The "Secret" of "Winning" Investment Advice?

Ersun Warnke writes on “Investing for Value” in Salem-News.com HERE:

“The History of Value in Economics”

"Adam Smith is a well recognized figure in the economics world. Most people in our society, and especially in the business community, have probably heard his name in connection with the “free-market” or the “invisible hand.” What may be less known is that Adam Smith learned many of his economic ideas from François Quesnay.

Both Quesnay and Smith paid great attention to the question of value, because they understood that it is impossible to have a coherent economic theory that does not start by answering the question of its own purpose.

Quesnay postulated that land is the source of all value. Quesnay approached the question of value from a physical sciences perspective, and concluded that because food is the source of all energy expended in human activity, the land that produces the food is the source of all value. He theorized that because all human activity falls within the bounds of energy produced from food, the value of everything in an economy is limited by food production. In a mixed economy, where only some people produce food, food is traded by the food producers for the things they need. This economy is perfectly balanced because the value of everything is set by food production. All goods are valued relative to their cost of production, which is the food that the producers of goods must trade their goods for.

Quesnay was the European originator of the concept of a perfectly balance free market. Adam Smith expounded on this idea, and added to it the concept of labor as value. In Smith's theory, the labor expended on producing a good was equal to its value. This model of value is consistent with Quesnay, because labor expended is equal to food consumed, and so value in the labor model can ultimately be traced back to value in the land model. The major contribution of the labor theory of value is that it takes into account variations in the efficiency of production between various producers of goods and shows how markets can adjust the value assigned to different goods when the efficiency of their production changes.

This is but a brief overview of the theory of value in economics. The salient point is that “economic laws,” such as market efficiency, are rooted in a physical science approach to value. It is only by tracing value to an objective physical basis, such as the energy produced and expended in working the land, that it is possible to assert that there are physical laws that control economic activity.”

Comment
Ersun Warnke has a “theory”, of which he is so proud that he believes that it explains everything.

The problem is that he indulges in hubris without thinking for a moment that the plausibility of his “theory” may be compromised by the fact that others, iin over two-hundred years, have not noticed that the outcome of investment decisions, dependent as they are on the unpredictability of future events, would be predictable if only they followed Ersun Warnke’s “theory”, based as it is on a notion from Quesnay, and picked up allegedly by Adam Smith in the 18th century.

Smith admired Quesnay, whom he met and discussed with on his visit to France, 1764-6. Smith was critical too, especially of Quesnay’s focus on land as the sole source of productive labour; manufacturing, in Quesnay’s doctrine, was designated as “sterile” (WN IV.ix.38: 678), which Smith considered, rightly, as a major source of wealth creation (wealth, that is, defined as the annual output of “the necessaries, conveniences, and amusements of human life” (WN I.v. 1: 47).

Smith was more than skeptical (his personal respect for “Dr Quesnai”, the celebrity physician in the French Court, restrained his tone of rejection of the basic concept guiding the Tableau Economique) of Quesnay’s ideas.

He specifically rejected the pre-requisite necessity of an economy in “perfect liberty” for progress to opulence:

“Some speculative physicians seem to have imagined that the health of the human body could be preserved only by a certain precise regimen of diet and exercise, of which every, the smallest, violation necessarily occasioned some degree of disease or disorder proportioned to the degree of the violation. Experience, however, would seem to show that the human body frequently preserves, to all appearances at least, the most perfect state of health under a vast variety of different regimens; even under some which are generally believed to be very far from being perfectly wholesome. But the healthful state of the human body, it would seem, contains in itself some unknown principle of preservation, capable either of preventing or of correcting, in many respects, the bad effects even of a very faulty regimen. Mr. Quesnai, who was himself a physician, and a very speculative physician, seems to have entertained a notion of the same kind concerning the political body, and to have imagined that it would thrive and prosper only under a certain precise regimen, the exact regimen of perfect liberty and perfect justice. He seems not to have considered that, in the political body, the natural effort which every man is continually making to better his own condition is a principle of preservation capable of preventing and correcting, in many respects, the bad effects of a political œconomy, in some degree, both partial and oppressive. Such a political œconomy, though it no doubt retards more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of the bad effects of the folly and injustice of man, in the same manner as it has done in the natural body for remedying those of his sloth and intemperance” (WN IV.ix.28: 673-4).

