Adam Smith's Lost Legacy

A Wee Thought While For My Journey to Oz

2010-02-06T14:14:00.003Z

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

2010-02-05T20:27:00.002Z

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

2010-02-03T17:26:00.003Z

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

2010-01-31T09:41:00.001Z

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

2010-01-30T21:06:00.002Z

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

2010-01-29T11:28:00.001Z

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

2010-01-28T21:06:00.001Z

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

Gavin

Adam Smith as Theologian

2010-01-27T13:28:00.004Z

Michael Kruse sent a comment to Lost Legacy but it has 'disappeared', once again. He referred to the publication by Routledge of papers from the conference sponsored by the Templeton Foundation on "Adam Smith as Theologian", which are edited by Paul Oslongton.

The upshot is that Michael looks forward to my review of the papers. As is, I intend to do that, having read some of the papers from the conference, and corresponded with the authors.

At present I am editing my own paper (not part of the conference!), The Hidden Adam Smith in his Alleged Theology, in response to anonymous referees with a view to it being published in a journal (details later if and when it is accepted).

I am also presenting this paper to a seminar chaired by Paul Oslington at the Catholic University of Australia on 10th February in Sydney at 1 - 2.30.

I should make clear that Paul does not agree with my hypothesis. That, of course, is how knowledge improves.

Fresh Air Blowing from Oxford

2010-01-27T13:14:00.003Z

Nita Colaco writes in the Oxonian Review HERE:

“A cloud looms over Adam Smith’s legacy. The 18th-century scholar is best known as an unalloyed extoller of the market and an apologist for self-interest, a reputation stemming from two centuries’ mischaracterisation of his thought. In the last 50-odd years, this interpretation has been given new credence by economists of the Chicago School (George Stigler famously described his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, as “a stupendous palace erected on the granite of self-interest”), by libertarian champions like Margaret Thatcher and Ronald Reagan, and by myriad others who associate him solely with free-market capitalism and self-interest.

The narrow popular perception of Smith hides a simple truth: the putative father of modern economics had a complex understanding of human nature. Indeed, sympathy and societal relations, not rational self-interest, lie at the heart of a work Smith himself considered “much superior” to Wealth of Nations: his Theory of Moral Sentiments.

Smith has been misrepresented for so long that the mere range of his writings often comes as a surprise. After his education at Glasgow and Oxford, he lectured and wrote on subjects from rhetoric to logic to astronomy. But it is his moral philosophy, as articulated in Theory of Moral Sentiments, that presents the greatest challenge to traditionally myopic interpretations of his thought. Published almost two decades prior to Wealth of Nations, Theory of Moral Sentiments celebrated its 250th birthday last year. In recognition of this occasion, and perhaps hoping to restore Theory of Moral Sentiments to the glory of its better-known cousin, Penguin Classics is releasing a special anniversary edition of Smith’s forgotten treatise, featuring an introduction by the modern-day economist-cum-public intellectual Amartya Sen.

Based on lectures Smith delivered during his time as Chair of Moral Philosophy at the University of Glasgow, Theory of Moral Sentiments is the bedrock of Smith’s intellectual project. Unlike Wealth of Nations, with its oft-quoted passage about the role of self-interest in commercial transactions, Theory of Moral Sentiments attempts to explain the motivations of human behavior, broadly construed. In characteristically lucid prose, Smith writes of people as inherently social creatures with a propensity for sympathizing with their brethren (a sharp break from the vision of mankind expounded by Hobbes, or even Rousseau, whom Smith admired). This natural human disposition leads to the formation of a moral sense: we approve of a person’s behavior to the degree that we sympathize with him.”

Comment
These opening paragraphs of Nita Colaco’s article are a gale of fresh air in the normal output on Adam Smith, particularly from US academe, regularly reviewed on Lost Legacy.

I recommend that you follow the link and read her article in full.

I do not quite agree fully with her references to the invisible hand metaphor, but I can say that she gets as close to my agreement as is possible.

Nita Colaco is reading for an MPhil in Economic and Social History at Lady Margaret Hall, Oxford. On this evidence, Adam Smith’s legacy will be in good, and safe, hands. (More please!)

Recognition in High-Places Of Smith's Real Views on Earthquake Disasters

2010-01-25T07:30:00.006Z

Brad DeLong post prolifically on his blog:
“The Semi-Daily Journal of Economist J. Bradford DeLong: “Grasping Reality with Opposable Thumbs” -
(“A Fair, Balanced, and Reality-Based Look at the World”)from the
Department of Economics, U.C. Berkeley HERE:

“I Wonder If Matthew Bishop of the Economist and Michael Green Have Apoogized to Their Readers and to Adam Smith Yet...”

Gavin Kennedy, on quotations out of context.

Why oh why can't we have a better press corps?”

Comment
Yes, the short to-the-point one-liner is Brad Delong signature post.

On this occasion, he refers to Lost Legacy's post of 16 Saturday:

“Adam Smith on Earthquakes and a "Man of Humanity"

Matthew Bishop, US Business Editor of The Economist and Michael Green write for Philanthrocapitalism Blog and have produced, I hope in innocence, what amounts, by implication, so far as their readers are concerned, to a scurrilous slur on Adam Smith.” HERE http://adamsmithslostlegacy.com/2010/01/adam-smith-on-earthquakes-and-man-of.html

Which, incidentally, followed Friday's post:

“Another Half-Quotation from Adam Smith

In The Australian, Tim Soutphomassane, under the name, ‘The Philosopher’ asks:

Should we donate more to earthquake victims?”

But first, my thanks to Brad Delong, the doyen among economics bloggers, for pointing his readers to Lost Legacy.

To succeed in countering the many errors and alien beliefs about Adam Smith that circulate among economists, including those at the very top of the profession who publish regularly in the media, as well as in refereed journals, Lost Legacy needs all the positive publicity it can attract.

A Correct Quotation

2010-01-24T11:35:00.003Z

Emmanuel writes (23 January) in International Political Economy Zone (“attitudes of elegant despair on subprime globalisation”) HERE:

“What Would Adam Smith Do About Ben Bernanke?”

“At the risk of a dressing down from Gavin Kennedy, Adam Smith would get rid of B-B-B-Bennie of the Feds straight away and get another Fed chief. As you probably know, Bernanke's renomination as Federal Reserve chairman is being subject to political football at the moment. See the Financial Times and the Wall Street Journal for more.

