Another Great Smithian Metaphor

Peter Boettke writes in The Austrian Economists (HERE):

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

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

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

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

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

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

I recommend that you follow the links.

Jacob Viner Confirmed

There were two articles this morning in Blogland worth a look over if you have a spare 20 minutes. Both discuss whether Adam Smith was really a Leftist, a view likely to become more common as Adam Smith's the so-called rightist views comes under challenge:

1 “Was Adam Smith the Anti-Capitalist?” by Thom Stark Here (7 Sept 09)
and
2: “Free-market activists distort original message of Adam Smith’s “invisible hand” by James Pyland HERE (11 Feb 2006):

Comment
Jacon Viner once remarked that it would be surprising if some writer could not claim support for his strange economic ideas from Wealth Of Nations. These articles exemplify Viner's remarks.

Myths About Charles Darwin and Adam Smith

Len Hart writes the The Existentialist Cowboy Blog HERE:
and posts an article “H. L. Mecken Covers the ‘Monkey Trial’ “, in which includes the following:

“Interestingly, the term "survival of the fittest" was never used by Darwin”

“Evolution is often considered to be so true as to be trivial: what survives survives. Critics of Darwin will often cite the tautology though it does not support them; it supports Darwin. Species which survive pass on their genes as well as mutations. This is quite beyond debate. Every farmer who has bred for specific characteristics knows the truth of it. And every cowboy will tell you that if you kill a slow roach, you improve the breed. Evolution! Adaptation! Natural Selection! Some of the more subtle critics of "Darwin" say that "survival of the fittest" is a circular argument: the fittest are those who survive, and those who survive are deemed fittest. There are problems with that:

1. Darwin never used the term "survival of the fittest"! That dubious honor belongs to Herbert Spencer, a "Social Darwinist" who never understood Darwin, nor was he "social"!

2. Even if the term "natural selection" is more properly substituted for the bogus term "survival of the fittest", the argument is circular only if the invalid conclusion that "only the fittest survive" is added! The invalid value judgment –survival of the fittest –is falsely attributed to Darwin.”

Comment
I am not wholly in disagreement with Len Hart’s article (on the Scope’s Trial) but in the interests of protecting Charles Darwin’s legacy (much like I strive to protect Adam Smith’s legacy, Len Hart (NO DOUBT IN GOOD FAITH) distorts Daewin's legacy.

I have often seen the denial that Charles Darwin ever used the term: ‘survival of the fittest’; the statement's origins is more often associated with Herbert Spencer, yet Darwin mentions to ‘survival of the fittest’ several times in his book, The Descent of Man and selection in relation to sex, 1871, John Murray, London.

An example, one of several, is found in Chapter IV, “Of the Manner of the Development of Man from Some lower Form” (page 157 in the photoreproduction Princeton University Presss edition, 1981):

“In an area as large as one of these islands, the competition between tribe and tribe would have been sufficient, under favourable condition, to have raised man, through the survival of the fittest, combined with the inherited effects of habit, to his present high position in the organic scale.”

It is interesting to see myths that become "facts" merely by repetition as they spread round the world with an ease which are contrary to the real facts.

Clearly, the epigones re-presenting Darwin’s ideas, are like the epigones who have represented Adam Smith’s ideas since the 1950s, who have not cared to read the authors they imply they quote from with authority (in Adam Smith’s case some of the perpetrators of the myths received the accolade of Nobel Prizes).

It's best to remember that ther 'patron saint' of all students everywhere is St Thomas, also known as 'doubting Thomas'. I always warned first year students, and on occasion reminded final year students' never to trust what they were told by their lecturers, but always check for themselves by reading all references they asserted to justify their claims about what others were supposed to have written.

Surprised at Sloppy Notions for Chomsky

From Noam Chomsky: Education is Ignorance (2 May) in W.E.A.L.L.B.E. here:

"David Barsamian: One of the heroes of the current right-wing revival... is Adam Smith. You've done some pretty impressive research on Smith that has excavated... a lot of information that's not coming out. You've often quoted him describing the "vile maxim of the masters of mankind: all for ourselves and nothing for other people."

Noam Chomsky: I didn't do any research at all on Smith. I just read him. There's no research. Just read it. He's pre-capitalist, a figure of the Enlightenment. What we would call capitalism he despised. People read snippets of Adam Smith, the few phrases they teach in school. Everybody reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division of labor is. But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be. And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceeding to its limits."

Comment
This is a long article and I wish to comment on other paragraphs, so I will focus on the above passage and return on other days to other posts.

Let me say first that Noam Chomsky is respected as a formidable intellectual with a lot of ‘hinterland’ as we say in the UK, and he says quite a lot about Adam Smith that you won’t find from many modern economists, because, as he says, few of them actually read Smith’s books. But if you put up this line of argument it is best if you show that you have read Wealth Of Nations well.

That he confesses he ‘read him’ but didn’t do ‘research’ is revealing and perhaps explains why his interpretation, given with that certainty that comes from a certain kind of intellectual bully, is actually misleading on the issue of Adam Smith and the division of labour, a common enough error among most of the Left.

Smith was a moral philosopher; he observed everything but did nothing. He didn’t bring to his work a preconceived set of prescriptions and apply them to his study of commercial society in the context of 18th-century Britain. He described, taking the long-view of history as well as his reading about and visiting fairly primitive work places to see how the division of labour increased labour productivity. And not just in the pin factory (‘a very trifling manufacture’; p14). He also, and perhaps of greater significance, he described the ‘accommodation of the most common artificer or day labourer in a civilised and thriving country’ (p 22). Here he described the long supply-chain, including its international dimensions, that produced the common labourer’s ‘woollen coat’, the ‘produce of the joint labour of a great multitude of workmen’.

