Chinese Premier Wen Almost CertainlyHas Read Adam Smith

In Stephen’s Posterous (HERE):

Financial Times Editor Lionel Barber (LB) interviews Premier Wen of Chen (full text):

"LB: Premier Wen, I realise we’re running short of time. I had my own quote from the Theory of Moral Sentiments.

WJ: Well, I think for quite some time this book has not attracted due attention or attention that it deserves. I think it is as important as The Wealth of Nations. He made a reference to the invisible hand only on two occasions in these books. One, he refers to the market; the other, he talks about the morality. And please go ahead with your quote.

LB: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others and render their happiness necessary to it, though he derives nothing from it except the pleasure of seeing it.”

WJ: I think this is very well said, and I have been reading the book and this book I carried with me in my suitcase on the trip.

LB: Thank you very much for agreeing to talk to the Financial Times. It’s been very enlightening.
WJ: Thank you."

Comment
The full interview is most interesting and you should follow the link and read it.

I selected the reference to what Premier Wen said about Moral Sentiments and Wealth Of Nations becuase other claim to carry a copy of one of them around too (I believe Gordon Brown also makes this claim).

Of course, many select the first paragraph of Moral Sentiments to quote, thus safely giving the impression that have read it all. But what is interesting and signifcant in my mind is that Premier Wen probably has read both books because he says:

"He [Adam Smith] made a reference to the invisible hand only on two occasions in these books. One, he refers to the market; the other, he talks about the morality."

Now most people don't appear to know this fact of the singular reference to 'an invisible hand' in each book, and even fewer would fiferentiate between the use in Wealth Of Nations and its use in Moral Sentiments. Many economists - too many - appear to believe that Wealth Of Nations is riddled with references to the metaphor of an invisible hand and they talk was if there is absolutely no doubt that Adam Smith had a 'theory' of the invisible hand applied to his writings on how markets work.

The fact is he didn't have such a theory nor does he use the metaphor in refernce to how markets work (see Book I and II, in which Smith does not use the metaphor.

Premier Wen accurately stated Smith only used the metaphor once each in both books. That suggests that he has read both books and is more familiar with Smith's use than most Western economists.

True, he links the use in Wealth Of Nations to the market and, in my view, that is incorrect, but I think the realisation that Premier Wen has done what he says he has done is most encouraging, and it remains a bit of a shame that we cannot celebrate the same for the majority of economists, who arrogantly tells us what Adam Smith was about, from sadly, a position of real ignorance.

Congratilations Premier Wen.

A Premier Speaks, Quoting Moral Sentiments

This is a story about Wen Jiabao, the Chinese Communist premier, contributed to by Lionel Barber, Geoff Dyer, James Kynge and Lifen Zhang writing in the Financial Times (UK), quoted in the Irish Times.com (Dublin) (HERE) is worth reading:

“Wen gives short shrift to those who blame fiscal crisis on China”

“AN ECLECTIC reader, Wen says that when he travels he always carries a copy of The Theory of Moral Sentiments by Adam Smith, the Scottish economist, which lays out the moral underpinnings for governing societies – and market economies.

“Adam Smith wrote that in a society if all the wealth is concentrated and owned by only a small number of people, it will not be stable,” he says.

It is an observation that holds just as well for the crisis-ridden US as it does for China, with its skewed model of development and rising inequality.”

Comment
Great to see that a Chinese communist is reading Adam Smith’s Moral Sentiments, if only to wrong foot capitalist leaders who haven’t read Moral Sentiments, or even Wealth Of Nations.

Of course, in having a go at inequality in capitalist countries, Wen, slides over the vast discrepancies in China, both economically, and overwhelmingly in political power, between the cadres of the Chinese Communist party, who double as high functionaries of the State, and the vast majority of the poor, especially in the countryside.

I don’t recognize the paraphrased comment Wen gives, allegedly from Moral Sentiments, which is about the virtues and proper behaviour of individuals, but I am more than willing to give allowance for a translation from English into Chinese and then back into English.

It may be taken, also, as a warning to China's own entrepreneurs in its stae-capitalist economy, that domestic inequality may only go so far before the State steps in with confiscatory taxation, if not outight expropriation, at some point.

One feature of Chinese State-Capitalism that may inhibit such drastic measures is the close integration of many members of the Communist Party and State bureaucracy with the domestic capitalist entrepreneurs at all levels, though that may not save foreign capitalist firms from discriminatory measures.

Wen’s response to questions about the causes of the current financial crisis are well worth reading (follow the Link).

