James Otteson on Karl Marx v. Adam Smith

James Otteson conducts a lesson for students on Adam Smith and Karl Marx HERE

James Otteson's lecture/tutorial was at the 2010 FEE Home School Debate Tournament on "Karl Marx v. Adam Smith"

Follow the link and watch the video for a lively seminar for students.

It's not meant to be deep and authoritative and links explicit details of the experiences of Soviet socialism and the dreadful crimes against humanity practised in the former and current socialist/marxist states, a methodology with which I am not too comfortable intellectually. As a first pass it's OK, but the ideas of Marx and Engels are not linked directly to ideas as interpreted by people decades after the founders of Marxism had died, anymore than the ideas ascribed to 'Jesus' are represented by the pageantry and wealth of the main Christian Churches centuries later. However, that's a quibble.

Otteson's account of Smith's ideas is fair enough (except for the his nuanced mythology of the "invisible hand'!) and his listeners appear enthusiastic in response to his enthusiasm (always a necessary aspect of lecturing).

Jim Otteson is an original contributor to Adam Smith studies: see his Adam Smith’s Market Place of Life, 2002, Cambridge University press.

More of Adam Smith's Views of State Actiity

Scott Sumner, who taught economics at Bentley University for the past 27 years, earned a BA in economics at Wisconsin and a PhD at Chicago. His research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. He also writes a lively Blog, The Money Illusion (“A slightly off-center perspective on monetary problems”) HERE

“Adam Smith did favor laissez-faire”

“Mark Thoma recently linked to a Gavin Kennedy post that argued Adam Smith did not favor laissez-faire. I don’t agree. The evidence cited was a one page list of government interventions that Smith favored. The US, by contrast, has enough government interventions to fill a New York City phone book, if not a small library. And the US is regarded by the Europeans as “unbridled capitalism.” Even Hong Kong intervenes in far more ways than Adam Smith contemplated. Of course Smith was not an anarchist, he did favor some government intervention in the economy. But relative to any real world economy, his policies views were extremely laissez-faire.”

“I see this as a common cognitive bias. The Gavin Kennedy list posted by Thoma certainly looks impressive, but when you think more deeply about the issue it is a trivial set of policies. I’m reminded of what happens when I discuss Singapore, which usually ranks number two in the world in lists of economic freedom. People will often respond by telling me about all the ways the Singapore government intervenes. My response is “so what?” They could intervene in a 1000 different ways and still be vastly more laissez-faire than the US government. Laissez-faire is a relative concept, and always has been. I’ve read The Wealth of Nations, and Adam Smith is clearly a pragmatic libertarian.”

Comment
“The evidence cited was a one-page list of government interventions that Smith favored.”

Yes, that’s why Viner listed the numerous examples of government interventions. They amount to a lot more than can be summarised a single page and the compromise notions that Smith was laissez-faire in the meaning of the term.

Smith never used the phrase ‘laissez-faire’. His association with the idea was an invention in the 19th century and was widely promoted by modern economists from the mid-1950s. About this time Smith was also widely promoted as the author of the notion of there being “an invisible hand” in the market. Both inventions are false.

We can agree that Smith was pragmatic about policies but whether he was a pragmatic libertarian remains problematical.

It’s not clear why the items in the list from Smith’s Wealth Of Nations and hi Lectures on Jurisprudence are “trivial” in Ron Sumner’s opinion, other than when he looks around the incomparably richer 21st-century United States than were the 13 British colonies in 1776 when Smith was writing.

There were hundreds of miles of inter-city roads in need of construction and repair; scores of harbours that needed to be built and dredged; thousands of bridges in need of construction; hundreds of towns that need to be paved and have street lighting in place; thousands of ‘little school’ constructed and staffed with state-registered teachers; scores of palliative care hospitals established for those afflicted with ‘loathsome diseases’; scores of depots for stamping clothes with government quality marks; a network of post-offices established and organised; and likewise for all the other activities that Smith envisaged should be funded and managed by the state.

In practice this took near on a century to be introduced in Britain. Set against the size of commercial society in 18th-century Britain, the state sector was not ‘trivial’ in any meaningful sense. Nor is it today. On one thing we surely can agree: neither 18th-century Britain with its colonies in North America was not a laissez-faire economy nor are the 21st-century territories that descended from them.

Adam Smith was not a laissez-faire ideologue.

What Adam Smith Actually Identified as the Appropriate Roles for 18-century Governments

Andrew B. Busch writes (3 March) in the CNBC Guest Blog HERE

“Busch: Following The Father of Modern Economics”

“The father of modern economics supported a limited role for government. Mark Skousen writes in "The Making of Modern Economics", Adam Smith believed that, "Government should limit its activities to administer justice, enforcing private property rights, and defending the nation against aggression." The point is that the farther a government gets away from this limited role, the more that government strays from the ideal path that will ensure the fastest path towards the creation of "universal opulence" or wealth for workers.

How this issue is handled will decide whether the country can more closely follow Adam Smith's prescription for growth and wealth creation or move farther away from it.”

Comment
Jacob Viner addressed the laissez-faire attribution to Adam Smith in 1928 in his “Adam Smith and Laissez-Faire” in the collection of essays published to commemorate the Sesquicentennial of the Publication of the Wealth Of Nations, reproduced by Augustus M. Kelly, Fairfield, New Jersey in 1968.

Here is a list of appropriate activities for government, which goes way, way beyond Mark Skousen’s extremely limited – and vague – 'ideal' government. That in itself is fair enough, if it is issued under Skousen’s name (everybody has a right to express an opinion), but he goes on to attribute his ‘ideal’ list to Adam Smith, which is not alright.

In fact, its downright deceitful, for which there is no excuse of ignorance (before attributing the limited ideal to Adam Smith we assume, as scholars must, that Skousen read Wealth Of Nations and noted what Smith actually identified as the appropriate roles of government in the mid-18th century.

But even if Skousen was in a hurry and without time to check through Smith’s two-volume tome (or the massive one-volume tome if he consulted the 1937 edition of Wealth Of Nations from Random House, New York, edited by Edwin Canaan), he, surely, was familiar with Viner’s 1928 essay, conveniently reprinted and widely available from Augustus Kelly from 1968?

No? Shame.

Here is a list extracted from Wealth Of Nations:

• the Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’ (WN464);
• Sterling marks on plate and stamps on linen and woollen cloth (WN138–9);
• enforcement of contracts by a system of justice (WN720);
• wages to be paid in money, not goods;
• regulations of paper money in banking (WN437);
• obligations to build party walls to prevent the spread of fire (WN324);
• rights of farmers to send farm produce to the best market (except ‘only in the most urgent necessity’) (WN539);
• ‘Premiums and other encouragements to advance the linen and woollen industries’ (TMS185);
• ‘Police’, or preservation of the ‘cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances’;
• ensuring the ‘cheapness or plenty [of provisions]’ (LJ6; 331);
• patrols by town guards and fire fighters to watch for hazardous accidents (LJ331–2);
• erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours) (WN723);
• coinage and the mint (WN478; 1724);
• post office (WN724);
• regulation of institutions, such as company structures (joint- stock companies, co-partneries, regulated companies and so on) (WN731–58);
• temporary monopolies, including copyright and patents, of fixed duration (WN754);
• education of youth (‘village schools’, curriculum design and so on) (WN758–89);
• education of people of all ages (tythes or land tax) (WN788);
• encouragement of ‘the frequency and gaiety of publick diversions’(WN796);
• the prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population (WN787–88);
• encouragement of martial exercises (WN786);
• registration of mortgages for land, houses and boats over two tons (WN861, 863);
• government restrictions on interest for borrowing (usury laws) to overcome investor ‘stupidity’ (WN356–7);
• laws against banks issuing low-denomination promissory notes (WN324);
• natural liberty may be breached if individuals ‘endanger the security of the whole society’ (WN324);
• limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’) (WN539); and
• moderate export taxes on wool exports for government revenue (WN879).

