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.]

A Confusion of Identities

In the Daily Klos Blog, Patrice Ayme writes HERE:

“SMITH OUGHT TO HAVE LEARNED MORE THAN FRENCH:

Adam Smith, having apparently confused his mastery of French with a mastery of economics, grabbed the word "laissez faire" from the French self christened "Economistes", and thought that this "invisible hand" had solved house management, for the better. Adam Smith did not invent the theory of the "invisible hand", either, it was written down before Smith was born (by Mandeville who subtitled his famous Fable of the Bees, with: "Private Vices Public Benefits" – this striking formulation pretty much extols the naivety of it all).

Well, "laissez faire" and invisibility of manipulators do not provide necessarily with the best housemanagement. Every country that has established a government insured health care system has long known that.”

Comment
Patrice appears not to know that Adam Smith never used the phrase ‘laissez-faire’ at all in anything he wrote, so it seems strange that Patrice thinks he ‘grabbed’ it from French economistes (I think he means the Physiocrats).

Patrice is correct, however, though not in the way he thinks: Adam Smith did not ‘invent the theory of the invisible hand’ – he never had such a theory in anything he wrote.

For Smith it was a metaphor, not a 'theory', and its modern notion was invented by modern economists in Chicago in the 1930 and popularised from the 1940s. Its modern meanings had nothing to do with Adam Smith.

I am not clear how Bernard Mandeville gets into this story.

The rest of Patrice’s article is a long rant about health care ... I gave up reading it.

Was Adam Smith Trumped by Charles Darwin?

Thomas McQuade writes (12 July) in Think Markets (‘A blog of the NYU Colloquium on Market Institutions and Economic Processes’) HERE:

“Frank and Stein

In a recent opinion piece in The New York Times (“The Invisible Hand, Trumped by Darwin?”), Robert H. Frank proposes that Charles Darwin, not Adam Smith, should be seen as the real intellectual founder of the discipline of economics. He claims that Smith’s most famous idea – that the competitive pursuit of individual self-interest can redound to social good – is but a special case of Darwin’s more general picture of competition in which individual benefit sometimes does, but often does not, benefit the larger group. The sort of competition for which the invisible hand does not work well is, he says, where the competition is for relative gain, i.e., when the rewards depend on relative performance, and people gain by bettering each other rather than by bettering nature.

The problem with Frank’s argument is his careless deployment of the analogy between human beings interacting in a highly structured social environment and animals in general interacting in an environment of considerably less social complexity. He is ignoring the effects of human institutions in constraining self-interested behavior. And compounding the error, he appears unable to distinguish between those institutions which provide constraining feedback and those which undermine and deflect such feedback.

The economic problem at hand is not, as Frank characterizes it, competition based on relative performance versus competition based on absolute performance. It is competition constrained by negative feedback versus competition freed from normal constraints. Successful social institutions, as well as providing positive incentives for personal gain, incorporate negative incentives for straying very far from conventional expectations. The interplay between these opposing forces can make for stable growth of the societal activity in question. It is the reason why science has been such a spectacularly successful social enterprise, and why markets, despite being set about by all sorts of monetary and regulatory interventions which weaken the feedback, have greatly increased human wellbeing.

Frank points to “the recent economic wreckage”, an instance of what can happen when “greedy people trade for their own advantage in unfettered private markets”, as evidence for his contention. Unfettered markets, if they existed, could certainly display greed, herding behavior and other “inefficiencies.

Adam Smith’s contention was that the pursuit of self-interest, constrained by appropriate social institutions, would be much more effective at producing societal wellbeing than actions which purported to aim at that wellbeing directly. And “appropriate” does not involve the overriding of constraining incentives. That is why so much of The Wealth of Nations is taken up with analysis and criticism of the social institutions of Smith’s day. Frank predicts that, 100 years from now, economists will point to Darwin as the owner of the shoulders they are standing on, not Smith. Let me make a competing prediction: that 100 years from now economists will look back and wonder how so many of their predecessors could have been so superficial in their appreciation of Adam Smith and, as a result, could have so completely misunderstood the economic events they lived through.

