A Lost Legacy Open Book Discussion (II).

After Adam Smith: a century of transformation in politics and political economy, 2009, Murray Milgate and Shannon C. Stimson, Princeton University Press, Princeton and Oxford.

There is no doubt that the popular (and academic) portrayal of the lifetime-works of Adam Smith is quite at odds with the actual contribution of the Adam Smith born in Kirkcaldy in 1723. It’s as if a completely new persona was invented bearing limited resemblance to him or his surviving works (sometimes referred to on Lost Legacy as the 'Chicago Adam Smith').

I sometimes wonder if anything similar happened to other historical figures from the ancient worlds of Greece and Rome – spectacularly in the case of Jesus – and the thousands who stand out in the great Pantheon of those who are known to us today for their places in the history of human endeavour.

We have The Glasgow Edition of The Life and Correspondence of Adam Smith, from Oxford University Press (and the low cost Liberty Fund editions): The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth Of Nations, plus his extant essays, The History of Astronomy (1744-<1758) and Origins of Language (1761). To these we have surviving student notes of his lectures, Jurisprudence (1762-63) and Rhetoric and Belles Lettres (1763), plus the surviving Correspondence of Adam Smith, and, most important, the definitive biography, The Life of Adam Smith (1996, 2nd ed. 2010) by Ian S. Ross.

We ought, therefore, to be pretty sure as to what constitutes Adam Smith’s oeuvre, but instead of his works being a model of pure scholarship, they are riven by contrary, incompatible, and mutually exclusive opinions as to what he wrote and what he meant, much of it advanced by scholars of indisputable integrity.

However, there is even considerable doubt as to the exact words he used to express his ideas, despite the ready availability of all of his works to whomsoever wishes to consult them – sadly, many scholars pontificate with the certainties of the highly opinionated, who clearly have not read his works for themselves or have forgotten what they may claim to have read years ago.

Now, something must have happened in the 219 years that separate his death from today. It’s not all down to elementary scholarly slackness. Ideas about the past, and the people who lived through them, do not form in a vacuum. Adam Smith – contrary to trite media assertions – did not write his books as veritable bibles; he was not the ‘high priest’ of economics; he did not ‘invent’ capitalism; not was he the manic believer in ‘laissez-faire’, and other similar nonsense (Smith neither used the word ‘capitalism’, nor ‘laissez-faire’).

Readers influence the accepted meanings of what an author writes (see, for instance, Willie Henderson, Evaluating Adam Smith: creating the wealth of nations’, 2006, Routledge). Smith's readers are no exception, and because Adam Smith’s name is often quoted (excessively so today) in support of, or as the problem of, current controversies in the (mis)management of economies, it adds to the intellectual – and popular – confusion as to what credence should be given to this or that declamation on one side of the other of those making the noise, which passes for political discourse in this first decade of the 21st century.

Lost Legacy readers will know that I am researching at present the origins of the spread of the notion of an actual (or metaphorical) “invisible hand” in the teaching of economics since the 1940s. From that teaching came forth consequential policies in business and government as students graduated and entered the “ordinary business of life”, and applied their teachers’ wisdom, either within society generally or in their own teaching careers. A conceptual virus spreads like the biological kind.

Earlier this year, I discussed Steven G. Medema’s excellent, The Hesitant Hand: taming self-interest in the history of economic ideas (Princeton University Press), which covered a slice through history from Adam Smith to 20th-century welfare economics. This fits well with what I am about to undertake with the book by Murray Milgate and Shannon C. Stimson, which takes a broader sweep through the first hundred years from Adam Smith to the end of the 19th century.

It short, Milgate and Stimson have studied how the “grand ideas” that are attributed to Adam Smith are “as much the product of the gradual modifications and changes wrought by later writers”, such that we “are much the heirs of later images of Smith as we are of Smith himself”. I concur with Milgate and Simson in at least this brief survey of their book (I have yet to read the details, which I shall share with you over the next week or so).

I consider from reading their introduction that this is an important quest for all scholars and students of Adam Smith. If their method is correct, and it substantiates their hypothesis, the similar hypothesis embedded in my current research will have stronger foundations.

I, and many readers of Lost Legacy, have lived through the last half of the 20th century, in which “the gradual modifications and changes wrought by later writers” on the unchanged original exposition of the ideas of Adam Smith lie in pristine innocence in his texts. Therefore, we can compare and contrast his original ideas with the “later images of Smith”, which are often a long way from those we read in the works written by “Smith himself”.

How we got from what Adam Smith wrote to what modern economists assert him to have written is an interesting study in the history of intellectual dilution. Murray Milgate and Shannon C. Stimson may have written the first part of that history; we shall discuss that proposition over the next week or two.

Modestly, I would hope that I can emulate their work, as I tackle the intense dilution of Smith’s work in the second-half of the 20th century, which dilution began, almost tentatively, in the late 19th century.


[Thanks to Robert Vienneau, who hosts the Thoughts on Economics Blog HERE: http://robertvienneau.blogspot.com/, drew my attention to Milgate and Stimson’s new book in a message commenting on Lost Legacy earlier this month.]

A New Slant on Adam Smith's Use of the Invisible Hand Metaphor

A New Slant on Adam Smith: must be read HERE

“In a Word or Two, Placed in the Middle: The Invisible Hand in Smith’s Tomes
by Daniel B. Klein and Brandon Lucas"

"Abstract: The meaning and significance of Smith’s expression “led by an invisible hand” has been long debated, and especially lately. We speak to the large debate only in fine, by focusing on the conjecture, first hinted at by Peter Minowitz, that Smith deliberately placed his central idea, as represented by the phrase “led by an invisible hand,” at the physical center of his masterworks. We bring supportive evidence and argumentation to the conjecture. The four most significant points developed are as follows: (1) The expression “led by an invisible hand” occurs pretty much dead center of the 1st and 2nd editions of Wealth of Nations, and of the final edition of the volumes containing Theory of Moral Sentiments. (2) The expression in WN drifted only a bit from the center, only about 5 percent from the center in the final edition (and even less if the index is excluded). (3) The rhetoric lectures show that Smith not only was conscious of deliberate placement of potent words at the center, but thought it significant enough to remark on to his pupils, noting that Thucydides “often expresses all that he labours so much in a word or two, sometimes placed in the middle of the narration.” (4) There numerous and rich ways in which centrality and middle-ness hold special and positive significance in Smith’s thought. In conjunction with larger considerations, these points may be helpful in assessing the significance of Smith’s famous phrase."

Comment
Readers will know that Daniel Klein and I have been engaged in civilised debate in the pages of Econ Journal Watch (May and Sept) HERE, HERE and HERE
on the significance of Adam Smith’s use of the metaphor of “an invisible hand”.

Daniel has prepared a most interesting paper, which he believes supports, at least indirectly, his mainstream interpretation of the major significance of Smith’s use of the famous metaphor and its modern associations across the discipline. It is an original and careful piece of work and I hope many readers promote the link to it on their own Blogs.

I have read through the paper quickly and can commend it to you. It is worth reading. I shall review the arguments on Lost Legacy when I have studied it more carefully.

The Incorporated Towns Were Bad, but the East India Company Was Worse

Sam Smith, who covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964 edits
UNDERNEWS (‘the online report of the Progressive Review’) (30 October) HERE:

“RECOVERED HISTORY: MEET THE REAL ADAM SMITH”

“…Adam Smith is routinely and thoughtlessly invoked as the founder of modern capitalist though, based on unrestrained trade, limited government, and the mechanics of market economies. To this day, The Wealth of Nations is held up as the espousal tome for free-market ideology that decries government regulation, excessive taxation, and wealth redistribution (in whatever contrived shapes it may take).

As Chomsky notes, Smith saw the East India Company and other stockholding corporations as bending state policy towards the good of the few at the expense of the many. Smith to this end was in favor of heavy-handed government regulation to prevent financial and corporate powers from manipulating government policy for their own ends. This led him to conclude on the nefarious impulse of corporate manipulation, that when "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary."

Comment
Much as I agree with the drift of Sam Smith’s post – after all, it recognises that the Adam Smith myth was invented in the 20th century (and the 19th century before that with assertions that Smith supported laissez-faire, though he never said so himself) – I am compelled to apply the same standards of accuracy as I would demand of a modern purveyor of the myth.

The East India Company was a private company, granted a Royal Charter by government on behalf of the sovereign, which operated nearly a year’s sailing away (nearly two years there and back) in India, and, thereby, well-beyond the ability of the government, and, as important, the ordinary shareholders, to monitor, by Smith’s accounts, the appalling behaviours of its officers and servants. Smith’s strictures against the Company are detailed in Wealth Of Nations (Book IV and V).

However, the quotation offered is quite separate from his discussion of the behaviours of the Chartered Companies in Book V. It comes from Book I, on an entirely different subject:

“This led him to conclude on the nefarious impulse of corporate manipulation, that when "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” (WN I.x.2.27: 145)

This is part of a discussion of the role of the ‘towns corporate’ in Britain, where the old Trade Guilds still held sway: ‘Inequalities occasioned by the Policy of Europe’ (WN pp 135-59).

The inequalities that Smith speaks of were those associated where “the policy of Europe, by not leaving things at perfect liberty, occasions other inequalities of much greater importance” (WN 135), in particular ‘the “exclusive privileges of corporations”, or the “incorporated trades”.

To be employed in commercial activity in towns, the person had to serve a seven-year apprenticeship under a master, who was restricted to two apprentices only. Without an apprenticeship, served in the town, nobody could open a shop for trade (this happened to James Watt in Glasgow – he had served his apprenticeship elsewhere; Smith got a job for him at the University of Glasgow, just across the town boundary).

It was to these ‘tradesmen’ that Smith referred – small, single-trade shopkeepers and artisans, who owned their own little businesses and who exercised a monopoly of their trades in an “incorporated town”, who tended to exact monopoly prices for their merchandise or artisan services, and who swore to only buy from other incorporated tradesmen for any other items that they required, even where unincorporated tradesmen could supply at lower, more competitive prices.

In short, the Incorporated trades were a cabal of monopolists, living of their monopoly prices at the expense of the public.

But, be clear, these incorporated town monopoly trades and the tradesmen running them had nothing to do with Chomsky’s version of the East India Company, a massive international monopoly company operating East of the Cape of Good Hope to India and beyond,and behaving appallingly.

The local tradesmen who met for “for merriment and diversion” were small fry compared to the East India Company. Chomsky, apparently, conflates the two monopoly cases together.

Sam, a well-experienced journalist, knows of the importance of accuracy. So should Chomsky.

Almost Right But Not Quite

Rev. Dr. Marilyn Sewell writes on “Economics and Religion” HERE:

“A word about the ancient god of the free market system, Adam Smith. When Smith is quoted regarding the "invisible hand" of the market, what is conveniently forgotten is his assumptions about the conditions necessary to make free markets work. Smith assumed that we would operate on a small scale and so would know the character of the people we trade with. He assumed that our financial dealings would exist in the context of our values. Instead, Smith's writing is used to justify the mad pursuit of shareholder profit, which is held to be holy and untouchable.”

Comment
Smith was not an “ancient god of the free-market system”.

He regarded primitive belief in gods as “pusillanimous superstition” (his History of Astronomy, 1744-58; published posthumously in 1795 on his direct instructions just before he died in 1790).

He did not have a theory of the “invisible hand of the market”.

The rest of the paragraph as a statement of his broad views is acceptable:

“Smith's writing is used to justify the mad pursuit of shareholder profit, which is held to be holy and untouchable.”

Modern interpretations, and not a few inventions too, of Smith’s views are almost wholly wrong. Dr Marilyn Sewell, a minister of the Christian religion, is excused. I presume she wrote the above in good faith.

The Significance of Property - Again

Bruce Web is in debate with me HERE: and we both are stuck in conceptual confusion about the meaning of property – is it purely a legal term, distinguished by its codification by jurists and authors, or was it a quite unintended development by unknown people in the very distant past of pre-history, and to which the codifiers and the great judicial minds came much, much later, long after property-rights were practised and enforced by local violence?

The attempt, below, is to set the scene so that we may move on to the relatively short, six-centuries of struggle for Liberty (since medieval times), which manifested itself in such isolated, though significant events – in the consequences they had eventually – as, in England, Magna Carta (and the declaration of Arbroath in Scotland).

This was followed by a long, slow and gradual process from which liberty took its modern forms in the separation of powers, trial by juries, independence of the judiciary (for life and good behaviour), Habeas Corpus, the executive elected by universal suffrage and subject to an independent parliament, with powers of impeachment of the executive, freedom of speech, separation of Church/Mosque/Temple from the State, and rights of assembly. (I outline these aspects in chapter 16 of my “Adam Smith’s Lost Legacy”, 2005, Palgrave Macmillan.)

Property is a human phenonmenon, which in my view pre-dates legal forms and norms which came to be associated with it in recorded history (c.8,000 ya). In the forest, aeons ago, while Homo sapiens were forming through the speciation of the Hominines (from c. six million years ago, right through to the appearance of the first, fully humans c.200,000 years ago), primates were distinguishable from those that shaped and used stone-tools and those that didn’t (broadly speaking). At some time, some humans discovered the use and management of fire, learned to make covering using animal skins and vegetation, and to select and use natural materials for digging, processing, decorating and, on occasion, protecting themselves (and attacking others).

These skills were spread widely among human groups and for most groups these technologies and the knowledge that enabled learning, while relatively sophisticated compared to other species, were the norm (with languages) for all humans for much of prehistory.

Some tribes actually ‘lost’ some of these skills, examples being the tribes of Fuegans of South America, and those Aborigines cut-off in the island of Tasmania with rising seas levels, which tribes reverted to even more primitive living than their ancestors in the rest of South America and Australia, both of which were described by Europeans who visited them in the 18th–19th century, as the “brutes”.

The important thing is that while racists took the 'brutes' as representative of all tribe cultures, they were in fact the exceptions. But they had no notions of property as a possession and appear to have ‘lost’ the basic knowledge of subsistence-craft too; the majority of the world’s tribes practised early notions of property, albeit of a very primitive quality.

Property, through most of its pre-history, and the first millennia of recorded history, had no connection with its legal forms which came much, much later. Quoting legal ideas – early Roman, Norman, English or French law and such like - is not appropriate.

Our focus should be, for these discussions, on the role that property ‘mine’, ‘ours’, ‘their’s, and ‘yours’ – played in practice, long, long before literate societies recorded even crude details of its manifestations.

We should also not get hung up on later ideas about the lineage of property in its proto-modern forms. Nobody knows which tribes first ‘discovered’, ‘invented’, or ‘conceptualised’ forms of property. We can trace only the slimmest of evidence of the evolution of property (‘meum and tuum’; mine and thine), mainly by archaeological stone remains and clues from folk myths (which may be wildly inaccurate). It is almost certain that no one tribe of humans (or race groups, black, white, yellow, brown) can make a claim to be the originator. Stone tools were common in East Africa from long ago.

We do know that somewhere, sometime, and by somebody, property appeared from human action, not by design, somebody’s genius, or a ‘great leader’. It is the distinguishing characteristic of humanity; in its physical forms, it separates us from all other primates, past and present. It may have been a mixed blessing.

Property enabled the alpha males and females of a tribe to claim and exploit its territory and the people within it (the latter, a long established behaviour set among other primates); similarly within families, with allies, and individuals as the benefits of property (as a resource also to ensure obedience) became manifest.

Access to subsistence was related to the evolution of property (better tools, easily carried, replaced quickly; larger domains, natural obstacles to movement overcome; baskets for carrying food, and babies; heavier clubs and longer wooden poles to deal with predators; and so on).

With better and regular subsistence, life-spans increased, and populations increased too. Of course, all this was net of local losses from bloody conflict. Successful tribes grew larger, more mobile, more dangerous to distant neighbours – and their womenfolk – and the long journey to property in the forms of herding and farming began, not in a straight line, and not always in one direction.

John Locke summed it up in the phrase: “In the beginning, all the world was America”, using North America’s native tribes as the standard mode of subsistence of pre-Mediterranean, Egypt, Babylon, India, China, and Europe (and for non-Roman parts of 17th-century Europe, including the Highlands of Scotland).

Property distinguished the property-less ‘brutes’ from the property-abundant humans, especially after the division of labour and the “propensity to truck, barter, and trade” became established.

The correlation between property and rising total subsistence is manifest. Note, a rising total GDP did not mean, necessarily, a rising per capita GDP for long periods; per capita GDP remained static mostly, including from the 5th to the 15th century following the fall of Rome (except in plague years).

Our ancestor’s rulers diverted considerable subsistence into ‘civilised’ artefacts in stone buildings, walls and roads, and all the trappings of military might, which sometimes, along with plagues and famines, destroyed the very basis of their ‘civilisation’. All that dreary experience of history changed with the sustained rise in per capita incomes and, of course, total GDP from about 1800 onwards.

Should we continue our discussions, the above, very roughly, is where I am coming from conceptually.

