A Good Idea for a Celebration, But...

College of Charleston holds an annual ‘Adam Smith Week’ (8 March), which, normally, I would welcome handsomely for its educational mission (details HERE) .

John Stossel , the talented free markets’ advocate, is to speak during it, so it will do some good.

But, wait, what’s this?

“Adam Smith is one of the most recognizable figures in economics, and his contributions to the fields of philosophy and economics are still relevant today,” says Pete Calcagno, associate professor of economics and Director of the IPCM. “His concept of the invisible hand is considered the classic statement on laissez faire capitalism.”

Comment
Oh dear! Pete Calcango manages to perpetuate two myths which are slurs on Adam Smith’s life work, simultaneously in a single sentence.

By whom is the “concept” (sic) of an “invisible hand” considered ‘the classic statement on laissez-faire capitalism”?

Not by Adam Smith, whose works show the metaphor (not a concept) to refer to feudal (not capitalist) landlords feeding the “thousands whom they employ” (they had no real choice but to do so); see Moral Sentiments (1759) TMS IV.ii.10: 184; and to some, but not all merchants who were risk-averse and concerned for the security of their capital and in consequence preferred to invest locally rather than abroad, which, on the arithmetic rule that the whole is the sum of its parts, added to national output; see Wealth Of Nations (1776) WN IV.ii.9: 456.

Lost Legacy urges students (and, clearly, staff tutors too!) to look up the only two references to “an invisible hand” that Smith makes in his two main books.

They do not amount to a “concept” and had nothing to do with “laissez-faire” (words that Smith never used), nor to “capitalism” ( a word invented in English in 1854 by Thackeray; Smith died in 1790).

What Adam Smith Actually Identified as the Appropriate Roles for 18-century Governments

Andrew B. Busch writes (3 March) in the CNBC Guest Blog HERE

“Busch: Following The Father of Modern Economics”

“The father of modern economics supported a limited role for government. Mark Skousen writes in "The Making of Modern Economics", Adam Smith believed that, "Government should limit its activities to administer justice, enforcing private property rights, and defending the nation against aggression." The point is that the farther a government gets away from this limited role, the more that government strays from the ideal path that will ensure the fastest path towards the creation of "universal opulence" or wealth for workers.

How this issue is handled will decide whether the country can more closely follow Adam Smith's prescription for growth and wealth creation or move farther away from it.”

Comment
Jacob Viner addressed the laissez-faire attribution to Adam Smith in 1928 in his “Adam Smith and Laissez-Faire” in the collection of essays published to commemorate the Sesquicentennial of the Publication of the Wealth Of Nations, reproduced by Augustus M. Kelly, Fairfield, New Jersey in 1968.

Here is a list of appropriate activities for government, which goes way, way beyond Mark Skousen’s extremely limited – and vague – 'ideal' government. That in itself is fair enough, if it is issued under Skousen’s name (everybody has a right to express an opinion), but he goes on to attribute his ‘ideal’ list to Adam Smith, which is not alright.

In fact, its downright deceitful, for which there is no excuse of ignorance (before attributing the limited ideal to Adam Smith we assume, as scholars must, that Skousen read Wealth Of Nations and noted what Smith actually identified as the appropriate roles of government in the mid-18th century.

But even if Skousen was in a hurry and without time to check through Smith’s two-volume tome (or the massive one-volume tome if he consulted the 1937 edition of Wealth Of Nations from Random House, New York, edited by Edwin Canaan), he, surely, was familiar with Viner’s 1928 essay, conveniently reprinted and widely available from Augustus Kelly from 1968?

No? Shame.

Here is a list extracted from Wealth Of Nations:

• 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 on 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 walls to prevent the spread of fire (WN324);
• rights of farmers to send farm produce to the best market (except ‘only in the most urgent necessity’) (WN539);
• ‘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 and fire fighters to watch for 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 and so on) (WN731–58);
• temporary monopolies, including copyright and patents, of fixed duration (WN754);
• education of youth (‘village schools’, curriculum design and so on) (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); and
• moderate export taxes on wool exports for government revenue (WN879).

"Viner concluded, unsurprisingly, that ‘Adam Smith was not a doctrinaire advocate of laissez-faire’.

That [Viner] needed to write this 150 years after Wealth of Nations to remind 20th-century readers conclusively that it contained detailed and specific evidence of advocacy of breaches of laissez-faire, popularly attributed to him, suggests that a substantial drift away from important elements of Smith’s legacy had taken place among early-20th-century economists.

How could Smith be so closely linked with laissez-faire policies when he so clearly and explicitly was not?”

[The list and the comment is reproduced from my “Adam Smith: a moral philosopher and his political economy”, 2008, Palgrave-Macmillan.]