Comments
I think Thomas McQuade is closer to the truth than Robert H. Frank. In this month of celebration of Charles Darwin’s Origin of Species (1859), it is natural that writers look for new angles on both Adam Smith and Charles Darwin would compare with the banking crisis uppermost in our minds.

Robert Frank chooses to pit Darwin against Smith (albeit that Frank’s is a version of the Chicago Adam Smith rather than the Adam Smith born in Kirkcaldy in 1723). Even Frank’s contest for the supposed title of ‘the real intellectual founder of the discipline of economics’ is quite spurious (Smith was awarded the title today by others and with the supposed prestige of ‘inventing capitalism’ and or of being the ‘high priest of capitalism’, or similar hierarchical nonsense).

Frank writes: “Smith is celebrated for his “invisible hand” theory, which holds that when greedy people trade for their own advantage in unfettered private markets, they will often be led, as if by an invisible hand, to produce the greatest good for all. The invisible hand remains a powerful narrative, but after the recent economic wreckage, skepticism about it has grown. My prediction is that it will eventually be supplanted by a version of Darwin’s more general narrative — one that grants the invisible hand its due, but also strips it of the sweeping powers that many now ascribe to it.” (New York Times: HERE)

Smith is ‘celebrated’ by Frank for the invented reasons of modern economists (post-war in the late 1940s), not for what Smith actually wrote in Wealth Of Nations or Moral Sentiments. Smith never alluded to ‘selfish reasons’ and ‘greed’ (that was Bernard Mandeville, whom Smith described as ‘licentious’ in Moral Sentiments. Smith was made into a cartoon image by Hollywood script writers (‘Wall Street’ and ‘Beautiful Mind’). He certainly never claimed that “greedy people” will “often be led, as if by an invisible hand, to produce the greatest good for all” and it belittles Frank's credibility for him to claim that he did.

With such glaring errors about Smith, Frank's claims for Darwin are immediately suspect.

“The central theme of Darwin’s narrative was that competition favors traits and behavior according to how they affect the success of individuals, not species or other groups. As in Smith’s account, traits that enhance individual fitness sometimes promote group interests. For example, a mutation for keener eyesight in hawks benefits not only any individual hawk that bears it, but also makes hawks more likely to prosper as a species.”

Comment
At least Frank gets Darwin right. Of elks, Frank writes: “For instance, a mutation for larger antlers served the reproductive interests of an individual male elk, because it helped him prevail in battles with other males for access to mates. But as this mutation spread, it started an arms race that made life more hazardous for male elk over all. The antlers of male elk can now span five feet or more. And despite their utility in battle, they often become a fatal handicap when predators pursue males into dense woods.”

But is this not the same with Smithian competition? An individual exploits a handy source of raw materials, disregards the environmental damage, and enjoys prosperity for a while. He runs out of the resource, or the owners of the resource site impose heavy taxes, or take the resource over and run it themselves. Local maxima need not be higher than competitive maxima.

Frank: “Ideas have consequences. The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all. If, as Darwin suggested, many important aspects of life are graded on the curve, his insights may help us avoid stumbling down that grim path once again.

The competitive forces that mold business behavior are like the forces of natural selection that molded elk. In each case, we see instances of socially benign conduct. But in neither can we safely presume that individual and social interests coincide.”

Comment
Frank notes that the “uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts”, but which ‘disciples’ is he talking about? (Note the religious overtones of ‘disciples’).

The Kirkcaldy Adam Smith was quite clear on the need for regulations (or ‘police’ as they were called then) where ‘merchants and manufacturers’ misbehaved (see Smith’s discussion on regulating banks to curb the behaviours of ‘bold projectors’, WN II.ii.56-7: 304).

