Correct Summary of Adam Smith's Ideas

‘pilgrim’ in Red State Blog (HERE): writes “Fisking Marx” (that’s Reinhard Marx, archbishop of Munich and Freising, formerly, bishop of Trier, the birthplace in 1818 of Karl Marx, who has views on the end of capitalism, to which ‘pilgrim’ objects, during which post he made these statements:

“Never did John Locke, David Hume, Adam Smith, John Stuart Mill, Ayn Rand, F.A. Hayek, or Milton Friedman advocate unbridled capitalism or freedom. It seems that socialists have badly sullied the reputation of liberty. The socialists have repeatedly alleged that capitalism caters to so-called capitalists and gives them unbridled powers to exploit the weak. But that is totally false. Philosophers of liberty have always insisted that freedom comes with responsibility and justice. Adam Smith opposed mercantilism and monopolistic industrial interests. David Ricardo wanted more competition and free trade. Adam Smith and John Stuart Mill advocated labor unions to face the economic power of the owners of industry.

Unlike Karl Marx, who was a revolutionary, Adam Smith was a reformer. Where Karl Marx saw class struggle, Adam Smith saw special interests that were often at odds with the public interest. If Adam Smith were alive today, it is unlikely that he would join the chorus of triumphant anticommunists. Instead, he would warn that capitalism is prone to excess. He would observe that vigilance is required to ensure that the political system is not manipulated for the economic benefit of a few to the detriment of the entire society. He would be advocating political reforms to make sure that the system is not corrupted by special interests.

Adam Smith described free markets as an obvious and simple system of natural liberty. He did not favor the landowner, the factory owner, or the worker, but rather all of society. He saw, however, self-defeating forces at work, preventing the full operation of the free market and undermining the wealth of all nations.”

Comment
I think we can rest assured that ‘pilgrim’ understands what Adam Smith was about.

Perhaps ‘pilgrim’ is stretching a bit when saying Adam Smith favoured labour unions – he certainly objected to collusion among employers to restrain labourers who sought either pay rises, or resisted pay cuts, and he considered the Combination Acts against labour taking collective action in defence of their interests, while employers’ combinations, especially their ‘secret’ meetings, were not disallowed under current laws.

I suspect that Adam Smith wanted restrictive laws against combinations repealed, but favoured open competition in wages matters, applied to both labourers and employers. He certainly favoured higher wages for labourers because these were conducive to higher productivity and diligence and opposed reactionary policies that held wages down, ostensibly in the belief that such measures ‘encouraged’ labour to work harder.

Apart from this criticism of ‘pilgrims’ post, I would suggest readers follow the link because overall ‘pilgrim’ is spot on.

A Reply to a Commentator

My post yesterday, which I attributed to ‘anon’, apparently comes from a ‘gk’, or ‘Gary’, from Knoxville, Tennessee, though I did not notice his initials when I commented, for which I apologise. His initials, in small type, are easily missed (at least by me).

I shall reply to his comments in general terms – a blow-by-blow critique of them would probably cause deeper friction than is expressed in his response in the Lost Legacy comments, and which are much enhanced on his Blog (HERE): As an educator, I have no interest in causing friction when there is an opportunity to learn something.

I accused Gary of appearing not to have read Wealth Of Nations in respect of Smith’s use of The Metaphor of ‘an invisible hand’. His critique of President Obama’s misuse of The Metaphor was not/is not the subject of my post; I do not comment on another country’s politics).

My interest is in defending Adam Smith’s legacy, which, in my view Gary has not understood, and no wonder. Almost the entire body of US (and UK’s) academe misrepresents Adam Smith’s use of The Metaphor (see earlier posts since 2005 on Lost Legacy), including the worthy encyclopaedias and internet dictionaries cited by Gary – of which Wikipedia is particular notorious).

This misrepresentation began in the early 1950s as economists reacted to the assault on ideas about Western capitalism emanating from the Cold War (but ‘hot’ in places), with Soviet communism. The contest between communist planning and market capitalism was in the forefront of these debates, as Western European economies, with several social-democratic parties in government, and large communist parties in France and Italy, hotly contested which economic system was appropriate.

Economics textbooks, such as Paul Samuelson’s, introduced a modern version of the metaphor of ‘the invisible hand’ and credited it, under Adam Smith’s name, as being his ‘theory’ of markets, which markets were (and are) superior to state planning. These textbooks gradually became the norm across academe, training hundreds of thousands of students in beliefs that markets were guided by an ‘invisible hand’ to lead to optimum solutions of problems of market resource allocation and efficiency, in contrast to the manifest failings of Soviet State planning, and Western social-democratic ‘nationalisations’.

What became of The Metaphor (unintentionally, I am sure) in the rest of the 20th century was a belief, widespread to be sure, that markets had a ‘mystical’ ingredient in them that made them superior – in some recent versions, the invisible hand has become the ‘Hand of God’ – which is wholly ridiculous if linked to Adam Smith and the Wealth Of Nations.

Moreover, the modern myth of the invisible hand, mentioned only once by Adam Smith, and then not about how markets work, is based in part of a paragraph in a chapter about a specific issue (risks in the colonial trade), as if it was a major element in Adam Smith analysis of commercial society. It was, in fact, nothing of the sort.

I have made this case regularly on Lost Legacy (follow the ‘invisible hand’ label, including on my comment on Gary’s post), and in my books; ‘Adam Smith’s Lost Legacy’, 2005; and ‘Adam Smith: a moral philosopher and his political economy’, 2008, both by Palgrave Macmillan.

I have also posted a downloadable paper, ‘Adam Smith and the Invisible Hand: from metaphor to myth’ on this site (it’s on the Lost Legacy Home page; click on the red lettering; scroll through to ‘Articles and Press’ and then click ‘The History of Economic Thought 40th Anniversary Conference at University of Edinburgh: Adam Smith and the Invisible Hand: from metaphor to myth: A Lecture by Gavin Kennedy’.

I did not on this occasion go into such detail in my comments on Gary, because the documentation supporting my assessments is widespread on Lost Legacy. I quote examples of the popular prior use in literature of the metaphor of an invisible hand, as follows (refs are in the above paper):

“ Homer (Iliad, 720 BC); ‘And from behind Zeus thrust him [Hector] on with exceeding mighty hand’; [12]

Horace, Fulminantis manus Jovis (‘The mighty hand of thundering Jove’); [13]
Ovid of Caeneus at Troy: ‘twisted and plied his invisible hand, inflicting wound within wound’;[14]

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

Augustine, 354-430AD, “God’s ‘hand’ is his power, which moves visible things by invisible means’;[15]

Shakespeare, (1605) ‘Thy Bloody and Invisible Hand’;[16]

Glanvill, J. 1661. ‘nature work[ing] by an invisible hand in all things’; ‘invisible intellectual agents’;[17]

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

[18]Daniel Defoe, ‘A sudden Blow from an almost invisible Hand, blasted all my Happiness’, in Moll Flanders (1722); ‘it has all been brought to pass by an invisible hand’ (Colonel Jack, 1723); [19]

Nicolas Lenglet Dufesnoy (1735) an “invisible hand” has sole power over “what happens under our eyes”;[20]

Charles Rollin (1661-1741), whom Pierre Force describes as ‘very well known in English and Scottish Universities’, said of the military successes of Israeli Kings “the rapidity of their consequences ought to have enabled them to discern the invisible hand which conducted them”;[21]

William Leechman (1755): ‘the silent and unseen hand of an all wise Providence which over-rules all the events all the events of human life, and all the resolutions of the human will’;[22]

Charles Bonnet (whom Smith befriended in Geneva in 1765) wrote of the economy of the animal: “It is led towards its end by an invisible hand”;[23]

Jean-Baptiste Robinet (1761) (a translator of Hume) refers to fresh water as “those basins of mineral water, prepared by an invisible hand”;[24]

Walpole, H. 1764. ‘the door was clapped-to with violence by an nvisible hand’[25]

Reeve, C. (1778) ‘Presently after, he thought he was hurried away by an invisible hand, and led into a wild heath’.[26]

Adam Smith had many of these books in his library. The invisible hand metaphor was a popular literary reference in the 18th century.

For Adam Smith, the metaphor came into use (only once in the entire volume) after he had succinctly explained in detail in Chapter 2: ‘Of Restraints Upon the Importation from Foreign Countries of Such Goods as Can be Produced at Home’, how merchant traders chose between using their capital in the export/import trade or using it in domestic investment. The key variable for them was the relative risks of both:

“Thus, upon equal or nearly equal profits, every wholesale merchant naturally prefers the home-trade to the foreign trade of consumption, and the foreign trade of consumption to the carrying trade. In the home-trade his capital is never so long out of his sight as it frequently is in the foreign trade of consumption. He can know better the character and situation of the persons whom he trusts, and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress. In the carrying trade, the capital of the merchant is, as it were, divided between two foreign countries, and no part of it is ever necessarily brought home, or placed under his own immediate view and command.” (WN IV.ii.6: p451 or Edwin Canaan’s 1937 edition, p 421, Random House).

This is about risk avoidance, which Smith clearly identifies (‘he intends only his own security’), repeated in the passage that Gary quotes from:

“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.” (WN IV.ii.9: p 456; or in Canaan, p 423)

Now, any close reading of the whole chapter up to paragraph 9 shows what were Smith’s arguments. He identifies risk avoidance as the ‘trigger’ for the actions of some, but clearly not all British merchants, because many merchants traded with the British colonies in North America under the advantages of the British Navigation Acts, which gave British ships, crews, and owners of cargoes a monopoly on exports from Europe to the colonies and imports from the colonies to Europe, all enforced by the Royal Navy and at all British sea ports.

Those merchants who were more risk-averse than the exporters/importers willingly preferred the less risky domestic trade even if it was less profitable. It was this prior decision, fully explained by Adam Smith, which caused them to invest locally and, on the arithmetic law that the whole is the sum of its parts, by doing so it meant that local domestic investment was higher than it otherwise it would be, which benefited domestic capital formation and domestic employment as an unintentional consequence.

Now any reader who had followed Smith’s argument in the previous eight paragraphs had no difficulty in understanding Smith’s conclusion, but not all readers of political economy (then as now) follow every argument, which was important to Smith’s general critique of monopoly foreign trade, especially with the British colonies in North America and, to make sure he carried all his readers with him, he added at the end of his clear argument the metaphor of ‘an invisible hand’ leading them to do as they did on entirely on their own account under the influence of their risk aversion. His use of the metaphor of ‘an invisible hand’ meant nothing more or less than that.

Hence, when I read, as I do, 10-20 times a day from the world’s press and academic papers, assertions to the effect that Adam Smith was the first to identify the invisible hand and that he applied it to his political economy of markets (markets are discussed thoroughly in Books I and II without a single mention of the metaphor in any role at all), I quite often remind Lost Legacy readers of this fact.

Modern economists who make assertions about the invisible hand and associate it with Adam Smith are absolutely wrong to do so.

Smith is wholly innocent of involvement in the mystification of markets; their workings are understood, and were understood by Adam Smith. It insults his legacy to suggest otherwise.

Markets are superior to state-managed economies, including state-capitalist corporate economies, which presently dominate the West, and which enshrine monopolistic principles in place of the superiority of competition, which promote legislators, and those who influence them, to directing roles for which their capabilities are well-short of modest competence.

In that opinion I agree with Gary that governments are not as competent as markets; but this has nothing whatsoever to do with ‘hands’ that are ‘visible’ or ‘invisible’ or with anything that should be associated with Adam Smith.

The Metaphor, the President, and the Critic

‘Anon’ writes (25 February) on Effor.com (‘Rambling rants from the lunatic fringe'), HERE:

“This will not help”

“President Obama today said “If we once again guide the market’s invisible hand with a higher principle, our markets will recover, our economy will once again thrive and America will once again lead the world in this new century as it did in the last”.

Has he actually read The Wealth of Nations, the classic Adam Smith book that coined the term “invisible hand?” Does he even know what the term means?

Evidently not, because “invisible hand” is the term economists use to describe the self-regulating nature of markets. I’d like for President Obama to reconcile that with his call today for increased regulation of financial institutions.”

Comment
‘Anon’ asks if President Obama has read Wealth Of Nations, strongly implying that if he has, or did, he would not have used The Metaphor in his speech. Moreover he would know what the ‘term’ means.

This is problematic because it is not evident that ‘Anon’ has read Wealth Of Nations.

Adam Smith did not ‘coin the phrase’ at all; he used a fairly commonplace metaphor, well known to readers in the 18th century, though less so in the 19th and hardly at all to readers in the 20th century until it was dusted down by some economists in the 1950s, given an entirely bogus meaning, turned into a ‘theory’, a ‘paradigm’ even, and widely publicized to add popular mystical properties (even implying religious purposes) to how markets work compared to state-run communist economies (a bye-product of the Cold War).

Needless to say (or is it?) these pure inventions had had nothing whatsoever to do with Adam Smith and his use of The Metaphor only once in Wealth Of Nations and only once in Moral Sentiments had nothing to do with markets.

Even ‘Anon’ got something right: the ‘invisible hand’ is ‘the term [modern] economists use to describe the self-regulating nature of markets’.

The error is to link this modern use to Adam Smith – and, of course, to mock the President for something he/she has not done himself/herself.

Adam Smith and Religion

A reader, ‘RCAR’ comments on a post by Jennifer Rubin, ‘False Choices, Indeed’ on Commentary Magazine.com HERE:

“Great point, but we already tried that. Even Alan Greenspan himself has now admitted that we need to nationalize the banks and that free markets are not self regulating. It took him a while to figure that out. Also, remember that Rand was the hardest of hard core atheists, not a position consistent with the “invisible hand” of Adam Smith”.

Comment
I shall not bother correcting the myth of Adam Smith and the invisible hand – there are plenty of posts to that effect on Lost Legacy.

My comments are directed at the alleged religiosity of Smith’s use of The Metaphor. There are many differences between Ayn Rand and Adam Smith (she was an ideologue; Smith wasn’t). That she was an atheist but that he allegedly was not is more problematical.

We are not comparing the fierce independence of mind of Ayn Rand, born in Russia, but moved to the USA, a country denominated on the right of free speech, and therefore able to enjoy the brave luxury of saying exactly what she liked (and did so), whereas Adam Smith lived in Scotland, a country dominated by religious bigots and zealots, who threw their considerable weight around at whoever expressed any views deviating an iota from the authoritarian creeds of the Protestant Church, or, down in the small details, against those who appeared to live lives of less than total (sexual) virtue (if female) or, both sexes, who didn’t attend Church services on Sundays.

How Ayn Rand, a ‘free-spirit’ would have gotten on in the company of these gentlemen – the Taliban of the age – does not bear thinking about. To teach in a university, the faculty had to sign the Westminster Confession of Faith, lead prayers at the start of a class, and lecture in Latin. Under no circumstances could they offer dissent from religion. These onerous conditions would not have bothered Ayn Rand, should she have been alive then – being female she would not have gone to university, let along taught in one.

Adam Smith signed the Calvinist Confession of Faith, asked permission to abandon the saying of prayers (was refused by Glasgow University), and otherwise he ‘got along by going along’.

The first edition of his book in 1759, ‘Moral Sentiments’ was written so as to pass the religious test (Hume teased him that three Bishops had visited his publisher to buy copies and wondered what ‘true philosophers’ would think of its author being read by ‘these retainers to superstition’, Letter, 12 April 1759).

Yet, Smith published six edition in his lifetime, the last showing quite significant changes which diluted the religious language he felt obliged to use in the 1st edition. Smith died a few weeks after the 6th edition was published. It was clearly a symbolic statement of his rejection of revealed religion; he knew he was dying and if he had believed in an ‘after life’ it was not the best time for him to cause offence to god.