Unfair to Adam Smith: his philosophy accords with modern psychology

I return to another article in Psychology Today (HERE), this time written by Darcia Narvaez, Associate Professor of Psychology and Director of the Collaborative for Ethical Education at the University of Notre Dame:

“Moral Landscapes Living the life that is good for one to live: The Cultural Airspace of Harmony Morality, Which emotions does your cultural airspace promote?

“Although the philosophers David Hume (1751/1998) and Adam Smith (1759/2002) considered concern for others to be fundamental to human character, empathy turns out to be highly influenced by one's upbringing. Parents and culture shape which moral emotions we dwell on and which morality we favor. Emphasizing anger, hate, fear, contempt leads to Bunker morality; emphasizing compassion, concern, love, forgiveness leads to Harmony morality.”

Comment
Darcia Navaez, PhD, has, in my view, a similar problem to that of Jim Taylor, PhD (Lost Legacy, 23 October): neither of whom is really up-to-speed on the works of Adam Smith, but by citing them in support of their otherwise most readable articles, I assume they felt that it would make their pieces publishable in Psychology Today, whose sub-editors would note that a well-known name makes their pieces reader-recognisable.

Smith did not believe that human characters or behaviours were, to quote a fashionable but incorrect metaphor, "hard wired", or 'inherent', or 'instinctive' (that was a view of Francis Hutcheson, Smith's Glasgow tutor). These behaviours and sentiments are learned and can vary widely according to upbringing and context.

Smith’s (and Hume’s) understanding of human nature – the sympathetic “concern for others” – was supported by a lengthy discussion in “Moral Sentiments” (1759) on how these “concerns” were generated, and they are not much different from Darcia’s elaboration of “Parents and culture shape which moral emotions we dwell on and which morality we favor”.

I refer readers to Moral Sentiments from which I could quote extensively from Smith’s early chapters, but feel on this occasion, his simple illustration is sufficient to make his point:

“Were it possible that a human creature could grow up to manhood in some solitary place, without any communication with his own species, he could no more think of his own character, of the propriety or demerit of his own sentiments and conduct, of the beauty or deformity of his own mind, than of the beauty or deformity of his own face. All these are objects which he cannot easily see, which naturally he does not look at, and with regard to which he is provided with no mirror which can present them to his view. Bring him into society, and he is immediately provided with the mirror which he wanted before. It is placed in the countenance and behaviour of those he lives with, which always mark when they enter into, and when they disapprove of his sentiments; and it is here that he first views the propriety and impropriety of his own passions, the beauty and deformity of his own mind. To a man who from his birth was a stranger to society, the objects of his passions, the external bodies which either pleased or hurt him, would occupy his whole attention. The passions themselves, the desires or aversions, the joys or sorrows, which those objects excited, though of all things the most immediately present to him, could scarce ever be the objects of his thoughts. The idea of them could never interest him so much as to call upon his attentive consideration. The consideration of his joy could in him excite no new joy, nor that of his sorrow any new sorrow, though the consideration of the causes of those passions might often excite both. Bring him into society, and all his own passions will immediately become the causes of new passions. He will observe that mankind approve of some of them, and are disgusted by others. He will be elevated in the one case, and cast down in the other; his desires and aversions, his joys and sorrows, will now often become the causes of new desires and new aversions, new joys and new sorrows: they will now, therefore, interest him deeply, and often call upon his most attentive consideration.” (TMS III.1.3: 110)

Smith discusses this process as dependent on contact with others, sequentially, first with parents (and other adults), then in the company of other children (school, playground, street games, etc., the great 'school of self-command'), through to entering adulthood.

How one treats others influences how they treat us; and from long sequences of complex interactions among humans in society, we are subsumed in the interdependent outcomes known as the ‘way we live’. He uses the metaphors of the “looking glass” and the “mirror” to emphasise the two-way nature of the what today we call the socialization of humans in society.

I recommend that readers either read Moral Sentiments directly or, for a short introduction to Smith’s moral philosophy, try my book, Chapter 2: “so weak and imperfect a creature as man”, pp 47-61, in Adam Smith: a moral philosopher and his political economy, 2008, Palgrave Macmillan.

When Wealth Isn't Wealth

Andy Absher writes in the Herald Bulletin online HERE

“Businesses compete because they must Discouraging risk-taking is a red herring”

“When you read Nancy Turner’s viewpoint, you would think the name of Adam Smith’s book was, “The Wealth of the Wealthy”. Though Smith makes many points, the point of competition isn’t so that the rich can get richer but so the common consumer can have the best price via market competition.”

Comment
Andy Absher makes this comment in the course of a local debate on Health Insurance, which is outside my remit on Lost Legacy (I only comment on political topics in the country where I vote – Scotland).

However, it is worth noting that Andy appears to confuse a different meaning of the word “wealth” with Adam Smith’s. Smith wrote Wealth Of Nations to clarify the real meaning of wealth from its confused meaning. That confusion remains active today.

The prevailing meaning of “wealth” in 18th-century Britain was that it manifested itself in gold and silver bullion (paper money in the form of promissory notes were of recent vintage – most people preferred their money in bullion form). A consequence of this version of money is that Sovereigns were supportive of policies that seemed to assure them of the greatest amount of gold and silver bullion accumulating in their treasuries year by year,

From this obsession they approved all kinds of policies that ensured they exported products abroad to earn more gold and silver than they had to send out of the country to pay foreigners for those products they imported. And they kept a tight reign on exports of gold and silver by means of protection (tariffs, prohibitions, monopolies of shipping and general hostilities towards other countries).

Adam Smith taught that the real wealth of a country was measured in the “annual output of the necessaries, conveniences, and amusements of life”, in short, what a country produced annually. Policies that led to more output were wealth creating; policies that restricted imports caused the purchase of expensive products that could be produced more cheaply at home, thus reducing the “annual output of the necessaries, conveniences, and amusements of life”, and made the country poorer as a result.

“The Wealth of the Wealthy” on this measure is meaningless. It smacks of a radical student’s slogan.

A Little Mystery To Be Solved

Ben Hyde writes in “Ascription is an Anathema to any Enthusiasm” Blog (HERE) in:

“The Perverse and Invisible Hand”

““I have recently started reading Albert Hirschman’s 1991 book “The Rhetoric of Reaction: Perversity, Futility, Jeopardy.” I’m only 20 pages into it so no telling where it’s going. But so far, it has totally blown me away. The book is an outline of three styles of rhetoric that are commonly used by reactionaries, i.e. those who would react against progress. These are generic arguments good in most any situation. Introducing free speech, extending the franchise, ramping up public education, rearranging the kitchen? You name it these rhetorical devices stand ready and willing.

He labels the first of these “perversity.” Here in while [sic] reactionary pretends supports the goal he then goes on to explain that efforts toward that end are certain to backfire. Efforts to improve health care? Such efforts will decrease health care! Universal schooling? Such efforts will lead to wide spread idiocy. Do-gooders make things worse. The audacity of this argument is breath taking. But look at the record! How that French Revolution turn out?

Hirschman points out that observers of the French Revolution quickly deployed this argument. Even before the it all went to hell in a hand basket. Edmund Burke in particular used this perverse argument, and later when it things got ugly he got a lot of credit for being so insightful. So did Burke invent this technique? Hirschman argues that no, Burke was mimicking newly popular argument with a similar structure that had recently arisen in the circles he ran in. I.e. the hypothesis of Adam Smith. Aka, the Invisible Hand. This takes my breath away!

The invisible hand is a perverse argument. But in this case bad actions (individual greed, personal vices, and self interest) have the unintended consequence of creating a vibrant national economy. It’s as if God in his infinite wisdom had sus’d out how to turn his flock of sinners into something constructive. Smith might have given credit to divine providence but choose to give the credit to more amorphous but still spirtual invisible hand. Many of Smith’s readers saw right thru that. Particularly all those commercial actors looking to get the church off their case.”

Comment
I haven’t yet read Hirschman’s little volume, “The Rhetoric of Reaction: Perversity, Futility, Jeopardy”, (it’s now on order from Amazon for £13), so I cannot fully dissect what Ben Hyde is asserting.

He seems to be reporting that “Burke was mimicking newly popular argument with a similar structure that had recently arisen in the circles he ran in. I.e. the hypothesis of Adam Smith. Aka, the Invisible Hand.”

I find this intriguing to say the least. Had the “invisible hand” argument really “recently” arose “in the circles he [Burke] ran in”? If so, this is a discovery of momentous importance in the history of economic thought! More to the point: how did I miss it?

Or is it an idea of Hirschman’s that Burke used a rhetorical device to make his case against the French Revolution that was similar in construction to that device which Adam Smith used in the case of “an invisible hand”, with a side assumption on the part of Hirschman that Burke ‘ran in” the “circles” where they discussed Adam Smith’s metaphor of “an invisible hand”?

For this to be true, Hirschman must either have documentary evidence that Smith’s metaphor was widely discussed in the late 18th century (for which I have not found any trace so far) or he must assume that it should have been widely circulated because the metaphor was widely discussed in the late 20th century! Either basis for Hirschman’s argument is in itself a preposterous proposition.

Or, lastly, is it something that Ben Hyde drew from his reading of the first 20 pages of Hirschman’s book? Until I receive the book I cannot comment or sort out who was the author of what part of Ben’s post.

October Lost Legacy Prize Won by Kieran O'Hara - also a nominee for the 2009 Annual Prize

Kieron O'Hara, UK Centre for Policy Studies writes (25th October) in Gov Monitor HERE:

“Capitalism And The Decline In Trust Of Our Markets”

“Smith has not been well-served by commentators whether admiring or hostile. He was neither the apostle of ‘greed is good’, nor the evangelist of free markets as the ideal resource allocation mechanisms at all times. In fact, his careful and lengthy examinations of human motivation, The Theory of Moral Sentiments and The Wealth of Nations still contain important lessons for our time.

It is particularly interesting that free market economics is widely blamed for the decline of trust throughout society, because rereading Smith reminds us how once upon a time the spread of markets was thought beneficial because it helped spread trust.

Our understanding of markets has fragmented since the days of Smith. Economists see them as mechanisms for optimally allocating resources, while sociologists see them completely differently as exchange mechanisms that tend to overwhelm other types of connection that hold societies together. … But Smith himself saw them as both social and economic. Their two different aspects could not be separated out.

Participation in markets helped people internalise the norms of socially-beneficial behaviour, spreading habits of trust and trustworthiness. They used pre-existing trust mechanisms, such as respect for contracts, the rule of law, sound money and a work ethic, and brought them all together in a perfect storm, magnifying their individual effects and transmitting trustworthy behaviour, self-discipline, moderation and stability across society.

Smith denied that markets could rest on selfishness (as many on the left maintain they do). Markets do indeed rest on self-interest, but that is not the same as selfishness. My self-interest is not simply the sum of my preferences at the moment (as many on the right will say it is). I am not the sole determinant of my self-interest; society makes a contribution too.

Whichever is the case (and they are not mutually exclusive), the knee-jerk reaction to blame market economics for the increase in individualism and the decline in trust is mistaken. Instead, following Smith, we should deduce that markets function less well, and are treated with more suspicion by consumers, when trust has declined for independent reasons."

Comment
Without doubt Kieron O'Hara deserves the October 09 Lost Legacy Prize for the best article on the Internet on Adam Smith (I would put it in for the best article on Smith in the year, but we must wait and see over November–December).

I am not prepared to risk overstepping the copyright conventions by publishing the whole article (though “it is better to ask for forgiveness than for permission”, as the Jesuits used to say).

The article is "COPYRIGHT © 2002 - 2009 Policy Dialogue Media Group International, INC. All rights reserved."

It can be read in full
HERE:

I strongly recommend that your follow the link and read Kieran’s full argument (and pass the news on to your readers and Twitter sites. It is astonishingly brilliant compared to the normal daily dross put out in the media, including by top economists.

Congratulations to Kieron O’Hara for showing his understanding of Adam Smith, and to Gov Monitor for publishing it.

Excellent Writing But Still Mythical

Atanu Dey writes a highly readable and lively piece on “Why education matters” HERE

“I am sure that there is no secret cabal of powerful people with evil glints in their eyes plotting to keep Indians illiterate. But individual behavior motivated by private incentives - micro behavior - have consequences at the social level - macro outcomes - that are not intended by individuals. The most famous example of this is Adam Smith's "invisible hand" - the market mechanism that grinds out the socially beneficial outcome even though an individual is only interested in his or her own welfare. So also, there could be what we can call the "invisible fist" of the government which can pummel the life out of a society even though no single government official is doing anything more than making his or her life comfortable.”

Comment
Atanu Dey writes well and complains that 33 per cent of Indian adults are illiterate. An alarming statistic for any country and doubly so for the world’s largest democracy.

His clever construction of the possible reason why government action fails to address the illiteracy problem by drawing a parallel with the invented notion of an “invisible hand” in the economy, wrongly attributed to Adam Smith by modern economists is well stated. But good writing is still vulnerable to the evidence.

Because Adam Smith didn’t write anything about the “invisible hand” being a “market mechanism” that “grinds out the socially beneficial outcome even though an individual is only interested in his or her own welfare” - see numerous posts in Lost Legacy that expose this myth – it was at root a myth created by well-meaning modern economists as part of anti-Soviet planning propaganda during the Cold War (and over enthusiastic mathematicians carried away with their 'proof' of general equilibrium applying to the real world).

Their motives were laudable – Stalin’s Soviet planning was backed by repressive civil violence and threatened to cause World War III (and IV and V, etc.,). But by their apparent endorsement of unrestrained behaviours their own unintended consequences created a mythical monster that self-interest, elided by epigones in selfishness, worked out, Panglossian-like, for the “best of all possible worlds”, covering over a plethora of externalities that damaged the interests of the rest of society (pollution, environmental destruction, monopoly pricing, protectionism, and local wars arising from them.

By associating Adam Smith with the invented myths, they traduced his reputation too. Most economists actually believe that Smith was the author of the myth. He wasn’t.

Yet many climb on the bandwagon that the current recession ‘exposes’ the ‘failures’ of following Adam Smith’s policies, in particular ‘laissez-faire’ (which he never supported – nor mentioned even once), ‘lack of regulation’ (when in fact he specifically advocated the exact opposite where it came to bank policies “which might endanger the whole security of the society”; see WN II.ii.94: 324) and the mythical “invisible hand”, mere metaphor for an entirely different set of circumstances).

Tenuous Links Do Not a Theory Make

Bill Bonner writes in Running Because I Cant Fly Blog HERE:

"Macro for Dummies"

“Later, economists of the Scottish enlightenment, notably Adam Smith and Adam Ferguson elaborated. Smith, like Harding, saw the economy ordered by the invisible hand of God. Ferguson saw markets as a ‘spontaneous order,’ which were the “result of human action, but not the execution of any human design”.

Comment
Adam Smith wrote nothing to suggest he saw the economy “ordered by the invisible hand of God”. Adam Ferguson, a former Chaplain to the famous Scottish Regiment of the Black Watch, may well have harboured such ideas, but Adam Smith didn’t reveal such beliefs, if he held them.

The meaning of the words, “result of human action, but not the execution of any human design”, does not necessarily imply that if it was not the result of “human design” it must have been designed by God; it could as well be the that their “design” was not necessary – it was not “designed” by anybody, or anything, but was the result of unintentional activities, some of which had unforeseen consequences.

Evolution of species shows that few, if any, life forms remained exactly the same from their predecessors over geological time; they change as their environments change, some became extinct, others change their forms, even dramatically from sea- to land animals, and a few changed from quadrupeds to bipeds, as the evolution of humans from Hominines show.

On Adam Smith’s alleged “invisible hand of God” theory, his religious beliefs did change from being a candidate for ordainment as a minister in the Episcopal Church of Scotland up to 1744 (at Oxford, aged 21) to a secular career as a moral philosopher.

I discuss this in my paper, “The Hidden Adam Smith in his Theology”, presented to the History of Economics Society, University of Colorado, Denver, June 2009 (available on request).

A Claim Too Far

Terry Arthur posts on the Adam Smith Institute Blog HERE:

The “invisible hand”, in its modern guise, has been given many invented roles by modern economists since the 1950s, all wrongly attributed to Adam Smith’s single use of the popular, 18th-century metaphor in Book IV of Wealth Of Nations.

For example, it’s been credited wrongly with meaning market forces, supply and demand, the price mechanism, market co-ordination, balancing economies, and ensuring that self-interested actions always result in public benefits.

Terry Arthur takes these exaggerations to new heights:

“It is the result of Adam Smith’s "invisible hand" – the most powerful information system the world has ever seen – bar none...”.

In Smith’s use he explains why some, but clearly not all (British foreign trade was a high proportion of its 18th century annual economy), merchants, from a “concern for their own security’, preferred to avoid the higher risks of foreign trade by investing locally, which, by the arithmetical rule that the whole is the sum of its parts, increased domestic output and employment.

It had nothing to do with Smith’s writing on the above subjects, all covered in Books I and II of Wealth Of Nations without any mention of “an invisible hand”.

Should Terry Arthur wish to source his notion of Adam Smith’s original use of the “invisible hand” he would search “vainly for support of [his] notions” in Wealth Of Nations.