His reputation as a believer in ‘laissez-faire’ ideology is undeserved (he never used the words ‘laissez-faire’). Smith was no extreme ‘libertarian’, but he believed firnly in Liberty, tempered by the negative virtue of Justice, without which society would ‘crumble to atoms’; TMS II.3.4: 86).

How much of Adam Smith has Robert Frank actually read recently? He is, after all, an economist at Cornell, and a visiting faculty member at the Stern School of Business at New York University.

Frank adds: “The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all.”

I would agree, but the ‘invisible hand’ celebrated by modern economists, many of them proud to wear the title of ‘disciple’ of the Chicago Adam Smith, is actually a crown of thorns: he never had a ‘theory’, a ‘concept’, a ‘doctrine, or a ‘paradigm’ of ‘an invisible hand’ (fir him it was a mere metaphor), and while such people, and the people they influence (for good money), parade their version of it to limit some regulations, they also have used their influence to continue the mercantile regulations, which Smith railed against in the 18th century, and which blight modern economies through various forms of protectionism and tariff policies, and they lower world living standards both at home and abroad, particularly in poorer countries.

Thomas McQuade ends his review of Frank’s article with a a comment on Frank's prediction that:

“100 years from now, economists will point to Darwin as the owner of the shoulders they are standing on, not Smith. Let me [Thomas McQuade] make a competing prediction: that 100 years from now economists will look back and wonder how so many of their predecessors could have been so superficial in their appreciation of Adam Smith and, as a result, could have so completely misunderstood the economic events they lived through.”

I completely agree with Thomas McQuade and give a thumbs down for Robert Frank.

Adam Smith on Liberty

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

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

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

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

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

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

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

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

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

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

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

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

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

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...

The Misteaching of Students - I Blame Their Tutors

Three students, judging by their Blogs, which contain their essays on the same set reading, “Garrett Hardin, The tragedy of the Commons, Science, 162(1968):1243-1248”, come to erroneous conclusions about the parable of the ‘Tragedy of the Commons’ and, in passing make, reference to Adam Smith and his alleged views of individual self-interested choices and their aggregate consequences for society. These illustrate the epigones in modern teaching at work distorting Adam Smith’s legacy:

First the posts:

1 Chandana Damodaram writes HERE:

“According to the conclusions laid down by Adam Smith, all the decisions which reach the individual will in fact be the decision made for the entire society. Each individual pursues his best interest to explore the freedom of the commons so as to maximize his profit which eventually brings ruin to all. Each man is locked up in the system which forces him to increase his usage of the commons without the limit, in a world that is limited. Individual benefits through the denial of the truth of how the freedom of commons is affecting the society as a whole around him. Author refers to this as the “Tragedy of Freedom in a commons”.

2 Jim Totten writes HERE:

“In "The tragedy of the Commons" Hardin explores the inherent weaknesses of the socio-economic view (Post Adam Smith) when applied to areas of common property. Hardin argues against Smith's position that the decisions of individuals tend to be the best decision for society as a whole since each individual agent will act an a manner that increases their own benefits. Hardin argues that while Smith's "invisible hand" might have been true at some point in history it fails to hold up in modern times in the face of increased population density.”

Andrew writes HERE:

“Hardin contrasts the Tragedy of the Commons to the laissez-faire principles of Adam Smith, which state that what is good for the individual will be good for society. Examples of the Tragedy from the paper include population growth, exploitation of natural resources, and pollution of the environment. The author concludes that “the morality of an act is a function of the state of the system at the time it is performed” and that historically the only way to solve the tragedy of the commons is through regulation or through transforming the commons into private property, forcing people to take responsibility for their own actions.

I also agree that, when possible, transforming the commons into private property is the most effective way of averting the tragedy of the commons. At times in the paper I felt like the paper was more about promoting the author’s own individual beliefs on population than about actual science.”

