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

Mythical Basis for a Theory

Linda Naiman writes at the Creativity at Work Blog HERE:

“Taking Responsibility for the Whole”

“Built into the concept of capitalism and free enterprise from the beginning was the assumption that the actions of many units of individual enterprise, responding to market forces and guided by the ‘invisible hand’ of Adam Smith, would somehow add up to desirable outcomes.

“But in the last decade of the twentieth century, It has become clear that the ‘invisible hand’ is faltering. It depended upon a consensus of overarching meanings and values that is no longer present. So business has to adopt a tradition it has never had throughout the entire history of capitalism: to share responsibility for the whole. Every decision that is made, every action that is taken, must be viewed in the light of that kind of responsibility.”

Comment
The “assumption” that market forces were “guided by the ‘invisible hand’ of Adam Smith” add up “to desirable outcomes” was not “built into the concept of capitalism and free enterprise from the beginning”.

That is a modern myth spread widely and repeatedly from the 1950s by modern economists (though it was earlier taught in the Chicago oral tradition from the 1930s). It was backdated to Adam Smith to give the myth high-level approval, as if he had made the metaphor of ‘an invisible hand’ a central theorem of his analysis of 18th century commercial markets (he never knew of ‘capitalism’, a word invented in English for the first time in 1854 – see Oxford English Dictionary).

Smith used the metaphor of ‘an invisible hand’ only three times in nearly a million words: once only in his Essay on Astronomy, written from 1744 to 1758, unpublished in his lifetime and published posthumously in 1795; once in Moral Sentiments, 1759; and once in Wealth Of Nations, 1776.

In no sense was the metaphor about “responding to market forces and guided by the ‘invisible hand”. In fact Smith discussed how markets worked in Books I and II in Wealth Of Nations without any mention of ‘an invisible hand’. That he is alleged to have done so is a myth – a sort of ‘academic campus myth’ like those ‘urban myths’ we hear so much about.

Modern economists blessed their mathematical models of general equilibrium with quasi-miraculous foundations and it was used also to proclaim the self-evident superiority of capitalist institutions and markets over the then prevailing counter-claims of the centralized planned economies of communist rivals.

Modern economists ‘over egged the pudding’, as we say in English. Markets are superior in most cases to non-market institutions and do not need the imaginary aid of so-called invisible hands, and certainly not associated with Adam Smith's isolated use of the metaphor, a wholly innocent victim of the purloining of his legacy.

That there may be a role for regulation, made on a case-by-case basis and not as a catch-all cop out, is quite consistent with Adam Smith’s moral philosophy and political economy.

Smith was NOT opposed on principle to intervention in some markets; his outright opposition to the forms of government inspired interventions from the 16th century in Britain through policies which he described as ‘mercantile political economy’ (many features of which remain active today) should not be taken as evidence for his general views on the levels of government promoted interventions.

Smith in Wealth Of Nations identified several important areas for government intervention – such as in banking regulations (even if it was contrary to his principles of ‘natural liberty’ when the security of people was at stake) - and in weights, measures, quality of cloths, gold and silver, the Mint, and post offices. He advocated public funding of in ‘public works’ (roads, bridges, canals, harbours, town cleanliness, and pavements) and in public institutions (education and aspects of health). He also advocated the separation of church and state.

His general policy is best summed as ‘markets where possible’ (operating under the justice system - an independent judiciary, Habeas Corpus, and trial by juries) and ‘public works where necessary’. Which is a far cry from the so-called ‘night watchman state’ (actually an idea of Ferdinand Lassell’s, the firebrand 19th century socialist, not Adam Smith’s).

Which Adam Smith Was Wrong?

Shaun Grovers writes the Schlog blog (HERE):

"ADAM SMITH WAS WRONG"

"At the dawn of the Industrial Revolution, during the Age of Enlightenment, Adam Smith wrote Wealth of Nations. It’s earned him the title “father of economics” and it greatly influenced the founders of America with its argument that free market capitalism was the best economic system available for a society prone to selfishness.

Adam Smith wasn’t just an economist. In fact, at the time, economics wasn’t its own field yet. The best I can figure it was a branch of philosophy mixed with sociology and even a little religion. Adam Smith, for instance, was a professor of Moral Philosophy at the University of Glasgow - not some mathematician or finance guru working as a prof in a business school. That doesn’t discredit him, of course, but it’s something to keep in mind when reading his thoughts: They’re as much a prescription for morality or theology as they are for business practices.

“Adam Smith believed, for instance, that in order for a free market society to prosper, individuals must look out for their own self interests foremost. “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.”

Comment
Smith’s observation was that individuals are ‘self-interested’, an assessment with a long pedigree in classical philosophy long before Smith taught his students. But that was not the problem in itself. The main problem was that people depended upon others, mostly unknown others, for their daily sustenance.

Long gone in Europe were the days when individuals sought whatever they could get for themselves from gathering fruits, roots, insects and birds’ eggs in the forest in ‘rude’ societies that were common before farming and shepherding (and still were common in 18th century experience over much of the world, with a few remnants still found today).

Society was more complex (though fairly simple compared to now) and without mutual dependence, largely from the division of labour and the propensity to exchange, common to all people in Europe, and in the ancient stone civilisations of China and India, the mass of the population would soon suffer grosser privations than was already common. There was not enough subsistence available to support distribution by such benevolence as was present to allow everybody, or a majority, to rely on benevolence for their daily survival. It wasn't that benevolence was wanting so much as it would never feed enough people alone.

Smith addressed the prospects for commercial societies (he didn’t use the word ‘capitalism’ nor have knowledge of the 19th century phenomenon), which if allowed to operate without the oppression of existing state-supported monopolies it would continue the spread of opulence to the majority of the population.

Shaun Grovers jumps into assumptions about what Adam Smith said quite clearly and differently, both in Moral Sentiments (1759) and Wealth Of Nations (1776). Smith did not have an idealistic view about human behaviour – he was an observer of how people actually behaved and not how they might behave in an imaginary utopia.

Moreover, Smith dealt in relatives, not absolutes. It wasn’t that the ‘butcher, brewer, and baker’ would behave like perfect boy scouts; given the chance – particularly the opportunity provided by monopoly, a common enough condition under the Guild system that had controlled the supply of food and necessaries in most towns since the 16th century – the butcher, brewer, and baker would behave exactly as Shaun concludes in the substance of his article. The trader would pay more than likely “an unjust wage to his workers, lying about the quality and origins of his products, making promises for immediate gain with no intention to keep them, etc,” and much worse besides.

The Smithian antidote to monopoly is competition, not as an idealistic model, but as the best known remedy to selfish behaviours emanating from monopoly.

The Acts of Parliament that created state-granted monopolies, which often fostered private cartels and 'conspiracies' against the consumers, were often orginally awarded with good intentions (and we know to where those roads lead), and had by mid-18th-century Britain become barriers to commercial growth, jobs and good health.

Smith’s critiques of such government interventions was severe (see Book IV of Wealth Of Nations) – so severe that modern readers often generalise incorrectly his specific remarks about 18th-century government interventions as his supposed opposition to all government interventions, which is far from the case, as regularly discussed on Lost Legacy.

Shaun writes:

“Adam Smith, like I said earlier, came up with his ideas during the Age of Enlightenment - a period characterized in part by radical optimism about the human spirit, denying that all men are born spiritually powerless and corrupt. Ronald Reagan sounded a lot like a modern day Adam Smith sometimes. He was very inspiring but very wrong when speaking about the inherent goodness and strength of mankind: “A people free to choose will always choose peace” or “I know in my heart that man is good” or “There are no constraints on the human mind, no walls around the human spirit, no barriers to our progress except those we ourselves erect.”

Comment
I do not know where Shaun got these ideas from, but they certainly were never expressed by Adam Smith. This leads me to ask if Shaun has actually read Smith’s works, or is he confined to what others have said that the wrote, plus a few quotations out of context?

“Adam Smith was wrong. Free market capitalism might just be the best economic system the world has ever seen. I assume so, but what do I know about economics? I’m a musician. But it doesn’t produce the rosy results Smith argued it would either. A society full of Smith’s imaginary butchers will not benefit the whole of society because the butcher is not inherently good and self-regulating. He does not naturally pay a living wage to his workers. He does not naturally keep his promises. He does not naturally tell the truth at all times. He’s just like me. And just like you. If we serve ourselves with no outside restraints placed upon us, we’ll cheat to get more and horde what what we get while the distance between us and the have nots widens.”

Comment
Having set up an imaginary straw man and called him ‘Adam Smith’, Shaun concludes that ‘Adam Smith was wrong’. What astonishing insight! Sadly, what nonsense too. It’s not that Shaun is deliberately misleading; he is simply uninformed.

And finally:

“Adam Smith’s error may come from his understanding of God. Adam Smith is believed to have been a deist - someone who thinks “The Great Architect” built the universe but then walked away from it, never to return, never getting mixed up in human affairs, never entering the human heart, never putting on skin and becoming a man for man’s sake, never sending Spirit to guide and teach, never to lead his People to be creators of equality and justice and, well, regulation.”

Comment
Shaun here is interesting. Many make similar interpretations of Smith’s alleged ‘Christianity’ and his alleged providential tendencies, and his alleged Deism, but not as clearly as Shaun does.

However, this would take a lot longer to respond to at this time. I am presently in Denver to read my paper, ‘The Hidden Adam Smith in his Theology’ (in part a response to Lisa Hill’s 2001 paper, ‘The Hidden Theology in Adam Smith’).

Readers interested in the current draft of this paper, which answers in some measure the ideas expressed in the paragraph in his article, should send an email to me: gavin at negWeb dot com.