In books I and II, Smith discusses market forces and the coordination role of prices, without mention of an “invisible hand”, and in Book IV, where he mentions (once) “an invisible hand”, he does not discuss market forces or the coordination role of prices.

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

A Psychologist Invites Modern Economists to His Couch

Jim Taylor, Ph.D. writes in Psychology Today HERE:

“Economics: Economists are Irrational!”

What are free-market economists thinking?

“I recently read an article by the Nobel Prize-winning economist Paul Krugman in which he described the renewed battle between so-called freshwater economists (so named because they are largely based at the University of Chicago and other Midwestern universities) and saltwater economists (based primarily at Princeton, MIT, Berkeley and other coastal universities). The freshwater economists are disciples of Adam Smith and espouse the free-market and rational actor models. The saltwater economists align with John Maynard Keynes and his belief in the need for regulation in financial markets and that people aren't rational actors.
The past 50 years have been dominated by freshwater economists who had a reverential faith in the power of free markets (Smith's "invisible hand") and the rationality of people in their financial decisions. Given what has happened to our economy in the last decade, noted for its multiple bubbles (e.g., Internet, housing, mortgage), it's hard to believe that any of these "efficient market" adherents still have jobs, much less credibility in how the economy actually works.”

Comment
You should read Jim Taylor’s article. It’s a great knock-about piece of popular journalism, much of which I enjoyed, some of which I thought not quite fair in its populism, and on occasion some elements of which he is wrong. This last is not Jim’s fault: he takes the claims of modern economists at face value and responds to them to his light-hearted rant.

Lost Legacy has never been slow in criticizing the ‘Chicago Adam Smith’, a person with ideas that are far from the ideas of the Adam Smith born in Kirkcaldy in 1723.

George Stigler’s boast that “Adam Smith is alive and well and lives in Chicago” (1976) reflects to invention of the Adam Smith of the “invisible hand” (a mere metaphor for Adam Smith whose single use of it in Wealth Of Nations referred to the unintended consequences of the risk-avoidance of some, but not all merchants – foreign trade with Europe, India, and the North American colonies, was a major contributor to the British economy – who preferred the home trade), and had nothing to do, at least in Adam Smith’s mind, with how markets worked, how banks should be regulated (yes, he favoured government regulations in banking!: WN II.ii.94: 324), or how the price system worked.

The belief that the “invisible hand” was a significant ‘idea’, ‘concept’, ‘theory’, or ‘paradigm’ was wholly invented in the 1950s by neo-classical economists on the back of general equilibrium mathematics (which interestingly did not include a term for the “hand”) and in support of a worthy criticism of Cold War, Soviet central planning. It is now taught in every economics 101 class as if it had historical validity, mainly by people who have never bothered to read Wealth Of Nations.

However, Adam Smith did not espouse a vision of ‘perfect competition’, of ‘Homo economicus’, or ‘rational actor models’. On this assertion Jim betrays a lack of appreciation of Adam Smith’s works.

Even when discussing price changes in a market, he spoke of ‘neighbourhood’ markets, not an economy (Book I, Wealth Of Nations). I don’t expect Jim to be familiar with the Kirkcaldy Adam Smith, or with economics generally (his three degrees are in psychology), but he might appreciate a glance through Lost Legacy to see how much he traduces Smith’s reputation by making light of the differences between what he as responsible for (“Theory Of Moral Sentiments”, 1759 and “Wealth Of Nations”, 1776) and what modern epigones invented in his name.

Jim says he “would love to put these economists on the couch and explore what is going on in their heads” (I assume no Freudian motives here!); I would rather that Jim sat in a library and read some Smith and Keynes for himself. As it is, he gives offence to the valid notion that inter-disciplinary familiarity is good for scholarship.

Jim and I can agree that modern “economists” who dominate the profession presently, invented a mathematical world devoid of human beings. Adam Smith, incidentally, a talented mathematical scholar by 18th century standards, is totally innocent of such a charge. Those ‘guilty’ as charged can defend themselves and Jim should direct his ire, undergraduate humour, and psychological "explorations of their heads" to them.

An Unbridled Error

Stephen Fleischman, writer-producer-director of documentaries (see www.amahchewahwah.com, e-mail stevefl@ca.rr.com), writes in the
The Smirking Chimp HERE:

“Hypocrisy Unbridled”

“Going back to Adam Smith, the concept that the "invisible hand" of the free market would keep the capitalist economy in balance has been the conventional wisdom. Capitalism must grow or die. And grow it did. Mergers and acquisitions became the modus operandi as corporate enterprises struggled with their competitors to survive.”

Comment
Stephen Fleischman writes a racy and articulate polemic against the “hypocrisy” of certain ideas about capitalism, as taught him from his long experience in tv news media.

Yes, the “conventional wisdom” may very well be as stated above, but this view has nothing to do with anything Adam Smith wrote. The “conventional belief” was an invented myth by certain economists in the 1950s. Indeed, it is a distortion of the significance of Adam Smith’s single reference to “an invisible hand” in Book IV of his Wealth Of Nations which also discusses markets in Books I and II, without mentioning “an invisible hand”.

This is more than an academic quibble. If you believe that markets are kept in “balance” (whatever that means!) by such an entity then you are in severe danger of complacency when events show that markets are out of “balance”.

Recent events have shown how fragile such beliefs attributed to Adam Smith are with leading personages, such as Alan Greenspan, who included in his very public “mea culpa” a renunciation of his belief in the “invisible hand”, as if Adam Smith had somehow let him down and was responsible for his own self-deception, courtesy, it may be said, of listening too much to Ayn Rand.

An Infamous Misquote

“Hank” writes in Own The Dollar (“Don’t Let the Dollar Own You”) HERE:

“Famous Quotes About Money And Investing From Adam Smith The Father of Capitalism » Stock Quotes Online”

“Who Is Adam Smith? Adam Smith wrote “The Wealth of Nations” which is considered the first modern work of economic theory. The Wealth of Nations discussed that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods needed by society by a so-called “invisible hand”. The invisible hand of the market is the term economists use to describe the self-regulating nature of the marketplace. The invisible hand is created by the combination of our economy’s self-interest, competition, and supply and demand forces, and is capable of allocating resources in society. Adam Smith is widely cited as the father of modern economics and capitalism.”

Comment
Hank writes an "infamous summary" of Adam Smith’s “quotes”

Yes, “the invisible hand” is a “term” used by many modern economists to “describe” the underlined sentence above, but it was never used by Adam Smith to do so.

It is a complete myth that Smith used the metaphor of “an invisible hand” in this manner. He used the metaphor only once in Book IV of Wealth Of Nations and not in a description of “self-regulating markets” , “competition” or “supply and demand forces”, all of which he discussed in Books I and II of his Wealth Of Nations but without mentioning "an invisible hand".

This fact is checkable by those economists who purvey the myth of Smith’s use of the “invisible hand”, should they ever bother to read Wealth Of Nations.

Whether Smith was the founder of “modern economics”, as taught today, is doubtful; even more doubtful, is the proposition that Smith founded “capitalism”, a 19th-century phenomenon and a word first used in English in 1854 (Oxford English Dictionary) by the novelist William M. Thackeray, in his book “The Newcomes” (Smith died in 1790).

“Hank” has some explaining to do. Merely repeating what his tutors told him, or his textbooks claimed, is no substitute for showing exactly where Adam Smith wrote that the “invisible hand” produced “the right amount and variety of goods needed by society”.

Long Post - Magna Carta's Significance

Bruce has posted the following on his Blog (HERE)and I have commented below too.

Bruce's Post:

"Magna Carta: What it is and what it isn't"

I would think most educated people in the Anglo-American tradition and in those countries who either had English Common Law imposed or adopted as the basis of their own national law have heard of the Magna Carta and understand that it is in some sense the fountainhead of that law. But to a large degree this is a misconception of its nature and purpose, it is not a grant of privileges from the King to his subjects, instead it is if anything a confession by King John in 1215 that he has overstepped what later became known as the Ancient Constitution. Britain did not and still does not have a written Constitution, instead its fundamental laws and institutions were considered at least through the nineteenth century to have been transmitted literally from time immemorial, that is in time prior to memory. And this is to my knowledge typical of all ancient European law and perhaps all Indo-European law (people with knowledge of Vedic Indo-Iranian law please jump in) and maybe all law, rather than looking back at some indefinite point where people entered into a Social Contract there seems to be a sense that Law precedes society altogether. A concept that may be echoed (or not, you tell me) in John 1:1 "In the beginning was the Word, and the Word was with God, and the Word was God."

Now certainly there were attempts at compiling and codifying the law, notably associated with the names of King Alfred the Great and Edward the Confessor, but the common view before Maitland was that the law itself was pre-existent. (A recent book that I confess I have yet to read but by the very thorough historian Patrick Wormald is Making of English Law: King Alfred to the 12th century). This was not the exclusive view, some maintained that the Common Law came over from Normandy with the Conquest in 1066, but generally the idea that King Alfred and then Edward the Confessor were law compilers and not law makers won out. (Though Alfred seems to have a more expansive view of his powers in this regard.)

What does any of this have to do with the Magna Carta? And what is so important about the Magna Carta to start with? I mean this is an economics blog! Well I am not sure, I am kind of making it up as I go along, those who want to follow and correct this line of thought can follow along.

A translation of the Magna Carta can be found at Constitution.org http://www.constitution.org/eng/magnacar.htm where it is after the Athenian Constitution held as the second oldest foundational documents for our own Constitution. Yet in reading the Magna Carta it is with a few partial exceptions not foundational at all, instead it is a restoration of the Ancient Law to the time before innovations by King John, his brother Richard the Lion-Hearted and their father Henry II. Now there are two provisions which are foundational if not actually considered original to the Magna Carta.
14. And for obtaining the common counsel of the kingdom anent the assessing of an aid (except in the three cases aforesaid) or of a scutage, we will cause to be summoned the archbishops, bishops, abbots, earls, and greater barons, severally by our letters; and we will moveover cause to be summoned generally, through our sheriffs and bailiffs, and others who hold of us in chief, for a fixed date, namely, after the expiry of at least forty days, and at a fixed place; and in all letters of such summons we will specify the reason of the summons. And when the summons has thus been made, the business shall proceed on the day appointed, according to the counsel of such as are present, although not all who were summoned have come. & 63. Wherefore we will and firmly order that the English Church be free, and that the men in our kingdom have and hold all the aforesaid liberties, rights, and concessions, well and peaceably, freely and quietly, fully and wholly, for themselves and their heirs, of us and our heirs, in all respects and in all places forever, as is aforesaid. An oath, moreover, has been taken, as well on our part as on the art of the barons, that all these conditions aforesaid shall be kept in good faith and without evil intent.
Thus Ch. 14 lays down the principle of 'no taxation without representation' while Ch. 63 affirms the pre-existing rights of all Englishmen. But note that these two do not precisely map, you will look in vain for the concept of 'democracy' tout court in the Magna Carta, there is no hint that the Parliament promised in ch. 14 includes FULL representation of the people.

Instead if you read through the Great Charter, the Magna Carta, you will see that it is primarily a reassertion of the King's Tenants in Chief's (those who held their land directly from the King) property rights against the King rights with only some secondary protections for sub-tenants and freemen.

But words and concepts you will not find in the Magna Carta: Equality and Democracy. Instead it is a fairly straightforward defense of the principle that Liberty=Freedom from coercion from above over property, where property includes ones own person. This is not to concede that the concepts of equality and democracy are not inherent in English and hence American society all along, just to recognize that it would be a long time before those were recognized in law.
Posted by Bruce Webb at 12:53 PM


My Comments:
Gavin Kennedy said...

Hi Bruce

Your interpretation of Magna Carta's significance is quite accurate in parts and contains much of my stated views abotu its significance
.
However, you raise issues I do not raise, specifically that Magna Carta was not about 'democracy' (a not well-known idea before the late 18th century) nor about the 'liberty of the common people'.

Long before governance by 'feudal' law, there was a long period from the fall of Rome (5th century), across Europe, known since as 'Alodial' rule, where the 'barbarians', so called, invaded the former Roman provinces and seized land that was held on the basis of who was strong enough to hold it.

With the coming feudal tenancy, the strongest war lords or 'kings' gave title to those war lords who recgonised the King as the sole dispenser of land, and title, to whomsoever he pleased to do so in exchange for military obligations of loyalty and recognition to the King AND his heirs.

From this, Kings tended to assumre absolute powers and to become 'oppressive' and arbitrary in their judgements, offending traditional rules and behaviours (e.g., King John).

The significance of Magna Carta was its bringing under scrutiny the arbitrary powers of Kings. They had obligations to consult their near equals, the Barons, not the people! This was a power-sharing charter, albeit limited in scope.

Popular liberty (the peasants remained, in effect, 'slaves' with no rights) is at this stage about curbing absolute powers, and had nothing to with 'democracy', and little to do with popular 'equality'.

Judge its politics, not against modern connotations that followed six or more centuries later. Laws were not created by single individuals; they took centuries to become formalised.

You seem to be close to seeing this in some paragraphs, but then slip into stubborn focus on modern ideas that came much later.

History took longer, as the debate over the US Constitution showed, before and after the Declaration of Independence and the adoption of its Constitution.

Gavin

Announcement

Somebody sent two comments for Lost Legacy today and I passed them for publication but they seem to have 'disappeared'!

I did not make a note of them but they referred to their enjoyment of Lost Legacy (thank you very much) and commented on somebody whose ideas were the subject of my posting.

Could the person concerned kindly report his/her message, please.

Thank you

Gavin

Another Great Smithian Metaphor

Peter Boettke writes in The Austrian Economists (HERE):

“Is Adam Smith's discussion of governmental "juggling trick" relevant to our policy discourse today?

Scott has already talked about this at The Economic Way of Thinking, but we should dig a bit deeper into the discussion from Smith's Wealth of Nations, Vol. 2, pp. 929-230. Smith argues in those pages that: (1) when the public debt reaches a certain level, the fiscal system is threatend, but there is not a single instance where a government has paid off the debt fairly and completely; (2) rather than pay down the debt with increased taxes, government's choose "pretended payment"; (3) the prefered method of pretend payment is repudiation through debasement of the currency; (4) this method extends the 'calamity to a great number of other innocent people'; and (5) rather than do the right thing -- which would be least dishonorable to the debtor, and least hurtful to the creditor -- government instead choses to engage in "juggling trick".

Comment
This is a case of the appropriate use of a quotation from Adam Smith’s Wealth Of Nations because it is still relevant, as government debt has increased significantly since the 18th century – in those days debt was raised mainly to fund wars or bribe foreign powers – whereas nowadays government debts fund just about anything that modern, BIG, governments spend taxpayers’ and lenders’ money upon.

Smith wrote while governments were happily inventing new forms of raising revenue for governments from the private economy. ‘Sinking Funds’ to pay-off debt soon became sources of new funds to spend more money, not always, if ever, wisely. Then they added, on a ‘temporary’ basis, income tax , and so it has gone on and on. Today, in Britain’s case, we have ‘stealth taxes’ and ‘quantitative easing’ (printing money), and unheard of levels of debt.

Smith observed that governments managed to avoid paying back all of their debt through various “juggling tricks” (beware: another one of Smith’s metaphors!).

Congratulations to Peter Boettke for picking upon Scott's (HERE) references to government debt and 'juggling tricks'.

I recommend that you follow the links.

Where a Little Knowledge can be Misleading

Paul F. Hosman resides in Kalamazoo and writes for “Read & React” in the Kalamazoo Gazzete ("A blog to create conversation between the Kalamazoo Gazette and its readers) (HERE):

“Intelligence, beauty and skill favor select segments of society over the welfare of all people”

“Maybe we as a nation need to accept the proven fact that Adam Smith was wrong when he stated that the optimum in society occurs when everybody works in their own best interests, and accept John Nash’s Nobel prize winning dissertation in economics that states that society works best when we work in our own best interests and in the best interests of society as a whole.”

Comment
The trouble is for this argument, Adam Smith did not say everybody should work (with whom?) in ‘their own best interest’. That is a crude, narrow and incorrect representation of his philosophy (and economics).

Nor did John Nash state that “an economy works best when we work in our own best interests and in the interests of society as a whole”. That is a crude, partial, and misleading statement of his work.

Where did Paul F. Hosman, residing in Kalamazoo (I remember the song), get his ideas about Smith and Nash from? Could it be the Hollywood film, “A Beautiful Mind”?

From the rest of his post he seems to be hooked up on a crude DNA theory that some are rich and some are poor because of their inherited DNA profile giving them, or not, as the case may be, “Intelligence, beauty and skill”.

I take it from this “evidence” that Paul has read bits on Adam Smith and John Nash, though not enough to understand either author’s ideas - Moral Philosophy in the case of Smith; mathematical modeling (Prisoner’s Dilemma) in the case of Nash, plus, perhaps a magazine article or two on genetics, DNA and the inheritance of characteristics.

Arguments prefaced with a need to accept “the proven fact” about something, of which I am familiar (Smith and Nash) and which is also not a “fact” and certainly not “proven”, but manifestly wrong are reminiscent of “dinner party” debates and a few “bar room” arguments (the latter in days when I drank alcohol).