Let us return to one of Smith's most quoted statements:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” [(WN I.ii.2: 26-27)

While naive readings of this statement (think Chicago School) believe it to be an argument for selfishness, an interpretation more consistent with Smith's prior works suggests otherwise. This more nuanced argument is profoundly others-centred. In contemporary vocabulary, we do not beggar-thy-neighbour during transactions by trying to sucker them into a bum deal. We should think, "how can we offer our neighbours a fair deal ?"...one that meets with approval in the eyes of the impartial spectator?”

Comment“

"At the risk of a dressing down from Gavin Kennedy”. Dressing down from me?

Na. No way, surely. In debate, I am a kitten (of the domestic pussy-cat variety).

Emmanuel gives a correct interpretation (so rare from his neck-of-the-woods) of Smith’s ‘butcher, brewer, baker’ passage. It is about two self-interested parties bargaining over the content of a man’s dinner (note the 18th-century diet of a man about town – meat, bread and beer).

Smith’s advice is from Persuasion 101: address the other fellow’s interests, not you own. And the advice is to both sides – the buyers and the sellers.

Two lines immediately earlier, Smith described the elements of 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, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.”

Sound advice. I have presented Smith’s advice for bargaining to Smithian scholars, who presented their own views – or somebody else’s – and demonstrated that their reputations as Smithian scholars did not extend to an understanding of bargaining (my day-job for thirty-plus years).

By addressing their interest we seek to align them with the bargain we wish to make. They do the same too. Neither of us can insist on our version of the deal only; we have to mediate our differences under the influence of each of us trying to show why the deal is good for the other.

I discuss Smithian bargaining in my Adam Smith: a moral philosopher and his political economy (2008), Palgrave Macmillan: ‘Bargaining exchanges’, pp 112-116, in which I draw into the discussion Smith’s ethical views from Moral Sentiments.

However, on the question of whether Bernanke should resign of be fired, I am neutral. I follow my policy on Lost Legacy of only commenting on political issues, if I ever do, in the country where I vote (Scotland).

UPDATE:
This comment arrived Monay 25 January but got 'lost' in publishing it, and I am not sure to which post it refers, this one or yesterday's:

"Extremely helpful towards a basic understanding of Smith's famous quote; thank you." (JMJanssen)

Thank you J. M. Jansen for writing to Lost Legacy. Much appreciated. Gavin

Another Half-Quotation from Adam Smith

2010-01-22T21:01:00.003Z

In The Australian, Tim Soutphomassane, under the name, ‘The Philosopher’ asks:

Should we donate more to earthquake victims? (HERE):

The Philosopher (philosophercolumn@gmail.com) takes his text from Adam Smith’s Theory of Moral Sentiments (1759'), and comments:

“Adam Smith, better-known as the father of modern economics, may appear an unlikely source of philosophical guidance. But in The Theory of Moral Sentiments, Smith asked his readers to imagine an earthquake swallowing up the whole of China. While "a man of humanity in Europe" would be moved to express his melancholy, he would, Smith argued, ultimately return untroubled to his ordinary life.

"If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren."

Smith's observations have perhaps lost part of their sharpness. Technology has made a mockery of distance. In the 18th century, the images and sounds of an earthquake's devastation could not have been broadcast into the living rooms of those on the other side of the world, as they are today.

Even so, for all the horror we may feel about the Haitians' hardship, how many of us have watched the late-night news update, only to slip quietly to bed for a good night's sleep? Maybe Smith had a point.

I do not mean to make anyone feel guilty, or more guilty, about not feeling deeply enough about the plight of the Haitians. Nor am I for a moment suggesting that we should withhold assistance or charity. If one has the means to do so, one should be giving generously to the Haiti aid appeals. Governments can afford to be magnanimous in such times.

However, Smith highlighted a truth about the limits of human sympathy. Our sense of solidarity with those who suffer is strongest when we consider someone else as "one of us" where "us" means something smaller and more local than the human race. Philosophers of obligation would remind us that we owe a special concern for the welfare of our families and compatriots.”

Comment
Regular readers of Lost Legacy will know what Tim Soutphomassane has done. He has taken a truncated quotation from Adam Smith and then made a case without bothering – or even not knowing – what Smith said next, in the same paragraph.

By misleading his readers in The Australian, a newspaper with a hight reputation as a serious and authoritative source (certainly a cut above the usual tabloids) he makes a few dollars from traducing the reputation of a real moral philosopher;

Here is the rest of the quotation about how “man of humanity” would really act in response to a calamity of an earthquake, in contrast to how Smith draws his listeners into a discussion, using the earthquake as an example (China was a year’s sailing from Britain at the time):

“Human nature startles with horror at the thought, and the world, in its greatest depravity and corruption, never produced such a villain as could be capable of entertaining it. But what makes this difference? When our passive feelings are almost always so sordid and so selfish, how comes it that our active principles should often be so generous and so noble? When we are always so much more deeply affected by whatever concerns ourselves, than by whatever concerns other men; what is it which prompts the generous, upon all occasions, and the mean upon many, to sacrifice their own interests to the greater interests of others? It is not the soft power of humanity, it is not that feeble spark of benevolence which Nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self-love. It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration. It is from him only that we learn the real littleness of ourselves, and of whatever relates to ourselves, and the natural misrepresentations of self-love can be corrected only by the eye of this impartial spectator. It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the smallest injury to another, in order to obtain the greatest benefit to ourselves. It is not the love of our neighbour, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own characters.” (TMS III.3.4: 136-37)

Quite a different picture of the ‘man of humanity’, eh?

I suggest that Tim Soutphomassane read a little more before pontificating about the point that Smith was making.

UPDATE:
This comment arrived Monay 25 January but got 'lost' in publishing it:

"Extremely helpful towards a basic understanding of Smith's famous quote; thank you." (JMJanssen)

Thank you J. M. Jansen for writing to Lost Legacy. Much appreciated. Gavin

Adam Smith's Close Colleague Did Not Mention the Invisible Hand

2010-01-19T21:58:00.004Z

I had an opportunity today to spend it in University of Edinburgh library and among the items I selected from the shelves was volume IX of Dugald Stewart’s Collected Works, edited by Sir William Hamilton, Bart, and published in Edinburgh by Thomas Constable and Co., (and Little Brown, and Co. Boston). This volume contains, Dugald Stewart’s, Lectures on Political Economy, volume II, delivered in 1801.