In sum, Shaun Grovers’ article is interesting but flawed by a reliance on the writings of others (mainly ‘rightwing’ Reagonites it seems who describe a fictional Adam Smith invented in Chicago from the 1950s; though he is not enamoured with the ‘leftwing’ either) and not on the work of the real Adam Smith, born in Kirkcaldy in 1723.

There is a world of difference between these two Adam Smiths, and knowing the differences is important, as well as fairer to the Adam Smith born in Kirkcaldy.

Adam Smith on State Intervention

Confessions of a Bipolar Virgin (31 May) HERE:

“First, let's analyze some of the things that happened to people during the Great Depression. Unfortunately, when this awful event in U.S. history happened, there was no unemployment compensation, no FDIC, no SEC, and none of the fiscal and monetary policies we now have in place. In a sense, it was a total free market system, guided by Classical Economics (i.e. Say's Law and Adam Smith). The most prominent economic work of this time frame was Adam Smith's book "The Wealth of Nations" that introduced the theory of "The Invisible Hand." This theory states that the market is governed by an "invisible hand," and less interaction by the government in the market, the better (i.e. laissez faire). This proved to be a disaster (at the time) and Keynesian Economics quickly became the new "economic theory" in place (long story-LOL!). Keep in mind that this is a very SIMPLE description and I am keeping a LOT of IMPORTANT facts out of play here (note: we still have Classical Economics in place today, as it does serve a purpose).’

Comment
The author self-describes himself/hereself as ‘bipolar’ (a modern term for depressive) and I am commenting in the hope of lessening the load by explaining what Adam Smith actually wrote in Wealth Of Nations (1776) and its difference from what he is alleged to have written, with a view to elucidate the controversy about what to do in the current situation.

‘In a sense, it was a total free market system, guided by Classical Economics (i.e. Say's Law and Adam Smith). The most prominent economic work of this time frame was Adam Smith's book "The Wealth of Nations" that introduced the theory of "The Invisible Hand." This theory states that the market is governed by an "invisible hand," and less interaction by the government in the market, the better (i.e. laissez faire).”

What Adam Smith actually advised was that the wrong interventions in a commercial market by government should be, first, reversed and secondly those wrong interventions should be avoided, and other interventions of governments should be encouraged. This is not the same thing as being against government intervention as a whole. He wasn’t of the opinion ascribed to him by modern economists since the 18th century. In fact, Adam Smith advised that certain interventions, not in his time undertaken with much consistency by government, should be undertaken as soon as possible.

For example, besides government expenditures on defence against foreign invasions (not defence expenditures to intervene in European dynastic quarrels and wars for trivial ends, including defending loss-making colonies) and on the provision of systems of justice, minimally such as independent judges, jury trials, Habeas Corpus, and the rule of law, not men.

He suggested what amounted to a substantial public investment in public works, such as roads (Britain’s roads were appalling, right into mid-19th century), public bridges, safe harbours, and canals, as well as public investment in a national educational system through a ‘little school’ in every parish (about 60,000 of them!) to educate all boys between 6 and 14 (at the time the mode was not to educate girls in public schools, only at home), in ‘reading, writing, and account’, with a smattering of geometry and such skills useful for earning a living and be productive.

Public expenditure was to be paid for initially from taxation on the richer sectors of the population and their maintenance financed by charging tolls or user-charges of public facilities for the costs of repairs to roads and bridges, plus subscriptions according to potential means to pay for teachers, books, and school prizes, and to pay for palliative care for sufferers from ‘leprosy and other loathsome diseases’.

Government also should develop the postal service for public use (it was originally set up by government to monitor control of the nation’s territory by regular contact with its farthest reaches), it should provide assay officers to determine hallmarks on gold and silver bullion, and on quality standards of woollen goods, cloths and paper. It should also run an official mint to guarantee the purity of the coinage. He also was in favour of a central bank (the Bank of England) to manage government debt and to introduce necessary regulations to stop drawing and redrawing bills of credit and over-trading, to set maximum interest rates, and the minimum amount denominated on the promissory paper notes issued by private banks.

Altogether, this is a formidable list even for the 18th century, contrary to his modern image of him being against government intervention on some sort of laissez-faire (incidentally, a term Smith never used) principle. What then did Smith consider inappropriate for government intervention?

The list is quite specific and is wrongly interpreted as being directed at all government interventions. Smith’s Wealth Of Nations is not a textbook of economics as we understand it today. It was a critique of the mercantile political economy of British governments from the 16th century, which still dominated public policy making in the 18th century (and in many respects still does so today in various forms).

Legislators and those who influence them are susceptible to all kinds of erroneous ideas about how commercial societies work; fads and fancies are spread with conviction that have no scientific basis, much as the everyday observation that the ‘sun rises in the east and sets in the west’ led people to believe that the sun (and the planets) orbited the earth. Indeed, for millennia it was an article of religious faith, against which those who questioned it were dealt with severely (think of the famous case brought against Galileo).

Among mercantile fallacies were such notions as the balance of trade required to be positive in favour of exports, so that a nation could accumulate stocks of gold and silver (which the King could use to fight wars against neighbours - you can see why kings were easily converted to the nonsense!).

From this fallacy, policies of protection against imports were developed, supported by tariffs and prohibitions, even though this meant that large numbers of goods cost domestic consumers much more from higher prices (and profits) than importing them would have allowed – you can see why many ‘merchants and manufacturers’ were enthusiastic true believers in this fallacious idea, and still are!

Moreover, the obsession with high bullion stocks led to ‘jealousies of trade’, in which nations adopted hostile stances to neighbours, some of it spilling over into wars, unofficial piracy and destruction of foreign shipping and ports – you can see why the 18th-century military and navy were enthusiastic proponents of ‘national glory’ from heavy investment in war-making!

Smith opposed such government interventions because they held back mutually advantageous trade from which peaceful trading countries could increase the opulence of their peoples. Many of the trade items added to the long lists (which grow ever longer) of protected trade were derived, not from economic principles or national secureity but from the lobbying of legislators and the hiring of influencers (with not a little bribery) on behalf of domestic ‘merchants and manufacturers’, who profited by narrowing the supply and widening the higher-priced market for their goods.

The richest countries in the world today still engage in such fallacious policies, not just against each other, but also against the poorest countries, for which the richer countries' taxpayers spend small fortunes each year in subsidies, gifts and donations, not to make them richer but the ameliorate their poverty induced by less trade than they could otherwise enjoy.

At the time, Smith observed that certain domestic laws also made matters worse, such as the award of monopolies to the chartered Guilds in towns for the production and processing and selling of scores of goods, and which prohibited outsiders in nearby towns from competing in the markets and fairs of other towns with better goods at lower prices.

These Acts were supported by the Statute of Apprentices which required ‘skilled’ tradesmen to serve 7-year apprenticeships in the town where they wished to trade, keeping out equally good tradesmen from elsewhere by law. James Watt, an apprenticed instrument-maker was not allowed to ply his trade in Glasgow because he had served his apprenticeship elsewhere (fortunately Adam Smith persuaded the university senate to appoint Watt to the University where he worked for several years and began his researches on steam power, essential for the future industrialisation of the world).

Perhaps the worst example of government intervention were the Acts of Settlement preventing labourers from moving from their home parish to another one in search of work.

Altogether, Smith considered these government interventions a breach of natural liberty, introduced originally for arguably good reasons (the development of trade in Britain), but through time generating unintended consequences. In fact, they became major obstacles to the development of free trade in goods and work opportunities in Britain, which together would have fostered the emergence and extension of a commercial society and the spread of opulence through to the majority of the very poorest families in society earlier than happened, for which, of course, the poor paid the highest price.

From experience of legislators and those who influenced them – and Smith met and conversed with, and listened to, members of this exclusive club, from opinionated individuals through to Cabinet ministers and Prime ministers – and he did not think highly of their business judgement and acumen.

He observed that the complexity of the detail in any business decision was formidable at any level beyond the most basic – if demand rises for your products make more of them; if it falls produce something else – and such decision-making was best left to the dispersed individuals involved who profited if they were right and lost if they weren’t, and should not be assumed by any ‘single person [or] no council or senate whatever, and which nowhere [would] be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it’ (WN IV.ii.10: 456).

It is that passage which exponents of the distorted view that Adam Smith opposed all interventions of governments across the board base their enthusiastic convictions upon, forgetting (or not being aware of – not all ‘expert’ quotation-spreaders read Wealth Of Nations) how specific Smith was about the important and necessary role of well-managed State in providing support for the working of a commercial society, which today is bound to be larger than in the 18th century, though not as large as most modern state sectors have become.

In so far as Bipolar Virgin recognises that there is a role for State interventions in certain specific areas - private enterprise where possible, state interventions only where necessary - we may find agreement in a truly Smithian manner.

[Note: I have not taken up the mythical metaphor of the 'an invisible hand' on this occasion: see my paper: Adam Smith and the invisible hand: from metaphor to myth HERE

Dangerous Crowds of Activists Gather to Excite Each Other

Sarah Kuck reports on “Using Human Rights Law to Address Climate Change” (29May) in 'World Changing change your thinking’ HERE: in which Victoria Hykes Steere, author of an essay titled “An Iñupiaq Reflection on ‘Ice,’” from Global Warming Reader, by William H. Rodgers, Jr., Jeni Barcelos, Anna Moritz, and Michael Robinson-Dorn, (in press, Carolina Academic Press, Durham). She is also a former law student of William H. Rodgers, Jr., at the University of Washington School of Law, speaks on “What are the legal and human rights implications of climate change?”:

"Our market-based economy owes its existence to Adam Smith and his tract, "The Wealth of Nations." We now must rethink our consumer-based economy. We must learn to share this planet with one another and all animals. The challenge to use climate change to create the opportunity to remake the way we interact with the earth's systems is inspiring. The chance to totally reshape our relationships with the earth, each other and to ensure future generations rarely comes. We must all reach out of our comfort zones and make the message simple. The lives of our children, the oceans, and animals flicker in front of us. Simple is best. Not fear, not anger or guilt but some thing simple and beautiful that we all dream together with the political will to make the dream reality.”