Yes, the national and international division of labour is ‘wonderful’. It operated in Smith’s day without ‘central planning’, ‘central direction’, and without the help of university professors from either Glasgow (1461) or Harvard
(1636), or the sovereigns of any kingdom, or legislators and those who influenced them, in the few places where they existed.

Having discussed the division of labour and its commercial consequences in Book I of Wealth Of Nations (it created, among other things, the wealth that enabled Scotland and a British colony in North America to divert some portion of their ‘annual output of the necessities, conveniences, and amusements of life’ to the employment of professors to educate young men – no girls! – to add to the human capital of what were for many decades (in Scotland, for centuries) humans otherwise bereft of learning and sunk in ignorance.

Chomsky notes: ‘But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be.’

Now, some parts of this sentence are fine, some parts woefully wrong, and almost all of it out of historical context. I have no idea how a Harvard professor managed to attack those who ‘read the first paragraph of The Wealth of Nations’ but do not ‘get to the point hundreds of pages later’ (768 actually), and yet manifestly misleads his readers as if he hasn’t read Book V himself with the due care and attention we expect from Harvard undergraduates, let alone its senior faculty.

The relevant section reference is ‘Article ii’, ‘Of the Expense of the Institutions for the Education of Youth’, pages 758-88, of Book V of Wealth Of Nations, and the relevant page is 782 (from the Glasgow Edition, Oxford University Press):

“In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.” (WN V.i.f: 782)

The education of youth is a long and important part of Wealth Of Nations. In it Adam Smith presents a detailed description of the history of education from classical times to its then state in Britain. The first notable feature was that only boys were formally educated for a few years; girls were left to their parents to ‘home educate’, which for the majority meant no education at all (their parents were likely to illiterate and general ignorant).

Across Britain the picture was patchy. England was largely backward educationally. It had two universities, Oxford and Cambridge, but local schools were rare. In Scotland, there were four universities, Edinburgh, Glasgow, St Andrews and 'Aberdeen'. But local provision for education since the 17th century was managed by ‘little schools’ in most parishes, paid for by a mixture of charitable sources, local contributions and donations. Most male children spent a year or more, some ‘bright’ children up to age of 14. Middle class boys tended to stay longer than the children of the poor, most of whom were sent to work from about 8, their parents near destitute.

Smith describes this in Book V. In fact, he offers the ‘little school’ system in Scotland as suitable for England too (a much larger country in population and wealth than Scotland). He envisages all children spending some time learning the ‘read, write and account’ to extend literacy across the majority of children (he left open the question of education for girls, but clearly they could be accommodated in the ‘little school’ system).

Book V is about government expenditure and revenue. How was education to be funded? The government would have to play a serious role in such a project, which meant taxation of a relatively narrow taxation base. At the time taxation was a sensitive subject (it was ever thus) and the people who would have to consent to such an additional expense (‘little schools’ would need to be built, which with 60,000 parishes was no mean line item in a budget) were the legislators, mainly representative of the agricultural aristocracy and few ‘improving’ landlords.

If Chomsky re-reads the paragraph quoted above he will note two themes in his argument. The first, which Chomsky has focused upon, is that of the deleterious effects of the division of labour, which were of longstanding antiquity (the division of labour preceded commerce by many millennia back into pre-history).

Farm labourers were marginally ‘better off’ than the fewer primitive factory labourers, hauliers, seamen, servants and soldiers, and etc. But be clear, the outdoor farm labourers were not all dancing round May Poles and living as happy families on the prairy. Theirs was a hard life, short too, with infirmities and early deaths from disease, incapacity, accidents and starvation.

Into this background Smith raises the ‘man whose whole life is spent performing a few simple operations’ and the consequences in his stupidity and ignorance. He does not raise the spectre of millions living their awful rural lives in similar terms – his appeal is to support from the few rich men who owned the farms.

He also turns his argument neatly as his second theme. If the sources of finance for education (mainly the aristocrats) were not inclined to support the ‘little schools’ from their usual selfish inclinations to prodigality, then it would be useful to appeal to their fears of disturbances to their sheltered lives – the steady decline in martial prowess of the uneducated mass of poorer men (and Smith knew how to write well).

For the indigent labourer whose ‘torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life' could be written as a major threat lurking everywhere. Moreover, ‘Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war.’ If not inclined to rebellion, his services in defence of the island country could be useless.

These concerns were meant to strike a chord with that class of taxpayers who were fearful of weak armies and of easily misled labourers who might become rebellious (such rebel ‘mobs’ had forced the British army out of the colonies).

In short, Smith was 'spinning', as we say today, a case for increased taxation to pay for public institutions regarded as deficient in 18th-century Britain. That he was doing so 768 pages after the ‘pin factory’ was deliberate, Few of his readers would have the faintest idea of what went on in a factory and his prose was powerful because it pushed all the right buttons to rouse the rich readers from their complacency – and not a little hostility – about the plight of the children of labourers.

Chomsky has not considered this context. Hence, he can decry the division of labour and assert with conviction that it ‘will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be’, but not with much credibility. He apparently has no idea of how ignorant were the members of the majority of ordinary labouring families in the 17th and 18th centuries, let alone the millennia before then.

Empirical evidence beats speculation. Was the result of the division of labour, even through the horrors of the industrial revolution of the 19th century, a nation of people who were turned into ‘creatures as stupid and ignorant as it is possible for a human being to be?’

