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

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

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

Introductory link reminder:

“There is no doubt that the popular (and academic) portrayal of the lifetime-works of Adam Smith is quite at odds with the actual contribution of the Adam Smith born in Kirkcaldy in 1723. It’s as if a completely new persona was invented bearing limited resemblance to him or his surviving works (sometimes referred to on Lost Legacy as the 'Chicago Adam Smith').

I sometimes wonder if anything similar happened to other historical figures from the ancient worlds of Greece and Rome, as it did spectacularly in the case of Jesus, and the thousands who stand out in the great Pantheon of those who are known to us today for their places in the history of human endeavour.

We have The Glasgow Edition of The Life and Correspondence of Adam Smith, from Oxford University Press (and the low cost Liberty Fund editions): The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth Of Nations, plus his extant essays, The History of Astronomy (1744-<1758) and Origins of Language (1761). To these we have surviving student notes of his lectures, Jurisprudence (1762-63) and Rhetoric and Belles Lettres (1763), plus the surviving Correspondence of Adam Smith, and, most important, the definitive biography, The Life of Adam Smith (1996, 2nd ed. 2010) by Ian S. Ross.

We ought, therefore, to be pretty sure as to what constitutes Adam Smith’s oeuvre, but instead of his works being a model of original scholarship, it is riven by contrary, incompatible, and mutually exclusive opinions as to what he wrote and what he meant, much of it advanced by scholars of indisputable integrity.

However, there is even considerable public doubt as to the exact words he used to express his ideas, despite the ready availability of all of his works to whomsoever wishes to consult them – sadly, many scholars pontificate with the certainties of the highly opinionated, who clearly have not read his works for themselves or have forgotten what they must have read years ago.

Now, something must have happened in the 219 years that separate Smith’s life from today. It’s not all down to scholarly slackness. Ideas about the past, and the people who lived through them, do not form in a vacuum. Adam Smith – contrary to trite media assertions – did not write his books as veritable bibles; he was not the ‘high priest’ of economics; he did not ‘invent’ capitalism; nor was he the manic believer in ‘laissez-faire’, and other similar nonsense (Smith neither of the words ‘capitalism’, nor ‘laissez-faire’).

Readers influence the accepted meanings of what an author writes (see, for instance, Willie Henderson, Evaluating Adam Smith: creating the wealth of nations’, 2006, Routledge). Smith's readers are no exception, and because Adam Smith’s name is often quoted (excessively so today) in support of, or as the problem of, current controversies in the (mis)management of economies, it adds to the intellectual – and popular – confusion as to what credence should be given to this or that declamation on one side of the other of those making the noise of interested faction in this first decade of the 21st century.

Lost Legacy readers will know that I am researching the origins of the spread of the notion of an actual (or metaphorical) “invisible hand” in the teaching of economics since the 1940s. From that teaching came forth consequential policies in business and government as students graduated and entered the “ordinary business of life”, and applied their teachers’ wisdom, either within society generally or in their own teaching careers, and inadvertently spreading a conceptual virus like the biological kind.

Earlier last year, I discussed Steven G. Medema’s excellent, The Hesitant Hand: taming self-interest in the history of economic ideas (Princeton University Press), which covered a slice through history from Adam Smith to 20th-century welfare economics. This fits well with the book by Murray Milgate and Shannon C. Stimson, which sweeps through the first hundred years from Adam Smith to the end of the 19th century.

It short, Milgate and Stimson have studied how the “grand ideas” that are attributed to Adam Smith are “as much the product of the gradual modifications and changes wrought by later writers”, such that we “are much the heirs of later images of Smith as we are of Smith himself”. I concur with Milgate and Stimson in this commentary on their book."

I, and many readers, living through the last half of the 20th century, during which “the gradual modifications and changes wrought by later writers” on the unchanged original exposition of the ideas of Adam Smith sleep in pristine innocence in his texts. Therefore, we can compare and contrast his original ideas with the “later images of Smith”, which are often a long way from those written by “Smith himself”.

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

Commentary No. 3:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Adam Smith On Education and the Division of Labour

Michael Robbins writes in digital emunction (“I refer to largesse in thought HERE:

“Best books of the year. A mug, a game. Benjamin Schwarz predictably plumps for biographies & Alice Munro, while Amazon readers appear to be, in Adam Smith’s words, “as stupid and ignorant as it is possible for a human creature to become . . . 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.”

To which I was about to leap in and place Smith’s assertion in context by providing the full paragraph from Wealth Of Nations:

“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.e.50: 782).

Moreover, to understand what Smith was up to it is necessary to see his comments on the effects of the division of labour as in reality as part of his belief in the importance of education provision, especially of the children of the poor majority of the families of labourers and their wives. So many speedy readers of Wealth Of Nations, searching for ammunition against the division of labour and commercial society, link the above paragraph directly to the division of labour and assert that Smith had reservations about the phenomenon of the division of labour that had raised living standards and technology well above those experienced by the remaining peoples in the Americas, Africa, and parts of Asia, who were limited to living of the fruits of the forest and small animals that lived there. But read this paragraph from the summary of the need for a nationwide programme on education:

“The same thing may be said of the gross ignorance and stupidity which, in a civilized society, seem so frequently to benumb the understandings of all the inferior ranks of people. A man without the proper use of the intellectual faculties of a man, is, if possible, more contemptible than even a coward, and seems to be mutilated and deformed in a still more essential part of the character of human nature. Though the state was to derive no advantage from the instruction of the inferior ranks of people, it would still deserve its attention that they should not be altogether uninstructed. The state, however, derives no inconsiderable advantage from their instruction. The more they are instructed the less liable they are to the delusions of enthusiasm and superstition, which, among ignorant nations, frequently occasion the most dreadful disorders. An instructed and intelligent people, besides, are always more decent and orderly than an ignorant and stupid one. They feel themselves, each individually, more respectable and more likely to obtain the respect of their lawful superiors, and they are therefore more disposed to respect those superiors. They are more disposed to examine, and more capable of seeing through, the interested complaints of faction and sedition, and they are, upon that account, less apt to be misled into any wanton or unnecessary opposition to the measures of government. In free countries, where the safety of government depends very much upon the favourable judgment which the people may form of its conduct, it must surely be of the highest importance that they should not be disposed to judge rashly or capriciously concerning it” (WN V.i.f.61: 788).

