was good; indeed God was apparently the only person required to be good.

Now, of course, most Englishmen do not take a creed in this clear-cut way; and even when they swallowed the Smith philosophy pretty completely for generations, it was mixed up with other things. But when all such allowance is made, what an extraordinary creed it was to swallow! What a weird cosmos it was to inhabit; in which everything was good because everybody was bad. A world in which the financial speculator grew thistles to attract donkeys; and the thistles grew figs to be the food of all the good and wise; in which your neighbour gathered grapes of the thorns you had planted in order to scratch him. The whole thing was much more rationally stated than are most modern expositions; it was also rank raving nonsense, as anyone would have seen in an age of creeds and common sense. Sanity sees at a glance that society finds it hard enough to hang together, with everybody taught to be unselfish; and that it would simply smash if everybody were taught to be selfish. Incidentally, I may add, it has already smashed. We have seen with our own eyes the Wealth of Nations wither into the Poverty of Nations. But there were stranger examples after Adam Smith; and I shall say something of them next week.”

Comment
I could simply dismiss ‘G.K. Chesterton’ as grossly misled as well as offensive in respect of Adam Smith’s legacy.

‘Chesterton’ has run together misleading ideas from the epigones, mainly associated with modern economics associated with Chicago and not with the Adam Smith born in Kirkcaldy in 1723.

'Chesterton' places Adam Smith in the ‘early 19th century’ – he was born in 1723 and died in 1790 – not an auspicious start for a claimed authority on Adam Smith.

“dull and stolid person who invented Free Trade” – not true; many others wrote about free trade (not least among them, David Hume).

“a religion; and a very rum religion it was. Its theological thesis was this: that God had so made the world that He could achieve the good, if men were sufficiently greedy for the goods” – close to being arrant nonsense; Smith never advocated ‘greed’; he called such vices ‘licentiousness’ and severly criticised its exponent ; his Theory of Moral Sentiments was solid (not ‘stolid’) in its advocacy of the virtues in all aspects of human social life.

“Sanity sees at a glance that society finds it hard enough to hang together, with everybody taught to be unselfish; and that it would simply smash if everybody were taught to be selfish” – how true, and how Smithian!

The practice of the positive virtues was an essential part of Adam Smith’s moral and economic teachings, plus the negative virtue of justice. And the instrument of keeping people from selfishness? Why, it was nothing less than the ‘impartial spectator’ from whom nobody could hide when tempted to selfishness. If an individual behaved badly, his impartial spectator would not approve, nor would other people.

If I catch the “promised stranger's” examples, next week, I shall report on them, though this week’s examples do not promise that next week’s will be much better.
Update: The 'Chesterton' Blog appears to be written by Richard Aleman HERE and a note on 'distributism' is HERE

Adam Smith on Raking Winter Leaves

Abigail Higgins writes on “Garden Notes : Thinking winter” in The Martha’s Vineyard Times, 4 December, HERE:

"What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom." - Scottish economist Adam Smith.

Having a garden is sound home economics, not only as a bulwark against total dependency but also as an emotional safeguard against idle hours and anomie.

Our "fearless leaders" (fearful, is more like it) have disdained Adam Smith's advice while deceitfully invoking his name, and now it is left to us to pick up the pieces.”

Abigail continues with advice for gardening, including ‘raking leaves’ and depositing refuse that makes for good ‘soil additive’, summing her advice with a touch of Smithian prudence:

“My simplistic-sounding advice: get gardening and grow something. Plow anxiety and frustration, or extra hours stemming from work slow-downs, into profitable use.”

Yes, ‘profit’ from personal therapy for your woes in your garden, if you've got one.

Worrying Developments In Universities

Miranda Devine writes in the Sydney Morning Herald (4 December) HERE:

“Monoculture is killing thought”

“The entire liberal or conservative tradition [was] summed up by that article … When students enrol in a contemporary ideology subject and finish it not knowing any of the works of Adam Smith or John Stuart Mill or Milton Friedman or any of the great thinkers of our time, that is a significant quality issue."

A month after Rozner's testimony, on November 4, the inquiry committee received a letter from a "disappointed" University of Melbourne vice-chancellor Glyn Davis, who defended the subject. But he said it was to be replaced next year with a "broader introduction to political ideas subject [with readings from such] liberal authors such as John Stuart Mill and Milton Friedman". Chalk up a victory to the Young Liberals, even if no one will ever admit it.”

Comment
There is a lot that I could comment on the Australian experience, which I believe is replicated throughout the world to one degree or another. It doesn’t always need to be associated with the left-right spectrum. It can also be found in subjects that ought to be bias free.

Scientists also fall out (even statisticians). There was a long running argument in sociobiology, which reached dreadful levels when one set of lecturers encouraged their students to attend another lecturer’s sessions to block them taking place by causing disruption! I believe this was in the precincts of one of the USA’s most prestigious universities.

