A Perspective of State Interventions

Gary Lipow writes in Grist (‘a beacon in the smog”) HERE

“Historically U.S. infrastructure, the basis on which this nation developed, was never some magical response to supply and demand.”

The Erie Canal would not have been built without rights of way given away to the builders. Land given to homesteaders and farmers made us one of the world's great farming nations. Railroads were built because the great railway companies were granted land a mile out from their tracks to compensate for construction costs. Or think of the telegraph, one of the first types of public infrastructure to receive not only grants of rights of way, but massive direct public cash subsidies. And it is worth remembering that none of this was built on empty land; American Indians were slaughtered or driven away for every one of these things. Much of the work on that stolen land was done by slaves. I can't imagine a "green tax" that could have compensated for that. …

… Adam Smith, the inventor of the term "the invisible hand" favored fire regulations, free public education, building safety codes, and (in emergencies) wage and price controls. As someone concerned with supporting an infant capitalism, and overthrowing the remnants of feudalism, he would have laughed at the idea of capitalism without a strong state. And yes, Adam Smith was overoptimistic about the ability of such regulation to contain the dark side of capitalism. But, given when he wrote, he may be excused his errors, especially since even then he was a far clearer thinker than the fuzzy headed right wing libertarians who consider themselves his true heirs today.

I think he did invent (or at least promote) a fundamental error that explains why the role price can play in replacing other forms of regulation is often overlooked. He thought of price as reflecting a balance between supply and demand. To some extent price does reflect those things. But price also reflects power. In Adam Smith's time, price often reflected the ability to kill people, seize their land by force, and then work that land with slaves. Today the price of a pound of rice reflects in part the Haitian market for that rice developed by applying financial pressure to a series of Haitian governments, and forcing them to destroy their domestic capacity to produce their own rice.”

Comment
I shall ignore on this occasion the error about “Adam Smith” being “the inventor of the term "the invisible hand" ‘ (see Lost Legacy posts passim) and focus on his articulate charges about the roles of the state in development.

Gary Lipow is correct to balance the over enthusiasm for the ideals in the US Constitution, its defects in its application shrinking in significance compared with the history of the European states, including Britain at the time. To a significant extent, the evolution of the basis of liberty, as noted by Smith, within Britain, was a contributory factor to the ideals manifested in the US Constitution; they were not invented by Congress.

Lipow adds more to the theme of the paragraph I have quoted and it is worth considering in the light of this week’s debate on the relative size of the state in practice. Aside from Lipow’s presentation of the politics of state regulation, he does make some powerful points about the role that the state – any modern state – plays in everyday matters like urban development, roads (parking!) and the infra-structure that Smith outlined as the proper role of state (Wealth Of Nations, Book V).

It makes quite a list and I urge you to follow the link. If you are put off by Lipow’s political partiality, don’t be; in the kernal of what he says there is a general truth, worth considering when debates about the size of the state commence.

Adam Smith No Ideologue

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Memories of a Wasted Youth

The Hesitant Hand by Steven Medema (Princeton University Press, 2009) Part Four: Chapter 3

This book gets more and more interesting as the author develops his theme of tracing how self-interest was gradually addressed by successive generations of economists and how it both changed its meaning and its application from the classical through to the neoclassical schools.

Chapter 3 is headed : ‘Marginalising the Market: Marshall, Pigou and the Pigovian Tradition’. It sets out the story of how Marshall, followed by his successor, Pigou, changed the terms of the debate through to the 1930s.

In what is called the classical school, ‘laissez-faire’ dominated the policy debate, though whether the participants in academe and the policy makers in the state (and those who influenced them), plus of course the business entrepreneurs, all agreed on what their respective roles were, or even what they thought the roles of the other participants were, is an altogether different matter.