In this light, Smith addresses his readers – the educated minority in 18th-century Britain, mainly in the ‘middling’ and ‘superior’ ranks of society – with, in effect, a final reason if they remain unconvinced of the case he has made on its own merits, for which the government would have to udnertake substantial expenditure, with a final reason for agreeing to action now:

‘your safety in turbulent times depends on your having provided for the education of the ‘inferior’ ranks as a barrier to these people being led astray by ‘enthusiasts’ and malcontents.’

However, I casually read the comments below Michael Robbins’ post and found, first, this comment from “Henry”:

“I take it the Adam Smith quote is something of a joke. But why does the discussion of what people read so often have to start off on this note of snobbery & disdain? It turns me off immediately, so that I no longer care what you like to read.”

Plus a correct response from Michael Robbins:

“Well, now, Henry, if you’d read the Smith in question, you’d know he’s not being snobbish at all, but denouncing the conditions that lead to such ignorance. I don’t see how regretting that people read Dan Brown & Glenn Beck is snobbish, either: it simply is a regrettable fact, objectively.”

To which I can only say: it pays to read the whole article and any associated comments, before assuming that their authors have got it wrong!

Michael Robbins hasn’t got it wrong. He was using his selection from Smith’s quotation to provoke a post like that of “Henry”, which worked.

Well done, Michael!.

[I hope my additional selection from Wealth Of Nations added some value to Lost Legacy readers.)

Samuel Johnson's Early Observation of the Division of Labour

ELIZA GRAY (a Bartley Fellow) writes for the Wall Street Journal:

“Samuel Johnson and the Virtue of Capitalism: The great 18th century writer on commerce and human happiness.”

HERE:

“He was even more struck by the contrast between places where markets thrived and those where they didn't. In Old Aberdeen, where "commerce was yet unstudied," Johnson found nothing but decay, whereas New Aberdeen, which "has all the bustle of prosperous trade," was beautiful, opulent, and promised to be "very lasting."
Johnson also understood that what Smith would later call the division of labor was instrumental for human happiness and progress.

"The Adventurer 67," which he wrote in 1753 at the height of a commercial boom (and 23 years before Smith published "The Wealth of Nations"), delights in the sheer number of occupations available in a commercial capital like London. The insatiable demand for the most specialized goods and services means employment for anyone who wants to make a living: ". . . myriads [are] raised to dignity, by no other merit than . . . contributing to supply their neighbors with the means of sucking smoke through a tube of clay."

"[E]ach of us singly can do little for himself," he wrote insightfully, "and there is scarce any one amongst us . . . who does not enjoy the labor of a thousand artists." He also saw the market as the only mechanism by which the diversity of human desires could be satisfied: "In the endless variety of tastes and circumstances that diversify mankind, nothing is so superfluous, but that some one desires it . . ."

Johnson described what today we would call the capitalist system. Of course, the term "capitalism" was unknown in his day (though "capitalist" was; Johnson pithily defined it in his dictionary as "He who possesses a capital fund"). Also unknown to Johnson was the notion of "ideology." Rather, what he wrote was drawn from observations and reflections on human nature as he saw it—a nature that always aspired for more and better and (when properly instructed) nobler things. That nature is still with us, as is the economic system that Johnson observed is best adapted to it. Our latter-day moralists shouldn't lightly throw it away.”

Comment
Eliza Gray supplies a gem of which I was not aware and which may be of interest to lecturers seeking new angles for jaded Econ 101 lectures and writers looking for good references to identifiable names like Samuel Johnson who said something interesting in the context of basic economics.

Of course, the contrast between bustling London in a boom and the daily life of contrasts in Old and New Aberdeen, let alone the desperately poverty-stricken Western Island communities in mid-18th century Scotland, is stark and shocking.

Those moderns contemplating – nay, evangelising in favour of - a return to local, self-sufficient economies in place of modern, global capitalism, may wish to take on board the realities of what such a return would mean, including the need to liquidate 2-3 billion humans to make it happen. Never has mass murder on such an unprecedented scale been advocated by so plausibly nice campaigners as one finds among environmentalists (though, true, some of them really are weird).

But Johnston’s point surely stands.

A small caveat about Eliza’s reference to Adam Smith includes the fact that he never claimed to have been the first to in any way to notice the division of labour. He makes the point en passant in Wealth Of Nations that the phenomenon “has been very often taken notice of”; he didn’t claim to discover it. (WN I.i.3: 14).

Moreover, Johnson’s acute observation was reported in 1753 which Eliza notes was “23 years before Smith published ‘The Wealth of Nations’”, implying for casual readers of WSJ that Johnson identified the division of labour before, by a country mile, Adam Smith. However, Smith lectured on society’s economic subjects from his time in Edinburgh (1748-51) and then in Glasgow (1752-64).

He stoutly defended his early record in his lectures in an enigmatic paper (since lost) read by Dugald Stewart in his eulogy to Adam Smith in 1793 at the Royal Society of Edinburgh. Known as the ‘1755’ paper, it contained this in it:

“A great part of these opinions .. enumerated in this paper is treated at length in some lectures which I still have by me … They have all of them been the constant subject of my lectures since I first taught .. the first winter I spent in Glasgow, down to this day, without any considerable variation …[and were] the subjects of lectures which I read in Edinburgh the winter before I left [1750-1]…”
[Quoted in Ian S. Ross, The Life of Adam Smith, 1976: p 108, Oxford University Press – a second edition is to be published in 2010.]