Smith did not envisage the “concept of a perfectly balance[d] free market”. That is a post-Smithian, 19th-20th century retrospective invention (used by some theorists to trace ‘general equilibrium’ theories back to Adam Smith). If anything, Smith was about ‘disequilibrium’ economics.

Smith did not just “add” to Quesnay’s land-is-value belief, “the concept of labor as value”. Moreover, the labour theory of value was a distraction, and in its muddled presentation in Wealth Of Nations it is not clear if Smith really had a ‘LTV’ at all. It certainly is not a basis for modern valuations to determine investment decisions.

There is no inherent ‘value’ in a commodity. Exchange value is a ratio; as Smith showed, it is what we give up to get what we want. “Give me that which I want, and you shall have this which you want” (WN I.ii.2: 26) is the meaning of offers in bargaining.

And exchange value can change rapidly and extraordinarily. Consider Richard III’s offer of a fine bargain: “A horse, a horse, my kingdom for a horse” (The Tragedy of Richard III, Shakespeare).

Ersun Warnke may prosper as an advisor of the readers of Salem News.com (I wish him well), but, probably, he, or more importantly, his readers, may not.

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...

Three Common Errors About Adam Smith

Arthur Foulkes, a Terre Haute native and longtime resident, writes in Tribune Star HERE: “Many people misunderstand free trade, and so they don’t trust it”

“Adam Smith gave us an excellent metaphor when he compared free market forces to an “invisible hand” that guides each of us — in the pursuit of our own interests — to promote the interests of others.

But Smith, in some ways, set economic thinking back by embracing some mistaken ideas. For example, Smith believed that the value of a thing sprang from the amount of labor that went into its making. Before Smith, several economic thinkers realized that a thing’s value was in the eye of the beholder, but Smith stepped into this mistake nonetheless.

Smith also erred in believing trade springs from an inclination among men to “truck and barter.” In other words, Smith argued that people exchange with each other because of some innate human tendency to swap.”

Comment
But Smith didn’t compare ‘free market forces’ to ‘an invisible hand’. His use of the 18th century metaphor was not about markets; it was about how some merchants, but not all, react to their ‘concern for their security’ by avoiding the real risks of overseas trade by opting to trade locally,. Thus adding to local investment and, thereby, increasing local investment above what it otherwise would be, and increasing local employment and local output.

Having given this as the causes of the actions of some local merchants, in contrast to others who took the risk in pursuit of higher profits, the used the metaphor on ‘an invisible hand’ for those who didn’t follow his reasoning about the causes of their actions. It was the real risks and concerns for the security of their capital that led some merchants to act as they did, and thereby unintentionally benefit local society.

His explanation would survive scrutiny without the later use of the metaphor, but the metaphor would no make much sense without his prior explanation. Therefore, the metaphor is redundant, and didn’t mean anything like what was credited to it in the 1950s by modern economists.

Smith didn't believe that the 'value' of something was determined by the amount of labour undertaken to make it in commercial society; he believed that in a 'savage' hunter society that the exchange value would be determined by the amount of labour the two hunters would take into account (plus 'higgling and bargaining'), because when labour is the sole factor involved that was all there was to consider (the two hunters unambiguously owned the product of their labour).

But the situation changed once other factors came into existence - the land was owned by the landlord who charged a rent; the initial subsistence consumed by the labourer was advanced by the owner of surplus subsistence goods, who loaned it to make a profit from the sale for money.

He made philosophical points about the exchange value of items were accorded their purchase price by the 'toil and trouble' a labourer saved by not having the makle them, a wholly reasonable idea philosophically, of similar standing to the natural inclination of all people to 'seek to better themselves'.

Smith's assessment of the 'propensity to truck, barter, and exchange' was not 'innate'; it arose from the 'faculties of reason and speech', i.e., deep in what we call prehistory.

Readers can download my paper from Lost Legacy Home Page (clikc of the link in red), 'On the Pre-history of Bargaining: a multi-disciplinary treatment, Part I', which I presented last year in Rome at a meeting of the European Association for Evolutionary Political Economy.

Exchange is a central theme in Smith's entire corpus from his: 'History of Astronomy' (1744-); Moral Sentiments, (1759); 'Origin of Language' (1761); 'Lectures on Jurisprudence' (1762-3); and Wealth Of Nations (1776).

I discuss this in my book: 'Adam Smith: a moral philosopher and his political economy', 2008, Palgrave Macmillan.

Smith's Theory of Value

Isaac Moorehouse writes in The Prometheus Institute Blog an interesting article on Adam Smith’s theory of value HERE (23 January):

“Was Adam Smith wrong?’