"Viner concluded, unsurprisingly, that ‘Adam Smith was not a doctrinaire advocate of laissez-faire’.

That [Viner] needed to write this 150 years after Wealth of Nations to remind 20th-century readers conclusively that it contained detailed and specific evidence of advocacy of breaches of laissez-faire, popularly attributed to him, suggests that a substantial drift away from important elements of Smith’s legacy had taken place among early-20th-century economists.

How could Smith be so closely linked with laissez-faire policies when he so clearly and explicitly was not?”

[The list and the comment is reproduced from my “Adam Smith: a moral philosopher and his political economy”, 2008, Palgrave-Macmillan.]

Adam Smith On Banking Regulation

Paul Krugman writes in the New York Times HERE

Financial Reform End Game

“For one thing, governments always, when push comes to shove, end up rescuing key financial institutions in a crisis. And more broadly, relying on the magic of the market to keep banks safe has always been a path to disaster. Even Adam Smith knew that: he may have been the father of free-market economics, but he argued that bank regulation was as necessary as fire codes on urban buildings, and called for a ban on high-risk, high-interest lending, the 18th-century version of subprime. And the lesson has been confirmed again and again, from the Panic of 1873 to Iceland today.”

Comment
Krugman is correct about the details – Adam Smith did advise that government regulation of elements of banking practice justifiably could be legitimised by the consequences to innocent others from failures in certain specific activities, notably the issue by banks of low denomination promissory notes, such as for 6 pence, even though customers and their customers were prepared to accept them, and certain high risk lending (WN II.ii.94: 324).

He acknowledged that such regulations are “a manifest violation of that natural liberty which it is the proper business of law, not to infringe but to accept” (no prevarication there then), but set against the “security of the whole society” the “natural liberty of a few individuals” which “might endanger” that “security”, should and “ought to be restrained by the laws of all governments; the most free, as well as the most despotical” (no lack of clarity either).

He went further too: not only must bankers be “restrained from issuing” low value bank notes (the central bank had not monopoly at the time in circulating paper currency), they must also be required to make “an immediate and unconditional payment of such bank notes as soon as presented”. The consequence of this last regulation would be that “their trade, may with safety, be rendered in all other respects perfectly free” (WN II.ii.106: 329).

The purpose of banking regulations was to oblige “all of them to be more circumspect in their conduct, and by not extending their currency beyond its due proportion to their cash [in Smith’s day, gold and silver], to guard themselves against the ruinous runs, which the rivalship of so many competitors is always ready to bring upon them”.

He added that by “dividing the whole circulation into a greater number of parts, the failure of any one company, an accident which, in the course of things, must sometimes happen, becomes of less consequence to the publick” (WM II.ii.106: 329).

This chapter on banking in Wealth Of Nations should be a highly advised read set by tutors to their students in any course on banking and finance.

Some so-called “free-market” ideologues, who oppose all regulation whatsoever, should recognize, as Smith did (he was no ideologue), that the freedom of the market works best, when protected by laws of justice and when its participants exercise a high degree of prudence in their conduct before they can ruin it for everybody else.

The Limitations of Philosophers

Lauren Axelrod writes the interesting Blog, “Ancient Digger: a view from an archaeology Student” HERE/a>">:

“When Adam Smith and the Physiocrats brought about new economic laws, it completely changed society. Wealth could be increased with more agricultural production, so to put it simply, it was the only productive means of increasing state revenues. Consequently, with the establishment of laissez-faire, merchants were allowed to pursue their own economic self interests. This was the start of the small business. As a result, Adam Smith and the Physiocrats were able to establish the foundation known as economic liberalism.”

Comment
While making allowances for a specialist crossing over from archaeology into 18th-century political economy, I found this fairly common error of attributing to, in this case, Adam Smith and the Physiocrats their bringing “about new economic laws, [that] completely changed society”.

Philosophers who observe and then report on the object of their thinking do not “completely change society”. A moment’s thought would show the absurdity of such ascription.

Smith observed the elements of commercial society that already existed and had been underway since the re-emergence of commercial society, circa 15th century, a thousand years after the fall of Rome in the 5th century. Smith didn’t “completely change society” – it had already, long ago, had changed. He only reported what he observed.

In short, if Smith had never been born, commercial society would have continued to develop without the aid of philosophers. Moreover, the idea of laissez-faire was never established in practice – it remained an idea that some Physiocrats put forward for the way that society should be organized.

But Adam Smith was sceptical of the benefit to the public of merchants’ behaviour when “allowed to pursue their own economic self interests” because of their proclivity to monopoly practices to the detriment of consumers. Indeed, the merchant who responded to Colbert’s question as to what the state could do for them – to which he replied “laissez faire” – spoke for himself and merchants and not for consumers (a point unlikely to have been missed by Smith, which probably is why he never used the words ‘laissez faire’, despite his false reputation for favouring the doctrine).

Society is not changed by the pronouncements of philosophers. It changes itself from the actions of individuals undirected, unintentionally, and without foresight, often long before the philosophers, or anybod
">http://www.ancientdigger.com/2010/02/monday-ground-up-philosophes-and-their.html

“When Adam Smith and the Physiocrats brought about new economic laws, it completely changed society. Wealth could be increased with more agricultural production, so to put it simply, it was the only productive means of increasing state revenues. Consequently, with the establishment of laissez-faire, merchants were allowed to pursue their own economic self interests. This was the start of the small business. As a result, Adam Smith and the Physiocrats were able to establish the foundation known as economic liberalism.”

Comment
While making allowances for a specialist crossing over from archaeology into 18th-century political economy, I found this fairly common error of attributing to, in this case, Adam Smith and the Physiocrats their bringing “about new economic laws, [that] completely changed society”.

Philosophers who observe and then report on the object of their thinking do not “completely change society”. A moment’s thought would show the absurdity of such ascription.

Smith observed the elements of commercial society that already existed and had been underway since the re-emergence of commercial society, circa 15th century, a thousand years after the fall of Rome in the 5th century. Smith didn’t “completely change society” – it had already, long ago, had changed. He only reported what he observed.

In short, if Smith had never been born, commercial society would have continued to develop without the aid of philosophers. Moreover, the idea of laissez-faire was never established in practice – it remained an idea that some Physiocrats put forward for the way that society should be organized.

But Adam Smith was sceptical of the benefit to the public of merchants’ behaviour when “allowed to pursue their own economic self interests” because of their proclivity to monopoly practices to the detriment of consumers. Indeed, the merchant who responded to Colbert’s question as to what the state could do for them – to which he replied “laissez faire” – spoke for himself and merchants and not for consumers (a point unlikely to have been missed by Smith, which probably is why he never used the words ‘laissez faire’, despite his false reputation for favouring the doctrine).