My current research into the alleged religiosity of Adam Smith has revealed a far different perspective on him. He certainly was not a Christian and nor, in my view, was it likely that he was even a Deist by the time he died. I am preparing a paper on these issues at present and will post it on Lost Legacy, as well, I hope, present it to a conference of Historians of Economic Thought later this year.

A Philosopher Pontificates in Ignorance

Steve Gimbel, a philosopher at Gettysburg College writes Philosopher’s Playground Blog,(‘One Part Sandbox, One Part Soapbox: An on-going game of intellectual tag concerning ethics, science, politics, and all topics philosophical’), HERE:

“But we can layer onto rationality the question of morality. Even Adam Smith, the father of Capitalism, wrote his classic Theory of Sentiments to argue that enlightened self-interest which guides the invisible hand of the marketplace is insufficient for a good human life, one must also have what he termed "sympathy," what we call empathy. Human ethical behavior must smooth the rough workings of the marketplace. We see this after natural disasters when price gauging is a both a crime and a dastardly undertaken, that is, it is deemed wrong to sell something at market price.”

Comment
Adam Smith did not write Moral Sentiments to “argue that enlightened self-interest which guides the invisible hand of the marketplace is insufficient for a good human life”.

He didn’t even write in Wealth Of Nations about ‘an invisible hand’ guiding “the marketplace”. His use of the metaphor had nothing to with markets in either book (where it is mentioned only once in each book).

Steve Gimbel should pause, reach for a copy of either (preferably both) and read each chapter (there is only two!; one in each book) on how Smith used the popular 18th-century metaphor of an invisible hand. One both occasions it had nothing to say about how markets work.

After that exercise, he could usefully read my paper, ‘Adam Smith and the Invisible Hand: from metaphor to myth’. 2008 (downloadable from the Home Page of Lost Legacy in red). Then and only then should he pontificate on Smith’s use of The Metaphor.

Odd in a way: I would have thought that doing the above as a minimum would be what a philosopher (not the least particular about the meaning of words in all the disciplines taught in universities and colleges) would do before making such fallacious assertions.

A Query for Wordsmiths

Does anybody know what William Magee, Bishop of Dublin, may have meant in 1809 by the words ‘scolists and whitlings’?

Magee used the words to describe David Hume and Adam Smith for their religious scepticism.

I have tried the Oxford English Dictionary and Google to little avail.

My crytic crossword expert, a.k.a. my wife, says it has something to with 'wormlike creatures nibbling away at bits of things'.

Once More With Feeling

Rowan Wolf writes (22 February ), “Nationalize This!”, posted on TPM blog HERE:

"We(the world) have a big problem, Namely that the global economy is crumbling. That crumbling started, and was facilitated by, an ideology that markets (including financial markets) are self-regulating. It is a fundamental belief in laissez faire capitalism. However, the ideology combines with the ranking of corporations as fictive "individuals" and therefore that they should be protected from the intrusion of government in their affairs.

The former belief ties to Adam Smith's theory of the "invisible hand" of capitalism. In its contemporary iteration, this means that people (including the fictive ones) will function within their own self interest, and that self interest includes "regulating" themselves against long term harm.”

Comment
Adam Smith did not have a “theory of the invisible hand”.

See Lost Legacy posts passim.

A Financial Advisor who Understands Adam Smith

Michael Hennigan, Founder and Editor of Finfacts (Ireland) HERE, writes a most encouraging post : ‘The "free market" in these calamitous times’, containing this gem:

“Adam Smith, the father of modern economics, in his 1776 book The Wealth of Nations, identified the importance of individual self-interest, but contrary to what some critics have claimed, his emphasis was that you serve your own self-interest by serving the self-interest of others. It is not what is generally concluded because the last line of the following extract is what is most often quoted, in isolation:

"In civilized society he [man] stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-love, and never talk to them of our own necessities but of their advantages."

Comment
Regular readers of Lost Legacy will recognise this familiar quotation from Wealth Of Nations (WN I.ii.2: pp 26-7; Edwin Canaan, 1937 edition, p 14).

Michael Hennigan is absolutely right in his reading of this famous passage. Congratulations.

Misleading Instructions: I try again

No posts yesterday. It was my birthday and the family took me to the races at Musselburgh, near Edinburgh, and dinner at Guiseppe's il Positana in Newington Edinburgh. At my age, birthdays are celebrated by people like no others...

A correspondent asks me how to find my paper : "Adam Smith and the invisible hand: from metaphor to myth", as have others on occasion.

Apologies, if you found my instructions unclear.

It is accessed from the Home Page on this site (the one you open when clicking on the site).

Near the top of the page there is a paragraph in Red.

Read through that and follow the invitation to 'click here'.

That opens a list of items. Scroll down until you reach this: "Letters to Editors and Articles"

You will find a list of items, including:

"The History of Economic Thought 40th Anniversary Conference at University of Edinburgh: Adam Smith and the Invisible Hand: from metaphor to myth: A Lecture by Gavin Kennedy".

Click on that - that's it!

I hope you find it interesting. Any comments? mail me at gavin At NEgweb DoT com.

Adam Smith on Exchangeable Value

Art Carden, assistant professor at Rhodes College, who teaches, inter alia, 'Classical and Marxian economics', and posts today on “David Harvey on Karl Marx”, on the authoritative and excellent economics blog, Division of Labour, HERE:

Less interested in Karl Marx, I noted this interesting paragraph:

“In fairness to Marx, he derived his erroneous value theory from Adam Smith and David Ricardo, but in fairness to the classical economists, they did not try to build an entire theory of history and social change on so sandy a foundation as the proposition that labor alone is the source of value. As I read Adam Smith, his endorsement of the "obvious and simple system of natural liberty" does not derive from his value theory".

Comment
In this statement we see the drift in meaning that led to both the Ricardo-Marx error, which was picked up by the modern economists on its own terms and continued the drift, until we are no longer talking about the same things.

Smith’s ‘exchangeable value’ became ‘value’, as if the two are synonymous and value is something ‘intrinsic’ (a misreading that even Oscar Wilde didn’t realise).

Admittedly, Smith wrote a muddled presentation of his basic ideas and it takes some effort to disentangle them. I have a draft paper on my disentanglement which I must finish sometime soon.

The idea of ‘exchange value’ is central to Adam Smith’s analysis of commercial society and how it evolved from the time when humans were predominantly, even exclusively, gatherer-hunter/scavengers. There was no idea of property except in the ability of humans to ‘pick fruit’ (which Smith erroneously dismissed as ‘hardly imployment’ in his Lectures on Jurisprudence, 1762-3) and to track and kill animals, in the forest and open land owned by nobody. There were no landlords or stock holders, or tax collectors, with whom they shared the fruits of their gathering or hunting.

Smith looked for a basis by which the products of the labour of people could be exchanged freely among them (summarized in his ‘beaver and deer’ parable in Lectures on Jurisprudence 1762-3, and reproduced in Wealth Of Nations, 1776).

He deduced exchange value as being the labour time taken to acquire products for exchange. It was in exchange that products acquired their exchangeable value; outside exchange, products did not have value in any intrinsic sense. The word ‘exchangeable’ is important because it defines value related to the act of exchange, and not to some notion of common views of their ‘intrinsic’ value. That was the extent of his pure theory of exchange value in the first age of mankind.

But beyond the forest, when humans settled in permanent locations and when ‘herding’ wild animals and gathering plant food in relative abundance from accidentally or deliberately farming the land, property was extended from the labour of people to the ‘ownership’ of land and all that was on it. With property human life changed for ever.

It did not matter whether property was held in common by the band or larger tribe, or ‘nation’ of tribes, or by the head of a family, or by private individuals. Property was held by the ‘what we have, we hold against all comers’ basis, which became the first ‘law’ of human society, enforced by those strong enough to enforce it.

In those parts of the world where property emerged in land and resources, separate from the labour of producing them, about 11,000 years ago initially, and then spread, the new property relations set the necessary conditions for permanent settlements with their growing populations able to reap (unequally) the benefits of growing productivity through exchange relationships fostered by specialisation and divisions of labour.

The singular characteristic of these early property-based societies was that the products of labour were shared among those who laboured and those who owned property. Smith acknowledges this important difference between the beaver-and-deer hunters’ parable, with which he opened his analysis of exchangeable value. The beaver hunters, etc., now had to share the exchange value of their prey with the owner of the land on which the beaver were found, and the owner of the wherewithal by which he sustained himself and his family by the necessary subsistence and tools, themselves extracted from somebody’s, or some tribe’s, claim to the ownership of land and natural resources.

Unfortunately, in jumping from one mode of subsistence (primitive hunting in the ‘open’ land) to another (property in labour, land and resources), a process that took millennia, not decades) to get underway, and more millennia to spread across Europe ad the Near East, and those other parts of the world, though not necessarily contiguous in either time or territory, Smith, without the basic knowledge common today in an Anthropology 101 class or text, in compressing the process, he constantly gets into a muddled exposition, switching back and forwards between what we now know were different periods with their much varied local circumstances.

Hence, Wealth Of Nations on exchangeable value is a challenge to disentangle, much like primitive, ancient maps of the world, where imagination often informed their authors, but which are barely recognizable to a modern eye, familiar with maps of the entire planet in different forms of projection, and which are embedded in instantly recognizable shapes and proportions when shown North to South.

Smith’s exchangeable value for commercial society specifically includes the requirement that the (much higher) product of labour is shared between the three owners with their claims to their shares: the labourer, the owner of land, and the owner of stock (formed from resources for subsistence and tools). From this point on, for these people, but not for those who stayed as hunter-gatherer-scavengers, labour alone ceased to have the sole claim of the (lower) product of labour.

Smith’s clear acknowledgement of the significance of these changes, and, what was in effect, if not stated too clearly, his repudiation of the labour theory of early exchange value, became and remains one of the most enduring misreading of Wealth Of Nations since it was published in 1776 (and of much older vintage than the modern myth of the ‘invisible hand’, which only dates from the 1950s).

This problem today was prompted too by the misreading of Smith’s statement about ‘toil and trouble’ being the 'real cost' (or value to the indvidual)of anything, which can be read as a return to labour as the source of exchange value (clearly is demarked elsewhere in Wealth Of Nations as determined by Market prices, which may coincide or be close to Natural prices), when in fact it relates to one of the benefits of the division of labour, namely that by acquiring products through exchange, the receivers save themselves the ‘toil and trouble’ of making those products themselves. In short, it is a psychological advantage of a commercial economy from the plethora of products to which people have access, should they choose to pay (or have) the market (money) price for them. It was not a labour theory of value!

A last point where Art Carden is right: Adam Smith’s ‘endorsement of the "obvious and simple system of natural liberty" does not derive from his value theory’. Theories of Natural Liberty come from the philosophical theory of ‘Natural Law’, from such philosophers as Grotius, Pufendorf, Carmichael, and Hutcheson, which Smith learned while a student at Glasgow University, where Natural Law jurisprudence was taught to him and which his writings are sprinkled with throughout. In turn, these ideas are often confused with laissez-faire, but that's another story...

A Good Case for Markets Spoiled by Misuse of Quotations

Walter E. Williams posts (18 February) ‘Economic Miracle’ in The Patriot Post (‘the conservative journal of record’) HERE:

“Adam Smith, the father of economics, captured the essence of this wonderful human cooperation when he said, "He (the businessman) generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. ... 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." Adam Smith continues, "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. ... By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it." And later he adds, "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."

If you have doubts about Adam Smith's prediction, ask yourself which areas of our lives are we the most satisfied and those with most complaints. Would they be profit motivated arenas such supermarkets, video or clothing stores, or be nonprofit motivated government-operated arenas such as public schools, postal delivery or motor vehicle registration? By the way, how many of you would be in favor of Congress running our supermarkets?”

Comment
While agreeing with much of the content of Walter E. Williams’s article, I am bound to say that he also exposes that he has never read Wealth Of Nations from which he quotes.

This is obvious from his lack of context to his quotation of the famous and sole ‘invisible hand’ paragraph from page 456 in Book IV of Wealth Of Nations, which doesn’t quite say what he alleges it does. But leave that alone. It is an error that many (most?) people make and I have answered it many times on Lost Legacy.

However, he then says: ‘And later he adds, "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”, which is on page 27 of Book I, that is 235 pages earlier than page 456, and is by no means ‘later’. Clearly, Walter has never opened a copy of Wealth Of Nations, otherwise he would not have made such a crass error.

Is this important? Well, it is indicative that Walter relies on ‘popular’ versions of the misuse of The Metaphor, which are usually quite wrong.

I have read prominent economists, of unimpeachable standing, join the invisible hand paragraph (there is only one in the entire Wealth Of Nations written by Adam Smith) to the ‘butcher, brewer, and baker’ paragraph as if they appear together.

Even then, they miss the point Smith makes in the ‘butcher, brewer, and baker’ example: Smith advised those seeking their dinner to appeal not to their own self-interests, but to address themselves to the self-interests of the ‘butcher, brewer, and baker’. In short: you serve your own self interests by serving the self interest of others, which is not how most economists conclude from what is plainly written there.

But, this paragraph has nothing to do with The Metaphor of ‘an invisible hand’ as Smith used it, nor anything to do with how the numerous authors before and contemporary with Smith used it (download my paper, Adam Smith and the invisible hand: from metaphor to myth, from Lost Legacy’s home page, in red).

Another 'As If' Attribution

Andrew Rosenblum writes: “Two distinguished economists try to revive Keynesianism—true Keynesianism”, in a review of “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism”
By George A. Akerlof and Robert J. Shiller, (Princeton University Press) in The New York Observer: HERE:

“In their account of the Great Depression, Messrs. Akerlof and Shiller portray Keynes as the true “centrist,” with actual socialists to his left arguing for the government to take over private enterprise and assign jobs to the unemployed. Meanwhile, critics on the right clung to Adam Smith’s hallowed economic model: They insisted that through balanced budgets and limited government regulation—“as if by an invisible hand”—private markets would create a job for any worker willing to get paid less than he produced.”

Comment
Another assertion that “as if by an invisible hand” was part of “Adam Smith’s hallowed economic model” – whatever that means – adds ‘as if’ to The Metaphor as if has validity!

Even then, Maynard Keynes was not that ignorant. His assault on ‘classical economics’ was more on his contemporaries, who believed that ‘laissez-faire’ was a judicious policy, and was not an historically accurate attribution to Adam Smith (who never advocated laissez-faire, or mentioned the words).

Not having read George A. Akerlof and Robert J. Shiller’s “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism”, I cannot comment on the validity or veracity of its content. The 'as if' error may well be the reviewer's, Andrew Rosenblum's sole responsibility.

A Myth Inside a Myth

Robert Stavins, writes The Myth of the Universal Market in Huffington Post, HERE:

“Instead, self-interested producers and self-interested consumers meet in the market place, engage in trade, and thereby achieve the greatest good for the greatest number, as if "guided by an invisible hand," as Adam Smith wrote in 1776 in The Wealth of Nations. This notion of maximum general welfare is what economists mean by the "efficiency" of competitive markets.”

Comment
Er, no. Adam Smith did not use the qualifier ‘as if’ in front of “guided by an invisible hand”. In fact he did not write ‘guided by’: he wrote ‘led by’.

Neither did he address his single use of The Metaphor of 'an invisible hand' to “self-interested producers and self-interested consumers meet in the market place, engage in trade”. At least, I am referring to the Adam Smith born in Kirkcaldy in 1723 whose book, An Inquiry into the Nature and Causes of the Wealth Of Nations, was published in 1776.

Robert Stavins, writing on “The Myth of the Universal Market” may care to note he is ascribing to the Kirkcaldy Adam Smith a widespread, but nevertheless, absolutely wrong version (a real myth!) of a much misused popular 18th-century metaphor, which modern version was invented (not too strong a word) in the 1950s by many academic economists, including some Nobel Prize Winners.