In Chapter III, ‘Of Trade’, Stewart discusses, not uncritically, Smith’s Wealth Of Nations and quotes as an extended footnote, containing an abstract of the first 8 chapters of Book IV. This includes in ‘the following satisfactory and conclusive manner’, a direct quotation of the paragraphs from Chapter 2, including the famous paragraph 9 containing his reference to ‘an invisible hand’.

Dugald makes no comment on Smith’s use of the metaphor of ‘an invisible hand’. Now Dugald Stewart was a close, intimate friend on Smith’s (his father, Michael Stewart, had been a fellow student of Smith’s at Glasgow and they remained friends while Michael was the professor of mathematics at Edinburgh (a chair that Dugald 'inherited. before switching to the professor of moral philosophy). Indeed, Dugald gave the Eulogy on Smith at a meeting of the Royal Society of Edinburgh in 1793.

That Dugald did not mention the alleged significance of the invisible hand, which some modern economists insist was Adam Smith’s ‘greatest idea’, neither in his 1793 eulogy, nor in his 1801 lectures, is in itself highly significant. If anybody would have known of Smith’s alleged attachment to his so-called ‘greatest idea’, his ‘concept’, ‘theory’, or ‘doctrine’, and its significance, or otherwise, it would have been Dugald Stewart, but he never mentioned anything about it, even in his lectures on political economy.

This suggests that the modern certainties of the significance to Adam Smith of the metaphor of ‘an invisible hand’, are highly exaggerated at the very least, and, in my view, wholly invented. The metaphor does not appear to have meant anything to Dugald Stewart.

Review Commentary No. 4: Milgate and Stimson's "After Adam Smith"

2010-01-17T16:28:00.005Z

After Adam Smith: a century of transformation in politics and political economy, Princeton University Press, Princeton, ISBN 978-0-691-14037-7

The idea of civil society – the sovereign at the top, the Church alongside, then those distinguished by rank and privilege within the realm of the sovereign’s grace and favour, and men of letters somewhat ambiguously within their sight and often in their service, and the vast bulk of the populations in degrees of servitude and inferiority – began to give way to another view among some men of letters, writing of a separate phenomenon found in the new political economy of the 18th century, that noticeably was emerging, of by intrusion and not invitation, as a rival centre of authority in ideas to the existing order.

Milgate and Stimson trace these developments through Smith, Ricardo, Marx and the new Marginalists of the 1870s. Whereas, the early classical school embedded the individual into society’s class structure – landlords, labourers, and owners of stock – the new school, post the late 19th century, elevated the actors in society as individuals, not as members of classes. In Marx, the individual was virtually absorbed in favour of the State; in Jevons, Menger, and company, classes were abolished in favour of autonomous individuals maximising total utilities. (Thank you to Paul Walker for correcting my silly error.)

Ricardo saw class structure as the dominant characteristic – the proprietor of the land, the owner of stock, and the labourers, sharing the rewards the produce of the earth in different proportions, regulated by ‘laws’ of political economy, not by the sovereign’s will. In Ricardo’s formulation, the quantity of labour necessary for the production of commodities, given a subsistence wage sufficient to purchase the ‘food necessaries, and conveniences’ of life, inversely determined the rate of profits. Thus, setting the labourers and the capitalists into mutual zero-sum conflict.

These relationships were the primary focus of political economy under Ricardo’s influential dominance of the discipline until J. S. Mill

Once the idea that the market and its ‘laws’ were autonomous, the belief that, like Newtonian gravity, they should not, for good purpose, be interfered with, placed the weakest class of labourers at a disadvantage. Innovation in machinery was profitable for proprietors, but disadvantageous for labourers; the poor laws, though founded for benevolent reasons by misguided legislators, made the rich poorer and thereby the poor poorer to no advantage than before such policies were introduced; and the free market-driven free trade with other countries was good for domestic consumers, and for capitalists enabled to pay lower wages because of cheaper food for labourers, but not so good, albeit in the ‘short term’, for labourers.

With the neoclassical school, the focus of the discipline shifted; it became more abstract, divorced from the real world to that of the ‘allocation of scarce resources to competing ends’, with any illustrative ‘stories’, or parables, shunted into the homely world of ‘Robinson Crusoe’ and ‘Man Friday’.

Men like Marshall kept one foot in reality by describing people going about the ‘ordinary business of life’; but once formalism was introduced, simply as an illustrative device, it eventually took over: algebra, calculus, and geometry graduated from appendices to the main text.

Milgate and Stimson’s account of these transitions is informative. Accepting the distribution of wealth as a ‘given’ prior to the exchange relationships, slips into discussing ‘factor prices’ devoid of their politics within the ambit of ‘positive’ science, making any intrusion of ‘normative’ values ‘unscientific’.

Our authors point out that one consequence of this transformation from the visions of Smith, and the classical political economists, to the abstract, perfect, worlds of modern economics, was to distance the subject from politics and values. ‘Equity’, say Milgate and Stimson, gave way to concerns about ‘efficiency’ (p72). This approach had some utility in fusing economics with an apparent predilection for scientific authority, thus separating itself and its practitioners from ‘wooly minded’ social so-called sciences, like politics, sociology, and history. At best, what is, became the norm, and all else was regarded as imperfections and deviations.

For neoclassical economists, positive economics and political life are separable; for classical economists they are interdependent. This is not a trivial difference. In support of which, Milgate and Stimson assert that this was problem picked up by Jeremy Bentham, who in his “Writings on the Poor Laws”, all but “accuses Smith of failing to distinguish between the necessity of what might be termed the ‘hand of government’ in practical affairs and the role of an ‘invisible hand’ on the systematic account of the operation of the market”.

Though the point is well made, I was not aware that Bentham had ever mentioned Smith’suse to the metaphor of an invisible hand, and I suspect the reference is a modern interpolation. From such authoritative authors myths grow.*

The authors close their chapter with an account of James Buchanan’s work on contemporary constitutional economics, in what amounts to a step towards joining the polity into the realm of economics by “returning to Smith’s project which (Buchanan) identifies as constitutional political economy, suitably update of course in a modified language of public choice”.

[In the next commentary we move onto the economy s machine.]