Smith on Laissez-Faire, Markets and Morals

Edward A. Fallone writes in the Marquette University Law School Faculty Blog
HERE

“As R. Kent Newmyer succinctly summarized it, in his book “John Marshall and the Heroic Age of the Supreme Court,” Marshall understood the rights of property ownership to include an individual’s right “to acquire property and deploy it creatively as he saw fit and to enjoy its fruits without hindrance.” (Newmyer p. 264) But this does not mean that Marshall embraced Adam Smith’s theory of completely free markets, where private business enterprises act completely free from government regulation. First of all, not even Adam Smith advocated for markets that were sealed off from all government regulation. Second of all, while the Framers of the Constitution were aware of Adam Smith, there is little evidence that Smith’s economic theories influenced the Constitution.”

Comment
Adam Smith did not have a “theory of completely free markets” – he did not subscribe to the laissez-faire views of some of the French Physiocrats and did not use the phrase at all. All of the beliefs that he did have such a theory are attributions from the 19th century; at best they were careless exaggerations that missed the nuances of Smith’s political economy; at worst they were the self-interested preferences of merchants and manufacturers in the industrialization of Britain (see: The Economist, the parliamentary spokesmen for mill owners, The Anti-Corn Law League, the Manchester School, J. S. Mill, and non-readers of Wealth Of Nations).

The whole tenor of Wealth Of Nations was about how unfree markets were in 18th century Britain, characterised by the deliberate actions of ‘merchants and manufacturers’ and of mercantile policies favoured by legislators and those special interests that influenced them.

In proposing that these interventions in markets should be swept away, Smith carefully acknowledged that markets should be operated under the rule of law and under the moral guidance of participants.

To ensure compliance, Smith indicated that regulations may be necessary on a case-by-case basis (example: banking, assaying, indicating the quality of certain manufacturers; buildings posing fire risks; and public cleanliness and safety). It was also essential that government intervene in the procurement of certain public works to facilitate commerce and certain public institutions to facilitate education, healthy minds and treatment of obnoxious diseases.

Edward A. Fallone’s assessment is correct broadly.

[NB: Edward Fallone, Associate Professor at Marquette, carries the following in his faculty biography:

“When I was a law student, my Corporate Law professor treated the study of insider trading, hostile takeovers and corporate crimes as the dry recitation of legal rules to be memorized. My approach to teaching is different. I teach these cases as human tragedies (and sometimes comedies) involving greed, betrayal and corruption. In my view, the law in this area serves the classic end of all laws: to protect ourselves from our own worst impulses.”

This about as close to a genuine moral ‘Smithian’ approach to people in markets as you can get.]

A Case for Competitive Markets

Jim Carlton speaks at the launch of Richard Morgan’s “Lessons of the Global Finance Crisis: The relevance of Adam Smith on morality and free markets” HERE

“…this book is the most effective antidote I have seen in a long time to the inanity being peddled by those with a deep mistrust of the marketplace, usually coupled with a naïve confidence in the capacity of governments to produce results in areas outside their sphere of competence…

… The usual form of attack is to define free markets as laissez faire, anything goes forms of economic activity. As anyone who actually bothers to familiarize themselves with what Adam Smith actually said, and as Richard Morgan demonstrates, on no account does Smith advocate laissez faire. To quote Richard Morgan on page 47, “For Smith, a ‘well governed’ society provides for free competitive markets, law and order and infrastructure. If these elements are not in place, he warns, living standards will decline and indeed in extreme cases ‘go backwards.’

The use of the phrase “free competitive markets” is instructive. When we use the shorthand “free markets” we do leave ourselves open to willful or ignorant misinterpretation. Markets are not, in fact free, in the sense we mean it, if they are not regulated to ensure competition. Enemies of the market economy also seize on the word “deregulation” to suggest a descent into laissez faire…

… Another aspect of the Morgan book that appeals to me is that he has drawn from both Smith’s great works, The Theory of Moral Sentiments, and Wealth of Nations, to stress the underlying morality, and dare I say it, the deep compassion for the underprivileged, inherent in Smith’s writings.”

Comment
These few quotes from Jim Carlton’s speech at the launch of Richard Morgan’s new book are a blast of fresh air in Australian political economy.

In parts of the speech not reported here, Jim Carlton discusses the long term problems of the Australian economy and political policies followed by successive governments that shaped the legislative illusion that markets do not matter and can be replaced by lawyers and vested interest (a down-under version of the corporate state, if I may say so), until reality intruded and wage determination by courts, not free bargaining between employers and labour was gradually re-introduced in the 80s and 90s, leading to the strong economy Australia has today (unlike Britain, for example, which is now not the ‘sick patient’ of Europe, it having graduated to the 'sick man of the global economy' with pretensions that Britannia stills rules the waves) under the ‘spend and tax’ ‘labour’ government of Blair and Brown, since 1997.

As an example of the truth about Adam Smith’s intended legacy, which includes his Moral Sentiments, 1759, as well as Wealth Of Nations , 1776, Jim Carlton’s speech, and Richard Morgan’s “Lessons of the Global Financial Crisis”, are first rate introductions.