When Adam Smith wrote Wealth Of Nations (1764-1776) he did not have a vote under the existing franchise – in fact he never had a vote – but by the late 19th century, literacy levels were at unprecedented higher levels, ignorance was not the norm, and trade unions were beginning to exercise their functions, and were led by working men who could do a lot more than ‘read, write, and account’.

By exaggerating his case with colourful prose, few facts, and no history Chomsky undermines those parts of his case that are worthy of our attention. I shall examine the rest of his article over the next few days to see whether he can be taken seriously.

Self-Interest is Not Always Benign

A regular correspondent writes:

‘I don't know if you take requests, but I would love to see one of your posts on the recent interview at the Freakonomics blog about "The Invisible Hook", a new book about the economics of piracy. Here's the link:

Here is the quotation from the Freakonomics article on piracy:

"In Adam Smith, the idea is that each individual pursuing his own self-interest is led, as if by an invisible hand, to promote the interest of society. The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest. So they were driven to build systems of government and social structures that allowed them to better pursue their criminal ends. They’re connected, but the big difference is that, for Adam Smith, self-interest results in cooperation that generates wealth and makes other people better off. For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively."

Comment
The first question is easy: I am delighted to respond to requests about any subjects related to Adam Smith’s Lost Legacy. I receive these regularly by email and I usually replied privately by correspondence, but there is no inhibition on my part from replying via ASLL.

I have also read the article by Freakonomics in the New York Times (link above) and my initial response to the sentence: ‘The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest', was incongruity.

Who suggests that criminals do not act according to their self-interest? Of course they do. They certainly do not act for anybody else’s interests!

When Mugabe authorises maltreatment of opponents by his hired thugs, he acts in accordance with his self-interest as he sees them. Indeed, Adam Smith gives 60 instances of people acting according to their self-interest but not in the interests of others in Books I and II of Wealth Of Nations, and these people’s actions certainly did not benefit society as a whole, nor were they intended to do so.

That’s part of the problem with the Freakonomics’ approach: it seeks the rational motives behind people’s actions, when rational decision-making can have non-beneficial consequences for those affected by the decisions. But the Freakonomics authors, ingenious as their explanations often are, sometimes fail to find unanimity in the decision makers’ cohorts – not all members of a cohort, sharing, say, the same characteristics as gang members, become gang members, or take drugs, get pregnant, or kill anybody.

So the pirates ‘driven to build systems of government and social structures that allowed them to better pursue their criminal ends’ is only part of the story.

Smith noted a significant and relevant point in this regard:

‘Society, however, cannot subsist among those who are at all times ready to hurt and injure one another. The moment that injury begins, the moment that mutual resentment and animosity take place, all the bands of it are broke asunder, and the different members of which it consisted are, as it were, dissipated and scattered abroad by the violence and opposition of their discordant affections. If there is any society among robbers and murderers, they must at least, according to the trite observation, abstain from robbing and murdering one another. Beneficence, therefore, is less essential to the existence of society than justice. Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it.’ (TMS II.ii.3.3)

Now, pirates in the 17th and 18th centuries were composed of experienced seamen and their officers. The learned their trade as seamen in the merchant marine and the Royal Navy. Both sections of the shipping business had many shared customs, some of ancient vintage. For example, in times of severe scarcity, food from a captured seabird’s carcass was divided among the crew by the venerable system of ‘who shall have this?’ and not by the captain’s prerogative.

One seaman turned his back of the divided segments of the bird and another seaman pointed to a piece of dismembered bird and asked ‘who shall have this’. The crew member who could not see what his colleague was pointing at would shout out a name, and that piece, whatever it was – beak, feathered tail, webbed feet, or succulent breast – was allocated to the man whose name was called out. This happened to Captain Bligh and his boat crew after the mutiny – the men were amused (quietly) when Bligh received the feet on one occasion.

So, much of the so-called drive ‘to build systems of government and social structures that allowed them to better pursue their criminal ends’ which were merely simple rules for self-preservation, and, as Smith put it: ‘any society among robbers and murderers, they must at least, according to the trite observation, abstain from robbing and murdering one another’, because ‘the prevalence of injustice must utterly destroy it.’

Now fast forward to Somalia and the pirate menace to shipping.

The first big difference is that 18th-century pirates sailed large, self-sufficient, and well-armed and fast ships, crewed by excellent seamen, and captained by proven leaders who could keep the crew in order according the conventions among pirates. Everybody received a share of the loot according to their station (much like Prize Money paid by the Royal Navy for captured foreign vessels).

The Somalia pirates are in a different league; their ships are less seaworthy, their crews number a half-dozen men, and the ships they board are defenceless largely. Their leaders, judiciously, are on shore, not on the little boats. They take the bulk of the loot obtained – ‘independents’ are rare – and they launder the vast sums with the efficiency of banks through high-level international contacts. When a heist goes wrong, it’s the boys in the bum boats who die, not the shore-based quasi-bankers.

‘For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively’.

Pirates do not create nor destroy wealth; they redistribute it. Plunder as an alternative to wealth creation is as old as, if not older than, voluntary exchange. Hijacking a lorry full of merchandise is not different that sea-born piracy and regularly happens inside all major economies.

The nature of an activity does not alter the self-interested activity of criminals, polluters, spoilers of the commons, kleptomaniac African (or Russian, or Prohibition Mafias), and petty thieves in supermarkets.