* Modern quips abound and project backwards by joining past figures in collusive, but false, associations. For example, Richard McIntyre (2003), penned the line: “Neo-classical theory is really an arranged marriage between Adam Smith’s invisible hand and Jeremy Bentham’s utilitarianism.”

In Richard MacIntyre, 2000. ‘Globalism, Human Rights and the Problems of Individualism, A review of George F. De Marino of Global Economy, Global Justice: Theoretical Objections and Policy Alternatives to Neoliberalism,’ New York, Routledge

Adam Smith on Earthquakes and a "Man of Humanity"

2010-01-16T11:06:00.002Z

Matthew Bishop, US Business Editor of The Economist and Michael Green write for Philanthrocapitalism Blog HERE and have produced, I hope in innocence, what amounts, by implication, so far as their readers are concerned, to a scurrilous slur on Adam Smith:

“Philanthrocapitalism and the Heart Strings”

“Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connection with that part of the world, would be affected upon receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment… And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquillity, as if no such accident had happened. The most frivolous disaster which could befall himself would occasion a more real disturbance.”

Those words, written by the great British economist Adam Smith, seem strikingly wide of the mark at the moment, as millions of people around the world respond with generosity to the terrible misfortune that has befallen the people of Haiti. Twitter and Facebook are churning with tips on how to give and to whom to give. Governments, businesses and individuals the world over are all opening their wallets to help.

Although sometimes caricatured as a champion of selfishness for extolling the power of the ‘invisible hand’ of the market, Smith’s quote comes from his lesser-known work, The Theory of Moral Sentiments, in which he argued that it is our sympathy for others that motivates our good deeds. In the world without telephones and televisions that existed when he was writing, catastrophes on the other side of the world were abstract stories; today, we can see the suffering of others and do something about it. For that reason, Smith would not have been surprised by the way the public has responded to this latest crisis, and would have celebrated this as progress for humankind.

Smith would also have noted with pleasure that a massive earthquake in China in 2008 led to a dramatic change in attitudes to giving there, where the government had previously been hostile to philanthropy. Yet he might also have worried that the economy’s invisible heart led to philanthropic funds being misallocated by the surge of sympathy after high profile disasters, which often attract more money and in-kind gifts than can be used effectively on the ground, at the expense of less compelling but more effective uses of the donations.”

Comment
The above quotation comes from Moral Sentiments (1759) and, unfortunately it is only part of this paragraph that is often quoted by quotation-chasing, media folk in a hurry to make their point when earthquakes are in the news.

‘Tis a pity that Matthew or Michael did not quote the rest of the paragraph – maybe it was only partly quoted from their book of Smith quotations – for they would have gotten a whole new perspective on the Adam Smith they think they knew.

Here it is, right after where their truncated quote ends: “…would occasion a more real disturbance”:

“Human nature startles with horror at the thought, and the world, in its greatest depravity and corruption, never produced such a villain as could be capable of entertaining it. But what makes this difference? When our passive feelings are almost always so sordid and so selfish, how comes it that our active principles should often be so generous and so noble? When we are always so much more deeply affected by whatever concerns ourselves, than by whatever concerns other men; what is it which prompts the generous, upon all occasions, and the mean upon many, to sacrifice their own interests to the greater interests of others? It is not the soft power of humanity, it is not that feeble spark of benevolence which Nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self-love. It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration. It is from him only that we learn the real littleness of ourselves, and of whatever relates to ourselves, and the natural misrepresentations of self-love can be corrected only by the eye of this impartial spectator. It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the smallest injury to another, in order to obtain the greatest benefit to ourselves. It is not the love of our neighbour, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own characters” (TMS III.3.5: 136-37).

I suggest this shows a different take on Adam Smith’s insightful comment on how “a man of humanity” would react to an earthquake in distant China (then a year’s sailing from Britain and the same back).

Yes, the world has grown smaller today, but the same human spirit, extolled by Smith, is evident in what follows in the near-by Caribbean. I would wish that Matthew and Michael would spread that message about Adam Smith’s legacy on such occasions.

Adam Smith's Panmure House - Centre of the Scottish Enlightenment

2010-01-14T16:07:00.003Z

Brian Monteith writes in The Scotsman HERE

“See beyond glass to get Smith's house in order.”

“Small buildings like Panmure House, just off the Royal Mile, and the former home of Adam Smith, the founder of modern economics. For the last 50 years, it has, unfortunately, been owned by various public bodies that showed no concern for its history or its preservation.

Its interior was once rich with original features. Now all that remains, other than a sturdy stone hulk with dull and dilapidated magnolia rooms, is one original fireplace – in the attic! Everything else was stripped out as it was used to deliver utilitarian democratic socialism or some other value-free ideal.

Fortunately, Panmure House has new owners. The Edinburgh Business School – a commercial wing of Heriot-Watt University that appropriately teaches market economics – bought it last year with the specific promise that it would return the building to the role of a meeting place to discuss the social, economic and philosophical issues of the day, as Adam Smith used it for.

Smith would regularly have the great minds of Scotland's Enlightenment round for Sunday lunch and a blether, and what better than to return the house to such a use? Not least as it is only a short hop from a parliament badly in need of some clear and original thinking.

However, like so many other charming buildings of its size, turning it into a public building that meets all the regulations of today requires a lift, fire escapes and other physical intrusions that make renovation expensive and difficult to comply with planning regulations.

It would be a pity, and ironic, if Smith's house could not be used for the sort of discussions he used to hold in it, just because of modern-day bureaucracy.

To resolve the difficulties – mainly caused by a lack of space – the architects have come up with a glass atrium that sits outside the façade of the building, providing a meeting space and stairs. Although some might consider this nothing more than a glass box, it is in fact an intelligent way out of the conundrum……

Needless to say Historic Scotland – commonly known as Hysterical Scotland amongst many professionals – is objecting to anything that does not use old materials or is not a faux bolt-on. The only alternative is to turn the house into a private home, but a private domestic owner would not be obliged to provide public access, certainly not every day”.

Comment
Bought two years ago it has taken this long to get into the decision process with the city planners abotu the renovation of Adam Smith's Panmure House.

No public money is involved. Edinburgh Business School is self-funded from the educational provision it provides. (I am just finishing ome last minute post-graduate exam papers - it'd my old day-job before retirement in 2005).

Follow the link for more news.

