A Wee Thought While For My Journey to Oz

It occurs to me in my new paper on the invisible hand, as it became in mid-20th century economics, that it is worth considering what happens after those merchants who are risk-averse to foreign trade and, in consequence, invest locally rather than take the greater risks (as perceived by them, but not all merchants - many do invest abroad, of course), which Adam Smith observed, benefitted the national economy (the whole is the sum of its parts), that the tale ought not to end there.

Modern economists generalise from the narrow case which Smith discusses in Wealth Of Nations (WN IV.ii.1-9) to make the bold - near heroic! - assertion that self-interested people end-up benefitting the public by acting on their self-interest. Milton Friedman (among many others) celebrated this assertion, supposedly attributed to Adam Smith.

However, consider the real consequences of a national policy of investing as much as possible domestically. True (absolutely true), the more merchants who invested in profitable projects domestically, the larger would be national output (and employment) on grounds of the 'whole is the sum of its parts'.

'Tis but a short step from such a conclusions for the same domestic merchants delivering their outputs locally for some of them (it only takes a few, even one) to realise that they can raise their profits yet more by curbing rival suppliers from competing in the same domestic markets.

One obvious target is foreign traders sending foreign outputs to doemstic markets - including those domstic marchants who exported abroad and returned with foreign goods to sell domesticlaly. Of domestic merchants, confined to the domestic market, having been 'led by an invisible hand', the temptation to go for retrictive tariffs and outright protection by prohibition must become real.

So, being led by an invisible hand to forego profitable trade with foreigners (Smith's narrow example), they are likely to promote protectionism, to narrow the competition for local consumers by widening the market for domestic merchants.

The question occurs to me: are they led by an invisible hand to take this step?

We can ask ourselves: which group of merchants usually prefer tariffs and prohibitions against foreign traders? Which lobbies their legislators and those who influence them to this end? Is it the domestic merchants primarily, or is it those merchants who invest in foreign trade?

I conclude (for short), that the merchants engaged in domestic trade only (driven by their risk aversion from foreign trade) are the most likely proponents of tariffs and prohibitions on imports, and not the less risk averse domestic merchants who do engage in foreign trade.

As there is unlikely to be an invisible hand at work leading domestic merchants to prefer tariffs and prohibitions (the latter also brought about by narrow national interests - 'jealousy of trade'), which must make the general interpretation of the doctrine of invisible hands, as a special, limited, and partial phenomena. Smith, of course, knew this, and he also knew he was not making a general recommendation against foreign trade. Modern economists, 200 years on, ought to know this too.

What went wrong?

Visit to Australia 7 to 22nd February

Having been fairly unsettled healthwise for over two-weeks, I have recovered in time for my trip to Sydney and Melbourne, leaving this Saturday. Not before time; this is Scotland's coldest winter since records began in 1914 (no wonder the climate lobby have re-named their concerns 'climate chage' in place of yesaterday's Global Wwarming).

Apologies for the absence from posting regularly – you no doubt have noticed – and a bit more forbearance is required until I link up on the net from Monday 8 February (all being well at the Oz end).

My trip is a private visit, mainly to re-visit the haunts of my teen years when I attended the “university of life” as an unaccompanied minor just 15, and, hopefully to meet up with surviving members of my time in Sydney, should I find them.

This is my family’s 70th birthday present – they know the impact that those years had on me from which I graduated with a good 'pass'. On return to Britain, I eventually went to an academic university and graduated from there with honours, having learned lots about economics, but not as much about life as I had learned from the mean (though warm) streets of Sydney.

My academic friends, learning I was making this trip, have asked me to contribute to three informal seminars (no expenses and unpaid of course!), which I am delighted to do. These include an extra-mural debate on the my paper, “The Hidden Adam Smith in his Alleged Theology” (10 February) and on 11 February, evening, a debate on the contribution of theology to Adam Smith’s economic analysis (“Reconciling God and Mamon”).

However, the bulk of my time will be spent ‘normally’, seeing old friends and old sights. I spent weeks in the Mitchell Library researching for my biography of William Bligh (Captain Bligh, the man and his Mutinies, Duckworth, London 1989) and I have visited Australia several times since, on business (my old day-job).

But primarily, I hope to spend some of the time working on various projects including my editing of 'Adam Smith: a moral philosopher and his political economy', Palgrave, for a paperback edition, and my new paper for June on modern accounts of the invisible hand from the 1950s onwards.

But, of course, I shall post on Lost Legacy – back to normal (er, jet-lag permitting).

Announcement XII

I have been unable to post since Sunday due to a sudden heavy cold/cough episode, which tied me close to my bed until today (Wednesday).

This has knocked my schedule out completely, as a) we get entry to our new house Thursday (Tomorrow) and there is much to do arranging the administration of the first part of our move; b) I am flying to Australia on Saturday and there is also ultra much to do; c) my intended academic work intruded upon. I was meant to be finishing a couple of papers (one: my response to the brilliant new paper by Daniel Klein and Brandon Lucas, which I wanted them to have before I went to Australia; two: my re-drafted paper on "The Hidden Adam Smith in his Alleged Theology", which I shall send off this evening.

Apologies, but this has squeezed out Lost Legacy. Those who know me will know how difficult it has been to focus on the main, delayed, tasks.