Comment
Victoria begins with an absurdity: ‘Our market-based economy owes its existence to Adam Smith and his tract, "The Wealth of Nations."’ It doesn’t get much better.

The commercial society, of which she refers, was formed long before Adam Smith and 1776. It was active in Britain in the centuries before the 18th century from which emigrants from Britain took with them to North America. It is safe to say that if Adam Smith had never lived, let alone had never written Wealth Of Nations (some ‘tract’ at nearly 1000 pages!), commercial society in what became the United States of America would have continued to flourish, just as it did in Britain and Europe. It does not ‘owe is existence’ to Adam Smith!

If Victoria wants to ‘rethink’ her ‘consumer-based society’, and to urge others to do so, she is free to do so – largely because Britain in Europe had evolved the instruments of liberty (rule of law, independent justice, separation of powers between King and parliament, Habeas Corpus, and private property).

She wants to ‘totally re-shape our relationships with the earth, and each other’, an ambition that is no mean challenge, especially as it requires that ‘we all dream together with the political will to make the dream reality’. I fear that Victoria’s dream hosts the roots of the age of totalitarianism like the world has never seen – and lets face it, the earth has hosted some pretty accomplished totalitarians who were not shy of soaking their dreams in considerable rivers of blood and angst.

And who is to blame for the US predicament? Why a mild, 18th-century moral philosopher, Adam Smith, who never sought to enforce his observations of how the world worked (badly, as it happens) upon anybody. Who sought by his writings in both of his Books, ‘The Theory of Moral Sentiments’ [1759] and ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ [1776], to influence legislators and those who influenced them – he never had a vote under the existing electoral franchise (never forget, liberty is more important than democracy) – to address some important problems that he considered worthy of the early attentions of governments.

He did, however, leave some important messages applicable to Victoria, and all of her ilk at present adding determination to their sense of urgency and pending doom (always a toxic mix for activists).

Smith writes of political activism in Moral Sentiments in two parts. The first is for those whose ‘public spirit’ is ‘prompted altogether by humanity and benevolence’:

“The man whose public spirit is prompted altogether by humanity and benevolence, will respect the established powers and privileges even of individuals, and still more those of the great orders and societies, into which the state is divided. Though he should consider some of them as in some measure abusive, he will content himself with moderating, what he often cannot annihilate without great violence. When he cannot conquer the rooted prejudices of the people by reason and persuasion, he will not attempt to subdue them by force; but will religiously observe what, by Cicero, is justly called the divine maxim of Plato, never to use violence to his country no more than to his parents. He will accommodate, as well as he can, his public arrangements to the confirmed habits and prejudices of the people; and will remedy as well as he can, the inconveniencies which may flow from the want of those regulations which the people are averse to submit to. When he cannot establish the right, he will not disdain to ameliorate the wrong; but like Solon, when he cannot establish the best system of laws, he will endeavour to establish the best that the people can bear.”

The second is for ‘the man of system’ who is ‘apt to be very wise in his own conceit’:

“The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.”
[Both from The Theory of Moral Sentiments, Book VI.ii.2:116-17]

If Victoria and her ilk were ever to read Adam Smith’s books, they would learn a lot about the manifest gaps in their education.

Adam Smith on What Needed to be Done

‘sposton’, a commentator, responds to Paul Krugman, Nobel Prize winner, in a column on the recession and when it will end (recovery in the summer, and ending in 2014, says, Krugman), in the Huffington Post HERE.

‘Sposton’ broadens the discussion:

‘My friend, you know very little about moral philosophy and its history. Did you know that Adam Smith was first and foremost a moral philosopher? And so were many other early liberal economists. Smith's never reduced himself to a mere economist in your sense of the word. Your statements are the end result of modern reductionism than liberal economists. Our current situation is precisely the result of this kind of thinking where one discipline is utterly divorced from another and all divorced from any moral or ethical anchor. Without such an anchor our knowledge is utterly devoid of any wisdom and that is what our world need now more anything else. This methodology may have brought some good results in science but on the other hand it has diminished us all.

In its own little thought universe all you have said makes some sense. The problem lies in the nature of your universe. It belongs more to the domain of our problems and less so to the domain of solutions.’

Comment

I have no idea who ‘Sposton’ is or what else he/she stands for. Another commentator lists all of Krugman’s impressive awards beside a Nobel Prize, but while I acknowledge them and Krugman’s achievements, I am sceptical of their relevance when precise dates are given for a global event of the current magnitude.

If Krugman is correct, we shall stand in awe; if his precision is wrong, we can expect concurrent explanations from him about ‘surprises’, ‘lags’ and such like. We certainly will not hear his silent retirement from the prediction business.

This partly is why I noted ‘Sposton’s’ comment. Moral philosophy in Smith’s day encompassed many areas of science beyond political economy, or ‘police’ as it was known in the 18th century.

In Smith’s case, it included jurisprudence (how civil societies ‘ought’ to be governed – he wrote but did not publish a book on the subject; it was burned on his order in 1790), but he saved the philosophical method, published posthumously in 1795, and known as his ‘History of Astronomy’). He also wrote on history and the history of politics, and how the range of human behaviour influenced events in all their complexity.

Above all, Adam Smith did not make predictions about the future; his was a backward-looking appreciation of the past and a studied analysis of the present.

He did not say that everybody pursuing their self interest would necessarily produce an outcome beneficial to society; a ludicrous proposition as any acquaintance with history – of the present! – would confirm. It was human intervention, for good or ill intentions, that creates the very situation that policy makers, and individuals following their self interests, try to improve (often making them worse in the process too).

Adam Smith did not recommend sitting back and doing nothing – the logical advice if he had the views attributed to him by modern economists. Wealth Of Nations was a critique of the then political economy of the governments of Britain since the 16th century, know to Smith as mercantile political economy (‘mercantilism’ is a word, also attributed to Smith, first applied in the late 19th century; Smith died in 1790).

If he had believed that self-interest was enough he would have had no need to spend 12 years writing Wealth Of Nations!

Smith’s critique was aimed at the high policy levels of legislators, and those who influenced them, trying to persuade them to desist from policies that slowed down the growth path to the spread of opulence.

In these policies, ‘merchants and manufacturers’, were complicit; indeed, their self interests made them so; by narrowing the competition they widened the market for their goods and raised prices against consumers, many already on the bread line. Their self-interests did not benefit society; Smith knew this and said so, explicitly.

Only modern economists, Krugman included, teach a model of society without humans, who supposedly are rational maximisers, harmoniously creating an optimum output; or, in the sophisticated version (I am being a touch sarcastic) would be doing so if only government did not intervene at all.

It is the moral corruption of the players, legislators and influencers, producers and consumers, alike that leads to a far less sub-optimal outcome, precisely because self-interest, while the powerful driving force behind human endeavour, is best not left completely alone.

If moral teaching is not enough, which was the subject of Adam Smith’s earlier work, The Theory of Moral Sentiments (though its ideas were taught by Smith alongside his lectures on ‘police’ and civil government at Glasgow University in 1751-64), as Smith believed it was not, then a strong system of justice was essential, as well as a culture of Liberty, enforced by law.

Smith was not a utopian. He did not believe that there was a ‘master plan’, which if adopted would change the world towards perfection. Far from it; he denounced such ‘plans’ as the dangerous illusions of ‘men of system’, arrogant in their approach to society.

Smith took human nature as it was, pointed out several major areas where what was going on was deleterious to society (protectionism, monopolies, ‘jealousy of trade’, wars beyond the needs of defence against invasion, legal restraints on labouring people ‘combining' to raise wages or stop them being cut, while employers could ‘combine’ to resist their employees, laws preventing anybody but members of ancient Guild monopolies from exercising applying their labour as they wished, laws preventing working men seeking employment elsewhere than in the parish they lived in, and national policies that failed to educated children in ‘reading, writing, and account’ (girls were not educated at all, except in the middle class and above), and the absence of palliative care for persons afflicted with leprosy and ‘other loathsome diseases’.

In all this, Smith did not expect sweeping changes or any immediate changes. He set out only to persuade; not to impose. He did not believe that international free trade would ever be enacted, nor that slavery would ever be abolished (it’s still operating today in some countries), nor that the world would become full of ‘sweetness and light’. But it could be improved, at the margin, if legislators and those who influenced them were persuaded to do so.

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.

Only Slightly Disappointed

A correspondent writes to inform me that Dan Ariely is not a graduate economist but, in fact, he was a graduate in psychology (BA), cognitive psychology (MA), cognitive psychology (PhD) and Business Administration (PhD). Apart from his second PhD, he is not an academic economist, so I was wrong to be astonished that he wrote what he did about Adam Smith (it depends on how much history of economics he read on the business administration programme).

However, Duke University is home to one of America’s strongest centres for history of economics and very much the current ‘home’ of the subject. It publishes the leading academic, refereed journal, History of Political Economy (HOPE), regularly recruits graduate students for its PhD programmes.

But it is still surprising that a specialist in behavioural economics, which is justifiably critical of the rational Home economicus model, has not read what Adam Smith actually wrote in both Moral Sentiments and Wealth Of Nations, and appears to have accepted on trust what 20th-21st century ‘authorities’ claim were his ideas.

If a major figure is claimed to be the foundation of so-called rational economics and one’s major work is about developing a more realistic model of human behaviour, I would have thought it incumbent to read for oneself the original works and published papers.

Call me old fashioned but that’s my approach. When I taught undergraduate students in Economics I, many years ago, I often reminded them that St Thomas, the Doubter, was the patron saint of students. Should I ever visit the subject of behavioural economics, I would start with a long reading list before commenting on what has proceeded my interest or curiosity.