One thing had certainly changed since Smith’s time. The size, importance, and independence of the state (legislators and civil service), and its prospective roles as the decades slipped by, certainly was very different from the smaller, more widely corrupt and corrupting, and largely not very competent performer, of the 18th - early 19th centuries, was by the 1870s onwards a larger, less criminally corrupt (though persuadable by informal relationships, now professionalised as lobbyists), and more competent administration than ever before.

The duties of the state were no longer only as set out in Wealth Of Nations, or Mill; they had become diverse at national and local government in levels. Public finance was giving way to what became public choice, with political and economic analysis to match.

Marshall was suspicious of old ideas of laissez-faire, which in the form it had taken was regarded all round (Sidgwick) as less than reliable, and anyway did not address how public goods fitted into the frame. Much was spoken about how markets were better than alternatives – they were, but not in isolation from the burgeoning roles taken on by governments, and nor was laissez-faire typical of competition (certainly as seen by business – and politicians – who, it is suspected never really understood what laissez-faire meant in practice.

Marshall sought a means to justify the social superiority of competitive markets and came up with ‘consumer surplus’; Pigou took it further with his model of market failure in ‘net social product’ and ‘net private product’, both entwined with notions of ‘decreasing’, ‘constant’ and ‘increasing’ returns. Their cases were almost convincing, though whether anybody could apply them in practice was another matter.

Pigou’s ideas were the most developed and appealed at the macro-level, at least to theorists and politicians (and their civil servants). In the latter case, the theoretical case for bigger roles for the state was welcome; in the former the incitement to theoretical development was irresistible, and fashioned a spate of high theory in welfare economics, competition theory, including monopoly, oligopoly, and monopolistic competition, and, of course, the Keynesian decades. All of which was accompanied by the longish march to mathematics and the goal of economics as the undisputed champion of science among its less scientific sister and, more distant, co-disciplines.

Pigou’s role is clearly explained by Steve Medema – the best part of The Hesitant Hand so far – and it is all the more instructive for that. It was not a case of state action and laissez-faire being sharply different – even at odds with each – but of their necessary dependence on each other (massively increased by the vast public expense of the recent war).

A modern state could not finance itself adequately without the productivity of the competitive market and a competitive market cannot be productive without the functions of an efficient state (‘unless robbery under arms is restrained by law, fraud repressed, and contracts which have been formally accepted enforced’, wrote Pigou in 1935).

Perceptive readers will find much in Pigou that lines him up with Adam Smith, although vulgar epigones will confront an Adam Smith , from Kirkcaldy, who is a complete stranger to those who have never seriously read his books, and who spout with the total conviction of the ill- informed a completely alien set of thinking about what Adam Smith actually observed and pragmatically advised.

Pigou had the measure of the those who went beyond the role of the state within its level of competences, who looking backwards and can see where current business policies began to go wrong – firms both made money and lost it because their futures are unknowable, except afterwards - whereas armed with the certainties of the present about the past, the public servants develop an overblown enthusiasm for state planning (‘spotting winners’, etc.,), for which Britain, among other European countries, adopted a taste for from the 30s onwards.

With laissez-faire (the name awarded to the fiction that Britain had such an economy) and the fiction that business and government were separate entities, run by disinterested public servants (actually as self-interested as anybody else, but with the public funds and the weight of public problems self-evident before them), the debate about policy issues became completely muddled, mixed as it was with the electoral arithmetic complicated by notions of socialism in its various guises.

As Steve concludes, quoting Pigou:

‘What this theory (neoclassical welfare analysis) demonstrated, in a nutshell, was the perfect markets work perfectly, imperfect markets work imperfectly, and perfect government can cause imperfect markets to also function perfectly. ....The role of government vis-a-vis the market was no longer an a priori set of assumptions nor an opinion based upon casual empiricism; it was demonstrable in a “scientific” sense’ (p76).

As a student of the 1960s, I recognise the truth of Steve’s summary, and the analysis of Pigou’s largely unread work, somewhat overshadowed by Keynes (I have a copy of Pigou's Welfare Economics in my library) leading up to it, and all the events following it.