We know also from the student notes, published as Lectures on Jurisprudence (Oxford University Press, 1978), of Smith’s lectures in 1762-63, that his chapters in Wealth Of Nations on the division of labour are almost verbatim from his Glasgow lectures (see for example, lecture for 5 April, 1763: pp 355-6).

In short, the 23 year gap, if there is one, is considerably shortened and the analytical detail gone into be Adam Smith considerably advances to acute observations of Johnson.

Still, economists should be grateful to Eliza Gray for her reporting the early recognition of the benefits of specialisation in mid-18th century Britain.

Uncovering Crucial Aspects of Smithian Growth Theory

Tim Hartford, author of a new book (7 August) ‘Dear Undercover Economist’ (Little Brown), who blogs at the ‘Undercover Economist’ blog HERE, also writes a regular column at FT.com HERE: , yes a busy underground economist too (but then he is good at what he does).

Try this for example:

“Why getting complicated increases the wealth of nations”

One of the defining characteristics of the modern economy is that it’s awfully complicated. Even a fairly humble product such as a shirt might incorporate cotton from west Africa, oil from Indonesia to make the polyester in the button (manufactured in China), and designs sketched out by an Italian using American computer software.”

Comment
Tim paraphrases Eric Beinhocker, author of The Origin of Wealth, quoting Brad Delong’s (www.J-brad-delong.net)
calculation of the relative balance of access to product complexity of tribes people among the Yanomamö living by the Orinoco River compared with the New Yorker tribes people living by the Hudson River. Brad estimated the ‘income’ gap as $90 for the Yanomamö compared to $36,000 for the New Yorker.

Putting this into product complexity terms and using the retailer’s Stock-Keeping Units’ measure (SKUs) of access to available product types, this equates to a few hundred – several thousand at the most generous estimate – SKUs available to the Yanomamö tribes compared to several ‘tens of billions’ available to New Yorkers. See Beinhocker, E. D. 2006, The Origin of Wealth, Evolution and Complexity and the Radical Re-Making of Economics, Harvard Business School Press, Boston, pp 8-11 [Recommended, but ignore Beinhocker’s quoting the myths about Adam Smith’s ‘invisible hands’].

“This would probably not have surprised Adam Smith, who emphasised the importance of specialisation as a source of the wealth of nations. Specialisation and complexity are closely linked: an economy with more specialists is one that requires more teamwork and more distinct interactions between individual activities.”

Comment
Adam Smith most certainly would not have been surprised.

Consider the issues raised by the complexity and abundance of SKUs of high significance in Adam Smith’s treatment of the division of labour and its necessary entwining with complex specialisation.

While the ‘pin making’ example in Wealth Of Nations has achieved world-wide recognition (though its accuracy is under challenge from the French economist, Jean-Louis Peacelle; see his 2006 article: ‘Adam Smith’s use of multiple references for his pin-making examples’, European Journal of the History of Economic Thought, 13:4, pp 480-512), the far more significant attention that Adam Smith gave to the manufacture of the labourer’s common woolen coat in Wealth Of Nations (WNI.11: pages 22-23) is almost totally neglected today.

Yet, Smith identified the complexity issue long before it attracted much attention until recently. I compiled a small table (in my Adam Smith: a moral philosopher and his political economy, 2008, Table 6.1, page 106, Palgrave Macmillan, Basingstoke) to illustrate Smith’s insightful realisation of the importance of comparative complexity for relative wealth experience in different economies, and indirectly why some economies are wealthy and other poor, from observation of:

‘the accommodation of the most common artificer artificer or day-labourer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation. The woollen coat, for example, which covers the day-labourer, as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! how much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them. Were we to examine, in the same manner, all the different parts of his dress and household furniture, the coarse linen shirt which he wears next his skin, the shoes which cover his feet, the bed which he lies on, and all the different parts which compose it, the kitchen-grate at which he prepares his victuals, the coals which he makes use of for that purpose, dug from the bowels of the earth, and brought to him perhaps by a long sea and a long land carriage, all the other utensils of his kitchen, all the furniture of his table, the knives and forks, the earthen or pewter plates upon which he serves up and divides his victuals, the different hands employed in preparing his bread and his beer, the glass window which lets in the heat and the light, and keeps out the wind and the rain, with all the knowledge and art requisite for preparing that beautiful and happy invention, without which these northern parts of the world could scarce have afforded a very comfortable habitation, together with the tools of all the different workmen employed in producing those different conveniencies; if we examine, I say, all these things, and consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilized country could not be provided, even according to what we very falsely imagine, the easy and simple manner in which he is commonly accommodated.”

Tim recognises that identifying complexity, or ‘round about’ supply chains “is not the way that most economists think about what makes countries rich. It is not that they disagree, simply that they tend to focus on more easily measurable aggregates, such as the total stock of capital and labour.”

To which we could lay a heavy responsibility on ‘most economists’ for their modern notions as to what is important in their subject area. By neglecting the appropriate starting point of their inquiries – such as, Wealth Of Nations, for example, they became fixated with “more easily measurable aggregates, such as the total stock of capital and labour”, and cannot see the wood for the trees (or vice versa!), or, if you like, the are still looking under the lighted lamp-post and not in the darker alley.

If you consider Allyn Young’s seminal article in the Economic Journal, 1928: (‘Increasing returns and economic progress, vol. 38: pp 527-42; available HERE:), you will see how the complexity of the supply chain and the increasing sub-division of specialised production right-along the chain, mainly quite independent of the final destination of the complex products, makes possible the ever widening abundance of SKUs that become available to their populations.

Smith noticed this in his concluding paragraph in Wealth Of Nations, Book I, Chapter 1: pages 23-24:

“Compared, indeed, with the more extravagant luxury of the great, his accommodation must no doubt appear extremely simple and easy; and yet it may be true, perhaps, that the accommodation of an European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages.”