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)]

Adam Smith and Capitalism

Paul Martin writes 'It isn't capitalism, it's greed' for Revolution Radio HERE:

“What we have is a bunch of greedy people who we, the people, have elected to office. Keep in mind that Adam Smith who created the capitalist system (just as Karl Marx created the socialist and communist systems that redistribute wealth) said that capitalism was a profit-motivated form of economics. He made it very clear that when greed became the driving factor behind an economy, it was not capitalism at work. It was greed.”

Comment
Much as I admire the life’s work of Adam Smith, to describe him as the person ‘who created the capitalist system’ is, well, breathtaking in its sheer ignorance, much as a teenager, or younger, looks in awe at favourite celebrities.

Smith observed and described, with more than a few conceptual flourishes of great merit, but he in no way at all ‘created the capitalist system’.

Indeed, he never knew anything of ‘capitalism’, a word invented in English for the first time in 1854 (Smith died in 1790).

Philosophers do not ‘invent’ systems and nobody invented ‘capitalism’ or the ‘commercial society’ which Smith described, and which had been around since long before he was born in 1723.

It follows that Smith did not make ‘it very clear that when greed became the driving factor behind an economy, it was not capitalism at work. It was greed’.

Of the two men mentioned, Adam Smith and Karl Marx, it may surprise some readers to realise that Adam Smith was far more condemnatory of ‘merchants and manufactures’ for their monopolising behaviours, out-right scheming against the public interest, and their corruption of the legislature, than Karl Marx was of 19th-century capitalists.

Power Bid Mentioning Hobbs and Smith

Trevor Manuel, Finance Minister of South Africa, writes in FT.com (16 March) HERE:

‘Let fairness triumph over corporate profit’

‘From Adam Smith’s defence of moral sentiment before economic self-interest to Debreu’s algebraic articulation of the informational requirements for a welfare-maximising equilibrium, economists have been clear that markets are incomplete and cannot be left to themselves.

Political economists since Thomas Hobbes and Adam Smith have understood that capitalism relies on state power to impose instrumental checks on greed and abuse of influence.’

Comment
I think Trevor has got this wrong, somehow.

Adam Smith observed the role of moral sentiments in society; he did not invent them, not did he invent self interest, he observed its role too.

Debreu’s general equilibrium mathematics were a model of an imaginary economy without human beings. His equations were determinate within their assumptions, itself a triumph of pure analysis but with little scope for practical political economy.

Much like Oscar Lange’s neo-classical socialism for running the Polish economy (the planner to set prices MC=MR); it never ran the Polish economy and the Polish planners set prices as per the instructions of the Soviet planners, with the not unpredictable results).

Adam Smith’s view on ‘state power to impose instrumental checks on greed and abuse of influence’ was compromised as such by the fact that he identified British State power as a instrument of the ‘greed and abuse of influence’ of legislators and those who influenced them taking their advice from the ‘merchants and manufacturers’ who preferred monopoly, protectionism, and prohibitions that narrowed the competition which raised prices and reduced the real incomes of consumers.

I read his piece as a justification for increasing South Africa's state power in the economy as a instrument of the politicians in the government, prominent among them, of course, would be Travor Manuel.

Adam Smith, Neither Left Nor Right

James R. Otteson, author of Adam Smith’s Market Place of Life, 2002, Cambridge University Press, (in my view a seminal approach to Adam Smith’s work) write on his Blog, HERE (17 March):

This Just In: Poverty and the Right

"I was asked (challenged?) by a reader to provide examples of right-of-center political or economic theorists who are genuinely interested in the poor. There are many, but let me mention one classical source and one contemporary source.

The classical source: Adam Smith in his 1776 An Inquiry into the Nature and Causes of the Wealth of Nations. Smith's concern for the poor there is palpable and undeniable. Now some scholars argue that, partly because of that, Smith would not quite qualify as a right-of-center thinker (Samuel Fleischacker, for example, but there are many others), but I think Smith's defense of free trade, markets, and limited government do qualify him. He is not an anarchist or even a libertarian, and he does not subscribe to a theory of natural rights that, as in Locke or Nozick, give principled restrictions on state activity: Smith is too practical and pragmatic for that. But that makes him what is usually called a "classical liberal," not a progressive liberal.

The contemporary source: Deirdre N. McCloskey's The Bourgeois Virtues: Ethics for an Age of Commerce. McCloskey's argument is that capitalist institutions are not amoral but are, instead, positively encouraging of virtue. But a large part of her argument in that book is that capitalism has brought substantial and often unappreciated benefits to millions of people, including especially the poor. McCloskey draws explicitly on Smith in making her case.


The classical source: Adam Smith in his 1776 An Inquiry into the Nature and Causes of the Wealth of Nations. Smith's concern for the poor there is palpable and undeniable. Now some scholars argue that, partly because of that, Smith would not quite qualify as a right-of-center thinker (Samuel Fleischacker, for example, but there are many others), but I think Smith's defense of free trade, markets, and limited government do qualify him. He is not an anarchist or even a libertarian, and he does not subscribe to a theory of natural rights that, as in Locke or Nozick, give principled restrictions on state activity: Smith is too practical and pragmatic for that. But that makes him what is usually called a "classical liberal," not a progressive liberal.

The contemporary source: Deirdre N. McCloskey's The Bourgeois Virtues: Ethics for an Age of Commerce. McCloskey's argument is that capitalist institutions are not amoral but are, instead, positively encouraging of virtue. But a large part of her argument in that book is that capitalism has brought substantial and often unappreciated benefits to millions of people, including especially the poor. McCloskey draws explicitly on Smith in making her case.

Comment
I fully appreciate Jim’s the line of argument. I have often posted on Lost Legacy about Smith’s ‘neutral’ approach to the labour-capital divide, when chastising writers from both left of centre and right of centre, and others at either of their extremes, who try to hijack Smith into being in favour of one side of the other.

Smith is a much more complex advocate for his approach to political economy than his critics appreciate.

He favoured reforms of the policies of mercantile political economy because they inhibited the full power of commercial society to grow, and in doing so, to put the unemployed to gainful and productive employment and, for those taking the initiative, to save towards an amount of capital stock and put it into productive activity, thus widening opportunities for increasing opulence, the beneficiaries of which would largely be the labouring poor.

Right-of-centre-minded people are, or should be comfortable with Smith’s policies for labour, and for commercial enterprise, and for government interventions at the macro-level. The same should appeal to left-of-centre-minded people too.

Extreme libertarians, of right and left (yes, they do exist) and traditional anarchists or Marxists may not be comfortable with anything less than their ideal utopias (or nightmares).

Smith was not an ideologue, of left or right (the concepts of left or right were unknown in his lifetime).

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.

Adam Smith on Liberty

Doug Thorson writes The Freedom factory (‘life, liberty, and the Pursuit of Cash’) Here:

“Adam Smith, who lived in the eighteenth century, provided the philosophical and most systematic arguments for the underpinnings of a laissez-faire economic system in his book “The Wealth of Nations.” Smith makes the argument that it was only the interference of government which disrupted the natural working of economic society and created poverty and decay rather than abundance and harmony.

As Smith explained:
The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred obstructions with which the folly of human laws too often encumbers its operations.

The drive for greater government regulation is the drive toward increased poverty, unemployment and the loss of liberty. With the Obama administration pushing an ever expanding federal government plan to take control of our financial institutions, health care system, the auto industry, and its attack on free speech, the time is now to clearly articulate the differences between free markets and free people, and government administered markets and government control of our lives.”

Comment
Smith was more ‘nuanced’ (as is the fashion in these matters) about the causes of wealth creation (poverty is not ‘caused’; it is a consequence of the absence of wealth). Smith did not ‘underpin’ laissez-faire as an economic system in Wealth Of Nations. That is an ideological myth.

He wrote a critique of the existing political economy of the British state and, by implication, of other European states. He did not dismiss all government actions and interventions; his critique focused on specific government policies, some in place since the 16th century, summarized as mercantile political economy, and which directly hindered the creation of wealth and thereby allowed poverty to continue for a segment of the population.

These mercantile policies included ‘jealousy of trade’ against neighbours (who were Britain’s customers), wars that projected political interferences in continental countries and not to promote legitimate defence interests of an island society, erroneous policies of hoarding gold and silver which led to tariffs and prohibitions on wealth creating trade, laws and statutes than inhibited capital and labour mobility (the Town Guilds, Corporate monopolies of wholesale and retain trades, Apprentices Statutes, and Settlements Acts, all of which were promoted by legislators and those who influenced them, and, the roles of Chartered Trading Monopolies (the East India Company) and the foundation of colonies in North America, which grossly distorted wealth creation through trade monopolies, excess profits, and expensive wars to maintain, well beyond any benefit to Britain.

In response to these inhibitions by government policies, Smith advocated a substantial role for government in funding the infrastructure investment across Britain in project to ‘facilitate commerce’, such as in a national road-building programme, the creation of safe harbours for trade and travel, canals between population centres, the paving of large towns, street lighting, sewage and waste disposal, and the proper administration of ‘police’ (a broader term than modern day usage, which included ensuring the appropriate supply and regular availability of subsistence for town populations.

He also advocated national education facilities in ‘little schools’ in every parish to educate every child to ‘read, write, and do account’, preferably with some geometry in place of Latin because such skills would be more suitable for young adults looking for work. He also made a little noticed case for government palliative care for people suffering leprosy and ‘other loathsome diseases’ (a provision with large future cost implications).

Smith saw competition as the major stimulus for commerce in place of monopoly and regarded many ‘merchants and manufacturers’ as a barrier to the growth of commerce from the attempts to lobby legislators and those who influenced them for trade protection and special privileges.