Buy Richard Morgan’s book from Amazon.

Smith on Government Roles

Attorney Jonathan Emord writes(19 October) in News With Views HERE:

“OVERNIGHT SOLUTION TO THE NATION'S ECONOMIC WOES”

“There is an alternative to this highly paternalistic and historically failed approach to problem solving. It is the alternative view, understood to be a moral imperative by the primary author of it, that Scottish philosopher Adam Smith in his rebuttal to mercantilism, The Wealth of Nations. To paraphrase Smith, it is not by the benevolence of the butcher or the baker by which we obtain our meat and bread but by the pursuit of their own self interest. In short, self interest in the market causes those who would profit to find ingenious means to improve the human condition, for which others are willing to pay. For the benefit arising from invention, the inventor is given a just reward, profit. If the inventor is allowed to keep the lion’s share of that profit, he or she will have an incentive to invent yet again, and, if he or she guesses correctly, will hit upon yet another item that best suits the needs of consumers, lifting their standard of living in the process.

Rather than place faith in the market which has proven its profound power to transform and uplift, the present administration places boundless faith in government. Government is that great parasite that the Founding Fathers viewed as a necessary evil, one to be limited and checked so as to avoid its intrusion into our daily affairs. As government has grown exponentially, it has proven itself in every nation incapable of solving the vast majority of the human problems that its political rulers expropriate private funds to solve.”

Comment
The sentiments, broadly speaking, expressed by Jonathan Emord should appeal to many people needing a headline slogan approach rather than a detailed policy, because the stuff of practical politics is much more complex when the details are examined for selection prior to implementation.

Emord’s theme is an “overnight solution”, typical of a lawyer’s thinking – review the facts, come to a verdict, pronounce it, and then leave other people to run with its consequences. And his “overnight solution” would certainly have consequences.

I am not sure that his star witness, Adam Smith, offered quite the passive advice attributed to him by Emord:

“To paraphrase Smith, it is not by the benevolence of the butcher or the baker by which we obtain our meat and bread but by the pursuit of their own self interest.”

What happened to the “brewer”, as in “the butcher, the brewer, and the baker”, all three apparently necessary for an 18th century “dinner” (WN I.ii.2: 27)? (I note that it is quite common for the “brewer” to be missed off such “paraphrases”, and also from supposed direct quotations, mainly, I presume, from religious hostility to the consumption of alcohol).

The main point, however, is that the motivation from self-interest is not a one-way bet; the self-interest of the potential consumer also counts and differences between the producer and consumer are reconciled by their mediating their self-interests into a price acceptable to both of them.

Smith advises consumers to “address” the other’s “self-love”, while refraining from addressing ”our own necessities”; instead address “their advantages” from concluding a transaction. In short, from offering them a “bargain”: “Give me that which I want, and you shall have this which you want” (WN I.ii.3: 26). The parties are not just “price” takers – they bargain, and do so in condition where there is competition emanating from the presence of other buyers and from other sellers.

Emord goes on to assert that “Government is that great parasite that the Founding Fathers viewed as a necessary evil, one to be limited and checked so as to avoid its intrusion into our daily affairs.” I cannot speak with authority on the “Founding Fathers” viewing government as a “necessary evil”, as in that they preferred not have a government, but I suspect this view is exaggerated.

The duties of government, according to Smith, were to cover the expenses of “defence”, “justice”, certain “public works and public institutions” and the “dignity” of the “sovereign” (WN V.a.b.c.d.e.f.g.h:663-814).

Smith noted that defence was “of much more important than opulence” (WN IV.vii.30: 464-5), justice was the absolute necessity of society (without justice society “would crumble into atoms” (TMS II.ii.3.4: 86), public institutions were “necessary to facilitate commerce”, including public education (“gross ignorance and stupidity” threaten the “safety of the government” and “frequently occasion the most dreadful disorders” (WN V.i.f. 61: 788) and palliative health care (WN V.i.f.60: 787-8), and (substituting the ‘sovereign’ by ‘government’), enabling the government to “perform its several duties” (WN i.h.i.1: 814).

Smith denounced the role of several governments in pursuing the wrong policies, summed an “mercantile political economy” and challenged the competence of ministers to make decisions on behalf of the individual, but he did not preclude government enacting certain measures and enforcing them through the courts on the conduct of individual “merchants and manufacturers” when they acted against the public interest. In particular, the early forms of banking outside of any regulations to protect the public interests were dangerous to prosperity, and he advocated certain interventions to protect against “misconduct”.

These interventions he conceded were a “manifest violation of … natural liberty” but “ those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed (WN II.ii.94: 324).

The popular image among certain sections of Adam Smith being the enemy of government (the advocate of the “night-watchman state”) is quite false in its generality. Indeed, the metaphor of the “night-watchman state” was an expression introduced by Ferdinand Lasselle, the 19th-century firebrand socialist, and not Adam Smith!