Society is not changed by the pronouncements of philosophers. It changes itself from the actions of individuals undirected, unintentionally, and without foresight, often long before the philosophers, or anybody else, noticed what is going on.

A Myopic Visionary Speaks: holiday edition

Prof Viswanathan, Director, International Socio-Economic Research Bureau (E Mail Id : economist@dataone.in) post a long manifesto of sorts on the Mike Adkin’s Blog (HERE)

It is full of harmless nonsense, of which its author is seriously attached, and eminently missable on busy workday but worth a look at the outer-fringes of curiousity. Here is a sample on Adam Smith:

“3. Economic Affidavit of Adam Smith: In his book Adam Smith spelt out an ‘Economic Affidavit’ solemnly and sincerely that if we, the people, entrusted our capital to a few capitalists in the name of ‘Capitalism’ (Individualism), they would not only change even the sand into gold but also drive the mankind to march towards an ‘Ideal Society’ by modernizing production potentialities with the help of scientific technologies and division of labor. Completely ignoring the working class who constitutes the society, Adam Smith concentered and focused his interest on a few capitalists and advocated that they without the interference of State would accumulate wealth of nations with the help of division of labor using modern machines and assured that the few independent capitalists would moreover create a favorable climate for the establishment of Ideal Society by increasing production many folds. Adam Smith completely neglected the equitable distribution of wealth to the mass working class. He linked the establishment of an ideal society with the mass production but not equitable distribution of wealth. Thus he misguided the whole world convincingly and decisively for a long period during which the working class was thrown into appalling poverty and horrible living hood.”

Comment
What can one say? Meanwhile, what was going on in Asia, or Africa, or the Americas, or Russia? All the tens of millions of the world’s population gave their “capital” – of what did their “capital” consist of [if their "labour" why are the labour surplus countries so wretched?] -– to “capitalists” – where did they come from, and why did they not use their own “capital”? Where did this major historical event take place and when?

The entire history of the human species has been one of varying degrees of barely tolerable poverty, absolute and relative, and debilitating ignorance, and above all short-life spans. Per capita incomes hardly changed, except for a changing few, for tens of thousands of years, and hasn’t changed yet for a significant minority.

The detritus of stone-built former ‘civilisations’ are found scattered across the globe where the elites used growing ‘GDP’ to create these structures, some useful, like irrigation, some not, like temples to their gods, meanwhile holding per capita incomes down to the eternal-like subsistence level of ages past.

Only since the so-called 'idustrial revolution', or the triumph of commerce, have many of these indicators improved, some quite dramatically in recent times.

Prof Viswanathan creates an alternative history and a fictional future to do what? Read it for yourself. Of one thing I am sure; it ain’t going to happen.

Review Commentary No. 1: Milgate and Stimson's "After Adam Smith": a promising good read

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

Murray Milgate, a fellow and director of studies in economics at Queen’s College, University of Cambridge, and Shannon C. Stimson, professor of political science and the history of political thought at the University of California, Berkeley, have co-authored a promising exhibition of scholarship in the history of economic thought, which has significant meaning for economists and political theorists – perhaps also policy makers – in the 21st century.

They tackle the relatively unexplored territory of what happened to political economy after Adam Smith died in 1790 that made the subject, and what replaced it, quite different by the last quarter of the 19th century (and, therefore, beyond, to what it has become today).

The gap, if there is one, which I think there is, has traditionally been filled with studied accounts of the theoretical ‘corrective’ process, considered inevitable in a new discipline, once the early authorities have passed on and new authorities have arisen in public esteem, seemingly correcting the early errors and sloppy concepts that no longer held sway or even respect.

Indeed, I have read both scholars and ‘young Turks’, who comment with unveiled and disparaging astonishment that Adam Smith, for example, did not take, what is now obvious to them, because of their graduate training, a very small step from where he left some of his prominent concepts. If Smith had done so, apparently he would have ‘saved’ the discipline a hundred years of frightful errors in a dead-end, made worse by the political consequences of the delay to new ideas ‘discovered’ in the 1870s, but apparently discoverable in the 1770s, or at least in the 1790s (Smith, we note died, in 1790).

These critics have in mind the example of his alleged ‘labour theory of value’ – more a ‘labour theory of muddle’ in my view – which, apparently, led to Karl Marx and , in the rather silly assessment of the ever-irascible Murray Rothbard, this meant Smith was to blame for the 20th-century’s horrors of communism! (“Against stupidity even the gods battle in vain’, Schiller)

Milgate and Stimson are not of that ilk. They have written a well-argued, mature approach to what happened in the broad discipline of political economy after Smith died. The period, of what they call the transition, which took place between the eighteenth-century discourse on commercial society and liberty of trade (Smith’s focus) and what these ideas came to exemplify in what is broadly known today as classical political economy and the science of politics.

Adam Smith was not the only memorable political economist of the eighteenth-century. The field is almost crowded with justly-memorable figures and with several-thousand lesser known and unknown figures in the healthy pamphlet culture that flourished for a hundred years before Smith’s Wealth Of Nations (Yale University has over 4,000 such pamphlets on economics, finance, and politics in its archives).

Smith wrote a synthesis of economic thought relevant to his main theme – a critique of mercantile political economy, the ruling political dogma at the time – and brought to the attention of his readers large parts of what he had taught his students about jurisprudence, including ‘police’, civic society, rhetoric, and moral sentiments, from 1748-51 in Edinburgh and 1751-64 in Glasgow.

In the first half of the 19th-century, Malthus, Ricardo, and Mill dominated British political economy and shifted its focus into new territories, which Milgate and Stimson note was quite a break from the direction in which Smith took, so much so, that they note that modern ‘left-right’ political histories that treat as a continuity the writings of Smith with modern welfare and neo-liberal politics are ‘anachronistic and misleading’. Adam Smith, the radical, however valid for the 18th century, in modern terms is unconvincing. The agenda has changed, as has the way we see social problems.

There is wide disagreement among modern commentators on what Smith was saying – see the journal literature for an overview and a sense of the differences. Milgate and Stimson explore what Smith meant and show how his idea of ‘perfect liberty’ in its market and government manifestations was developed and altered after him.

Economists were no longer talking about the same things. Take self-interest; it became “constrained optimisation” and “not only a component part of economic life in civil society but rather its only component. Where once stood Smith’s rich description of morally regulated, prudent behaviour described self-interested interaction – derived from a model of a socially constructed self – now stood a rational calculator of exclusively private costs and benefits” P6).

Milgate and Stimson open with Dugald Stewart, the son of Smith’s student friend, Michael Stewart, Professor of Mathematics at Edinburgh University, the chair that Dugald occupied before transferring to the Edinburgh Chair of Moral Philosopy, which in the fashion of the time, included political economy.

Dugald, they report, “altered Smith’s views on the input that political economy might have in both legislative practice and constitutional reform” by re-creating Smith as someone for whom “political economy was exclusively a science of the legislator” and which “had nothing to contribute to debates over forms of constitutional order”, especially in “revolutionary ways”.

Dugald Stewart had previous form in these matters, which might explain his motives for the shift. In January and March 1793, Dugald Stewart gave the eulogy at the commemoration of Smith’s life to the Royal Society of Edinburgh, coinciding inadvertently with social unrest in Scotland among the “inferior orders”.