Doug Thorson may not appreciate the extent to which Adam Smith was not an advocate of laissez-faire as advanced by some the French économistes or Physiocrats. In 17th-18th-century France, local trade markets were highly regulated by central government and the inspectors appointed by Government interfered closely in the day-to-day running of businesses, large and small, to a degree unknown in Britain. Their cry for ‘laissez nous faire’ had a different basis to Smith’s advocacy of commercial markets where possible, government intervention where necessary.

The ‘folly of human laws’ was not advanced by Adam Smith as a case for no, or limited, laws. He insisted on instruments of justice as a foundation for human society, but he knew, as we do, that governments pass laws regularly, some of which are manifest follies in the consequences, and which are the faults of the use of political processes for sectional interests.

That is why Liberty, enshrined in law and practice, is a foundation for the creation of wealth.

A Blogger Promises to Change the 'Entire System' - World Waits With Baited Breath!

A Blogger, ‘Heroesall’, on Alternet.org writes a bit of sense with a large amount of nonsense HERE:

“I’ve said it before, but it bears repeating: the utopian free market doesn’t exist. It can’t exist. It’s based on a mis-interpretation of Adam Smith and what John Cleese might call the blinkered, philistine, pig-ignorance of economists, blithely holding on to abstract concepts that have no relationship to the real world. So we have to stop basing all of our financial decisions on what might happen if those free market fairies really existed, and start basing our decisions on what happens here on Planet Real.”

And:

“It’s also a very good idea to direct some of the bailout billions towards calming the housing crisis in the US. If governmental power and billions of dollars can’t stop people being turfed out of their homes while CEOs ride the cash wave, then it should be blatantly obvious to anyone with more than 3 brain cells to rub together that our economic system no longer serves the common good and should be replaced entire. I’ve got a few suggestions there, which I’ll talk about in coming weeks.”

Comment
Yes, the ‘utopian free market’ does not exist. Whether it “can exist” or “can’t exist” is a completely different question, with many different answers.

As for “free market fairies”, I have some sympathy with ‘Heroesall’, having to deal almost daily with the mythical body part of ‘an invisible hand’ here on Lost Legacy.

Old ideas and beliefs from the ancient cult of Mercantile Political Economy still dominate much of world trade, with their pathological ‘jealousy of trade’ (David Hume’s evocative description of the condition), and the sectional instincts of protectionism, common tooin the so-called 'free-market' economies of the USA and Europe.

I am not sure that ‘Heroesall’ is coherent on ‘Planet real’ (by which she means her set of beliefs, which may or may not be as fanciful as what she criticises). Her language is not encouraging for readers who look for answers from her:

“it should be blatantly obvious to anyone with more than 3 brain cells to rub together that our economic system no longer serves the common good and should be replaced entire.”

Wow! ‘Heroesall’, able by self-affirmation to “rub together” (an unusual metaphor for the workings of the human brain) more than “three brain cells, intends to “replace” the “entire” “economic system” within which billions of us go about our lives.

I am impressed, to say the least, and scrolled down the read more about what was to replace our “our economic system” and, as important, exactly how this would be done, but alas, the post ended there with the cop-out line, that ‘Heroesall’ is going to reveal her “few suggestions”, about which she’ll “talk about in coming weeks”.

But can the world wait for a “few weeks” to hear about how the “entire” system is changed?

I think there is little substance in “Heroesall’s” more than ‘three brain cells’ master plan to change everything, everywhere. A clue to this judgement comes in the sentence, quoted above:

“If governmental power and billions of dollars can’t stop people being turfed out of their homes while CEOs ride the cash wave…”

It may have escaped her notice that her defining moment for change in the recognition that people have been and are “turfed out” of their homes for all kinds of reasons throughout booms as well as busts, and would continue to be so in any conceivable economic system.

But worse, billions of people do not have anything like the relative luxury of the worst housing in the USA, let alone the average quality found there, in places like Asia, including China and India, and the slums of many Third World countries (see ‘Slum Dog Millionaire’ and compare the worst in the rest of the world with the poor in the USA).

Capitalism, even in its State-Capitalist variety, has produced living standards unprecedented in history and, recently, in countries that have liberalised their economies (China, India, Vietnam) the results have raised tens of millions out of their absolute poverty levels.

Over the next few weeks, while we await Heroesall’s remedies, I hope she contemplates her ‘entire’ changes with a wider perspective than she shows in her post.

Left Split Modern Rightwing from Adam Smith

Devilstower writes in the Daily Kos, HERE:

An obviously leftish rant against the right, entitled: “The President and Private Pay”, which includes this paragraph:

“In the past, people were able to distinguish between capitalism and chaos, and understood that government intervention in the markets was needed when the organizing principle of the markets was sent askew. The idea that the market is inviolable and all-knowing didn't really start with Adam Smith. It's more a product of the Ronald Reagan-Ayn Rand fusion of the 80s -- the one that drove "hands off" legislation leading to the S&L meltdown. That was the source of inspiration for stripping away the protection that had kept the market sane since the last time these guys got their way.”

Comment
I make no claims for or against the political contents of Devilstower’s piece. The politics of another country are not my concern. The key sentence for me is:

“The idea that the market is inviolable and all-knowing didn't really start with Adam Smith. It's more a product of the Ronald Reagan-Ayn Rand fusion of the 80s -- the one that drove "hands off" legislation leading to the S&L meltdown.”

At last, a recognition that the linking of Adam Smith to post-1950s mainstream economics was and remains a false attribution and is a step forward in re-asserting Adam Smith’s legacy.

So close is the identification of Adam Smith to Ayn Rand’s (among other modern ideologues) has led to immense confusion, even ensnaring Greenspan, who like so many leading commentators on these issues, linked the Adam Smith invented by Friedman, Arrow, and other Nobel prize-winners, to general laissez-faire policies with which there is little textual support in Wealth Of Nations or Moral Sentiments.

Of course, the Left also misread Adam Smith as some sort of social democrat on the basis of selective quotations from his polemics against mercantile political economy, still prevalent in the 21st century, as it was during the 15th-18th centuries.

But small steps by one side or the other add up, slowly and gradually, to rectifying these errors, and are to be welcomed no matter from which place on the political spectrum they come from.

Adam Smith On Selfishness and Public Spirit

Roland Patrick lets go on Let’s Fly Under the Bridge HERE: with at The Kansan (Thomas Frank: author of ‘What’s the Matter with Kansas?’) with “What's the Matter with Frank?” in a warm debate between them both on the ‘crumbling US infrastructure’ (roads, bridges, and highways).

Roland Patrick states in his piece:

“Well over two centuries ago Adam Smith explained, in Wealth of Nations, how the public got what they needed, and it wasn't usually through 'public service'. It was by appealing to the selfish interests of producers of food, clothing and shelter. i.e., by offering money in return.”

Comment
If your are going to quote from Adam Smith (or, indeed, anybody) you ought to get the quotation correct. Slipping in the word ‘selfish’ before interests is, er, naughty. There is quite a lot of difference between ‘self interest’ and ‘selfish interest’.

You may be selfish as your fancy takes you, but that’s no way to engaged with other people. Selfishness begets selfishness. But in exchange transactions, especially when bargaining for something, Adam Smith made it clear exactly what is involved:

‘But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. 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.’ (WN I.ii.2: p 26-7)

You get what you need, not be being selfish but by interesting their [NOT your] self-love in his [NOT your] favour, and show them that it is for their [NOT your] own advantage to do for him [You] what he [You] requires of them [Him].

It’s a two-way, not a one-way, street. It’s his self-interest you address, not your own. And you do this by using a conditional proposition, ‘If you..Then I’:

“Give me that which I want, and you shall have this which you want”

The important element of bargaining is to convince the other party how and why she benefits from the transaction. You have to be ‘other-centred’, not selfishly self-centred.

Nobody selling you a television would be successful if he told you that you should buy because he, the seller, will be able to afford a new car. The buyer wants to hear what benefits she gets from the deal, not what the seller gets, and the seller should tell her why it is beneficial to her not him for her to agree a purchase.

I am amazed how so many people, supposedly living in the most capitalist market place in the world, never seem to think about the numerous buying and selling transactions they must get involved in and how and why some went better than others. Even supposedly well-trained sales people remain ignorant of the basic principle of sales – link your product to the needs of the buyer, not your needs as a seller.

Adam Smith never recommended selfishness – in fact he criticises selfishness in his earlier book, Moral Sentiments, and repeats his anti-selfish message in the passage quoted above from Wealth Of Nations. And, by the way, contrary to common perceptions, Smith also had some positive things to say about ‘publicly-spirited men’:

“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. ….
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.” (TMS IV.i.11: pp185-6)

This suggests to me that Adam Smith saw some advantages in certain public acts by men of ‘public spirit’ through their drive and enthusiasm for making where they reside a better place than living with a ‘crumbling infrastructure’ and accepting the failings of governments – not markets – with a helplessness born of unsocial and inhumanity for those who have to accept it because they know of no other way of life.

People accept rubbish strewn streets, they are resigned to them; yet the same people could be mobilized by enthusiasm to start cleaning it up and keeping it clean.

In Smith’s time this civic duty was called ‘police’ (not the law and order kind - a later emaning - but cleaning up the streets), and a place was judged clean by the absence of rubbish and sewerage in its streets. Edinburgh’s Old Town was a filthy mess for many years, until some public spirited citizens demanded that the City Officers kept clean what the local people had cleaned up.

Nice Contrasting Quotations

Diane Gaston write for the Risky Regencies blog HERE:

“Though Samuel Johnson described a smuggler as "A wretch who, in defiance of the law, imports or exports goods either contraband or without payment of the customs,” many would prefer the definition of Adam Smith—himself a Customs commissioner: "A person who, though no doubt highly blamable for violating the laws of his country, is frequently incapable of violating these of natural justice and who would have been in every respect an excellent citizen had not the laws of his country made that a crime which nature never meant to be so."