It was the policies of 17th-18th century governments that Smith railed against, and not the fact that they had policies. Because Smith criticised many of the then existing policies of governments, many readers in a hurry concluded he was opposed to all government policies.

Adam Smith was not an ideologue. He observed that legislators and those who influenced them, especially the special interest groups of “merchants and manufacturers”, commonly were the worst offenders. From this background he did not advocate “laissez-faire” – he never used the words - because he could see where leaving policies to the parliamentary clients of “merchants and manufacturers” had led Britain.

Whether, Jonathan Emord’s “overnight” prescription would work if implemented – which would require the legislature to enact it, many of whom are tied, sometimes by “obligations”, others indirectly by constituency special interests – is another question. It is not a serious (as in likely to be enacted) proposition.

Two Errors on Adam Smith

"dakinikat" writes (19 Sept) “Support your new Alphabet Soup Agency” (HERE):

“Even Adam Smith, creator of the invisible hand and the term laissez-faire economics, realized the need for government regulation of certain markets.”

Comments
Oh, dear!

Two blatant errors, “creator of the invisible hand and the term laissez-faire economics”.

For the “invisible hand” see Lost Legacy (previous post and scores of earlier ones (also read my:

“Adam Smith: a moral philosopher and his political economy”, 2008: Palgave Macmillan).

For “laissez-faire economics”, $1000 if “dakinikat” can show that Adam Smith ever used the words “laissez-faire”.

Yes, Adam Smith identified that there were circumstances when there was a need for “government regulation of certain markets”.

Can “dakinikat” show where in Wealth Of Nations he did so? (Hint: in a business sector very much in the news recently).

"The Hesitant Hand" by Steven Medema: Review, Part One:

Steve Madema opens his book, The Hesitant Hand, with a Prologue that spells out where he is going with his main theme on the part played by self-interest in society as a whole and how philosophers like Adam Smith and those before him approached the question. With an economy of style he gets down to business quickly.

Smith was not the first, nor the only, philosopher to focus on self-interest. Decades before 1776 (Wealth Of Nations), others had made explicit reference to self-interest. My first slight concern occurs here because Steve associates these interests of others and Smith with laissez-faire, a uniquely French term, which was not mentioned by Adam Smith in any of his works or correspondence, though he was familiar with it from his contacts with the French Physiocrats and their publications.

There is today an assumption that Smith’s preference for competition and reduced interventions of the kind practised by European governments in their mercantile legislative policies was in essence a policy of laissez-faire, which, strictly, it was not. Not all Physiocrats advocated laissez-faire – in fact some of their policies were interventionist, as were some of Smith’s.

It could be argued that such quibbles were outwith the thematic realm of Steve’s book – he wants to get on with his narrative, absent such scholarly niceties – and ordinarily I would agree with him, but just as the term had specific meanings for Vincent de Gournay, who popularised the term in his debate with Colbert, the Finance Minister of Louse XIV (“laissez-faire, laissez- passer”), about freedom from the stifling regulations pertaining to the conduct of commerce in France, it has come to have specific meanings for modern economists of the extreme libertarian school – the absence of government - neither of which can be said to be particularly Smithian in content or application.

However, Steve's Prologue is a masterly entre to what follows, especially in Chapter 1, “Adam Smith and His Ancestors” (5-25). This opens with Adam Smith and “an invisible hand” which would tend to “harmonise individual and social interests” and “attempts by the state to interfere with this would run counter to the national interest”. “Competition”, says Steve, “was hampered on all sides” (5).

Much of the legal structure was inimical to economic growth and this structure was the creation of governments following, or initiating, assertions about appropriate economic policy, mixed with religious or contemporary moral philosophies, from the
Greeks onwards.

Steve marches through this history at a brisk, readable pace, which economists who read the chapter would do well to take on board (or be reminded of). Plato, Aristotle, Aquinas, and the Scholastics, are buried in continuing economic thinking, despite the best efforts of modern economists to purge anything that cannot be modelled mathematically.

Rulers prefer subjects who submit to their rule by identifying their self-interest with the Sovereign, and still today they seek enforcement of their writ where their subjects do not do what is wanted of them (in Britain and the US we have petty bureaucrats, in Iran we have black-clothed thugs on motor-cycles, in Pakistan, police with canes, and China their versions of the Gulag). Learn about the past and you understand the present.

Steve covers Scholastic thinking neatly, with comments on much Christian thinking (the will of God) and how it related to, then, contemporary problems of taxation, the sovereign’s appetite for expenditure, regal lifestyles, monuments to their greatness, and the morality of borrowing (usury debates). Into this mix the self-interest of commoners and crown conflicted (the king debased his currency and his subjects ‘clipped’ it), as they did in debates over private and public property (sound familiar in echoes of the tragedy of the commons?).