”Indeed, Adam Smith, in his depiction of the division of labor in a pin factory and his timeless prose on the invisible hand and the self-interest of the butcher, offers some of the greatest explanations and defenses of capitalism ever written, even some 230 years later. I consider Smith a great thinker, and a hero of liberty. That doesn’t mean he was never wrong; particularly when it comes to the question of value.

Smith’s thoughts on the derivation of value in his Wealth of Nations laid the groundwork in this area for later thinkers like David Ricardo (another brilliant mind who was right about many other things) and eventually Karl Marx.

Smith essentially, though somewhat confusedly, argued that the value of any good was ultimately derived from the amount of labor it took to produce. Money or commodity prices reflected only the nominal but never the real value of a good. In this way he described the different prices of different goods as a simple formula:

“If among a nation of hunters, for example, it usually costs twice the labor to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer.” (The Wealth of Nations, Book I, Chapter VII)

Smith elaborated further by describing other costs of producing a good, including the role of the entrepreneur and capitalist and the profits they require.

The problem with Smith’s analysis is not that the cost of production has no link to the value or money price of a good – indeed, the two are closely connected. He merely had the relationship backwards.

In reality, prices reflect the money equivalent of the value a buyer places on a good. That is to say, an individual who wishes to have a good places an entirely subjective value upon that good as compared to other goods, and the difference is typically expressed in terms of money. If in Smith’s example no one cared for beavers, the cost of killing a beaver wouldn’t matter; the beaver would sell for little or nothing. There is no one value of a good, but each individual values each good differently, as compared to other goods. It is the same for Smith’s supposedly changeless measure of value, labor. An hour of the same kind of labor may be valued (or disdained) to different degrees by different people.

It is for this reason that price is merely the reflection of the amount of money an individual was willing to give up to obtain a given good in the most recent exchange.

However, Smith was correct in seeing a relationship between the cost of production and price: Once a producer or entrepreneur has an indicator of what someone was willing to pay for a good, he can speculate how much others will be willing to pay in the future. He may be incorrect, but he will start with an estimate based on past experience and hope to get an equal or higher price. It is the estimated price (which reflects the value others place on the good) that will dictate how much he can spend on production.

Smith correctly saw that the various costs which go into production must be paid by the sale price of the final good. What he failed to see is that the costs of production do not create the price of the final good or imbue it with some objective value, but that the subjective value that each consumer places on the good sends signals backwards to producers and tells them how much they can expend on production without suffering a loss.

That Smith saw the factors which go into the production of a good as the cause of the price, rather than the effect, may seem like a small error. But economics, like all attempts to study the behavior of human beings, is a subtle science which requires great attention to the correct logical progression of actions. A misunderstanding between cause and effect can be fatal.

Comments
“Adam Smith, in his depiction of the division of labor in a pin factory and his timeless prose on the invisible hand and the self-interest of the butcher, offers some of the greatest explanations and defenses of capitalism ever written, even some 230 years later.”

Comment 1:
‘his timeless prose on the invisible hand and the self-interest of the butcher” is problematic. He used this particular metaphor once and it becomes ‘timeless prose’.

Compare his use of another metaphor: ‘The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air; enable the country to convert, as it were, a great part of its highways into good pastures and cornfields, and thereby to increase very considerably the annual produce of its land and labour’ ( WN II.ii.86: p 321).

This metaphor is surely more important than the invisible hand, yet it is not regarded as a ‘theory’, or a ‘concept’. Nor is it, surprising, regarded to offer a great explanation.

“Smith essentially, though somewhat confusedly, argued that the value of any good was ultimately derived from the amount of labor it took to produce. Money or commodity prices reflected only the nominal but never the real value of a good. In this way he described the different prices of different goods as a simple formula:

“If among a nation of hunters, for example, it usually costs twice the labor to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer.” (WN I.vi.1: p 65)

Comment 2: This is the first of several misunderstandings of Smith on value, which is shared with many economists and many more casual readers.

Smith discusses society before the ‘accumulation of stock and the appropriation of land’, that is in primitive society when the only factor of production (using modern terminology) is the labour of the hunter. There are no owners of capital stock and no owners of land. How is the exchange value to be determined in these circumstances. The two hunters have only the products of their hunting endeavours available for exchange.