Comment
I liked the selected quotation because it links ‘natural justice’ – a universal law in Natural Liberty – with actual laws of a country.

Tariffs and duties were an essential source of government revenue in Smith’s time, which is why he thought it wise to remind readers who would favour Britain ideally becoming a free port for the world’s trade, that unless another source of government revenue was to become practical, there would always be a need to have some tariffs. (Smith was not an ideologue

Also, Smith and Samuel Johnson did not get on very well, ever since Smith criticised Johnson's dictionary for its incorrect grammar, illustrated by the word 'But'!

If they ever discussed smuggling, I suspect they might have argued their differences, with Smith, the moral philosopher, presenting the Natural Law theory of jurisprudence and Johnson sounding like someone in a Church of England Pulpit.

Adam Smith Not an Advocate of Laissez-Faire

Sir Courtney N Blackman’s speech is reported in the Trinidad and Tobago Review , entitled

“THE GLOBAL FINANCIAL CRISIS AND THE COLLAPSE OF THE NEO-LIBERAL PARADIGM”, HERE: which contains the following paragraph:

“Neo-Liberalism is the direct descendant of the laissez-faire paradigm inaugurated by Adam Smith’s The Wealth of Nations in 1776 and elaborated by successive Classical economists, culminating with Alfred Marshall’s Principles of Economics in 1920. The Classical paradigm failed to deal effectively with the Great Depression of the 1930s and was superseded by the Keynesian paradigm.”

Comment
Laissez-faire did not feature in Adam Smith’s Wealth Of Nations. He did not agree that laissez-faire was an appropriate policy – that came from some of the French Physiocrats – and identified many areas where it should not apply in a commercial society.

I posted the following list last month (from Jacob Viner), but its worth reminding readers of his stance:

"● 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 upon 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 wars to prevent the spread of fire; (WN324)
● 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, fire fighters and of other 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); (WN731-58)
● Temporary monopolies, including copyright, patents, of fixed duration; (WN754)
● Education of youth (‘village schools’, curriculum design); (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)
● Moderate export taxes on wool exports for government revenue; (WN 879)

Jacob Viner concluded, unsurprisingly, that Adam Smith was not a doctrinaire laissez-faire advocate.

[From Viner, J. 1928. ‘Adam Smith and Laissez-faire’, In ‘Adam Smith, 1776-1928: Lectures to Commemorate the Sesquicentennial of the Publication of Wealth Of Nations, p 53, August M. Kelly, Fairfield, NJ; Lost Legacy provided the references to Wealth Of Nations.]

Much of the confusion and misinformation about Adam Smith comes from attributions to him from people who either, or both, have not read Wealth Of Nations fully and rely only on quotations, or do not understand statements by Adam Smith on Natural Law, are from a theory of jurisprudence (following Grotius, Pufendorf, Carmichael, and Hutcheson), and are not just a theory of how to run a commercial system; Natural Law and Liberty applies to all societies.

Adam Smith is Innocent

Martin Hutchinson, writes on “How Beatniks, Pyromaniacs and Gangsters Caused the Global Financial Crisis" on the Monday Morning Blog (HERE), to which a Richard Williams posts this comment (29 January 2009):

“The point you seem to have taken very long to grasp is that deregulation, laissez-faire, free-market economics, etc. have never functioned. Free trade is a British hoax used to plunder its colonies. Adam Smith was recruited by Lord Shelburne to concoct the Wealth of Nations as a means of discrediting the American System, which has always been the adversary of the British System, the one that is now collapsing. Smith argued that individual selfishness and greed leads to the common good. In fact, national governments are the sole guarantors of the general welfare. Perhaps you ought to read Alexander Hamilton.”

Comment
Richard Williams puts modern spin of Alexander Hamilton’s protectionist policy writings for the new Republic, and on the German author, Friedrich List’s nationalist polemical work, The National System of Political Economy (1841). Fair enough. Any student of the period should read these and other works, and should make his or her mind up about the issues related to them.

However, Richard Williams extends his criticism of the period to what Adam Smith is alleged to have written and advised, which clashes with the known facts. Now this is not surprising because Smith’s legacy is subject to widespread distortion from many sources, not the least significant of which is the distortion emanating from modern economists who invented of a wholly mythical Adam Smith, some parts of which Richard Williams draws upon.

As for meetings between Smith and Lord Shelburne on the subject of colonies, in this case of the behaviour of Greek and Roman colonies in classical times (which he found, variously, acted independently, didn’t always contribute to the mother country, and were in states of rebellion).

Smith repeated some of this material in Wealth Of Nations. Far from ‘discrediting the American system’ (whatever that means), he wrote what history reported and what he observed about recent relations with the British colonies.

Smith’s analysis in Wealth Of Nations was not sympathetic to the aims of british legislators, and some of those who influenced them, as British governments moved towards suppression of the rebellion by British colonists. He suggested a compromise of a union of parliaments – full representation in the House of Commons and a contribution to the cost of defending the colonies from French and Spanish military interventions – Spain held territory to the south of the British colonies and the French held territories to the North and West, and both were present in the Caribbean and Central America.

From Britain’s point of view, the Cromwellian Navigation Acts were beneficial to Britain, an island that was dependent on access to and from the sea for its trade. That is a fact of geography and of commerce. Whether it was justified to monopolise trade to and from its colonies was always another matter.

Smith certainly did not think the British mercantile monopoly should continue, as he shows quite clearly in Book IV of Wealth Of Nations, in his polemic against mercantile political economy and its affects on trade with the British colonies in North America and British commercial exploitation through the East India Company and its Royal Charter.

How all this discredited the ‘American system’ in the 1760s is beyond me – it discredited the British mercantile system, not the ‘American’.

He advised Britain that it should have continued to improve agriculture as a generator of wealth (the ‘annual output of the necessaries, conveniences, and amusements of life’) before embarking on too rapid an increase in industry, which he considered was the natural course of development.

Given the new facts about an independent North America, them emerging, he advised the former colonies to continue trading for manufactured goods from the whole of Europe and not just Britain (to break the pernicious British trade monopoly, and utilize competition to reduce import prices and raise export prices), and as the country would grow even richer it should develop the import replacement sectors. This was his honest judgement of how any modern economy should develop naturally. It is cynical in the extreme to see this as a 'conspiracy' or a ‘hoax’.

Smith NEVER ‘argued that individual selfishness and greed leads to the common good’. These were the ‘licentiousness’ views of Bernard Mandeville (1731) , which Smith criticised in Moral Sentiments (1759), though ignorant Hollywood scriptwriters passed it off as Smith’s in the mouth of Geko, and it has been copied since by the uninformed media for readers who know no different.

Whatever the failings of ‘deregulation, laissez-faire, free-market economics, etc.’, these were not Adam Smith’s policies – he never ever used the words ‘laissez-faire’! That is an attribution that gained currency after he had died in 1790, particularly from the early 19th century onwards.

Smith made specific recommendations about the need for regulation (see his chapters in Wealth Of Nations dealing with problems in banking and his recommendations that the Government was the only safe agency for quality controls in stamping cloths and assaying gold and silver plate and bullion).

Smith favoured freer commerce, within the ambit of laws and justice. The numerous interventions of Government in social life, including commerce, were well founded in the 18th century, including the legalisation of town guilds (local trade monopolies), the Settlement Acts preventing the free movement of people around the United Kingdom, and the Apprenticeship Statute which pretended to guarantee quality, but which enabled Masters to ‘widen markets and narrow the competition’.

His recommendation for widespread public funding of education – a ‘little school’ in every parish – was an ambitious expansion of public expenditure, with parents paying something (even a penny) for the education of all children (a nascent voucher scheme?).

Finally, what are we to make of the allegation: “Free trade is a British hoax used to plunder its colonies”?

For a start, whatever British governments did from the 16th century onwards it was surely fortuitous that North America was settled largely by people largely from the British constitutional monarchy (1688) and not the Spanish, Portuguese, or French absolute monarchies.

It is unlikely that Richard Williams (of Anglo-Welsh descent?) would be able to write so despairingly about the running of, and the outcomes from, British colonies in North America. The Spanish and Portuguese colonies have not exactly performed as well, either economically or in terms of Liberty, as the former colonies performed when under British rule and since, when to a large extent, the institutional structures of the new Republic were formed from British theory (if not practice) in jurisprudence, moral philosophy, and civic justice.

Smith himself drew the favourable contrast between the state of affairs in the British colonies in America and the state of affairs in India under the East India Company on the eve of the Rebellion (not that the ‘Indians’ in North America prospered well from the benefits of Liberty any more than the Indians under The Company did any better).

But for ‘Free Trade to be a Hoax’ it would require some serious conspiracy naivety to link this to Adam Smith.

His historical observations in jurisprudence and his writings of a commercial society were largely ignored and were not implemented by British governments. Free trade remained an idea and not an actuality; he didn’t think a fully free trade society was likely ever to occur because of the need for some tariffs to raise revenue for government (there was no income tax in Britain while Smith was alive), and without customs revenue, governments would not function in their essential duties of defence, justice, public works and public institutions that facilitated trade (as the USA soon found out).

His last paragraph in Wealth Of Nations was to recommend that:

“Great Britain should free herself from the expence of defending those [colonial] provinces in time of war, and of supporting any part of their civil or military establishments in time of peace, and endeavour to accommodate her future views and designs to the real mediocrity of her circumstances’ (WN V.iii.92: p 947; Edwin Canaan, 1937 edition, p 900, Random House).