As the power of the state increased from the 16th century, Steve notes that the influence of theologians declined and that of merchants rose (11), the latter with a self-interested motive to try to influence government policy, based on the well-known (and perpetuating knack for presenting their otherwise blatant self-interest in terms that appealed to the ‘national interest’, which was of greater concern to the sovereign than the petty wishes of seedy merchants). It was, and still is, the way of the lobbyist.

A small quibble emerges for me in Steve’s assertion that the term ‘mercantilism’ was coined in the 1760s (11); I have always understood that it originated from the German word in late 19th century and transferred to English from the late 19th century.

Of no doubt though, the critique of mercantile policy emerged in the late 18th century, particularly in Smith’s Wealth Of Nations in Book IV. While often presented as a critique of bullion accumulation, it goes much deeper than that, summed as the policies associated with what Hume called ‘Jealousy of Trade’.

Steve’s account of the debate is another example of his masterly exposition style which makes the subject interesting (11-13).

The subject is a clear example of the self-interested actions of individual merchants, in alliance with legislators and those who influenced them, that were, in Smith’s and in others’ view, contrary to the national interest.

Self-interest, clearly, does not necessarily result in some way in the public interest (and it remains a mystery to me why proponents of such a view continue to attribute it to Adam Smith – presumably they have never read Book IV!).

If you are not sure what the issues were (and, regrettably still are today) in the mercantile policy debate, Steve’s exposition will remove all doubts and uncertainties. He quotes from the inimitable Jacob Viner to great effect (13) on the appeal of mercantile advocates to Providence for chauvinistic support for their doctrines.

Moving on to the Physiocrats and the economic policy regime of Jean Baptiste Colbert (1619-83), Steve uses 17th-century France as a case study in all that was wrong with mercantile interventionist policy. He discusses their strong points (identified by Adam Smith, who admired them personally) and their ‘errors’ - the superiority of agriculture (produit net) versus the ‘sterility’ of manufactures. They related their ideas to their version of ‘natural law’. (15) As Steve points out the Physiocratic programme required a strong state led by ‘experts’.

This brings Steve to Adam Smith and his works.
However, apologies (I am supposed to be on holiday, and family demands on my attention interrupt my section on Adam Smith - I shall finish it tomorrow and post it then.

Another Inaccurate Claim About Adam Smith and Charles Darwin

W.C. Hayward, Editor of the Blog, Undismalization (‘towards a rational, constructive, non-ideological dialogue on economics and pubic policy') HERE
writes (14 July):

“The Flaws of Quasi-Darwinist Arguments for a Pure Laissez-Faire System”

“Adam Smith, having published The Theory of Moral Sentiments, in which the theory of “the invisible hand” first appears, precisely a century before Darwin’s Origin of the Species, created a model involving a “selection process” in the realm of commerce that could be said, from an analogous perspective, to anticipate Darwin’s theory of natural selection in the realm of biology.”

“Since Darwin, however, links between laissez-faire and Darwinist thinking have appeared frequently, at least in popular parlance, with the survival-of-the-fittest concept supporting the premise that a pure laissez-faire system is more efficient because it is more natural.”

Comment
Adam Smith did not have a ‘theory of an invisible hand’ in his Moral Sentiments (nor anywhere else). Whether such a non-existent theory by analogy ‘anticipated’ Charles Darwin’s theory of ‘natural selection in the realm of biology’ is also suspect.

As is ‘at least in popular parlance, with the survival-of-the-fittest concept supporting the premise that a pure laissez-faire system is more efficient because it is more natural.”

Natural selection is by definition ‘natural’, but ‘laissez-faire’ is certainly not, at least in the common understanding of being ‘natural’. Laissez-faire is anything but ‘natural’. Like Hobbes’s ‘state of war’ of ‘all against all’, laissez faire has never existed, anywhere on the planet throughout the history of the human race, at least as far as we can judge, even deep into pre-history; it certainly left no traces found by anthropology, so far.

Adam Smith was quite critical of Dr Quesnay , the French economiste, whom he admired so much, on the subject of what is often taken to be about laissez-faire (though Smith, familiar with the term laissez-faire never used the term at all):

“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: 674-5)

What Smith is saying is that an economy can tolerate quite severe distortions in its purity of function without collapsing into disaster and that if a society, as most were and are, was supposed not to prosper unless if enjoyed ‘perfect liberty and perfect justice’ the evidence of the history human societies contradicts the assertion because ‘there is not a nation in the world which could ever have prospered’.

In short, perfect liberty and perfect justice – about as close as we can get to what now passes for laissez-faire – does not support “the premise that a pure laissez-faire system is more efficient because it is more natural”. It isn’t natural; indeed it would be most unusual, even unnatural, should laissez faire be established anywhere and anytime.

Attempts to link laissez-faire to Darwin’s natural selection, of which there has been a spate of them recently, falls at the first essential hurdle of empirical evidence.

The rest of W.C. Hayward’s piece makes an interesting case about the current condition in the USA (follow the link to see how much of it you agree with), but that is separate from his assertions about Darwin’s and Smith’s ideas.