What Freakonomics adds to what we know about self-interested actions, for good or ill, I am not qualified to comment, but on the piracy phenomenon, I am not impressed.

Smith on Morals of Competition

John E. Hill writes a comment to an article, ‘Adam Smith would be appalled’ in The Boston Globe (20 April) HERE:

‘GORDON MARINO hit the nail squarely on the head with his op-ed "The business of business ethics." But he did not hammer the nail hard enough. Adam Smith, considered the father of capitalism, wrote, "In the race for wealth, and honors, and preferments, [one] may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors." But Smith added that one should not harm another in the process.

Surely Marino's critique of investors "taking unconscionable but legal risks with other people's pensions and life savings" means that hundreds of thousands of people have been harmed. And isn't the opacity of the instruments used to essentially defraud people of their pensions an impediment to the transparency needed for a truly free market?

The greedy Wall Street manipulators have violated not only ethical principles but also the free-market principles of Adam Smith.

Comment
John Hill should quote the full passage following the sentence he quotes to make clear and definitive the particular point that Smith makes (though congratulations to John Hill for spotting the basis of Smithian moral conduct in competition):

‘In the race for wealth, and honours, and preferments, he may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit of. This man is to them, in every respect, as good as he: they do not enter into that self-love by which he prefers himself so much to this other, and cannot go along with the motive from which he hurt him. They readily, therefore, sympathize with the natural resentment of the injured, and the offender becomes the object of their hatred and indignation. He is sensible that he becomes so, and feels that those sentiments are ready to burst out from all sides against him.’ [TMS II.ii.2.1: 83]

The Man of Public Spirit Praised by Adam Smith

I was asked recently by a correspondent if I knew of anything written by Adam Smith on ‘public spirit’. I replied:

It depends of what is meant by 'public spirit'. I assume it is something to do with acting in a manner that has public welfare benefits.

Adam Smith addressed this possibility in The Theory of Moral Sentiments (1759). To understand Smith’s idea, you should read the whole of chapter 1 in Book IV, in which he discusses the role of 'beauty' in relation to 'utility', and asserts that the beauty of a contrivance is more valued than its utility (which he claimed, uncharacteristically, as his original development of an idea from David Hume).

First, he sets out his proposition that the ‘fitness’ of a contrivance is valued more than the ‘very end for which it is intended’ by giving everyday examples of disordered chairs in a room which the owner would tidy up angrily, though it makes no difference to their utility as chairs; and of a two-guinea timepiece that runs two-minutes slow, so that the owner buys fifty-guinea watch that runs only second slow, but which runs perfectly for its the possessor. Or a hovel, which keeps the inhabitants dry, compared to a palace that does the same task and costs immense amounts of money, but enhances its owner’s prestige

This leads him to discuss the parable of the 'poor man's son whom heaven in its anger has fired with ambition', who is driven to work hard to become rich because he imagines the rich have the means to happiness. It also covers the rich landlord who surveys his fields and feels good, even though he cannot eat any more than poor man.

Having noted the significance of these delusions, Smith describes their social implications: these are the delusions that created civilisation.

He then turns to the ‘public spirited’ man and discusses what drives such a man; Smith asserts a driver is his admiration for the workings of a great society, which incentivised him to devote his time and his own money to improving society in some manner to make it even better. And it is appropriate that they should do so. It is not all down to a stark choice between that perennial antipathy of private enterprise versus public spending. There are additional sources of enterprise that are significant today.

Individuals can be affected by a sense of public spirit to bring about improvements in what private and public spending has done, so far, on their own. Apart from foundations that disperse funds to what they consider worthy ends and charities that mobilise resources to fill gaps in current provision, there are publicly-spirited individuals who make donations to selected objectives or take the initiative to undertake beneficial public projects on their own account. All these, and others, are well within the ambit of Smithian political economy for commercial societies.

Here is Smith’s (much neglected) explanation of the efficacy of ‘public spirit’:

“The same principle, the same love of system, the same regard to the beauty of order, of art and contrivance, frequently serves to recommend those institutions which tend to promote the public welfare. When a patriot exerts himself for the improvement of any part of the public police, his conduct does not always arise from pure sympathy with the happiness of those who are to reap the benefit of it. It is not commonly from a fellow-feeling with carriers and waggoners that a public-spirited man encourages the mending of high roads. When the legislature establishes premiums and other encouragements to advance the linen or woollen manufactures, its conduct seldom proceeds from pure sympathy with the wearer of cheap or fine cloth, and much less from that with the manufacturer or merchant. The perfection of police, the extension of trade and manufactures, are noble and magnificent objects. The contemplation of them pleases us, and we are interested in whatever can tend to advance them. They make part of the great system of government, and the wheels of the political machine seem to move with more harmony and ease by means of them. We take pleasure in beholding the perfection of so beautiful and grand a system, and we are uneasy till we remove any obstruction that can in the least disturb or encumber the regularity of its motions. All constitutions of government, however, are valued only in proportion as they tend to promote the happiness of those who live under them. This is their sole use and end. From a certain spirit of system, however, from a certain love of art and contrivance, we sometimes seem to value the means more than the end, and to be eager to promote the happiness of our fellow-creatures, rather from a view to perfect and improve a certain beautiful and orderly system, than from any immediate sense or feeling of what they either suffer or enjoy. There have been men of the greatest public spirit, who have shown themselves in other respects not very sensible to the feelings of humanity. And on the contrary, there have been men of the greatest humanity, who seem to have been entirely devoid of public spirit. Every man may find in the circle of his acquaintance instances both of the one kind and the other. Who had ever less humanity, or more public spirit, than the celebrated legislator of Muscovy? The social and well-natured James the First of Great Britain seems, on the contrary, to have had scarce any passion, either for the glory or the interest of his country. Would you awaken the industry of the man who seems almost dead to ambition, it will often be to no purpose to describe to him the happiness of the rich and the great; to tell him that they are generally sheltered from the sun and the rain, that they are seldom hungry, that they are seldom cold, and that they are rarely exposed to weariness, or to want of any kind. The most eloquent exhortation of this kind will have little effect upon him. If you would hope to succeed, you must describe to him the conveniency and arrangement of the different apartments in their palaces; you must explain to him the propriety of their equipages, and point out to him the number, the order, and the different offices of all their attendants. If any thing is capable of making impression upon him, this will. Yet all these things tend only to keep off the sun and the rain, to save them from hunger and cold, from want and weariness. In the same manner, if you would implant public virtue in the breast of him who seems heedless of the interest of his country, it will often be to no purpose to tell him, what superior advantages the subjects of a well-governed state enjoy; that they are better lodged, that they are better clothed, that they are better fed. These considerations will commonly make no great impression. You will be more likely to persuade, if you describe the great system of public police which procures these advantages, if you explain the connexions and dependencies of its several parts, their mutual subordination to one another, and their general subserviency to the happiness of the society; if you show how this system might be introduced into his own country, what it is that hinders it from taking place there at present, how those obstructions might be removed, and all the several wheels of the machine of government be made to move with more harmony and smoothness, without grating upon one another, or mutually retarding one another's motions. It is scarce possible that a man should listen to a discourse of this kind, and not feel himself animated to some degree of public spirit. He will, at least for the moment, feel some desire to remove those obstructions, and to put into motion so beautiful and so orderly a machine. Nothing tends so much to promote public spirit as the study of politics, of the several systems of civil government, their advantages and disadvantages, of the constitution of our own country, its situation, and interest with regard to foreign nations, its commerce, its defence, the disadvantages it labours under, the dangers to which it may be exposed, how to remove the one, and how to guard against the other. Upon this account political disquisitions, if just, and reasonable, and practicable, are of all the works of speculation the most useful. Even the weakest and the worst of them are not altogether without their utility. They serve at least to animate the public passions of men, and rouse them to seek out the means of promoting the happiness of the society.”

[Theory of Moral Sentiments, Book IV.I.II pages 185-87 (Glasgow Edition, Oxford University Press, 1976; Liberty Fund edition, 1982)]

Thought for the Day 2

‘Security, therefore, is the first and the principal object of prudence. It is averse to expose our health, our fortune, our rank, or reputation, to any sort of hazard. It is rather cautious than enterprising, and more anxious to preserve the advantages which we already possess, than forward to prompt us to the acquisition of still greater advantages. The methods of improving our fortune, which it principally recommends to us, are those which expose to no loss or hazard; real knowledge and skill in our trade or profession, assiduity and industry in the exercise of it, frugality, and even some degree of parsimony, in all our expences.'
(TMS VI.i.6: 213)

Comment
I have made many references to the use by Adam Smith of the metaphor of ‘an invisible hand’ in Wealth Of Nations (1776) and I thought it relevant to quote the above passage from Smith’s Moral Sentiments [1759, ed 6. 1790].

He discusses security and specifically mentions how security is ‘averse’ to exposing ourselves and ‘our health, our fortune, our rank, or reputation to ‘any sort of hazard’.

I was recently criticised by a academically respected referee for using the more modern term, ‘risk averse’, to describe the motivation for why some (but not all) merchants, discussed by Smith in Chapter IV (ii.9: 456) of Wealth Of Nations, preferred to trade and invest locally rather than take the risks of trading or investing abroad, particularly in the American colonies.

The referee considered ‘risk-averse’ as being about the utility functions of players in modern game theory and not applicable to the merchants that Smith identified in his famous ‘invisible-hand’ paragraph.

Despite my reservations, I accepted the referee’s assertion, not being able to lay my hands of the relevant quotation at the moment I needed it. But I found it this morning while looking for something else.

I consider Smith’s comments on the ‘prudence’ of ‘security’ and ‘aversion’ excuse my original mentions of ‘risk aversion’ as the direct cause of these merchants investing locally and thereby, on the arithmetical law that the whole number is the sum of its individual parts, the behaviour of these merchants, which unintentionally made domestic national output and employment larger in total than it otherwise would be, completely explain what motivated them to do so.

The outcome was brought about, and is eminently explained by the causes identified by Adam Smith before he used The Metaphor of 'an invisible hand', thus making The Metaphor redundant as an explantion, and with its redundancy ,all the subsequent chatter that The Metaphor itself was an explanation are shown to be wrong.

The modern myths of invisible and disembodied hands, including the 'Hand of God' and other mysteries, were not part of Adam Smith's original explanation for the phenomenon, the merchant's 'risk-aversion' ('he intends only his own security' (WN IV.ii.9: 456).

The real mystery, in my mind, is why so many respectable and senior fellow economists can read the same passage from Wealth Of Nations and endorse the modern myth.

In these circumstances I feel permitted to use the term 'risk aversion' as being the cause of the merchants' conduct, without implying any connections to elements of modern games theory.