What a wasted youth that amounts to!

I recommend readers to read Steve Medema’s Hesitant Hand (Princeton University Press).

[Next up is my review of Steve’s treatment of Italian public finance.]

Mythical Basis for a Theory

Linda Naiman writes at the Creativity at Work Blog HERE:

“Taking Responsibility for the Whole”

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

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

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

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

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

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

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

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

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

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

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

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

At Last! Great Sense on the Current Crisis!

Dr Madsen Pirie, of the Adam Smith Institute (London) reports on an analysis of the current recession, written by Professor David Simpson: The recession – whodunit? (HERE)

A publication the Adam Smith Institute is particularly proud of is The Recession – Causes and Cures by Dr David Simpson. Dr Simpson was Economics professor at Strathclyde, and then economic advisor to Standard Life. His piece is short, eloquent, and utterly convincing. It forms a crucial part of our counter-attack on the facile but common notion that it was greedy bankers who brought about our downfall.

Not so. Dr Simpson methodically traces the bust's causes to the previous credit-fuelled boom instigated by governments and their central bankers. There were indeed bankers who made foolish (rather than greedy) decisions, and who read risks wrongly. But they did so amid a sea of cheap money which governments had flooded onto them. The asset-price bubbles (which are now bursting or deflating as markets correct the errors) resulted from interest rates deliberately kept too low for too long.

The best way to treat a bust is to avoid it altogether by not stoking up the antecedent boom, but given a bust, the treatment should be lower corporate and personal taxes. These should be financed by spending cuts, not by borrowing which signals future tax rises. And the policy-makers who oversaw this crisis should be replaced.

The book is a terrific read, and puts its whole case in fewer than 40 pages. It is both compelling and convincing. Do read it. (HERE)

[Disclosure: I am a Fellow of the Adam Smith Institute]

Newish Blog on the Block

An interesting Blog has come to my attention. It’s called The Debts of a Nation (‘dedicated to presenting finance and economics news in plain English’) HERE:

Its heading description is tantalising:

“In Debt We Trust

The Debts of a Nation is a modern revision of "The Wealth of Nations" by Adam Smith. Smith structured his arguments as a critique against the prevailing economic and political ideology of his time - namely mercantilism. Under mercantilism the colonial powers of Europe amassed enormous amounts of gold and silver wealth through strict control of exports and the wholesale looting of foreign shores. Their colonists were locked in a cycle of indebtedness with financiers in their home countries. Fast forward to the modern age. Not much has changed - except instead of specie wealth we have fiat based currencies based on overleveraged government bor[r]owing. Mercantilist trade imbalances still exist. Citizens continue to live under debt bondage. And Western governments continue to loot emerging markets. The next few years will be a time of unknown risks surfacing. The majority of market pundits continue to operate under the assumption that all known risks have been contained. They still believe that the system's parameters can sufficiently contain the world's credit problems. They still continue to believe in the debts of a nation.”

Comment
Briefly, as I am preparing for a visit to geological site today (the ‘non-conformity’ at Siccar Point, near Edinburgh, discovered and explained by James Hutton, 1726-1797, and a close friend of Adam Smith) and I will come back later to discuss The Debts of a Nation in more detail, which appears to parallel my general approach to what has changed/not changed since Adam Smith wrote Wealth Of Nations, as discussed on Lost Legacy.

Most prominently, we still live in a world dominated by mercantile political economy, jealousy of trade, wars not for defence, tariff and non-tariff protectionism, limited free trade, state-favoured business (made worse by Big Government), regulations beyond that necessary for good government, and constant tinkering in personal affairs, and the dominance of a legislative cycle that is shorter than the policy-effectiveness period need to prove the effectiveness or otherwise of the interventions.

The Debts of a Nation, on the basis of a rapid glance, looks serious. I shall test my first hasty impression later after my geological expedition.