Darwin’s books and notes form a formidable body of evidence for natural selection (he didn’t get everything quite right, but he took major steps forward before the world knew anything about inheritance, genetics and the genome).

Attempts to forge a link with Darwin and Adam Smith on the grounds quoted above ultimately fail because they create so-called analogies with their ideas, mostly fanciful.

There is a connection however; both took an evolutionary approach to change and in a future post I shall discuss the forms that they took.

Mythical Basis for a Theory

Linda Naiman writes at the Creativity at Work Blog HERE:

“Taking Responsibility for the Whole”

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

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

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

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

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

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

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

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

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

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

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

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

Left Split Modern Rightwing from Adam Smith

Devilstower writes in the Daily Kos, HERE:

An obviously leftish rant against the right, entitled: “The President and Private Pay”, which includes this paragraph:

“In the past, people were able to distinguish between capitalism and chaos, and understood that government intervention in the markets was needed when the organizing principle of the markets was sent askew. The idea that the market is inviolable and all-knowing didn't really start with Adam Smith. It's more a product of the Ronald Reagan-Ayn Rand fusion of the 80s -- the one that drove "hands off" legislation leading to the S&L meltdown. That was the source of inspiration for stripping away the protection that had kept the market sane since the last time these guys got their way.”

Comment
I make no claims for or against the political contents of Devilstower’s piece. The politics of another country are not my concern. The key sentence for me is:

“The idea that the market is inviolable and all-knowing didn't really start with Adam Smith. It's more a product of the Ronald Reagan-Ayn Rand fusion of the 80s -- the one that drove "hands off" legislation leading to the S&L meltdown.”

At last, a recognition that the linking of Adam Smith to post-1950s mainstream economics was and remains a false attribution and is a step forward in re-asserting Adam Smith’s legacy.

So close is the identification of Adam Smith to Ayn Rand’s (among other modern ideologues) has led to immense confusion, even ensnaring Greenspan, who like so many leading commentators on these issues, linked the Adam Smith invented by Friedman, Arrow, and other Nobel prize-winners, to general laissez-faire policies with which there is little textual support in Wealth Of Nations or Moral Sentiments.

Of course, the Left also misread Adam Smith as some sort of social democrat on the basis of selective quotations from his polemics against mercantile political economy, still prevalent in the 21st century, as it was during the 15th-18th centuries.

But small steps by one side or the other add up, slowly and gradually, to rectifying these errors, and are to be welcomed no matter from which place on the political spectrum they come from.

'Free Market Capitalism' is Not Laissez-Faire

P. A. Triot (‘pen name of a retired journalist’) writes in OEN (OpEdNews.com) HERE:

“Government right to intervene economic matters”

“Neoconservative, by any name, means only one thing: laissez faire capitalism.

Free market capitalism is the newest name for laissez faire capitalism.
Laissez faire capitalism was first introduced to the world in the 18th century by Adam Smith who wrote "Wealth of Nations." Smith is regarded as the "father of modern economics."

The term "free market" was mentioned by Smith in his book as a condition of laissez faire capitalism.

The late Milton Friedman piggy-backed on Smith's concepts by sort of tweaking the lexicon and advocating free market capitalism all the way to a Nobel prize in economics (awarded in 1976).

The concept of free markets is in sharp contrast with controlled markets or regulated markets, in which governments regulate prices or supplies--either directly or indirectly.

What's left is that laissez faire capitalism and free market capitalism are synonymous terms.

All of this is simply economic theory, not fact at all.”

Comment
‘P. A. Triot’ (patriot – get it?) makes an argument (read it from the link) that is founded on muddled history of Adam Smith’s contributions to political economy.

Smith never mentioned ‘laissez-faire’ once. He was familiar with the ideas of its exponents – French small merchants who wanted the French Minister, Colbert, to ‘leave us alone’ instead of regulating everything they could do quite well on their own. It became a slogan of some of the Physiocrats, but not all of them – Dr Quesnay, their leader, for example did not advocate it, and has been lumped with Adam Smith, first by mid-19th century conservative agitators (the Manchester School) and then a century later by propagandists, some of them Nobel Prize winners, of neoclassical general equilibrium theories and ‘free market’ American big business.

Adam Smith, meanwhile, was far more pragmatic. He certainly advocated freer markets than were available in mid-18th century. He heavily criticized the regulation and interferences of legislators and those who influenced them, the waste and prodigality of governments, the mercantile political economy of his day, dominated as it was false notions of gold and silver being wealth and thereby subjecting the real economy to policies that encouraged ‘jealousy of trade’, hostility to trading with and the trading of political rivals (France, the Dutch provinces, and Spain), and the record of sovereigns embarking on frivolous wars and colonial adventures.