Since my younger days, I have learnt to pass over such “arguments” to save embarrassing the host and the speaker, and to calm my blood pressure.

From a Multitude of Epigones

Tom Slater writes (19 October) in GreenBeat (HERE)

“Cap and Trade 101: For those who haven’t been following for the last 30 years”

“This approach to regulation applies ye olde economist Adam Smith’s theory of the “invisible hand” (the power of the free market, essentially) to curtail pollution with less human intervention and at a lower cost. As is, California spends close to $500 billion annually regulating businesses’ emissions. The U.S. is trying to avoid this on a national level. But the idea of cap-and-trade can’t be traced all the way back to Smith. Instead, it began with a 1960s-era supercomputer.”

Comment
“Adam Smith’s theory of the “invisible hand” (the power of the free market, essentially)” compromises the rest of Tom Slater’s interesting article.

I am less concerned with the errors in Tom’s attribution to Adam Smith of the myths about the metaphor of the “invisible hand” than I am with the effect of the continual repetition of the attributed myth in all sorts of contexts.

The real culprits for the myth are those modern economists (from the 1950s onwards) who grabbed it from “ye olde economist” and applied it to their theories of general equilibrium in solving a problem – is a market equilibrium theoretically possible? – or who adopted it to give an unnecessary mystical credence to the manifest superiority of markets, under liberty and the rule of law, over the then competing claims of Soviet planned economies and the visibly repressive political structures associated with their operation.

The intentions were perfectly honourable and, I believe acceptable, but markets are well understood and do not need ‘miracles’ of mystical “invisible hands”, which nobody has ever explained how these “invisible hands” work, and often attribute different meanings to them – some say variously that the invisible hand is (a small selection from a larger list):

“supply and demand”,
“the power of free markets”,
“coordination out of autonomous decisions”,
a “theorem at the root of economic liberalism”,
“market competition”,
“the market process at work”,
“market forces”,
“self-interest”,
“competition”,
“consumer satisfaction”,
“maximised profit”,
“free competition”,
“foundation of modern welfare economics”,
“the price system”
“great idea of intellectual history”,
“the purchases or sales of goods or services for money”
“ a force inherent to the market”
“inevitably pilots the economy”

There are honourable doubters too, who assert that the metaphor has been misused by economists, though they are fewer in number than those who have bought into the myth.

Recently, of course, several new voices of dissent emerged in response to the current financial crisis, allegedly caused by adhering to the myth of the invisible hand as a perfectly natural corrector of market variations.

Already, as financial institutions steady their balance sheets, some of these recent “converts” are retracing their steps back to the myth, under the familiar truth that “the markets are self-correcting”.

Markets are strong enough to ‘self-correct’ but that has always been true, without any recourse to “invisible” body parts. It’s not the undoubted resilience of markets that is in dispute; it’s whether the invisible appendage ought to be invoked and attributed to the wholly innocent Adam Smith by a profession that claims to be a harder science than theology.

From the Invention of Property (collective and individual) All Else Followed

Readers will recall that I had an exchange with Bruce on Bruce Web last week (HERE): Here

This is my initial response to where we diverge - the historial significance of the invention of property - if we cannot agree on that issue, I do not see how we might agree on the rest,

Hi Bruce

We appear to be marching in diverging directions, possibly reflecting a difference in our understanding of the pre-history, and more recent history, of humanity. I take the long view; you appear to hold to a shorter horizon; I try to be disengaged, preferring to understand rather than take sides; you are influenced by E. P. Thompson’s history of the English working class, a much more immediate scholarship of a narrower slice of human history, from a particular perspective.

We do not see eye-to-eye on the most important role of the evolution of human property. Apart from the period when the entire human species, dispersed across the landmass and ignorant of each other more than a few hundred miles away in any direction, subsisted from the limited bounties of nature, the late pre-history and history of the human race began, in effect, with the discovery of the novel role of new forms of subsistence encompassed in Herding (possibly 20,000 years ago after the Ice-age, and Farming, sometime around 11,000 years ago in the plains of Eurasia and the ‘fertile crescent, centred on the Middle-East.

Most human groups outside these areas remained based on the hunter-gatherer economies, where the sole form of property was group, later tribal, territory (‘our territory, not theirs’), a notion ‘known’ (because practiced) to primate cousins and to predator animals. The subsistence economies known to Hominids (Homines) or proto-humans species, also evolved stone-technologies (the stone ages) and laid claim to territories by virtue of their ‘occupation’, and abandoned or lost them in the face of violent challenges from other groups.

This subsistence culture was stable overall and almost unchanging – some stone-tool cultures didn’t change their technologies for over a million years - even as Hominid species became extinct. With the greater intelligence of Homo sapiens, from 200,000 years ago, primitive technologies evolved in some areas of the earth, though not in others, as early explorers found from the 16th-18th centuries. Tiny groups survived as hunter-gatherers, with relatively sophisticated cultures, into the 20th-century.
We can debate why some human groups developed notions of property and others didn’t; it had nothing to do with called ‘superiority’ and a lot to do with circumstances. Among the latter was the discovery of “herding” and “domestication” of animals, and later of plant foods, at the end of the last-ice age. We can trace the effects on the human populations. Briefly, population levels reflect the subsistence base (as throughout nature in all species). For populations to grow, gross annual output of subsistence has to rise, and as it rises, new or more intensive subsistence exploitation has to grow as well. Additionally, institutional development promoted by the subsistence technologies has to succeed in transmitting to following generations the necessary disciplines.

It is my contention, following Adam Smith (and others), that one institutional innovation was what we call property, collective and personal. No human groups, so far known, achieved the necessary subsistence growth without the innovation of property. Taking the ‘bigger picture’ across the earth, those groups that relied solely on the forest, rivers and sea shores were bound by the limits imposed by the free bounties of nature. Those groups that discovered appropriate technologies, including property (in herds of animals and specialized in farming), grew in overall sustainable population levels and the necessary higher output of annual subsistence.

Collective property has always existed alongside notions of private property. The former is vaguer and universal; the latter is specific and local. Humans have always lived in social groupings (like our primate cousins), not least for protection from predators and from rival groups. Success in subsistence growth both strengthens group bonds and attracts the attention of rival groups. Issues of inheritance, peace and war, inter-group bonding (women) and alliances, begin to form and eventually take their shape in relationships within and without the group.
Herds wander; they also attract outsiders. Crops are vulnerable to wandering animals and to intrusive herds. Fences, natural and man-made, give form to the institution of property. The fable of Cain and Able in Genesis illustrates the potential of property rights to lead to violence. Tribal and family wanderings across vast stretches of territory is incompatible with farming seasons, which promote settlements close to farmed land.

Jared Diamond writes eloquently about this being humanity’s greatest ‘mistake’, but what was once done cannot be undone (to return to the subsistence of population levels comparable with 11,000 years ago means the elimination of c.6 billion people). The hunter-gatherer cannot last without regular subsistence, the level of which is limited by the available bounty of nature; and neither can the farmer, but if farmers can solve the problem of inter-seasonal gaps in subsistence (storage, foraging, very large herds, and the domestication of the horse), and their new forms of subsistence can produce annually sufficient for per capita consumption, the basis is laid for a survival strategy.

Two things are clear. First, the subsistence problem was ‘solved’ eventually – growing populations at steady, low, levels of per capital consumption – and, Second, the inevitable consequence of growing inequality from growing total subsistence levels, was a siphoning off of a proportion of the annual output for the disposal of whichever sub-group took control of the group, and claimed and held control of its property.

Throughout history right up to the end of the 18th century in parts of Europe, per capita consumption was steady, but total output was slowly rising. From the decades around 1800 onwards, per capita income began and continued to grow without precedent, as did total GDP. Whereas earlier elites diverted much of the economy’s growing surplus into stone-built early examples of ‘civilizations’, the detritus of which can be found in Mediterranean countries, Egypt, Babylon, all across Europe, India and China, parts of Central America and South-east Asia, to show the scale of what became available, net of the huge amounts lost in wars, and reached levels hitherto unknown to humanity. And population numbers grew accordingly.

None of this would have happened without the invention of property. Nothing is implied here about whether people were ‘happier’, better off, ‘properly or fairly treated’, by those who ruled over them. Adam Smith (and many others) took the view that human nature is unchanging. Material change does not necessarily make for more worthy people. The task of the philosopher is to observe, not to take sides; is to learn from history, not to export current ideas to previous generations; and to make modest suggestions (they are the only ones likely to be adopted) for improvements that accord with how humans behave.

The “Man of system,” warned Smith, “is apt to be very wise in his own conceit”, and seems to imagine “that he can arrange the different members of a great society with as much ease as the hand can arrange the different pieces upon a chess board”, but “every single piece has a principle of motion of its own, altogether different from that which the legislator might chuse to impress upon it” (Moral Sentiments VI.ii.2.17: 233-34).

[Follow Link: http://bruceweb.blogspot.com/]

Another Myth Circulates

Subir Gokarn (19 October) in Business Standard HERE http://www.business-standard.com/india/news/subir-gokarnvalueorganisation/373592/
writes on Oliver Williamson's work and its “great relevance for many contemporary Indian issues”

“Adam Smith is best known for his characterisation of the market economy as an “invisible hand”. Buyers and sellers, each acting in their own interest, lead to a collectively superior outcome in terms of the efficiency of resource utilisation. The efficiency gains that the invisible hand generated were a primary contributor to the “wealth of nations”.

Comment
Adam Smith never “characterised” the market economy as “an invisible hand”. Yes, many modern economists have so-characterised Smith in such an attribution, but there is no documentary evidence that he did so.

The documentary evidence of the only three times that he used the invisible hand (in his posthumous Essay On Astronomy, 1795; Theory Of Moral Sentiments, 1759; Wealth of Nations, 1776) shows clearly that he was not referring to the market economy at all.

The first time (History Of Astronomy, 1744-58) refers to the invisible hand of Jupiter, a Roman god, no mention of a market economy; the second time, Moral Sentiments (1759), refers to a rich landlord feeding the “many thousands” he employed from the produce they supplied each harvest (no mention of a markets economy), and the third time, Wealth Of Nations (1776), refers to some, but not all merchants investing their capital locally rather than abroad (no mention of a market economy).

Smith discusses the working of markets in Books I and II of Wealth Of Nations and does not mention “an invisible hand” at all. I would regard this as conclusive: when he does mention the metaphor as an “invisible hand” he does not mention “market economies” and when he mentions market economies, he does not mention an “invisible hand”.

On this basis why is “Adam Smith … best known for his characterisation of the market economy as an “invisible hand”?

The explanation can only be that the belief is a myth, created by modern economists who believed what they were told by their tutors or read in their modern textbooks. None of them, apparently, checked with Adam Smith’s published works. Most still insist, however, in believing the characterisation to be true despite the facts being drawn to their attention.

See my articles on “Adam Smith and the Invisible Hand: from metaphor to myth” HERE; the response by Daniel Klein (HERE) and my reply to Daniel Kelin HERE.

Smith on Government Roles

Attorney Jonathan Emord writes(19 October) in News With Views HERE:

“OVERNIGHT SOLUTION TO THE NATION'S ECONOMIC WOES”

“There is an alternative to this highly paternalistic and historically failed approach to problem solving. It is the alternative view, understood to be a moral imperative by the primary author of it, that Scottish philosopher Adam Smith in his rebuttal to mercantilism, The Wealth of Nations. To paraphrase Smith, it is not by the benevolence of the butcher or the baker by which we obtain our meat and bread but by the pursuit of their own self interest. In short, self interest in the market causes those who would profit to find ingenious means to improve the human condition, for which others are willing to pay. For the benefit arising from invention, the inventor is given a just reward, profit. If the inventor is allowed to keep the lion’s share of that profit, he or she will have an incentive to invent yet again, and, if he or she guesses correctly, will hit upon yet another item that best suits the needs of consumers, lifting their standard of living in the process.

Rather than place faith in the market which has proven its profound power to transform and uplift, the present administration places boundless faith in government. Government is that great parasite that the Founding Fathers viewed as a necessary evil, one to be limited and checked so as to avoid its intrusion into our daily affairs. As government has grown exponentially, it has proven itself in every nation incapable of solving the vast majority of the human problems that its political rulers expropriate private funds to solve.”

Comment
The sentiments, broadly speaking, expressed by Jonathan Emord should appeal to many people needing a headline slogan approach rather than a detailed policy, because the stuff of practical politics is much more complex when the details are examined for selection prior to implementation.

Emord’s theme is an “overnight solution”, typical of a lawyer’s thinking – review the facts, come to a verdict, pronounce it, and then leave other people to run with its consequences. And his “overnight solution” would certainly have consequences.

I am not sure that his star witness, Adam Smith, offered quite the passive advice attributed to him by Emord:

“To paraphrase Smith, it is not by the benevolence of the butcher or the baker by which we obtain our meat and bread but by the pursuit of their own self interest.”

What happened to the “brewer”, as in “the butcher, the brewer, and the baker”, all three apparently necessary for an 18th century “dinner” (WN I.ii.2: 27)? (I note that it is quite common for the “brewer” to be missed off such “paraphrases”, and also from supposed direct quotations, mainly, I presume, from religious hostility to the consumption of alcohol).

The main point, however, is that the motivation from self-interest is not a one-way bet; the self-interest of the potential consumer also counts and differences between the producer and consumer are reconciled by their mediating their self-interests into a price acceptable to both of them.

Smith advises consumers to “address” the other’s “self-love”, while refraining from addressing ”our own necessities”; instead address “their advantages” from concluding a transaction. In short, from offering them a “bargain”: “Give me that which I want, and you shall have this which you want” (WN I.ii.3: 26). The parties are not just “price” takers – they bargain, and do so in condition where there is competition emanating from the presence of other buyers and from other sellers.

Emord goes on to assert that “Government is that great parasite that the Founding Fathers viewed as a necessary evil, one to be limited and checked so as to avoid its intrusion into our daily affairs.” I cannot speak with authority on the “Founding Fathers” viewing government as a “necessary evil”, as in that they preferred not have a government, but I suspect this view is exaggerated.

The duties of government, according to Smith, were to cover the expenses of “defence”, “justice”, certain “public works and public institutions” and the “dignity” of the “sovereign” (WN V.a.b.c.d.e.f.g.h:663-814).

Smith noted that defence was “of much more important than opulence” (WN IV.vii.30: 464-5), justice was the absolute necessity of society (without justice society “would crumble into atoms” (TMS II.ii.3.4: 86), public institutions were “necessary to facilitate commerce”, including public education (“gross ignorance and stupidity” threaten the “safety of the government” and “frequently occasion the most dreadful disorders” (WN V.i.f. 61: 788) and palliative health care (WN V.i.f.60: 787-8), and (substituting the ‘sovereign’ by ‘government’), enabling the government to “perform its several duties” (WN i.h.i.1: 814).

Smith denounced the role of several governments in pursuing the wrong policies, summed an “mercantile political economy” and challenged the competence of ministers to make decisions on behalf of the individual, but he did not preclude government enacting certain measures and enforcing them through the courts on the conduct of individual “merchants and manufacturers” when they acted against the public interest. In particular, the early forms of banking outside of any regulations to protect the public interests were dangerous to prosperity, and he advocated certain interventions to protect against “misconduct”.

These interventions he conceded were a “manifest violation of … natural liberty” but “ those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed (WN II.ii.94: 324).

The popular image among certain sections of Adam Smith being the enemy of government (the advocate of the “night-watchman state”) is quite false in its generality. Indeed, the metaphor of the “night-watchman state” was an expression introduced by Ferdinand Lasselle, the 19th-century firebrand socialist, and not Adam Smith!

It was the policies of 17th-18th century governments that Smith railed against, and not the fact that they had policies. Because Smith criticised many of the then existing policies of governments, many readers in a hurry concluded he was opposed to all government policies.

Adam Smith was not an ideologue. He observed that legislators and those who influenced them, especially the special interest groups of “merchants and manufacturers”, commonly were the worst offenders. From this background he did not advocate “laissez-faire” – he never used the words - because he could see where leaving policies to the parliamentary clients of “merchants and manufacturers” had led Britain.

Whether, Jonathan Emord’s “overnight” prescription would work if implemented – which would require the legislature to enact it, many of whom are tied, sometimes by “obligations”, others indirectly by constituency special interests – is another question. It is not a serious (as in likely to be enacted) proposition.

Announcement - temporary no connection from 11am UK time

I am travelling back to Edinburgh from France today (Saturday) and will reconnect, all being well, later this evening.

It looks like an interesting debate is commencing between myself and Bruce on the geo-historical formation and evolution of property (see my post on the ideas of Bruce for Thursday and follow the links to Bruce's website).

An Early Non-Believer in the Invisible Hand

Thirty-two years ago I reviewed a book for the Times Higher Education Supplement by John Cornwall, 1977, Modern Capitalism: its growth and transformation (Martin Robertson).