Invisible Hand as a Metaphor

2010-01-14T10:44:00.006Z

“James” writes in “Bubble Meter” HERE

“Adam Smith's "invisible hand" in context”

“Princeton University economics professor Alan Blinder puts Adam Smith's concept of the "invisible hand" in context:

When economists first heard Gekko's now-famous dictum, "Greed is good," they thought it a crude expression of Adam Smith's "Invisible Hand"—which is one of history's great ideas. But in Smith's vision, greed is socially beneficial only when properly harnessed and channeled. The necessary conditions include, among other things: appropriate incentives (for risk taking, etc.), effective competition, safeguards against exploitation of what economists call "asymmetric information" (as when a deceitful seller unloads junk on an unsuspecting buyer), regulators to enforce the rules and keep participants honest, and—when relevant—protection of taxpayers against pilferage or malfeasance by others. When these conditions fail to hold, greed is not good.”

[“James”]:
“Greed is a natural human vice, just like aggression. As much as we may try, we cannot get rid of them because they are part of human nature. But just as sport channels aggression into productive use, free enterprise does the same for greed. Free enterprise is only productive when its goal is to benefit consumers. When it becomes acceptable to screw consumers (or taxpayers) in the quest for wealth, the benefit is entirely lost.

Greed is not good. It is the productive work and investment we do as a result of our greed that is good.”

Comment
A muddle, I am sorry to have to say. Blinder’s point is discussed in a reader’s comment in an earlier post this week.

Adam Smith had no time for espousers of “greed” in their books (such as Bernard Mandeville, 1734, whose ideas he called “licentious” in Moral Sentiments (TMS VII.ii.iv.6-14).

It’s a bit like that modern combination that starts of asserting the cliché of their being only two motives for human action, “fear” and “greed”, and then proceeds to elaborate on some silly “theory” or other. I recently refereed a proposed book applying this to defence economics (my earlier specialty before the fall of communism) and found it projects a prejudicial imperative onto its author’s conclusions.

“Adam Smith's "Invisible Hand"—which is one of history's great ideas” is actually a recent invention among modern economists. It certainly is one of our discipline’s “great” re-defined and heavily promoted metaphors.

Smith’s point was not that “greed is socially beneficial” (please give us a direct quotation from Adam Smith showing that he ever made this absurd assertion!).

What he argued – once only – was that when some, but clearly not all, merchant traders were concerned about risks to their capital (remember, in the 18th century, the alternative to safety and prudence in one’s investments was utter ruin and its associated severe, and perhaps life-threatening, deprivation) they preferred to invest locally rather than invest their capital in riskier foreign ventures.

The greater the number of merchants who invested locally as individuals, the greater would be annual national investment and the greater the consequential national output and employment (always a concern of Smith’s for lifting working people out of their unemployed deprivation), because it’s an arithmetic law that the whole is the sum of its parts. Yes, that’s all it is.

He added, to describe the process by which individuals seeking the most profitable investment of their capital (prudence, not greed!) and to explain the arithmetic consequences to his readers, most of whom were not political economists, that individuals who behaved in this manner were led by “an invisible hand”.

This was not original to Adam Smith . It was never Adam Smith's invisible hand".

It was a popular literary metaphor, widely used by theologians in their sermons (Augustine), political writers in their weighty tomes, playwrights (Shakespeare in Macbeth), fiction authors (Daniel Defoe in Moll Flanders), philosophers (Voltaire) and classical writers from Greece and Rome. The metaphor was easily recognizable among literate readers of Wealth Of Nations.

I have a list of nearly 50 separate uses of the invisible hand metaphor, most of them probably known to Adam Smith, plus scores of other authors using the metaphor in other contexts up to the 20th century.

Smith taught his students that a metaphor should be used to give “due strength of expression” in “a more striking and interesting manner” (see Adam Smith’s “Lectures on Rhetoric and Belles Lettres”, 29 November 1762, Oxford University press, 1983, p 29).

His use of the metaphor of ‘an invisible hand’ (only once in Wealth Of Nations and once in Moral Sentiments, and once in his ‘juvenile student’s essay) certainly achieved his literary intention. Pity that modern economists from the 1950s burdened Smith’s achievement with a wholly invented content – not that they can agree on exactly what he meant by it, as a perusal of modern interpretations soon shows careful readers.

So James takes one step towards understanding Smith’s legacy and two steps back by obfuscating his literary meaning with the burden of the wholly invented charge of explaining why “greed” might be “good” under certain conditions of perfect competition (another modern idea unknown to Adam Smith).

Update:
I received a comment from "James" which since has 'disappeared' after I clicked 'publish';

Here it is:

"Sorry, but no one believes an invisible hand actua... Sorry, but no one believes an invisible hand actually exists. Everyone understands that it is only a metaphor. Your claim that "most campuses teach their students to believe that the metaphor is a real object, that it exists" is just plain wrong. It is not just wrong, it is ridiculously wrong."

Update 2:

James, have you read recent economics 101 textbooks lately, let alone those major ones since the 1970s? Also, scroll through Lost legacy and note the comments I make on references to the 'invisible hand of Adam Smith'.

These are all actual refernces spread across the world and media sources.

Look at the professional, refereed, journals, which with few exceptions pass for publication references to the invisible hand in its many guises.

No doubnt, you can find a few examples that contradict my statement, but they are swept aside by the scores that justofy it.

Gavin

Announcement X

2010-01-11T20:52:00.003Z

I saw two comments, one from Entech and one from Nick Gruen, which 'disappeared' and I would apreciate if they were reposted either on the Blog or via my email (gavin At negweb doT com).

The reaons for these losses are obscure.

Gavin

Review Commentary No. 3: Milgate and Stimson's "After Adam Smith":

2010-01-10T13:35:00.002Z

Murray Milgate and Shannon C. Stimson, 2009. "After Adam Smith: a century of transformation in politics and political economy", Princeton University Press, Princeton, ISBN 978-0-691-14037-7

[I hope from now on to continue with my review/commentary of Milgate and Stimson’s excellent book, which was interrupted by domestic affairs (moving house, etc.,). To re-start my review commentary (Nos. 1 and 2 were posted in November and December)]

Introductory link reminder:

“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, as it did 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 original scholarship, it is 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 public 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 must have read years ago.