The exchange value of each item, Smith argues, can only be determined by how much of one item is exchanged for the other. It is the ratio of beaver/deer or what amounts to the same, the deer/beaver exchange ratio that is to ‘higgled and bargained’ by the two hunters. Nobody else is involved, because nobody else has any claim on the property of the two hunters.

Smith asserts that the only variable relating one good to the other is the time (effort) required to acquire the kill.

Because both hunters are in the same position, turning to each hunter’s subjective value, either as ‘buyer’ or a ‘seller’ (actually which is which?), is not a solution – that is a recipe for a long haggle! On its merits, whatever exchange ratio they settle upon, their ‘toil and trouble’ (a phrase Smith uses elsewhere for a different purpose) is likely to be an important consideration.

“In reality, prices reflect the money equivalent of the value a buyer places on a good. That is to say, an individual who wishes to have a good places an entirely subjective value upon that good as compared to other goods, and the difference is typically expressed in terms of money. If in Smith’s example no one cared for beavers, the cost of killing a beaver wouldn’t matter; the beaver would sell for little or nothing. There is no one value of a good, but each individual values each good differently, as compared to other goods. It is the same for Smith’s supposedly changeless measure of value, labor. An hour of the same kind of labor may be valued (or disdained) to different degrees by different people.

It is for this reason that price is merely the reflection of the amount of money an individual was willing to give up to obtain a given good in the most recent exchange.”

Comment 3
In bargaining transactions neither the buyer nor the seller unilaterally determines the outcome of the eventual bargain, but Isaac Moorehouse tends to present his critique of Smith from the buyer’s point of view. He has also introduced money into the transaction, which represents an entirely different mode of subsistence from that of crude transactions between hunters before other owners came into Smith’s account of exchange value.

In ‘early and rude society’, labour certainly was the unambiguous property of the labourer. He shared it with nobody else. Natural Law theory, incidentally, also dictated this to be the case (though such a theory carried no weight in such times). Ian states that “each individual values each good differently” – absolutely correct and that very essence of the bargained transaction never changed before and after the invention of money.

But I think Ian has made the same conclusion that most readers come to in the rather confusing switch back and forth among ‘early and rude society’ and those modes of subsistence, which came later in historical time, where other property owners were present.

In short, too much is made of the labour theory of value (LTV) implied in Smith’s example of the hunters. And, again briefly, there is some confusion with Smith’s use of the phrase, ‘toil and trouble’ as a psychological de-motivator, with its possible (though unintended) meaning as a sort of ‘embodied’ component of the so-called inherent value of an owned product of other property owners, landlords, labourers and stock holders.

No product, beyond ‘rude’ society has inherent value; there is only exchange value – what each party is prepared to give to get whatever else in transacted with the other. It is only in ‘rude’ society that their labour is the value of a product in exchange as far as the parties to the transaction are concerned. It is what each argues for that counts towards their subjective perception of what their own product is worth in exchange for the other’s product.

Societies moved on to the existence of property owned by others. The landlord owned the forest and all that was in it, and charged what we call rent for her permission to hunters or farmers to enter her land. The stock owner (provider of subsistence and tools) charged labourers (deducted from wages) for whatever they needed to complete their work that replaced the capital stock he had laid out, plus his profit, otherwise there was no point advancing his stock to one labourer merely to have that amount returned and nothing more – when he preferred to advance his stock to other labourers to have it returned plus a profit.

In the transactions to sell the products of the owners of the factors, land, labour, and stock, sellers are mindful of the costs that must be met for successive transactions (if they lose out in money terms, they withdraw from future transactions) and the buyers, unconcerned, because unaware, with the sellers’ costs are focussed on acquiring products that they value more than what they give up to acquire them. The ratio of what is given up to what is acquired is the exchange value of the product. Careful reading of the relevant chapters (not strings of quotations, often out of context) shows that this is Smith’s theory of exchange value and not some crude version of LTV.

“Smith correctly saw that the various costs which go into production must be paid by the sale price of the final good. What he failed to see is that the costs of production do not create the price of the final good or imbue it with some objective value, but that the subjective value that each consumer places on the good sends signals backwards to producers and tells them how much they can expend on production without suffering a loss.”

Comment 4
In societies beyond ‘rude’ subsistence, Smith did not have a cost of production theory. He offered the psychological motivation of people preferring and thereby labouring to acquire the means of buying – money from rent, wages or profits – what they required or fancied because from such transactions they avoided the ‘toil and trouble’ of making them for themselves, contrasted with the hunter in the forest who laboured for his families food, for their animal-skin clothing, and for their wooden shelters. He didn’t have enough time in a day to do more than that which satisfied his and his families immediate needs.