The consequent trials of those perceived to be the leaders of the bouts of unrest took place in the heightened social tensions where the “superior orders” took fright, so to speak at the events in revolutionary France. Hanging, prison and transportation followed for the guilty.

The legal establishment took a closer look at intellectuals, such as Smith, whose Wealth Of Nations may have been supposed among the legal minds of the day (let’s be clear they were not radically-minded men; reactionary would hardly exaggerate their inclinations) to have contributed to the social unrest.

Smith was dead but Dugald Stewart was alive, and was making controversial public speeches, albeit to the staid fellows of the RSE and not the ignorant and easily stirred up ‘mob’. Think of Smith on the combination acts, his hostility to “merchants and manufacturers”, and his intemperate remarks about landlords (though actually making clear they behaved “like all men”) who preferred to “reap where the never sowed”.

Dugald escaped judicial punishment, largely by assuring his legal interrogator that Smith had no ambitions to alter the existing constitutional order. He saved himself, but also moved Smith away from his legacy, just enough to start the long transformation of his original ideas into what they became 50 years later.

I shall say more about this episode in future review/commentaries on Milgate and Stimson’s fascinating account, as I go through chapter by chapter.

You can order it from Amazon and follow my account and comments. Your opinions are also welcome.

A Twisted Tale of Falsehood About Adam Smith

Niall Ferguson, a distinguished historian, writes an interesting, if inaccurate and perplexing piece, “Dead Men Walking: why 2009’s truly top thinkers are yesterday’s news” in Foreign Policy (18 December) HERE.

Ferguson’s theme is somewhat predictable, given recent events in the global economy, and fairly consistent presentations of Adam Smith’s alleged writings since the 1950s.

Where before not hold – and certainly did not hold such attributions to anything like the degree to which modern economists credited to him – it is now fashionable to announce, if not recantations of their earlier errors, then certainly what amounts to mealy-mouthed confessions that their earlier attributions showed Smith to have been wrong, while failing to recognise, let alone admit, that it was their attributions that were false, not Smith's ideas!

I find it difficult to express my frustration at this approach, so carefully constructed by Niall Fergusson in “Dead Men Walking”, because it shows many modern economists have learned nothing from the impact of the events leading to a revision of their past views. Here is a sample of his approach:

“It has, for example, been a bad year for Adam Smith (1723-1790) and his "invisible hand," which was supposed to steer the global economy onward and upward to new heights of opulence through the action of individual choice in unfettered markets.”

Comment
Coming at the head of Ferguson’s “Dead Men Walking”, this unqualified nonsense sets one’s heart thumping.

Ferguson justifies the wrong, absolutely wrong, attributions of Smith’s lost legacy, instead of, perhaps, revisiting Wealth Of Nations to check the validity of his false attributions.

After all, Ferguson, a distinguished historian by any measure, should practise elementary scholarly caution by checking his references back to the original texts and compare them with their modern interpretations.

My own books, Adam Smith’s Lost Legacy (2005, Palgrave) and Adam Smith: a moral philosopher and his political economy (2008, Palgrave), with all their defects, can modestly claim to have identified where the modern misattributions are located.

How did Adam Smith’s modest use of a popular 16th-21st century metaphor once only in Wealth Of Nations (and once only in Moral Sentiments), in reference to the preferences in mid-18th-century of some, but not all, merchant traders to trade locally, rather than undertake the greater risks of foreign trade, manage leap across the years to the mid-1950s and onwards, and supposedly “steer the global economy onward and upward to new heights of opulence through the action of individual choice in unfettered markets”?

Moreover, given the counter-factual that the ‘global economy’, or main parts thereof, never come to be characterised by “individual choice in unfettered markets”, I find it difficult to understand how a top historian can look outside his window, or review his case notes, or read the papers, and write such a sentence and still attribute the false view to Adam Smith.

Pure laissez-faire was never a notion attributable to Adam Smith (see Jacob Viner, 1928, Adam Smith and Laissez faire). In fact, he never used the words at all, anywhere in his writings or correspondence.

The myth that he did so began to spread in the mid-19th century such as from John S. Mill 1849; the Manchester School; Cobden, the editor of The Economist, and assorted speeches in the House of Commons on behalf of mill-owners and manufacturers, and lazy authors, sub-editors, and other who did not read Wealth Of Nations (or they only read isolated, out of context, sentences which they gratuitously transposed to suit their claims). They quoted the only French they knew, or could remember, because others they read said so.

It sounded Smithian. But Smith always emphasised that the main enemy of competition was monopoly and the main legal protection of monopoly was particular (but not all!) government-sponsored state regulation, and illegal collusions among corporations. He commented that legislators and those who influenced them, giddy with the false arguments of mercantile political economy, used regulations to stymie competition, whether from other merchants (and would-be merchants) and their employees through collective action, plus, of course, legalised protectionism, tariffs and prohibitions.

En passant, Ferguson makes another slight against Adam Smith with this bundle of nonsense:

‘…At a time when other University of Chicago-trained economists were forging the neoclassical synthesis -- Adam Smith plus applied math -- Minsky developed his own math-free "financial instability hypothesis".’

There is a world of difference between the maths of “the neo-classical synthesis” and Adam Smith's writings. While Adam Smith was an accomplished mathematician by 18th-century standards and expressed his admiration for mathematicians(TMS III.2.20: 124), he did not conceive of humans in society as reducible to equations. He had nothing to do with the invention of Homo economicus in the late 19th century.

He specifically rejected the idea in his (famous) comment in Moral Sentiments about the “man of system” who “seems to imagine that he can arrange the different members of society with as much ease as the hand arranges the different pieces on a chess–board …” but “in the great chess-board of human society, every single piece has a principle of motion of its own” (TMS VI.ii.2.17: 234).

Interestingly, those “University of Chicago-trained economists” who “were forging the neoclassical synthesis” to whom Ferguson refers, were also among the first to invent the wider modern role for the metaphor of “an invisible” hand in the 1930s.

Paul Samuelson, who died recently, aged 94, graduated from Chicago in 1935 and was the first to note the dangers of taking the metaphor too far (Samuelson, Economics, 1948, page 36). Ironically, after Samuelson, most authors of textbooks did just that.

But at the end of his article, Ferguson drops his headline of Smith, and others, being “Dead Men Walking”, and commences a partial resurrection of their reputations:

“…So though superficially this crisis seems like a defeat for Smith, Hayek, and Friedman, and a victory for Marx, Keynes, and Polanyi, that might well turn out to be wrong. Far from having been caused by unregulated free markets, this crisis may have been caused by distortions of the market from ill-advised government actions: explicit and implicit guarantees to supersize banks, inappropriate empowerment of rating agencies, disastrously loose monetary policy, bad regulation of big insurers, systematic encouragement of reckless mortgage lending -- not to mention distortions of currency markets by central bank intervention.”

Taking the last sentence on its own, there was no need to write the first part of his article in the manner in which he did. Many readers might well stop after the first page, miss the second and third pages, and from the reputation of the author, remain attached to the new myth about Smith being the cause of the recent recessions and global financial crises!

That he wasn’t, in historical truth, and wasn’t in recent fact, makes Ferguson’s article more than unsatisfactory.

An Empty Front for What?