Now, something must have happened in the 219 years that separate Smith’s life from today. It’s not all down to 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; nor was he the manic believer in ‘laissez-faire’, and other similar nonsense (Smith neither of the words ‘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 of interested faction in this first decade of the 21st century.

Lost Legacy readers will know that I am researching 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, and inadvertently spreading a conceptual virus like the biological kind.

Earlier last 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 the book by Murray Milgate and Shannon C. Stimson, which sweeps 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 Stimson in this commentary on their book."

I, and many readers, living through the last half of the 20th century, during which “the gradual modifications and changes wrought by later writers” on the unchanged original exposition of the ideas of Adam Smith sleep 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 written by “Smith himself”.

How we got from what Adam Smith wrote to what modern economists assert about him is a study in the history of intellectual dilution and invented accretion. Murray Milgate and Shannon C. Stimson have written the first part of that history.

Commentary No. 3:

Milgate and Stimson provide an authoritative account of the distorted modern presentations of his thinking that claim him to express ideas and themes known today as a liberal capitalist perspective. It is worth the attention of readers to begin with what Milgate and Stimson say about the ‘rise and fall of civil society’ because this encompasses the basic differences between the way that societies were observed before Smith the 18th century (and earlier) and how they came to be observed from the 19th century (and later).

Society in the feudal (also in earlier allodial forms) and in the mercantile era was a top-down affair, at the head of which was the sovereign, with the feudal lords below him (and the disregarded lower orders below them). The ‘superior orders’ were given to continual unrest, specifically over dynastic issues and territory, including strategic alliances, marriages, and shifting family allegiances and the unavoidable strife they caused before the victors, settled the inheritance for generations of the ownership of vast physical properties, and the power that flowed from them.

These dynastic struggles affected neighbouring kingdoms in Europe in very long and bloody, wars that were fought across neighbouring domains (such as the 30-years and the 100-years wars). They required substantial physical resources and manpower and the means to maintain them. Hence the importance to kings, and those close to them, of mercantile notions of how to pay for and maintain sufficient resources to project their state powers.

Gold and silver were not sought for their own sake; kings did not just sit in their ‘counting houses, counting out their money’ like obsessed misers; money was the very essence of a king’s necessary self-defensive duty to protect his power and his inheritance against the regular violent challenges of rivals (among family kin, cousins, and distant opportunists). Hence, the king’s writ supported his claims on resources through enforcing feudal obligations in taxation and the provisions of armies, and through the ordering of civil society in ways that expressed his legitimate right to control his dominions as he saw fit, with everybody below him, secular and religious, obeying him as if he was ordained by an invisible God. (‘Treason never prospers because if it prospers none dare call it Treason.’)

The re-emergence of despised commerce (regularly condemned as impious by theologists) from around the 15th century, after the so-called ‘dark ages’ since the fall of Rome in the 5th century, was crude, rude and none too genteel, and its participants were liable to be audaciously robbed and bullied by Lords and local disorders, and none too fussy about morals themselves. Despite these unpromising beginnings, merchants and their customers slowly transformed the meaning of traditional civil society by creating, unintentionally, an alternative means to relative wealth from within it. Commerce did not require a revolution; it just needs to find customers.

Milgate and Stimson capture the broad sweep of these changes in Chapter 3 (‘Rise and Fall of Civil Society) by writing a brilliant, intellectual account of the transformation towards a different society, identified by the questions asked by Adam Smith, and others, of the shibboleths of the mercantile state and the associated government regulations that enforced local Incorporated Guilds and international royal-chartered monopolies, of which the East India Company was the most morally disgusting.

Much wringing of hands among philosophers and divines - did it enhance the values of civil society or cause their degeneration? - began with the first appearance of commerce. James Steuart, the last of the traditional mercantilists, equivocated in his Principles of Political Economy (1767), as did another author, Adam Ferguson, the first of what became the new discipline of sociology, in the same year.

Ferguson had an on-off relationship with Smith and an almost romantic vision of the Roman Republic and the civic potential for morality in human society. He saw the progress of commerce, in particular that of the division of labour, as a dual-headed benign blessing, and a not so benign monster.

Karl Marx in Capital mistakenly praised Ferguson, the “tutor”, to Smith, ‘his pupil” from prior publication of his Essay on Civil Society (1767) before Smith’s Wealth Of Nations (1776).

In fact, Smith’s famous references to the productivity of the division of labour, were taken verbatim from Smith’s Glasgow Lectures on Jurisprudence (1762-63), which circulated (as was the norm) as students notes in Glasgow and Edinburgh, where Ferguson probably read them. Ferguson certainly quarrelled with Smith about his allegations of ‘plagiarism’, though how original Smith’s reporting was on the role of the division of labour is questioned today by J-L Peaucelle: ‘Adam Smith’s use of multiple references for his pin making examples’, European Journal of the History of Economic Thought, 13:4, pp480-512.).

Milgate and Stimson’s treatment of these episodic events among the literati are thorough and stimulating, and readers unfamiliar with these debates can glean a great deal from them. The civil-society debate continued in Smith’s work, and in those who like Mandeville preceded him, and those who followed later, such as Ricardo, Mill and Marx, though, as the decades slipped past, the issues matured and their content changed.

Smith is quoted (p 48) from his History of Astronomy (named, by Milgate and Stimson, for an unstated reason, as his ‘lectures’, and date them ‘ca. 1750’); as viewing society as resembling an invented ‘system’ connecting the different movements and effects of reality. They quote from Wealth Of Nations; I quote the whole reference:

“It is thus that every system which endeavours, either by extraordinary encouragements to draw towards a particular species of industry a greater share of the capital of the society than what would naturally go to it, or, by extraordinary restraints, force from a particular species of industry some share of the capital which would otherwise be employed in it, is in reality subversive of the great purpose which it means to promote. It retards, instead of accelerating, the progress of the society towards real wealth and greatness; and diminishes, instead of increasing, the real value of the annual produce of its land and labour.

All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society. According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.” (WN IV.ix.50-52: 687-89)

Clearly, Smith is not talking about the system that exists (has it ever existed?), but of an imagined system, which if it did exist, then society in practice would be better off than the existing distorted systems of ‘preference and restraint’ will ever be, as long as the ‘preferences and restraints’ continued.

However, the existing mercantile system, despite its drawbacks, of which it had many and against which Smith made a “very violent attack” in Wealth Of Nations, could not stop all ‘progress to opulence”, nor stop it prospering (WN IV.ix.28: 674).