The social evolution of ‘truck, barter, and exchange’ where it was established as a behavioural habit began to widen the availability of goods that saved them the ‘toil and trouble’ and simultaneously raised their subsistence quality.

The avoidance of the toil and trouble of making all the things they wanted was the true worth to them of other people’s products, and, crucially, what became available to them in ‘higher’ modes of subsistence which became by many quanta far more numerous than ever was available in the forest.

Brad Delong calculated that the differences between the ‘toil and trouble’ facing the Yanomamo tribe of stone-age hunters, who live beside the Orinoco River in South America, compared to the modern-age tribes of New Yorkers, who live along the Hudson River in North America, was worth in modern money about $90 for the Yanomamo hunters and about $36,000 for New Yorkers. In modern retailer’s Stock Keeping Units the Yanomamo hunters access several hundred SKUs; New Yorkers access tens of billions of SKUs (quoted in my Adam Smith: a moral philosopher and his political economy, pp105-6, Palgrave Macmillan, 2008).

Non-History of a Famous Economist

Politonomist - Kelowna,B.C.,Canada, writes “A History of Famous Economists”, HERE:

“1776 marks the beginning of what most consider to be the birth of economics - the legendary Scottish Adam Smith publishes his lassiez-faire-supporting-invisible-hand-equilibrium work, An Inquiry into The Nature and Causes of the Wealth of Nations - colloquially known simply as, The Wealth of Nations. The work is unquestionably canonical in economics, so much so that one economist we interviewed bravely claimed “it’s more important than the Bible; even to non-economists!”

Smith, in the Wealth of Nations proposed a disproportionate number of ideas about the organization and performance of markets that survive today - nearly 300 years later, and an economic revolution or two after the publication. The concept of an “invisible hand,” which Smith barely even mentioned in his book, is widely associated with the text and Adam Smith himself. The invisible hand referred to the market structure that simply appears to organize itself, and, furthermore the simple organization of a market, even after a catastrophic or unexpected economic crash - generally returning itself to pre-disasterous state with no intervention by a greater body, whatsoever.

The book is a difficult read for modern economists, so much of the knowledge extracted from it is passed along to future economists through other, more modernized theories. At the time, there was no field of economics, there was no conception of “capitalism,” and feudalism was still a rampant force leftover from the middle ages in Europe. Much of what is discussed in the book makes very little sense in a modern context - but still, the concept of an equilibrium market, where various negative forces may be applied, generally from interventionism and negative economic situations, holds strong to this day.

Many economists question whether classical economics is truly the foundation for neoclassical economics based on a number of common rejections - particularly the development of Smithian value theory, where a distinction is made between market price and natural price. If, for example, neoclassical economics is the current development of classical economics - when did each start and end? Economic historians do clearly define these periods, focusing on the response to other rejections, as we do here."

Comment
Parts of this summary are almost correct; others are not correct at all.

“Adam Smith publishes his lassiez(sic)-faire-supporting-invisible-hand-equilibrium work, An Inquiry into The Nature and Causes of the Wealth of Nations”

Smith did not support ‘laissez-faire’, nor did he express an “invisible-hand-equilibrium work” (wrong on both the “invisible-hand” and on “equilibrium”).

Wealth Of Nations is not “a difficult read for modern economists”, unless they are illiterate. True, it is a different read to the common modern textbook because it is not an economic textbook.

“The concept of an “invisible hand,” which Smith barely even mentioned in his book, is widely associated with the text and Adam Smith himself. The invisible hand referred to the market structure that simply appears to organize itself…”

The invisible hand was not a concept – it was a metaphor – used only once in Wealth Of Nations, which at a stretch could be deemed to be “barely even mentioned”, though why “Politonomist” doesn’t just say “once” is surprising.

The invisible hand metaphor when used once by Smith did not refer to “market structure” at all, nor was it about a structure that “appeared to organize itself”. If anything it conformed to the arithmetic rule that the ‘whole is the sum of its parts’.

Smith’s writing on markets did not have “the concept of an equilibrium market”; it noted that the market price would ‘gravitate towards' natural price, sometimes undershooting, sometimes overshooting which is not an equilibrium. Prices are determined by the ‘higgling and bargaining’ of real people who are not governed by pure rational thinking – that’s why they ‘higgle and bargain’!