“Anonymous” writes RFK action front Blog (12 Dcember) HERE:

“How Wall Street killed Adam Smith and Milton Friedman

“But what I hadn't realized until just this morning, is that the collapse of the financial sector in 2008 killed Adam Smith and Milton Friedman. Their ideas should have been dead long ago but they kept hanging around because they provided the cover by which the powerful could continue to enrich themselves (at the expense of everybody else). But the collapse of the entire global financial system in 2008 and the fact that federal governments around the world had to come in and rescue the titans of finance with trillions of taxpayer dollars (and pounds and Euros and Deutsche Marks), definitively shows that Adam Smith and Milton Friedman were just shakedown artists. Rather than being an elegantly self regulating machine in tune with the deepest truths of the universe it turns out that our financial system in criminally corrupt and hopelessly unable to survive without massive government assistance. …

… And here's the craziest thing in all of this. The financial collapse of 2008, not only killed Smith and Friedman, but it also brought Marxist critiques of capitalism back to life. Well technically speaking, Marx was wrong and Nikolai Kondratiev was correct -- but the fundamental point of both men remains and has now been confirmed: an endless cycles of booms and busts are intrinsic to capitalism and capitalism is an inherently unsustainable system. Furthermore, it is only through a strong state regulatory system that the vicissitudes of capitalism can hope to be controlled.
… In some ways then we live in a remarkable time with enormous political, economic, and even philosophical instability. Adam Smith and Milton Friedman are dead. And Marx and Kondratiev had prescient critiques of the problems of capitalism, but no solution for an alternative approach that is more sustainable. So for the time being the regulated capitalism of Keynes becomes the big winner. And maybe that's the best that we can do. But it seems to me that there is also a higher synthesis waiting to emerge from this whole crisis -- if we can just figure it out before the gaping abyss of uncertainty causes people to completely freak out.”

In the comments to a critic of his piece, RFK defends his caricature of Adam Smith:

“Thanks for your thoughtful comment. Too often in the popular debate (and I include myself in this critique), we deal with the caricature of these men or what they have come to represent rather than the actual writings themselves.”

Comment:
Anonymous seems to be carried away with his (her?) rhetoric:

“Rather than being an elegantly self regulating machine in tune with the deepest truths of the universe it turns out that our financial system in criminally corrupt and hopelessly unable to survive without massive government assistance.”

I cannot speak for Milton Friedman on “self-regulating machine in tune with the deepest truths of the universe" (a trifle hyperbolic surely) but I do not recognize Adam Smith, the moral philosopher, historian, and social commentator in these assertions.

From his knowledge of history (and speculations about pre-history), Smith was unlikely to have considered the emergent commercial society of 18th-century Western Europe (itself interrupted from the 5th century by the thousand-year interregnum following the fall of Rome) as other than a typically human phenomenon, with all its long-standing weaknesses, not to mention the thwarted ambitions of Kings and those who influenced them.

Friedman may have exhibited an enthusiasm and too-hasty a vision of modern capitalism as a dominant economic system, in truth unshorn of the errors of mercantile political economy (tariff protection, et al), but such an arrangement was unknown to Adam Smith (who knew neither the word nor the phenomenon – ‘capitalism’ entered the English language only in 1854, that is 64 years after Smith died).

I am not sure what a “shakedown artist” is, being unfamiliar with the term, but it seems to be disreputable and I don’t think it is justified in Smith’s case, nor, if truth be told, in Friedman’s (one can be wrong about something without calling them names). We need not both caricature nor denigrate people who are entitled to some respect. Name calling is not a legitimate nor acceptable form of argument, except perhaps in bar-room verbal brawls.

RFK’s peroration: “the fundamental point of both men remains and has now been confirmed: an endless cycles of booms and busts are intrinsic to capitalism and capitalism is an inherently unsustainable system. Furthermore, it is only through a strong state regulatory system that the vicissitudes of capitalism can hope to be controlled” is questionable on two grounds.

Rhetoric about “an endless cycles of booms and busts” lacks historical and current perspective.

The unmitigated rise in living standards under various forms of capitalism since early 19th century, despite occasional "booms" and "busts", both on its own terms and comparatively is unrivaled by any alternative arrangements, including undeveloped commercial societies, socialist planning - the apogee par excellence of “a strong state regulatory system” if ever there is one – and all pre-capitalist societies known to anthropology.

There is no signs of a vast movement of populations from “unstable” capitalism to take their chances in those parts of the Earth that are non-capitalist.

However, there are large-scale attempts of populations to move in the other direction, apparently willing to risk all for their chance to suffer from “the vicissitudes of capitalism”.

It is precisely because of what Adam Smith has “come to represent” in public discourse, rather than what he advanced in his “actual writings”, of which RFK and many modern economists appear to be uninformed, that Lost Legacy functions.

Or it may be that RFK is aware of what Adam Smith actually laboured to make clear in his Moral Sentiments and Wealth Of Nations, in which case RFK is engaged, albeit, in a deception.

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

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

“Capitalism And The Decline In Trust Of Our Markets”

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

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

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

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

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

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

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

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

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

It can be read in full
HERE:

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

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

Smith on Government Roles

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

“OVERNIGHT SOLUTION TO THE NATION'S ECONOMIC WOES”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Smithian View of History

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

"Hi Bruce

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

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

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

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

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

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

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

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

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

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

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

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

Adam Smith No Ideologue

Baron Bodissey writes long articles in the “Gates of Vienna” (HERE)and is connected (how, is not clear) to The Fjordman Files HERE the themes of which are too complex, long and not related much to Lost Legacy’s focus on Adam Smith.

“The Scottish philosopher Adam Smith, professor at the University of Glasgow, published his famous The Wealth of Nations in 1776 where he argued in favor of freedom of enterprise. Government should interfere with commerce as little as possible and limit itself to three primary duties: Provide defense against foreign invasion, maintain civil order with courts and police protection, and sponsor certain indispensible public works and institutions that could not make adequate profit for private investors. Smith made the pursuit of self-interest in a competitive market the source of a natural harmony and equilibrium. The “invisible hand” of free competition would gradually lead to increased wealth for all.”

Comment
I take the view that if Baron Bodissey is wrong in both detail and in general about a small paragraph from his long histories of the world, such as Adam Smith’s role in his big-picture spectacular history of everything, I expect the rest of his article may well contain similar errors too.

When Adam Smith wrote Wealth Of Nations he was no longer a professor at a University of Glasgow. He left the university in 1764 to undertake tutorial duties with the Duke of Buccleugh in a tour of Europe (1764-1766, during which he commenced writing his famous book from lectures notes from his professorial stint (1751-64), published in 1980 as Adam Smith’s Lectures On Jurisprudence (1978; Oxford University Press) and possibly from notes of his Edinburgh lectures, 1748-51. Wealth Of Nations took from 1764 to 1776 to write and was published in 1776.

Smith did not write in favour of “enterprise”; he wrote in favour of “commercial society”. The former is a projection of a modern word onto the past; in fact, he displayed throughout Wealth Of Nations strong suspicions about the conduct of “merchants and manufacturers”.

To summarise Smith as saying that “Government should interfere with commerce as little as possible” is another back projection onto the historical facts. It conflates Smith’s “violent attack” on the conduct of political economy in mid-eighteenth century Britain, in the form of “mercantile”, government-sponsored, monopoly privileges granted as favours to special interests, as promoted by individual legislators, and those who influenced them, often associated with bribery and other favours (of which the East India Company was a prominent example), with modern misinterpretations of Smith’s legacy by his epigones.