It is among my library in France and I looked it up yesterday. In its preface I found this reference to the invisible hand:

"To put the matter somewhat differently, what is downgraded in the pages that follow is the view that economic events are the outcome of some invisible hand guiding an economy through time and space in some predetermined way, with the outcome depending only upon some assumed initial conditions" (Preface, page x).

Comment
Of all the references to the metaphor of "an invisible hand" I have read lately - and believe me I have looked up and read moany more than a few (my notebook is up to page 84) - this is the only one, including a couple of self-proclaimed marxist/radical authors, that specifically rejects the use of the "invisible hand" to account for economic activity.

Some books, mainly published before 1945, of course, do not mention the invisible hand at all, my contention being that the metaphor of the "theory", "concept", "paradigm", of the invisible hand is a modern invention, attributed wrongly to Adam Smith from the post-war years, singly at first in the late 1940s (Lange, Samuelson) and then in a flood-like ubiquity (if I may allowed such a violent expression) from the early 1970s.

Thank goodness for John Cornwall, then of Dalhhousie University, to resist the early torrent of mysticism and present his analysis shorn of a metaphor that has no role in serious economic analysis.

I wonder what happened to John Cornwall.

Spare Us From the Invisible Hand

Patrick Kilbride writes in Chamber Post HERE:

“Free People, Free Minds, Free Markets”

‘In the 18th-century, Adam Smith left us with the indelible image of markets producing desirable social outcomes through the work of an "invisible hand." ’

Comment
In an otherwise neat argument for both liberty and free markets, Patrick Kilbride spoils his case with modern nonsense about Adam Smith and his use of the metaphor of “an invisible hand”.

Smith did not use the metaphor when explaining either how markets work generally (Books I and II, Wealth Of Nations) or how some, but not all, merchant traders preferred to invest locally following their concerns about the higher risks of investing abroad or in shipping (Book IV.ii, Wealth Of Nations).

In fact, a close reading of the only place in Wealth Of Nations where he used the metaphor of an invisible hand, shows that he first explains in detail the circumstances leading some, but not all, merchant traders to behave as they did (paragraphs 1 to 8, chapter 2, Book IV), and only then deploys the metaphor for the consequences of their specific behaviour (“intending their own security”), conforming to the arithmetic rule that the whole (the national annual output of wealth, including local employment) is the sum of its parts – the more merchant traders who are risk averse, despite the high profits from foreign and colonial trade, the greater the total annual wealth, including domestic employment.

Modern economists have invented a whole new meaning to Smith’s singular use of the metaphor, giving it the characteristics of a “law” of markets, though it was never stated as such by Adam Smith.

The modern invented meaning is commonly taught in first year economics courses and textbooks, and such is the effect of it on modern economists, it is extremely difficult to dislodge it – they seldom actually read Wealth Of Nations or even the relevant paragraphs (1 thru 8) and, by relying on a truncated extract from paragraph 9 only, they remain solidly convinced that Adam Smith explicitly stated what their tutors told them he wrote.

This gives succour to hostile critics of markets who throw the “invisible hand” back at them (“invisible fist” or, as seen recently, “invisible middle finger”, and such like). But there is no actual “invisible hand”, it does not exist and never did. The metaphor is just that, a metaphor, and one that was popular in literature, sermons, and poems in the 17th and 18th centuries – I have a list of 59 examples of its uses, besides Smith’s.

Mathematicians called it into being when “proving” that general equilibrium in an imaginary market, loaded with assumptions that removed all semblances of real world economies, was a theoretical possibility (Debreu, Arrow). Others (Samuelson, Freidman) and among them propagandists against Soviet communist planning, used the metaphor to good effect – Stalin needed the gulags to enforce planning, but free markets had an “invisible hand” that did its work without menace.

Editors of Time, Newsweek, Wall Street Journal, Financial Times and assorted media journalists loved the “invisible hand”, Nobel Prize winners sang it praises, and the epigones believed in its miraculous powers with the passionate certainties of Jihadists.

Worse, the invisible hand became an alibi of last resort, flaunted all round as if it existed. When it “failed”, the invisible hand was dumped among wails and the gnashing of teeth in wholesale “confessionals” (Alan Greenspan).

Markets suddenly became naked – they always were naked, but the veil of the invisible hand obscured their nakedness. It never was the answer to everything that could go awry in the normal condition of disequilibrium in all economies, much of it excited to crises by public policy interventions by legislators and those who influenced them.

Smith was right about them and the damage they could inflict – fortunately “there is a lot of ruin” in an economy, as he might have put it in another context...

A Smithian View of History

Bruce (11 October ) at the Bruce Web – history, politics, myth HERE [Please follow the link as our debate is "parallel" rather than direct (I am not sure exactly what Bruce is debating with me, so I have offered an alternative perspective of history, which I think I share with Adam Smith.]

"Hi Bruce

I shall offer some comments on your article: “Adam Smith and Glibertarianism: history vanished into the memory hole”, first stating I am not sure to whom you address your remarks and,adding, I do not share your narrower view of history than Adam Smith’s, nor (on a lesser scale of philosophical symmetry) mine.

Applying class analysis to history, especially where it is informed by back-projecting 19-21st century consciousness, is limiting. If the mass of people in the distant past were deprived of the category, “democracy” as an idea, they were unaware of it. Athenian “democracy” disenfranchised women and slaves; in its modern context, glimmers of democracy appeared in Cromwell’s England (Levellers) and in late 18th century British colonies, and in Britain and France. Until then, the issue of “Liberty” was more important and, in my view, liberty still is more important than democracy – the former cannot be other than self-evident, the latter often is a sham (as recent and current examples show).

In Smith’s Lectures on Jurisprudence (1762-63) he gives a very clear account of the very ‘slow and gradual’ political evolution of liberty: Magna Carta, trial by jury, independent judiciary, rule of law, Habeas Corpus, through the absolute monarchies of the ‘allodial’ and ‘feudal’ disorders of Europe from the fall of Rome in the 5th century to the Constitutional Monarchies after the English civil war, 1740-60, and the ‘Glorious Revolution’, 1688.

A lack of democratic consciousness runs right back to and throughout pre-history and, incidentally, so does a lack of consciousness about property. The discovery of “property” was a revolutionary idea enabling a minority of the world’s tribes to move to rising population levels from the population-limiting mode of subsistence of the forest and rivers in which, well past the 18th century, the absence of private property among the majority of the world’s tribes in the vast land-mass of Africa, south Asia, Australia, the Pacific and the Americas, held their human populations in check. Tribal populations before property, and many of them afterwards, unaware of the phenomenon of property lived on in their subsistence modes. Both property and non-property societies were oblivious of each other’s existence until relatively recently.

Whilst their concepts of property were primitive and were confined to tribal properties, they were firmly resistant to other tribes intruding on “their” particular territories, but without their having clear concepts of property they could not evolve into early civic societies, based on laws, that were practiced over millennia. The group and individual violence common in many such primitive regimes of ‘tribal’ property is well documented in anthropological studies. Marxists idealise the ‘forest’ mode of subsistence as “primitive communism”, but it certainly had a bloody record among populations over hundreds of millennia, with women mainly suffering as victims and ‘war’ booty, and men suffering early and violent deaths (proportionally greater than well-known, so-called “murder capitals” in modern times).

Shepherding and agriculture (Smith’s 2nd and 3rd ages of man) gradually brought more sophisticated forms of property, first from tribal towards extended familial property forms and then towards individual families, and finally to inheritable personal properties. With such local property forms the need for resolving disputes emerged, many of them violent. Societies with individual property forms developed fairly high forms of civic society, at least for short periods, and while the annual distribution of “the necessaries, conveniences, and amusements of life” remained skewed, the long accumulations of stone-civilisations spread across Europe and the north Asian landmass, while not much changed elsewhere.
Into this world of cycles of civilisation and barbarism, with accumulating knowledge amidst “pusillanimous superstition”, and slow growth in total “GDP” (for want of a better term), though fairly constant per capita GDP (the surplus creamed off and directed to stone monuments, the detritus of such is scattered across the Euro-Asian landmass), Bruce introduces a conceptual apparatus to judge past epochs as if such concepts are applicable or remotely relevant to the past generations involved, or to modern generations, about what is called “history” (none of which we can change, experience, or even remedy now).

The distant past is, well, distant. The terrible crimes of oppression, genocide, sexual dominance, shaman-led atrocities, wholesale slavery, conquest, and ignorance, cannot find a remedy, a balm or an anti-septic comfort, nor can they be “revenged” (by whom on whom?). We are not just the descendants of noble savages, ignoble tyrants, and human saints. There are now six billion (and counting) where two millennia ago there were 100 million, and a couple of hundred millennia ago there may have been 50,000 or fewer.

Back-projecting modern indignation onto that past is an awesome vision. Who knows which “crimes” and degrees of “culpability” were shared by which individuals in the ancestors of each of us? Who knows who, among the past populations aided and abetted any of the “crimes” of their fellows, whether chasing and killing interlopers from other tribes on “sacred land”, or stole their women, or swung the lash or the sword at the defenceless “spoils of war” and unspeakable domination, right up the modern genocides of Nazism or Stalinism?

A Smithian perspective is somewhat less ambitious, and more to the point. It is to study the past to learn how the present came about; to neither condemn nor praise it, but to understand it, and to offer advice in areas where changes may be made to improve the lot of those unable to prosper humanely under the current regimes of the current plenty.

Property made some societies in the mainly Northern latitudes incomparably more opulent that the majority of the rest of the world’s population; attacking, perhaps destroying, the basis of that opulence is to act as if property never happened, or that it should have happened differently. That it didn’t happen differently is sufficient warning that what didn’t happen couldn’t happen. No examples of societies without property, "fairly" or “unfairly” distributed, managed to create the technologies and knowledge levels of those with property. Searching for evidence of seething masses of revolutionary inspired “soldiers” held down by perfidious state functionaries is as futile as it is fictional.

I think understanding such awesome facts is a proper prelude to understanding how and why we might move, slowly and gradually, towards societies more in line with the sentiments, oft expressed by Adam Smith, where those who sustain and co-operate in the progress towards opulence share in the resultant growth in “the annual output of the necessaries, conveniences, and amusements of life”.

[My 2008 book, Adam Smith: a moral philosopher and his political economy, (Palgrave Macmillan) gives a more detailed account than I managed to squeeze in here.]

Jay Richards on Selfishness

Jay W. Richards, author of Money, Greed, and God: Why Capitalism is the Solution and not the Problem (2009), (15 October) writes in The American (the journal of the American Enterprise Institute) HERE:

"Greed Is Not Good, and It’s Not Capitalism"

“The Virtue of Selfishness?

You might think that greed has been bound up with defenses of modern capitalism from the very beginning. You might recall Adam Smith, the father of modern capitalism, who famously wrote, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Ayn Rand and others seemed to extend Smith’s point by treating greed as the basis of a free economy. There are connections here of course; but Smith never argued that greed is good. His view was far different, and far more subtle.

Adam Smith argued that in a rightly ordered market economy, you’re usually better off appealing to someone’s self-love than to their kindness.

First, Smith argued that in a rightly-ordered market economy, you’re usually better off appealing to someone’s self-love than to their kindness. The butcher is more likely to give you meat if it’s a win-win trade—if there’s something in it for him—than if you’re just asking for a handout. This is, or should be, common sense.
Second, Smith knew the difference between self-interest and mere selfishness. Every time you wash your hands or take your vitamins or clock into work on time or look both ways before you cross the street, you’re pursuing your self-interest—but none of these acts is selfish. Indeed, generally speaking, you ought to do these things. Greed, in contrast, is a sort of disordered self-interest. Adam Smith, the moral philosopher, always condemned it as a vice.

Third, Smith never argued that the more selfish we are, the better a market works. His point, rather, is that in a free market, each of us can pursue ends within our narrow sphere of competence and concern—our “self-interest”—and yet an order will emerge that vastly exceeds anyone’s deliberations.

That’s the problem with socialism and all sorts of nanny-state regulatory prescriptions: They don’t fit the human condition.

Finally, and most importantly, Smith argued that capitalism channels greed. He recognized that human beings are not as virtuous as we ought to be. While many of us may live modestly virtuous lives under the right conditions, it is the rare individual who ever achieves heroic virtue. Given that reality, we should want a social order that channels proper self-interest as well as selfishness into socially desirable outcomes. Any system this side of heaven that can’t channel human selfishness is doomed to failure. That’s the genius of the market economy.”

Comment
I have criticised many times on Lost Legacy the cynical author of the Hollywood film script, Wall Street, for putting out the “Greed is Good” nonsense. Such a view had nothing at all to do with Adam Smith, either in Wealth Of Nations or Moral Sentiments.

Jay’s article is almost a perfect riposte to the Gekko libel about capitalism except for a paragraph elsewhere in it:

“In contrast, capitalism is fit for real, fallen human beings. “In spite of their natural selfishness and rapacity,” Smith wrote, business people “are led by an invisible hand ... and thus without intending it, without knowing it, advance the interest of the society.” Notice he says “in spite of.” His point isn’t that the butcher should be selfish, or even that the butcher’s selfishness particularly helps. Rather, he argues that even if the butcher is selfish, he can’t make you buy his meat. He has to offer you meat at a price you’ll willingly buy. He has to look for ways to set up a win-win exchange. Surely that’s good.”

Jay compresses two paragraphs together from Wealth Of Nations to make this unnecessary point about the so-called “invisible hand”. However, the example he makes of the “butcher, brewer, and baker” paragraph (Wealth Of Nations, Book I.ii.2:27) is spot on and worthy of wider circulation.

Regular eaders of Lost Legacy will know that Smith was not referring to all “business people” being “led by an invisible hand”, but only to those in a special case when they preferred the home trade to foreign trade, the trigger for their behaviour being their risk-avoidance regarding foreign trade (Wealth Of Nations, Book IV.ii. paragraphs 1 to 9: 452-56).

However, this corection is for the record only and in no way diminishes the excellent case that Jay Richards makes against the elision of self-interest into selfishness. Bernard Mandeville (1734: Fable of the Bees ) and his modern epigone, Ayn Rand, were absolutely wrong about selfishness. Adam Smith (and Jay Richards) was absolutely right about the anti-commercial sentiments of "selfishness".

A candidate for the October Lost-Legacy Prize?

Elinor Ostrom - An End to Homo Economicus?

Mario Rizzo writes (13 Oct) in Wall Street Pit HERE and Here:

“Elinor Ostrom and the Relevance of Economics”

“In fact, I would venture the guess than most economists had not heard of her before the prize was announced yesterday morning.

Two reasons for this are that her degree is in political science and she has written for publications outside of the mainstream economics journals. Additionally, her work, by and large, lacks the high degree of mathematical formalism now so characteristic of economics.

Yet the Nobel Prize Committee has done a great service to economics and the greater social-scientific community. When a well-known economist receives the prize little is gained apart from the recognition of a job well done and perhaps some wider public recognition. I do not think that great contributions are made in any discipline because of the incentive effects of an improbable prize. However, in this case the Nobel Committee has brought extraordinary work to the attention of an economics discipline that has become excessively specialized and, perhaps increasingly irrelevant to the real world, as Paul Krugman and others have recently suggested.

Professor Ostrom’s work is highly relevant to important issues in economic development, common-pool resources, the development of social norms, and the solution of various collective action problems. Her work is also methodologically diverse. She uses experimental methods, field research, and evolutionary game theory. She is not afraid to draw on various disciplines when appropriate: economics, political science, evolutionary psychology, cultural anthropology and so forth.

“She is a very worthy intellectual descendant of Adam Smith who realized that the study of trade based on self-interest needed to be supplemented by a broader view of humankind – individuals capable of the so-called “moral sentiments” like honesty, benevolence, and loyalty, as well as the standard vices.”

“The central problem on which her employment of the notion of “thick rationality” can shed light is what she calls “social dilemmas.” These are circumstances in which interacting individuals can easily succumb to maximizing their short-term interests to the detriment of their long term interests. To return to our irrigation example, suppose farmers share the use of a creek for irrigation. They face a collective problem of organizing to clear out the fallen trees and brush from the previous winter. Each farmer would like to have the others do it. There are incentives to free-ride on the “public spiritedness” of others – however, everyone may think this way and nothing will get done. Ostrom finds that cooperation will often take place while the “thin” theory of rationality predicts that it will not. She finds that factors such as face-to-face contact (likely when there are small numbers), the equality of each farmer’s stake in the benefits of irrigation, and the ease of monitoring the farmer’s contribution to brush removal all make the likelihood of cooperation greater.”

Comment
If, like me, you are unfamiliar with the new Nobel Prize winner, Elinor Ostom’s work, you should start by reading this short piece by Mario Rizzo. It is a continuation of Adam Smith’s approach to moral philosophy and political economy.

It also rejects the sanitized neo-classical formalism, locked into abstract maths and non-human theories of rationality, but which claims “scientific” status despite the evidence that little of it applies to the real world and real humans – and when it is applied and policy conclusions are drawn from it and tried, they fail miserably, as the billions spent on development have shown from their unspecified, though visible and obvious, unintended outcomes.

From what I have read so far, Adam Smith’s legacy is safer in Elinor’s hands than almost the entire discipline of modern neo-classical economists put together.