From endless repetition since the 1950s to generations of students The Metaphor is now believed to be Adam Smith’s ‘theory’, ‘concept’, and ‘paradigm’ even. It is also common to add the wholly mythical qualifier, ‘as if’, which is totally absent from Adam Smith’s single use of The Metaphor in Wealth Of Nations (see WN IV.ii.9: p 456, Oxford University Press, or, page 423, in Edwin Canaan’s 1937 edition for Random House).

Misuse of The Metaphor

Guest blogger: Bill Chu, Chair, Canadians for Reconciliation,
writes to Chinese in Vancouver Blog HERE:

“For those who emigrated from China, their perspective on the homeless should be a bit better. However in its shift to capitalism, China inherits all its viruses. The prime one being the assumption that an individual in pursuing his own self-interest will promote the good of his community as a whole through a principle called “the invisible hand”. In Adam Smith’s words, a free market will work, as if guided by “an invisible hand”, for the public interest and common good.”

Comment
I have long been worried that a common Chinese approach to the history of economic ideas has been to use the existing orthodoxy in respect of Adam Smith as the authentic body of ideas by which he and events should be judged, for or against.

Chinese leaders speak of the invisible hand metaphor as if Friedman and others are right to describe it as a theory by which one’s self-interest, also known (incorrectly) as selfishness, promotes “the good of his community as a whole”.

Bill Chou is a clear example of this, though in Bill’s case he criticises the so-called ‘principle’. But Bill is completely incorrect to say that “In Adam Smith’s words, a free market will work, as if guided by “an invisible hand”. Adam Smith never said “as if guided by “an invisible hand”; the ‘as if’ is a 20th century attribution to Smith’s 18th century words.

Moreover, Adam Smith did not link The Metaphor (it deserves capitals give its modern infamy) of ‘an invisible hand’ to the ‘free market’. That too is a 20th-century attribution by modern economists from the 1950s onwards.

When Smith used The Metaphor in Book IV of Wealth Of Nations (the only time he did use The Metaphor in Wealth Of Nations!) he was not writing about free markets, or even about markets; he was writing about why some, but not all, merchants who were risk-averse, because they were concerned about ‘their own security’, when choosing between the monopolised colonial trade with the British colonies in America and their own domestic trade in Britain.

Check it out; read the whole Chapter 2 of Book IV: ‘Of Restraints upon the Importation from foreign Countries of such Goods as can be produced at Home’, pp 452-72 – The Metaphor is used on page 476 – in the Oxford University 1976 Edition (and pages 420-39 in the Edwin Canaan 1937 edition).

Bill's other comments on the attitude of some new Chinese migrants into Canada towards the homeless is a timely reminder that negative attitudes to the less fortunate is regrettable - 'there but for fortune go I'.

Apologies: My Angry Rant Against Nonsense

Nicholas Jones, an ‘Analyst, Bourbon & Bayonets’, writes “Between a Rock and a Hard Place” on Oxbury Publishing HERE:

“All in all, what I’m trying to say is that an economy whose growth is based on liquidity expansions cannot last. It’s just like Adam Smith’s invisible hand. Our economy is not running at its equilibrium point and the further we get from that equilibrium, and the longer we stay there just means the invisible hand starts to push harder and harder. Natural forces are trying to push our current economy back to equilibrium. The excessive growth was the result of an expansion of liquidity (inflation), and in order to get back to equilibrium, liquidity must do the exact opposite and contract (deflation). So the question of do we inflate or deflate becomes a question of if we can’t inflate we deflate. The question of policy is do policy makers try and inflate or let it deflate? Let’s look at what happens in each scenario.”

Comment
Where did Nicholas Jones get his new ‘theory’ of the metaphor of ‘an invisible hand’, which has ‘it’ pushing (what?) ‘harder and harder’ (where?)?

Or, for that measure, where is his ‘theory’ of equilibrium from and why are ‘natural forces’(what happened to the metaphor?) only pushing ‘back’ (but not away)?

And (hopefully) sensible people pay good money for this ‘analytical’ advice?

Adam Smith, what nonsense is spoke in your name!

On Homo economicus

'Oz Andrew’, a correspondent writes a ‘Comment’ to my post "Evolution Challenges Homo Economicus", Friday last (13 February):

“As for the rational homo-economicus model itself, it will be staying in place until someone comes up with a superior and complete alternative. No amount of data contradicting the model can change that.”

To which I agree completely and replied:

“Homo economicus cannot be improved; it is just plain wrong as it pretends to model behaviour in an economy representative of the real world. It isn't. It models behaviour in an imaginary economy that does not exist.

It's like Des Cartes' model of the solar system with 72 concentric circles, which Adam Smith discusses in his "History of Astronomy" (1744-?).

That is the point I tried to make.

Unlike the solar system for which a better model was developed which can predict eclipses ten, a hundred, a million years hence. Homo economicus cannot predict anything outside of the assumptions of the model.”

This week I am working on my paper “The Alleged Religiosity of Adam Smith: evidence from the History of Astronomy and Moral Sentiments” for presentation in the summer, and I am checking references in Moral Sentiments, and I came across this short note by Adam Smith on the other-worldliness of mathematicians, which I think says a great deal about the continuity of their temperaments through the ages:

“Mathematicians, on the contrary, who may have the most perfect assurance, both of the truth and of the importance of their discoveries, are frequently very indifferent about the reception which they may meet with from the public. The two greatest mathematicians that I ever have had the honour to be known to, and, I believe, the two greatest that have lived in my time, Dr. Robert Simpson of Glasgow, and Dr. Matthew Stewart of Edinburgh, never seemed to feel even the slightest uneasiness from the neglect with which the ignorance of the public received some of their most valuable works. The great work of Sir Isaac Newton, his Mathematical Principles of Natural Philosophy, I have been told, was for several years neglected by the public. The tranquillity of that great man, it is probable, never suffered, upon that account, the interruption of a single quarter of an hour. Natural philosophers, in their independency upon the public opinion, approach nearly to mathematicians, and, in their judgments concerning the merit of their own discoveries and observations, enjoy some degree of the same security and tranquillity.”

Smith goes on the compare mathematicians with other men of letters:

"The morals of those different classes of men of letters are, perhaps, sometimes somewhat affected by this very great difference in their situation with regard to the public.

Mathematicians and natural philosophers, from their independency upon the public opinion, have little temptation to form themselves into factions and cabals, either for the support of their own reputation, or for the depression of that of their rivals. They are almost always men of the most amiable simplicity of manners, who live in good harmony with one another, are the friends of one another's reputation, enter into no intrigue in order to secure the public applause, but are pleased when their works are approved of, without being either much vexed or very angry when they are neglected." (TMS III.2.20: p 124-5)

How true this remains I could not say, but high-level mathematicians among economists, do tend to be exclusisve among themselves, and are distant from the general public; they also have a reputation for not looking outside their windows.

They don't share the comfort of their astronomer relations, who at least see their work vindicated by observations. After 130 years of mathematicising economics, pray tell us what they have either explained about events that have past, or predicted about events which actually happened, the last a much vaunted test of a 'hard science'?

A Theorist Writes - Badly

“john joseph jay" posts (14 February) on Summer patriot, winter soldier HERE:

demise of democracy? of the nation state? the demise of the democratic nation state?

“in addition, the nation state required the birth of a man seldom mentioned anymore, let alone studied, which is indeed unfortunate, as his thought was a vital step in establishing the intellectual premises towards creating and understanding the personal and economic freedoms underpinning the democratic state, and the process by which individual decision making powered economies and political groupings. i speak of course, of adam smith. his ideas and analysis are literally, in my view, the underpinnings of the view that individuals may determine their futures without recourse to higher political structures, and that, indeed, for humanity to flourish individuals must follow their own individual paths, guided by their prescriptions and not the notions of others. adam smith coined the concept of “the unseen hand” as guiding the progress of societies, in one bold indefinable stroke obviating the need for paternalistic oversight of human affairs in politics and economics. his is a lesson apparently soon forgotten.”

Comment
An example of uniquely poor use of the English language as she is written.

It has a theatrical and affected prose style too: “the nation state required the birth of a man seldom mentioned anymore, let alone studied, which is indeed unfortunate”.

What is the science involved in a ‘nation state’ ‘requiring’ a specific birth ‘of a man’ to occur and this event occurring?

The answer is mumbo jumbo, mysticism, not science.

Adam Smith was conceived by his parents sometime in October 1722. His father was ill; he died in January 1723 (his Will is dated November 1722). Short of belief in an immaculate conception, that the future of the ‘nation state’ depended on a string of events implausibly linked to the fate of a nation or the world, is wildly improbable, and sheer hyperbole.

His was in inauspicious start; young Adam was a ‘sickly child’, tenderly cared for by his widowed mother.

“his thought was a vital step in establishing the intellectual premises towards creating and understanding the personal and economic freedoms underpinning the democratic state.”

Again ahistorical misunderstanding. Adam Smith wrote of Liberty, not democracy. He didn’t have a vote under the existing franchise in Scotland.

“his ideas and analysis are literally, in my view, the underpinnings of the view that individuals may determine their futures without recourse to higher political structures, and that, indeed, for humanity to flourish individuals must follow their own individual paths, guided by their prescriptions and not the notions of others.”

That may well be the ‘view’ of ‘John Joseph Jay’ about the most ‘mentioned’, discussed and ‘studied’ moral philosopher of all today. Never a day goes by in which Adam Smith is not written about somewhere in the world’s media – I know, I read most of it; sometimes 40 or more articles are published every day across all times zones.

“adam smith coined the concept of “the unseen hand” as guiding the progress of societies”

I won’t bother exposing this myth on this occasion. Down load from Lost Legacy's Home Page my paper 'Adam Smith and the Invisible Hand: from metaphor to myth' (clikc on the red print)

John Joseph Jay has a theory; it’s quite long and, if you are interested, you should follow the link; its, er, more than quite long.

Walk On By Those Offfering to Make You Rich

Ron Ferguson, 'an entrepreneur who has many years of experience online', writes in the Money, Finance and Free Stuff Search Blog, HERE:

“Online business Makes You Wealthy And Prosperous”

“Wealth is the most common a very familiar word throughout the world. Initially the phrase was derived from the old English word weal. Wealth carries many definitions and few of them are given by some distinguished people in the society, Adam Smith refers wealth as “the annual produce of the land and labor of the society” ‘Wealth’ refers to some accumulation of income, whether abundant or not. ‘Richness’ refers to an abundance of such income. A wealthy individual, community, or nation thus has more resources than a poor one. The opposite of wealth is destitution. The opposite of richness is poverty. Wealth can be categorized in a minor and major ways wherein wealth of a person or nation is the value of assets owned net of liabilities owed (to foreigners in the case of a nation) at a point in time.”

Comment
If an expert offers to show you how to make as much as he has made in business, common sense suggests you ask: ‘Why?’

One obvious answer is that the ‘expert’ intends to make money from showing those gullible enough to send him money for his alleged ‘know how’. But why is this more profitable for him than, presumably, continuing to make money on his own account from his online business?

In short, in the words of the song, when hearing ‘experts’ of this nature: “Walk on By”.

There’s a hint in Ron’s advertisement that almost gives the game away:

“Ron Ferguson, an entrepreneur who has many years of experience online”

But he does not say the nature of his experience – he may have had ‘many years of experience’ that showed him that it was too difficult to make money on-line - except by selling dreams to those who do not have his experience (yet) and are willing to part with money to continue dreaming.

Apart from all this, Ron slips in reference to Adam Smith defining wealth as: “the annual produce of the land and labor of the society”. Partly true, but as regular readers will know Adam Smith considered wealth as the annual produce or output 'of the necessaries, conveniences, and amusements of society’, and he did not confine wealth to the inputs of land and labour.

In short, output, not money, which in itself is a means to obtaining wealth, is not wealth.

The belief that gold and silver bullion were wealth was the major error of mercantile political economy from the 16th century onwards, which led to the non-creation of the real wealth that a county could produce by provoking wars and causing an absence of wealth for the very poor.

Finally, the above quotation from Ron is reproduced verbatim. But readers inspired to contact Ron may not notice the missing full stops, commas, and semi-colons, contained in the punctuation errors in its third 'sentence', suggesting it was written by a semi-illiterate author or an illiterate sub-editor (or both).

How to Make a Financial Crisis Worse

lMafukidze is the chairman and chief financial Architect of KM Financial Solutions, and he writes in Zimbabwe Independent (12 February) HERE:

“Freedom, the Invisible Hand to Build Economy”

“In a now famous statement Adam smith (1723-1790) said that the combination of self interest, private property, and competition among sellers in the markets lead producers “as by an invisible hand” to an end that they did not intend, namely, the well–being of society.

In his legendary book published in 1776, The Wealth of Nations, Smith had a strong conviction that a market economy was a superior form of organisation for both economic progress and advancement of human liberty.

Yes markets are imperfect and there is need to regulate these markets, but the heart of Smith’s submission stands tall and largely true in 2009, over 200 later.

For economic progress, it is important that the government enhances and safeguards business and individuals to pursue their interests and capabilities in a competitive environment.

The government should aim mainly at creating equal opportunities, and protecting freedoms. Equal opportunities and freedom to pursue one’s interests are infinitely powerful motivating forces that have powered the wealth of nations for years.”

Comment
The last thing Zimbabwe, or any other country, needs is an incorrect theory about how economies work, especially one that encourages mythical notions of ‘an invisible hand’ guiding markets, and, in this case, acting ‘as if’ it does.

The ‘as if’ is a sure give-away that the author has not read Wealth Of Nations beyond a second-, or third or more-, rate quotation from some unreliable source (Smith never used the ‘as if’ qualifier in his once-only mention of the popular 18th-century metaphor of ‘an invisible hand’; - see Wealth Of Nations, Oxford University Press edition, 1976, page 456; or page 423, Edwin Canaan, 1937 edition, Random House).

To the false laxative of 'quantiative easing' on a grand scale, adding a mythical invisible hand can only spell more trouble.

Evolution Challenges Homo Economicus

Gary Marcus, a professor of psychology at New York University, is author of "Kluge: The Haphazard Evolution of the Human Mind" (Houghton-Mifflin, 2008), tell us to: “Forget About Survival of the 'Fittest'” in Wall Street Journal, HERE:

“Evolution usually makes do with 'good enough'”

“To the extent that evolution has often been forced to make do, contemporary economics has a serious problem. A great deal of contemporary economic theory has been premised on the assumption that individual human beings are "rational agents," people capable of reliably acting in their own self-interest, assessing costs and benefits with a sure eye toward making optimal choices.

If we were really creatures that invariably acted in the interests of our "selfish genes," the so-called homo economicus or "rational man" theory would have some substance. It would make sense to try to predict the actions of the multitudes by assuming that each individual would act in the interest of his (or her) own selfish genes.

In reality, we often don't. Although any fool will instantly realize that winning $5,000 is better than $500, daily life is filled with decisions that cannot be said to be rational, optimal or otherwise maximally fit. At the micro-level, we'll drive across town to save $25 on a $100 microwave, but not to save the same $25 on a $1,000 flat-screen TV, showing both that we are blind to the cost of our own labor, and confused about the fact that money is an absolute rather than relative commodity.
The average American watches three to four hours of television a day, which does nothing for our "reproductive fitness" or even for our happiness (regular TV viewers are actually less happy than those who watch rarely, as several studies have shown). Our brains often have trouble keeping our minds on track, even when vital decisions are at stake. We procrastinate on important projects until we have too little time to complete them properly, often making careless errors as a result, and we frequently sabotage long-term goals (like living a long, healthy life) in favor of ephemeral short-term pleasures (like smoking cigarettes). Such self-defeating choices afflict even the powerful and the brilliant (witness the decline and fall of Eliot Spitzer -- or the many who lost millions by investing in Bernie Madoff).
All this matters because endeavors like economics and social policy are all built around theories about what human beings are and how they function. We allow consumers access to credit cards, for example, because we assume (despite ample evidence to the contrary) that they will be smart enough to balance their short-term needs as consumers with their long-term capacity to maintain a fiscally sensible reality.