Unfortunately, but probably inevitably, his advice was disregarded by all British governments, despite the great opportunity that the loss of the British colonies presented them with, enabling them to abandon the goal of Empire, world roles of imagined glory and unilaterally assumed responsibilities, refrain from embarking on fresh continental wars and from keeping old colonies, Canada, Caribbean, and not to embark on adding new colonies (Australia, 1788), Africa, India and Asia, and continuing with an ever deeper mercantile political economy, all refuted by Smith in futile detail in Wealth Of Nations.

‘Free trade’ was never a ‘hoax’ on Smith’s part. His thinking was ignored in practice, though his memory is only lauded in a theory he did not condone. That is measure of the British national tragedy right into the 21st century.

Markets and Morals

Mike Masnick writes on the market in techdirt (HERE):

“Free Market Capitalism, Moral Character And Doing Good All Work Hand In Hand” - from the can-we-get-over-this-already? Dept."

“I've never quite understood the complaints of some that free market capitalism somehow goes against morality or good deeds. As we've discussed in the past, moral questions shouldn't even come up at all in scenarios where everyone is better off. Moral questions only arise in scenarios where some are worse off and some are better off, and a decision needs to be made about who is worse off and who is better off. The nice thing about free market capitalism is that it tends to increase the overall pie, allowing a much larger number of people to be better off, and tends to do so in a more efficient manner than other systems…

… But, still, there are some who suddenly question whether or not the free market takes away a moral backbone -- but the only situations in which that would clearly be true are in cases of either outright fraud, or where you're dealing with a zero-sum game. In an economy that has the potential for growth, then one should encourage more growth to increase opportunities for everyone. There may be additional moral questions later concerning overall allocation, but increasing the wider opportunity, which is exactly what free market capitalism does, seems ridiculous to question.

In the end, it seems that some have this odd guilt associated with money -- as if because one person has made a lot of it that it somehow takes away from others. That's simply not true. Adam Smith, who wrote the original book on free market capitalism, The Wealth of Nations, only did so after first writing a book on morality, called The Theory of Moral Sentiment. Free market economics and morality go hand in hand. To think that they're mutually exclusive shows both a misunderstanding of morality and economics.”

Comment
I quoted from the piece because it encapsulates ideas that are going the rounds at present, though the confusion about ‘profit’ is of long lineage.

Wealth Of Nations is not about “free market capitalism”, except to those who have never read it.

It is critique of an 18th-century state-managed commercial society, governed by major landowners, and provides an historical analysis of how a growing commercial economy operates in that milieu.

The separate dates of their publication, Moral Sentiments, 1759, and Wealth of Nations, 1776, mislead many commentators, who are unaware that both of Smith’s books were based on his lectures on ‘Ethics’, ‘Rhetoric’ and ‘Jurisprudence’ to students at Glasgow University in the years 1751-64 (and previously mainly to University of Edinburgh students, off-campus in a winter series of public lectures from 1748-51).

Their main ideas were developed and delivered together (and definitely “go hand in hand”) to the same students each session [Adam Smith, Lectures in Jurisprudence, 1762-3, including ‘Early Draft of Wealth Of Nations’, 1763; Adam Smith, Lectures in Rhetoric and Belles Lettres 1763, Oxford University Press/ Liberty Fund].

Adam Smith wrote about how markets worked and was not confined to only writing about ‘free markets’. In fact, he criticized the French Physiocrats, whose economic models required and assumed ‘a state of perfect liberty’ (which nowhere existed, and certainly didn’t exist in absolutist France in the 1760s):

“Mr. Quesnai, who was himself a physician, and a very speculative physician, seems to have entertained a notion of the same kind concerning the political body, and to have imagined that it would thrive and prosper only under a certain precise regimen, the exact regimen of perfect liberty and perfect justice. He seems not to have considered that, in the political body, the natural effort which every man is continually making to better his own condition is a principle of preservation capable of preventing and correcting, in many respects, the bad effects of a political œconomy, in some degree, both partial and oppressive. Such a political œconomy, though it no doubt retards more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of the bad effects of the folly and injustice of man, in the same manner as it has done in the natural body for remedying those of his sloth and intemperance.” [WN IV.ix.28: p 674; Canaan, ed 1937, Random House, p 638]

Smith did not write a treatise on a free-market economy; he did write on human behaviour – his theory of moral sentiments – but he had no illusions about the ‘perfectibility’ of men or society. He was no ideologue; no man with a mission to solve all problems.

He wrote frankly about ‘merchants and manufacturers’ (and the need never to legislate in their interests without the most careful scrutiny of their proposals), and about the limitations of the majority of the population (the labourers and their families), for as long as they remained uneducated (‘unless government take some pains to prevent it’ WN V.i.f.50: p 782), and about the landowners, who owned much and ran everything, and ‘like all other men’ (this part is often overlooked by those who quote the sentence), ‘love to reap where they never sowed’ [WN I.vi.8: p 67; Canaan ed. 1937 p 49, Random House].

Adam Smith was not writing about ‘free market capitalism’ and nothing that has happened to the governance and political economy of all societies, since his time, suggests that it would be worthwhile to pontificate on moral sentiments and modern markets as if something fundamental had changed.

People are no more nor less ‘moral’ than in Smith’s day (or in any other previous age or place) and economies are no ‘freer’ than they were in the 18th century.
If anything the State has grown from powerful governments into bigger and more powerful Governments, and they are susceptible, as they ever were, to the blandishments, false theories, and blatant sectional interests of powerful legislators and those who influence them.

That the discourse of public life is dominated by ideological assaults on the idea of freer markets, and the supposed blessings of ‘regulation’ by bureaucracies, instead of by the justice system, is a symptom of the misjudged tendency to blame markets, which are not free, for the failings from political interventions that are not capable.

Throwing good money after bad is a weakness of poor management; ever tighter regulation to cover the deficiencies of regulations that don’t work as intended is congenital to micro-regulators.

In business markets, incompetence is terminated by losses; in political regulation, incompetence is cushioned by the public purse.

An Imaginary Perspective of History

Niall Ferguson, a contributing editor of the Financial Times and the author of ‘The Ascent of Money: A Financial History of the World’ (Penguin), writes in FT.com, 27 December, HERE:

“An imaginary retrospective of 2009”

“As Adam Smith had foreseen in The Wealth of Nations, economic liberalisation had allowed the division of labour and comparative advantage to operate on a global scale.”

Comment
Er, not quite. Long before Adam Smith (genius that he was) put pen to paper, global markets operated across Europe, and from the geographical explorations of the New World, began to link up with distant lands, in their case by systematic plunder by Spain in Central America and in India and south-east Asia (Dutch, Portugal, England (Britain) and France.

Adam Smith’s account of the global links in the manufacture of the common labourer’s woolen coat (Wealth Of Nations, Book I, chapter 1) is a description of what was happening already, before a version of ‘economic liberalisation’ came into practice.

Indeed, long before anybody wrote about free economies and a large-scale roll back of legislative interventions in economic life, there was a brisk, sustained, and expanding trade between and within European countries from the 14th century, which contributed the international division of labour.

Adam Smith, as a philosopher, was an observer, not an initiator.

‘Overselling’ his role is persistent, though a relatively minor transgression on his reputation.

Of far greater importance are the daily distortions of his radical assessment of how economies work and how they may be better able to work if people, not just legislators and those who influence them, would also first observe and not then offer prescriptions to ‘improve’ what happens anyway, often without the slightest contact with what is happening now and what brought to pass the ‘fine mess we are often in’.

Adam Smith Favoured Publicly Funded Public Works

Nissim Mannathukkaren, Assistant Professor with Dalhousie University, Canada, posts on Pragotiti (‘progress and people’) HERE:

“Whose media? Which people?”

“What the urban middle classes and the elite want is not democracy but Adam Smith’s night watchman State which does nothing more than the strong and efficient protection of the life, limbs and property of the people (read the classes).”

Comment
As I mentioned yesterday, the phrase the “night watchman State” did not come from Adam Smith – he never used such a phrase; his ideas of the duties of the state went well beyond the ‘first duty’ of security – and, anyway, the phrase itself was not used until the 1850s, and then not by an adherent of Smith’s political economy.

The ‘night watchman state’ was first uttered by Ferdinand Lassalle, a firebrand, leftwing socialist, in his disparagement of bourgeois state intervention, taunting them because they did not advocate taking full advantage of the awesome state power of 19th-century European states to take over much of the commercial activities of their economies.

How then did it become associated with Adam Smith? Well, possibly, via the usual route of assimilation by those who hadn’t read their Adam Smith too closely, if at all, and from their not appreciating what he was talking about in what quick readers of Book V of Wealth Of Nations thought were his ‘modest’ proposals for government.

Defence expenditures (the first duty of the sovereign) were the largest single budget expenditure in the 18th century (the seven years war cost £125 million). It continued to rise until after the Napoleonic Wars (the on-and-off 23years war). Justice (the second duty) was also expensive, especially as the number of possible crimes codified into law rose dramatically in the last quarter of the 18th century (and led to the colonisation of Australia from 1788 for convicts).

But the real potential source of approved growth lay in the third duty, that of expenditures on public works and public institutions that facilitated commerce or were advantageous for social stability.

Roads, harbours, canals, and bridges formed a massive agenda for public expenditure and if carried out diligently would have added tens of millions to public expenditure annually for much of the next 50 years. To which, in time, would have spread expenditurs from what was called ‘police’ to city water, sewage and refuse disposal, and public health (he also suggested palliative care of leprosy victims and other ‘loathsome diseases’ in Wealth Of Nations - glimmers of a public health service?

Of public institutions, the main one was the ‘education of youth’. The public provision of ‘little schools’ in every parish (about 60,000 of them) alone would have been a massive budget line for the buildings and state subsidies of teacher remuneration, supplemented by fees charged to all parents, except the most destitute.