“Much of what is discussed in the book makes very little sense in a modern context” can only be believed if the author does not realize what the Wealth Of Nations was about.

Much of what Smith wrote about is still with us – the damaging role of the State in a commercial economy, when its legislators and those who influence them were guided by false doctrine of ‘mercantile political economy ‘ (still with us!), monopoly practices (still with us!), tariff protectionism (still with us!), problems of balancing the needs of public expenditure and the ability to bear taxation (still with us - perhaps even worse today!), wars for unimportant ends (sometimes still with us!), and meddling and unnecessary interventions in micro-management of people’s lives, under the influence of politicians (still with us, only more so!).

It is not clear what is meant by “the development of Smithian value theory”.

If it is meant to be the distinction Smith draws between ‘natural and markets prices’, then this may misunderstand what Smith was on about; basically the difference between how buyers and a sellers observe their interests to the value in exchange – buyers are not interested in a seller's costs, only in price; sellers are interested in their costs because price must cover their costs plus a profit.

If it is about Smith’s theory of exchangeable value, this is probably the most misunderstood element of Wealth Of Nations, mixed up as it often is with a supposed Labour Theory of Value, which Smith did not extend to commercial society because of the role of property once mankind left the forests.

Adam Smith cannot be understood by reading modern accounts of what he is supposed to have written, plus quotations from him at second, or tenth, hand, often out of context.

Politonomist should, I respectfully suggest, read Wealth Of Nations (and Lost Legacy).

Adam Smith Did NOT Have a Labour Theory of Value Outside Hunting

‘CLS’ posts on Classically Liberal Blog (HERE):

"Marxism wasn't all wrong but when they were...."

"The Marxists were right --- sort of. Actually it would be remarkable if they were consistently wrong. But Marxism is not consistently wrong. But, often when it is wrong, it is wrong in astoundingly gigantic ways. The clearest example of that is Marx’s labor theory of value. I don’t blame Marx too much for that error, after all he borrowed it from Adam Smith and David Ricardo”

Comment
I am not sure exactly what ‘CLS’ is getting at but I am sure that he does not understand Adam Smith on the so-called labour theory of value (LTV).

First, ‘CLS’ is wrong to name Adam Smith as the originator of what became known as LTV. It was a fairly common view among philosophers before Smith presented his framework (John Locke was prominent exponent long before Adam Smith). And Marx in the so-called fourth volume of Capital, ‘Theories of Surplus Value’ in which he lists all the earlier authors (including Adam Smith) from the 16th century onwards who influenced him in the 19th century (in his view) by getting their LTV wrong.

I have argued for some years now (I even have a draft paper, to which I intend to return) that Adam Smith did not have a LTV at all, except for the hunter/ scavenger – gatherer, first age of mankind.

It is quite clear that when the hunter or gatherer goes out into the bush to collect food for sustenance, animal skins for warmth, and wood to make shelter, that as it is his (or her) own labour that provides these resources, that these items belong to the labourer; he is the sole source of labour and therefore the sole owner of what he labours to produce. In that principle, in conformity with what Adam Smith understood as Natural Law (from Samuel von Pufendorf, the Natural Law jurist, he was perfectly consistent and right.

Smith makes it clear in Wealth Of Nations (I shall add references later as I am about to leave for a seasonal house party at my daughter’s) that with the appearance of property (shepherding, agriculture, and commerce), the labourer of the forest was no long the sole source of products desired by humans; it was not just his labour alone that made it possible to provide sustenance, clothing, and shelter (later the ‘annual output of the necessities, conveniences, and amusements of life).

The land was no long ‘free’; somebody else ‘owned’ it and charged for its use or exploitation; the means of subsistence (capital stock or the ‘grub stake’ until products were available) were contributed by others, who made what they owned available for use by the labourers. These other owners required a share in the output produced by whomsoever sought access or use of what they owned. The labourer’s labour was not longer the sole input; it was one of several inputs owned by others.

At this point the LTV dropped out of Adam Smith’s reckoning. He says so several times. But because this part of Wealth Of Nations is ‘badly’ explained and muddled it is not clear to fast readers, or readers of isolated quotations, or third-hand, off the cuff, remarks by tutors, media commentators, or the politically inclined, the myth has grown up that Adam Smith had a LTV for commercial (and by extension, capitalist) economies had a LTV and Karl Marx developed into his theory of surplus value.

Marx’s theory is quite different. The ‘surplus’ is the contribution of the other owners of inputs. He simply appropriates it from the other contributors!