The new discipline of behavioral economics is aimed at addressing these issues, but is not taken seriously enough. Even now, in the eye of the worst fiscal storm in recent memory, we trust citizens to do the "right thing," without factoring in the quirks of our evolved psychology.

As we deal with the current crisis and in the years to come, it will behoove us as a society to recognize that evolution equipped us not with foolproof, steel-trap rational minds, but something more like a "kluge," a clumsy and inelegant mental patchwork that is good enough to get the job done, but far from perfect.

If humans were truly the fittest possible creatures one could imagine, the rational-man model would make sense. But the "fittest" that survived are not necessarily the fittest possible. We are flesh and blood creatures, filled with cognitive quirks that are the detritus of evolution. If we are to move past perpetual cycles of fantasy-driven booms followed by devastating busts, we must recognize evolution's limits, and confront them head-on.”

Comment
I am a regular critic of Homo economicus and rational agents, so I feel able to offer a correction to the statement from Gary Marcus, without being misunderstood:

“A great deal of contemporary economic theory has been premised on the assumption that individual human beings are "rational agents".

The correct statement is slightly, but importantly, different. Gary Marcus should have written:

“A great deal of contemporary economic theory has been premised on the assumption that individual agents in their theoretical models are "rational agents".

There can be no pretension that in the real economy individuals act as ‘rational agents’, nor that ‘Homo economcus’ is other than a theoretical abstraction first postulated in the late 19th century when the first steps were made by ‘smart’ economists to abandon ‘political economy’ in favour of mathematical make-believe.

Gary Marcus is absolutely correct in the general tenor of his article. Myths of ‘rational agents’ being representative of human beings are now so firmly entrenched in our discipline (often with a mixture of enthusiastic pride and disdainful put-downs to those who protest that far too much is concluded about so much of economic life from too narrow a connection with reality).

Any study of evolutionary theory, and of human history (and pre-history!) shows how varied are any species in their behaviours in their multiple environments, including at, and beyond, their normal localities.

Indeed, natural selection shows many biological cul-de-sacs, so to speak; social evolution among humans shows as many ‘dead-ends’ in social forms, of which the large stone detritus strewn around Europe and beyond, and small stone artifacts, cave paintings, and ‘grave goods’, strewn everywhere else, are strong reminders.

The ‘religion’ of rational man is due for a quiet burial. It offers little as a reliable explanation of the current crisis (it caught its exponents ‘off-side’, as we say in football). Whether ‘behavioural’ economics is the answer remains to be seen, but it certainly looks like a step forward.

[I have ordered Gary Marcus's "Kluge: The Haphazard Evolution of the Human Mind" and shall report in due course on its merits.)

Selfishness Is Never a Smithian Virtue

Theodore Roosevelt Malloch, author of Spiritual Enterprise: Doing Virtuous Business (Encounter Books), writes in American Spectator this week, ‘The Deeper Roots of Our Financial Crisis’ (11 February), HERE:

“Capitalism, the goose that laid our golden eggs over the past decades, brings about immense transformation, particularly in its globalized form. It is in nature as Adam Smith reminded us in his first book, The Theory of Moral Sentiments, written long before his better-known work, The Wealth of Nations, all about what he called "the moral sentiments." He himself distinguished between self-interest, which he promoted, and greed. Self-interest is both good and essential. Greed is always wrong and bad. The key difference is the former uses self-restraint, which obviously requires a moral code and a moral compass. There are moral preconditions in a market economy: the sentiments of sympathy, benevolence and compassion, of approval; disapproval and indignation, which underpin the social order and make it possible to engage in business in the first place. Human beings are not just profit-maximizers. They have moral scruples, personal commitments and the desire for happiness. These set limits to their plans for personal profit, and also stimulate them to pursue profit in ways that honor their higher values and generosity. Many companies, large and small, exhibit these; they live and conduct business by these values, in every industry and on every continent. I collected sixty examples in my recent book but there are thousands upon thousands.”

Comment
Adam Smith also taught his course in ‘Ethics’ (moral philosophy) in his public Edinburgh Lectures, 1748-51, and at Glasgow University, 1751-64. Much of their contents were written up as The Theory of Moral Sentiments (1759). It is also important to realise that he also taught his Lectures on Jurisprudence, which contained elements of his ‘political economy’ and parts of which were repeated verbatim in Wealth Of Nations (1776 – though essentially completed c. 1763-4).

I mention this to be sure that Theodore Roosevelt Malloch does not accidentally give the impression that Smith’s moral philosophy was in some sense an ‘early work’ that was different in moral tones from his Wealth Of Nations, published some years later. Smith’s Work, essentially, a part of his oeuvre was not a ‘second thought’ as exponents of the myth of the 19th-century, ‘Das Adam Smith problem’, still tout seriously today (I heard a paper claiming it to be a continuing problem in 2008!).

Having said this, I congratulate Theodore on his assessment of Smith’s clear understanding, and repeated statements of the difference between self-interest and selfishness.

This is the second time today that I have offered congratulations to an author on this subject, which certainly makes a change from almost daily having to chastise authors for eliding the two quite separate motivations of self-interest and selfishness, and worse, attributing the erroneous elision to Adam Smith.

Smith didn’t ever get confused on this matter. Those authors – sad to say, many of them economists – who do so, confuse Adam Smith with a predecessor, Bernard Mandeville (1734), whom Smith criticised in Moral Sentiments as ‘licentious’, and they exhibit the ignorance of the Hollywood script writer who had Gordon Gecko mouth the savage words, ‘greed is good’, or perhaps, like Alan Greenspan of the Ayn Rand school of selfishness, misread what Adam Smith actually wrote, perhaps relying on Ayn to be authentic.

That misleading ideas about Adam Smith are not unanimous, encourages Lost Legacy in its not so-lonely battle against the epigones.

Dipanka Dasgupta's February Lost Legacy Prize

Dipankar Dasgupta, former professor of economics, Indian Statistical Institute, , in The Telegraph, Calcutta, India, 12 February, HERE:

‘The Wickedness Theory’

“Greed, of course, is a strong expression, bearing as it does the connotation of sinful behaviour. To the extent, though, that one is sitting on judgement against the background of market-driven societies, a paradox of sorts seems to arise. In this context, one cannot fail to recall one of the most frequently quoted sentences from Adam Smith’s Wealth of Nations: “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.”

Smith, of course, may not have had market economies alone in his mind when he wrote these lines. It was a broader statement, indeed, for he was explaining a natural propensity for barter among civilized human beings. The latter acquire from others objects for their sustenance not by brute force, but through exchange based on mutual consent. Moreover, the consent in question is guided by self-interest. Or, as Smith points out, “Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer....” (One wonders, of course, if British colonial rule conformed to Smith’s perception of civilized behaviour.)

While Smith’s notion of self-interest cannot be identified with greed by any means, the dividing line between the two concepts turns imperceptibly thin once we move on to market-driven economies or capitalist societies. The driving force underlying the capitalist mode of production happens to be profit and, even without Marx’s insight, one ought to be able to appreciate the fact that more profit is necessarily preferred to less. Or, to link it to Smith’s wisdom, a capitalist’s self-interest lies in profit-making, and it is quite pointless to set an upper bound on the volume of profit that capitalist enterprises might desire. When an excess of revenue over cost constitutes the bull’s eye, the larger the excess, the happier is the man taking his aim.”

Comment
There is much else in Dipankar Dasgupta’s article (follow the link to read it). I praise Dipankar for his (?) appreciation of the true conclusion from Adam Smith’s famous paragraph of ‘the butcher, the brewer, and the baker’, which is about the ‘propensity to truck, barter, and exchange’ for mutual advantage, and not an assault of the moral behaviour of benevolence, as some badly informed people continue to repeat, possibly because they read only the short quotation and not the second chapter of Wealth Of Nations.

But Dipankar avoids that error. He also avoids the crass error (not too strong an expression, because the error is grossly crass) in confusing Adam Smith’s self-interest with selfishness. However, I do not agree that the distinction between selfishness and self-interest is “imperceptibly thin” in capitalist societies (a different form of market-driven society to that observed by Smith in mid-18th century Britain), particularly as Dipankar sees the profit motive as being the essential trigger for the change.

The characteristic difference in markets undergoing societal changes is that activities which begin as highly profitable tend to become less so as new entrants into those markets arrive and through competition drive down the rate of profit (I discussed this on Lost legacy recently). Capitalists engage in ever finer divisions of labour, and the outsourcing of inputs in longer supply chains, to drive down unit costs, which means price reductions for consumers and rises in their real incomes, while growing employment drives up their money incomes at the expense of declining profits.

The notion that there is an ever lasting rise in profit rates for bloated capitalists (more like salaried managers with share options, and dividends for shareholders, the majority of which are pension funds) is mythical, except in the current ‘good thing’ (derivative innovators) where large earnings attract finance specialists who drive down bountiful profits in time, until the next ‘good thing’ arrives. There is also the inevitable ‘bust’ cycle that ends every boom and bubble.
All this is despite individuals craving ‘more’ against the realities of the eventual ‘less’. And it is this psychological ‘delusion’ that keeps the economy ticking over (it keeps soldiers going in the heat of battle – ‘it won’t happen to me’…).

Technological possibilities are not ending; new ‘good things’ are on the horizon.

Smith puts it well:

“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.ii.10: p 183)

And Dipankar Dasgupta gets these thought mostly right. It is great to see an Indian economist understands these matters better than the majority of mainstream US and UK economists.

For this article Dipankar Dasgupta is awarded February's Lost Legacy Prize.

To Predict It Is Necessary to Know Your History

Dani Rodrik, Professor of Political Economy at Harvard University’s John F Kennedy School of Government, writes in the Business Standard (India) HERE:

“Those who predict capitalism's demise overlook its historical malleability.”

“Capitalism is in the throes of its most severe crisis in many decades. A combination of deep recession, global economic dislocations, and effective nationalization of large swathes of the financial sector in the world’s advanced economies has deeply unsettled the balance between markets and states. Where the new balance will be struck is anybody’s guess.

Those who predict capitalism’s demise have to contend with one important historical fact: capitalism has an almost unlimited capacity to reinvent itself. Indeed, its malleability is the reason it has overcome periodic crises over the centuries and outlived critics from Karl Marx on. The real question is not whether capitalism can survive — it can — but whether world leaders will demonstrate the leadership needed to take it to its next phase as we emerge from our current predicament.

Capitalism has no equal when it comes to unleashing the collective economic energies of human societies. That is why all prosperous societies are capitalistic in the broad sense of the term: they are organized around private property and allow markets to play a large role in allocating resources and determining economic rewards. The catch is that neither property rights nor markets can function on their own. They require other social institutions to support them.

So property rights rely on courts and legal enforcement, and markets depend on regulators to rein in abuse and fix market failures. At the political level, capitalism requires compensation and transfer mechanisms to render its outcomes acceptable. As the current crisis has demonstrated yet again, capitalism needs stabilizing arrangements such as a lender of last resort and counter-cyclical fiscal policy. In other words, capitalism is not self-creating, self-sustaining, self-regulating, or self-stabilizing.”

“The history of capitalism has been a process of learning and re-learning these lessons. Adam Smith’s idealized market society required little more than a “night-watchman state.” All that governments needed to do to ensure the division of labour was to enforce property rights, keep the peace, and collect a few taxes to pay for a limited range of public goods.”

“The share of public spending in national income rose rapidly in today’s industrialized countries, from below 10 per cent on average at the end of the nineteenth century to more than 20 per cent just before World War II. And, in the wake of WWII, most countries erected elaborate social-welfare states in which the public sector expanded to more than 40 per cent of national income on average.”
“The lesson is not that capitalism is dead. It is that we need to reinvent it for a new century in which the forces of economic globalization are much more powerful than before. Just as Smith’s minimal capitalism was transformed into Keynes’ mixed economy, we need to contemplate a transition from the national version of the mixed economy to its global counterpart.”

This means imagining a better balance between markets and their supporting institutions at the global level. Sometimes, this will require extending institutions outward from nation states and strengthening global governance. At other times, it will mean preventing markets from expanding beyond the reach of institutions that must remain national. The right approach will differ across country groupings and among issue areas.

Designing the next capitalism will not be easy. But we do have history on our side: capitalism’s saving grace is that it is almost infinitely malleable.”

Comment
Dani Rodrik is an excellent economist and thoughtful commentator, and I have considered his contributions to international debate as constructive. I have to make some fairly basic points about his post in the Business Standard (you should read his article in full by following the link).

He starts off well, even prophetically: “Those who predict capitalism's demise overlook its historical malleability”, which is well worth many current commentators reading and thinking about, who, jumping the gun, predict the imminent demise of all forms of capitalism, much of it in the form of the State-Capitalism most of us live in.

Those who approach such a prospect with joyful hope are going to be disappointed.
As I was disappointed to read Dani’s paragraph:

‘Adam Smith’s idealized market society required little more than a “night-watchman state.” All that governments needed to do to ensure the division of labour was to enforce property rights, keep the peace, and collect a few taxes to pay for a limited range of public goods.’

This is a crude caricature of Adam Smith’s observations about the commercial society he lived in, and what he proposed for it as it increased the annual output of the ‘necessaries, conveniences, and amusements of life’ and, not forgetting, as it ‘spread opulence’ towards the labouring poor. His time-scales somewhat longer than a politician’s electoral horizon – even longer than a dictator’s life expectancy.

Dani uses the well-worn phrase, “night-watchman state” in association with the name of Adam Smith, as if the two go together in an eternal association. Strange! Given that the “night-watchman state” was uttered first by Ferdinand Lassalle, the fire-brand, 19th-century State Socialism, when he was mocking the laissez-faire politicians of the right for fiddling for penny profits in business and ignoring (what was obvious to socialists like Lassalle and his ilk) the far greater power and authority that would come from gaining controlling the State. No piddling capitalist ever controlled as much wealth and command over resources of the most petter politician!

But Adam Smith’s ideas were not limited by visions of a “night-watchman state”.

Writing in the mid-18th century, Smith’s agenda for government was already extensive, and promised by inevitable osmosis a far from insignificant state employing ‘night watchmen’.

At the time, defence was already a major expense of government; it did not diminish in the coming century, with its global reach of the Royal Navy and a military reach to match.

The growth of the expense of justice was already threatening to reach beyond the relatively passive bounds of local magistrates, especially as the list of capital crimes grew inexorably beyond the capacity of jails and ship’s hulks to hold those not hanged, so much so that the expense of founding a new colony in New South Wales was undertaken in 1788.

Smith’s agenda for public works and public institutions that ‘facilitated commerce’ was so extensive that it would take near on a hundred years to build and improve the necessary roads, canals, harbours and bridges, and by then whole new projects were added to the rising financial powers of municipal governance from the industrial ‘revolution’.

In education, universal provision across the 60,000 parishes of ‘little schools’ on the Scottish model, required 60,000 school buildings, teaching staffs, libraries and furniture, plus their annual maintenance, paid for partly by the state and by parents. He even had a scheme for gymnasia for exercises and crude martial fitness.

Significantly, Smith also alluded to primitive health measures in Wealth Of Nations, worthy of the government’s ‘most serious attention’ to prevent the spread of ‘leprosy or any other loathsome and offensive disease’. It would start there and expand when dealing with other health issues considered to be ‘so great a publick evil’. (WN V.i.f.60: pp 787-88)

Similarly, policies to meet the ‘police’ obligations of Britain’s towns implied considerable municipal expenditures (and taxes) to meet the needs for night lighting, pavements, disposal of soil and rubbish, and the maintenance of law and order.