Identify the Invisible Hand!

Alex Tabarrok writes on the Nobel Prize for Oliver Williamson in an article on the Marginal Revolution Blog HERE “Oliver Williamson and the pin factory”, which is fine but it contains the following paragraph:

“Transaction cost economics is all about applying these ideas in different settings to figure out the best governance structures (marriage, vertical integration etc.) in different circumstances. How does one deal with expensive investments (such as highly individual dies or plant construction) that are specific to a given trade and put the investor at risk yet which increase productivity? Williamson analyzes how firms come to rely on long term contracts or vertical integration or other seemingly non-competitive solutions to enhance market productivity. Early generations of antitrust enforcers often saw these as monopolistic dealings, but scholars such as Williamson helped us understand how these are essential to the workings of the invisible hand.”

Comment
Be clear, I applaud the award to Oliver Williamson, whose books I read as an undergraduate (I bought these outside of the recommended reading list and tried to introduce their ideas into my essays), and, of course, applaud the shared award with Elinor Ostrom.

So deep is the modern association of the workings of markets with the metaphor of the “invisible hand”, that it slips in even in the strangest of circumstances.

How is vertical integration “essential to the workings of the invisible hand”? What “workings”? Where can they be seen? Who has seen them to date? Where did he or she see them? Where did they describe them in a publication? Where in the maths of markets is the term for the “invisible hand”?

I could go on, but won’t.

A Small Step for Cubans?

The other evening, watching television, an item on the news caught my attention. Apparently, a group of Cuban farmers had been given permission from the Raul Castro government to produce lettuces for private.

This permission seemed to have shown early results, mainly in the form of more lettuces for people who wanted to buy them, in itself an unexceptional outcome to those among us who appreciate how markets work, but for those sceptics, living in the richest economies on the globe, whose impatience with markets leads to their condemnation of them (because they don’t solve all the problems they imagine that they should solve), the new Castro experiment is the thin of end of the wedge to perdition.

Now I have no illusions about Raul Castro, or his brother for that matter, nor for any of the Chinese communist leadership experimenting with capitalist incentives, nor their Vietnamese neighbours, but I do recognise sensible pragmatists who have realised at last that their idealist systems do not work.

Their ideological certainties may make them, and what Lenin< called their “useful idiots” overseas, feel superior to “bourgeois lackeys” like we classical economists, but the realities show them to be utterly wrong about doing away with markets.

The short film clip showed two brothers loading their lettuce harvest onto a waggon, already bursting at the edges with lovely, green lettuces destined for market (or government warehouses – it wasn’t clear which). The sudden rise in production looked phenomenal. Marxists can argue against markets but nobody can argue with an empty market stall under their system and a full one under the “permission” to produce for reward.

I have to say that I watched the changes before me – the brothers were laughing with pride – and I thought of Adam Smith describing how markets worked in Book I and II of Wealth Of Nations and their morality in Moral Sentiments. Instead of their sisters and daughters prostituting themselves to cater for sex tourism, they can work voluntarily in food production or whatever for the benefit of themselves and their customers, if only Castro’s bureaucrats – never short of lettuce under the socialist system – would only get out of the way.

An Hour in the Life Of a Humble Journeyman

I have a copy of Hector C. Macpherson’s (1899) "Adam Smith", Famous Scots Series, Oliphant Anderson & Ferrier, Edinburgh, in my library in France, which I had cause to look up shortly after I arrived at for a week. I acquired my copy in a second-hand bookshop in Edinburgh in the early 90s for £5.00. There is an interesting inscription on the fly-leaf:

“With Mrs Pollocks’ best wishes. To Willie T. McVittie, Manse Auldgirth. July 1916.” Maybe, “Willie” was of an age for a First World War call-up and Mrs Pollocks thought he needed some good moral guidance?

The Manse, of course, was the Church of Scotland’s local Minister’s house, provided by the Kirk (the phrase, "son of the Manse" was a much used one until recently) and many Manses have been sold at good prices because they generally were subtantially built).

When I wrote (2003-05) my Adam Smith’s Lost Legacy (2005, Palgrave Macmillan), I quoted from Macpherson’s book:

“...Smith’s conception of economic science, including as it did the co-operative and sympathetic side of life, was eminently hopeful and enervating. His view of the industrial order was wide enough to give full play to that subtle psychological chemistry by which egoism is transmuted in altruism. In Smith’s words: ‘In civilised society 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 such a state, as Smith goes on to show, man can most satisfactorily connect himself with his fellows through the medium of the reciprocity of services – a process which invests self-interest with a social and ethical quality. From this social and ethical germ develops all the higher virtues of civilisation.” (pp. 75-6)

“Hector Macpherson’s (1851-1924) unpretentious little book demonstrates a clearer understanding of Smith’s works than has been exhibited by many distinguished authorities. The sentence: ‘His view of the industrial order was wide enough to give full play to that subtle psychological chemistry by which egoism is transmuted in altruism’ allied to the phrase ‘the reciprocity of services’ cuts through the worthless babble about ‘selfishness’ and its associated ideas of ‘economic man’ (the one with the dismal personality).”

“...Economic science suffers, from what Macpherson called a ‘distracting confusion’, because it ignored how people actually satisfied their wants through reciprocal exchanges in real markets. Smith’s insight is no manifesto to selfishness, nor a triumph of the one-sided pursuit of self-interest (or indeed, a paean to the ‘granite of self-interest)! It is not necessary to wriggle to ‘softer’ interpretations of self-love’ to defend Smith’s insight.” (p. 114)

By the time I was compiling the Lost Legacy manuscript I had forgotten about Macpherson's ieas on the invisible hand and the social harmony that was induced by reciprocation. That particular part of my Lost Legacy concentrates on Smith’s unique assessment of the role of bargaining (corresponding with mine, as I had spent twenty-years observing and teaching bargaining at Business Scools).

I dealt briefly and inadequately at that time with the invisible-hand metaphor in chapter 39 of Lost Legacy, though traces of my eventual considered opinion are clear enough (see: "Adam Smith and the Invisible Hand: from metaphor to myth", 2009 HERE). It was not as important to me at the time in 2005 as it has become; the almost unanimous and serious misinterpretation of the famous "Butcher, Brewer, Baker" passage in Wealth Of Nations (WN I.ii.2: 26-27) was far more important than the invisible hand was to become.

Macpherson ascribes the invisible hand to the “ability” by which society in modern terms lessens the “individual struggle for existence” (progress to opulence?) in a “constant transformation of the onerous into the gratuitous utilities of life”. Looking at the transformation of the UK throughout the 19th century from Macpherson’s perspective, the spread of opulence was real (though children in Edinburgh slums were photographed shoeless around this time); in the early 19th century, Edinburgh slums were indescribably worse.

Announcement - connected

Connected 09.45pm French time.

Shall post Sunday.

Gavin

Announcement: Connection Interrupted

I shall of off-line until I re-establish connection in France.

This short break is to arrange the property for the winter.

Always mindful that Adam Smith visited France (Toulouse, Bordeaux, and Paris) 1764-66, I also have parts of my library there.

I hope to re-connect later today.

Gavin

Comments Moderation Stays ON

A series of attacks on Lost Legacy from foreign repetitive language trolls and mischief-makers forced me to introduce the Blogger feature of Comments Moderation.

These have continued intermittently since (the latest, a couple of hours ago). I am therefore compelled to leave Comment Moderation on.

Apologies.

As I tend to visit Lost Legacy regularly when I am in the house (and when connected abroad), there should not be a long delay for genuine readers wishing to make a point or two. Though, I notice the number of comments from readers has dropped away. This too is disappointing and I hope it is soon reversed.

Let me have your views.

Gavin

The Invention of Homo Economicus

Terence Netto writes on "Anwar Ibrahim at Berkeley in Din Merican: the Malaysian DJ Blogger: Remove Authorianism and Dictatorship" (8 October) HERE

"Anwar’s Bridging Ability

Anwar’s penchant for synthesizing thought from Islamic and western streams recently drew attention from an unlikely quarter. Sholto Byrnes, assistant editor of the British left wing publication, New Statesman, said in a column in the September 3rd edition, that Anwar had once commented that “Asian man was ‘Homo religiosus’ “.
Evidently, the term was derived from Adam Smith, the Scottish moral philosopher and economic theorist, who founded classical economics on the premise of the rational “economic” man – “Homo economicus”. Anwar is fond of quoting from Adam Smith’s books, especially The Theory of Moral Sentiments."

Comment
Adam Smith did not found ‘classical economics’ on the premise of ‘Homo economicus’. The idea of the perfectly rational man in economic behaviour came much later in the 1870s (Smith’s last edition of Wealth Of Nations was published in 1790, a few weeks before he died.

It did not mention or imply Homo economicus, which is associated with the ‘marginalist economics’ of Jevons, Walras and others, and is elaborated in the 20th century as neo-classical economics and general equilibrium theorists of the 1950s onwards.

It alleged association with Adam Smith is a modern invention.

Excellent Questions on Adam Smith's Thinking

Scott Beaulier reports on The Economic Way of Thinking HERE

“A Night of Enlightenment”

“Jim Otteson's talk here at Mercer last week was titled "The Scottish Enlightenment on the Promise and Peril of Commercial Society." Jim gave us a wonderful overview of the Enlightenment (with particular emphasis on Adam Smith). According to Otteson, the promise of commercial society was material abundance and greater freedom of choice; Smith, the great empiricist, speculated about the causes of economic abundance, and, with hindsight, his conjectures appear to have been on the mark.

While I got to spend plenty of time with Jim while he was in town, there were still a number of questions I never got to ask him while he was in town.”

[Scott lists the questions he didn’t get to ask Jim, but does not appear to offer any suggested answers, which is a great pity as they are good questions and Jim Otteson is an excellent source for good answers]

The Questions:

“(1) As a philosopher and historian of economic thought, what does he (Otteson) think of the literature that says Adam Smith was no liberal (in the classical sense)?

Many respected historians of economic thought have painted a picture of Smith as someone other than Mr. Laissez Faire. Along with some recent and carefully thought through history of thought pieces, there's also Murray Rothbard's attack on Smith.

(2) In Otteson's Adam Smith's Marketplace of Life, the "Das Adam Smith Problem" is reconciled by saying a model of self-correction is present in both of Smith's major books, The Wealth of Nations and The Theory of Moral Sentiments. In fact, Otteson pushes the idea to say a market-like model is present in Smith's ideas about aesthetics and language, too.

While I find the Otteson argument persuasive, I worry about the mechanisms in the "market for morality." They are less clear than the signals sent by profit and loss in formal markets.

(3) Can you tell us a bit about ways Smith's friendship with Hume influenced Smith's views of economics, politics, and religion?

(4) What are we to make of Smith taking a job as commissioner of customs of Scotland late in his career?

(5) How much stock do you place in the happiness research results mentioned above and discussed in your presentation?

(6) What would Smith think about the economic imperialism (e.g., the law & economics revolution, the economics of the family, etc.) that has occurred in our discipline?”

Comment
If I hear any more about answers to these questions I shall post the link on Lost Legacy.

Failign that I shall post my answers to them, though I would prefer to read Jim's answers too.

On Smith’s Approach to Corporate Governance

[This is a long post because it requires a proper presentation of some of the evidence.]

At the History of Economics Society annual meeting in the University of Colorado, Denver this year, I attended one of the sessions at which there was a small eruption of differences between myself and the distinguished scholar, Professor Amos Witzum (London Metropolitan University), a brilliant lecturer, given to an upbeat, enthusiastic style of delivery. He also betrays hints of an almost abrasive disposition when faced with minor dissent. However, I have always found Amos a most likeable educator with a friendly personality and the kind of colleague I tend to find both admirable and companionable.

Amos delivered a typically robust account of the inequities of joint-stock companies as part of his lecture on “Incentives, Ownership and Motivation”, during the course of which he made several remarks about the failings of joint-stock companies, calling on support for some of his views from Adam Smith’s well-known criticisms of the 18th-century version of them in Wealth of Nations (Books IV and V).

Amos did not make any incorrect statements about Smith’s criticism – I recognised his references as I am sure most of the other listeners did too – but I did think that Amos generalised too far from Smith’s specific remarks about the 17th-18th century joint stock companies that he covered in his later editions of Wealth Of Nations, the histories of which companies Smith went into in considerable detail, leaving some choice quotations that have proved popular ever since.

Now this is not something unique to Amos. I reported on Lost Legacy, 28 September 2006, comments on a paper by Professor Sankar Muthu (Princeton University ) who delivered (in first-class teaching form) “Adam Smith’s critique of International trading Companies: theorising globalisation in the age of Enlightenment”, which was a well-based study of Smith’s thoughts on an aspect of international trade, at a conference I attended (“Re-thinking Adam Smith”) in New York. Sankar Mathu applied Smith's criticisms directly to modern coporations.

The protocols of the Conference prohibit my commenting directly on Professor Muthu’s paper, so I wrote in Lost Legacy only generally about the subject of Smith’s critique of the 18th-century international trading companies. (Readers can read my comments in the Archives for September 2006, by clicking the month and year in the right-hand column on this page).

My main point is that we have to be careful in reading Wealth of Nations (Books IV and V) so as to downplay the limited relevance of Smith’s criticism with modern joint-stock companies. Smith's condemnatory comments are so pertinent to the targets of his ire that it is too easy to quote wholesale, out of context, and transfer them to present times.

That, basically was my comment after listening to Amos Witzum’s, otherwise excellent, paper. I probably made the debating mistake of saying that Smith’s criticism of the chartered trading joint-stock companies was really about their “distance” from supervision, though it clearly played a part. It was not just their structure; “distance” magnified the foibles of managers operating more that a year in sea journeys to and from India. To which Amos immediately interupting said adamantly that I was “wrong”. Fair enough, if I was wrong, I was wrong, but I didn’t think that my objection could simply be dismissed by repeating emphatically the words, “you’re wrong”, several times, no matter what I tried to say.

Let us look at Wealth Of Nations. First of all Book IV.

Smith discusses the mercantile system and notes the practice of Dutch traders with the Spice islands, who burnt the ‘speceries’ after they had loaded their ships with produce, so that they limited the quantity of spice entering Europe in a season (WN IV.vii.c. 101: 636). This “destructive plan” also impoverished the local people by lowering their “annual produce” (WN IV.vii.c.102: 637).

“Nothing can be more completely foolish than to expect the clerks of a great counting-house at ten thousand miles distance, and consequently almost out of sight, should upon a simple order from the masters, give up at once any sort of business on their own account, abandon for ever all hopes of making a fortune, of which they have the means in their hands, and content themselves with the moderate salaries which those masters allow them, and which moderate as they are, can seldom be augmented, being commonly as large as the real profits of the company trade can afford.” (WN IV.vii.c.105: 638-9)

[Smith is careful to not expose himself to the risk of legal action: “I mean not, however, by any thing which I have here said, to throw any odious imputation upon the general character of the servants of the East India company, and much less upon that of any particular persons.” WN IV.vii.c.107: 641]

In “Of the Public Works and Institutions which are necessary for facilitating particular Branches of Commerce” (WN V.i.e; added to the last edition of Wealth Of Nations, 1790), Smith sets the scene, first with the regulated Companies):

“Some particular branches of commerce, which are carried on with barbarous and uncivilized nations, require extraordinary protection” (WN V.i.e.2: 731).

“These companies, though they may, perhaps, have been useful for the first introduction of some branches of commerce, by making, at their own expence, an experiment which the state might not think it prudent to make, have in the long-run proved, universally, either burdensome or useless, and have either mismanaged or confined the trade” (WN V.i.e.5: 733) … “they are called regulated companies” (WN V.i.e.6: 733).

“But though such [regulated] companies may not, in the present times, be very oppressive, they are certainly altogether useless. To be merely useless, indeed, is perhaps the highest eulogy which can ever justly be bestowed upon a regulated company; and all the three companies above mentioned seem, in their present state, to deserve this eulogy” (WN V.i.e.9: 734).

“The object, besides, of the greater part of the bye-laws of all regulated companies, as well as of all other corporations, is not so much to oppress those who are already members, as to discourage others from becoming so; which may be done, not only by a high fine, but by many other contrivances” (WN V.i.e.10: 736).

Then with the Joint-stock companies:

“The directors of a joint stock company, on the contrary, having only their share in the profits which are made upon the common stock committed to their management, have no private trade of their own of which the interest can be separated from that of the general trade of the company. Their private interest is connected with the prosperity of the general trade of the company, and with the maintenance of the forts and garrisons which are necessary for its defence. They are more likely, therefore, to have that continual and careful attention which that maintenance necessarily requires” (WN V.i.e.11: 737).

“Joint stock companies, established by royal charter or by act of parliament, differ in several respects, not only from regulated companies, but from private copartneries” (WN V.i.e.15: 740).

“In a joint stock company, on the contrary, no member can demand payment of his share from the company; but each member can, without their consent, transfer his share to another person, and thereby introduce a new member” (WN V.i.e.16: 740).