Comment
Chandana Damodaram reports that Adam Smith said the individual sees his “best interest” as using the “freedom of the commons so as to maximize his profit which eventually brings ruin to all.”

The tragedy of the commons is not confined to a modern profit-maximisation model; herders can overgraze the commons because of the actual or anticipated overgrazing by others, who may not leave enough grass to keep their animals alive.

Children overuse the cookie jar’s contents out of wasteful eating, by not finishing their biscuits, dropping or leaving them carelessly, and so on; this has nothing to do with profit maximisation; it is the unconstrained use of a resource at zero price to them in the absence of property rights.

The tutor should point that out, gently.

Jim Totten reports that “Hardin argues against Smith's position that the decisions of individuals tend to be the best decision for society as a whole since each individual agent will act an a manner that increases their own benefits. Hardin argues that while Smith's "invisible hand" might have been true at some point in history it fails to hold up in modern times in the face of increased population density.”

This completely over states an alleged position of Adam Smith that “the decisions of individuals tend to be the best decision for society as a whole since each individual agent will act an a manner that increases their own benefits.”

Adam Smith did not make such a nonsensical statement because it equates any and all self-interested actions of people as being benign, which most certainly was not his view at all.

Smith gives over 50 examples in Books I and II of Wealth Of Nations of examples to the contrary of the above alleged assertion:

WN: BK I: 40; 43; 51-2; 77; 78; 79; 80; 84; 89; 90; 91; 95; 96; 106; 111-12; 115; 116; 124; 125; 126; 135; 136; 137; 139;140; 141;142; 143; 144; 145; 146; 151; 152; 153;154; 156; 157; 158; 160; 163; 171; 174; 266-7 [47]; BK II: 285; 302-03; 304-05; 308; 310-17;321; 323-24; 326; 339-42; 344; 346.

Will Jim's tutor make this clearer so that his students are well informed? Or is the tutor the source of such errors?

Which raises the question as to where tutors, including Garrett Hardin, got these ideas from about Adam Smith?

If Hardin ‘argues that while Smith's "invisible hand" might have been true at some point in history it fails to hold up in modern times in the face of increased population density’, he almost certainly is wildly wrong.

The myth of Smith’s use of the metaphor of the invisible hand never applied as ‘true’ or ‘false’ – it was an remains a literary metaphor. As Adam Smith said of metaphors, while discussing Shakespeare’s use of them: they were a ‘figure of speech’ in which ‘there must be an allusion betwixt one object and an other’, and that a metaphor can have ‘beauty’ if it ‘is so adapted that it gives due strength of expression to the object to be described and at the same time does this in a more striking and interesting manner’. (Lectures on Rhetoric and Belles Lettres, p 29, 29 November 1763, ed. J. C. Bryce, Liberty Fund, Indianapolis).

Andrew asserts another false conclusion of Adam Smith: “Hardin contrasts the Tragedy of the Commons to the laissez-faire principles of Adam Smith, which state that what is good for the individual will be good for society.”

Whatever Hardin contrasts with laissez-faire, they have no relevance for Adam Smith who did not hold to a laissez-faire stance on how commercial societies worked, or ought to work. Smith was not a laissez-faire ideologue at all. That assertion confuses Smith with some of the French Physiocrats (1760-66) who did advocate laissez-faire; the plain fact remains that Adam Smith did not.

Scroll down a few posts on Lost Legacy to Monday's post where I rebut the erroneous mid-19th century notions, endlessly repeated through to the 21st century, about Adam Smith and which are not based on a close reading of Wealth Of Nations (or see Gavin Kennedy, Adam Smith: a moral philosopher and his political economy, 2008, Palgrave Macmillan).

The notion that Smith said “that what is good for the individual will be good for society” is a variation on what Jim Totten says above and to which I have responded.