Tim Hartford’s article should be read to see how he links this Smithian view to modern differences among exporting countries active in world markets today. It is well worth reading.

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.

Not Quite Accurate About Wealth Of Nations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Adam Smith on Exchangeable Value

Art Carden, assistant professor at Rhodes College, who teaches, inter alia, 'Classical and Marxian economics', and posts today on “David Harvey on Karl Marx”, on the authoritative and excellent economics blog, Division of Labour, HERE:

Less interested in Karl Marx, I noted this interesting paragraph:

“In fairness to Marx, he derived his erroneous value theory from Adam Smith and David Ricardo, but in fairness to the classical economists, they did not try to build an entire theory of history and social change on so sandy a foundation as the proposition that labor alone is the source of value. As I read Adam Smith, his endorsement of the "obvious and simple system of natural liberty" does not derive from his value theory".

Comment
In this statement we see the drift in meaning that led to both the Ricardo-Marx error, which was picked up by the modern economists on its own terms and continued the drift, until we are no longer talking about the same things.

Smith’s ‘exchangeable value’ became ‘value’, as if the two are synonymous and value is something ‘intrinsic’ (a misreading that even Oscar Wilde didn’t realise).

Admittedly, Smith wrote a muddled presentation of his basic ideas and it takes some effort to disentangle them. I have a draft paper on my disentanglement which I must finish sometime soon.

The idea of ‘exchange value’ is central to Adam Smith’s analysis of commercial society and how it evolved from the time when humans were predominantly, even exclusively, gatherer-hunter/scavengers. There was no idea of property except in the ability of humans to ‘pick fruit’ (which Smith erroneously dismissed as ‘hardly imployment’ in his Lectures on Jurisprudence, 1762-3) and to track and kill animals, in the forest and open land owned by nobody. There were no landlords or stock holders, or tax collectors, with whom they shared the fruits of their gathering or hunting.

Smith looked for a basis by which the products of the labour of people could be exchanged freely among them (summarized in his ‘beaver and deer’ parable in Lectures on Jurisprudence 1762-3, and reproduced in Wealth Of Nations, 1776).

He deduced exchange value as being the labour time taken to acquire products for exchange. It was in exchange that products acquired their exchangeable value; outside exchange, products did not have value in any intrinsic sense. The word ‘exchangeable’ is important because it defines value related to the act of exchange, and not to some notion of common views of their ‘intrinsic’ value. That was the extent of his pure theory of exchange value in the first age of mankind.

But beyond the forest, when humans settled in permanent locations and when ‘herding’ wild animals and gathering plant food in relative abundance from accidentally or deliberately farming the land, property was extended from the labour of people to the ‘ownership’ of land and all that was on it. With property human life changed for ever.

It did not matter whether property was held in common by the band or larger tribe, or ‘nation’ of tribes, or by the head of a family, or by private individuals. Property was held by the ‘what we have, we hold against all comers’ basis, which became the first ‘law’ of human society, enforced by those strong enough to enforce it.

In those parts of the world where property emerged in land and resources, separate from the labour of producing them, about 11,000 years ago initially, and then spread, the new property relations set the necessary conditions for permanent settlements with their growing populations able to reap (unequally) the benefits of growing productivity through exchange relationships fostered by specialisation and divisions of labour.

The singular characteristic of these early property-based societies was that the products of labour were shared among those who laboured and those who owned property. Smith acknowledges this important difference between the beaver-and-deer hunters’ parable, with which he opened his analysis of exchangeable value. The beaver hunters, etc., now had to share the exchange value of their prey with the owner of the land on which the beaver were found, and the owner of the wherewithal by which he sustained himself and his family by the necessary subsistence and tools, themselves extracted from somebody’s, or some tribe’s, claim to the ownership of land and natural resources.

Unfortunately, in jumping from one mode of subsistence (primitive hunting in the ‘open’ land) to another (property in labour, land and resources), a process that took millennia, not decades) to get underway, and more millennia to spread across Europe ad the Near East, and those other parts of the world, though not necessarily contiguous in either time or territory, Smith, without the basic knowledge common today in an Anthropology 101 class or text, in compressing the process, he constantly gets into a muddled exposition, switching back and forwards between what we now know were different periods with their much varied local circumstances.

Hence, Wealth Of Nations on exchangeable value is a challenge to disentangle, much like primitive, ancient maps of the world, where imagination often informed their authors, but which are barely recognizable to a modern eye, familiar with maps of the entire planet in different forms of projection, and which are embedded in instantly recognizable shapes and proportions when shown North to South.

Smith’s exchangeable value for commercial society specifically includes the requirement that the (much higher) product of labour is shared between the three owners with their claims to their shares: the labourer, the owner of land, and the owner of stock (formed from resources for subsistence and tools). From this point on, for these people, but not for those who stayed as hunter-gatherer-scavengers, labour alone ceased to have the sole claim of the (lower) product of labour.

Smith’s clear acknowledgement of the significance of these changes, and, what was in effect, if not stated too clearly, his repudiation of the labour theory of early exchange value, became and remains one of the most enduring misreading of Wealth Of Nations since it was published in 1776 (and of much older vintage than the modern myth of the ‘invisible hand’, which only dates from the 1950s).

This problem today was prompted too by the misreading of Smith’s statement about ‘toil and trouble’ being the 'real cost' (or value to the indvidual)of anything, which can be read as a return to labour as the source of exchange value (clearly is demarked elsewhere in Wealth Of Nations as determined by Market prices, which may coincide or be close to Natural prices), when in fact it relates to one of the benefits of the division of labour, namely that by acquiring products through exchange, the receivers save themselves the ‘toil and trouble’ of making those products themselves. In short, it is a psychological advantage of a commercial economy from the plethora of products to which people have access, should they choose to pay (or have) the market (money) price for them. It was not a labour theory of value!