I shall be in Australia until 22 Feb (not a good domestic move, two days after we move in!).

I shall post before I go (and during my visit).

Gavin

A Comment, Now Lost

A Comment arrives and then ‘disappeares’, again.

I now take the precaution of copying them to Word first, which is fine if they eventually turn up, but as they are separated from the post they apply too, I am sometimes ‘lost’ as where to place them for context:

“This is Chris, the author of the post. My whole point was not to psycho-analyze Adam Smith. I've actually never read "Wealth of Nations" and I'm not an economist; I'm an engineer.

My point was this: Instead of trying to come up with a universal treaty for cutting carbon emissions, let's let each country come up with it's own strategy in hopes that because it is benefiting the whole, it will benefit itself.

If America commits to clean energy, we will sell our technology to other countries; thus lowering worldwide carbon emissions and benefiting America.

By focusing on America first, we help the whole world succeed.”

Comment
Chris, you ignore ‘free-riding’ by which other countries do nothing and the enormous expense right now of doing what the ‘climate change’ lobby advises, which cost is felt by the people in the countries that do something and who pay for it.

The US electorate may not share your patience and vote out the ‘do-it-alone’ US government – back to square one! Selling (expensive) US energy-saving technologies requires a market for them – doing nothing is still cheaper.

Economics is not engineering.

The “climate change” lobby appears to have dropped its earlier name of “global warming”, perhaps to cover the Goldilocks possibility of “too warm” or “too cold”. I remain skeptical, though I am not a physicist.

But thanks for your post.

Gavin

Some Good Sense on Trade Policy

John Papola writes in What the Hell do I know? (HERE):

“about 600-year-old defunct economics in the state of the union address?”

“As part of a speech that was marvelously delivered and, as is typical of such things, coated with pandering and economic nationalism, the President made the proclamation that his trade policy would attempt to double American exports. I doubt this was a Steve Jobs-style teaser for a hot new product coming from the Whitehouse that will fly off the shelves worldwide like the Apple iPad. No, this export goal is going to be sought through restrictive government trade and tariff policy. There is a name for this kind of economic policy and it’s nothing new (and certainly not “change”): mercantilism.

Mercantilism is economic nationalism for the purpose of building a wealthy and powerful state. Adam Smith coined the term “mercantile system” to describe the system of political economy that sought to enrich the country by restraining imports and encouraging exports. This system dominated Western European economic thought and policies from the sixteenth to the late eighteenth centuries. The goal of these policies was, supposedly, to achieve a “favorable” balance of trade that would bring gold and silver into the country and also to maintain domestic employment. In contrast to the agricultural system of the physiocrats or the laissez-faire of the nineteenth and early twentieth centuries, the mercantile system served the interests of merchants and producers such as the British East India Company, whose activities were protected or encouraged by the state.

Mercantilism, at its heart, is a deeply pro-merchant/pro-“business” approach to trade, hence the name. Mercantile policy uses protectionist tools like tariffs and import quotas to help the narrow group of exporters at the expense of consumers and society on the whole. Why is Coca-Cola made of corn-syrup instead of sugarcane? Mercantile import quotas on sugar that help out the Domino Sugar corporation at the expense of the rest of us is the reason. Mercantilism is a 600-year-old doctrine, which is funny because many mercantile market skeptics critique the free-market liberalism of Adam Smith as being “our of date” and “a 200 year old doctrine”. Based on age, the trade policy of the Obama administration makes Adam Smith look downright hip."

Comment
You must read this critique of today’s version of the 600 year-old mercantile policy of modern economies. Follow the link. It’s an highly original – and mostly correct – appreciation of what has been going on since Adam Smith’s time.

The facts are that not much notice was taken in practice in regard to Adam Smith’s detailed critique of the mercantile political economy, laid out on Wealth Of Nations (mainly Book IV). Yes, the Corn Laws were repealed, but the British navy and numerous British regiments enforced commercial relations between Britain and subject states throughout the 19th century.

Tariff reform was always on the agenda at some time or another; but kept coming back, and never really went away. It’s not as if Smith advised that all protective tariffs should be scrapped immediately, or overly hasty, or in ignorance of their effects on those dependent on protection to keep their jobs and incomes.

“Slowly and gradually” were Smith’s watch-words.

Paper on Adam Smith's Alleged Religious Beliefs

My paper on the alleged religiosity of Adam Smith – admittedly, those who assert that he was religious in some way, are in a majority at present – is now available from the Social Science Research Network:

Kennedy, Gavin, The Hidden Adam Smith in His Alleged Theology (December 16, 2009).

Available at SSRN: http://ssrn.com/abstract=1524409

I have received some very helpful comments on it from readers and from two anonymous referees, and one of my next tasks is to complete the revision of the paper – shortening it for example – but also re-casting some of my statements to take account of reader’s comments and my re-thinking since I presented it at the History of Economic Thought Annual Conference meeting at the University of Colorado, Denver in June 2009.

[In Australia on 10 February (13:00-15:00), I am to present the paper to an academic audience at the Australian Catholic University, School of Arts and Sciences Research Seminar Series 2010, Sydney, and on 11 February I am participating on an early evening panel to discuss, “Reconciling God and mammon: Adam Smith and How Religion Shaped his Ideas”.]

Announcement XI

I have been out of aciton since Monday with a bug. Now recovered, I think.

Gavin