True, the total expenditure required in Adam Smith’s Britain was relatively small alongside the total expenditure that would be required in the continental United States by the time of Ferdinand Lassalle (1870s). But it was much, much more than a ‘night watchman state’.

Dani claims that Smith believed: “All that governments needed to do to ensure the division of labour was to enforce property rights, keep the peace, and collect a few taxes to pay for a limited range of public goods.”

This is journalism, echoing the 1755 paper of Smith's, but is not a proper audit of Smith's ideas by a leading economist.

I suspect that Adam Smith and ‘division of labour’ go together in the minds of Dani’s readers, but with industrialisation, the division of labour in the pin factory had been superseded by the much more significant increasing division of labour of the kind alluded to by Adam Smith in his example of the day labourer’s ‘woollen coat’ and the long and complex supply chain required to produce this simple item. (WN I.i.11: pp 22-24)

The implications of this less well-known example of Smith’s insight (how few read on past the pin factory?) has been reactivated following the ‘re-discovery’ of Allyn Young’s 1928 article, ‘Increasing returns Increasing Returns and Economic Progress’, (Economic Journal, vol. 38. 1928: pp: 527-42).

Dani anticipates that “Designing the next capitalism will not be easy”. But if the ‘next capitalism' is down to ‘human design’, I must express scepticism as to its practicality. Capitalism was not designed, though futile attempts at socialism were ‘designed’, but unfortunately did not work out for those who had to endure the experiments.

Societies can legislate for this or that form of parts of their economies; sometimes they work, and last for a while, voluntarily; most often they don’t.

Social evolution is not about design, it’s about experimenting, sometimes intentionally, sometimes unintentionally. It has ever been thus. That is why history if littered with social experiments – the pyramids, the ‘hanging gardens' of Babylon, the Great Wall of China, the Scottish clans, the French majesties, ancient Greece and Rome, the hordes of Genghis Khan, Mahomet’s promises, the Czar’s empire, and the anonymous stone-tool makers of pre-history.

Globalism does not make co-ordinated design any easier, or local initiatives more difficult.

At root, when all else is failing, the Smithian urges to ‘self-betterment’, the ‘propensity to truck, barter, and exchange’ to ‘avoid toil and trouble’, will assert themselves, no matter what else is happening, somewhere among some people, humanity will start over.

Caveat Emptor - The Quote Suspect

‘Trent’ posted ‘Maturity and Money’ on ‘Easy Simple Side Money’, allegedly (caveat emptor!) "
A place for the little guy to learn how to make a couple bucks on the side.’
HERE:

"The one absolute requirement of a money manager is emotional maturity. If you don’t know who you are, the stock market is an expensive place to find out.
- Adam Smith

I ran across that amazing quote from Adam Smith (an 18th century economist that’s often seen as the father of modern economics) the other day at the library and it’s stuck with me."

Comment
Wherever ‘Trent’ got this spurious quotation from it was not from Adam Smith (1723-90).

I suggest Trent's readers ask him to check the library he says he got it from – someone may be conning him, which in the money advice business could be fatal for his readers’ wealth.

The Misteaching of Students - I Blame Their Tutors

Three students, judging by their Blogs, which contain their essays on the same set reading, “Garrett Hardin, The tragedy of the Commons, Science, 162(1968):1243-1248”, come to erroneous conclusions about the parable of the ‘Tragedy of the Commons’ and, in passing make, reference to Adam Smith and his alleged views of individual self-interested choices and their aggregate consequences for society. These illustrate the epigones in modern teaching at work distorting Adam Smith’s legacy:

First the posts:

1 Chandana Damodaram writes HERE:

“According to the conclusions laid down by Adam Smith, all the decisions which reach the individual will in fact be the decision made for the entire society. Each individual pursues his best interest to explore the freedom of the commons so as to maximize his profit which eventually brings ruin to all. Each man is locked up in the system which forces him to increase his usage of the commons without the limit, in a world that is limited. Individual benefits through the denial of the truth of how the freedom of commons is affecting the society as a whole around him. Author refers to this as the “Tragedy of Freedom in a commons”.

2 Jim Totten writes HERE:

“In "The tragedy of the Commons" Hardin explores the inherent weaknesses of the socio-economic view (Post Adam Smith) when applied to areas of common property. Hardin argues against Smith's position that the decisions of individuals tend to be the best decision for society as a whole since each individual agent will act an a manner that increases their own benefits. Hardin argues that while Smith's "invisible hand" might have been true at some point in history it fails to hold up in modern times in the face of increased population density.”

Andrew writes HERE:

“Hardin contrasts the Tragedy of the Commons to the laissez-faire principles of Adam Smith, which state that what is good for the individual will be good for society. Examples of the Tragedy from the paper include population growth, exploitation of natural resources, and pollution of the environment. The author concludes that “the morality of an act is a function of the state of the system at the time it is performed” and that historically the only way to solve the tragedy of the commons is through regulation or through transforming the commons into private property, forcing people to take responsibility for their own actions.

I also agree that, when possible, transforming the commons into private property is the most effective way of averting the tragedy of the commons. At times in the paper I felt like the paper was more about promoting the author’s own individual beliefs on population than about actual science.”

Comment
Chandana Damodaram reports that Adam Smith said the individual sees his “best interest” as using the “freedom of the commons so as to maximize his profit which eventually brings ruin to all.”

The tragedy of the commons is not confined to a modern profit-maximisation model; herders can overgraze the commons because of the actual or anticipated overgrazing by others, who may not leave enough grass to keep their animals alive.

Children overuse the cookie jar’s contents out of wasteful eating, by not finishing their biscuits, dropping or leaving them carelessly, and so on; this has nothing to do with profit maximisation; it is the unconstrained use of a resource at zero price to them in the absence of property rights.

The tutor should point that out, gently.

Jim Totten reports that “Hardin argues against Smith's position that the decisions of individuals tend to be the best decision for society as a whole since each individual agent will act an a manner that increases their own benefits. Hardin argues that while Smith's "invisible hand" might have been true at some point in history it fails to hold up in modern times in the face of increased population density.”

This completely over states an alleged position of Adam Smith that “the decisions of individuals tend to be the best decision for society as a whole since each individual agent will act an a manner that increases their own benefits.”

Adam Smith did not make such a nonsensical statement because it equates any and all self-interested actions of people as being benign, which most certainly was not his view at all.

Smith gives over 50 examples in Books I and II of Wealth Of Nations of examples to the contrary of the above alleged assertion:

WN: BK I: 40; 43; 51-2; 77; 78; 79; 80; 84; 89; 90; 91; 95; 96; 106; 111-12; 115; 116; 124; 125; 126; 135; 136; 137; 139;140; 141;142; 143; 144; 145; 146; 151; 152; 153;154; 156; 157; 158; 160; 163; 171; 174; 266-7 [47]; BK II: 285; 302-03; 304-05; 308; 310-17;321; 323-24; 326; 339-42; 344; 346.

Will Jim's tutor make this clearer so that his students are well informed? Or is the tutor the source of such errors?

Which raises the question as to where tutors, including Garrett Hardin, got these ideas from about Adam Smith?

If Hardin ‘argues that while Smith's "invisible hand" might have been true at some point in history it fails to hold up in modern times in the face of increased population density’, he almost certainly is wildly wrong.

The myth of Smith’s use of the metaphor of the invisible hand never applied as ‘true’ or ‘false’ – it was an remains a literary metaphor. As Adam Smith said of metaphors, while discussing Shakespeare’s use of them: they were 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’. (Lectures on Rhetoric and Belles Lettres, p 29, 29 November 1763, ed. J. C. Bryce, Liberty Fund, Indianapolis).

Andrew asserts another false conclusion of Adam Smith: “Hardin contrasts the Tragedy of the Commons to the laissez-faire principles of Adam Smith, which state that what is good for the individual will be good for society.”

Whatever Hardin contrasts with laissez-faire, they have no relevance for Adam Smith who did not hold to a laissez-faire stance on how commercial societies worked, or ought to work. Smith was not a laissez-faire ideologue at all. That assertion confuses Smith with some of the French Physiocrats (1760-66) who did advocate laissez-faire; the plain fact remains that Adam Smith did not.

Scroll down a few posts on Lost Legacy to Monday's post where I rebut the erroneous mid-19th century notions, endlessly repeated through to the 21st century, about Adam Smith and which are not based on a close reading of Wealth Of Nations (or see Gavin Kennedy, Adam Smith: a moral philosopher and his political economy, 2008, Palgrave Macmillan).

The notion that Smith said “that what is good for the individual will be good for society” is a variation on what Jim Totten says above and to which I have responded.

However, I did agree with Andrew’s accurate assessment of Hardin’s paper that “At times in the paper I felt like the paper was more about promoting the author’s own individual beliefs on population than about actual science.” [A sure sign of a wide-awake student who might go far! I hope his tutor notices his early talent]

Overall, these three short tutorial essays by these three students provides an insight to the continuing harvest by modern economic teachers of new recruits to the ahistorical understanding of Adam Smith’s legacy and the perpetuation by the epigones, including by those at the very top of our discipline, of myths about Adam Smith to the detriment of general understanding of economics and a slight upon the Adam Smith born in Kirkcaldy in 1723.

Readers may download my paper: "Adam Smith and the Invisible Hand: from metaphor to myth" from Lost Legacy's Home Page (click on the red notice)

A Blogger Promises to Change the 'Entire System' - World Waits With Baited Breath!

A Blogger, ‘Heroesall’, on Alternet.org writes a bit of sense with a large amount of nonsense HERE:

“I’ve said it before, but it bears repeating: the utopian free market doesn’t exist. It can’t exist. It’s based on a mis-interpretation of Adam Smith and what John Cleese might call the blinkered, philistine, pig-ignorance of economists, blithely holding on to abstract concepts that have no relationship to the real world. So we have to stop basing all of our financial decisions on what might happen if those free market fairies really existed, and start basing our decisions on what happens here on Planet Real.”

And:

“It’s also a very good idea to direct some of the bailout billions towards calming the housing crisis in the US. If governmental power and billions of dollars can’t stop people being turfed out of their homes while CEOs ride the cash wave, then it should be blatantly obvious to anyone with more than 3 brain cells to rub together that our economic system no longer serves the common good and should be replaced entire. I’ve got a few suggestions there, which I’ll talk about in coming weeks.”

Comment
Yes, the ‘utopian free market’ does not exist. Whether it “can exist” or “can’t exist” is a completely different question, with many different answers.

As for “free market fairies”, I have some sympathy with ‘Heroesall’, having to deal almost daily with the mythical body part of ‘an invisible hand’ here on Lost Legacy.

Old ideas and beliefs from the ancient cult of Mercantile Political Economy still dominate much of world trade, with their pathological ‘jealousy of trade’ (David Hume’s evocative description of the condition), and the sectional instincts of protectionism, common tooin the so-called 'free-market' economies of the USA and Europe.

I am not sure that ‘Heroesall’ is coherent on ‘Planet real’ (by which she means her set of beliefs, which may or may not be as fanciful as what she criticises). Her language is not encouraging for readers who look for answers from her:

“it should be blatantly obvious to anyone with more than 3 brain cells to rub together that our economic system no longer serves the common good and should be replaced entire.”

Wow! ‘Heroesall’, able by self-affirmation to “rub together” (an unusual metaphor for the workings of the human brain) more than “three brain cells, intends to “replace” the “entire” “economic system” within which billions of us go about our lives.

I am impressed, to say the least, and scrolled down the read more about what was to replace our “our economic system” and, as important, exactly how this would be done, but alas, the post ended there with the cop-out line, that ‘Heroesall’ is going to reveal her “few suggestions”, about which she’ll “talk about in coming weeks”.

But can the world wait for a “few weeks” to hear about how the “entire” system is changed?

I think there is little substance in “Heroesall’s” more than ‘three brain cells’ master plan to change everything, everywhere. A clue to this judgement comes in the sentence, quoted above:

“If governmental power and billions of dollars can’t stop people being turfed out of their homes while CEOs ride the cash wave…”

It may have escaped her notice that her defining moment for change in the recognition that people have been and are “turfed out” of their homes for all kinds of reasons throughout booms as well as busts, and would continue to be so in any conceivable economic system.

But worse, billions of people do not have anything like the relative luxury of the worst housing in the USA, let alone the average quality found there, in places like Asia, including China and India, and the slums of many Third World countries (see ‘Slum Dog Millionaire’ and compare the worst in the rest of the world with the poor in the USA).

Capitalism, even in its State-Capitalist variety, has produced living standards unprecedented in history and, recently, in countries that have liberalised their economies (China, India, Vietnam) the results have raised tens of millions out of their absolute poverty levels.

Over the next few weeks, while we await Heroesall’s remedies, I hope she contemplates her ‘entire’ changes with a wider perspective than she shows in her post.

Thoughts on the Banking Crisis, Invisible Hands, and Risk Aversion

It strikes me that the current banking crisis provides a useful illustration of the behaviour which Adam Smith noted in his famous chapter 2 in Book IV in Wealth Of Nations.

I have quoted this chapter many times here when discussing Smith’s use if the 18th century popular literary metaphor of ‘an invisible hand’, which modern economists since the 1950s elevated into a ‘theory’, ‘concept’, ‘principle’ and even a ‘paradigm’ of how markets work.

Of course, it was nothing of the sort; it became a convenient piece of semi-mystical ideology to propagandise on behalf of leaving large corporate entities to do whatever they found convenient to their interests.

Looking at the political issues around the ‘credit crunch’, the complaint is often presented as the banks being unwilling to make loans to willing borrowers, presumably of good quality, or even to each other. Much angst is suffered asking to why this should be so, given the billions of pounds they have been ‘given’ by various governments.

The answer is partly concealed in the cause of the problem. I refer to the risk-aversion of the banks. They have taken onto their books billions of pounds worth of ‘toxic assets’, most of which neither they nor those who carry them as ‘assets’ are sure exactly as to their true worth. Lending to people with undisclosed – because unknown – liabilities is no way to run a profitable or any other kind of bank.

Borrowers from the general public may receive a trickle of loans, but these are nowhere sufficient to ‘kick-start’ the sluggish economy, and without bank credit flowing more freely, the economy becomes increasingly sluggish.

Borrowers from within the banking sector, even those supported by government loans, guarantees, and assurances, are unlikely to engage in normal ‘inter-bank lending’, while nobody is willing to disclose even to other banks because they may not know themselves the extent of their ‘toxic’ debts, nor their true level of toxicity. This fully explains the current impasse in bank lending.

Hence, the frustration of hapless government ministers, whose complicity in the creation of the mess is as big a secret as are the extent of toxic problem.

But let’s be clear. It is the risk-aversion of the players in the banking crisis that leads them to behave in this manner. They prefer to hold onto what real assets they have rather than commit their business to the uncertain fortunes of lending to both other banks and the wider business community.

Ironically, government borrowing creates an opportunity to buy bonds and earn some interest, though at lower rates than they were used to. But that won’t end the crisis. But banks carry debts owed to them by foreign banks, and what they fear about the risk of their bank lending in Britain is made much worse when considering the security of their loans abroad, where uncertainties caused by doubt and ignorance of the true state of affairs with foreign banks makes them ever more insecurity.

What is true for British banks is also true for foreign banks, all of which was made worse by the swift decision of the Prime Minister and the Chancellor, just when the crisis broke, to seize and confiscate the funds of the Iceland banks in London. Other foreign banks, seeing this treatment, were positively encouraged to disengage their banks situated in the UK. Likewise, British banks’ insecurity about lending abroad is another disincentive to lend.