“Secondly, In a private copartnery, each partner is bound for the debts contracted by the company to the whole extent of his fortune. In a joint stock company, on the contrary, each partner is bound only to the extent of his share” (WN V.i.e.17: 740-41).

“The trade of a joint stock company is always managed by a court of directors. This court, indeed, is frequently subject, in many respects, to the control of a general court of proprietors. But the greater part of those proprietors seldom pretend to understand anything of the business of the company, and when the spirit of faction happens not to prevail among them, give themselves no trouble about it, but receive contentedly such half-yearly or yearly dividend as the directors think proper to make to them. This total exemption from trouble and from risk, beyond a limited sum, encourages many people to become adventurers in joint stock companies, who would, upon no account, hazard their fortunes in any private copartnery. Such companies, therefore, commonly draw to themselves much greater stocks than any private copartnery can boast of … The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. It is upon this account that joint stock companies for foreign trade have seldom been able to maintain the competition against private adventurers. They have, accordingly, very seldom succeeded without an exclusive privilege, and frequently have not succeeded with one. Without an exclusive privilege they have commonly mismanaged the trade. With an exclusive privilege they have both mismanaged and confined it” (WN V.i.e.18: 741).

“But a joint stock company, consisting of a small number of proprietors, with a moderate capital, approaches very nearly to the nature of a private copartnery, and may be capable of nearly the same degree of vigilance and attention” (WN V.i.e.21: 744).

“But the loss occasioned by the negligence, profusion, and malversation of the servants of the company had probably been a tax much heavier than all those duties. That a joint stock company should be able to carry on successfully any branch of foreign trade, when private adventurers can come into any sort of open and fair competition with them, seems contrary to all experience” (WN V.i.e.25: 746).

“It is merely to enable the company to support the negligence, profusion, and malversation of their own servants, whose disorderly conduct seldom allows the dividend of the company to exceed the ordinary rate of profit in trades which are altogether free, and very frequently makes it fall even a good deal short of that rate. Without a monopoly, however, a joint stock company, it would appear from experience, cannot long carry on any branch of foreign trade” (WN V.i.e.30: 755).

Smith’s very detailed critique of the joint-stock companies in foreign trade is the main source of his quotable comments about their management (the principal–agents’ problem as it is known today). However, he turns to possible exceptions where joint-stock companies may be viable and honest:

“The only trades which it seems possible for a joint stock company to carry on successfully without an exclusive privilege are those of which all the operations are capable of being reduced to what is called a routine, or to such a uniformity of method as admits of little or no variation. Of this kind is, first, the banking trade; secondly, the trade of insurance from fire, and from sea risk and capture in time of war; thirdly, the trade of making and maintaining a navigable cut or canal; and, fourthly, the similar trade of bringing water for the supply of a great city” (WN V.i.e.32: 756).

“Except the four trades above mentioned, I have not been able to recollect any other in which all the three circumstances requisite for rendering reasonable the establishment of a joint stock company concur … The joint stock companies which are established for the public-spirited purpose of promoting some particular manufacture, over and above managing their own affairs ill, to the diminution of the general stock of the society, can in other respects scarce ever fail to do more harm than good. Notwithstanding the most upright intentions, the unavoidable partiality of their directors to particular branches of the manufacture of which the undertakers mislead and impose upon them is a real discouragement to the rest, and necessarily breaks, more or less, that natural proportion which would otherwise establish itself between judicious industry and profit, and which, to the general industry of the country, is of all encouragements the greatest and the most effectual” (WN V.i.e.40: 758).

Readers may note all of these positive example given by Smith operated in Britain, under English or Scottish law, and were within ‘sight’ of their shareholders and creditors.

Given the alternative institutions available in the 18th century and the experience of these, as detailed by Adam Smith, for as long as these impediments persisted, Smith’s conclusions are inescapable.

That much I can agree with Amos Witzum (and did), but to extract Smith’s criticisms of the performances of the East India Company managements in London and Calcutta (more than a year’s sail out and back) with today’s 24-hour news cycle, internet messages in seconds and the far great public regulation and reporting requirements, that dominate global and national businesses alike is at least questionable without an emphatic “you’re wrong!” as the only response.

Edmund Conway’s Case "Not Proven" (as in the Scottish Verdict)

Edmund Conway’s "50 Economics Ideas You Really Need to Know" published by Quercus at £9.99, arrived yesterday and, as promised in Lost Legacy (29 September), I said I would comment on whether it justified my apprehensions, or not, by simply repeating the claims of modern economists that Adam Smith, allegedly asserted that every individual acting to promote their self interests contributed to the public good (a dubious contention is practice).

Chapter 1. ‘The Invisible Hand’ opens with the ‘Greed is Good’ quote in the film, Wall Street, comparing the impact of Gekko’s line to the “impact” Adam Smith’s “radical idea of the ‘invisible hand’ had when first proposed … in the 18th century.” (p 6) Strange then that Smith’s use of the metaphor on invisible hand passed almost unnoticed in his lifetime, and, indeed, for many decades afterwards, with nary a sign of it having any impact at all until mid-20th century.

By the end of these two paragraphs, I felt sure that Edmund Conway’s book was about to go the way of all lazy modern economists in their swallowing of the invisible hand myth. But, strange to say, “50 economics ideas” seems to have been edited somewhat crudely, or in a hurry, to avoid that fate. Otherwise, I would have to be much firmer with it than I find I need to be.

Edmund sidesteps my scholarly ire neatly by simply equating the metaphor of the invisible hand as “shorthand for the law of supply and demand”, adding that this law “explains the pull and push of these two factors [which] serve to benefit society as a whole”. Undeniably true, supply and demand serves to “benefit society as a whole”. But, of course, the metaphor had nothing to do with the law of supply and demand whatsoever (as analysed by Smith in Books I and II of Wealth Of Nations, without mentioning anything about “invisible hands”).

Edmund notes, inaccurately, that “Smith used the phrase only three times in his 1776 masterpiece” and then accurately quotes from the single instance of his use of the invisible hand metaphor in Wealth Of Nations (Book IV.ii.9: 456). Smith only used the metaphor 3 times in all of his works (over a million words): first once in his Essay on Astronomy [1744-58; published 1795 – he died in 1790] (HOA III.2: 49); then once in Moral Sentiments [1759] (TMS IV.ii.10: 184), and finally once in Wealth Of Nations [1790].

And that’s the lot, for an alleged “radical idea”, which hardly anybody took any notice of until the end of the 19th century, and latterly in the 20th century, particularly after 1950; the supporting evidence for the claim is slim indeed. The metaphor only became “radical” in the minds of its modern re-inventors from seeking to justify their “radical” mathematical models of general equilibrium from only 62 years ago onwards, a long time from the 18th century, and in competition with claims for Soviet/Social Democratic-style planning over Western markets.

Edmund restores his position to some extent in the last three paragraphs of Chapter 1:

“Although the idea of the invisible hand has been hijacked by right-wing politicians in recent decades, it is not a theory that necessarily represents a particular political view … The invisible hand underlines the fact that individuals – rather than governments and administrators – should be able to decide what to produce and consume, but there are important provisos.

Smith was careful to distinguish between self-interest and pure selfish greed. It is in our self interest to have a framework of laws and regulations that protect us, the consumers, from being treated unfairly. This includes property rights, the enforcing of patents and copyrights and laws protecting workers. The invisible hand must be backed up by the rule of law.

This is where Gordon Gekko got it wrong [more correctly, where the Hollywood scriptwriter’s imagination got it wrong]. Someone driven purely by greed might choose to cheat the law in an effort to enrich himself to the detriment of others. Adam Smith would never have approved.”

Concluding assessment: Edmund Conway is about 60 per cent correct. By slightly obfuscating Smith and the invisible hand, in effect he shows that if the modern version of the metaphor was dropped altogether, and the sentences left were based on supply and demand, on markets and on the rule of law, the underlying commercial society that is at the root of our prosperity, plus our liberty and our moral sentiments, would ensure the least worse outcomes of all known (tried and untried) arrangements, including the ones we have just now. If his “50 economics ideas” gets than across he will do all of us (and Adam Smith’s legacy) a considerable favour.

Paul Samuelson's Nuanced Assessment of the Invisible-Hand Doctrine

Following yesterday’s post on Paul Samuelson’s 1948 introduction of the alleged “theory” of Adam Smith about the “invisible hand”, I thought I should bring the debate a bit closer than 62 years ago (as a correspondent, Garry, suggests via email).

Turning to my draft text, I shall quote from Paul Samuelson and William D. Nordhaus’s 12th edition of Economics, published in 1988, or 22 years ago (I did not make notes of the 18th edition in 2008; a new, 19th edition is imminent), because it added little to the debate, but I shall make notes on my next visit to the library).

After quoting the (in)famous paragraph from Wealth Of Nations (WN IV.ii.9: 456), chapter 3 continues:

“The Invisible Hand and Perfect Competition”

“Smith proclaimed the principle of the ‘invisible hand’. It says that every individual, in selfishly pursuing only his or her personal good, is led, as if by an invisible hand, to achieve the best good for all. In this best of all possible worlds, any interference with free competition is certain to be injurious.” (p 41)

A few pages later, Samuelson and Nordhaus add:

“After two centuries of experience and thought, however, we now recognise the scope and realistic limitations of this doctrine”, mentioning the “absence of perfect competition” and “externalities” as contributing to the doctrine’s limitations. (p 46)

Also:

“The invisible hand can also misguide the economy when economic activities spill over outside the market place … This review of the failures of the invisible hand doctrine serves as a prologue …the virtues of the invisible hand must to some extent be discounted. And in such circumstances, the truth of the invisible-hand doctrine may vanish” (p 46)

“Yet we must not forget that the invisible hand can sometimes lead the economy onto the wrong path” (p 47)

These admirable qualifications to the invisible-hand doctrine, originally hinted at by Samuelson in his 1948 introduction of it in his first edition: an “unguarded conclusion has done almost as much harm as good in the past century and a half”, p 36, is followed up at the end of the 12th edition by stepping backwards so to speak to the modern myth, under the heading:

“A Modern Restatement of the Invisible Hand Theory”

“If Adam Smith were alive today, he would probably agree with all of this. Moreover, one ventures the guess, from his biography, that he would probably …say in effect (p 681):

“You think you are helping the economic system by your wll-meaning laws and interferences. You are not. Laissez-faire; let be; hands off. The oil of self interest will keep the economic gears working in almost a miraculous fashion. No sovereign need rule. The market will answer all things.” (p 760)

“Smith never did prove the truth of this. Indeed, until the 1940s, no on yet knew how to prove – or even state properly – the kernal in Adam Smith’s invisible hand doctrine.” ( p 760)

A footnote from Samuelson’s 10th edition (with Peter Temis), 1976:

“In short, Adam Smith, in the famous passage quoted on page 41 [from WN IV.ii.9: 456], had no right to assert that an Invisible Hand successfully channels individuals who selfishly seek their own interest into promoting the “public interest” as these last two words might be defined by a variety of prominent ethical and religious notions of what constitutes the welfare of a nation. Smith has proved nothing of the kind, nor has any economist since 1776” (p 634).

Garry’s point (for which I am grateful) is well taken – and is in my draft manuscript – but I have not included it so far in Lost Legacy because the focus has been rather narrow. The 19 editions of Samuelson’s Economics provide a significant contribution to the spread of the “invisible-hand doctrine” among modern economists, but Samuelson’s contribution is quite nuanced (thankfully, and ackonwledged by me) compared to the epigones who simply repeat what their tutors and textbooks told them.

From the start, Samuelson expressed misgivings about the metaphor and, in the above quotes (among others), he makes explicit that the assumed universality of the invisible-hand doctrine is suspect, partly, I think because he was among the first, if not the first, in the 1940s to state properly what the alleged proposition really meant and to work out its form, without it being solved, except implicitly, in general equilibrium mathematics (heavily restricted in its assumptions).

This makes the fallacies of turning a metaphor into a myth, as happened in modern economics, all the more significant and it makes the constant association of the myth with Adam Smith’s use of a mere metaphor, all the more futile.

A Research Agenda

“Even Adam Smith, the canny Scot whose monumental book, ‘The Wealth Of Nations’(1776), represents the beginning of modern economics or political economy – even he was so thrilled by the recognition of an order in the economic system that he proclaimed the mystical principle of ‘the invisible hand’: that each individual in pursuing his own selfish good was led, as if by an invisible hand, to achieve the best good of all, so that any interference with free competition was almost certain to be injurious. This unguarded conclusion has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their college course in economics.”

(Paul A. Samuelson, Economics: an introductory analysis, 1st edition, p 36, 1948, McGraw-Hill, New York.)

Comment
This paragraph, from one of the world’s most popular textbooks by the distinguished Nobel Laureate, Paul Samuelson, encapsulates the modern myth of the invisible hand, which is often sanctified with the other myth that Adam Smith was its original inspiration.

Samuelson’s warning that the “unguarded conclusion” had already done “as much harm as good” was soon discarded and was as soon forgotten by his colleagues (including by Samuelson himself in the eighteen editions of his textbook, Economics, that followed to 2009).

The metaphor of “an invisible hand” is now ubiquitous in almost all economics textbooks (miss-teaching generations of students), in many articles in peer-reviewed journals, in campus lectures, policy statements, political debates, mainstream media, and among scores of economic Blogs across the global Internet.

My current research is about the making of those myths from their early beginnings in the 20th century up to today’s treatment of the “invisible hand”, its credibility somewhat mixed of late following the global “credit crunch” of 2007-09, and what might be the main causes of its popularity, how it developed into a “Panglossian” error of perception, why it is mythical and why the popular belief that it is related to anything written by Adam Smith endures even when the evidence to the contrary is so strong.

In writing about the history of an idea throughout a period from the 1770s to the 21st century there is a danger that the appeal limits itself to a tiny band of specialist historians, presumably divorced from the interests of modern readers.

Well, that may be the case if my subject was, say, a history of the anachronistic labour theory of value, more suited as a PhD subject. But the essential beauty of a study of the evolution of the metaphor of the “invisible hand”, and its promotion into a major “idea”, “concept”, “theory”, even “paradigm” of economics, is that despite its longevity (much older than Adam Smith’s ambivalent use in the 18th century), the metaphor in its modern forms entered serious discourse and gained its undeserved credibility among academics and policy makers at the highest-level of politicians in the world’s legislatures, who applied its implications in their real “hands off” versus “hands on” treatments of the economies they managed.

In short, from the 1950s onwards, the metaphor of the invisible hand became operational, and not just descriptive, in practice.

How and why did this happen? What have been, and are, the consequences for economic policy and practice? What evidence is there, besides Samuelson’s 1948 warning about it doing “almost as much harm as good”, that any economists over the past 60 years realised the emptiness of the myth? What happened from their belief in Panglossian outcomes from mythical invisible hands to their actual policy recomendations? Does modern capitalism need the invisible hand myth or would it be better off without it?

These and related themes are the central questions to be addressed throughout Lost Legacy.

Smith and the Prisoner's Dilemma

John Cassidy writes on: “Rational Irrationality: The Real Reason That Capitalism Is So Crash-Prone” in The New Yorker (5 October). Normxxx comments, parenthetically, on Cassidy’s thoughts in normxxx ruminates... HERE
[[comments in double-square brackets are normxxx’s]]

“Because financial markets consist of individuals who react to what others are doing, theories of 'free-market economics' are often less illuminating than the Prisoner's Dilemma, an analysis of strategic behavior that game theorists associated with the RAND Corporation developed during the early nineteen-fifties. Much of the work done at RAND was initially applied to the logic of nuclear warfare, but it has proved extremely useful in understanding another 'explosion-prone' arena: Wall Street.

Imagine that you and another armed man have been arrested and charged with jointly carrying out a robbery. The two of you are being held and questioned separately, with no means of communicating. You know that, if you both confess, each of you will get ten years in jail, whereas if you both deny the crime you will be charged only with the lesser offense of gun possession, which carries a sentence of just three years in jail. The best scenario for you is if you confess and your partner doesn't: you'll be rewarded for your betrayal by being released, and he'll get a sentence of fifteen years. The worst scenario, accordingly, is if you keep quiet and he confesses.

What should you do? The optimal joint result would require the two of you to keep quiet, so that you both got a light sentence, amounting to a combined six years of jail time. Any other strategy means more collective jail time. But you know that you're risking the maximum penalty if you keep quiet, because your partner could seize a chance for freedom and betray you. And you know that your partner is bound to be making the same calculation. Hence, the rational strategy, for both of you, is to confess, and serve ten years in jail. In the language of game theory, confessing is a "dominant strategy," even though it leads to a disastrous outcome. [[What you are trying to do is minimize your maximum possible loss.: normxxx]]

The Prisoner's Dilemma is the obverse of Adam Smith's theory of the invisible hand, in which the free market coordinates the behavior of self-seeking individuals to the benefit of all. Each businessman "intends only his own gain," Smith wrote in "The Wealth of Nations", "and he is in this, as in many other cases, led by an invisible hand to promote [[a socially positive: normxxx]] end which was no part of his intention". But in a market environment the individual pursuit of self-interest, however rational, can give way to collective disaster. The invisible hand becomes a clenched fist.”