A last point where Art Carden is right: Adam Smith’s ‘endorsement of the "obvious and simple system of natural liberty" does not derive from his value theory’. Theories of Natural Liberty come from the philosophical theory of ‘Natural Law’, from such philosophers as Grotius, Pufendorf, Carmichael, and Hutcheson, which Smith learned while a student at Glasgow University, where Natural Law jurisprudence was taught to him and which his writings are sprinkled with throughout. In turn, these ideas are often confused with laissez-faire, but that's another story...

To Predict It Is Necessary to Know Your History

Dani Rodrik, Professor of Political Economy at Harvard University’s John F Kennedy School of Government, writes in the Business Standard (India) HERE:

“Those who predict capitalism's demise overlook its historical malleability.”

“Capitalism is in the throes of its most severe crisis in many decades. A combination of deep recession, global economic dislocations, and effective nationalization of large swathes of the financial sector in the world’s advanced economies has deeply unsettled the balance between markets and states. Where the new balance will be struck is anybody’s guess.

Those who predict capitalism’s demise have to contend with one important historical fact: capitalism has an almost unlimited capacity to reinvent itself. Indeed, its malleability is the reason it has overcome periodic crises over the centuries and outlived critics from Karl Marx on. The real question is not whether capitalism can survive — it can — but whether world leaders will demonstrate the leadership needed to take it to its next phase as we emerge from our current predicament.

Capitalism has no equal when it comes to unleashing the collective economic energies of human societies. That is why all prosperous societies are capitalistic in the broad sense of the term: they are organized around private property and allow markets to play a large role in allocating resources and determining economic rewards. The catch is that neither property rights nor markets can function on their own. They require other social institutions to support them.

So property rights rely on courts and legal enforcement, and markets depend on regulators to rein in abuse and fix market failures. At the political level, capitalism requires compensation and transfer mechanisms to render its outcomes acceptable. As the current crisis has demonstrated yet again, capitalism needs stabilizing arrangements such as a lender of last resort and counter-cyclical fiscal policy. In other words, capitalism is not self-creating, self-sustaining, self-regulating, or self-stabilizing.”

“The history of capitalism has been a process of learning and re-learning these lessons. Adam Smith’s idealized market society required little more than a “night-watchman state.” All that governments needed to do to ensure the division of labour was to enforce property rights, keep the peace, and collect a few taxes to pay for a limited range of public goods.”

“The share of public spending in national income rose rapidly in today’s industrialized countries, from below 10 per cent on average at the end of the nineteenth century to more than 20 per cent just before World War II. And, in the wake of WWII, most countries erected elaborate social-welfare states in which the public sector expanded to more than 40 per cent of national income on average.”
“The lesson is not that capitalism is dead. It is that we need to reinvent it for a new century in which the forces of economic globalization are much more powerful than before. Just as Smith’s minimal capitalism was transformed into Keynes’ mixed economy, we need to contemplate a transition from the national version of the mixed economy to its global counterpart.”

This means imagining a better balance between markets and their supporting institutions at the global level. Sometimes, this will require extending institutions outward from nation states and strengthening global governance. At other times, it will mean preventing markets from expanding beyond the reach of institutions that must remain national. The right approach will differ across country groupings and among issue areas.

Designing the next capitalism will not be easy. But we do have history on our side: capitalism’s saving grace is that it is almost infinitely malleable.”

Comment
Dani Rodrik is an excellent economist and thoughtful commentator, and I have considered his contributions to international debate as constructive. I have to make some fairly basic points about his post in the Business Standard (you should read his article in full by following the link).

He starts off well, even prophetically: “Those who predict capitalism's demise overlook its historical malleability”, which is well worth many current commentators reading and thinking about, who, jumping the gun, predict the imminent demise of all forms of capitalism, much of it in the form of the State-Capitalism most of us live in.

Those who approach such a prospect with joyful hope are going to be disappointed.
As I was disappointed to read Dani’s paragraph:

‘Adam Smith’s idealized market society required little more than a “night-watchman state.” All that governments needed to do to ensure the division of labour was to enforce property rights, keep the peace, and collect a few taxes to pay for a limited range of public goods.’

This is a crude caricature of Adam Smith’s observations about the commercial society he lived in, and what he proposed for it as it increased the annual output of the ‘necessaries, conveniences, and amusements of life’ and, not forgetting, as it ‘spread opulence’ towards the labouring poor. His time-scales somewhat longer than a politician’s electoral horizon – even longer than a dictator’s life expectancy.

Dani uses the well-worn phrase, “night-watchman state” in association with the name of Adam Smith, as if the two go together in an eternal association. Strange! Given that the “night-watchman state” was uttered first by Ferdinand Lassalle, the fire-brand, 19th-century State Socialism, when he was mocking the laissez-faire politicians of the right for fiddling for penny profits in business and ignoring (what was obvious to socialists like Lassalle and his ilk) the far greater power and authority that would come from gaining controlling the State. No piddling capitalist ever controlled as much wealth and command over resources of the most petter politician!

But Adam Smith’s ideas were not limited by visions of a “night-watchman state”.

Writing in the mid-18th century, Smith’s agenda for government was already extensive, and promised by inevitable osmosis a far from insignificant state employing ‘night watchmen’.

At the time, defence was already a major expense of government; it did not diminish in the coming century, with its global reach of the Royal Navy and a military reach to match.

The growth of the expense of justice was already threatening to reach beyond the relatively passive bounds of local magistrates, especially as the list of capital crimes grew inexorably beyond the capacity of jails and ship’s hulks to hold those not hanged, so much so that the expense of founding a new colony in New South Wales was undertaken in 1788.

Smith’s agenda for public works and public institutions that ‘facilitated commerce’ was so extensive that it would take near on a hundred years to build and improve the necessary roads, canals, harbours and bridges, and by then whole new projects were added to the rising financial powers of municipal governance from the industrial ‘revolution’.