Thought For The Day

‘What institution of government could tend so much to promote the happiness of mankind as the general prevalence of wisdom and virtue? All government is but an imperfect remedy for the deficiency of these. Whatever beauty, therefore, can belong to civil government upon account of its utility, must in a far superior degree belong to these. On the contrary, what civil policy can be so ruinous and destructive as the vices of men? The fatal effects of bad government arise from nothing, but that it does not sufficiently guard against the mischiefs which human wickedness gives occasion to’.
[Adam Smith, Moral Sentiments: TMS IV.2.1: 187; 1872 edition: pp 165-66]

Comment
Adam Smith was quite right. Utopian proposals and plans for reform that do not take account of human nature are prone to derision, if advocated, and to disappointment if implemented, and the unintentional results are obvious for all to see and suffer from.

As neat a description of party politics as could be offered for the many failings of governments. The only barrier to ‘human wickedness’ (which covers a multitude of crimes of commission and omission) is that of the system of justice, separate from government, and safeguarded by Liberty – democracy is a necessary but not sufficient condition (they ‘elect’ cruel dictators don’t they?).

Poor Essay Quality Discredits Educational Value

Mark Vargus, described as a San Diego Economy Examiner, writes a regular series in the Examiner.com (HERE) :

‘Self-interest and greed, the economic driver according to Adam Smith’.

“When Adam Smith started his study that eventually became the book "Wealth of Nations" he was a professor of political philosophy at the University of Edinburgh. Perhaps because of his experience with philosophy he theorized that men were driven by what he called "enlightened self-interest and greed" and wrote that people would act according to that drive.

Today, the original meaning of that phrase "enlightened self-interest and greed" receives wildly different definitions depending on the economist and his interests. Its not difficult to come up with more than a dozen interpretations of what would be the drive for a human. However, I find that the solution starts with considering how a person of Adam Smith's time viewed the world around him.”

Comment
I read essays from examiner.com fairly regularly. I am not sure what their business model is, but I have the impression their academic model is of poor quality, and, therefore, generally refrain from commenting on their essays.

However, taking a break this morning from my other work, I could not resist noting that Mark Vargus is particularly off-track in his above ‘essay’.

For a start, Adam Smith was never ‘a professor of political philosophy at the University of Edinburgh’, nor indeed was he ever a ‘professor of political philosophy’ anywhere else. Wrong town, wrong chair.

He gave some private lectures in the city of Edinburgh during 1748-51, from which he earned £100 a year, sponsored by Henry Home Kames, later Lord Kames after he became a judge.

Smith’s first chair was the chair of logic 1751-52, when the transferred to the chair of moral philosophy in 1752, both at Glasgow University.

He did not theorize ‘that men were driven by what he called "enlightened self-interest and greed". He certainly theorized about ‘self-interest’; the ‘enlightened’ bit was added by modern presentations of his philosophy.

He never ‘theorised’ about ‘greed’, except to criticise the idea that ‘greed' had any redeeming features, especially as it had been presented by Bernard Mandeville (‘Fable of the Bees: Private Vice, Public Virtue’, 1714/32), with whom Smith is often confused by modern essayists, and especially by Hollywood scriptwriters and not a few academics, who should know better.

To consider ‘how a person of Adam Smith's time viewed the world around him’ it would be a good place for Mark Vargus to start by reading what Adam Smith actually wrote about.

Overcoming my normal modesty, I suggest he reads my book, Adam Smith: a moral philosopher and his political economy’, Palgrave Macmillan, 2008, or, better still, he should read Smith’s ‘Theory of Moral Sentiments’ (1759) and ‘An Inquiry into the Nature and Causes of the Wealth Of Nations’ (1776). He could usefully read the best biography of Adam Smith, such as that of Ian S. Ross: The Life of Adam Smith, 1995, Liberty Books, Indianapolis (student-budget edition).

Only then should Mark Vargus (and the rest of the team at Examiner.com) write essays for students who rely on him to be a competent teacher about Adam Smith’s ideas.

Meanwhile, if the scheme's business model involves payment, then anybody tempted to pay for these essays, should hold off with their cash.

In today's world, these essays are, factually, toxic.

Adam Smith and Greed

Richard Gwyn writes on: ‘Unchecked, unregulated greed breeds corruption’ in the Toronto Star HERE:

“Capitalism is about greed. It's not exclusively about that. It's also about creativity and independence (the alternative to the market is some form of bureaucracy), providing a service or good that people need, and about providing jobs.

But greed is the motor that powers capitalism. Way back in the 18th century, Adam Smith understood this when he wrote in The Wealth of Nations that the self-interests of the butcher, the baker and the candlestick maker benefit the rest of us.
Smith, though, also wrote a second book, one that he regarded as far more important. Its title was The Theory of Moral Sentiments. In it, he tried to come to terms with the ethical consequences of unleashed greed and self-interest.”

Comment
In what is a familiar story line, at least to readers of Lost Legacy, Richard asserts, as if it is self-evident (though not to the ultra-poor masses of unemployed labourers and their families in large swathes of the planet, looking in on the life-styles of the vastly richer peoples of Canada) that ‘greed is the motor that powers capitalism’.

Richard goes ‘way back’ to the 18th century when almost the whole world was stuck in poverty, superstition, disease that carried off most children who were born, and those who ‘survived’ had the luxury of living, if ‘lucky’ to the ripe old age of about 40.

Murder rates per thousand were higher than the most gang-ridden modern slum towns, illiteracy was almost total, and the ground where you first stood on (if you survived infancy) was the only ground you would ever know. Richard should ask himself: where would he rather live – in the slums of Mumbai or rural Darfur or the slums of Toronto?

His evidence for ‘greed’ apparently comes from his misunderstood point that Adam Smith allegedly made in that famous partial quotation ‘that the self-interests of the butcher, the baker and the candlestick maker benefit the rest of us’.