Its Called Scare Marketing and Adam Smith Knew Why

Paul Midler in Forbes.com writes (26 July):
“Dealing With China's 'Quality Fade'

“If Adam Smith were around today, he would have had to write a separate chapter on global outsourcing. Because it takes importers a long time to find suppliers and to get them up to speed, importers keep their suppliers a secret. The last thing that an importer wants to do is let his competitors know the source of any supply chain advantage he may have. Even when it is in their collective interest to share information, importers keep to themselves.

As a result, factories pay little, if any, reputational cost for production shenanigans. The invisible hand doesn't work well when the manufacturers themselves are unseen.”

[Paul is the founder and president of China Advantage, a services firm that provides outsourcing and supply chain management to U.S. and European companies. He has been involved with China for more than 15 years, and in the course of his manufacturing career, has had dealings with thousands of Chinese factories.]

Comment
As expected an article in Forbes is authoritative and worth reading. And this one is no exception. It is about the perils for US businesses which source off-shore in China. Problems of quality are among the topics and the usual effect of growing trade on improving quality does not work quite like it should. Because US firms keep their import sources secret, a poor-to-bad quality Chinese supplier is not penalised by publicity; it just changes its customers and carries on producing shoddy goods.

US businesses in these conditions need reliable information about the quality standards of Chinese manufacturers, and the author of the article is in that business, running 'China Advantage’. Fine; that’s a useful service and deserves its market niche.

My problem is with the obligatory paragraphs on Adam Smith. That aims to hit the readers'‘recognition’ buttons, fair enough, but happens to be unwarranted. Would Adam Smith need “to write a separate chapter on global outsourcing. Because it takes importers a long time to find suppliers and to get them up to speed…”?

If you think about it, Wealth Of Nations would have to contain a lot of new chapters because the world has moved on through European imperialism, the industrial revolution, the communist failed experiments, and such like. But even in outsourcing, why would it need a new chapter?

Trade over large distances – and trade within Britain in mid-18th century was truly 'distant' – it took three weeks to travel by ‘road’ from Edinburgh to London, which is as long as a factory-to-factory cargo from China to the mid-west or California.

Smith wrote about these and related problems and the perils of distant, including foreign, trade in Wealth Of Nations. If the author had read all of the chapter from which he borrows the metaphor of the ‘invisible hand’ (WN IV.ii. ‘Of Restraints upon the Importation from foreign Countries of such Goods as can be produced at Home’, pp 452-72), he would have found plenty of comments about the risks, perils and costs of what is called today ‘outsourcing’, a word invented and promoted by those who oppose foreign trade (also known as competition) among businesses, trade unions, tv demagogues and those who fear they are about to fail to be elected.

Hence, when the authorwrites: “The invisible hand doesn't work well when the manufacturers themselves are unseen…”, he misses the reason why domestic merchants prefer the home to foreign trade which was discussed by Adam Smith:

“In the home trade his capital is never so long out of his sight as it frequently is in the foreign trade of consumption [importing]. He can know better the character and situation of the persons whom he trusts, and if happens to be deceived, he knows better the laws of the country from which he must seek redress.” (WN IV.ii.6: p 454)

To which part of that sentence would the author add something different? Of course, he could expand it (as I could) but Wealth Of Nations does not need expanding!

A US manufacturer buying in Chinese manufactured parts (computer chips) and being sold duff products, will soon know if her computers don’t work, because her customers will tell her, the trade press will report her quality problems and her customers’ suppliers will cancel orders.

Secrecy about her Chinese supplier becomes irrelevant at the most important level; the US business woman’s loss of business, perhaps terminally. If her testing procedures were operating properly (‘what do you mean she hasn’t got any?) that batch of chips, or whatever else it consists of, would have been rejected.

Similarly if Chinese manufactured chairs collapse, or items do not survive their first wash, or customers suffer from toxic poisoning, or for that matter, US based suppliers act similarly selling down the road or across the states, the US manufacturer suffers legal redress from its customers, plus loss of business.

I think I shall put this author's article down to ‘scare marketing’ of his excellent services. US firms looking at foreign supply chains would do well to call on his services if they are embarking on outsourcing in China, or his equivalents in Indian or European outsourcings. They would be wise also to check carefully a local outsource supply across town. Its called ‘due diligence’ and you don’t need to read Wealth Of Nations to know this in business, though if you do, you’ll find references to it.

PS: There are no invisible hands in markets (see archives for plenty of explanation of Smith’s use of the metaphor).