Adam Smith shows in Wealth Of Nations an analogous situation when noting that some, but not all, domestic merchants preferred to invest their capital locally rather than join those merchants who sought higher profits from trading with the British colonies in North America.

The risk premium, plus long experience of some merchants in the Atlantic trade, was covered by the higher profits they could obtain while their monopoly trade, under the protection of the British Navigation Acts – originally an idea under Cromwell’s remit - and which were enforced by the Royal Navy and every British seaport at home and abroad.

But those merchants, who were risk-averse towards overseas trade, found that local investment, nearby where they operated, though less profitable, were also much less risky. Local courts were serviced by neighbours they knew and laws were clearly defined. These considerations led them to invest locally, which directly benefited the British economy and produced a higher national output of the ‘necessaries, conveniences, and amusements of life’, with a higher amount of employment than would otherwise have occurred. [The whole is the sum of its parts.]

Smith used the metaphor of ‘an invisible hand’ to explain how they were ‘led’ to do this, which has since taken on a life of its own, as if such an entity actually existed; some attribute the ‘invisible hand’ to the hand of God (presumably the hand of the Judaic-Christian God only) and some to ‘Providence’, maybe even to the ‘Intelligent Designer’ too.

The cold fact remains, the action of those, but not all, merchants who preferred to invest locally, was driven by their risk-aversion, and not by anything mystical at all. Likewise, today’s bankers, who hang on to their money rather than lend it out, are driven by their risk-aversion, and nothing else.

There is no invisible hand at work in the Banks. It’s a judgment about comparative risks made by those who run the banks. Change the personnel, but the risk-aversion remains while the causes of it remain on their books.

Meanwhile, the plethora of so-called ‘doing the right things’, in a stream of endless and empty sound bites, creates a complex web of suspicions, fuelled by failures, to have any real effect, and makes it more and more difficult, and unlikely, that the crisis will end for a long and longer time.

Hollywood 'John Nash' Was Wrong

Hwee Ling writes a most interesting Blog, The Learning Economist (HERE):

“Is Economics a "Science"?

The scientific approach involves the 4 following steps:
1. Observation
2. Reasoning
3. Formulation of Theory
4. Testing
In the movie "A Beautiful Mind", you can see part of this scientific approach in use: The scene is set in a bar in which John Nash (played by Russell Crowe) rebutted Adam Smith's idea that, 'the best result comes from everyone in the group doing what's best for himself'. Adam Smith had said: "In competition, individual ambition serves the common good."

But John Nash took an opposing view.

In the movie, he observed what was going on in the bar, in which it was clear that all his friends had the same idea.. to go straight for a pretty blond girl who had just walked into the place with her other pretty (but not quite as pretty) friends. He related to his friends how they could all score if they all didn't go for the blonde but for her friends instead... He told them that, 'the best result will come where everyone in the group does what is best for himself ... and the group.' He envisioned a scenario -- a bargaining strategy -- in which nobody loses.. Watch how the idea (which was later developed into a theory) was conceived after he carefully observed the scene...

In case you missed the dialogue, here's the transcript:

Nash : Adam Smith needs revision.

Hansen : What are you talking about?

Nash : If we all go for the blonde...we block each other. Not a single one of us is gonna get her. So then we go for her friends, but they will all give us the cold shoulder because nobody likes to be second choice. Well, what if no one goes for the blonde?
We don't get in each other's way, and we don't insult the other girls.
That's the only way we win.
(Laughs)
Adam Smith said the best result comes from everyone in the group doing what's best for himself, right? That's what he said, right?

Others : Right.

Nash : Incomplete.
Incomplete, okay?
Because the best result will come...from everyone in the group doing what's best for himself...and the group.

Hansen : Nash, if this is some way for you to get the blonde on your own, you can go to hell.

Nash: Governing dynamics gentlemen. Governing dynamics. Adam Smith...was wrong.”

Nash leaves the bar.

Comment
I have commented several times on Lost Legacy on this scenario from the film, Beautiful Mind, and the above words written by Hollywood script writers, whose authority for attributing ideas to Adam Smith is an unknown variable, though it is unlikely to be accurate if influenced by the existing consensus of US academe with its, frankly, appalling record of misunderstanding, misattribution, and mistaken presentation in many matters relating to the philosophy and political economy of Adam Smith.

I have no objections whatsoever if the above scenario is presented as a strategic Prisoner’s Dilemma problem using a casual dating game as its subject, which, plausibly, is replicated in bars and clubs across the land. My objection is to the imagined scenario being associated with Adam Smith’s assertions about individual self-interest and group behaviour.

The lesson of the Prisoner’s Dilemma, either in its original form of a ‘red-black’ [NB. The convention later became a red-blue choice] 100-round game, or as the well-known choices of confessing or not confessing offered separately to two prisoner’s suspected of a major crime, is that acting for what is best for self (confess to go free – as long as the other prisoner does not confess) or acting for what is best for both of them (both of them not confessing), is that always acting for self, or always playing red, leads to long jail sentences or high negative scores, whereas doing what is best for both of them (both don’t confess; both play black), as long as they both choose leads to short sentences and high positive scores.

This was precisely what Adam Smith recommended through the venerable and ancient ‘propensity to ‘truck, barter, and exchange’, or bargaining: ‘give that which I want, and you shall have this which you want’.

To settle a bargain, the players should consider that which is best for both of them; competing in a bargain to get the best deal for self, generally means that they don’t get a deal; they deadlock, fail to agree, and go their separate ways in disappointment.

In the bar scene, all the boys have the same choice; pick separate ‘targets’ and go for their favoured girl. (Unsaid, of course, the girls had the same choice of picking one boy; the male script writers typicaly took a chauvinistic view of the scenario.) As everybody is a stranger, it doesn’t really matter which you pick; you’re not making a life-time choice!

The real lesson of Prisoner Dilemma games is quite interesting (I have used them thousands of times in Business School negotiating courses since the 1970s) is that in the overwhelming majority of cases (92 per cent, when I used to keep scores for analysis) the outcomes were sub-optimal, that is negative red-blue scores, translating in Prisoner’s Dilemma games to maximum long jail sentences. Only 8 per cent of pairs scored maximum blue points (48 each).

Other researchers (John Carlyle, for instance) reported slightly better results of 87 per cent and 17 per cent respectively, but while I can be sure that my pre-game briefings were the same each time, and no hints were given by me, it may be that John’s pre-briefing of the game was not devoid of ‘hints’, which would account for the slightly different outcomes.

In short, Adam Smith was correct. People who act without addressing the self-interests of the other party do much worse than those who do (See WN I.iii.2: p 26-7).

It may be that John Nash understood the better outcome of the co-operative choice as well as Adam Smith did - people bargaining are not competitors; they are co-operators; they do best for themselves by serving the interests of the other guy – or gal – too.

Bargaining exchanges that conclude successfully are co-operative outcomes; both do best by serving each other’s interests consistent with the best available outcome for themselves.

This propensity among humankind was of early vintage in the history and pre-history of humanity (see my Pre-History of Bargaining: a multi-disciplinary treatment, Part I’, downloadable from Lost Legacy’s Home Page). It’s in chapter 2 of Wealth Of Nations. The 'Beautiful Mind' scriptwriters are wrong about Adam Smith (John Nash may well have been innocent).

Incidentally, if only I had read Wealth Of Nations before I was 20:

when I was a teenager going to weekly dances (jiving, etc.,) I had a friend who demonstrated his dating technique, which was to dance with girls who were ‘wallflowers’, rather than ‘popular’ girls. He claimed he always got a ‘certain’ date that way, while most of us ended up walking home alone …

Congratulations to Hwee Ling for writing a most interesting Blog for students.

Three Common Errors About Adam Smith

Arthur Foulkes, a Terre Haute native and longtime resident, writes in Tribune Star HERE: “Many people misunderstand free trade, and so they don’t trust it”

“Adam Smith gave us an excellent metaphor when he compared free market forces to an “invisible hand” that guides each of us — in the pursuit of our own interests — to promote the interests of others.

But Smith, in some ways, set economic thinking back by embracing some mistaken ideas. For example, Smith believed that the value of a thing sprang from the amount of labor that went into its making. Before Smith, several economic thinkers realized that a thing’s value was in the eye of the beholder, but Smith stepped into this mistake nonetheless.

Smith also erred in believing trade springs from an inclination among men to “truck and barter.” In other words, Smith argued that people exchange with each other because of some innate human tendency to swap.”

Comment
But Smith didn’t compare ‘free market forces’ to ‘an invisible hand’. His use of the 18th century metaphor was not about markets; it was about how some merchants, but not all, react to their ‘concern for their security’ by avoiding the real risks of overseas trade by opting to trade locally,. Thus adding to local investment and, thereby, increasing local investment above what it otherwise would be, and increasing local employment and local output.

Having given this as the causes of the actions of some local merchants, in contrast to others who took the risk in pursuit of higher profits, the used the metaphor on ‘an invisible hand’ for those who didn’t follow his reasoning about the causes of their actions. It was the real risks and concerns for the security of their capital that led some merchants to act as they did, and thereby unintentionally benefit local society.

His explanation would survive scrutiny without the later use of the metaphor, but the metaphor would no make much sense without his prior explanation. Therefore, the metaphor is redundant, and didn’t mean anything like what was credited to it in the 1950s by modern economists.

Smith didn't believe that the 'value' of something was determined by the amount of labour undertaken to make it in commercial society; he believed that in a 'savage' hunter society that the exchange value would be determined by the amount of labour the two hunters would take into account (plus 'higgling and bargaining'), because when labour is the sole factor involved that was all there was to consider (the two hunters unambiguously owned the product of their labour).

But the situation changed once other factors came into existence - the land was owned by the landlord who charged a rent; the initial subsistence consumed by the labourer was advanced by the owner of surplus subsistence goods, who loaned it to make a profit from the sale for money.

He made philosophical points about the exchange value of items were accorded their purchase price by the 'toil and trouble' a labourer saved by not having the makle them, a wholly reasonable idea philosophically, of similar standing to the natural inclination of all people to 'seek to better themselves'.

Smith's assessment of the 'propensity to truck, barter, and exchange' was not 'innate'; it arose from the 'faculties of reason and speech', i.e., deep in what we call prehistory.

Readers can download my paper from Lost Legacy Home Page (clikc of the link in red), 'On the Pre-history of Bargaining: a multi-disciplinary treatment, Part I', which I presented last year in Rome at a meeting of the European Association for Evolutionary Political Economy.

Exchange is a central theme in Smith's entire corpus from his: 'History of Astronomy' (1744-); Moral Sentiments, (1759); 'Origin of Language' (1761); 'Lectures on Jurisprudence' (1762-3); and Wealth Of Nations (1776).

I discuss this in my book: 'Adam Smith: a moral philosopher and his political economy', 2008, Palgrave Macmillan.

Left Split Modern Rightwing from Adam Smith

Devilstower writes in the Daily Kos, HERE:

An obviously leftish rant against the right, entitled: “The President and Private Pay”, which includes this paragraph:

“In the past, people were able to distinguish between capitalism and chaos, and understood that government intervention in the markets was needed when the organizing principle of the markets was sent askew. The idea that the market is inviolable and all-knowing didn't really start with Adam Smith. It's more a product of the Ronald Reagan-Ayn Rand fusion of the 80s -- the one that drove "hands off" legislation leading to the S&L meltdown. That was the source of inspiration for stripping away the protection that had kept the market sane since the last time these guys got their way.”

Comment
I make no claims for or against the political contents of Devilstower’s piece. The politics of another country are not my concern. The key sentence for me is:

“The idea that the market is inviolable and all-knowing didn't really start with Adam Smith. It's more a product of the Ronald Reagan-Ayn Rand fusion of the 80s -- the one that drove "hands off" legislation leading to the S&L meltdown.”

At last, a recognition that the linking of Adam Smith to post-1950s mainstream economics was and remains a false attribution and is a step forward in re-asserting Adam Smith’s legacy.

So close is the identification of Adam Smith to Ayn Rand’s (among other modern ideologues) has led to immense confusion, even ensnaring Greenspan, who like so many leading commentators on these issues, linked the Adam Smith invented by Friedman, Arrow, and other Nobel prize-winners, to general laissez-faire policies with which there is little textual support in Wealth Of Nations or Moral Sentiments.

Of course, the Left also misread Adam Smith as some sort of social democrat on the basis of selective quotations from his polemics against mercantile political economy, still prevalent in the 21st century, as it was during the 15th-18th centuries.

But small steps by one side or the other add up, slowly and gradually, to rectifying these errors, and are to be welcomed no matter from which place on the political spectrum they come from.

Adam Smith On Selfishness and Public Spirit

Roland Patrick lets go on Let’s Fly Under the Bridge HERE: with at The Kansan (Thomas Frank: author of ‘What’s the Matter with Kansas?’) with “What's the Matter with Frank?” in a warm debate between them both on the ‘crumbling US infrastructure’ (roads, bridges, and highways).

Roland Patrick states in his piece:

“Well over two centuries ago Adam Smith explained, in Wealth of Nations, how the public got what they needed, and it wasn't usually through 'public service'. It was by appealing to the selfish interests of producers of food, clothing and shelter. i.e., by offering money in return.”

Comment
If your are going to quote from Adam Smith (or, indeed, anybody) you ought to get the quotation correct. Slipping in the word ‘selfish’ before interests is, er, naughty. There is quite a lot of difference between ‘self interest’ and ‘selfish interest’.

You may be selfish as your fancy takes you, but that’s no way to engaged with other people. Selfishness begets selfishness. But in exchange transactions, especially when bargaining for something, Adam Smith made it clear exactly what is involved:

‘But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.’ (WN I.ii.2: p 26-7)

You get what you need, not be being selfish but by interesting their [NOT your] self-love in his [NOT your] favour, and show them that it is for their [NOT your] own advantage to do for him [You] what he [You] requires of them [Him].

It’s a two-way, not a one-way, street. It’s his self-interest you address, not your own. And you do this by using a conditional proposition, ‘If you..Then I’:

“Give me that which I want, and you shall have this which you want”

The important element of bargaining is to convince the other party how and why she benefits from the transaction. You have to be ‘other-centred’, not selfishly self-centred.

Nobody selling you a television would be successful if he told you that you should buy because he, the seller, will be able to afford a new car. The buyer wants to hear what benefits she gets from the deal, not what the seller gets, and the seller should tell her why it is beneficial to her not him for her to agree a purchase.

I am amazed how so many people, supposedly living in the most capitalist market place in the world, never seem to think about the numerous buying and selling transactions they must get involved in and how and why some went better than others. Even supposedly well-trained sales people remain ignorant of the basic principle of sales – link your product to the needs of the buyer, not your needs as a seller.

Adam Smith never recommended selfishness – in fact he criticises selfishness in his earlier book, Moral Sentiments, and repeats his anti-selfish message in the passage quoted above from Wealth Of Nations. And, by the way, contrary to common perceptions, Smith also had some positive things to say about ‘publicly-spirited men’:

“The same principle, the same love of system, the same regard to the beauty of order, of art and contrivance, frequently serves to recommend those institutions which tend to promote the public welfare. When a patriot exerts himself for the improvement of any part of the public police, his conduct does not always arise from pure sympathy with the happiness of those who are to reap the benefit of it. It is not commonly from a fellow-feeling with carriers and waggoners that a public-spirited man encourages the mending of high roads. When the legislature establishes premiums and other encouragements to advance the linen or woollen manufactures, its conduct seldom proceeds from pure sympathy with the wearer of cheap or fine cloth, and much less from that with the manufacturer or merchant. The perfection of police, the extension of trade and manufactures, are noble and magnificent objects. The contemplation of them pleases us, and we are interested in whatever can tend to advance them. They make part of the great system of government, and the wheels of the political machine seem to move with more harmony and ease by means of them. We take pleasure in beholding the perfection of so beautiful and grand a system, and we are uneasy till we remove any obstruction that can in the least disturb or encumber the regularity of its motions. All constitutions of government, however, are valued only in proportion as they tend to promote the happiness of those who live under them. This is their sole use and end.