However, I did agree with Andrew’s accurate assessment of Hardin’s paper that “At times in the paper I felt like the paper was more about promoting the author’s own individual beliefs on population than about actual science.” [A sure sign of a wide-awake student who might go far! I hope his tutor notices his early talent]

Overall, these three short tutorial essays by these three students provides an insight to the continuing harvest by modern economic teachers of new recruits to the ahistorical understanding of Adam Smith’s legacy and the perpetuation by the epigones, including by those at the very top of our discipline, of myths about Adam Smith to the detriment of general understanding of economics and a slight upon the Adam Smith born in Kirkcaldy in 1723.

Readers may download my paper: "Adam Smith and the Invisible Hand: from metaphor to myth" from Lost Legacy's Home Page (click on the red notice)

Adam Smith Not an Advocate of Laissez-Faire

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

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

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

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

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

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

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

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

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

Intellectual Life Does not Influence Everyday Life That Much

Canadian Content Blog carries an article, “The evangelical roots of economics” from “Let there be markets: The evangelical roots of economics”, extracted from Gordon Bigelow’s piece in Harper's Magazine (HERE):

“When evangelical Christianity first grew into a powerful movement, between 1800 and 1850, studies of wealth and trade were called “political economy.” The two books at the center of this new learning were Adam Smith’s Wealth of Nations (1776) and David Ricardo’s Principles of Political Economy and Taxation (1817):

"This was the period of the industrial transformation of Britain, a time of rapid urban growth and rapidly fluctuating markets. These books offered explanations of how societies become wealthy and how they can stay that way. They made the accelerated pace of urban life and industrial workshops seem understandable as part of a program that modern history would follow. But by the 1820s, a number of Smith’s and Ricardo’s ideas had become difficult for the growing merchant and investor class to accept.

For Smith, the pursuit of wealth was a grotesque personal error, a misunderstanding of human happiness. In his first book, The Theory of Moral Sentiments (1759), Smith argued that the acquisition of money brings no good in itself; it seems attractive only because of the mistaken belief that fine possessions draw the admiration of others.

Smith welcomed acquisitiveness only because he concluded—in a proposition carried through to Wealth of Nations—that this pursuit of “baubles and trinkets” would ultimately enrich society as a whole. As the wealthy bought gold pickle forks and paid servants to herd their pet peacocks, the servants and the goldsmiths would benefit. It was on this dubious foundation that Smith built his case for freedom of trade.

By the 1820s and ’30s, this foundation had become increasingly troubling to free-trade advocates, who sought, in their study of political economy, not just an explanation of rapid change but a moral justification for their own wealth and for the outlandish sufferings endured by the new industrial poor. Smith, who scoffed at personal riches, offered no comfort here. In The Wealth of Nations, the shrewd man of business was not a hero but a hapless bystander.

Comment
This type of article which links books written in 1759 (Moral Sentiments) and 1776 (Wealth Of Nations) by Adam Smith with another by David Ricardo in 1817 (Principles of Political Economy and Taxation) with the collective views of a “growing merchant and investor class to accept”, only become acceptable by distance of the reader from the relevant events.

While many ‘merchants and investors’ were educated at the time (and many others weren’t) it is a bit of a stretch to accepts that they were familiar with Smith’s and Ricardo’s texts (the last author is especially suspicious of people such as busy ‘merchants and investors’ being familiar with his work – a most obscure text if ever there was one!).

I suspect that the influence of intellectuals is much less than commentators might think, perhaps in the belief that because we read these works still, it must have been the case that they were widely read by entrepreneurs too. It is more likely that if none of the above books were written, that events in markets, development, innovation and growth would have continued in much the way that they did anyway. There is an intellectual life and an everyday life; the latter may influence the former but the former is less likely to influence the latter.