In education, universal provision across the 60,000 parishes of ‘little schools’ on the Scottish model, required 60,000 school buildings, teaching staffs, libraries and furniture, plus their annual maintenance, paid for partly by the state and by parents. He even had a scheme for gymnasia for exercises and crude martial fitness.

Significantly, Smith also alluded to primitive health measures in Wealth Of Nations, worthy of the government’s ‘most serious attention’ to prevent the spread of ‘leprosy or any other loathsome and offensive disease’. It would start there and expand when dealing with other health issues considered to be ‘so great a publick evil’. (WN V.i.f.60: pp 787-88)

Similarly, policies to meet the ‘police’ obligations of Britain’s towns implied considerable municipal expenditures (and taxes) to meet the needs for night lighting, pavements, disposal of soil and rubbish, and the maintenance of law and order.

True, the total expenditure required in Adam Smith’s Britain was relatively small alongside the total expenditure that would be required in the continental United States by the time of Ferdinand Lassalle (1870s). But it was much, much more than a ‘night watchman state’.

Dani claims that Smith believed: “All that governments needed to do to ensure the division of labour was to enforce property rights, keep the peace, and collect a few taxes to pay for a limited range of public goods.”

This is journalism, echoing the 1755 paper of Smith's, but is not a proper audit of Smith's ideas by a leading economist.

I suspect that Adam Smith and ‘division of labour’ go together in the minds of Dani’s readers, but with industrialisation, the division of labour in the pin factory had been superseded by the much more significant increasing division of labour of the kind alluded to by Adam Smith in his example of the day labourer’s ‘woollen coat’ and the long and complex supply chain required to produce this simple item. (WN I.i.11: pp 22-24)

The implications of this less well-known example of Smith’s insight (how few read on past the pin factory?) has been reactivated following the ‘re-discovery’ of Allyn Young’s 1928 article, ‘Increasing returns Increasing Returns and Economic Progress’, (Economic Journal, vol. 38. 1928: pp: 527-42).

Dani anticipates that “Designing the next capitalism will not be easy”. But if the ‘next capitalism' is down to ‘human design’, I must express scepticism as to its practicality. Capitalism was not designed, though futile attempts at socialism were ‘designed’, but unfortunately did not work out for those who had to endure the experiments.

Societies can legislate for this or that form of parts of their economies; sometimes they work, and last for a while, voluntarily; most often they don’t.

Social evolution is not about design, it’s about experimenting, sometimes intentionally, sometimes unintentionally. It has ever been thus. That is why history if littered with social experiments – the pyramids, the ‘hanging gardens' of Babylon, the Great Wall of China, the Scottish clans, the French majesties, ancient Greece and Rome, the hordes of Genghis Khan, Mahomet’s promises, the Czar’s empire, and the anonymous stone-tool makers of pre-history.

Globalism does not make co-ordinated design any easier, or local initiatives more difficult.

At root, when all else is failing, the Smithian urges to ‘self-betterment’, the ‘propensity to truck, barter, and exchange’ to ‘avoid toil and trouble’, will assert themselves, no matter what else is happening, somewhere among some people, humanity will start over.

Labour in the 18th century

Keith Thomas, writes in the Independent (UK) (HERE)

'The Saturday Essay: “If only the devil did make work for idle hands...”

“On the other hand, work was widely admired as a divine activity, practised by God during the creation of the world and by Adam and Eve in Eden. It was a sacred duty and the source of all human comforts, creating wealth and making civilisation possible. It was a cure for boredom and melancholy and a remedy for vice. It was the only sure route to human happiness, bringing health, contentment and personal fulfilment. It structured the day, gave opportunities for sociability and companionship, fostered pride in individual creativity and created a sense of personal identity. Idleness could never make people happy; and the ideal society was one in which there was satisfying work available for everybody.

The classical economists took the first of these two views. Adam Smith agreed with Dr Johnson that every man was naturally an idler. It was axiomatic that human beings preferred leisure to work. Labour meant "toil and trouble". It was undertaken only for the sake of remuneration, what in North America is still revealingly referred to as "compensation". The object of working was to acquire wealth, and the object of wealth was to avoid having to work.”

However, Locke also believed that psychologically, "men cannot be perfectly idle; they must be doing something".

It was his 18th-century successor, David Hume, who did most to develop this insight. "Every enjoyment," he wrote, "soon becomes insipid and distasteful, when not acquired by fatigue and industry. There was no craving of the human mind more constant and insatiable than the desire for exercise and employment."

When Adam Smith declared that labour involved the worker only in "toil and trouble", he was thinking primarily of manual work. Indeed he explicitly said that it was only what he called "the inferior employments" that were performed solely for the sake of the money, thus conceding the possibility that other occupations could be rewarding in themselves. Nevertheless, Karl Marx had a point when he declared that Smith's view of labour as a curse was psychologically misconceived.”

Comment
I think Keith Thomas is slightly off centre in some of his remarks.

For instance, it was only with the expulsion of Adam And Eve that they had to work, it being fairly clear from the start that the Eden Garden was a paradise of sorts, where all their needs were provided for in the forest, where, as Smith put it, ‘The pulling of wild fruit can hardly be called an imployment’ (Lectures in Jurisprudence [1762-3] 1978, p 14, Liberty Press).

Before they left the paradise of the Eden Garden (a somewhat misleading appreciation of the realities of the lives of hunter-gatherers), Adam and Eve were told in no uncertain terms, ‘In the sweat of thy face shalt thou eat bread’[Genesis 3.v.19) (taking many millennia from the life of the forest to the labour of farming).