Adam Smith on Government Roles

Leon Fink, a history professor at the University of Illinois at Chicago, writes (16 April) on “The piratical world of commerce” at the Chicago Tribune HERE.

“Unlike the 18th Century Barbary pirates, to whom they have been compared on the superficial grounds that they are both poor Muslims feeding off oceanic traffic, today's pirates are stateless actors generally operating in a medium (the ocean) of weak or even fictive states. Moreover, though they may be the most violent actors at sea, the pirates' mercenary motives and ethics place them in the mainstream of today's shipping world.

In "The Wealth of Nations," 18th Century political economist Adam Smith famously anticipated a world in which an unfettered marketplace would maximize production, trade and wealth. Yet, even as he counseled restraint from governmental interference, Smith allowed himself wiggle room when it came to commerce and the sea. Maintaining access to the navigable world and, if possible, control of the world's trade, was a crucial mark of national power.

For the most part, world shipping today is the prototype for "globalization," the reign of private marketplace competition over any national or political consideration. In keeping with a pattern of deregulation that has steadily grown since World War II, shipowners (commonly centered in the richer, Western countries and Japan) have evaded the labor and tax laws of their home states by registering their vessels with governmental weaklings like Panama, Liberia and the Marshall Islands as "flags of convenience".”

Comment
Smith was far too much a ‘man of the world’ to have ‘anticipated a world in which an unfettered marketplace would maximize production, trade and wealth’ (much of that notion was invented by modern economists in the 20th century).

Also, he was not confident that free trade would be established (he called that idea utopian) [WN IV.ii.43: 471], and he criticised the French Physiocrats for demanding that ever aspect of their philosophy or 'precise regimen' (which some of them called ‘laissez-faire’) be implemented in full (WN IV.ix.28: 674].

Smith did not anticipate 'a world in which an unfettered marketplace would maximize production, trade and wealth' nor counsel against all government interference as a principle; he certain counselled against those 18th-century examples of government interference, some of them going back to Elizabethan times (Acts of Settlement, Statute of Apprentices, Incorporated Trades and Guilds, Mercantile Political Economy, legislators and those who influenced them imposing legal monopolies and tariff protections, and general arrogance that they knew better than individuals about managing their affairs.

But it is essential to understand that Smithian political economy saw important roles and major roles for government in infra-structure investment (roads, canals, harbours, city sanitations, pavements, and street lighting), administration of justice, and in public-interest activity (Royal Mail, banking regulations, interest rate ceilings, cloth stamping, gold assaying, palliative health care, education and ecclesiastical freedoms).

To these must be added his acknowledgement of the government’s ‘first duty’, to protect the society from invasions, among which he recognised the need for an island society like Britain to ensure a sufficiency of naval power to protect its foreign trade (the Acts of Navigation). Of course, British governments, captured by special interest groups, took these sensible measures to the extremes of armed unnecessary interventions beyond defensive necessity to wilful intervention in Continental dynastic disputes, in unprofitable trading companies and colonies, and general hostilities based on toxic ideas of ‘jealousy of trade’, mercantile monopolies, and excessive expenditures (the seven-years war being typical at £120 million).

However, Professor Leon Fink’s article on the modern problem of piracy, apart from these observations, is an excellent read and I recommend that you follow the link above.

Apologies for some duplicate postings but I could not post this afternoon for some reason and my attempts led to duplication off screen.

Power Bid Mentioning Hobbs and Smith

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

‘Let fairness triumph over corporate profit’

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

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

Comment
I think Trevor has got this wrong, somehow.

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

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

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

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

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

Adam Smith is Innocent

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Goods and Bads of 'Do Something' Government Interventions

David Glen Cross writes in The Daily Banter Blog HERE: an angry piece that races along, dripping its anger in every sentence. Here is an indicative taste:

“Economics the Hard Way”

“Adam Smith and his “Wealth of Nations,” written in the leading colonial power over two centuries ago, wrote of ethics and the higher aspirations of man while England ruled one third of the world as a hereditary empire. Smith’s rights of man could be condensed down to the rights of wealthy Englishmen.”