Smith was not opposed to government-directed activities, and those he specifically advocated were not minor aberrations. Defence was a major expense in the annual budget – the seven-years war with France cost £120 millions – and it remained a major budget item well into the 19th century. The defence sector employed tens of thousands annually, both in the defence establishment (unproductive soldiers and seamen) and in productive defence employees, manufacturing defence supplies for a profit for the defence establishment. Technologies associated with defence, shipping, navigation, charts, overseas exploration and bases, and foreign relations, played a major role in the changing domestic economy and in British international trade.

“civil order with courts and police protection” was an absolutely crucial pre-condition for the development of a domestic commercial society. It was not just an “expense” to be minimised in a sort of 19th-century “watchman state”. Without justice, society would “crumble into atoms” and “a man would enter an assembly of men as he enters a den of lions” (Moral Sentiments II.ii.4: 86). With the growth of commerce, the role of contracts proliferated and was reflected in the administration of law, and the professions of lawyers.

Smith’s observation is inadequately stated as “indispensible public works and institutions that could not make adequate profit for private investors”. This is a major task, the scale of which is hidden in the brevity of Baron Bodissey’s sentence.

The appalling state of roads in 18th-century Britain required the building of thousands of miles of roads; the construction of canals, likewise; and the dredging of the hundreds of harbours around Britain added to a major capital investment in both the building and, crucially, the annual maintenance of this infra-structure on a scale that mocks the dismissive assertion that this policy was one requiring the government to “interfere with commerce as little as possible and limit itself” to a few minor tasks.

Assuming that Smith’s suggestions for government were adopted by an 18th or a 19th-century government, it would have required the substantial commercial activity of scores of commercial firms for the profitable building and maintenance of the infra-structure, spread over many decades.

That the building of these projects could never repay the projectors (Smith’s original point) did not mean that they could not make a profit for building and/or maintaining them if the government funded their erection. How they were to be funded was a matter for the public finances (fight fewer wars?), which does not in any way limit their economic impact given existing relationships between government funding (defence, is classic) and commercial suppliers of the means (infra-structure builders). Most ‘watchman-state’ attributors to Adam Smith miss the point.

[Of course, the notion of the ‘watchman state’ is wrongly attributed to Adam Smith; it was actually invented as an idea by Ferdinand Lassalle, the 19th-century, fire-brand socialist – Adam Smith, once again was innocent).

Baron Bodissey in identifying Smith’s “limited” role for government to “indispensible public works and institutions”, missed out saying anything about “public institutions” (even missing the adjective, “public”, as used by Smith in Wealth Of Nations), which is somewhat sad because the sheer scale of intervention that would have been necessary to put his recommendations into effect hides the extent of the prime role of education he envisaged for a commercial society.

Briefly, to erect a “little school” in every parish would have involved more than 60,000 such schools across the country – though Scotland already had “little schools”, having started on mass education in the 1600s). Add the teachers for such schools to the simple buildings, and book supplies, this was a formidable undertaking – if it had been taken up.

Smith discusses the role of government (Book V, Wealth Of Nations) under the heading of public finance – budget items and taxation. He does not disucss the role of intervention of a legislative kind. He was ferociously critical of much government legislative intervention – the creation of monopolies, protectionism and barriers to trade, jealousies of trade, and wars cause by such, and the imposition of various statutes (Apprentices, Settlement, Guilds, Patents of monopolies, and such like), and colonial policies. This does not mean he did not envisage a regulatory role for government.

Smith advocated certain other roles too. Among these there are his call for government intervention in special cases, even when such regulations are “a manifest violation of that natural liberty”, as the issuance of “promissory notes” for small sums (WN II.ii.84: 324), a small step in 18th-century banking, but one that was bound to expand with the expansion of commercial banking . Smith associated such interventions with the building of party wall to prevent the spread of fire, as common sense, not excluded by ideology.

Baron Bodissey ends his ommision-filled paragraph with “Smith made the pursuit of self-interest in a competitive market the source of a natural harmony and equilibrium. The ‘invisible hand’ of free competition would gradually lead to increased wealth for all.” Lost Legacy readers will recognise the multiple errors in Baron Bodissey’s summary of Smith’s view wrapped in two sentences.

The derivation of “free competition” from the “invisible hand” (or vice versa) uses a redundant metaphor, which explains nothing and, being a metaphor, is not required to do so, and misleads by inferring the actual existence of such a entity (see Lost Legacy passim).

The metaphor of “an invisible hand”, used only once in Wealth Of Nations (Book IV.ii.9: 456) was really about the arithmeticl rule - 'whole is the sum of its parts' – the more merchants who invested locally, in preference to foreign trade because of their aversion to the risks of losing sight of their capital, the larger would be total local investment and employment.

Many merchants continued trading internationally profitably despite the perceived risks. This outcome – larger local investment and employment would result whatever the competitive, or non-competitive, commercial society, ergo, the invisible hand metaphor had nothing to do with competition – it was to do with profitability tempered by risks.

Baron Bodissey links conclusions from modern general equilibrium theory (“free competition would gradually lead to increased wealth for all”) and not from Wealth Of Nations.

“Increased wealth for all” is not contingent on free competition; “increased wealth for all” would be greatly assisted by “free competition" but has not yet been experienced so far, except in tiny pockets for short periods of time. Mercantile distortions on commerce have long been prevalent and despite them, a gradual increase in wealth has been experienced by large proportions of the populations of all commercial societies over long periods (in Britain’s case, since the 16th century).

There are no “invisible hands” guiding commercial societies; there are only the powerful affects of markets, distorted, hampered, and inhibited by the local institutions and habits prevalent in particular societies. Markets work despite obstacles put in their way (ruinous interventions, wars, civil strife, cultural prejudices, politics and religions). Some work more efficiently than others.

Smith observed and understood. He didn’t expect the utopia of free trade to occur, he didn’t perceive that “natural liberty” was an essential pre-condition for the “progress to opulence”. He was not a visionary, nor a ‘man with a mission’. He was a moral philosopher, not ideologue.

Examples of Adam Smith's Lost Legacy

From the World Most Popular 20th century Textbook:

“Smith’s message said in effect:

‘You think you are helping the economics system by your well-meaning laws and interferences. You are not. Laissez-faire; let be; hands off. The oil of self interest will keep the economic gears working in almost miraculous fashion. No need to plan. No sovereign need rule. The market will answer all things’

Smith never did prove the truth of this. Indeed, until the 1940s, no one yet knew how to prove – or even to state properly – the kernel of it in Adam Smith’s invisible hand doctrine.”

Paul A. Samuelson and William D. Nordhaus, 1985. Economics: An introductory analysis, 12th edition, p 760

Comment
Pure imagination on Samuelson and/or Nordhaus’s part!

Smith never said anything like this “in effect” or otherwise.

Smith’s complaint about government was not about “well meaning laws and interferences” – he recognised the absolute need for laws and justice, without which, he said, society “would crumble into atoms” and “a man would enter an assembly of men as he enters a den of lions” (see Moral Sentiments, II.ii.3.3 & 4: 86).

He never said “Laissez faire; let be; hands off”. He never used the words ‘laissez faire’ anywhere in the near a million words he published. These words were uttered in 1680 by M. Le Gendre, a French merchant in Lyon, to M. Jean Baptiste Colbert, the French Minister of Finance.