‘Labour meant "toil and trouble” ’is another slightly misleading take on Smith’s use of the phrase. In his discussion on the ‘real and nominal Price of Commodities’ he states that the ‘Real price of everything, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.’ He goes on to say that what something is really worth ‘is the toil and trouble which he can save to himself, and which he can impose upon other people’. And what ever is bought with money is ‘purchased by labour as much as what we acquire by the toil of our body. The money or those goods indeed save us this toil.’ [WN I.v.2.p 47; Edwin Canaan, 1937 edition, p 30-1]

The ‘other people’ are the sellers of what he wants. He labours to acquire money to save him the 'toil and trouble' of making the things he wants for himself. It is not the toil and trouble of wage labour that is decisive; it is the ‘toil and trouble’ of making what he wants himself, or, realistically, having to do without what he wants because he couldn’t make these things for himself – they are beyond both his reach and grasp.

This relates to Adam Smith’s basic observation that the hunters of North America were living in comparative poverty compared to the ordinary day labourer of Scotland in terms of their mutual possessions. The life of a hunter was hard enough to collect the few basic things needed in the hours he spent each day, without contemplating what else he might desire if they were in reach.

The notion of ‘toil and trouble’ is a psychological impulse – much like the desire to ‘better themselves’ – which impels labourers in a commercial society to seek work to acquire the goods that constitute their real incomes. Idleness was a problem for the very rich (anxious boredom with goods and each other was their main problem, as the novels of the 18th-19th centuries show), whereas for the very poor it was their anxieties from poverty, exacerbated by the intermittent absence of work, and suffering from the strange view among some legislators and those who influenced them that relieving poverty was an ‘inconveniency to the society’. (WN I.viii.36: p 96: Edwin Canaan, 1937 edition, p 78-9 )

The higher real incomes are, the greater the motivations to work well to acquire what their incomes can buy, to save them and their families the ‘toil and trouble’ of daily lives.

‘Tis a pity, as David Hume might have put it, that it took long enough for society to see the connection between what Adam Smith was talking about, when he lamented the short-sightedness of treating labouring men as little better than labouring cattle. It’s not that they were idle in the abstract, any more than slavery was basically inefficient (as well as inhumane). The slave who had ‘no other interest but to eat as much, and to labour as little as possible’ (WN III.ii.9: p 387; Edwin Canaan, 1937 edition, p 365;, is but a step or two away from the low-waged labourer, whose interest is to act as ‘idle’ as he can get away with).

Commentators in the 21st century might show some humility when discussing life in the 18th century (and, perhaps life today in an impoverished, failed states).

Adam Smith On Specialisation

Nurrahmanarifs Weblog HERE, publishes an interesting post :

“A Brief History of Industrial Engineering”

“Adam Smith’s Wealth of Nations [26] published in 1776 was one of the first works promoting “specialization labor” to improve productivity. He observed in pin making that the division of task into four separate operations increased output by a factor of almost five. Whereas one worker performing all the operations produced 1000 pins per day, ten workers employed on four more specialized tasks could produce 48,000 pins per day. The concept of designing a process to use the work force efficiently had arrived.

It should be noted, however, that what worked for one process (e.g., pin manufacture) in 1776 may not work well for a similar process today.”

Comment
Wealth Of Nations was not ‘among the first’ to promote the “specialization labor” to improve productivity. Adam Smith was a moral philosopher who did ‘nothing but observed everything’. He reported on what he observed. Many others before him had also noticed the division of labour, such as his tutor, Francis Hutcheson, not to mention Plato.

Entrepreneurs, or undertakers, did not need to read Wealth Of Nations to do what they were already doing and had been doing for centuries. If modern society depended on everybody reading one or two books, I suggest it would never have happened.

Smith understood this. Specialisation through the division of labour is not just a matter of splitting each main task in a small manufactory into many smaller tasks to increase output. It is also about splitting tasks (‘outsourcing’ today) into long supply chains, which Adam Smith illustrated with the supply chains involved in making the simple woollen coat of a common labourer – it’s in the much neglected second part of the ‘pin-making’ chapter [WN I.i.11: pp 22-24;Canaan ed. 1937: pp 11-12].

For these reasons (see my Adam Smith: a moral philosopher and his politcal economy, 2008, Palgrave Macmillan, for an account of Smith's - and Young's - significance in these matters), I do not agree that Smith's writing on specialisation and the division of labour "may not work well for a similar process today". If anything, Smith's description of the full supply processes work in ways not yet fully appreciated.

The full significance of his account of the manufacture of a woollen coat lay neglected until Allyn A. Young brought it to our attention in his 1928 article in the Economic Journal.

Eighty years later Young’s paper is still seeping into the consciousness of the discipline, particularly in attempts by neoclassical growth theorists to account for increasing (not decreasing) returns in their equations. The essence of the 'commercial' production process (long preceded by millennia of its slow and gradual social evolution) is fully revealed in parable of the 'woolen coat'.

Is Adam Smith 'Disproved' by Ants?

Mark Thoma posts a most interesting article that debates the generality of Adam Smith’s famous opening chapter of Wealth Of Nations on the division of labour. It is prompted by an article on a study of the behaviours of rock ants, which asks: are ants more productive from specialisation?

The report of the research is published too in the New York Times (20 November) with the somewhat extravagant headline, “Adam Smith, Disproved” by HERE by Catherine Rampell. The research was undertaken by Anna Dornhaus: “Specialization Does Not Predict Individual Efficiency in an Ant” (HERE):

It’s worth a look over. Read Chapter 1 of Wealth Of Nations first and then read the research. What do you think? The comments to Mark Thoma's post are also worth reading (selectively, at least).