From a certain spirit of system, however, from a certain love of art and contrivance, we sometimes seem to value the means more than the end, and to be eager to promote the happiness of our fellow-creatures, rather from a view to perfect and improve a certain beautiful and orderly system, than from any immediate sense or feeling of what they either suffer or enjoy. There have been men of the greatest public spirit, who have shown themselves in other respects not very sensible to the feelings of humanity. And on the contrary, there have been men of the greatest humanity, who seem to have been entirely devoid of public spirit. Every man may find in the circle of his acquaintance instances both of the one kind and the other. ….
In the same manner, if you would implant public virtue in the breast of him who seems heedless of the interest of his country, it will often be to no purpose to tell him, what superior advantages the subjects of a well-governed state enjoy; that they are better lodged, that they are better clothed, that they are better fed. These considerations will commonly make no great impression. You will be more likely to persuade, if you describe the great system of public police which procures these advantages, if you explain the connexions and dependencies of its several parts, their mutual subordination to one another, and their general subserviency to the happiness of the society; if you show how this system might be introduced into his own country, what it is that hinders it from taking place there at present, how those obstructions might be removed, and all the several wheels of the machine of government be made to move with more harmony and smoothness, without grating upon one another, or mutually retarding one another's motions. It is scarce possible that a man should listen to a discourse of this kind, and not feel himself animated to some degree of public spirit. He will, at least for the moment, feel some desire to remove those obstructions, and to put into motion so beautiful and so orderly a machine. Nothing tends so much to promote public spirit as the study of politics, of the several systems of civil government, their advantages and disadvantages, of the constitution of our own country, its situation, and interest with regard to foreign nations, its commerce, its defence, the disadvantages it labours under, the dangers to which it may be exposed, how to remove the one, and how to guard against the other. Upon this account political disquisitions, if just, and reasonable, and practicable, are of all the works of speculation the most useful. Even the weakest and the worst of them are not altogether without their utility. They serve at least to animate the public passions of men, and rouse them to seek out the means of promoting the happiness of the society.” (TMS IV.i.11: pp185-6)

This suggests to me that Adam Smith saw some advantages in certain public acts by men of ‘public spirit’ through their drive and enthusiasm for making where they reside a better place than living with a ‘crumbling infrastructure’ and accepting the failings of governments – not markets – with a helplessness born of unsocial and inhumanity for those who have to accept it because they know of no other way of life.

People accept rubbish strewn streets, they are resigned to them; yet the same people could be mobilized by enthusiasm to start cleaning it up and keeping it clean.

In Smith’s time this civic duty was called ‘police’ (not the law and order kind - a later emaning - but cleaning up the streets), and a place was judged clean by the absence of rubbish and sewerage in its streets. Edinburgh’s Old Town was a filthy mess for many years, until some public spirited citizens demanded that the City Officers kept clean what the local people had cleaned up.

Nice Contrasting Quotations

Diane Gaston write for the Risky Regencies blog HERE:

“Though Samuel Johnson described a smuggler as "A wretch who, in defiance of the law, imports or exports goods either contraband or without payment of the customs,” many would prefer the definition of Adam Smith—himself a Customs commissioner: "A person who, though no doubt highly blamable for violating the laws of his country, is frequently incapable of violating these of natural justice and who would have been in every respect an excellent citizen had not the laws of his country made that a crime which nature never meant to be so."

Comment
I liked the selected quotation because it links ‘natural justice’ – a universal law in Natural Liberty – with actual laws of a country.

Tariffs and duties were an essential source of government revenue in Smith’s time, which is why he thought it wise to remind readers who would favour Britain ideally becoming a free port for the world’s trade, that unless another source of government revenue was to become practical, there would always be a need to have some tariffs. (Smith was not an ideologue

Also, Smith and Samuel Johnson did not get on very well, ever since Smith criticised Johnson's dictionary for its incorrect grammar, illustrated by the word 'But'!

If they ever discussed smuggling, I suspect they might have argued their differences, with Smith, the moral philosopher, presenting the Natural Law theory of jurisprudence and Johnson sounding like someone in a Church of England Pulpit.

A Classic Example of the Misuse of a Metaphor

John McCarthy writes in Florida Today HERE:

“Gas-price rise 'illogical'
AAA spokesman can't equate it with the fall in demand and crude oil cost”

One supposedly inviolable law of classical economics is that when the supply of a resource is greater than demand for it, the price of that resource will fall. The "invisible hand" of the marketplace should see to that, the father of economics, Adam Smith, said.

Comment
I know of no ‘inviolable law of classical economics' that ever mentions ‘an invisible hand’ and I am sure that John McCarthy or anybody else does not know of one either.

I do know of countless statements since the 1950s that says there is a ‘theory’, ‘concept’, even ‘paradigm’, and now a ‘law’ that Adam Smith believed that market places were managed by ‘an invisible hand’, but that is not the same as Adam Smith actually having done so.

In fact, he didn’t; he mentions the 18th-century literary metaphor on ‘an invisible hand’ only once in Wealth Of Nations, but not in reference to his theory of markets, which he analyses and elaborates in Books I and II of his classic work.

His sole reference to ‘an invisible hand’ occurs in Book IV in his brilliant critique of mercantile political economy – the very same economic system practised by Georgian Britain, which caused the American rebellion in 1776-83, and produced eventually the United States of America.

And for the record, Smith didn’t mention the metaphor in the other two books of Wealth of Nations (Books III and V).

His reference to ‘an invisible hand’ occurs after he has explained how the risk- avoidance behaviours of some merchants prompts them not to send their scarce capital abroad to the British colonies in North America (dangerous sea passage, unknown trading partners, backed by local colonial laws and practices, and uncertain, though high, profits).

Their risk avoidance prompted these merchants (but by no means all, of course – those prepared to trade in the colonies did well because of the British monopoly of colonial trade, backed by the Royal Navy’s enforcement of the Navigation Acts) to invest their capital domestically, without the risks of sea voyages, where they knew with whom they traded and had knowledge of the reliability of the local courts, and were more certain about their, albeit perhaps lower, profits.

So, risk-avoidance, and the obvious arithmetical law that the whole is the sum of its parts, led to domestic British capital formation to be higher than it would be if more merchants had sent their capital abroad. Additional domestic capital invested locally added to the total of domestic investment, which in turn added to local employment and to national output.

Having said all these over several pages in Book IV, Adam Smith added the metaphor that these merchants – but clearly not the others! – were ‘led by an invisible hand’ to add to domestic investment and output, though they only intended ‘their own security’.

Look it up in Wealth Of Nations (WN IV.ii.9: p 456). That is all Adam Smith meant by the invisible hand- a summary explanation of what he had explained in straight economic terms, but never a ‘theory’, and certainly not a ‘law’, except, perhaps, of arithmetic.

Indeed, John McCarthy uses the rest of his article to explain with potential facts what is causing gas prices to remain high – real prospects of a refinery strike by the US Steel workers Union in Florida, causing retail gas companies to stock-pile gas inventories in the event of the strike. The higher the price of gas at the pump at present, the more of their future supplies will remain in their inventories for use during the strike. That will keep gas customers driving for longer during a strike.

Correct analysis from John McCarthy without any need to misuse Adam Smith’s literary metaphor. He could have re-cast his wrong reference to Adam Smith by, perhaps, suggesting that the oil companies are being restrained by an ‘invisible hand’ from reducing their prices in the prospect of the strike-bound near-future situation! (Just joking.)

But that is not how modern economists, and those influenced by them, see how Smith’s use of the famous metaphor was quite different from their 20th-century invented attribution to him.

Adam Smith's Use of Metaphors

Evelyn Pyburn writes a guest commentary for Big Sky Business Journal HERE:

“Don’t Give Up on Markets”

“The financial meltdown has led many people, especially politicians, to blame the problem on market failure and to jump on the regulatory bandwagon. Though the problems on Wall Street are much more related to regulated markets than free markets, the call is for more regulation to fix failed regulation. Couple this with the fact President-elect Obama and a Democratically controlled Congress are unlikely to embrace Adam Smith’s notion of the invisible hand, and we can expect the anti-regulatory sentiment born in the Reagan administration to wane quickly.”

Comment
It’s better not to “to embrace Adam Smith’s notion of the invisible hand”, that way they only drop a metaphor that had nothing to do with anything Adam Smith wrote about markets.

Markets work without disembodied hands of unknown relevance, as Smith explained clearly in Wealth Of Nations in Books I and II. There is not need for mystical explanations for how markets work. Smith certainly didn’t link markets to quasi-spiritual influences in his use of a well-known 18th-century literary metaphor of ‘an invisible hand’.

Another metaphor he used had to do with the ‘operations of banking’ in the form of their “providing, if I may be allowed to use so violent a metaphor, a sort of waggon-way through the air” [(WN II.ii.86: p 321).

I wonder what the epigones of the mid-1950s would have done if they had read that far in Wealth Of Nations and had picked on that metaphor to describe the mysterious role of banking to “enable the country to convert, as it were, a great part of its highways into good pastures and corn fields, and thereby increase very considerably the annual produce of land and labour”?

Chinese Premier Wen Almost CertainlyHas Read Adam Smith

In Stephen’s Posterous (HERE):

Financial Times Editor Lionel Barber (LB) interviews Premier Wen of Chen (full text):

"LB: Premier Wen, I realise we’re running short of time. I had my own quote from the Theory of Moral Sentiments.

WJ: Well, I think for quite some time this book has not attracted due attention or attention that it deserves. I think it is as important as The Wealth of Nations. He made a reference to the invisible hand only on two occasions in these books. One, he refers to the market; the other, he talks about the morality. And please go ahead with your quote.

LB: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others and render their happiness necessary to it, though he derives nothing from it except the pleasure of seeing it.”

WJ: I think this is very well said, and I have been reading the book and this book I carried with me in my suitcase on the trip.

LB: Thank you very much for agreeing to talk to the Financial Times. It’s been very enlightening.
WJ: Thank you."

Comment
The full interview is most interesting and you should follow the link and read it.

I selected the reference to what Premier Wen said about Moral Sentiments and Wealth Of Nations becuase other claim to carry a copy of one of them around too (I believe Gordon Brown also makes this claim).

Of course, many select the first paragraph of Moral Sentiments to quote, thus safely giving the impression that have read it all. But what is interesting and signifcant in my mind is that Premier Wen probably has read both books because he says:

"He [Adam Smith] made a reference to the invisible hand only on two occasions in these books. One, he refers to the market; the other, he talks about the morality."

Now most people don't appear to know this fact of the singular reference to 'an invisible hand' in each book, and even fewer would fiferentiate between the use in Wealth Of Nations and its use in Moral Sentiments. Many economists - too many - appear to believe that Wealth Of Nations is riddled with references to the metaphor of an invisible hand and they talk was if there is absolutely no doubt that Adam Smith had a 'theory' of the invisible hand applied to his writings on how markets work.

The fact is he didn't have such a theory nor does he use the metaphor in refernce to how markets work (see Book I and II, in which Smith does not use the metaphor.

Premier Wen accurately stated Smith only used the metaphor once each in both books. That suggests that he has read both books and is more familiar with Smith's use than most Western economists.

True, he links the use in Wealth Of Nations to the market and, in my view, that is incorrect, but I think the realisation that Premier Wen has done what he says he has done is most encouraging, and it remains a bit of a shame that we cannot celebrate the same for the majority of economists, who arrogantly tells us what Adam Smith was about, from sadly, a position of real ignorance.

Congratilations Premier Wen.

A Reckless Optimist Meets a Cautious Pessimist

Pete Murphy replies to my post criticising his idea for selective tariffs to address the US trade deficit: "A Reckless Optimist Writes", posted Saturday on Lost Legacy.

Pete Murphy posts on Five Short Blasts Forum HERE:
His recent post is on “Clumsy Trade Policy” and it expounds a new theory of ‘safe’ protectionism by weighting tariffs on manufactured goods by an index of the density of population of a country – the denser a country’s population the more the imposed tariff. [Opening sentence modified following clarification from Pete in the original comments.]

“Gavin, I welcome the kind of constructive criticism and discussion provided by your post and those who have commented. I would just like to point out that I am not a protectionist basher of free trade in general. In most cases, free trade is the right policy.

However, I've discovered a factor that, in some cases, makes free trade tantamount to economic suicide and, I believe, is responsible for completely bankrupting America in the 34 years since our last trade surplus in 1975, during which time our cumulative trade deficit now exceeds $9.2 trillion. I wonder if any other country would be so patient with such trade results for so long? I don't see many volunteers in the global community raising their hands to take over for a while.

In these instances I speak of - trade in manufactured goods with badly overpopulated nations - the blind application of free trade policy is even more damaging (to the reasonably populated nation) than the blind application of protectionism in all of the other cases.

My fondest hope is that some economist of some influence will research the relationship between population density and per capita consumption, and then its effects on trade, as I've done. I think they would be astounded by what they found. It might be a great research project for economics students.

By the way, just a comment about my inclusion of Germany. When I analyzed America's trade deficit in manufactured products with each country, I translated it into per capita terms - that is, divided by the population of the nation in question. How else can one compare the effectiveness of our trade policy with a country like Ireland, let's say, as opposed to a country like China? Using 2006 trade results, I found that the deficit with China was rather unremarkable - nineteenth on the list. Germany, a nation seven times as densely populated as the U.S. and almost twice as densely populated as China, was 9th on the list, with a per capita trade surplus with the U.S. in manufactured goods of $541 per person - three times worse than China's surplus with the U.S. To not include Germany in my list of examples might come across as Asia-bashing.

Also, just as a matter of interest, in case you and your readers are wondering who was no. 1 on the list - it's Ireland. America's per capita trade deficit in manufactured goods with Ireland in 2006 was $4,306 - 25 times worse than the deficit with China. Of our top twenty per capita trade deficits in manufactured goods, eighteen were with nations much more densely populated than the U.S.

And here's an even more revealing statistic: in 2006, we had a $17 billion trade surplus with the half of nations below the world median population density. With the half above the median (same number of nations) we had a $480 billion deficit.

If tariffs in such instances aren't the answer, then there had better be another because a global economy that's predicated upon America enduring an enormous trade deficit in perpetuity is unsustainable, as the global economic collapse has demonstrated.

Thanks for the opportunity to present my case. Best wishes!”


My response:

Hi Pete
Apologies for the delayed reply but we've had more snow than usual this week and, as usual, the country has ground to a halt, though my domestic requirements haven't.

Thank you for your elaboration on your hypothesis, and your well mannered tone, both of which readers may find helpful.

However, it doesn't answer my objection to tariff targeting, which inevitably discriminates against some countries, who will notice the shift in their trade with the tariff imposing country and its effects on their revenues.

It is the noticeable affects of targeted protectionism that starts the 'beggar thy neighbour' spiral to less trade by futile attempts by retaliation to restore the new deficits.

This does not mean that general tariffs are less 'toxic'; in trade wars all parties involved lose, and usually for some considerable time, depending on the mutual retaliation exchanges. If the global system gets sucked into the trade war, then global depression threatens.

The problem is not really confined to international trade; there are domestic causes at work. The trade in manufactured goods in, say, the case of Germany, which you highlight as a possible target for your tariff proposal, is largely comprised of goods which both the US and Germany produce domestically – engineering products such as automobiles, electronics, etc. In these goods many US consumers buy the German imports in preference to US products. As the singer sings, she wants her man to buy her a 'Mercedes Benz' (or, many without singing, they buy 'Volkswagens').