He would never have said such a dangerous and seditious thing as “no sovereign need rule” in 18th-century Britain. Transportation would have been the least of his problems.

That such a popular textbook selling millions contained such twaddle is disappointing. No wonder the myths about Adam Smith are so widespread today.

[My comments do not detract from the huge debt economics as a discipline owes to Paul Samuelson.]

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.

Extremism is Seldom Convincing

Ben Linskey writes for the Observer online (London) HERE:

“Health care debate masks real issues"

“There are two basic means by which to do this. One option is to establish a free market, in which the "invisible hand" famously identified by Adam Smith works to distribute goods in the most efficient means possible. The other is to place all economic goods in the hands of a single governing agency and entrust it to use its presumably superior wisdom to determine who should have what. This latter method, of course, is fraught with problems. America has long favored free markets over central planning, but in recent years, the United States have abruptly and dramatically shifted course, bringing many formerly private sectors of the economy under government control and spending at an astonishing rate.”

Comment
Ben Linskey, reportedly a Libertarian, paints the picture in contrasting colours, when in fact it should be monochrome.

For a start Adam Smith did not use the metaphor of the invisible hand to illustrate how it “works distribute goods in the most efficient means possible”. That is a modern interpretation somewhat different from Adam Smith’s idea.

It gives the metaphor an aura it does not deserve nor does it carry it well. It’s what some Libertarians and assorted ideologues wish rather what happens.

I would think this should be abundantly plain to any reader of Wealth Of Nations who reads of Smith’s unfriendly suspicions of how 18th- century ‘merchants and manufacturers’ actually behaved in their steadfast pursuit of monopoly profits, schemes to eliminate competition, lobbying for special favours from legislators, gifts to those who influenced them, and hostility to free-trade for themselves.

Has that much changed in their behaviour today? How many lobbyists does it take to pass legislation in Congress or Parliament?

Smith’s use of the metaphor of the invisible hand in Book IV of Wealth Of Nations related to some – not all – merchants who were risk averse in respect of foreign trade (including with the North American British colonies) and who naturally preferred to trade locally in Britain. By doing so, they added to domestic capital formation, which raised domestic GDP (using modern terminology), considered by Smith, rightly, to be in Britain’s interests).

Markets were analysed in Books I and II of Wealth Of Nations and Smith did not mention the invisible hand as having any role in them. Whether the goods were distributed “efficiently” depended on a host of other factors, including profitability, successful investments, productively, lack of monopolies, the absence of restrictive practices and tariff protections.

Ben’s alternative to his vision of markets led by an invisible hand is “to place all economic goods in the hands of a single governing agency and entrust it to use its presumably superior wisdom to determine who should have what.” This reads more like something Marx and Engel’s might have written. It was not the alternative postulated by Adam Smith to his ideas in Wealth Of Nations.

The alternative to freer markets where possible (not laissez-faire, which was never advocated by Adam Smith), with state-funded and legal interventions where necessary. This was precisely what obtained in 18th-century Britain, the system of “mercantile political economy”, with state interventions at all levels (the Statute of Apprentices; the Settlement Acts; hostile tariff and prohibitions based on “jealousies of trade”, wars of dynastic succession in Europe, the Navigation Acts, and colonies).

Modern states have gone far beyond the interventions of the 18th century, as well as continuing some of the habits inherent in jealousies of trade. That modern societies required new forms of intervention does not decry their need. Smith advocated state interventions in banking, for example, to protect the citizenry even though individually they were “manifest violations” on perfect liberty (WN II.ii.94: 324).

He was never an ideologue, a tag that unfortunately cannot be disclaimed by some Libertarians.

Was 'Capitalism' Designed by Adam Smith?

In a debate, so far conducted as an exchange of comments, I have made a longer comment than the system allows, so I have brought it a a post below:

I refer to my post and subsequent comments 'Beyond the Facts' with Antony North, below'

'This was not how capitalism was meant to be, originally devised by Adam Smith as a philosophy to go alongside thrift.'

My problem with this sentence is the part: “how capitalism was meant to be”.

Societies are not ‘meant to be’ (if so, who by? How does the ‘meant to be’ work?, etc.).

Societies are not ‘designed’ by any one person. All attempts at utopias fail; good intentions account for nothing; nobody
‘designed’ any previous society.

Gatherers engaged in certain behaviours which they inherited from their primate ancestors (the common ancestor of both hominines (hominids) and chimpanzees). They developed regional behavioural differences. The pre-history of primates and hominines show variations (east and west African chimpanzees, bonobo’s, and the lineage of hominines went through at least 18 different species before the human species emerged, 400,000 years ago). Homo sapiens also varied in their adaptabilities to local conditions.

Gatherers, opportunistically, also hunted small-sized animals (as do chimpanzees), later going after scavenged carcasses and, eventually hunted bigger game, assisted by primitive technologies – worked stones and wooden shaped weapons.

No individual designed these changes – those that worked assisted survival; those never tried left those who never tried at the inherited level of subsistence (for most hominid species, they had long histories, counted in hundreds of thousands of years before their extinctions).

Shepherding was picked up by minorities of local tribes, as was farming. The majority of gatherer-hunters/scavengers remained as they were as humans for most of the 400,000 year span lived by humans so far. As John Locke put it: 'in the beginning al the world was America’ (in reaction to the discovery by higher technology tribes of lower technology tribes still living as did our forebears in the forest). Even today, there are some isolated tribes still living off their surroundings as the whole world once lived.

The division of labour was not designed by anybody; it happened as individuals found it worked for them. Professor Frances Hutchison opined in his posthumous work, A System of Moral Philosophy (1755), that the leader divided up the tribe into separate jobs, which was solely from his imagination. Where did the leader get the idea from? Or was it discovered independently scores of thousands of times over and again across human societies?

Hence, I come back to the question of who invented capitalism, a question that must also explain how and why it took different forms across the globe among those human societies that had moved from pastoral subsistence to ‘towns and countryside’ and had survived and functioned in many different forms across Europe and Asia, from the Atlantic to China, with many examples of some societies collapsing (Mediterranean) or stagnating (India and China) and not sustaining (or reviving) into commercial societies, as happened in late-Medieval western Europe from the 15th century.

The rise of commercial civil societies in the 18th century is explained historically and how and why they went on into distinctive forms of capitalism from mid-19th century onwards.

Crediting an individual when there were many individuals thinking and contributing their ideas, is the folly of such assertions. Just because some key thinkers (Pufendorf, Chydenius, Quesnay, Cantillon, Turgot, List, Hamilton are less well known today is not a good reason to hand such a role to Adam Smith, who did not live long enough to codify how British capitalism (which evolved differently from Scandinavian, French, German, and US capitalism) evolved. Moreover, as much of his legacy had been heavily distorted, and confused with others (Mandeville, the Physiocrats, Ferdinand Lasalle, Marx, etc., - see my Adam Smith’s Lost Legacy, 2005: Palgrave-Macmillan) it is not difficult to rebut the idea that he ‘designed’ capitalism.

You ask: ‘Is it correct to say Smith devised his concepts within an ethic of thrift? I think so’.

I answer that it is a extreme generalization. ‘Thrift’ as you postulate is in Smith’s philosophy expressed as ‘frugality’, as opposed to ‘prodigality’.