The chattering classes who ‘translate’ notable texts, and who make notable text more familiar to the each other and to those who listen to them, also filter ideas in the process of their popularising versions of them, quite often at the expense of vulgarising their authors’ ideas, where they don’t suppress things they choose to ignore. Hence, Adam Smith’s holistic ideas were filtered down to a few words, such as ‘laissez-faire’ (which happened not to be his ideas at all – he never mentioned these words once), or ‘night watchman state' (spoken not by Smith but by the socialist firebrand, Ferdinand Lassalle, who actually mocked the idea of a smaller, leaner bourgeois state).

A century later, in fact, a further filtering took place around the metaphor of ‘an invisible hand’. In all these cases, the extent of the knowledge of many people who have heard the name ‘Adam Smith’, but never read his books, is limited to these three erroneous propositions alleged to be his, ‘laissez-faire', ‘night-watchman state', and ‘invisible hand’.

The idea that the “growing merchant and investor class” gave a moment’s thought to either Adam Smith or David Ricardo, frankly, is quite ludicrous. That the educated classes of religious orthodoxy and evangelical enthusiasm concocted a ‘plausible’ narrative as described by Gordon Bigelow is perfectly possible. That it had anything to do with Adam Smith’s ideas is quite irrelevant, as anybody turning the pages of either of his books would grasp in no time.

Incidentally, per capita incomes rose throughout the 19th century, despite the dreadful conditions of those urban labourers at the very bottom of the social heap and they continued to do so throughout the 20th century. If the urban poor were near destitute, the lot of the rural poor was even worse, as it is today for the same division of populations in the poorer countries of the world.

Chicago Has Much to Answer For

Lawson A. Omokhodion (MD/CEO of the defunct Liberty Bank) writes an interesting opinion in The Guardian (HERE) of the banking business in Nigeria and his interpretation of the lessons from the current banking crisis:

‘How not to manage a banking crisis’

by Chief Lawson A. Omokhodion (MD/CEO of the defunct Liberty Bank):

“THE managers of the OECD economies are a marvel to watch. When the situation is right, they preach the monetarist glamour of free market, globalisation, liberalisation and the supremacy of the invisible hand of 'Adam Smith'. But at other times, they are not shy to radically embrace the Keynesian principle of the role of big government in economic transformation. The OECD economies can subsidise its production systems while kicking against a similar initiative in the developing economies.”

Comment
There are those in the OECD (and the World Bank, IMF, Wall Street, City of London, and Treasury Departments around the world, who do believe in the mantra that Chief Omokhodion recites on their behalf.

It’s the usual nonsense about the mystical belief in “the supremacy of the invisible hand of 'Adam Smith'” that caught my attention.

And that is a problem which Chicago created for economists when they invented the false image of Adam Smith as a believer in laissez-faire, a ‘small’ night-watchman state, and invisible hands mysteriously converting the actions of ‘merchants and manufacturers’ into benign outcomes for society, somehow, as long as they followed their self-interests (eliding in selfishness).

This creates a series problem for advocates of market solutions when those same behaviours are shown to be less than benign (pollution, monopolies, cartels, and anti-competitive). Chicago has given the enemies of markets a stick with which to beat up on proponents of Smithian economics of growth and employment.

Adam Smith Not a Laissez-Faire Ideologue

Carl Luna, Professor of Political Science, San Diego Mesa College, writes in Political Lunacy (HERE)

“The War Between the States (of corporate desperation) and a Short History of American Economic Time (and if this title was any longer it could never make it as a bumper sticker)” (12 July):

“In economics only two things matter: supply and demand. Government policy can try to affect one over the other—it can’t really effectively and successfully influence both significantly at the same time. When one of these paradigms dominates but, then, crashes and burns, government can only—and must—shift to the other.
American economic history can be divided into three great epochs. From the 19th Century—particularly after the Civil War—to 1932 that policy was Laissez-Faire industrialism. Laissez –Faire has never meant “hands off” the economy, as many simplistically believe. Adam Smith never wrote that it did nor believed it should. Laissez-Faire means government hands of the decisions of supply and demand in the economy but it also, for Smith, meant active government in maintaining an efficient and—most importantly—fair free market. Smith, a dower, Scottish moral philosopher, understood that people are people and, given the chance, they cheat. Hence his famous admonition that “People of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” The role of government was to prevent such “conspiracy” and “contrivance.”