His critique of governments that intervene in the economy is often taken by rightwing ideologues as proof that he opposed government intervention per se and favoured small government; his criticism of companies engaged in distant colonial adventures (the East India Company) for their rapacious behaviour and their internal lack of controls is often taken by leftwing ideologues as proof that he would have opposed capitalist firms as they developed in the 19th century and justifies their opposition to modern corporations.

Neither view is accurate, either as statement of fact, nor as a guide to Adam Smith’s prescriptions for commercial economies. It is not just a question of Adam Smith being ‘more nuanced’ that the caricature asserts; they are just plain wrong.

Wealth Of Nations has both general application and a specific context. It is not a textbook on economics, though it is based on current knowledge of his many predecessors, plus his own contributions derived from his historical analysis of how the commercial economies were revived (they had a long history in the classical world) after the long, near thousand year interregnum following the fall of Rome in the 5th century, and what was so exciting about the steady economic growth then germinating in western Europe, and particularly in Britain.

Smith saw the mercantile political economy in its various guises as distorting what caused the growth towards opulence; its related policies of forming trade monopolies through distant colonies, and the consequent wars that followed; its waste of scarce capital in various forms of prodigality; the legal system of primogeniture and entails as blocking agricultural prosperity through yeoman farming (as was sucessfuly shown in his mind by agricultural prosperity in some of the British colonies in North America which has abolished the legal inhibitions on land ownership); and the capture of the legislature by special interest groups that imposed protection, tariffs, prohibitions, and local-producer monopolies that widened private markets but narrowed competition to the detriment of the interests of consumers – the sole end of production.

Within his analysis there are many evident indicators that there was a crucial role for the government in creating and maintaining the necessary instruments for facilitating commerce (not running it). His programme for government expenditure was extensive but focussed: public works and public institutions such as infrastructure – Britain need functioning roads and highways, dredged ports and rivers, canals, bridges, and towns with night-lighting, pavements, sewage disposal, and police, backed by an independent judicial system and a reform of education provision, including for the children of poor labourers in schools part-funded by taxes and household contributions.

The first duty of government was defence and the island situation of Britain required a navy and an army (defence was more important that opulence) but the hostile stance of Britain towards neighbours since the fall of Rome, costs tens of millions (over £100 million in the seven-years war) that would be better spent on the above projects and on commercial activity that would increase employment and living standards.

That the “the late Milton Friedman piggy-backed on Smith's concepts’ is certainly true, but the responsibility for Smith’s works appearing in the distorted frame they have become, lies in the economics profession that has chosen to ignore the history of economic thought (lowly regarded by many modern economists as fit only for the elderly, the less talented, and the untenured).

If they were to read Adam Smith in context, they would find many of the failed policies imposed on legislators by the epigones, who quote Smith, but never read him for themselves, fully explained within his fairly primitive explanations of where Europe was going wrong, and, perhaps, why the global economy is still achieving less than it could achieve, if what has so far gone right (billions lifted out of poverty), despite the politicians and their advisors, was supported by arrangements that permitted commercial markets to do their work.

At that point, ‘Patriot’ would not equate ‘laissez-faire’ to ‘free-market capitalism' nor consider them as experienced in the real world.

Misquoting Adam Smith Undermines Analysis

In what is otherwise a fairly sound analysis of the current crisis, Marc Chandler in Seeking Alpha (HERE) asks: ‘What happened to Free Markets?’, in the course of which, unfortunately, he makes these remarkable assertions:

“The whole notion of an economy as a separate sphere of activity is nonsensical. The patron saints of the church of laissez faire, Adam Smith and David Ricardo, thought they were analyzing political economy. Moreover, they understood this political economy to be a moral economy insofar as it tried to promote certain values and behaviors. Pssst, Adam Smith was a moral philosopher.”

Comment
Adam Smith never said he favoured laissez-faire (he never used the words). He was not in favour of laissez-faire though he knew those among the French Physiocrats who advocated such a system. His writings on the economy included many statements that were contrary to laissez-faire, not the least that he was suspicious of the motives and behaviours of ‘merchants and manufacturers’ who could not be trusted because when left alone they sought to expand their markets and narrow the competition in favour of their local and colonial monopolies.

So Adam Smith would have made a poor ‘patron saint of the church of laissez-faire’. The reputation Smith’s alleged passions for such notions as laissez-faire is wholly inaccurate and borders on the irresponsible, and comes from attribution by modern economists and not from the works of Adam Smith (which most of them have never read). As for David Ricardo and laissez-faire I leave it to Ricadians to comment.

“There is this myth that once upon a time there were free markets and then the state encroached. But what was meant as allegorical has been assumed as fact. The narrative is simply not true. Positive state action was needed to turn the factors of production (land, labor and capital) into commodities that could be bought and sold. The corporate form of organization has been sanctioned by the state. The state's power of taxation can have significant impact on the incentive structure for economic activity.”

Comment
If there is such a myth prevalent across the world it had nothing to do with what Adam Smith wrote about. True, he was a moral philosopher, but he was also an historian and there is nothing in his works to suggest he believed that ‘free markets existed and then the state encroached’.