Actually, it was about the ‘Butcher, the Brewer, and the Baker’ from whom Smith observed that it was a more reliable way to get the ingredients for your dinner (obviously 18th century nutrition was not as well catered for in Scotland at the time, which is why many Scots left out shores for Canada, including my maternal grandfather, a coal miner, for Toronto) to appeal to the self-interests of said ‘Butcher, the Brewer, and the Baker’, rather than telling them solely about your self-interests or needs.

Why was this so significant?

Well, merely considering your own self-interests was unlikely to persuade them to serve you; two parties only intereted inn themselves cannot conclude a bargain, as Smith makes clear in the same paragraph that Richard misquotes:

‘He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.’ (Wealth Of Nations, I.ii.2: pp 26-27)

What is greedy about applying the observed offer to exchange what you have (money) for what he has (ingredients for your dinner)?

Smith did not quite write ‘a second book’ – The Theory of Moral Sentiments was in fact his first book (1759 – 17 years before Wealth Of Nations, 1776). In it he did not try ‘to come to terms with the ethical consequences of unleashed greed and self-interest’. He discussed how people behaved, well, kindly, or otherwise.

He discussed morality, including the morality of the historic development of property and its consequences, particularly the division of labour and the creation of complex supply chains that, from productivity. raised the ‘meanest labour’ in Scotland into higher standards of life than the most powerful ‘kings of Africa’ and North America, including around the area that became Toronto.

In fact, Smith decried the philosophy of Bernard Mandeville (1732), who claimed that ‘Private Vice was Public Virtue’, and he described it as ‘licentious’ and stated that Mandeville’s assertions about the benefits of greed were wrong in practice and in philosophy.

Richard aims at the wrong target. He might care to reflect on the basis for his assertions about Adam Smith.

Origins of the Myths of the Invisible Hand

I was looking for a reference in a book in my library and came across, at the back, as you do, my rather battered copy of Paul Samuelson’s popular textbook, ‘Economics’ (which I had looked for unsuccessfully for many years).

In the 1960s, my later edition of this book was the class textbook at my university; I also bought a first edition of it at a bookfair in the 70s.

I knew thatSamuelson had mentioned the ‘invisible hand’ in his textbook and he is, in my view, more than anyone else, responsible for popularising the incorrect notion that Smith believed there was an invisible hand at work in the general economy, which in the minds of modern economists somehow, mysteriously, was behind the undoubted success of capitalism in making possible unprecedented living standards. (The Cold War was on and many academics and their students were more impressed with Marxism than capitalsm.)

The reputation of Paul Samuelson, from the start of his illustrious academic career, and the publication of his Phd, Foundations of Economic Analysis (1947), deservedly is enormous.

His popular textbook, Economics, was used to teach, literally, tens of thousands of post-war students, and even his latest writings on his profession (e.g., ‘Inside the economist's mind: conversations with eminent economists‎, 2007 show why his reputation was and remains so high.

However, Samuelson was certainly wrong on one subject.

Metaphors, like ‘waggon way through the air’ (Wealth Of Nations, II.ii.86: p 321)or the ‘invisible hand’ (IV.ii.9: 456), are representative, not real; they exist only as the imaginary image of what they allude to; they do not define to what they allude (Smith: Lectures on Rhetoric and Belles Lettres, 30-1).

Modern economists have projected onto a venerable literary metaphor a significance well beyond anything implied by Adam Smith, whom they allege was the originator of their modern and different, version of the metaphor.

Among the first to do so was Paul Samuelson, in the first edition
(1948) of his famous and influential textbook, Economics: an introductory analysis, he wrote (page 36) that Adam Smith, ‘the canny Scot’:

‘was so thrilled by the recognition of an order in the economic system that he proclaimed the mystical principle of “the invisible hand”: that each individual in pursuing only his own selfish good was led, as if by an invisible hand, to achieve the best good of all, so that any interference with free competition by government was almost certain to be injurious. This unguarded conclusion has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their college course in economics.’

But the ‘canny Scot’, of course, said no such thing.

Smith did not proclaim ‘the mystical principle of “the invisible hand” ’. He was so reticent about his use of the metaphor that he mentioned it only once in Wealth Of Nations, more than half-way through his book, buried in a chapter about how some cautious (risk-averse) merchants preferred the ‘home trade’ to ‘foreign trade’ in pursuit of their ‘own security’.

Smith never proclaimed in favour of ‘selfishness’, nor did he describe the actions of such merchants as ‘selfish; he always recognised self-interest’, which he never confused with ‘selfishness’, an attribute of Bernard Mandeville's philosopy (1734), which Smith regarded as licentious'.

Smith never regarded nor stated that ‘any interference with free competition by government was almost certain to be injurious’; he identified the circumstances where government policies, such as the dominant policy of mercantile political economy since the 16th century, had slowed ‘progress towards opulence’ and he identified which of these policies should be changed.

Smith didn't think much good came from sovereigns and legislators telling merchants what to do - he didn't think governments were up to the task

In fact, Smith identified that the main ‘interference’ with ‘free competition’ came from the ‘merchants and manufactures’ themselves, with their agitation for legislators, and those who influenced them, to legalise or award monopolies and trade protection, which were against the public interest in general and the interests of consumers in particular.