Early Islamic Scholars on the Division of Labour

A scholarly article in the Journal of Institutional Economics, 2008, vol 4: 3, pp 403-413, ‘Nasir ad Din Tusi on social co-operation and the division of labour: fragment from The Nasirean Ethics’ by Guang-Zhen Sun (Monash University, Victoria, Australia) contains interesting material on a neglected part of the history of scientific endeavour:

“In particular, al-Ghazali (1058-1111), ‘unquestionably the greatest theologian of Islam and one of its noblest and most original thinkers’ (Hitti, Philip K. 2002: 431 [History of the Arabs, 10th edition, Palgrave Macmillan, New York]), makes some observations of the vertical division of labour that strikingly resemble Adam Smith’s in an interesting manner. In his most important book, Ihya Ulum al-Din (Revivification of the Sciences of Religion), al-Ghazali wrote:

“For a bread, for example, first the farmer prepares and cultivates the land, then the bullock and tools needed to plough the land. Then the land is irrigated. It is cleared from weeds, then the crop is harvested and grains are cleaned and separated. Then there is milling into flour before baking. Just imagine – how many tasks are involved; and we here mention just only some. And imagine the number of people performing these various tasks, and the number of various kinds of tools, made from iron, woods, stone, etc. If one enquires, one will find that perhaps a single loaf of bread takes its final shape with the help of perhaps more than a thousand workers.’ (Ihya, 4:118; quoted in Ghazanfar and Illahi, 1990: 390; 'Economic Thought of an Arab Scholastic: Aby Hamid al-Ghazali, 1058-1111', History of Political Economy, vol. 22: 381-403)

In further articulating the gains from, and necessary coordination in, the manufacturing division of labour, al-Ghazili took need production as an example, ‘even the small needle becomes useful only after passing through the hands of needle-makers about twenty-five times, each time going through a different process. As it happens, al-Ghazali’s needle example well resembles, over a ‘great gap’ in time as Schumpeter may tend to call, the French Encyclopédie’s ‘Epingle’ (1750s) production (consisting of eighteen separate processes), from which Smith’s famous pin-factory story was taken (cf. Edwin Canaan’s footnote 4 on page 8 in Smith 1776/1950). Does there really make much of a difference between the 25-stage needle production and the 18-stage pin production, the prototype of the division of labour principle due to the great influence of Smith’s (1776) justly celebrated system of economic analysis, so far as the division of labour is concerned?”

Comment
The notion of the ‘Great Gap’ in science between the 7th and the 13th centuries was due to Schumpeter’s assessment was published in his 1954 classic, History of Economic Analysis, pp 73-74 Allen & Unwin, London (edited from the unfinished manuscript by his wife, Elizabeth Boody Schumpeter). The information in the article eliminates Schumpeter’s assessment, or at least confines it to European experience only.

Edwin Canaan’s footnote in the 1937 edition, p 5, of Adam Smith’s Wealth of Nations, that is referred to above reads [the reference to ‘Adam Smith’s Lectures, p 164’ is to Edwin Canaan’s 1896 ‘Lectures on Justice, Police, Revenues and Arms. Delivered in the University of Glasgow by Adam Smith reported by a student in 1763, Clarendon press, Oxford; also known as ‘LJ(B) 1978’):

‘In Adam Smith’s Lectures, p 164, the business is, as here, divided into eighteen operations. This number is doubtless taken from the Enclyopédie tom. V. (published in 1755), s.v. Épingle. The article is ascribed to M. Delaire, ‘qui décrivait la fabrication d l’épingle dans les ateliers même des ouvriers’, p 807. In some factories the division was carried further, E. Chambers, Cyclopœ dia, vol ii, 2nd edition., 1738, and 4th ed., 1741, s.v. Pin. makes the number of operations twenty-five.’

This corresponds to the 25 operations mentioned by al-Ghazali. There is a full examination of Adam Smith’s use of sources in the pin making in J.-L. Peaucelle, 2006. ‘Adam Smith’s use of multiple references for his pin-making examples’, European Journal of the History of Economic Thought, 13:4: 480-512.

There was also some controversy on Lost Legacy in January 2008 between myself and Tim Harford over whether Adam Smith actually visited a pin factory or simply said he did. Harford remained convinced that Smith did not visit a pin factory, despite what Smith wrote in Wealth Of Nations:

“I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations’ and they managed to produce ‘upwards of forty-eight thousand pins in a day’ or ‘four thousand eight hundred pins’ each (Canaan: Wealth Of Nations, I.i: p 5).

Perhaps the most significant aspect of al-Ghazali’s extract is in his bread making example and in his estimate that ‘a thousand workers’ may be involved in making a loaf of bread, and which is a significant indicator of the extent of the division of labour even in fairly simple agricultural societies.

This example corresponds to Smith’s example of the manufacture of a ‘coarse and rough’ ‘woollen coat’ for day labourers (WN I.i: p 11) and which he elaborates after drawing attention to the question of “How many different trades are employed in each branch of the linen and woollen manufactures, from the growers of the flax and the wool, to the bleachers and smoothers of the linen, or to the dyers and dressers of the cloth!”:

“Observe the accommodation of the most common artificer or day-labourer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation. The woollen coat, for example, which covers the day-labourer, as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! how much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them.”

(WN I.i.p 11; it is similar wording to his lectures [LJ(A) vi 21-3: pp338-9; LJ(B) 211-13: p 489])

There are good reasons to believe that the extent of the division of labour through all the trades that co-operate (unintentionally) to produce the ‘necessaries, conveniences, and amusements of life’ for final consumption is of greater significance than localised divisions of labour in plants to economic growth and development. This aspect was picked up by Allyn Young in his seminal 1928 article in Economic Journal, which has done much to bring Adam Smith back into contention as the author of a more realistic growth theory than modern neoclassical models.

Thanks are due to Guang-Zhen Sun for his article that brings to the attention of readers a neglected early economic essay that has interesting things to say about the division of labour. As Smith notes in Wealth Of Nations the ‘trade of a pin maker’ is one in which ‘division of labour has been very often taken notice of” (thus disavowing any originality in his use of it), but I am fairly sure he was unaware of the contributions from Arabic and Persian predecessors in the 12th century.