Dipanka Dasgupta's February Lost Legacy Prize

Dipankar Dasgupta, former professor of economics, Indian Statistical Institute, , in The Telegraph, Calcutta, India, 12 February, HERE:

‘The Wickedness Theory’

“Greed, of course, is a strong expression, bearing as it does the connotation of sinful behaviour. To the extent, though, that one is sitting on judgement against the background of market-driven societies, a paradox of sorts seems to arise. In this context, one cannot fail to recall one of the most frequently quoted sentences from Adam Smith’s Wealth of Nations: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

Smith, of course, may not have had market economies alone in his mind when he wrote these lines. It was a broader statement, indeed, for he was explaining a natural propensity for barter among civilized human beings. The latter acquire from others objects for their sustenance not by brute force, but through exchange based on mutual consent. Moreover, the consent in question is guided by self-interest. Or, as Smith points out, “Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer....” (One wonders, of course, if British colonial rule conformed to Smith’s perception of civilized behaviour.)

While Smith’s notion of self-interest cannot be identified with greed by any means, the dividing line between the two concepts turns imperceptibly thin once we move on to market-driven economies or capitalist societies. The driving force underlying the capitalist mode of production happens to be profit and, even without Marx’s insight, one ought to be able to appreciate the fact that more profit is necessarily preferred to less. Or, to link it to Smith’s wisdom, a capitalist’s self-interest lies in profit-making, and it is quite pointless to set an upper bound on the volume of profit that capitalist enterprises might desire. When an excess of revenue over cost constitutes the bull’s eye, the larger the excess, the happier is the man taking his aim.”

Comment
There is much else in Dipankar Dasgupta’s article (follow the link to read it). I praise Dipankar for his (?) appreciation of the true conclusion from Adam Smith’s famous paragraph of ‘the butcher, the brewer, and the baker’, which is about the ‘propensity to truck, barter, and exchange’ for mutual advantage, and not an assault of the moral behaviour of benevolence, as some badly informed people continue to repeat, possibly because they read only the short quotation and not the second chapter of Wealth Of Nations.

But Dipankar avoids that error. He also avoids the crass error (not too strong an expression, because the error is grossly crass) in confusing Adam Smith’s self-interest with selfishness. However, I do not agree that the distinction between selfishness and self-interest is “imperceptibly thin” in capitalist societies (a different form of market-driven society to that observed by Smith in mid-18th century Britain), particularly as Dipankar sees the profit motive as being the essential trigger for the change.

The characteristic difference in markets undergoing societal changes is that activities which begin as highly profitable tend to become less so as new entrants into those markets arrive and through competition drive down the rate of profit (I discussed this on Lost legacy recently). Capitalists engage in ever finer divisions of labour, and the outsourcing of inputs in longer supply chains, to drive down unit costs, which means price reductions for consumers and rises in their real incomes, while growing employment drives up their money incomes at the expense of declining profits.

The notion that there is an ever lasting rise in profit rates for bloated capitalists (more like salaried managers with share options, and dividends for shareholders, the majority of which are pension funds) is mythical, except in the current ‘good thing’ (derivative innovators) where large earnings attract finance specialists who drive down bountiful profits in time, until the next ‘good thing’ arrives. There is also the inevitable ‘bust’ cycle that ends every boom and bubble.
All this is despite individuals craving ‘more’ against the realities of the eventual ‘less’. And it is this psychological ‘delusion’ that keeps the economy ticking over (it keeps soldiers going in the heat of battle – ‘it won’t happen to me’…).

Technological possibilities are not ending; new ‘good things’ are on the horizon.

Smith puts it well:

“And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants.” (TMS IV.ii.10: p 183)

And Dipankar Dasgupta gets these thought mostly right. It is great to see an Indian economist understands these matters better than the majority of mainstream US and UK economists.

For this article Dipankar Dasgupta is awarded February's Lost Legacy Prize.

Falling Profit Rates Raise Real Incomes

Jonathan Taplin is a Professor at the Annenberg School for Communication at the University of Southern California and writes Jon Taplin’s Bog (HERE)

“There are very few things that Adam Smith and Karl Marx agreed upon–but one was the “tendancy of the rate of profit to fall”. This term is so well known by economists that they use TRPF as the acronym. Here’s Adam Smith from The Wealth of Nations.

“It may be laid down as a maxim, that wherever a great deal can be made by the use of money, a great deal will commonly be given for the use of it; and that wherever little can be made by it, less will commonly be given for it. According, therefore, as the usual market rate of interest varies in any country, we may be assured that the ordinary profits of stock must vary with it, must sink as it sinks, and rise as it rises. The progress of interest, therefore, may lead us to form some notion of the progress of profit.”