I conclude, given the misunderstanding of Adam Smith’s political economy that began in the mid-twentieth century, which led to ideological protection of much corporate behaviour (not much different from their behaviours in his day) that if Samuelson had read Moral Sentiments and Wealth Of Nations for himself, instead of recalling what he was taught incorrectly by his Chicago tutors in the 1930s, he could have prevented many tens of thousands of students, who in the 16 editions of his textbook taught from it well into the 1970s, from ‘remembering’ the same error that he passed on to them, many of whom became teachers of yet more students. And so the myth was spread across generations of studenets and tutors.

His readers spread the nonsense of the myth of the invisible hand widely for more than forty years. They have also made Adam Smith culpable for the current crisis, when, he is, in fact, wholly innocent. The epigones are the guilty party.

Not Quite Accurate About Wealth Of Nations

John Clark, the creator of Provocate, a Senior Research Fellow at the Sagamore Institute, a think tank in Indianapolis. He was a Senior Fellow at the Hudson Institute and director of the Center for Central European and Eurasian Studies.

I comment upon selected pieces from John Clark’s discussion paper on Adam Smith’s Wealth Of Nations’ for HABEAS LOUNGE, A Public Art Project Focus on the Economy, One New York Plaza, this coming Wednesday in New York (details HERE:

'Comments from John Clark on Adam Smith’s “Wealth of Nations”'

John Clark asserts that pins, discussed in Chapter 1 are not what they seem:

“Pins” really means nails, which were essential in an economy in which everything was still made of wood rather than steel or plastic.”

Comment
They were not nails, they were household pins, drawn from iron wire and fully explained in Diderot’s ‘Encyclopédie’ (Paris, 1755) under the heading ‘Épingles’, French for pins.

Smith reports on his visit to a pin factory, saying that the division into 18 operations (the French norm) was undertaken by 10 men, where sometimes an individual man ‘consequently performed two or three distinct operations’ (WN I.i.3: p 15), the last one of which was to wrap the pins in paper, as appropriate for pins but not for nails.

“Democracy favors the development of industry by multiplying without limit the number of those engaged in it.”

Comment
Smith did not speak of democracy, except theoretically in ancient Greece. He did not have a vote under the existing electoral franchise in Scotland. His concern was more with Liberty, not democracy, hence he is not represented by Alexis de Tochville’s 19th century writings on the USA (Smith died in 1790).

“It’s the coat of a poor laborer. He ends the chapter may strike our enlightened 21st century ears as un-PC, but it’s a valid point: if an economy functions well, even the poorest members of societies can attain decent levels of consumption. In fact this is the rule of thumb for public policy he uses throughout the Wealth of Nations: if a policy improves the standard of living of the poor and workers (often the two categories overlap) it’s a good policy; if it hurts their standard of living, it’s a bad policy. This is important!”

Comment
Adam Smith’s example of the production of the day labourer’s common coat is a much stronger example of the (international) division of labour than the local manufacture of pins, which raised labour productivity, whereas the numerous workers engaged in the multiple supply chains necessary to produce the simplest coat for the poorest employees, indicated how complex the division of labour was becoming already by the mid-18th century.

Each step in the entire production process was capable, in practice, of improving its productivity if the extent of the markets for each bit of the process made it worthwhile to do so. As each bit of the process served the needs of many different products, as well as those needed for coats, this would tend to lower unit costs and intensify commercial society. As more employment opportunities were created this too would raise demand for labour and raise real wages.

“Before, the idea was that a wealthy economy was a big economy, with lots of resources at the disposal for the ruler to conspicuously consume or mobilize armies and navies. Smith says what matters isn’t the Wealth of the Sovereign, it’s the Wealth of the Nation, which means the wealth of the bulk of the people who make up the nation: that’s what he means by comparing the American colonies with Britain with China. Note his comments on Bengal (a declining state), where famine made things even worse than stagnant (stationary state) China. He knows who is to blame for the impoverishment of India — the Brits. And the Americans could prosper because the Brits left them alone. (See the notes for his criticisms of British policy toward the colonies later in the book).”

Comment
Adam Smith’s actual points were more interesting than the way it is presented here:

‘The difference between the genius of the British constitution which protects and governs North America, and that of the mercantile company which oppresses and domineers in the East Indies, cannot perhaps be better illustrated than by the different state of those countries. The liberal reward of labour, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. The scanty maintenance of the labouring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition that they are going fast backwards.” (WN I.viii.27: p 91)

His point was that whereas in the British colonies of North America, which were governed according to British laws and practices, the colonists (though not the indigenous people, nor the slaves) were protected by the rule of law, and the state governors and other officials were subject to removal from office for malfeasance (and were), while in Bengal the local populations were governed by the East India Company, noticeable for its oppression by the rule of men, many of whom were corrupt, nearly a year’s sailing from Britain, and beyond accountability for their actions.

In the British colonies in North America the colonists were industriousness, lived under civil order, and relative prosperity; in India there was appalling misbehaviour, poverty, and violence.

To say: “He knows who is to blame for the impoverishment of India — the Brits. And the Americans could prosper because the Brits left them alone,” is hyperbole, at least, as well as inaccurate.

The ‘Brits’ who colonised the eastern seaboard of North America and the ‘Brits’ who tyrannised Bengal were from the same stock of British people. If anything, it was from the circumstances that the ‘Brits’ in India were ‘left alone’ and beyond the remit of the rule of British law, that their worst excesses were encouraged and left unpunished.

The constitutional changes from the rebellion of the British colonists in North America led to major and lasting improvements in constitutional government (much of the jurisprudence of the USA has its roots in British jurisprudence), but it is no improvement to distort Adam Smith’s actual views in such a manner.