His Lectures on Jurisprudence, delivered in Glasgow University 1762-4 (and most likely before that from 1751-62) do not mention any such historical state of affairs.

Indeed, Smith's lectures, which covered pre-history to the 18th century, show that once property was ‘invented’ about 8,000 years ago and civil government established, the state has had a continual existence in all the millennia since. Moreover, Wealth Of Nations, which covers a similar time span (after all, large parts of it are verbatim from his Glasgow lectures), is focused on his critique of mercantile political economy, which is largely about state-led intervention in markets, which link directly to his non-recognition of the relevance of laissez-faire assertions to the markets that he discussed.

It was not ‘positive state action was needed to turn the factors of production (land, labor and capital) into commodities that could be bought and sold’. That is to miss the whole point about societies bedded in property relations. It is the establishment of systems of justice that are critical to society and not ‘positive state action’ (Book V, Wealth Of Nations) which were firmly approved of by Adam Smith ('without justice society would crumble to atoms').

There is no doubt that ‘The state's power of taxation can have significant impact on the incentive structure for economic activity’ (when added to state borrowing powers). The modern state is a major economic player (between 30 and 45% of the GDP in peacetime, potentially rising to 80 percent in wartime (UK: 1942-45), and near 100% in state-run economies (Soviet Union, etc.,).

Relying on inaccurate statements about Adam Smith undermines Marc Chandler's analysis.

Markets Remain Better Than The Alternative On Most Occasions

‘M.K.’ in the Mauritius Times opens his/her apparent ‘solution’ to the current turmoil in global finance with an example of muddled knowledge about Adam Smith, HERE:

“So much talk about good governance: how about putting it into practice?”

“Adam Smith, a Scotsman and founder of modern economics, is reputed to have advocated the laissez-faire doctrine of free markets in 1776. It is not quite certain whether he also advocated that governments should not interfere at all with the working of markets. However, free market capitalism, following in his wake, has imposed the view over centuries that the markets operate most efficiently if left to themselves without government interference. If we consider the havoc that the working of the free capitalist markets of the United States and Europe is currently wreaking on global markets, we would think twice before accepting wholesale this kind of laissez-faire doctrine. We must at least learn a lesson.”

Comment
Yes, Adam Smith was a Scotsman, but anointing him as the ‘founder of modern economics’ may be going too far.

Certainly he was a great thinker, certainly he synthesized a great deal that is important in modern economics still, and certainly his historical importance is in the front rank, but modern economics of the neoclassical variety – the dominant consensus – hardly owes much to Adam Smith’s Wealth Of Nations.

Except as a presentation volume given to retiring academics, Smith’s Wealth Of Nations, which they almost certainly never read as a student nor as an tutor, and almost as certainly they will leave on their bookshelf, unread too, it remains almost unread among the profession that allegedly owes its foundation to him.

If they did read it they would conclude that Adam Smith was not an advocate of laissez faire; he never used the words at all, anywhere in all of his one million words. The laissez-faire notion was first put forward in France by some of the Physiocrats in mid-18th century France, and Smith was very familiar with the men and their ideas, so there can be no question that his non-use of the words was other than deliberate.

Smith was too familiar with the actual behaviour of ‘merchants and manufacturers’ to have been as trusting of their working fairly and with other than grievous suspicion of their motives, as the words laissez-faire (‘leave alone’) imply. Indeed, Wealth Of Nations is full of his critical assessments of the merchants and manufacturers and their doings, unless curbed by both the vigilance of the law and the scepticism of legislators. MK can be assured that we are certain, beyond reasonable doubt, that Adam Smith never advocated ‘that governments should not interfere at all with the working of markets’. He made many statements quite to the contrary of such notions.

The notion ‘that the markets operate most efficiently if left to themselves without government interference’ would depend for credibility on what is meant by ‘without interference’. If we mean without the interference of individual legislators, then there is no doubt that such people are totally incapable of improving on free markets.

Day-to-day management of markets, and in their absence, management by state politicians and civil servants, has always proved to be less efficient – and incidentally, less fair - than creating the appropriate conditions by which the working of markets are as free as possible. Nobody, except extreme unreconstructed statists, advocates seriously the replacement of markets with Soviet- style socialism, or post-war nationalisation of the ‘commanding heights’ of the economy.
There is bound to be some degree of intervention by state agencies (defence, justice, public works, financial and banking regulations, the mint, the central bank, and such things as weights and measures education and health.

This does not mean that the current state arrangements are optimal – far from it – or that publicly funded services must be managed and delivered only by public employees and that there is no room for such services to be delivered in private and voluntary non-state personnel.

Visit www.adamsmith.org for a detailed exposition of many ideas that would improve the distribution of publicly funded services in current economic circumstances. Whereas, reverting to old notions of wholesale nationalisation programmes would only make everything worse, drab and tatty along all dimensions.