Smith already supported the public funding of the Royal Mint and the Post Office, plus various government inspectorates to ensure quality in certain outputs (bullion assaying; hallmarks; stamping of certain cloths, etc.,), and government officers of customs and excise, tax collectors and civil servants.

‘The dignity of the sovereign’, or the expenses of government, was a separate budget line too, and was bound to grow as governments grew larger across the economy at both national and local levels, as seen in the magnificent 19th century town halls and public buildings erected across the UK.

So, if ‘even Adam Smith’ had a large, and potentially growing, public expenditure agenda, it was consistent with his central theme that these expenditures were to ‘facilitate commerce’, and not to manage it or ‘crowd it out’, or replace it.

If anything, Smith’s admonition to his readers was to facilitate commercial markets where possible (clearly, in time, capital would become, and became, available for privately-financed, infra-structure projects), and also to utilize publicly-funded activities where necessary.

As always, Adam Smith was not an ideologue.

Postscript: a merry Christmas to all readers who catch this post today; and season's greetings to everybody else later.

Meanwhile, I have nine more exam scripts to grade ... before the usual family dinner.

A Senator Speaks...

Senator Fritz Hollings writes on “Economists and Free Trade” HERE:

“The irony is that economists learn in their very first class in school that it was a trade war which brought us our initial freedom as a country, and that semi-protectionism later helped build the United States. England started a "trade war" with the Colonies by adopting the Navigation Act of 1651 that required all trade be carried in British vessels. Manufacturing was forbidden in the Colonies, even the printing of the Bible, and then the Townsend Acts drafted by Adam Smith placed heavy import duties on a wide range of items. All of this precipitated the Boston Tea Party that started the Revolution.”

Comment
I have no comments on the general tenor of the Senator’s article – follow the link and read for yourself his views on some important contemporary issues.

However, I think the Senator may be more than a little harsh on Adam Smith’s well-known association association with Charles Townshend; more a case of Smith’s guilt by association, than a smoking gun.

Quite a lot is known about Adam Smith’s relationship with Townshend and his more important and longer relationship with Townshend’s stepson, the Duke of Buccleugh.

True, Smith worked for Townshend after resigning his Glasgow Chair on 1764 and taking his stepson, the Duke of Buccleugh, then a minor, on the normal educational tour to France that sons of gentlemen in those days enjoyed/endured as their rite of passage. This occurred in 1764-66 (November).

True, Townshend was the British Chancellor of the Exchequer, and was fated to be the author of the British policies that triggered the ‘disturbances’ that morphed into the rebellion of the British colonies in North America, followed by the successful foundation of the United States of America.

True, Adam Smith from November 1766 to March 1767 was in London and was consulted by Townshend on taxation policies that might redress the enormous debts that Britain had incurred in the various wars with France (the seven-years war cost £120 millions in defence of the £20 million a year trade between the colonies and the mother-country).

But Adam Smith’s contributions to Townshend’s thinking were largely, if not totally, confined to the creation of a ‘sinking fund’ to pay down the national debt to more manageable proportions (see Townshend’s letter to Smith, December 1766, pp 328-34, Correspondence of Adam Smith, Liberty Fund, 1987).

True, Smith agreed with the principle that the colonies should contribute to British taxation (as did Benjamin Franklin) as equity suggested. The issue for the parties involved was what kind of taxation and how much, and who decided the details?

For Smith, there were certain maxims of an equitable taxation system that were relevant, accepting the principle that government must be funded to conduct their main duties, which Smith set out in Wealth Of Nations (defence of the people against invasions; defence of the people against neighbourly injustices; public works to facilitate commerce and public institutions to facilitate the education of the youth; and financial support for the ‘dignity of the sovereign’, or what today we call the legitimate expenses of government.

That he recommended the standard ‘maxims’ of taxation that were commonly known in his day, if not always practised, in his day (as set out in Book V of Wealth Of Nations). Townshend’s taxes that he imposed on the colonies did not conform to the maxims alluded to by Adam Smith; it is, therefore, most unlikely that Adam Smith agreed to support the imposition of Townshend’s tax plans, let alone that he ‘drafted’ them as the good Senator asserts.

But there is a more telling evidence, beyond speculation, of Smith’s hostility to legislators being the private beneficiaries of their legislation, such as was the case of Townshend’s imposed taxes in the colonies; the ‘tea taxes’, for instance, were imposed on the colonies on tea imported under the monopoly of the East India Company.

The history and contemporary behaviours of the East India Company, excoriated heatedly by Adam Smith in Books IV and V of Wealth Of Nations made absolutely no concessions to excuses from the officers and speculators associated with its management of India, which made it impossible that he would be associated with any such suggestions because Charles Townshend was one of the prominent speculators active in the shares and business of the East India Company, a fact well-known in public affairs and public comment.

Smith left London in March 1767 for Edinburgh; the Townshend taxes were introduced into Parliament in June 1767, and they evetually provoked rebellion. We know of Smith’s interest in American affairs and where his sympathies lay.

He accepted in Book IV of Wealth Of Nations the right of the colonists to representation in parliament if they were taxed by it (he discusses his recommendations of parliamentary union with the colonies at WN IV.viii.c.75: pp 622-34; Canaan 1937 edition, pp 587-8).

In effect, Smith reversed the colonists’ demand of ‘no taxation without representation’, into ‘no representation without taxation’.

But by the time that Wealth Of Nations was published in 1776, events had moved on from protest towards rebellion and, in my view (explained more fully in my Adam Smith: a moral philosopher and his political economy, 2008, Palgrave Macmillan), was a major reason why he carefully avoided writing on American affairs, particularly after its ‘revolutionary’ (for the 18th century) constitutional developments.

He went further; his promised book on how civil governments ‘ought’ to be directed or the ‘theory of jurisprudence’, which he constantly assured readers right up to his death in 1790, would be completed, never appeared and, in fact he had the manuscript burned a few days before he died.

Indeed, he deliberately sought and lobbied influential friends, including the Duke of Buccleugh, to use their ‘interest’ (influence) to persuade the Prime Minister to appoint him as a Scottish Commissioner of Customs in 1777-8 and then used the excuse of how busy this made him to avoid undertaking the necessary work to complete his manuscript.

The records, minute books, and correspondence of the Customs Commission show Smith intimately involved 4-days a week on this work from 1788 until a few weeks before he died in 1790.

To publish a major theory on jurisprudence without discussing the developments in the former British colonies was neither possible nor politic.

Smith was a moral philosopher who taught, wrote and observed the necessity for the maintenance of the distinction of ranks for stable societies, including constitutional monarchy. For him to publish anything that would allow legislators, and those who influenced them, on behalf of mercantile promotion of their monopolies, protectionism, ‘jealousy of trade’, and everything else he opposed in Wealth Of Nations (for they surely would, and did in 1793, after he died in 1790) would be to make it too easy for them continue their perfidious influence, which, in Smith’s often stated view, held back the spread of opulence to the poorest majority in British society. These were his lifetime objectives and not any allegedly abstract principle of 'laissez-faire' (which he never mentioned) and pure free trade, which qualified several times - Smith was not a 'man of system .. wise in his conceit' (see Moral Sentiments, TMS VI.ii.2.17: pp 233-4); he was not an ideologue.

Therefore, the unjust attack on Adam Smith’s authentic role in the run up to the rebellion of the British colonists in North America is cheap political rhetoric from a US Senator (‘Sir’) and it is contrary to the historical evidence.

Adam Smith on Experts and Celebrities

An anonymous author of ‘Politics we believe in’ posted in RomeSentinel.com (‘serving Onieida county in the heart of New York state’) HERE, which reads like a manifesto (or, in extremis, to be like a recitation of a creed). It contains this sentence:

‘We believe Adam Smith’s abiding suspicion of anyone who claims special privilege or expertise.’

Comment
I understand the mood implied in this statement, especially in the context of the rest of declaration, and I can think of several places where Adam Smith expressed thoughts that could contribute to a manifesto writer to summarise them into the quoted sentence. But there is something – I know not what off hand – that is either missing or is left out.

Smith wasn’t too impressed by some examples of men of privilege – ‘vile rulers of mankind’ and he mocked the awe directed at what we describe today as ‘celebrities’, a far wider social phenomenon in the 21st century than was common among the narrower confines of 18th-century aristocratic society.

Smith's mocking tone was relieved by his observations that such popular reverence about the trivia of the daily lives of the ‘rich and powerful’ was a necessary part of the ‘distinction of ranks’ in a stable society (TMS I.iii.2: ‘Of the Origin of Ambition, and the distinction of Ranks’). Of course, in republican America there is little if any similar distinction of ranks based on birth and family lineage than was commoner in the centuries that preceded the foundation of the USA, but i the USA (and elsewhere) there is no mean application of the ‘celebrity’ culture of ‘wealth and fame’ among popular attitudes.

As a scholar, Adam Smith respected ‘expertise’ – his praise of thsoe who demonstrated it is not uncommon for distinguished ‘men of letters’ throughout his books.

Again, at the same time, he was also given to writing withering criticism of those who presumed (like sovereigns, statesmen, legislators in ‘councils and senates’, and those who influenced them, such as scheming ‘merchants and manufacturers’) that they knew better what people wanted, or how they should go about their lawful business, and who attempted to exercise ‘an authority which could safely be trusted … to no single person’ and would ‘be dangerous’ in ‘the hands of a man who had the folly and presumption’ to ‘fancy himself fit to exercise it'. (WN IV.ii.10: p 456)

Adam Smith was not a ideologue. Firm statements he made about many things often had a modifying qualification to go with it. Societies, Smith knew, are complex, not absolutes. And no student of history, of which there is a dearth in our generations, can fail to appreciate the quiet wisdom of Adam Smith as set against slight caricatures of him, even when meant in the best of sense as in the author while ‘serving Onieida county in the heart of New York state’.