Milgate and Stimson (p 48) assert that “the obvious and simple system of natural liberty” lies at the centre of Smith’s account of the market mechanism” and, further, that “it displaces the centrality of both the state and the direct influence of statesmen” from the market “space”.

In essence, this is the main challenge of market forces to the old verities of civil society; the king, if not dead, is made redundant.

I shall return to this evocative idea and place some caveats upon it in my next review/commentary post on Milgate and Stimson’s excellent book.

A New Slant on the Invisible Hand

2010-01-08T20:41:00.003Z

Susan McWilliams writes a review of "Methland: the death and life of an American smalltown" by Nick Reding in Front Porch Republic HERE http://www.frontporchrepublic.com/?p=7899
as:

"The Book You Should Read This Year"

“In this book we see corporations work with governments, again and again, to prevent legislation that would stem the flow of methamphetamine across national borders. So the national interest in, say, regulating the importation of pseudoephedrine, a key ingredient in meth production, is deemed not as important as the pharmeceutical industry’s desire to avoid regulations at all costs. (Reading all this, it is worth remembering Adam Smith’s own explanation of the “invisible hand” mechanism begins with the assumption that actors are all “preferring the support of domestic to that of foreign industry” – an assumption that is questionable at best in the era of the global corporation."

Comment
Extraordinary that we should read in a book review something I have never (yet) read in a serious article on economics about the context in Wealth Of Nations where Adam Smith uses for the once and only time the metaphor of ‘an invisible hand’.

This speaks volumes of the quality of the economics profession on what is surely now the main, if not the only, idea that readers worldwide – and well beyond the discipline of economics – know about Adam Smith.

Smith’s example is in paragraph 9 of chapter 2, Book IV of Wealth Of Nations, page 456, and discusses a consequence of some, but by no means all, British merchants prefering to trade locally rather than take the higher risks of trading abroad with Europe or the British colonies in North America, the Caribbean, Africa and India.

These overseas trading partners were risk-tolerant and represented a significant share of annual trade and, in Smith’s view diverted significant amounts of capital abroad, while these merchants who traded locally were risk-averse.

Smith concluded his analysis with his reference to ‘an invisible hand’ leading the local merchants to invest locally and thus contribute to domestic output and employment (the whole is the sum of its parts). Clearly, the other merchants trading abroad did not contribute to domestic output and employment to the extent to which they would have if they were as risk-averse as those following the ‘invisible hand’.

Viewed as Smith actually wrote about the invisible hand, it hardly qualifies as his most notable idea or as a general ‘proof’ that people following their self-interest unintentionally benefit the economy (in some versions today it is claimed that they perform a public service no matter what their motives).

Susan McWilliams does a great service to her readers, I hope some of them notice her reference to the invisible hand in, or at least close to, its proper context.

The Dead-End of General Equilibrium in Practice

2010-01-07T17:05:00.001Z

Dr Madsen Pirie of the Adam Smith Institute writes Here
which is part of his series on “Philosophical Observations on Economics.”:

“There is no equilibrium position in economic activity”

“Economists used to talk, and some still do, of the equilibrium position at which supply meets demand. Demand generally decreases as price rises, while more suppliers will tend to enter the market as prices rise. The equilibrium price is supposed to the price at which the supply exactly matches the demand. People use this (and other) 'equilibrium' notions to derive equations which aim to describe how an economy behaves.

The problem is that equilibria are entirely theoretical abstractions and do not occur in real economies. The real economy is characterized by motion. There never is a point at which supply meets demand. Demand changes from moment to moment, and so does supply. There are countless economic actions taking place every moment as potential consumers change their positions on whether they are in the market for particular items, and potential producers decide whether or not to put more produce on sale. Even further back, producers are deciding whether to commit resources now to augment production in a few months time, in anticipation of what demand might be.”

[Follow the link for the rest of the article]

To which I offered a comment:

“Congratulations, Dr Pirie. You have observed reality and not accepted that we can model it accurately with equations seeking to 'prove' equilibrium in markets. Beyond first year economics, equilibrium notions are misleading. The pursuit of scientific credentials from the 1870s - while rooting them by assertion in ancestral Smithian economics - has led to illusions of predictability and imaginary theorems, more poetic than real.

Smith never made predictions (except that the former colonies in North America would become the most powerful economy in the world by the 1870s) because given the multiple distortions and wrong-headed mercantile political economy myths in his day he knew enough about human interactions to know how easy it was to be wrong about the present.”

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

Announcement IX

2010-01-07T12:19:00.004Z

I am still having difficulty with posting legitmate comments on Lost Legacy. I click Publish, then they disappear, as appened to 'Entech' yesterday.

Therefore, may I ask readers, if their comments does not appear within 24 hours (it's probably 'lost', to repost it or send it direct to me (gavin At negweb dOT com).

I am asking my IT expert (my daughter) to examine what happens - what, perhaps I am doing wrong - and, after the present winter weather, alter my (mis)behaviour.

Lost Legacy values it readers comments - good or hostile. Please keep sending them int.

Gavin

The Fallibility of a Word

2010-01-06T10:48:00.002Z

“Mark” at Larvatus Prodeo writes HERE of “Rebranding Capitalism” to which I posted a comment:

The word ‘capitalism’ was first used in English by William Makepeace Thackeray in 1854 in his novel, The Newcomes, chapter XLIII.

He was talking about the business, mainly financial, affairs of some of his characters. He also used the word “capitalist” several times, though this word was first used in English in the 1790s (in French, capitaliste, was used earlier in the 1760s – I am writing from memory just here).

The word ‘capitalism’ was not used by Adam Smith (he died in 1790), nor by Ricardo (1817), Malthus, Mill (1849), nor, interestingly, by Marx.

Adam Smith referred to his ‘4th Age of Man’ as commerce, the earlier three being “1st, the Age of Hunters; 2dly, the Age of Shepherds; 3dly, the Age of Agriculture” (A. Smith, Lectures on Jurisprudence, p 14, [1762-63] 1978).