US relative inefficiency in product, design, and marketing, causes the trade imbalance, therefore the solution to the deficit is for US manufacturing the change. Because the US auto-industry is not tackling these sorts of problems, it loses US customers. Blocking German imports reinforces the inefficiencies of US manufacturing and slows down, where it does not stop absolutely, the inevitable changes needed to remove the deficit as it stands. The same is true across all protected industries.

Tariff proposals are an administrative measure to patch up a glaring inefficiency in US manufacturing, where what is needed is the power of the ‘perennial gale of creative destruction’ to impose change on the way US corporations (and their workforces – and, in the US case, their pensioned and about to be pensioned former workforces; and their Unions, and their legislators and those who influence them) who go about their ‘business as usual’, ‘until Hell freezes over’, stubborn resistance to what their trade deficit is telling them.

I called you a ‘reckless optimist’ because you advocated a measure that has a poor history of effectiveness for a world where other countries are not part of the US solution. Germany, alone, is a powerful member of the European Union, with political clout (not on the scale of the USA), but in the not insignificant ‘pond’ of the EU, its potential for creating the necessary momentum for a response to imposed targeted tariffs should not be overlooked. For these reasons, whatever merits your tariff proposals have in theory (itself not yet properly tested), they may have far fewer merits in practise.

Gavin

Adam Smith Not an Advocate of Laissez-Faire

Sir Courtney N Blackman’s speech is reported in the Trinidad and Tobago Review , entitled

“THE GLOBAL FINANCIAL CRISIS AND THE COLLAPSE OF THE NEO-LIBERAL PARADIGM”, HERE: which contains the following paragraph:

“Neo-Liberalism is the direct descendant of the laissez-faire paradigm inaugurated by Adam Smith’s The Wealth of Nations in 1776 and elaborated by successive Classical economists, culminating with Alfred Marshall’s Principles of Economics in 1920. The Classical paradigm failed to deal effectively with the Great Depression of the 1930s and was superseded by the Keynesian paradigm.”

Comment
Laissez-faire did not feature in Adam Smith’s Wealth Of Nations. He did not agree that laissez-faire was an appropriate policy – that came from some of the French Physiocrats – and identified many areas where it should not apply in a commercial society.

I posted the following list last month (from Jacob Viner), but its worth reminding readers of his stance:

"● The Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’; (WN464)
● Sterling marks on plate and stamps upon linen and woollen cloth (WN138-9)
● Enforcement of contracts by a system of justice; (WN720)
● Wages to be paid in money, not goods;
● Regulations of paper money in banking; (WN437)
● Obligations to build party wars to prevent the spread of fire; (WN324)
● Premiums and other encouragements to advance the linen and woollen industries’; (TMS185)
● ‘Police’, or preservation of the ‘cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances’;
● ensuring the ‘cheapness or plenty [of provisions]’; (LJ6; 331)
● patrols by town guards, fire fighters and of other hazardous accidents; (LJ331-2)
● Erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours); (WN723)
● Coinage and the Mint; (WN478; 1724)
● Post office; (WN724)
● Regulation of institutions, such as company structures (joint stock companies; co-partneries, regulated companies); (WN731-58)
● Temporary monopolies, including copyright, patents, of fixed duration; (WN754)
● Education of youth (‘village schools’, curriculum design); (WN758-89)
● Education of people of all ages (tythes or land tax) (WN788);
● Encouragement of ‘the frequency and gaiety of publick diversions’; (WN796)
● The prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population; (WN787-88)
● Encouragement of martial exercises; (WN786)
● Registration of mortgages for land, houses, and boats over two tons; (WN861, 863)
● Government restrictions on interest for borrowing (usury laws) to overcome investor ‘stupidity’; (WN356-7)
● Laws against banks issuing low-denomination promissory notes; (WN324)
● Natural liberty may be breached if individuals ‘endanger the security of the whole society’; (WN324)
● Limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’); (WN539)
● Moderate export taxes on wool exports for government revenue; (WN 879)

Jacob Viner concluded, unsurprisingly, that Adam Smith was not a doctrinaire laissez-faire advocate.

[From Viner, J. 1928. ‘Adam Smith and Laissez-faire’, In ‘Adam Smith, 1776-1928: Lectures to Commemorate the Sesquicentennial of the Publication of Wealth Of Nations, p 53, August M. Kelly, Fairfield, NJ; Lost Legacy provided the references to Wealth Of Nations.]

Much of the confusion and misinformation about Adam Smith comes from attributions to him from people who either, or both, have not read Wealth Of Nations fully and rely only on quotations, or do not understand statements by Adam Smith on Natural Law, are from a theory of jurisprudence (following Grotius, Pufendorf, Carmichael, and Hutcheson), and are not just a theory of how to run a commercial system; Natural Law and Liberty applies to all societies.

A Premier Speaks, Quoting Moral Sentiments

This is a story about Wen Jiabao, the Chinese Communist premier, contributed to by Lionel Barber, Geoff Dyer, James Kynge and Lifen Zhang writing in the Financial Times (UK), quoted in the Irish Times.com (Dublin) (HERE) is worth reading:

“Wen gives short shrift to those who blame fiscal crisis on China”

“AN ECLECTIC reader, Wen says that when he travels he always carries a copy of The Theory of Moral Sentiments by Adam Smith, the Scottish economist, which lays out the moral underpinnings for governing societies – and market economies.

“Adam Smith wrote that in a society if all the wealth is concentrated and owned by only a small number of people, it will not be stable,” he says.

It is an observation that holds just as well for the crisis-ridden US as it does for China, with its skewed model of development and rising inequality.”

Comment
Great to see that a Chinese communist is reading Adam Smith’s Moral Sentiments, if only to wrong foot capitalist leaders who haven’t read Moral Sentiments, or even Wealth Of Nations.

Of course, in having a go at inequality in capitalist countries, Wen, slides over the vast discrepancies in China, both economically, and overwhelmingly in political power, between the cadres of the Chinese Communist party, who double as high functionaries of the State, and the vast majority of the poor, especially in the countryside.

I don’t recognize the paraphrased comment Wen gives, allegedly from Moral Sentiments, which is about the virtues and proper behaviour of individuals, but I am more than willing to give allowance for a translation from English into Chinese and then back into English.

It may be taken, also, as a warning to China's own entrepreneurs in its stae-capitalist economy, that domestic inequality may only go so far before the State steps in with confiscatory taxation, if not outight expropriation, at some point.

One feature of Chinese State-Capitalism that may inhibit such drastic measures is the close integration of many members of the Communist Party and State bureaucracy with the domestic capitalist entrepreneurs at all levels, though that may not save foreign capitalist firms from discriminatory measures.

Wen’s response to questions about the causes of the current financial crisis are well worth reading (follow the Link).

Falling Profit Rates Raise Real Incomes

Jonathan Taplin is a Professor at the Annenberg School for Communication at the University of Southern California and writes Jon Taplin’s Bog (HERE)

“There are very few things that Adam Smith and Karl Marx agreed upon–but one was the “tendancy of the rate of profit to fall”. This term is so well known by economists that they use TRPF as the acronym. Here’s Adam Smith from The Wealth of Nations.

“It may be laid down as a maxim, that wherever a great deal can be made by the use of money, a great deal will commonly be given for the use of it; and that wherever little can be made by it, less will commonly be given for it. According, therefore, as the usual market rate of interest varies in any country, we may be assured that the ordinary profits of stock must vary with it, must sink as it sinks, and rise as it rises. The progress of interest, therefore, may lead us to form some notion of the progress of profit.”

“It somehow escapes the pea-brains of these dinosaurs, that these are the very policies that have brought us to this crisis.”

Comment
Adam Smith was quite clear on the cause of rising and falling rates of profit:

“The rise and fall in the profits of stock depend upon the same causes with the rise and fall in the wages of labour, the increasing or declining state of the wealth of the society; but those causes affect the one and the other very differently.”

“The increase of stock, which raises wages, tends to lower profit. When the stocks of many rich merchants are turned into the same trade, their mutual competition naturally tends to lower its profit; and when there is a like increase of stock in all the different trades carried on in the same society, the same competition must produce the same effect in them all.” WN I.x.1: p105

“In a thriving town the people who have great stocks to employ, frequently cannot get the number of workmen they want, and therefore bid against one another in order to get as many as they can, which raises the wages of labour, and lowers the profits of stock. In the remote parts of the country there is frequently not stock sufficient to employ all the people, who therefore bid against one another in order to get employment, which lowers the wages of labour, and raises the profits of stock.” (WN I.x.7: pp 106-7)

The interpretations placed upon these (and some other similar) statements are often woefully inadequate. Smith’s was not a determinate model, closed to enable a mathematical ‘solution’ to work. He was not entrapped in the diminishing returns of Ricardo (or Marx, who merely wanted to prove what he eventually called capitalism was going to collapse).

The point is that growing societies, with increasing productivity and markets, reduced price, which raised real incomes, and brought more people within them into employment, creating new markets for new products. Poor societies had enormous profits because capital opportunities were scarce (he cited China); richer societies had lower profits because capital opportunities were abundant (he cited Britain, and in a rare prediction, believed that the former British colonies by around 1880 would be even richer).

As more capital was utilised, the cost of capital would rise and profits would fall. Conversely as more capital was employed the price of labour would rise. As prices of commodities fell from increased productivity (pin-factory, etc.,) and the sub-division of labour within the supply chains (the common labourer’s coat), real incomes from employment would rise. But greater capitals, though they meant lower rates of profits, also meant larger amounts of profit. It was not zero-sum.

The process means a fall rate of profit, earned by ever larger amounts of capital, and rising real wages from work. With 'consumerism' the consequence is all around us in higher living standards.

Note Jon's assessment of those he criticises: 'the pea-brains of these dinosaurs', surely a most unProfessorial tone from California...

To Save Ourselves From Many A Blunder

Joseph Kranak writes the Skeptical Philosopher (‘comments on the history of ideas and on contemporary issues’) HERE:

“The perverse incentives and unintended consequences created by the welfare system in place should give us all the more pause, when considering something as extreme as eugenics, which is even more liable to create more perverse incentives and bigger unintended consequences. Government actions can have unintended consequences, which lead to further problems, necessitating further government actions, creating further problems and further responses. Sometimes government action can lead to a chain of action and response like some elaborate legal rube goldberg machine, such as the example that Adam Smith gives in the Wealth of Nations, when England closed down all the Catholic churches, which had been responsible for aiding the poor. Without someone to aid the poor anymore, the government forced parsonages to take care of the poor, leading to perverse incentives which the British government had to respond to, leading to more unintended consequences, until finally the poor were ultimately all but forbidden from traveling freely through England, which created huge disparities in labor availability (and thereby wages) from parsonage to parsonage.”

Comment
I shall ignore the eugenics part of this post.

The reference to the Adam Smith and the unintentional consequences of ‘well-meaning’ legislation is well made. If the promoters of legislation to solve this or another problem were to consider the potential consequences of their actions for their often worthy intentions, they would think again.

They only have to look at history for almost endless examples to influence that degree of modesty they lack.

One minor issue. It wasn’t the case that “England closed down all the Catholic churches, which had been responsible for aiding the poor”. It was the dissolution (and destruction) of the Monasteries, with their vast inherited wealth from lands left to him by Catholic families that created the problem:

“When by the destruction of monasteries the poor had been deprived of the charity of those religious houses, after some other ineffectual attempts for their relief, it was enacted by the 43d of Elizabeth, c. 2, that every parish should be bound to provide for its own poor; and that overseers of the poor should be annually appointed, who, with the churchwardens, should raise, by a parish rate, competent sums for this purpose.” (WN I.x.c.46: pp152-53; Edwin Canaan, ed, 1937: p 135-36)

It can take a long time to correct the unintended consequences of the wrong policies of governments.

The dissolution of the monasteries was ordered from 1564; the growing problem of the poor was still evident in mid-18th century, as Adam Smith noted in Wealth Of Nations (read the whole section referenced above).

This should cure even hardened ‘men of system’ from their well-meaning impulses to ‘improve’ the whole world with their whole-word solutions.

A Left-wing Anarchist Pronounces on Capitalism

Dan Goodman, currently doing postdoctoral research in theoretical neuroscience. Previously a mathematician, still a left-wing anarchist, amateur cook, and philosopher, posts at Le Samovar HERE:

“I wanted to explain why I think capitalism is a bad idea, and hopefully the reasons above do that. I’ve mostly focused on the present, but perhaps a word or two on the past and on the future. After all this criticism of capitalism, it would seem reasonable to respond that capitalism has done a great deal of good too. As Adam Smith says in the first chapter of Wealth of Nations, capitalism has allowed everyone to live better than kings of the past did (I’m paraphrasing here). I think that’s true. One might question whether or not that could have been achieved more expeditiously, but it’s in the past and the question is whether or not we can do better in the future. The Marxist (and some anarchists) would say that how you should organise society depends very much on the level of wealth. A rich society can in principle choose to organise itself in a much more egalitarian way than a poor one can. As our basic needs are provided for to a greater extent, we can stop worrying about living from moment to moment, and focus our attention on reorganising society to be more like how we wish it would be.

Experiments with Communism in the past largely failed for political reasons (democracy is essential), but also because countries that tried it hadn’t reached the point where basic needs were met, and because central planning was an inefficient mechanism (the planners didn’t understand the effects of their actions well enough, nor what was needed). I believe that the time may have come, or at least will quite soon come, when we will have the necessary means (basic needs satisfied, better understanding of economics, decentralised planning mechanisms such as those of parecon or otherwise) to do better than capitalism.”

Comment
Obviously a man who believes that he could re-arrange the ‘wooden pieces on a chess board’ merely by ordaining that it be done, forgetting, as Adam Smith reminds us in Moral Sentiments (TMS VI.ii.2.17: p234), that humans are not wooden pieces easily moved by a some human’s hand; with humans – and there are millions of them -‘each has a principle of movement of its own’.

That road leads to totalitarianism because the ‘man of system’ (in this case Dan Goodman) tries soft, then hard, persuasion, then soft laws and, when they don’t work well or fast enough, imposes harsher and harsher laws, all by necessity delegated to agencies staffed with other humans, who share neither the subtleties nor the shades of humanity that motivated the ‘leader’ in his younger days, and who behave with all the cruelty of the self-righteous on a mission to ‘change the world for the better’ – if only they could see the ‘higher purpose of history’, etc.

It is not democracy that ever fails, should it operate; it is the curbing of Liberty that causes all the problems. Dictators can arrange ‘democratic majorities’ – regular voting took place in all Communist countries, true there were only single party candidates; even Sadam Hussein held ‘elections’ (he ‘won’ them all), as did Mugabe, or his bought and paid for judges said so.

But what no dictator can hide or fool his or her citizens, or the world, about is whether the country is rule by the law, not men, and where Liberty prevails – freedom of assembly, freedom of an independent media, freedom of speech, the right to legal process under an independent judiciary, habeas corpus, trial by jury, and the occurrence of ‘inconvenient’ verdicts – the evidence is beyond doubt.

Dan writes: “As Adam Smith says in the first chapter of Wealth of Nations, capitalism has allowed everyone to live better than kings of the past did (I’m paraphrasing here)”. but, as always, the devil is in the detail.

Smith’s actual quotation is:

“Compared, indeed, with the more extravagant luxury of the great, his accommodation must no doubt appear extremely simple and easy; and yet it may be true, perhaps, that the accommodation of an European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages”. [WN I.i.11: p24]

Dan should note there is no mention of ‘capitalism’ (a word invented in English in 1854 and therefore unknown to Adam Smith who died in 1790). Smith wrote about ‘commercial society’, not capitalism, which was back-projected onto Adam Smith and the 18th century by modern economists, apparently more interested in politics, disguised as economic theory, than in historical accuracy.