“But to name any economist is to have another thrown in your face, like Keynes, Friedman, or even the ridiculous Ludwig von Mises, who espoused individualism over the wellbeing of city, state or national interests. Individualism uber alles, or I got mine so screw you. Defying centuries of human evolution and returning to the days of whichever monkey got to the bananas first, he believed that was the only monkey who deserved to eat. These economists go out of their way to deal in the theoretical and never ever postulate negative consequences to their own theories. Of course they believe that their theories have no negative consequences; they speak instead of economic dislocation or short-term economic distress.

It is ironic that in ancient times rulers dealt in absolutes and not in the theoretical. Pharaoh stored grain against famine because it was his duty to do so. Caesar passed out bread and coin to the poor because famine brought riots and riots brought fire, fire that would exceed ten times the cost of the bread and coin.

Today, economists would calculate the least amount of bread and coin necessary against the cost of fire and ruin. But all economic theories are true and all are false. While there is plenty, they are true; when there is not, they are all false.
Any system that fails to supply the most wealth into the most hands is a failed system. History proves it again and again and that is a fact and not a theory. So as I dabble in human economics, I count not the empty houses but the people made empty by these theories. Theories that fail by leaving out the most important component in economics, the wellbeing of the people. This singular failure is the root cause of most of the world’s misery, of war, rebellion and revolution.

It has fed the guillotine, the gallows, and the pike on Tower Hill. That’s learning economics the hard way.”

Comment
It’s beneficial to be brought down to earth occasionally by the voice of the angry past.

Consider, however, that sentence in the penultimate paragraph I quoted above:

“Any system that fails to supply the most wealth into the most hands is a failed system.”

On that basis, every system known to mankind that has ever existed, failed, sometimes severely, often outrageously, and on a few occasions in a few spaces on Earth, marginally. Among the marginal failures we have the relatively opulent areas of the world in the last two centuries during what is known as ‘capitalism’ in its various forms.

I define ‘marginal failures’ as almost reaching general opulence but from continuing long-standing distortions remaining in society, both in the economy and the body politic, while absolute poverty has been eliminated as much as is practically possible, the distribution of relative poverty still leaves those at the very bottom alienated and in despair (anger is a sign of post-recovery of moral strength), as much from tragic events, addictions of various kinds from social, personality, and mental problems, random incidents of the lottery of mindless violence and unsought for tragedy, and the many failings of personal responsibility that may be are impossible to eradicate in any society of humans.

Taking the first paragraph: “Smith’s rights of man could be condensed down to the rights of wealthy Englishmen”, I accept it as a point of view, presumably by a US citizen, but it is, in my humble view, more than a little unfair to Adam Smith, who, incidentally, being Scottish, would hardly be overly concerned with “to the rights of wealthy Englishmen”.

Smith’s Wealth Of Nations is studded with examples of his concern with the rights of the poor majority of British society, most of whom were badly treated labourers, tenant farmers and landless farmhands, with corresponding poverty-level, subsistence only, incomes.

Smith’s mocking contempt for the rich and powerful is only restrained by the necessary proprieties of public discourse in mid-18th-century Britain. It may be taken for granted by David Glen Cross that under US law he is free to write and speak as he pleases to a degree that was not enjoyed by Adam Smith and fellow professors.

That is one of the benefits of liberty, still almost unique in the entire world 232 years later. And bad as life was for David’s parents and grandparents, and during his own childhood years, those of us who taken more dispassionate view of the whole world, have to note, out of respect for hundreds of millions who do not live in North America or Europe and a few other places, the sort of rotten lives lived by the poor in the 1930s US depression illustrated eloquently by David, have been and still are the permanent lot of all of them (except the kleptocratic, hopefully jail-bound, refuse who form their governments and administer their crummy tyrannies).