Almost Right, But No Cigar

2010-01-05T11:18:00.002Z

Carlos Navaro, Online Journal, writes (5 January) HERE:

“Meet the real Adam Smith”

“Time to debunk the propaganda and myths: Modern-day American capitalism is not totally synonymous with free enterprise; making money is not necessarily the same thing as creating wealth; Wall Street and big government are but flip sides of the same power structure; the big-time money makers behind the scenes who finance the careers of political leaders and, in fact, write for them the laws that make their dealings legal are not entrepreneurs in the true sense of the word.

In his iconic The Wealth of Nations (1776), Adam Smith exposed and warned against the kind of corrupt laws and customs that in his day stifled free markets.

Unfortunately, few mass media pundits nowadays have read the book or, if they have, they deliberately ignore its message, latching instead on the author’s “invisible hand” simile, quite out of context, to justify the unbridled greed of making money for its own sake. They conveniently fail to mention that Adam Smith was first and foremost a moral philosopher, not the amoral, dog-eat-dog economist that he has been portrayed to be, as is evident in his other classic, The Theory of Moral Sentiments (1759).

Adam Smith’s moral philosophy was simple enough. … the only way to assure social stability was by allowing [people] to freely exchange labor, goods, and services for profit. If you have something that I want and I have something that you want, and if no king or deity prohibits us from trading what we want from each other, and if whatever those wants are, are not harmful to society, then despite our religious and political differences, whether we like each other or not, we can live in harmony. … Taken at a mega level, it was clear to Smith that the whole of society, as if guided by an “invisible hand,” would benefit from this competition.

Therefore, the main, if not the sole, role of government, according to Smith, was to assure that the competition was free and fair, and, moreover, that the competitors were imbued with a moral conscience, for otherwise the completion would degenerate into the law of the jungle. In his calm, philosophical voice, Smith noted how in his day the overlong terms of apprenticeship (a form of slave labor), the local restrictions against laborers from outside communities, the collusion among wealthy owners of land and capital to set prices, the stashing of bank gold deposits in private coffers and covering withdrawals with unsecured paper notes -- stealing the gold, in effect -- were, among other ruses, preventing the “invisible hand” from working its magic.

Adam Smith, for the record, was a man of modest tastes and means. The fabled guru of capitalism was no capitalist. He never owned a business or held a private sector job. His most remunerative employment was in the public sector as commissioner of Customs in Edinburgh.”

Comment
Carlos Navaro is right about the comparative power structures of 18th-century Britain and modern-day societies like the USA and those found in Europe, including 20th-century Britain. The parallels are striking. Did they ever change?

The power-elite, thanks to the press, the 24-hours news cycle, and the Blogosphere, particularly the less-constrained latter medium, is under constant view and exposure.

Smith’s Wealth Of Nations exposes the close alliance among the sovereign, his legislators and those who influenced them, the large landed-estates and the burgeoning merchants and manufacturers, en route to becoming the most powerful force in the land from a few decades later.

Smith’s main target was mercantile political economy – the fallacy that a country grew rich (and, therefore, could afford large armies to fight in Europe’s dynastic wars) by exporting more than it imported (the countries it traded with were often seen as the enemy, not as partners in joint prosperity) and, crucially, a country’s merchants and manufacturers prospered if they were state regulated by the King awarding to selected favourites a chartered monopoly status.

Smith’s stance of opposition in Book IV to mercantile political economy has often been misunderstood; he didn’t oppose all government action and intervention, he opposed the then current government’s actions and interventions where they curbed natural liberty and held back progress to “opulence” and diverted activity into prodigality. This also included the great diversion of scarce capital and labour into colonial monopolies, and their defence in particular.

Carlos Navaro gets most of this right. He begins well in identifying that they misread and thereby misuse the “author’s invisible hand simile, quite out of context, to justify the unbridled greed of making money for its own sake.”

I excuse Carlos Navaro’s misnaming Smith’s use the metaphor (not a “simile”!) of “an invisible hand”, but was relieved to see he condemned the modern version that uses it to “justify the unbridled greed of making money for its own sake”. Well done, I thought.

But reading on, I was disappointed – hence, no cigar – when he wrote about that competition would benefit society when allowed to operate “as if guided by an “invisible hand”.

If Smith had formulated his use of the invisible hand in such a manner that it operated “as if”, then it would be a simile, but he didn’t, nowhere, ever, use “as if” in association with “an invisible hand”.

The simile we can live with – it clearly implies that there isn’t an invisible hand –but the metaphor has become a belief that the invisible hand actually exists, which is nonsense when you think about it, unless you believe in the divine guidance of all the details of human society.

My concerns were compounded when I read that Smith’s critique of mercantile political economy, practised through legislation, prejudice and warfare, let alone the domestic policies of the Apprentices Statutes, the Settlement Acts, the Incorporated Town Guilds, and Cromwell’s Acts of Navigation, prevented “the invisible hand from working its magic”.

That may well be Calvos Navaro’s belief, but it was not Smith’s.

He never linked the invisible hand metaphor to markets on the single occasion that he used it in Wealth Of Nations (or in the other occasion in Moral Sentiments). If we are to “debunk propaganda myths” about US capitalism, we ought not to carry on with modern myths about Smith’s use of the invisible hand metaphor, a wholly contrived invention by modern economists since the 1950s.

Calvos Navaro’s takes a few steps in the right direction of understanding Adam Smith (hence, congratulations) but then falls back a step or two from buying another modern myth, hence no cigar, on this occasion.

Incidentally, Adam Smith, for the record, had one private enterprise job: he took the young Duke of Buccleaugh and his brother to France as their private tutor from 1764 to 1766, his only post outside the public and semi-public sector, for which he received a salary and a life pension from the Buccleaugh estate until 1790.

An Unothodox Critic of Rationality

2010-01-04T16:51:00.002Z

For an unorthodox criticism of assumptions of rationality in economics see Dr. Michael Towsey, Queensland University [Warning, it is a very long article HERE]:

“The Biopsychology of Cooperation - Part 2”

"Numerous experiments have revealed that human economic decision making is far more complex than accepted by the simple theory of maximising gain. This turns out to be true even for animals. For example, if two monkeys perform the same task side by side, and one is rewarded a grape (big money) and the other a cucumber (small money), the latter will throw a tantrum and toss the cucumber out of its cubicle. Yet if both receive a cucumber, both eat happily. Conclusion: monkeys show an aversion to inequality. The reward does not even have to be physical - it can be the affectionate attention of laboratory staff. - Michael Towsey

Comment
I have no views on the source of the article. It may be worth a look, or not.