Thackeray and others, (say, Trollope) noted the extravagant living of the upper-orders and saw the corruptions of the finance capital, which was the essence of late-19th century ‘capitalism’. Corruption was already evident in the South Sea Bubble, the East India Company, etc., in Smith’s time, in a relatively smaller–scale commercial society, and was more than evident in the decline of Rome. Adam Smith observed; he did not predict nor proscribe.

Capitalism evolved whatever Adam Smith or anybody else thought about the society they lived in. It has ever been thus; human nature is unchanging.

Dreaming Can Be Dangerous

Joe Campbell writes an intelligent Blog, 2parse (HERE):

He has hit on something quite important. He has come up against a discontinuity in one of histories certainties: Adam Smith’s ideas, as taught by academia, are quite wrong. There is a lot missing in the modern image of Adam Smith and what he was about.

Smith did not speak of capitalism because the word was not yet invented in English; in 1854 William Thackeray used the word, capitalism, for the first time in English in his novel, The Newcomes (Oxford English Dictionary).

Joe offers his “modest proposal for the day:

“Tear down our capitalist system and replace it with a free market.”

“The two terms are usually used synonymously – and I’m sure I am guilty of this myself. But after a long night of fevered dreams about politics and policy … I woke up realizing there is an important difference between the two ideas. (Perhaps as my unconscious mind dredged up some forgotten piece of writing from years ago.)

“The free market is a commonsensical idea – as it is based on the values of competition, individual opportunity, and liberty. Adam Smith (from what I know of him) was only a proponent of this system – which he called “the system of natural liberty” – rather than a proponent of “capitalism” – a term he never actually used. Smith – arguing for this system – argued against government being used to prop up industries or to direct them. What he did not argue for though was “capitalism” as it has been understood for the past century. In many ways, the idea of capitalism evolved to defend our system from Marxist ideas – so it evolved to preserve the status quo rather than to describe an ideal system.

“… Our economic system though was created in an ad-hoc manner – and the ideology which grew up to defend it lacked any clear ideals. So, this ideology was defined then by what it opposed rather than a positive protection of certain principles. Capitalism then means less government interference, less centralized control of the means of production, less regulation. What this capitalism has created though is a rather unfree market – in which a small number of individuals own most of the capital – in which competition is thwarted by monopolistic practices, by bigger and bigger mega-corporations, by regulations proposed by the mega-corporations to keep out competitors, by bailouts.

Our capitalist system is based on valuing capital over labor, of separating mangement and labor from ownership, of limiting the liability of individuals for their actions in corporate environments, of externalizing as much cost as possible to the public commons, of profit over all things. It is hard to see what most of these principles contribute to the creation of a free market. Indeed, many of them undermine it – creating a closed market, profitable only for a princely few who have the capital.”

Comment
Much of Joe’s thinking is well motivated but he is confused because he advocates root and branch transformation in a long-established socio-economic system, and that isn’t going to happen.

The sheer impracticality of it is breathtaking.

What do several billion people do while the transformation is agreed, let alone undertaken, should the very remote possibility of securing agreement happens?

What will those who believe they may lose from the transformation do about what they see as a bleak prospect? Would the political system remain neutral? Who has got the deepest pockets?

For these reasons I think a reminder of Adam Smith’s philosophical stance – do nothing but observe everything – is in order. Start with the stability of the society and propose practical changes that will slowly and gradually take affect without de-stabilising justice and society’s good order. Try to change your corner of the world oveer time but not the whole world in one go.

Also, avoid sleeping on rich food or strong drink, and don’t take seriously anything you remember about ‘a long night of fevered dreams’, no matter who she or he is.

Adam Smith Did Not Make Predictions

The Daily Reckoning HERE: carries an post, “Bubble Deniers”, by Bill Bonner, co-author of three New York Times best-selling books, Financial Reckoning Day, Empire of Debt, and Mobs, Messiahs and Markets:

“Long gone are the days when economists thought deeply about how life actually works. Adam Smith, Adam Ferguson, Anne-Robert Turgot - the great “moral philosophers” - all died hundreds of years ago. Since then, the trade has gone bad. They’re all numbers guys now. An economist, of the modern variety, is a statistician…an extrapolator…and a mountebank.* If numbers go up two months in a row, he predicts they will go up another one. He rarely stops to ask whether his numbers really make any sense. Instead, he merely adds them up and rolls them out. Thus - at the bubbly top in 2006 - he was he able to describe the likelihood of default on a certain derivative instrument as a “Six Sigma event” without laughing. A Six Sigma event happens once every 2,500,000 days. Then again, when the Bubble of 2002-2007 popped, they happened once a week.

The blogs are full of chatter on the subject. What good is the economics profession, asks Paul Samuelson, if it cannot foresee the biggest single economic event in at least a quarter-century?”

Comment
I agree with the broad sentiments of Bill Bonner with a few caveats.

There are an enormous number of economists working today and it is more than likely that some of them did warn about the pending bubbles before ‘sub-prime’ entered financial discourse. Popular books of the pending stock market crash, like a stopped clock are likely to be right at sometime.

Paul Samuelson, characteristically, hits the nail on the head: why did the economics profession fail to “foresee the biggest single economic event in at least a quarter-century?”

Partly, the answer is that large as it is, economists are not members of a unified science. Many economists focus solely upon in-doors experiments, with real people, or imaginary experiments with equations.

Some do not look out of their windows at all and in fact have been carefully groomed not to do so; most do not look over-the-fence at what closely aligned disciplines are doing or have done (think of sociology, psychology, anthropology and, above all, history), and they suffer promotion-withholding disdain from colleagues if they do so, and are disregarded by the sniffy-nosed severity of those who form tenure committees that pass over anyone showing evidence of a lack of disciplinary-defined gravitas.

For those who master the black arts of econometrics, only as good as the data they sometimes painfully collect, or the harder tests of stratospherically higher mathematics and their fateful misunderstandings of the real world, despite their mastery of their imaginary worlds without humans in them, the result is largely the same - neither the colourful future they arrogantly believe they see (with pay-cheques to match) nor the black-and-white past they virtually invent are connected to the real world.

Prediction in modern economics is the Holy Grail (more like the Devil’s Jest). Adam Smith avoided making predictions; he observed, as was the rightful duty of a moral philosopher, and reported to all who would read his books. He stuck to the humble arts of an influencer; he was not a man hawking a career-winning system.

He held on to humble hopes that legislators and those who influenced them would think about his observations and, slowly and gradually, they might adopt measures to change some of their and their predecessors’ behaviours a step at a time.

His sense of history (surely the great laboratory of human experience), based on a remarkable understanding of the whole range of human behaviours across and at all levels of society throughout history and the present, lowered his expectations as to what was tolerable by ‘so weak and imperfect a creature as man’, contrasted with what was possible if the world perfectly conformed to utopian imaginations, where the people in it behaved impeccably as ‘rational maximisers’ in the manner the out-of-touch theorists believed they would (give-or-take a few heroic, not to say fool-hardy, assumptions). Ironically, Smith is described today as such a philosoper in the image of today's 'rational maximisers!

Readers perplexed by the crisis should consult ‘The Recession: causes and cures’ (2009) by David Simpson, a classical economist. It is available from the Adam Smith Institute: www.adamsmith.org