Comment
There is a mixture of interesting ideas in this part of John Cassidy’s article, “Rational Irrationality”, in the New Yorker (5 October), on some perspectives of which I would put a different slant.

The two-person, single-round, Prisoner’s Dilemma game illustrates the choice between ‘co-operation’ and ‘defection’. Roughly, does a player independently choose to ‘co-operate’ or ‘defect’ (or, say, choose ‘trade’ or ‘plunder’)? This boils down to ‘doing what is best for self’ or ‘doing what’s best for both of us’.

The original Prisoner’s Dilemma (which is why it was called “prisoner’s dilemma”) is actually a 3-person game, with the detectives imposing the pay-offs of the two prisoners' choices, over which they had a contrary interest (law and order) to that of the criminals (getting away with their crimes).

In ‘co-operation’/’defection’ games the players’ gain or lose according to their choices. If one of them defects and is successful, her individual, positive payoff will be larger than the player who attempts to cooperate and loses, with a negative payoff. If both defect, successive rounds will produce losses for both of them (maximum sentence in prison, in which they can 'explain' to each other why they chose the defection option (confessing) to trap the other in not confessing!

If both cooperate (not confess) and are successful, they both gain a positive payoff, smaller than the gainer from an individual defection, but they have the prospect of repeating rounds of positive payoffs for both of them which are better than maximum jsil time. So, strategically, which game are we playing: defection for one-sided gains (which likely leads to mutual defection) or cooperation for mutual gains (which likely leads for successive mutual gains)?

The former is equivalent to mutual murderous plunder in the real world; the latter is equivalent to mutual, Smithian bargaining: “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.” (Book 1, chapter 2, page 26, Wealth Of Nations).

Bargaining is not about promoting self-interest or selfishness or defection; it is about addressing the “self-love” of the potential bargainer by “never talk[ing] to them of our necessities, but of their advantages” (WN I.2. page 27).

Hence, placing Smith’s statements as “less illuminating than the Prisoner's Dilemma, an analysis of strategic behavior that game theorists associated with the RAND Corporation developed during the early nineteen-fifties” is both a partial misreading of the sophistication of Prisoner’s Dilemma games and a partial ignorance of Smith’s acute observations of bargaining in competitive markets.

As I have taught for years at Business Schools, as sellers or buyers we are not in competition with the seller or buyer with whom we happen to be negotiating; we are in competition with the other sellers who can supply what the buyer wants across the table, or we are in competition with the other buyers who can buy what the seller across the table is selling. Not understanding this Smithian principle of competition is so fundamental, and so widespread among some very smart economists, as to constitute an error of perspective of the first magnitude.

The “optimal joint result” requires us both to do that which is best for both of us, not what is best for us alone. John Cassidy, however, is right in his analysis of the cause of the “madness of crowds” when piling into the insanity of the recent bubble – those who stayed in cash instead, not junk derivatives, survived; those who followed the rush, lost badly. They didn’t do what was best for all of them.

Given that Smith never endorsed a policy of acting selfishly under the fantasy that whatever they did would lead to social benefits (the modern myth of the “invisible hand”), he was not likely to advise anybody to chase the modern equivalent of the “South Sea bubble”. He had a low opinion of “projectors” and “enthusiasts”. So should Smithian scholars and practitioners.

The Policy Rot Rooted in Modern Economics

John Cassidy writes on: “Rational Irrationality: The Real Reason That Capitalism Is So Crash-Prone” in The New Yorker (5 October). Normxxx comments, parenthetically, on Cassidy’s thoughts in normxxx ruminates...
HERE

NB: [[comments in double-square brackets are normxxx’s]]

“Because financial markets consist of individuals who react to what others are doing, theories of 'free-market economics' are often less illuminating than the Prisoner's Dilemma, an analysis of strategic behavior that game theorists associated with the RAND Corporation developed during the early nineteen-fifties. Much of the work done at RAND was initially applied to the logic of nuclear warfare, but it has proved extremely useful in understanding another 'explosion-prone' arena: Wall Street.

Imagine that you and another armed man have been arrested and charged with jointly carrying out a robbery. The two of you are being held and questioned separately, with no means of communicating. You know that, if you both confess, each of you will get ten years in jail, whereas if you both deny the crime you will be charged only with the lesser offense of gun possession, which carries a sentence of just three years in jail. The best scenario for you is if you confess and your partner doesn't: you'll be rewarded for your betrayal by being released, and he'll get a sentence of fifteen years. The worst scenario, accordingly, is if you keep quiet and he confesses.

What should you do? The optimal joint result would require the two of you to keep quiet, so that you both got a light sentence, amounting to a combined six years of jail time. Any other strategy means more collective jail time. But you know that you're risking the maximum penalty if you keep quiet, because your partner could seize a chance for freedom and betray you. And you know that your partner is bound to be making the same calculation. Hence, the rational strategy, for both of you, is to confess, and serve ten years in jail. In the language of game theory, confessing is a "dominant strategy," even though it leads to a disastrous outcome. [[What you are trying to do is minimize your maximum possible loss.: normxxx]]

The Prisoner's Dilemma is the obverse of Adam Smith's theory of the invisible hand, in which the free market coordinates the behavior of self-seeking individuals to the benefit of all. Each businessman "intends only his own gain," Smith wrote in "The Wealth of Nations", "and he is in this, as in many other cases, led by an invisible hand to promote [[a socially positive: normxxx]] end which was no part of his intention". But in a market environment the individual pursuit of self-interest, however rational, can give way to collective disaster. The invisible hand becomes a clenched fist.”

Comment
Regular readers of Lost Legacy should spot the source of John Cassidy’s understandable error of interpreting Adam Smith’s so-called “theory” of ‘an invisible hand’ in the way that he does.

Cassidy starts innocuously: “the free market coordinates the behavior of self-seeking individuals to the benefit of all” and by quoting a phrase, popular with modern economists since the 1950s who have taught (and believed) it to read, “to promote [[a socially positive: normxxx]] end which was no part of his intention". Modern economists have spread their false conclusion that is caused by the presumed, but not specified context, in which Smith used the metaphor of “an invisible hand” (WN IV.ii.9: 456).

Smith’s point was less general than a “theory” and much more mundane.

Due to the arithmetic rule that the ‘whole is the sum of its parts’, every additional amount of local investment increases the total amount of local investment (a public benefit). It didn’t matter what caused each additional amount of investment because the individual amounts achieved the outcome of higher levels of annual domestic investment, promoting greater annual output of the “necessaries and conveniences of life”, along with higher domestic employment and a contribution of the “progress to opulence”, a not unimportant consequence for poor, unemployed labourers, and matter of general concern for Adam Smith.

But what caused the preference for local investment among some, but not all, merchant traders? In the specific case that Smith mentions the metaphor of “an invisible hand” (and, interestingly, this is the only occasion in which he does so in Wealth Of Nations), the motive is a merchant’s sense of the security of his investment.

You see, there are two groups of merchants involved in Smith’s discussion (paragraphs 1 – 9 of chapter 2, Book IV, of Wealth Of Nations, pages 452-456); those that are risk-averse to the extra risks of sending their capital abroad comprising the prices of the goods they sell and goods they buy for the return trips. There are the risks of sea travel, risks from dealing with people of less well-known, or unknown, reputation, risks from dealing with a foreign judicial system if they need to seek legal remedies, and the risks of accidents or piracy.

These risks, compared to dealing locally with people they know, with court systems and magistrates they also know, and the lesser risks of their being in sight of their capital stock and that which they buy in return, are perceived by some merchants to be lower than senind capital abroad.

Provided, says Smith, that the profits from local trade are “not much less, or equal” to foreign trade, taking account of the rate of turnover of their capital – 3 or 4 times annually domestically, compared to 3 or 4 years to return in foreign trade, some merchants preferred to invest locally and, from those that did, they added to domestic capital investment and, unintentionally, contributed to the public benefit.

I think we can agree that Smith’s narrow observation that in these circumstances (and in many others, but not all others!) the metaphor of being “led by an invisible hand” is a striking way of putting it, which is what good metaphors are meant to do (see Adam Smith’s “Lectures in Rhetoric and Belles Lettres”, [1763], 1983, Lecture 6, pp 25-32, esp. p 29). However, the “invisible hand” metaphor is not a “theory” or a “principle”, and the modern transformation of the popular, 18th-century metaphor into a general theory is manifestly a fallacy, and a dangerous one at that, as John Cassidy’s example shows.

The cause of the credit crunch? Unambiguously and without doubt, it was caused by the people who taught and believed the nonsense of an actual “invisible hand” that magically ensured that “the free market coordinates the behavior of self-seeking individuals to the benefit of all” (and all variations to that affect). It most certainly was “ideology”, as John Cassidy says, but it was never anything that Adam Smith asserted, despite hose who used his name as a sort of holy authority for claiming that the “ideology” was worthy of the attention given to it since the 1950s.

What is really worrying is that John Cassidy also reports that:

“Many leading economists still have a vision of the 'invisible hand' satisfying wants, equating costs with benefits, and otherwise 'harmonizing' the interests of the many. In a column that appeared in the Times in May, the Harvard economist Greg Mankiw, a former chairman of the White House Council of Economic Advisers and the author of two leading textbooks, conceded that teachers of freshman economics would now have to 'mention' some issues that were previously relegated to more advanced courses; such issues as the role of financial institutions, the dangers of leverage, and the perils of economic forecasting.

And yet "despite the enormity of recent events, the principles of economics are largely unchanged," Mankiw [[baldly: normxxx]] stated. "Students still need to learn about the gains from trade, supply and demand, the efficiency properties of market outcomes, and so on. These topics will remain the bread-and-butter of introductory courses."

Mankiw was referring to the 'textbook' economics that he and others have been teaching for decades: the economics of Adam Smith and Milton Friedman. In the world of such utopian [sic] [academic, ivory-towered?] economics, the latest crisis of capitalism is always a blip. As memories of September, 2008, fade, many will say that the Great Crunch wasn't so bad, after all, and skip over the vast government intervention that prevented a much, much worse outcome.”

Comment
Professor Mankiw is the author of one of the more popular undergraduate textbooks in North America. Cassidy reports: “teachers of freshman economics would now have to 'mention' some issues that were previously relegated to more advanced courses; such issues as the role of financial institutions, the dangers of leverage, and the perils of economic forecasting.”

This is not re-assuring! The same teachers may mention some aspects of more advanced courses, but as long as they still teach the same old rubbish about the “invisible hand” as a theory allegedly saying that the “self-interested actions of individuals” are led by an “invisible hand” to assure the public benefits, or “harmony”, or “equilibrium”, or even in extreme cases, that individuals acting from “selfishness” do so, then the rot at the centre of modern economics remains.

For as long as the invisible hand myth remains, then Lost Legacy, and similar Blogs, have a role to play in trying to clarify the damage done by the invention of a role for a metaphor to explain the wonder of markets(which phenomena do not need such fantasies, and nor does Adam Smith deserve to be associated with such nonsense). They demean economics, much as the Roman emperor, Caligula (AD 12-41) demeaned Rome by appointing his horse to the office of Consul.

[I have not commented on the Prisoner’s Dilemma issue in John Cassidy’s article in The New Yorker, but shall do so later; it too has some interesting lessons]

A Good Book Ruined by Misunderstanding Adam Smith

Richard Bronk, 1998, Progress and the Invisible Hand, London, Little, Brown and Company:

“For the ‘invisible hand’ of the market is seen to lead to the most efficient satisfaction of the wants of different market participants, and in this sense to maximise the social good, merely by harnessing the selfish desires of individuals to further their own ends.” (p 7)

“The invisible hand is a metaphor for the free market’s ability to spontaneously to reconcile and balance the requirements of competing individuals pursuing their own self-interest is such a way that self-interested behaviour can unintentionally promote the interests of society as a whole.” ( p 92)

“In the years that followed publication of The Wealth Of Nations, the conditions which Smith had stipulated (in particular, the need for perfect competition) – and the implicit moral context which he, as an Enlightenment moral philosopher, which he had assumed – were not as well remembered as his central message of the power of the invisible hand. It was this image which entered Western consciousness and helped to underpin faith in human progress.” (p 95)

“In this limited-efficiency sense, modern economists have succeeded in proving Adam Smith’s first intuition with regard to the invisible hand, that a perfectly free market can ensure that the pursuit of individual self-interest or preference satisfaction, as expressed through the market-exchange mechanism, will increase the benefits of society taken as a whole.” (p 107)

Comment
The above quotations are representative of how Smith’s use of the metaphor on “an invisible hand” has elided from its original use by Smith from a summation in a “striking manner” – which is the role of metaphors – in a case where merchant traders choose between exporting their capital abroad and investing in their locality from considering the risks of each choice and their relative profitability (wholly explained in Book IV of Wealth Of Nations, chapter2, paragraphs 1-9: 456), into a general principle of how markets operate, how supply and demand sets prices, and how society benefits from competition (incidentally covered in Books I and II without any mention of "invisible hands"!)

Richard Bronk pays no attention whatsoever to the stark difference between Adam Smith’s use of the popular, 18th-century metaphor and how modern economists, roughly from the 1940s, transformed its role (from metaphor into a 'concept', a 'principle', and a 'theory') and generalised its effects into general equilibrium theory, both verbal as a 'miracle of markets' and as a mathematical "proof" of the miracle. One consequence of Bronk’s ahistorical treatment of Smith’s role in the transformation, is that he attributes to Smith modern ideas of which he was wholly innocent.

Smith favoured competitive markets over monopolies (he was not opposed to state intervention on principle, where the role was to protect the consumer, e.g., banking regulation; quality of bullion; quality of cloths, and such like). He knew nothing about "perfect competition" - an idea from the inter-war years - and regarded "harmony" as a goal, not a destimation.

Bronk writes “In the years that followed publication of The Wealth Of Nations” - first edition 1776, Smith’s last edition 1790. Even taking the last edition date, practically no interest was taken in Smith’s use of the metaphor at all. Dugald Stewart mentioned the paragraph from Book IV, in a footnote to his Lectures in Political Economy, in 1808 (later re-published in his Collected Works, 9 volumes, 1856), but hardly anybody mentioned the metaphor again until a few mentions in the late 19th century - Malthus, Ricardo, Marx for example, did not focus on it.

For Bronk to assert that Smith’s other ideas “were not as well remembered as his central message of the power of the invisible hand” is breathtaking in its “ahistorical” hyperbole. Practically nothing was said about the “invisible hand”, even in the 1880s, compared to Smith’s alleged views on laissez-faire, his “ alleged labour theory of value”, and his polemics against “tarrifs”, “mercantile political economy”, and his alleged “small government” policies.

Much of this attention dominated accounts of Smith’s economics through to the early 1930s, when the Chicago, oral tradition began to take an interest in the “invisible hand” by applying its mystical powers from risk-averse merchants to markets as a whole (remember that the challenge, such as it was, in the Great Depression began to circulate from a critique of markets compared to the “new”, albeit doomed, central planning in Communist Russia), and, from the late 1940s, the invisible hand, partly transformed into a theory, emerged in print, most famously in Paul Samuelson’s textbook, Economics, (1st edition 1948; still going strong in its 18th edition). The depression was over, but the Cold War was on.

The new, invented invisible hand, began to appear in all textbooks, and slowly at first, then in torrents in journal articles, across the media, into the rhetoric of politicians and "experts", and lastly among the general public.

Bronk wrote post the mathematical “proof” of general equilibrium (Debreu and Arrow) and, from then on, the modern invented role of “invisible hands” has never looked back. Bronk blames the modern “invisible hand”, repeatedly misattributed to Adam Smith, for its “sins, as modern economics popularises it among governments in their trenchant beliefs in unlimited progress.

His book was written as the 1999s were recovering from the 1997-98 recessions (it reads quite up-to-date in the current recession of 2007-09!). I am surprised a new, revised, edition has not been published. If it were, I bet it would not add anything about the causes of the current crisis, nor change anything about the statements attributed to Adam Smith’s culpability in failures of modern macro-management. Indeed, Bronk could quote from similar tales in support of his own that have appeared almost daily in the media, and on many Blogs, blaming the “invisible hand” for its inadequacies as a positive force.

I have no complaints about Bronk’s criticism of modern economic management (or lack of it) – in fact, I enjoyed quite a lot of his analyses (he is good, clear writer). If he disassociated Adam Smith from the modern myth of the “invisible hand”, I would have much to say in Bronk’s favour.

Diary Announcement

I am visiting Aberdeen University Friday for a seminar on Scottish intellectual history under the auspices of the Scottish Philosophy Group, which covers academics from Glasgow, Edinburgh,St Andrews and Aberdeen universities, plus retired persons like me.

Leaving Edinburgh and 8.29 and returning about 12 hours later, so posts will be slim today - depending on how much awaits me on my return.

Comment moderation remains ON. It is blocking sustained 'attacks' from nuisance posters, so apologies. I check regularly during the day (except today in Aberdeen) but will read everything later this evening and process responsible comments immediately.

Just for the record, post I disagree with but on the subject appropriate to Lost Legacy will always be published.