“It somehow escapes the pea-brains of these dinosaurs, that these are the very policies that have brought us to this crisis.”

Comment
Adam Smith was quite clear on the cause of rising and falling rates of profit:

“The rise and fall in the profits of stock depend upon the same causes with the rise and fall in the wages of labour, the increasing or declining state of the wealth of the society; but those causes affect the one and the other very differently.”

“The increase of stock, which raises wages, tends to lower profit. When the stocks of many rich merchants are turned into the same trade, their mutual competition naturally tends to lower its profit; and when there is a like increase of stock in all the different trades carried on in the same society, the same competition must produce the same effect in them all.” WN I.x.1: p105

“In a thriving town the people who have great stocks to employ, frequently cannot get the number of workmen they want, and therefore bid against one another in order to get as many as they can, which raises the wages of labour, and lowers the profits of stock. In the remote parts of the country there is frequently not stock sufficient to employ all the people, who therefore bid against one another in order to get employment, which lowers the wages of labour, and raises the profits of stock.” (WN I.x.7: pp 106-7)

The interpretations placed upon these (and some other similar) statements are often woefully inadequate. Smith’s was not a determinate model, closed to enable a mathematical ‘solution’ to work. He was not entrapped in the diminishing returns of Ricardo (or Marx, who merely wanted to prove what he eventually called capitalism was going to collapse).

The point is that growing societies, with increasing productivity and markets, reduced price, which raised real incomes, and brought more people within them into employment, creating new markets for new products. Poor societies had enormous profits because capital opportunities were scarce (he cited China); richer societies had lower profits because capital opportunities were abundant (he cited Britain, and in a rare prediction, believed that the former British colonies by around 1880 would be even richer).

As more capital was utilised, the cost of capital would rise and profits would fall. Conversely as more capital was employed the price of labour would rise. As prices of commodities fell from increased productivity (pin-factory, etc.,) and the sub-division of labour within the supply chains (the common labourer’s coat), real incomes from employment would rise. But greater capitals, though they meant lower rates of profits, also meant larger amounts of profit. It was not zero-sum.

The process means a fall rate of profit, earned by ever larger amounts of capital, and rising real wages from work. With 'consumerism' the consequence is all around us in higher living standards.

Note Jon's assessment of those he criticises: 'the pea-brains of these dinosaurs', surely a most unProfessorial tone from California...

Adam Smith Quotations Out of Context

Maureen Tkacik writes in Vanity Fair (18 December) Here:

“Ponzi Nation: What Spitzer, Madoff, Geithner, and Adam Smith Can Teach Us About Our Own Mass Stupidity”

“The scale and simplicity of the Madoff scam seems to be moving the conventional wisdom in a sober new direction: We all fooled ourselves somehow by believing vast wealth could be easily generated. But here is a bit of actual wisdom, courtesy of Adam Smith:

“But the rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin”.

Luckily for America, profits are expected to be pretty low this year.”

Comment
Beware of Adam Smith quotations from authors who do not give a source; it usually signifies that they have not read Wealth Of Nations or Moral Sentiments. OK, so it’s only Vanity Fair, but the habit extends to economists writing in media publications too.

For the record, it’s from Wealth Of Nations at WN I.xi.p: p 266, or Canann,1937 ed. pp 249-50.

However, Adam Smith is discussing long term trends in the fundamentals of economies not annual fluctuations. So ‘pretty low’ profits for ‘this year’ are, well, meaningless in terms of the quotation. But Maureen Tkacik is in the good company, so to speak, of many professional economists who quote (but probably don’t read) Smith, Ricardo, and Marx, on the same theme of the rate of profit falling with economic prosperity.

Some have even found 'evidence' that this signifies the terminal decline of capitalism. Adam Smith saw the decline in the rate of profit as evidence of prosperity, which he never confused with a decline in the absolute amount of profits in a society.

If real wages rose secularly over the trend, this was the ‘spread of opulence’ that he welcomed; necessarily, if real wages rose as a trend then profit rates would fall as real incomes transferred from capitalists to labourers. Look at what he says a few lines down from the out-of-context quotation from Maureen above:

“Merchants and master manufacturers are, in this order, the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the public consideration. As during their whole lives they are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen. As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of the society, their judgment, even when given with the greatest candour (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects, than with regard to the latter. Their superiority over the country gentleman is, not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his. It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction, that their interest, and not his, was the interest of the public. The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.” [WN I.xi.p.10: p 267; Canaan, p 250]

If real wages decline in the USA that is because those concerned among modern day 'merchants and manufacturers' are persudaing legislators and those who influence them to bias the tax system and to narrow the market for their products.

I am most grateful to Vanity Fair for provoking me to add a little knowledge to Lost Legacy’s weekly output.