In practice, however, whenever you hear someone advocating so called Laissez Faire policies for government, they are calling for pro-supplyside policies: anti-labor, anti-consumer, pro-capital and a pro-producer. These were the policies of the industrial revolution—and the gilded age. This model crashed and burned in the ravages of the Great Depression, ushering in the Keynesian, demand-side, New Deal model.”

Comment
Apart from the hyperbolic language in the last paragraph, I comment on Professor Luna’s supporting arguments (not that I necessarily disagree with his broad characterisations of US history).

“Laissez –Faire has never meant “hands off” the economy, as many simplistically believe. Adam Smith never wrote that it did nor believed it should.”

Adam Smith never mentioned the words ‘laissez-faire’ at all; not once in anything he wrote. The sole source for laissez-faire was, not surprisingly, in France and among several of the French Physiocrats, whom Smith met, conversed, and read.

His association with ‘Laissez-faire’ is by attribution from his 19th-century successors (particularly among advocates against the factory Acts who resisted reforms to correct abuses in the employment of young children). The most active people characterising Adam Smith’s association with laissez-faire were found in the Manchester School and among Political Economists (J. S. Mill, etc.,). Modern 20th-century economists have embedded the false association of Smith with laissez-faire in academe and the media.

“for Smith, [he] meant active government in maintaining an efficient and—most importantly—fair free market.”

In so far as this means competition in markets, it meant repeal of all laws that allowed restrictions on competition (the Settlement Acts, the Apprenticeship Statutes, the Incorporated trades). He found the Navigation Acts necessary for defence, but was critical of the British monopoly on its colonies’ trade, and was critical of the absurdity of some of the tariff laws slipped into legislation by vested interests, but recognised the need for revenue from customs and excise to meet necessary government expenditure. In short, Smith’s policies were far more nuanced than they are often presented.

“Hence his famous admonition that “People of the same trade seldom meet together,…”.

This is often presented as Smith's general comment on business. It was, in fact, a reference to the incorporated towns where the members of each ‘trade’ – clockmakers, mechanics, drapers, weavers, butchers, printers, carriage makers, wheel makers, bakers, builders, matalworkers, and such like and so on, held a local monopoly over the sale of their designated products and prevented, legally, anybody not a member from setting up their business. It was major remnant of the old Guilds of the time, and choked competition such that members of different trades agreed not to buy from other sources, such as in nearby towns or imports, and thereby paid higher prices, but kept out competition which was a mutual benefit to all of them - but, alas, not their consumers.

The modern day equivalent is not the corporation of today; they are found in the professional guilds of employees, who have cornered markets for their skills (prominently evidenced in a town not too far from San Diego – yes, the one with it iconic name on the hills above it).

Moreover, Smith did not ‘understand’ that ‘people are people and, given the chance, they cheat’.

He had a much more subtle understanding of people – they did what was in their interests, as they saw them, and according to the norms of those around them. A community of robbers and murderers would refrain from robbing and murdering each other (Moral Sentiments) and most people will behave according to the mores of their time and place under the fairly effective tutelage of their ‘impartial spectator’.

It is true that where someone’s self interest was overwhelming, and where restraints, legal and moral were loosened (for example, the absence of competition) some of them would likely behave ‘rapaciously’), hence the need for the negative virtue of justice. Whether this required government, beyond the laws in place, to be active in administering laws and regulations to cover every eventuality, was a matter of practicality, not principle.

Professor Carl Luna’s recommended policies or the histories of them in respect of the New Deal and Keynesian policies as applied in the USA may have merits or otherwise, but I am not qualified to judge, not knowing enough about recent US economic history. My comments are confined to his representation of Adam Smith and his ideas.