Silencing views which are disputed is outrageous. The recent disputes about ‘global warming’ – now moved in name to ‘climate change’ – are a case in point. We have charges of ‘climate denial’, disputes about what has not yet happened and is not beyond doubt until it happens. Charges of ‘Holocaust denial’ are about denying what actually happened and is beyond doubt. When charges are made of 'climate denial, they aim to blacken the reputation of those who remain sceptical that it will happen on the scale envisaged in the near future. We are assured that the science of climate change is now 'settled'; funny that I keep meeting academics who are not so sure. Indeed, if the science is so united, why is it necessary to enforce a one-sided view? When everybody believes the same, who is left to do the thinking?

The lonely furrow I plough in Lost Legacy is against the majority of our profession’s consensus about what Adam Smith wrote and thought, but I am not derided as far as I know, nor discouraged from continuing.

True, I am not longer looking for an academic post and for most of my academic career I refused tenure, which incidentally was brought in to protect non-Church of England academics (non-conformists, Quakers, Catholics and Jews) in their jobs as professors in a British academic system where the Established Church had a monopoly of all appointments up to the early 19th century. Tenure moved on to becoming a restrictive practice in itself, much like the old Guilds that Adam Smith railed against with great justice.

This gave and gives me an independence from seeking privileges or being intimidated into conformity. Those still young enough to think they must kowtow to the prevailing orthodoxy, whether of the Left or the Right, or the creationist'evolutionary schools, should reflect on what they are doing.

Students who craft their course work to fit their lecturers’ take on subjects are no better in their judgement than those students one knew about who exchanged sexual favours to get better grades (a practice rightly condemned by feminist colleagues I worked with).

Moreover, those lecturers who silently accept course work from most of their students which agrees with their own prejudices should reflect that there is something wrong with their teaching (and lack of thinking). If students do not disagree with the prevailing orthodoxy which they teach, they should be concerned and troubled. That is not education; it’s brainwashing. Without dissent, science fails.

Give me Two-Handed Economists Any Day

Dragos Cabat writes in 1asigro.com (‘all about insurance’), Roumania, HERE:

“Corporate Capitalism on the edge”

“The aim is that, through the state's intervention into these companies' operations and ownership, the corporations situation to recover and investors to calm down (the depositors too, in the banks' case), but there are no guarantees for the management process improvement. That is why the market has no positive reactions towards the government's interference into the economy, accepting them only for a short period of time. For the economic climate betterment it is necessary to reform the corporative capitalist system through "breaking" the big companies and giving the owners the real control over their activities (a trend started in the '80's, but abandoned because of the globalization). A fact is for certain: we are living through interesting changes and the future capitalism will probably look more as the one that was theoretically described by Adam SMITH over 200 years ago.”

Comment
This makes a change. Almost everything I read about the current financial turmoil (or is more like treacle?) suggests that corporate capitalism is over, but few regard it as going back to the small corporate entities of Adam Smith’s day.

Most seem to predict (few with regrets) that Adam Smith is to be rejected too, especially with the myths that have adorned mentions of him, laissez-faire, invisible hands, and all such guff (of which, for the record, he was wholly innocent).

Dragos Cabat does not say much about how this ‘new’ world is about to be drawn up, agreed and created. Probably just as well. Predictions about the future, especially those radically different to an existing present, usually prove embarrassing to those who make them.

Like Adam Smith, I think it best not to make predictions. It’s always a trade off and in this sense the ‘two-handed economist’ is positively saintly compared to the kind who gives definite answers to complex problems, especially those involving human beings.

Caveat Emptor in 'Wowing her'

I return from my early winter break in the beautiful west-coast of Scotland's Port Appin to find this from Forbes awaiting me on-line:

Jenna Goudreau writes in Forbes.com on style (HERE):

“Twelve Gifts To Wow Her”

“This year, a few carefully selected items that will hold or appreciate in value set the right tone.

“A massage at the Peninsula might ease her mind, but a rare, $3,500 first edition of Adam Smith's Wealth of Nations will stretch it for years. And while a bottle of bubbly is always a chic choice, a more lasting option includes a set of elegant stemware from Baccarat ($195 each).”

Comment
Hardly ‘wow’ her! At $3,500 for a ‘first edition of Wealth Of Nations’, she would soon discover you are a having a cheap laugh at her expense, or you are so gullible that you believe whatever a salesperson tells you and you are dangerous to be close to because, as they say, ‘a fool and his money are soon parted’. Moreover, the goods are probably stolen and sold on by another fool, or were stolen from the thief.

Sotheby’s advertised a week ago that they had sold a first edition of Wealth Of Nations for £60,000 (I read of a copy being sold for £72,000 last year).

So what gives? A distress sale from a ‘maxed-out’ hedge fund manager? A fake mass-market ‘first edition’ from China?

Or the author of the article, Jenna Goudreau, was just guessing in the best traditions of an overworked, writing in haste, beat-the-deadlines journalist?

True, if she holds onto her fake ‘first edition’ for another couple of hundred years it might double in value maybe, perhaps, and hopefully. I suspect she would have gotten rid of her benefactor long before then …

So, instead buy her the "set of elegant stemware from Baccarat ($195 each)", but, er, not from the same source as the 'first edition'.