I include the paragraphs about David’s opinions on Ludwig von Mises, Pharaoh, Caesar, (the last mentione killed a million ‘French’ Gauls in his invasion and sold another million into slavery), and he, or more accurately his successors, financed the bread and circuses for the plebian mobs in Rome from selling millions into slavery, on which basis I would probably choose some other examples as ‘do something’ governments).

But I enjoyed reading David Glen Cross’s punchy and trenchant post, and suggest you do so too (while retaining some modicum of perspective).

Adam Smith On State Expenditures and Interventions

A correspondent asks:

“I'm still puzzled as to where Smith draws the line with regard to government intervention. In Book V, Chapter I, he talks about justice, defence and public works but it seems that he has a wider application for the state in market matters. I'd be very interested to hear your viewpoint on this.

To which I replied:

Yes, it is widely believed, even by some top academic economists, especially on Blogland, that Adam Smith favoured small government, often represented by the phrase, the 'night watchman state', which in fact was coined in the late 19th century by a firebrand socialist.

I have posted this list from my book, Adam Smith: a moral philosopher and his political economy' (2008, pp 247-48, Palgrave Macmillan):

"● The Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’; (WN464)
● Sterling marks on plate and stamps upon linen and woollen cloth (WN138-9)
● Enforcement of contracts by a system of justice; (WN720)
● Wages to be paid in money, not goods;
● Regulations of paper money in banking; (WN437)
● Obligations to build party wars to prevent the spread of fire; (WN324)
● Rights of farmers to send farm produce to the best market (except ‘only in the most urgent necessity’);(WN 539)
● Premiums and other encouragements to advance the linen and woollen industries’; (TMS185)
● ‘Police’, or preservation of the ‘cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances’;
● ensuring the ‘cheapness or plenty [of provisions]’; (LJ6; 331)
● patrols by town guards, fire fighters and of other hazardous accidents; (LJ331-2)
● Erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours); (WN723)
● Coinage and the Mint; (WN478; 1724)
● Post office; (WN724)
● Regulation of institutions, such as company structures (joint stock companies; co-partneries, regulated companies); (WN731-58)
● Temporary monopolies, including copyright, patents, of fixed duration; (WN754)
● Education of youth (‘village schools’, curriculum design); (WN758-89)
● Education of people of all ages (tythes or land tax) (WN788);
● Encouragement of ‘the frequency and gaiety of publick diversions’; (WN796)
● The prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population; (WN787-88)
● Encouragement of martial exercises; (WN786)
● Registration of mortgages for land, houses, and boats over two tons; (WN861, 863)
● Government restrictions on interest for borrowing (usury laws) to overcome investor ‘stupidity’; (WN356-7)
● Laws against banks issuing low-denomination promissory notes; (WN324)
● Natural liberty may be breached if individuals ‘endanger the security of the whole society’; (WN324)
● Limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’); (WN539)
● Moderate export taxes on wool exports for government revenue; (WN 879)

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

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

Second Question:

“How exactly does Smith make a distinction between permissible and unacceptable government intervention? I could justify some of this divergence by considering that much of his criticism of government involvement stems from actual experience rather than theoretical reasoning (which, if used, could rule out regulation all together!). What's your take on it?”

Smith, remember, wrote (Book V) of ‘public works and public institutions’ that ‘facilitated commerce’. It was, and I think, remains, an empirical test, not a theoretical outcome. Markets do not work because of theory, or ‘rational thought’, or who wrote books about it.

He didn’t sit down and think great thoughts about gaps in knowledge from his appreciation of the explanations of others and himself of real world events. That is the way of ‘shamans’, priests and inventors of religious explanations, with everything they cannot explain shunted into the mysteries of ‘invisible beings’ or gods.

The pure theory of markets, such as neoclassical economics and general equilibrium as much that it is meritorious, but it is a theory not a description of how markets actually work.

The players in markets are real human beings, not variables that operate within narrow confines of deterministic mathematics. Consider how Smith chided some of the Physiocrats (mentioning Dr Quesnay by name) for their apparent insistence that the ‘political body would thrive only under a precise regimen, the exact regimen of perfect liberty and perfect justice’… ‘if a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered’. (WN IV.ix.28: p 674)

The message is clear: start with the history, how things arrived at their present day circumstances and arrangements, and observe how they operate, drawing on lessons of how they worked, more or less, well in the past and what that teaches us selectively about what works and what doesn’t, assemble general principles that seem to be of practical benefit to assumed goals, and apply them to current events and trends.

Of course, everything depends on the selection and the objectives. Machiavelli, the Italian political practitioner drew on history to show how rulers ruled in the past and selected common aspects that could apply to rulers in his present (1500s), where the objective function was to remain ‘safe’ in power.

Smith’s objective function was how an economy, the State, and the people, could spread opulence from commerce to the nation, especially the poor majority, drawing on how nations remained stable (justice and the distinction of ranks), became prosperous (the desire of people to ‘better themselves’) given as much freedom to do so (Liberty) without it degenerating into monopoly, restrictive protectionism, and opulence for a minority using their political influence over the State, while leaving the poor as they had been left throughout all history as serfs, slaves, and penurious labourers.

Smith believed that a commercial society was the best opportunity for continual growth and the spread of opulence, and showed in his critique of mercantile political economy, as it had operated since the 15th century and was operating up to the Fall of Rome in the 5th century, what changes might be made by the legislature to let commerce do its work as speedily as was practicable in the real world and not in some kind of impossible utopia.

He was not an ideologue. His understanding of history demonstrated what was possible among real men as they were, not ideal ‘guardians’ of public interest who usually made everything worse than it need be.

Hence, his proposals for ‘public works and public institutions’, which were written in is inimitable style, were apparently quite modest (the incorrect ‘take’ on them by laissez-faire ideologues), though they added to a level of state expenditure that was actually quiet ambitious, with separately argued cases for the items listed by Jacob Viner in 1928 above, which together extended the agenda of appropriate expenditure by a classical liberal state (and even one ran by quite illiberal personnel).

Adam Smith Did Not Have a View on Government Bailouts

Ernest Werlin, a columnist at the Herald Tribune writes: “Too big to fail ... or to survive? Determining U.S. bailout policy” (HERE):

“Adam Smith, the father of economics, criticized governments giving grants to private enterprises. Smith supported competition to provide most efficiently the needs of society.”

Comment
I am not sure where Adam Smith made such a statement and would appreciate a reminder.

In mid-18th century, the government certainly purchased from private enterprise (defence, justice and civil project builders) and it issued Acts of Parliament and the King issued Royal Charters that gave monopoly powers and patents to private organisations and individuals. But ‘bailing out’ private businesses going bust (for that is what Ernest Werlin’s article is really about in the aftermath of Fannie and Freddie’s troubles.

It is not that Adam Smith took a stand that is worthy of comment on this modern issue – there were hardly any firms of such note. The government ‘allowed’ Dr Roebuck’s Carron Ironworks to go bankrupt; it didn’t bail out the South Sea Company, of ‘bubble’ fame, even though the Prime Minister among others lost their money.

This was not an issue for Adam Smith. Supporting new businesses with monopoly charters was fairly common, and was a policy initiated in Elizabethan times when the Guilds were given legal status, plus a lot of legislation that had great intentions but soon turned into deadweight drags on economic growth (the Apprentices Statutes, Settlement Acts, Navigation Acts, and Colony Charters).

To assert whether Adam Smith would support taking over Freddie and Fannie is absolutely pointless; he never faced such a question. But we do know he was in favour of regulation of the banking system in matters of currency denominations (Book II, Wealth Of Nations) and it setting up quality standard marks in key products.

Much beyond that is anybody’s guess; it wasn’t yet agenda for Adam Smith.